Chapter 14 Contracts and Sales: Performance and Remedies

Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning

Chapter 14Contracts and Sales:

Performance and Remedies

Its Legal, Ethical, and Global Environment

MARIANNE M. JENNINGS

7th Ed.

2 Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning

DefensesDefenses


• Both parties to a valid contract must have capacity, which includes age (18) and mental capacity.

• Age Capacity.– In most states age is 18.– Before that, the party is an infant or

minor.

Defenses: CapacityDefenses: Capacity


• Capacity – Age. – Contracts are voidable—minor can get out at

his/her option.– Liable in quasi-contract for necessaries.– Some exceptions—student loans; military

service.• Case 14.1 Schmidt v. Prince George’s

Hospital (2001).– Did the minor consent?

Defenses: CapacityDefenses: Capacity


• Person understands contracts are enforceable and significance of legal documents.

• Understands contracts involve costs and litigation.

• If declared legally incompetent-contracts are void!

• Otherwise, if no legal capacity, contracts are voidable.

Defenses: Mental Defenses: Mental CapacityCapacity


• Elements:– Misstatement of a material fact.– Reliance.– Damages.

• Remedy can be rescission-contract is set aside.

• Must have been material.• Cannot be sales puffing (opinion).

MisrepresentationMisrepresentation


• Elements:– Knowing and intentional use of false

information.– Knowing and intentional failure to disclose.– Many states have statutes exempting the

disclosure of a murder or AIDS victims as previous owners or residents.

• However, if there is an inquiry by the potential buyer, the information cannot be withheld.

FraudFraud


• Fraud: The failure to disclose material information can be fraud or misrepresentation

• Case 14.2 Reed v. King (1983).– What does Mrs. Reed need to establish to be

entitled to recession and damages?– Would the information about the house make a

difference to you in making a buying decision?

FraudFraud


• Duress – Contract Voidable.– Physical force or threats.– Party is deprived of a meaningful choice.– Has right of rescission.– Voidable.

• Undue Influence –Contract Voidable.– Must have confidential relationship.

• Attorneys/clients.• Elderly parents.

Duress – Undue Duress – Undue InfluenceInfluence


• Illegal subject matter.– Contract is void.– Contracts in violation of criminal

statutes.• Examples: Contract to have someone

killed; contract to pay for a vote.

Illegality – Public Illegality – Public PolicyPolicy


• Contracts in violation of licensing statutes must be competency-based as opposed to revenue-raising for contracts to be void.

• Contracts in violation of usury laws charging interest in excess of statutory maximum.



• Contracts in violation of public policy.– Exculpatory clauses—full liability

elimination is generally invalid.– Covenants not to compete must be

reasonable in time and geographic scope.

– Unconscionable contracts.



• Case 14.3 Water v. Min Ltd. (1992).– What are the possible defenses to this

contract?– What made the contract

unconscionable?– Is there any criminal conduct here?

DefensesDefenses


• When is Performance Due.– Conditions precedent.– Conditions concurrent.– Conditions subsequent.

Contract PerformanceContract Performance


• Standards for Performance.– Complete performance is required.– Substantial performance allowed in

contract cases.• Substantial Performance = Nonmaterial

Breach.



• E-Commerce: Payments.– Digital Cash.– Digital Wallets.– Virtual Points.– Person-to-Person Payment.– Virtual Escrow.– Virtual Credit Card.



• When Performance is Excused.– Impossibility—contract cannot be performed

• Example: Cannot build house if the land is washed away.

– Commercial impracticability—UCC-2-615. • Basic assumptions parties made are no longer

true.• Can protect themselves by putting in force

majeure clause—covers problems such as wars, embargoes, depressions.

Performance: ExcusePerformance: Excuse


• Case 14.4 Sons of Thunder, Inc. v. Borden, Inc. (1997).– What impact does “good faith” have on

termination of a contract?– What are the damages when there is a

lack of good faith in the termination of a conduct?

Performance: Good Performance: Good FaithFaith


• Novation.– Two original parties agree, along with

third party, to substitute one party for another.

• Accord and Satisfaction– Agreement reached to discharge a

disputed obligation.

Substitute Substitute PerformancePerformance


• Types of Damages:– Compensatory—put party in same

position they would have been in without the breach.• Example: Sales—buyer has to buy car for

$7,000 as opposed to original $6,000—gets $1,000 in damages.

– Incidental damages, e.g., cost of finding the other car; attorney’s fees.

Contract RemediesContract Remedies


• Types of Damages:– Consequential damages.

• Damages experienced in relation to third parties.

• Late fees or loss of income for delays.– Liquidated damages.

• Parties agree on damage amount in advance.

Contract RemediesContract Remedies


• Assignments.– Original party to contract assigns his/her

benefits under the contract to another.• Example: Credit company sells credit contract for

present value to another who undertakes its collection.

– Assignee has same rights as original party.• Delegation.

– Transfer of obligations under contract.

Third Party RightsThird Party Rights


Third Party RightsThird Party Rights• Third Party Beneficiary.

– Originally named in the contract to benefit from the contract.• Insurance beneficiaries are third party

beneficiaries.


• Assuring Payment:– Use a bill of lading.

• Title to goods controlled.• Used in connection with letter of credit or

draft.– Letter of Credit issued by buyers bank to

seller.• Seller may draw on L/C to receive payment.

International IssuesInternational Issues


• Assuring Performance:– Need force majeure clause.– Stability of currencies.

• Case 14.5 Lakeway Co. v. Bravos (1979).– How much did Lakeway lose once there was

devaluation.– How did the contract address the issue of

devaluation.

International IssuesInternational Issues

Documents

Chapter 14 Contracts and Sales: Performance and Remedies