Commercial Law Final Exam

Agreement of the Parties: Types

1. Mutual Rescission 2. Release 3. Accord and Satisfaction 4. Substituted Agreement 5. Novation 6. Modification

Quasi-Contract Remedies: Two types

1.Quantum meruit a.Value of service rendered b.If defendant unjustly enriched by receiving uncompensated for services, she must pay for them 2.Quantum valebant a.Value of property received b.Injured party has conveyed property that unjustly enriches the recipient, the recipient must pay for the value of the property

Injunction

A court order to stop (or enjoin) someone from engaging in a specific action Available when an innocent party could not otherwise be compensated 1.Temporary injunctions or temporary restraining orders are ordered upon a showing of that legal remedies are insufficient and the party requesting the order is likely to prevail on the merits 2.Permanent injunctions are issued after a full hearing in which the movant establishes a basis for the court order

Frustration of Purpose

A court-created doctrine under which a party to a contract will be relieved of his or her duty to perform when the objective purpose for performance no longer exists (due to reasons beyond that party's control). Underlying reason for a valid contract no longer exists Reason not specified in contract but may be ascertained by the circumstances Ex: Coronation of King Edward VII of England. Persons with homes along procession route created one day leases with persons who wished to view the procession Edward VII develops appendicitis 2 days before coronation One day landlords attempted to sue tenants who did not perform as the coronation was postponed Court: contract is valid, but purpose no longer existed; tenants were discharged from rental obligation

Breach of Contract

A failure to perform, as promised, at the time the performance was due. Total break of the obligation to perform The innocent party has an immediate cause of action if the breach is a material breach Ex: A agrees to buy B's necklace and pays B; B fails to deliver the necklace; A can sue to recover his money or to have necklace conveyed

Specific Performance

A legal action to compel a party to carry out the terms of a contract. Court order requiring the breaching party to perform exactly what is promised in the contract Only granted where the subject matter of the contract is considered unique and not replaceable or when no other remedy would rectify the injury Court is ordering the party to do something Note: real property is always considered unique

Mitigation of Damages

A nonbreaching party's legal duty to avoid or reduce damages caused by a breach of contract. (other than goods, i.e. services) Innocent, injured party must make a reasonable attempt to minimize her damages by attempting to find a replacement for the failed party's contractual performance Only reasonable attempts - extremely hard or expensive measures are not called for If mitigating party find a better deal, breaching party is off the hook

Impossibility of Performance

A party's performance becomes impossible to fulfill through no fault of his or her own Facts and circumstances determine what constitutes impossibility of performance Determination: the performance is totally incapable of being performed Strikes which delay delivery of perishable goods which are destroyed Impossibility is temporary; party is not discharged, performance is suspended until the impediment is discharged Strike prevents the off-loading of a non-perishable good Circumstances which make performance more difficult or expensive than originally anticipated do not relieve party of obligation

Agreement of the Parties: 2 methods

A. Original contract provides for dissolution of contract in a provision such as notice to terminate provision B. Parties change original contract by forming a new contract - 6 types of new agreements which have the effect of discharging the former contract

Mutual Rescission

An agreement between the parties to cancel their contract, releasing the parties from further obligations under the contract. The object of the agreement is to restore the parties to the positions they would have occupied had no contract ever been formed. Both parties to contract agree they do not want to proceed further under the agreement Both sides take back or rescind the agreement Consideration: the detriment incurred by each party by not receiving the promised consideration from the original contract Ex: A and B agree to be partners in a retail store pursuant to a written partnership agreement; prior to establishing business, A and B have a disagreement and decide to rescind the contract

Waiver cont.

Any party is free to waive any provision of a contract Waiver provisions are typically included with contracts which contain ongoing provisions to perform which state that a waiver of one provision does not necessarily waive other provisions, nor is a one time waiver considered a continuing waiver Once a party waives a provisions, the party is estopped from raising that provision as the basis of a lawsuit.

Agreement of the Parties

Both parties to a contract may freely rearrange their contractual agreement as long as both parties agree to the changes

Arbitration Provisions

Contracts may specify that disputes must be resolved by arbitration as opposed to court action

Reformation

Court ordered accord and satisfaction Parties to a disputed contract cannot resolve the contract Court will resolve it for them and keep the contractual relationship intact Courts can reform contracts in which quantity, quality and subject matter is disputed by ordering the contract to conform to what was actually delivered to preserve contract Ex: A and B dispute the grade of plums delivered - Grade A is $ 9/bushel and Grade B is $8/bushel; court reforms contract to $ 8.50/bushel

Performance Prevented

During the period of the condition, a party engages in an act which makes performance impossible for the other party Person preventing performance is still bound to the contract The other party is excused Ex: A agrees to paint B's house on Thursday; when A arrives to paint, B has locked the gate preventing A's performance; A is excused, B is still liable for costs and expenses If Party A is obligated to perform after a condition and Party A prevents the occurrence of the condition, Party A is still liable Ex: A hires B to remodel A's house for a sum certain and the receipt of an architect's certificate. If A prevents architect for giving certificate, A will remain liable to B for payment

Mitigation in damage awards

Duty of innocent party in a breach to attempt (as long as not unreasonably difficult or burdensome)to lessen damages the breaching party has to pay Ex: A contracts with B to purchase 1000 bushels of oranges for $ 10/bushel. B breaches; A purchases from C at $ 11/bushel (mitigates); damages are $ 1/bushel for B Ex: same as above but A purchases from D at $ 9/bushel - NO DAMAGES from B because this is a better deal Ex: A contracts with B for the purchase of a 50 carat sapphire. If B fails to deliver, this will be a full breach because this is a unique item which can A cannot mitigate

Methods of Discharge

Excuse of Conditions Performance Breach of Contract Agreement of Parties Impossibility of performance Supervening Illegality Death or Destruction of the subject matter or parties Frustration of Purpose

Determination of Compensatory Damages

Guidelines are based on the type of contract Sale of goods: difference between market value and the contract price Innocent buyer: difference between contract price and goods substituted in mitigation Innocent seller: difference between contract price and price received in resale Employment contract: E'er breach: e'ee gets contract price E'ee breach: e'er can recover cost of replacing the worker

Rescission and Restitution

If a party finds fulfillment of contract unduly burdensome, this party can ask the court to rescind or revoke the contract in the interest of fairness Each party must restore to the other whatever has been expended on the contract The breaching party is seeking relief in this instance by showing the court that fulfillment of the contract is so burdensome as to be unjust - not mere economic loss (risk of contract) Determined on a case by case basis Ex: A and B have entered into partnership agreement to publish a magazine; after 2 years, venture is losing money with no likely change in foreseeable future; A has gone through his money and needs to find a job; C wants to continue agreement; A could have court rescind contract because it is unduly burdensome

Equitable Remedies

Legal remedies must be insufficient to compensate the injured party for the contract breach Equitable remedies designed to prevent unfairness and unjust enrichment 5 categories: 1.Injunctions 2.Specific performance 3.Rescission and restitution 4.Reformation 5.Quasi-contractual

Modification

Merchants acting under a contract for the sale of goods may make good faith modifications to their contractual obligations

Compensatory Damages

Monetary award designed to put the injured party in the same position that the party would have occupied if the contract had been performed Courts determine the amount of monetary damage based on what was promised and what was delivered Ex: A buys pearl ring from B for $ 200. A later learns that ring is fake worth $ 2. Compensatory damage: $ 200 - $ 2 = $ 198 Ex: A contracts to buy 100 bushels of Grade A plums from B at $ 10/bushel from B. B delivers Grade B plums worth $ 8/bushel. Compensatory damage: $ 2/bushel.

Consequential Damages

Monetary awards beyond compensatory due to special circumstances and expenses incurred due to the injury Innocent party must have made the breaching party aware of special losses that might result from contract breach at the time of the contract Notice allows a party to the contract to determine if she wants to take the risk of loss or to change the contract terms to accommodate the risk

Speculative Damages

Monetary injuries which are not readily ascertainable, provable or quantifiable Ex: profit that the injured party had hoped to realize as a result of the contract CANNOT BE RECOVERED under any circumstances Ex: A hires limo to take her to important business meeting to sign a million dollar contract; limo fails to appear, A doesn't get to meeting and sues limo company for her lost profit of $ 300,000. She cannot recover this because it is not a foreseeable loss of the limo company.

Material Breach

No standard to determine, court look at intent of parties, contract terms, degree of hardship imposed by breach and extent to which injured party can be compensated Identify all contract terms of special importance to one of the parties as a "material clause"

Insolvency

One party to the contract becomes judicially insolvent The other side is excused from performance Ex: A has contract to deliver 1000 bushels of sweet potatoes to B at the end of the month; 3 weeks prior to delivery B files for bankruptcy; neither party is required to perform

Release

One side relieves the other of any obligation existing under a previous contract Releasing party receives consideration for her agreement to release other side from his original contract obligation Ex: A has contract with B ; after problems arise, A agrees to release B from contract for a certain sum of money; if B agrees, the parties are released

Quasi-Contract Remedies

Only equitable remedies with monetary award Available in situations with no contract but with unjust enrichment to one of the parties of the dispute Court can order that injured party receive the value of what is lost

Limitation of Damages

Parties agree at the time of contract to limit the damages to a ceiling amount in case of breach Injured party must prove breach AND actual damages Damage award will be actual damage amount up to specified ceiling, but no more

Accord and Satisfaction

Parties to a contract are in dispute Parties agree to settle dispute by changing the obligations of the contract itself with a new agreement Consideration = forbearance not to sue under original contract Substituted Agreement New contract which incorporates the original contract in the new provisions Original obligations absorbed by new agreement Ex: A agrees to purchase an item from B at a yard sale for a certain price; A then sees another item and haggles with B for new price for both items; original contract for sale is absorbed into the new substituted agreement

Performance

Performance of a contractual obligation obviously excuses the party's obligation to perform Most contractual obligations are performed this way

Breach of Contract Remedies

Punitive & Compensatory & Liquidation

Punitive Damages

Punitive or exemplary = awards granted by a court under unusual circumstances to punish a party There must be a statutory basis for the award of punitive damages because punishment is not a contract remedy Generally the breach must be accompanied by a breach of trust such as fraud or antitrust To recover, suing party must show contract breach AND statutory violation so that the innocent party receives both compensatory damages and punitives

Liquidated Damages

Reasonable damages that the parties themselves have agreed to in the context of the contract itself Parties normally specify liquidated damages if it would be difficult or impossible to compute compensatory damages because of the uncertain nature of the contract or subject matter Courts will usually award damages specified by the parties if the provision is meant to ease recovery of hard to determine losses Courts will NOT honor liquidated damages clauses if the underlying purpose is to punish a party for breach or award speculative damages Actual damages do not have to be established as, by definition of liquidated damages, they cannot be

Novation

Substitution of parties in an existing contract Original party no longer has rights or obligation under the contract Novated party is now responsible for contract obligation and has the right to receive the contract consideration

Supervening Illegality

The purpose of the contract for which the contract was created has become illegal Law will not permit persons to engage in illegal activities; therefore, parties are discharged A and B contract to open and manage a gambling facility; six months later town officials rescind ordinance permitting gambling; A and B discharged of contract

Death of Parties; Death or Destruction of Subject Matter

Unique subject matter which is not destroyed by an act of one of the parties will discharge the parties of contract obligations Not so if subject matter is capable of replacement Death may discharge the obligation (unique personal service) or the obligation may be undertaken by the estate of the deceased (conveyance of property) The enactment of a statute, regulation, or court decision that makes the object of an offer illegal. This action terminates the offer.

condition precedent

a condition that must be fulfilled before a party's performance can be required Condition fails to occur Ex: A agrees to purchase B's house if A can get financing; if A fails to find financing, terminates obligation to perform (purchase house from B) Condition terminates an obligation to perform (condition subsequent Ex: A agrees to pay B alimony pursuant to the terms of separation agreement until B remarries; remarriage of B terminates A's obligation to perform Situations where a party does something to prevent or excuse the performance of the other

divisible contract

a contract that can be broken up into independent parts, each part able to stand alone

Tendering complete performance

a party stands ready, willing and able to perform; if the other side refuses performance, the ready party is excused from performance

Insubstantial Performance

does not discharge the obligation However, if a party accepts substantial or insubstantial performance, the other party is discharged

Waiver

forgiveness by a party to the contract of the other party's failure to perform for a covenant or a condition

Voluntary DIsablement

form of anticipatory breach in which a party's conduct makes it so that he cannot perform his own conditions. A party to a contract voluntarily engages in conduct that makes it impossible for that party to perform his obligation The other party is excused from performance Ex: A agrees to purchase a vase from B, payment and delivery in 2 weeks; B sells vase to C a week later; unlikely that B will repurchase vase from C to sell to B; B has engaged in voluntary disablement; A's obligation to B is discharged Maj. - voluntary disablement = full breach of contract which may be sued upon immediately Min. - no lawsuit until the time period for the condition has run

Minor Breach

insignificant breach gives rise to lawsuit only for the minor act, not the entire contract Ex: A agrees to sell car to B for $ 1500; B takes possession of car and discovers it is totally broken; material breach of contract - B can sue for full purchase price Ex: if B merely discovers worn spark plugs, this constitutes a minor breach, B can sue for cost of replacement of spark plugs

Arbitration

non-judicial method of settling disputes in which both sides agree to submit the claim to an agreed on arbitrator (neutral) for relief Faster and less expensive Decision is often final and binding precluding the parties from further judicial relief

Anticipatory Breach

notification, before the scheduled time of performance, of refusal to perform contractual terms as agreed During the time of the condition, one party to the contract states an intention to the other that she does not intent to fulfill the obligations of the contract in words that are positive, unconditional and unequivocal Innocent party is excused from performance If innocent party has performed, there is no anticipatory breach; instead, there is a full breach of contract

2. Implied waiver

party acts in such a way as that a reasonable person would infer forgiveness of a breach

1. Express waiver

party expressly manifests an intent to forgive a breach

Legal Remedies

relief sought from a court, involving monetary damages Legal remedies or damages = monetary awards granted to injured party in contract dispute when money is an appropriate method to rectify injury Four types: 1. Compensatory 2. Punitive 3. Consequential 4. Liquidated

Condition

timing element of the contract creating or distinguishing a party's duty to perform

UCC: part performance for merchant traders is

unacceptable as they are entitled to perfect tender; merchant may reject or accept only conforming goods at the option of the merchant buyer; however, buyer must give seller the opportunity to remedy the defect in a reasonable time

Divisible Contract: Rules of Construction

uphold contracts if at all possible Courts have created divisible contract concept - division of contract into several separate, but equal, portions Divisibility may be stated or implied by the facts of the contract Contracts which are deemed divisible would remain intact even with a breach of one part of the contract Ex: A rents apartment from B for 2 year period with monthly rent payments of $ 300/month. A's rent check for 7th month bounces; breach in a divisible contract because lease term can be equally divided into 24 lease periods; breach is only for one of the terms; rest of contract is intact. Courts will apply this principle to contracts which can be evenly and easily divided and parties have not specified that contract is nondivisible

Partial Performance

will discharge an obligation if it is substantial although the party may have to compensate for the difference in full and partial performance Ex: A agrees to sell B 25 CD's for $ 100. A delivers 23 CD's; this constitutes substantial performance but may only receive payment for 23 CD's.