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Business Law II
Professor Pamela Gershuny
Fall 2011
BUSINESS LAW II
Contract Relationships
BUSINESS LAW II
Contract Relationships
1. Collateral Promises
2. Assignment Relationships
3. Delegation Relationships
Contract Relationships (3)
BUSINESS LAW II
Contract Relationships
Third Party Rights
• Privity of Contract– Only parties have rights and duties under the K
• Two Exceptions:
– Assignment = right to demand performance
– Delegation = duty to perform
BUSINESS LAW II
Contract Relationships
Collateral Promises
BUSINESS LAW II
Contract Relationships
Original ContractA (Debtor) B (Creditor)
Collateral Promises
BUSINESS LAW II
Contract Relationships
Original ContractA (Debtor) B (Creditor)
C (Third Party)
Collateral Promises
BUSINESS LAW II
Contract Relationships
Promise to Answer for A
’s Debt
(Requires a Signed Writin
g to Be Enforceable Against C)
Original ContractA (Debtor) B (Creditor)
C (Third Party)
Collateral Promises
BUSINESS LAW II
Contract Relationships
BUSINESS LAW II
Assignment Relationships
Contract Relationships
BUSINESS LAW II
Assignment Relationships
Step 1: Original Contract FormedHorton
(obligee-assignor)Brower (obligor)
Contract Relationships
BUSINESS LAW II
Assignment Relationships
Step 1: Original Contract FormedHorton
(obligee-assignor)
Kuhn (assignee)
Brower (obligor)
Contract Relationships
BUSINESS LAW II
Assignment Relationships
Step 1: Original Contract FormedHorton
(obligee-assignor)
Kuhn (assignee)
Brower (obligor)
Step 2: Horton Assigns
Rights under Contract to
Kuhn
Contract Relationships
BUSINESS LAW II
Assignment Relationships
Duties Owed after Assignment
Step 1: Original Contract FormedHorton
(obligee-assignor)
Kuhn (assignee)
Brower (obligor)
Step 2: Horton Assigns
Rights under Contract to
Kuhn
Contract Relationships
Third Party Rights• Assignments
– Unconditional Assignment• Rights of assignor extinguish
• Assignee has the right to demand performance
• Subject to defenses, e.g. fraudulent misrep
• Mortgage loans, accounts receivable
• Oral or written
Third Party Rights• Assignments
– Rights that cannot be assigned• Express prohibition by statute
• Personal services
• Material alterations of risks or duties of performance
• Antiassignment clauses» Except: right to receive money,
» real estate,
» negotiable instruments
» damages for breach or payment in a sale of goods
Third Party Rights• Assignments
– Assignment is effective immediately, before notice is given. However, if notice is delayed
• and two assignments are made, Check the jx for– first in time, first in right or
– first to receive notice rule.
• performance can be rendered to assignor before notice is received
BUSINESS LAW II
Contract Relationships
BUSINESS LAW II
Delegation Relationships
Contract Relationships
BUSINESS LAW II
Delegation Relationships
Horton (obligee)
Brower(obligor-delegator)
Step 1: Original Contract Formed
Contract Relationships
BUSINESS LAW II
Delegation Relationships
Horton (obligee)
Brower(obligor-delegator)
Kuhn (delegatee)
Step 1: Original Contract Formed
Contract Relationships
BUSINESS LAW II
Delegation Relationships
Horton (obligee)
Brower(obligor-delegator)
Step 2: Brower Delegates
Contract Duties To Kuhn
Kuhn (delegatee)
Step 1: Original Contract Formed
Contract Relationships
BUSINESS LAW II
Delegation Relationships
Horton (obligee)
Brower(obligor-delegator)
Step 2: Brower Delegates
Contract Duties To Kuhn
Kuhn (delegatee)
Step 1: Original Contract Formed
Performance Owed after Delegation
Contract Relationships
Third Party Rights• Delegations
– General rule: Obligee must accept performance
– Obligee can only legally refuse performance if duty cannot be delegated
– Breach makes delegatee liable to obligee– Delegatee and delegator can be sued
Third Party Rights• Delegations
– Delegator is not relieved of duty to perform is delegatee fails to perform.
– Duties that cannot be delegated• Special trust in obligor
• Personal skill or talents of obligor
• Material alteration in performance
• Express contractual prohibitions
Third Party Rights
• Assignment of “all rights”
– Assignment + Delegation– Assignor remains liable if assignee fails to
perform
Third Party Rights• Third Party Beneficiaries
– At formation, parties can create intended beneficiaries with legal rights who can sue promisor for breach.
– Intended beneficiaries• Creditor beneficiary
• Donee beneficiary
• Holsapple v. McGrath
Third Party Rights• Vesting of an Intended Beneficiary’s
rights– Rights vest upon
• Manifest assent
• Material alteration in position to his detriment
– Rights subject to• Express reservations of rights to parties
– Example: beneficiary to life insurance K
Third Party Rights• Intended beneficiaries occur when
– performance is rendered directly to the third party
– the third party has the right to control performance
– the third party is expressly designated as beneficiary
– Contrast: Incidental/Unintended Beneficiaries Caswell v. Zoya International, Inc.
End of Contract Relationships
BUSINESS LAW II
Damages
Availability
A party sustains and proves an injury arising directly from the loss of the bargain.
Result
The injured party is compensated for the loss of the bargain.
Remedy: Compensatory Damages
BUSINESS LAW II
Damages
Sale of Goods
Seller breach = KP - MP
Buyer breach = lost profits
Sale of Land
Seller breach = specific performance
If sold: Majority jx = KP-MP
Non-deliberate breach = down payment + expenses
Remedy: Compensatory Damages
BUSINESS LAW II
Damages
BUSINESS LAW II
Damages
BUSINESS LAW IIMeasurement of Damages
Breach of Construction Contracts
Measurement of Damages: Profits. (Contract price less cost of material and labor.)
Owner in Breach Before Construction has begun
BUSINESS LAW IIMeasurement of Damages
Breach of Construction Contracts
BUSINESS LAW IIMeasurement of Damages
Breach of Construction Contracts
Measurement of Damages: Profits plus costs incurred up to time of breach.
BUSINESS LAW II
Owner in Breach During construction
Measurement of Damages Breach of Construction Contracts
BUSINESS LAW IIMeasurement of Damages
Breach of Construction Contracts
Measurement of Damages: Contract price plus interest.
BUSINESS LAW II
Owner in Breach After construction is completed
Measurement of Damages Breach of Construction Contracts
BUSINESS LAW IIMeasurement of Damages
Breach of Construction Contracts
Measurement of Damages: Generally, all costs incurred by owner to complete construction.
BUSINESS LAW II
Contractor in Breach Before construction is completed
Measurement of Damages Breach of Construction Contracts
Availability
Special circumstances, of which the breaching party is aware of, should
be aware, cause the injured party additional loss. Hadley v. Baxendale
Result
The injured party is given the entire benefit of the bargain.
Remedy: Consequential Damages
BUSINESS LAW II
Damages
BUSINESS LAW II
Damages
Availability
Damages are normally available only when a tort is also involved.
Result
The wrongdoer is punished, and others are deterred from committing similar acts.
Remedy: Punitive Damages
BUSINESS LAW II
Damages
BUSINESS LAW II
Damages
Availability
There is no financial loss.
Result
Wrongdoing is established without actual damages being suffered. The plaintiff is awarded a nominal
amount (such as $1) in damages.
Remedy: Nominal Damages
BUSINESS LAW II
Damages
BUSINESS LAW II
Damages
AvailabilityA contract provides a specific
amount to be paid as damages in the event that the contract is later breached.Result
The non-breaching party is paid the amount stipulated in the contract for the breach, unless the amount is construed as a penalty.
Remedy: Liquidated Damages
BUSINESS LAW II
Damages
Parker v. Twentieth Century
Mitigation of Damages
BUSINESS LAW II
Damages
BUSINESS LAW II
Equitable Remedies
Rescission and Restitution
BUSINESS LAW II
Equitable Remedies
Rescission and Restitution
The injured party is entitled to recapture a benefit conferred.
Availability
BUSINESS LAW II
Equitable Remedies
ResultThe contract is terminated. The parties are returned to the positions they occupied before the contract was made. Racicky v. Simon
BUSINESS LAW II
Equitable Remedies
Specific Performance
BUSINESS LAW II
Equitable Remedies
Specific Performance
The subject matter of the contract is unique. (The legal remedy, money damages, is inadequate.)
BUSINESS LAW II
Equitable Remedies
The injured party gets the bargain promised in the contract.
Availability
Result
Specific Performance
No collection action
No need to cover
Performance worth more than money
BUSINESS LAW II
Equitable Remedies
No involuntary servitude
Benefits
Paintings, sculptures, rare books, coins, land
BUSINESS LAW II
Equitable Remedies
Reformation
BUSINESS LAW II
Equitable Remedies
Reformation
BUSINESS LAW II
Equitable Remedies
The written contract imperfectly expresses the parties’ agreement.
The contract is rewritten to reflect the parties’ true intention.
Availability
Result
BUSINESS LAW II
Equitable Remedies
Quasi-contractual Recovery
BUSINESS LAW II
Equitable Remedies
Quasi-contractual Recovery
BUSINESS LAW II
Equitable Remedies
The parties have no contract, but unjust enrichment cannot otherwise be avoided.
The party who conferred the benefit gets the reasonable value of the benefit conferred.
Availability
Result
Quasi-contractual Recovery
BUSINESS LAW II
Equitable Remedies
Conferring a benefit on the other party
With the reasonable expectation of payment
Without volunteering
Unjust enrichment of the recipient
Elements
Election of Remedies
• No double recoveries
• UCC 2-703, 2-711
• Waiver of Breach– Acceptance of defective performance– Pattern of conduct/course of dealing– Partial waivers
Contract Provisions Limiting Remedies
• Express clauses may rule out or limit damages
• Limitation of liability clauses - limit remedy for breach to replacement, repair, refund
• Exculpatory clauses - equal bargaining positions?
End of Equitable Remedies