Legal Environment of Business Chapter 13

Types of Damages

1. Compensatory (to cover direct losses and costs). 2. Consequential (to cover indirect and foreseeable losses). 3. Punitive (to punish and deter wrongdoing). 4. Nominal (to recognize wrongdoing when no monetary loss is shown).

bilateral mistake

A bilateral mistake is a "mutual misunderstanding concerning a basic assumption on which the contract was made."2 Note that, as with unilateral mistakes, the mistake must be about a material fact.

breach of contract

A breach of contract is the nonperformance of a contractual duty. The breach is material when performance is not at least substantial.

condition precedent

A condition that must be fulfilled before a party's performance can be required is called a condition precedent.

liquidated damages

A liquidated damages provision in a contract specifies that a certain dollar amount is to be paid in the event of a future default or breach of contract.

discharge in bankruptcy

A proceeding in bankruptcy attempts to allocate the debtor's assets to the creditors in a fair and equitable fashion. Once the assets have been allocated, the debtor receives a discharge in bankruptcy

unilateral mistake

A unilateral mistake is made by only one of the parties. In general, a unilateral mistake does not give the mistaken party any right to relief from the contract. Normally, the contract is enforceable.

impossibility of performance

After a contract has been made, supervening events (such as a fire) may make performance impossible in an objective sense. This is known as impossibility of performance and can discharge a contract.1

duress

Agreement to the terms of a contract is not voluntary if one of the parties is forced into the agreement. The use of threats to force a party to enter into a contract constitutes duress.

voluntary consent

An otherwise valid contract may still be unenforceable if the parties have not genuinely agreed to its terms. A lack of voluntary consent (assent) can be used as a defense to the contract's enforceability.

anticipatory repudiation

Before either party to a contract has a duty to perform, one of the parties may refuse to carry out his or her contractual obligations. This is called anticipatory repudiation13 of the contract.

Equitable Remedies for Contract Breach

Equitable remedies include rescission and restitution, specific performance, and reformation.

incidental damages

Expenses that are caused directly by a breach of contract—such as those incurred to obtain performance from another source— are known as incidental damages.

commercial impracticability

For someone to invoke the doctrine of commercial impracticability successfully, however, the anticipated performance must become significantly more difficult or costly. In addition, the added burden of performing must not have been foreseeable by the parties when the contract was made.

consequential damages

Foreseeable damages that result from a party's breach of contract are called consequential damages, or special damages. They differ from compensatory damages in that they are caused by special circumstances beyond the contract itself. They flow from the consequences, or results, of a breach.

restitution

Generally, to rescind a contract, both parties must make restitution to each other by returning goods, property, or funds previously conveyed. If the property or goods can be returned, they must be. If the goods or property have been consumed, restitution must be made in an equivalent dollar amount.

condition

In some situations, however, performance is conditioned. A condition is a qualification in a contract based on a possible future event. The occurrence or nonoccurrence of the event will trigger the performance of a legal obligation or terminate an existing legal obligation.10 If the condition is not satisfied, the obligations of the parties are discharged.

penalty

Liquidated damages differ from penalties. Like liquidated damages, a penalty specifies a certain amount to be paid in the event of a default or breach of contract. Unlike liquidated damages, it is designed to penalize the breaching party, not to make the innocent party whole

tender

Performance can also be accomplished by tender. Tender is an unconditional offer to perform by a person who is ready, willing, and able to do so. Therefore, a seller who places goods at the disposal of a buyer has tendered delivery and can demand payment. A buyer who offers to pay for goods has tendered payment and can demand delivery of the goods. Once performance has been tendered, the party making the tender has done everything possible to carry out the terms of the contract. If the other party then refuses to perform, the party making the tender can sue for breach of contract. There are two basic types of performance— complete performance and substantial performance

mutual rescission

Rescission is the process by which a contract is canceled or terminated and the parties are returned to the positions they occupied prior to forming it. For mutual rescission to take place, the parties must make another agreement that also satisfies the legal requirements for a contract. There must be an offer, an acceptance, and consideration. Ordinarily, if the parties agree to rescind the original contract, their promises not to perform the acts stipulated in the original contract will be legal consideration for the second contract

Substantial Performance

The basic requirements for performance to qualify as substantial are as follows: 1. The party must have performed in good faith. Intentional failure to comply with the contract terms is a breach of the contract. 2. The performance must not vary greatly from the performance promised in the contract. An omission, variance, or defect in performance is considered minor if it can easily be remedied by compensation (monetary damages). 3. The performance must create substantially the same benefits as those promised in the contract.

specific performance

The equitable remedy of specific performance calls for the performance of the act promised in the contract

discharge

The most common way to discharge, or terminate, contractual duties is by the performance of those duties.

performance

The most common way to discharge, or terminate, contractual duties is by the performance of those duties.

scienter

This element, normally called scienter,8 or "guilty knowledge," signifies that there was an intent to deceive.

waiver

Under certain circumstances, a nonbreaching party may be willing to accept a defective performance of the contract. This knowing relinquishment of a legal right (that is, the right to require satisfactory and full performance) is called a waiver

undue influence

Undue influence arises from relationships in which one party can greatly influence another party, thus overcoming that party's free will. A contract entered into under excessive or undue influence lacks voluntary consent and is therefore voidable.9

nominal damages

When no actual damage or financial loss results from a breach of contract and only a technical injury is involved, the court may award nominal damages to the innocent party. Awards of nominal damages are often small, such as one dollar, but they do establish that the defendant acted wrongfully

frustration of purpose

e Closely allied with the doctrine of commercial impracticability is the doctrine of frustration of purpose. In principle, a contract will be discharged if unforeseen supervening circumstances make it impossible to attain the purpose both parties had in mind when they made the contract.

novation

occurs when both of the parties to a contract agree to substitute a third party for one of the original parties. The requirements of a novation are as follows: 1. A previous valid obligation. 2. An agreement by all parties to a new contract. 3. The extinguishing of the old obligation (discharge of the prior party). 4. A new contract that is valid.