Week 4: Contract Rights and Remedies

Administrative Items

Case reading assignment for Week 5 on October 2nd:

A&M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473 (1982) {summarized in text at p. 283}

C. R. Daniels, Inc. v. Yazoo Mfg. Co., Inc., 641 F. Supp. 205 (S. D. Miss., 1986) {text at p. 310}

The Core Theory of Contracts

A and B each have the capacity to act in their own interest. A makes an offer to B -- a definite proposal for the exchange of promises about their future conduct. B informs A that B accepts the offer. Each receives legal consideration -- a future benefit, or a restriction on the other's freedom of action. They have made a contract.

Chapter 14: Written Contracts

"An oral contract isn't worth the paper it's printed on." Sam Goldwyn

(More Goldwynisms here)

"Statute of Frauds"

An anti-fraud rule that some contracts must be written/signed to be enforceable. Policy is to avoid reliance on fallible memory where value is great, or time lapse is large. See California Civil Code, Section 1624

If SoF applies, a contract is enforceable only if there is "a writing signed by the person from whom performance is sought"

Result can be one-way enforceability, if only 1 party signs

Contracts requiring a writing

  • Sale of land, or interest in land over 1 year
  • Courts may apply quasi contract when there's part performance, to avoid "unjust enrichment". Example: buyer takes possession and improves the property.
  • Contracts "that by their terms cannot possibly be performed in 1 year"
  • A little tricky: "could defendant *possibly* do all that's necessary to fully perform w/in 1 year?"
  • Guarantee and suretyship contracts: 3rd parties
  • Pay debts barred by limitations or bankruptcy
  • UCC 2-201: Sale of goods => $500; leases of moveable property => $1,000
  • was written in 1950's dollars ...

Relief from SoF: promissory estoppel.

If the oral promise forseeably induces material change of position in reliance, and injustice looms

E-signatures and Internet contracts

Issue: how do the rules bridge from paper-based commerce to electron-based?

Uniform Electronic Transactions Act Problem: recurring references to validation by context, and hardly any cases yet providing interpretation

Principles of Contract interpretation

Seek the meaning intended by the parties

  • Ordinary words in ordinary sense
  • Technical words and usage of trade in technical / trade sense
  • Specific overrides general
  • Written overrides typed overrides printed

Parole evidence rule

If the written contract is a "complete integration" of the deal, oral evidence of prior dealings is not admissible in evidence to vary it

Can explain ambiguities, reasonableness, prior course of dealings

Chapter 15: Third Parties & Relief from Obligations

Assignment of rights:

A transfers the benefits of B's performance to C. Not only do contracts give markets a time dimension, but contract rights themselves can be the subject of further transactions

Limitation on assignability

If assignment would vary the obligee's (= B = person who has to perform) duties, increase the burden, or impair likelyhood of getting return performance

Personal services not assignable: I'll work for you, but not for X

Can't assign a mere expectancy: future right that may or may not become real. (eg. can't sign away a future inheritance that may not happen.)

Contract itself may prevent assignment without consent, tho in commercial lease context there often is an implied obligation for landlord to act reasonably

Effect of assignment

original obligor (= A = recipient of performance) out of the picture

C must inform B, who must reasonably verify that A did indeed assign. Reason is so performance won't go to wrong person

Problem: A assigns a right to C and to D. A then disappears.

Several possible rules: "first in time first in right", or "first to notify B", or "consideration controls over a gratuitous assignment"

For secured transactions : UCC 9 solution: a financing statement in the state's public records puts all later parties on notice

Delegation of duties:

Duties can be delegated unless unique: e.g. personal services, trustees, or unless delegation would vary the performance

Both the delegator and delegatee remain liable.

B in effect guarantees C's performance of B's promise to A

Third party beneficiaries

Only "intended beneficiaries" can enforce contracts w/o being parties.

Donee Beneficiaries:

A wants to make a gift to C. A contracts w/ B, who agrees to deliver performance to C. C has contract rights vis-a-vis B, even tho C has no claim against A (since A received no consideration from C)

Creditor beneficiaries:

Example: A sells goods to B on credit. B sells to C, who agrees to pay A. A is creditor beneficiary of the B-C contract (and A can also still go against B)

Other beneficiaries are "incidental" without enforceable rights

Example - seller of sports team merchandise when the team negotiates a move to another city.

"Privity of contract" : important accountants liability issue


Terminology for "conditions"

"Covenant" = unconditional. "Condition" = {IF... THEN...}

Conditions can be "waived": "the voluntary relinquishment of a known right"

"Discharge": What ends the obligation to do as promised?

Excuses that relieve a party from performing

Excuse by "Objective impossibility"

"It just can't be done". Examples: death of party who is to perform services, destruction of the subject matter (e.g. building burns before the lease starts)

Excuse by "Force majeur"

"the greater force", that is, Acts of God or Princes. Example: effect of hurricanes on contracted deliveries by refineries

Excuse by Supervening illegality

eg. PNB letter of Credit payable in Los Angeles to a crony of ex-dictator Marcos

Excuse by Commercial impracticibility

It's not physically impossible to perform, but context of performance has changed beyond the reasonable range of expectations of the parties

How distinguish from wanting out of a bad bargain? -- this is a tricky judgment call

Frustration of purpose

The "coronation" cases: Edward VIII in 1902

Discharge of obligation by operation of law

Chapter 16: Performance and Breach

Complete performance is what a contracting party promises. But a party "breaching" (not performing) a contract is generally obliged only to give the other party the money value of performance. It may be "efficient" to break a contract. But is it ethical? Should the breaching party be punished? Are there transaction costs and losses that the "value of performance" standard doesn't catch?

Core idea: A does not perform as and when promised. What relief can B obtain from the courts?

Old English distinction between law and equity affects remedies. The traditional law courts could only award money damages or order contract rescission

If the breach is minor -- Substantial Performance

  • B may seek to have A "cure" (fix) the breach, and suspend B's own performance (for a reasonable time) until A cures
  • B may offset the price of the cure against the contract price (i.e. accept inferior performance and reduce the amount B pays)
  • B may pay for a fix and seek reimbursement of the cost of the fix from A

'Time is of the essence' = words that make lateness material.

Substantial performance does not justify rescission

If the breach is material -- Inferior performance or none at all

"Materiality" an undefined, judgment word

B may rescind

"Rescission" = undo the contract as of when it began. Restore the parties to where they were before the contract existed. B wants return of the consideration B gave

Available if material breach, fraud, mistake, etc.

B may seek compensatory damages

An amount of money equal to the value of the performance that was promised minus the value (if any) of the actual, materially breaching performance. Object is to put nonbreaching party in as good a position as performance would have

  • Sale of fungible goods

damages equal the "value of the bargain", that is, the market price at time and place of performance minus the contract price. Only nominal damages, if any, for the loss of a bad deal

  • Employment contract: lost wages, net of mitigation
  • Construction contract:
  • The nonbreaching contractor recovers out of pocket costs plus contract profit
  • The nonbreaching owner recovers extra cost to complete per contract

Consequential Damages?

Question is whether A knew/should have known the value to B of A's performance

Can be recovered only if they are reasonably forseeable, not if they are unique to B and unknown to A. B can recover lost profits only if known/ reasonably certain

Liquidated Damages

Parties agree in contract on the measure of damages. Upheld only if not a penalty.

Minimal liquidated damages with exculpatory effect. Perlin v. Morse

Nominal damages/ Symbolic damages

Example: "we award Pl. $1" for the loss of an unfavorable bargain

Punitive damages

Generally only for torts, not contracts (but see torts involving contracts, later)

Nonbreaching party has a duty to "mitigate"

Don't by action or inaction make the damages worse. Instead, act to reduce the loss: eg. landlord's duty to re-let

Anticipatory repudiation

A "repudiates" by telling B in advance of performance time that A will not perform when due. B is then discharged (need not perform) and may seek damages.

However, A may cure a repudiation, if B hasn't accepted it or if B hasn't acted in reliance on it

Why should A ever repudiate in advance, rather than waiting until the contract date? Doing so gives B "an option instead of a future" -- and an option is always more valuable than the equivalent future. What if it looks like A won't perform but A won't say so? What risks to B in pursuing alternative courses of action? UCC 607 has a solution -- the request for reasonable assurance.

Equitable remedies

These were historically available thru the king's chancellor's court of "fairness". Can't get these unless there is a showing that money damages are inadequate

Specific performance

A court order: you must do X (or baliff will lock you up for contempt of court)

eg. sale of real estate: compel the transaction. Real estate is presumed unique, so money will not compensate for loss ot *that* land.

Not for personal services -- too hard for court to administer

Reformation: correct the mistakes

Example: fix a will where name of charity is stated incorrectly

Quasi contract: prevent unjust enrichment

Injunction: a court order to prevent a certain act

Terms: TRO, preliminary, permanent

eg. departing tech employee wants to join competition, contrary to contract noncompete clause

Enforcement of judgments for money

Small claims handbook: Collecting Your Judgment

  • Debtor's examination
  • Attach the assets: sale by sheriff
  • Garnish the assets in hands of 3rds: eg. Wages

Torts related to contracts

Intentional interference/Wrongfully Inducing breach

What is "wrongful", as opposed to fair, tough competition?

Breach of good faith and fair dealing

Primarily an insurance tort

Reason tort remedies sought: punitive damages are potentially available

American rule: each pays for own lawyer unless agreed otherwise
Note, however, a California rule: automatic mutuality of attorney fee clauses in contracts

notes and format (c) 2001-08 Robert H. Daniels