Chapter 13 Contract Defenses Discharge and Remedies Chapter

Chapter 13 Contract Defenses, Discharge, and Remedies

Chapter Objectives 1. Describe the circumstances in which an otherwise valid contract may be unenforceable. 2. Summarize the ways in which contractual obligations can be discharged. 3. Define the different types of damages that may be obtainable on the breach of a contract. 4. Indicate the usual measure of damages for breach of various types of contracts. 5. List the equitable remedies that may be granted by courts and indicate when they will be granted. 2

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Case 13. 1 Raffles v. Wichelhaus purchased a shipment of cotton from Raffles to arrive on a ship called the Peerless from Bombay, India. Wichelhaus meant a ship called Peerless sailing from Bombay in October; Raffles meant another ship called the Peerless sailing from Bombay in December. When the goods were finally delivered in December, Wichelhaus refused them. The judge ruled in favor of Wichelhaus, claiming that a mutual mistake of fact had occurred. 4

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The Statue of Frauds Article 11 of the Contracts for the International Sale of Goods (CISG) does not incorporate any Statue of Frauds provisions. Article 11 accords with the legal customs of most nations, in which contracts no longer need to meet certain formal or writing requirements to be enforceable. If there were no Statute of Frauds and if a dispute arose concerning an oral agreement, how would the parties substantiate their respective positions? 7

Contract Discharge In addition to performance, there are numerous other ways in which a contact can be discharged, including: § Discharge by Agreement of the Parties § Discharge based on Impossibility of Performance 98

Discharge by Performance • A contract may be discharged by complete (strict) or by substantial performance. § In some cases, performance must be to the satisfaction of another. • Totally inadequate performance constitutes a material breach of contract. • An anticipatory repudiation of a contract allows the other party to sue immediately for breach of contract. 39

Case 13. 2 Van Steenhouse v. Jacor Broadcasting of Colorado, Inc. , owns and operates Newsradio 85 KOA. In 1991, Andrea Van Steenhouse signed a three-year agreement to perform as a radio talk-show host for KOA. She was to receive a salary and a performance bonus, depending on the number of people who tuned in. In 1994, she was replaced by the Rush Limbaugh show. Jacor paid Van Steenhouse her base salary but did not resume use of her services. Van Steenhouse filed suit claiming breach of contract. The court awarded her the amount of the bonus she would have received. If courts routinely held that only performance could discharge employment contracts, how would this affect employment relations? 10

Discharge by Agreement Parties may agree to discharge their contractual obligations in several ways: By Rescission By Novation The parties mutually agree to rescind (cancel) the contract. A new party is substituted for one of the primary parties to a contract. By Accord and Satisfaction The parties agree to render performance different from that originally agreed on. 11

Discharge Due to Impossibility • Parties’ obligations under contracts may be discharged by objective impossibility of performance or commercial impracticability of performance. • Where performance is only temporarily impossible, the performance is suspended until the impossibility ceases. 12

Punitive Damages The reason punitive damages are awarded in tort actions while they normally are not in contract actions has to do with the different purposes of tort and contract law. Unlike an intentional tort, which is generally viewed as a morally wrongful action, breach of contract is often viewed as morally neutral. Can a breach of a contract ever be viewed as “morally neutral” by the nonbreaching party to that contract? 13

Damages The legal remedy of damages is designed to compensate the nonbreaching party for the loss of the bargain. By awarding money damages, the court tries to place the parties in the positions that they would have occupied had the contract been fully performed. The nonbreaching party frequently has a duty to mitigate the damages incurred as a result of the contract’s breach 14

Types of Damages There are five broad categories of damages: Compensatory Damages Consequential Damages Punitive Damages Nominal Damages Liquidated Damages 15

Compensatory Damages that compensate the nonbreaching party for injuries actually sustained and proved to have arisen directly from the loss of the bargain resulting from the breach of contract. In breaches of contracts for the sale of goods or land, the usual measure of compensatory damages is an amount equal to the difference between the contract price and the market price. In breached construction contracts, the measure of damages depends on which party breaches and at what stage of construction the breach occurs. 16

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Case 13. 3 Shadow Lakes, Inc. v. Cudlipp Construction and Development Co. agreed to build up to 375 houses for Shadow Lakes, Inc. , near Tampa, Florida. Under the contract, the parties were bound to complete 14 of the houses, but either party had the right to terminate the agreement with regard to future houses if prices could not be mutually agreed upon by the parties. After starting construction on 8 houses, problems arose. Cudlipp filed a suit against Shadow Lakes alleging breach of contract. The jury awarded Cudlipp, but the Court of Appeals reversed the award. What might be an appropriate measure of damages if, in fact, a contractor was realizing no profit, or was even actually losing money, on a contract? 18

Consequential Damages resulting from special circumstances beyond the contract itself; the damages flow only from the consequences of a breach. For a party to recover consequential damages, the damages must be the foreseeable result of a breach of contract. The breaching party also must have known at the time the contract was formed that special circumstances existed and that the nonbreaching party would incur additional loss on breach of the contract. 19

Hadley v. Baxendale (1854) The question before the court was whether Hadley (the mill owner) could recover for consequential damages—the lost profits—caused by Baxendale’s delay in delivering a broken crankshaft. The court held that the Hadleys could recover only if Baxendale knew or should have known that the mill would have to be shut down while the crankshaft was being repaired. Was Baxendale aware of this? If it had not been the custom in the mid-1800 s for mills to have extra crankshafts on hand, how would this circumstance have affected the court’s ruling? 20

Punitive Damages Punitive damages (also known as exemplary damages) are awarded to punish the breaching party and deter similar conduct in the future. These are usually not awarded in an action for breach of contract unless a tort is involved. 21

Nominal Damages Nominal damages are those small in amount (such as one dollar) that are awarded when a breach had occurred but no actual damages have been suffered. They are often awarded only to establish that the defendant acted wrongfully. 22

Case 13. 4 Parker v. Twentieth Century- Fox Film Corp. Twentieth Century-Fox Film Corp. planned to produce a musical, Bloomer Girl, and contracted with Shirley Mac. Laine Parker to play the leading female role. Fox decided not to produce Bloomer Girl and tried to substitute another contract for the existing contract. Parker filed suit against Fox to recover the amount of compensation guaranteed in the first contract, because she believed the roles were not equivalent. The trial court ruled in favor of Parker, and the Supreme Court affirmed the decision. Many legal systems, including that of France, have no clear requirement that damages must be mitigated. Can justice be better served by requiring that damages be mitigated? If so, how? 23

Victims of Employment Discrimination Danny Greenway was hired by Buffalo Hilton Hotel, without notifying them he tested positive for HIV. Five years later when he took a disability leave, he informed them he was HIV positive. He was disciplined and eventually fired. He filed suit claiming violation of the ADA of 1990. The jury awarded him $1. 4 million, but the appellate court concluded that he was not entitled to receive damages for future health insurance premiums, medication costs, and front pay because he did not mitigate his damages by seeking other permanent employment. If the wrongfully discharged employee does not seek employment and fails to find any, why does the burden then fall on the former employer to prove that suitable employment was nonetheless available? 24

Liquidated Damages that may be specified in a contract as the amount to be paid to the nonbreaching party in the event the contract is later breached. Clauses providing for liquidated damages are enforced if the damages were difficult to estimate at the time the contract was formed and if the amount stipulated is reasonable. If construed to be a penalty, the clause will not be enforced. 25

Rescission and Restitution Rescission Restitution A remedy whereby a contract is canceled and the parties are restored to the original positions that they occupied prior to the transaction. Available when fraud, a mistake, duress, or failure of consideration is present. The rescinding party must give prompt notice of the rescission to the breaching party. When a contract is rescinded, both parties must make restitution to each other by returning the goods, property, or money previously conveyed. Restitution prevents the unjust enrichment of the defendant. 26

Specific Performance An equitable remedy calling for the performance of the act promised in the contract. Specific performance is only available in special situations, such as § those involving contracts for the sale of unique goods or land, or § when monetary damages would be an inadequate remedy. Specific performance is not available as a remedy in breached contracts for personal services. 27

Reformation An equitable remedy allowing a contract to be “reformed, ” or rewritten, to reflect the parties’ true intentions. Available when an agreement is imperfectly expressed in writing. 28

Recovery Based on Quasi Contract An equitable theory imposed by the courts to prevent unjust enrichment in a situation in which no enforceable contract exists. The party seeking recovery must show: § A benefit was conferred on the other party. § The party conferring the benefit did so with the expectation of being paid. § The benefit was not volunteered. § Retaining the benefit without paying for it would result in the unjust enrichment of the party receiving the benefit. 29

Election of Remedies A common law doctrine under which a nonbreaching party must choose one remedy from those available. The purpose of the doctrine is to prevent double recovery. 30

Remedies for Breach of Sales Contracts When the buyer breaches a contract for the sale of goods, the seller may stop or withhold delivery of the goods, or recover damages or the purchase price of the goods. When the seller breaches a sales contract, the buyer may reject the goods, recover damages, obtain specific performance, or cover and obtain from the seller the extra cost of the cover. 31

The Sale of Goods Article 2 governs contracts for the sale of goods (tangible, movable personal property). The common law of contracts also applies to sales contracts to the extent that the common law has not been modified by the UCC. 32

Laws Governing Contracts General Contract Law Relevant Common Law Not Modified by the UCC Article 2 Controls Co Nonsales Contracts (Contracts outside the UCC) ntr ols ls o ntr Contracts for the Sale of Goods Co 33

Performance of a Sales Contract The basic obligation of a seller under a sales contract is to transfer and deliver conforming goods, that is, goods that conform to the specifications of the contract. The basic obligation of a buyer is to accept and pay for conforming goods in accordance with the contract. 34

Provisions Limited Remedies A contract may provide that no damages (or only a limited amount of damages) can be recovered in the event the contract is breached. Whether such provisions are enforced depends on the type of breach that is excused by the provision. For example: § Clauses excluding liability for fraudulent or intentional injury or for illegal acts cannot be enforced. § Clauses excluding liability for negligence may be enforced if both parties hold roughly equal bargaining power. 35

Contracts for the International Sale of Goods International sales contracts are governed by the United Nations Convention on Contracts for the International Sale of Goods (CISG). If the countries of the parties to the contract have ratified the CISG (and if the parties have not agreed that some other law will govern their contract), the CISG covers the transaction. Essentially, the CISG is to international sales contracts what Article 2 of the UCC is to domestic sales contracts. 36

For Review 1. What defenses can be raised against the enforceability of an otherwise valid contract? 2. What contracts must be in writing to be enforceable? 3. How are most contracts discharged? 4. What is the difference between compensatory damages and consequential damages? What are the nominal damages, and when might they be awarded by a court? 5. Under what circumstances will the remedy of rescission and restitution be available? When might specific performance be granted as a remedy? 37