Chapter 11:

Chapter 12 Third Party Rights and Discharge of Contracts

Chapter 13 Contract Breach and Remedies

Chapter 11: Defenses to Enforcement of Contracts

A. MISTAKES

1. Unilateral mistakes occur when only one party is mistaken about a material fact regarding the subject matter of the contract.

a. General rule is that the mistaken party is not permitted to rescind the contract.

b. If the other party knew or should have known of the mistake and took advantage of it, then the mistaken party may rescind. And it the mistake occurred because of a clerical or mathematical error that was not the result of gross negligence, the party committing this type of error can rescind. And finally, if the mistake is so serious that enforcing the contract would be unconscionable.

2. Mutual mistakes occur when both parties are mistaken about the contract.

a. Mistake of fact concerns the essence or object of the contract. Either party may rescind.

b. Mistake of value regards the value of the essence or object of the contract. Neither party can rescind.

B. FRAUDULENT MISREPRESENTATION, also called fraud or deceit, occurs when a person intentionally makes an assertion that is not in accord with the facts.

1. Elements

a. false representation of a material fact

b. intent to deceive

c. justifiable reliance on the false representation

d. damages

The innocent party may rescind and obtain restitution or may enforce the contract and sue for damages.

2. Types of fraud include:

a. fraud in the inception occurs when the innocent party is deceived about the nature of their act.

b. fraud in the inducement occurs when the party is fraudulently induced to enter a contract.

c. fraud by concealment occurs when the other party acts to conceal a material fact from the other party.

d. silence as misrepresentation occurs if the party is under a legal obligation to disclose a material facts and fails to do so.

e. misrepresentation of law occurs when a less sophisticated party is intentionally deceived regarding the law by a professional party.

3. Innocent misrepresentation contains all of the elements of fraud except intent. The remedy is rescission, but no damages.

C. UNDUE INFLUENCE occurs when one person takes advantage of another's mental, emotional, or physical weakness and unduly persuades that person to enter into a contract.

1. Undue influence has two elements:

a. A fiduciary or confidential relationship existed between the dominant and servient parties.

b. The dominant party unduly used their influence to persuade the servient party to enter into a contract.

Presumption: If a dominant party enters into a contract with the servient party which benefits the dominant party, the law presumes undue influence. But the presumption is rebuttable.

2. Duress occurs when one party threatens to do some wrongful act against the other party unless the other party enters into a contract. Some examples of duress include:

a. physical duress

b. extortion

c. economic duress

D. STATUTE OF FRAUDS. By statute, certain contracts are required to be in writing to be enforceable.

1. Requirement of writing

a. Transfer of interests in real property include the sale of land, buildings and things attached to land, leases for a term of over one year, and easements.

b. Contracts that cannot be performed within one year of their formation.

c. Collateral contracts to answer for the debts of another, unless the main purpose of the promise is for the benefit of the promisor.

d. Promises in consideration of marriage.

e. Contracts for the sale of goods costing $500 or more.

2. Promissory estoppel prevents the application of the Statute of Frauds to prevent injury or unjust enrichment. This is the same equitable doctrine which prevents a promisor, in certain situations, from revoking a promise unsupported by consideration.

E. SUFFICIENCY OF THE WRITING

1. Sufficiency of writing

a. Does not have to be formal or drafted by a lawyer. Any writing will do, including a letter.

b. It must be signed, but only by the party against whom enforcement of the contract is sought. A variety of things constitute a signature, including initials.

c. Several writing may be combined to constitute the entire agreement by formally referencing another writing or by just being collected together by paper clip, file folder or even in one envelope.

2. Parol evidence rule provides that if a written contract is a complete integration of the agreement of the parties, then any prior or contemporaneous statements (oral or written) are inadmissible as evidence to alter or contradict the terms of the written contract.

a. Parol evidence may be used to:

(1) prove mistake, fraud, misrepresentation, undue influence or duress.

(2) explain ambiguous language.

(3) explain a prior course of dealings or course of performance between the parties or explain a usage of trade.

(4) fill in the gaps in a contract.

(5) correct obvious clerical or typographical errors.

3. Interpretation of contracts is sometimes necessary because of disagreement over the meaning of words used. The courts have developed rules for interpreting contracts as follows:

a. Ordinary words are given their usual dictionary meanings.

b. Technical words are given their technical meaning, unless a different meaning is clearly intended.

c. Specific terms are presumed to qualify general terms.

d. Typed words prevail over preprinted words; handwritten words prevail over both preprinted and typed words.

e. Ambiguities in the contract are resolved against the party who drafted the contract.

f. Unless otherwise agreed, words will be given their usual meaning in the trade if both parties are members of the same trade.

g. Words will be interpreted to promote the principal object of the contract.

Chapter 12: Third-Party Rights and Discharge of Contracts

A. ASSIGNMENT OF RIGHTS

1. Form

a. Assignment is the transfer of contractual rights by a party to the contract to a third person.

b. Assignor is the party making the assignment.

c. Assignee is the third party to whom the rights are assigned.

2. The effect of the assignment is to put the assignee in the shoes of the assignor and to given the assignee the right of the performance by the obligor.

3. Nature of the Assignment.

a. The assignee must notify the obligor that the assignment has been made and that performance must be rendered to the assignee.

b. If the assignee fails to give proper notice and the obligor gives performance to the assignor, then the assignee must look to the assignor for any relief.

4. Anti-assignment and approval clauses limit assignment of certain contracts.

a. The anti-assignment clause prohibits assignment of the contract.

b. An approval clause permits assignment only upon receipt of the obligor's approval and the obligor failure to give approval must be reasonable, e.g. a landlord's (the obligor) approval for a sublease.

B. DELEGATION OF DUTIES

1. Delegation of duties

a. A delegation is a transfer of contractual duties by a party to a contract to a third person.

b. The delegator is the party who transfers their contractual duties.

c. The delegatee is the third person to whom contractual duties are delegated.

2. Effect of delegation:

a. Assumption of duties makes the delegatee liable to the obligee for non performance. Obligee may sue either the delegator or the delegatee or both.

b. Declaration of duties doe not make the delegatee liable to the obligee for nonperformance. Obligee may only sue the delegator.

c. In either case, the delegatee is liable to the delegator for any damages suffered by the delegator due to the nonperformance of the delegatee.

3. Anti-delegation clause prohibits delegation of duties under a contract.

C. THIRD-PARTY BENEFICIARIES

1. Intended beneficiaries can sue to recover their rights under the contract and come in two types:

a. Donee beneficiaries are intended beneficiaries who have received the right without paying consideration, such as beneficiaries under a life insurance contract.

b. Creditor beneficiaries are creditors who become beneficiaries under a contract between the debtor and some third party, in which the third party agrees to perform some obligation of the debtor if the debtor does not do so.

2. Incidental beneficiaries are those who receive some benefit from the contract, but are not a person or class of persons for whom the contract was intended to benefit. These beneficiaries cannot enforce any rights under the contract.

D. PROMISES OF PERFORMANCE

1. Covenants are unconditional promises to perform, the breach of which gives the other party the right to sue.

2. Conditions are events, the occurrence or nonoccurrence of which, giving rise to the promisor's duty to perform or not perform under the contract. There are three basic types of conditions:

a. Condition precedent requires an event to occur (or not occur) before the promisor has a duty to perform. If you die during the period of the policy, the company will pay your beneficiary $.

(1) a personal satisfaction condition precedent has two standards. To the person's actual satisfaction applies when the performance involves personal taste or comfort. To a reasonable person's satisfaction if the performance involves mechanical fitness or a commercial contract.

b. Condition subsequent provides that the occurrence or nonoccurrence of a specific event automatically excuses performance under a contract.

c. Concurrent conditions arise when the parties to a contract must render performance simultaneously.

E. DISCHARGE OF PERFORMANCE

1. Discharge by agreement

a. mutual rescission of executory contract

b. substituted contract-new contract specifically revokes the old one.

c. novation-a third party replaces one of the original parties, who by the novation is discharged from all liabilities.

d. accord and satisfaction if the duty or debt is unliquidated.

2. Discharge by impossibility

a. Impossibility of performance occurs if the contract is objectively impossible to perform due to an event.

b. Commercial impracticability occurs when performance is impractical because of an event.

c. Frustration of purpose occurs when the object of the contract, of which both parties have knowledge, becomes worthless due to an unforeseeable event.

d. Force majeure clause. The parties have agreed in advance what events will excuse performance.

3. Discharge by operation of law

a. Statute of limitations is a period of time within which to bring a legal action to enforce a contract or forever loss the right to do so.

b. Bankruptcy relieves a person of the legal duty to pay most type of contractual debts or obligations.

c. Alteration of a contract, if done intentionally and if it materially changes the contract, then the injured party may cancel the contract or enforce it under either its original or altered terms.

Chapter 13: Contract Breach and Remedies

A. PERFORMANCE AND BREACH

1. Levels of performance

a. Complete

b. Substantial

c. Inferior

2. Anticipatory breach occurs when one party to a contract informs the other, by words or by conduct, that they will not perform their contractual duties when they are due in the future. This gives the other party an immediate cause of action for breach of contract, even though performance is not yet due.

B. MONETARY DAMAGES

1. Monetary damages

a. Compensatory damages

b. Consequential damages

c. Nominal damages

d. Liquidated damages

2. Mitigation of damages requires the nonbreaching party to take reasonable steps to avoid or reduce the damages they have suffered due to the breaching party.

C. RESCISSION AND RESTITUTION

1. Rescission and restitution restore the parties to the same position they occupied before the contract.

a. Rescission is an action taken to undo the contract.

b. Restitution is the return of any benefit or consideration received under a rescinded contract.

D. EQUITABLE REMEDIES are available if the nonbreaching party cannot be adequately compensated by a legal remedy or if necessary to prevent unjust enrichment.

a. Specific performance is an court order ordering the breaching party to perform under the contract. Available only in the subject matter is unique (original work or art). Never available under a personal service contract.

b. Reformation permits a court to rewrite a contract to express parties true intentions, especially to correct clerical or mathematically errors.

c. Quasi-contract is used to prevent unjust enrichment when no actual contract between the parties exists. Also called implied-in-law contract and quantum meruit.

d. Injunction is an equitable remedy which orders a party not to do something if the innocent party will be irreparably injured if the injunction is not granted.

E. TORTS ASSOCIATED WITH CONTRACTS

1. Types

a. Intentional interference with contractual relations.

b. Breach of implied covenant of good faith and fair dealing. Available only in certain contracts (insurance). Also called tort of bad faith.

2. Tort damages include the actual damages available in most torts (personal injury, pain and suffering, emotional distress, etc.) plus punitive damages since these torts involve intentional and in most cases egregious conduct.

E. ENFORCEMENT OF REMEDIES

1. Judgment is issued by the court after the trial or hearing and will specify the remedy the prevailing party has against the breaching party.

2. Methods of satisfying the judgment is the defendant does not pay it:

a. Writ of attachment is a court order to the sheriff to seize the defendant's property and to sell the property at auction. Proceeds are paid to the plaintiff.

b. Writ of garnishment is a court order to a third party (bank, employer, etc.) who holds property of the defendant to deliver the property to the court. Wage garnishments are subject to limits set by law.