Business Law Contracts Ch. 19: Breach of Contract and Remedies

To rescind a contract, each party essentially advances to the position he or she would have been in if the contract had been fully executed. ____ True ____ False. Explain

False; aim is to put parties back to position they would have been in had the contract never occurred.

A failure to perform entitles the non-breaching party to _______

rescind

Quantum Meruit and when it is used

- Latin for "as much as he deserved," the actual value of services performed. Quantum meruit determines the amount to be paid for services when no contract exists or when there is doubt as to the amount due for the work performed but done under circumstances when payment could be expected. - Used for forming quasi-contracts

Usual measure for compensatory damages for a breach of contract involving the sale of land

- Typically, remedy is specific performance - If specific performance is not applicable, in most states, the measure of damages is the difference between the contract and market prices of the land. - In some states, when a seller breaches a contract and the breach is not deliberate, the buyer recovers the down payment and expenses.

Consequential damages

- foreseeable damages that flow from the consequences of a breach but that are caused by circumstances beyond the contract. - The breaching party must know or have reason to know that special circumstances will cause the non-breaching party to suffer the additional loss.

Stark Industries breaches its Jericho missile contract with the U.S. Department of Defense (DoD) and so DoD must purchase more expensive missiles from another firm. DoD files a suit to recover compensatory damages, which are normally assessed to ¨ a. compensate a non-breaching party for the loss of a bargain. b. establish, in the absence of a loss, that a party acted wrongfully. c. pay for harm caused by special circumstances beyond a contract. d. penalize a breaching party. e. a and c.

A

Stark Industries leases its military production facilities. Due to Tony Stark's change of heart, Stark Industries no longer needs the facilities and so it vacates the premises six months before the end of the term. In some states, the owner of the facilities would have to...explain a.avoid re-letting the premises to recover any damages from Stark Industries. b.make reasonable efforts to re-let the premises to mitigate the damages recoverable from Stark Industries. c.re-let the premises to recover damages from Stark Industries. d.sell the premises to recover any damages from Stark Industries.

B; Think about the economics of it; it is inefficient to have the facilities sit idle.

Stark Industries breaches its Jericho missile contract with DoD and so DoD must go without these advanced missiles until it can re-procure them from another firm. In the interim, a terrorist cell attacks a U.S. military base in Afghanistan, causing loss of life, facilities, arms and equipment. This attack could have been avoided, had DoD been able to deploy the Jericho missiles against the cell. DoD files suit against Stark Industries to recover consequential damages in the form of these losses. Consequential damages are normally assessed to ¨ a. compensate a non-breaching party for the loss of a bargain. b. establish, in the absence of a loss, that a party acted wrongfully. c. pay for harm caused by special circumstances beyond a contract. d. penalize a breaching party.

C

Stark Industries breaches its missile subcontract with Lockheed Martin, which in turn has a prime contract with DoD to deliver the missiles as part of its integrated Peace Shield prime contract. Stark's breach delays Lockheed's performance as it attempts to find another vendor. DoD, dissatisfied with Lockheed's performance, terminates the Peace Shield prime contract, and Lockheed fails to make a profit. Lockheed sues Stark to recover consequential damages in the form of lost profit on the Peace Shield prime contract. Consequential damages are normally assessed to ¨ a. compensate a non-breaching party for the loss of a bargain. b. establish, in the absence of a loss, that a party acted wrongfully. c. pay for harm caused by special circumstances beyond a contract. d. penalize a breaching party.

C

Stark Industries agrees to buy five acres of land from the City of Los Angeles for $150,000 so that it may build a new factory to manufacture medical devices. The City fails to go through with the deal on the agreed upon date (having already sold it to Lockheed Martin) when the market price of the land is $170,000. Stark Industries may recover....explain ____ a. $170,000. ____ b. $150,000. ____ c. $20,000. ____ d. $0.

C; this is the difference between the old contracted for price and the new market value. It is not specific performance (where it usually is in land), because it is not applicable (since the land was already sold and it is too late for the city to comply with an order for specific performance)

Purpose of damages (general)

Designed to compensate the injured party for the harm suffered as the result of the wrongdoer's act

Stark Industries breaches its missile subcontract with Lockheed Martin, which in turn has a prime contract with DoD to deliver the missiles as part of its integrated Peace Shield prime contract. Stark's breach delays Lockheed's performance as it attempts to find another vendor. DoD, dissatisfied at Lockheed's performance, terminates the Peace Shield prime contract, and Lockheed fails to make a profit. Lockheed sues Stark Industries for, among other things, punitive damages in connection with Stark's breach. Generally speaking, punitive damages may be recovered when a contract has been breached a.in almost all cases b.if the breach is directly related to the commission of a tort, especially an intentional tort c.and the jury wishes to punish and make an example of the breaching party d.under no circumstances e.b and c

E

Case Brief: Kent State University v. Ford

Facts: Gene Ford signed a five-year contract with Kent State University in Ohio to work as the head coach for the men's basketball team. Contract provided that if Ford quit before the end of the term, he would pay liquidated damages to the school ($300,000 times years remaining on the contract). 4 years before the contract expired, Ford left Kent State and began to coach for Bradley University for $700,000. Kent sued and the court enforced the liquidated damages clause and awarded the university $1.2 million. Ford appealed, arguing that the liquidated damages clause in his employment contract was an unenforceable penalty. } Issue: Whether the disputed damages awarded by the court are enforceable liquidated damages or an unenforceable penalty. Rule: Liquidated damages in a contract attempt to make the aggrieved party whole and are unenforceable. Penalties set to punish the breaching party are unenforceable. 2 requirements for liquidated damages provisions: (1) when the contract was made, difficult to estimate damages incurred on a breach and (2) the amount set as damages must be reasonable (not excessive) Analysis: Damages were difficult to determine because the coach leaving could result in a decrease in ticket sales, impact the ability to successfully recruit players, impact community support for team, require finding a new coach and these are hard to measure. Damages were also reasonable because finding a coach of a similar skill and experience level as Ford would have an increased cost, evidenced by Ford doubling his salary. There was also a decrease in ticket sales and costs to find a new coach. Conclusion: There was justification for seeking liquidated damages to compensate for Kent State's losses, and thus, there was a valid compensatory purpose for including the clause. Given all of the circumstances of the case, court finds that the liquidated damages clause was not a penalty.

Case Brief: Hadley v. Baxendale

Facts: The Hadleys ran a flour mill. Crankshaft attached to the steam engine in the mill broke, causing the mill to shut down. The shaft had to be sent to a foundry to be fixed. Baxendale was a common carrier who transported the shaft. Baxendale promised to deliver the shaft the next day, but it was not delivered for several days, during which time the mill was closed. The Hadleys sued to recover the profits lost. The court ruled in Hadley's favor, and Baxendale appealed. Issue: Whether profits resulting from the delayed delivery of a crankshaft were compensable. More specifically, whether they were reasonably foreseeable. Rule: If an injury is outside the usual course of events, it must be shown that the breaching party had reason to foresee the injury. Analysis: In this case, it was not clear whether the Hadleys gave express notice of the circumstances to Baxendale to be awarded consequential damages. Conclusion: Court ordered a new trial.

Stark Industries is a supplier of aircraft parts to Airway International, Inc., a commercial passenger airline. Airway includes on its tickets a clause that states the airline is not liable for any injury to, or the death of, any passenger caused by its, or its employees', negligence. An Airway flight from Boston to New York crashes into Long Island sound, resulting in the deaths of all passengers. The cause of the accident is found to be due to Airway's negligence. Based on the clause on its tickets, Airway most likely can successfully avoid liability. True False

False; cannot exclude liability for negligence in this way.

What must a rescinding party do for the breaching party?

Give prompt notice of their decision to rescind

To rescind a contract, what must both parties do in general?

Must make restitution by returning goods, property, or money conveyed. If the actual goods or property can be returned, they must be. If they cannot be returned, restitution must be made in an equivalent amount of money.

Nominal damages

Nominal damages may be awarded to establish that a breaching party acted wrongfully even though no financial loss resulted from the breach.

Rescission

Rescission is essentially an action to cancel a contract

Significance of Hadley v. Baxendale case

Sets the foundation for consequential damages (usually lost profit)

On July 7, 2000, Frances Morelli agreed to sell to Judith Bucklin a house at 126 Lakedell Drive in Warwick, Rhode Island, for $77,000. Bucklin made a deposit on the house. The closing at which the parties would exchange the deed for the price was scheduled for September 1. The agreement did not state that time is of the essence, but Paragraph 10 did provide that "if seller is unable to convey good, clear, insurable, and marketable title, buyer shall have the option to (a) accept such a title as seller is able to convey without abatement or reduction of the purchase price, or (b) cancel this agreement and receive a return of all deposits. An examination of the public records revealed that the house did not have marketable title. Wishing to be flexible, Bucklin offered Morelli time to resolve the problem, and the closing did not occur as scheduled. Morelli decided the deal is over and offered to return the deposit. Bucklin refused, and, in mid-October, decided to exercise her option under Paragraph 10. She notified Morelli, who did not respond. Bucklin filed a suit in a Rhode Island state court against Morelli. In whose favor should the court rule? Should damaged be awarded? If not, what is the equitable remedy?

The court ruled in Bucklin's favor and ordered the remedy of specific performance: Morelli was to convey the house with whatever title she had. This is because specific performance is an available remedy when a purchaser of real estate under a written contract demonstrates that he or she was at all times ready and willing to perform the contract, or when a party unjustifiably refuses or fails to perform under the agreement. In this case, a valid agreement existed and Bucklin was ready, willing, and able to pay the agreed-upon consideration and accept the encumbered title to the property

While Tony Stark was in captivity, Stark Industries was late in delivering several shipments of Jericho missiles to DoD under their contract. In light of the circumstances, DoD repeatedly chose to forbear w/r/t to its right to terminate the contract for default and re-procure from another firm. Before DoD could terminate for late delivery on the next shipment, DoD would most likely have to give notice to Stark Industries that full performance will be required in the future to re-establish contract rights. True False

True

With Stark Industries exiting the weapons business, at least temporarily, senior executive Obadiah Stane decides to leave the company and accept a position at a competitor, Northrop Grumman. Stark Industries sues Stane under the covenant not to compete in his employment agreement. Under this restrictive covenant, Stane may not work for a competitor anywhere in the world in any capacity for a period of ten years. Assuming this restriction is too broad, a court may strike it down altogether or reform it so that it is reasonable. True False

True

Tony buys a famous piece of art (the Pollack) from Larry. If Larry breaches the contract and fails to deliver the Pollock, a court is likely to order award specific performance. Explain True False

True; each painting is unique

What allows a contract to be rescinded unilaterally

When fraud, mistake, duress, undue influence, misrepresentation, or lack of capacity to contract is present

a. Liquidated damages provision b. 2 requirements c. What if either is not met?

a. A liquidated damages provision in a contract specifies a certain amount to be paid on a default or a breach. b. (1) when the contract was made, it must have been difficult to estimate the damages that would be incurred on a breach and (2) the amount set as damages must be reasonable (not excessive). c. If either of these is not met, the provision will be construed as a penalty and not be enforced.

a. Compensatory damages b. Standard measure to determine amount

a. Compensate the injured party for the loss of the bargain (for injuries arising directly from the loss) - DIRECT LOSS b. The standard measure is the difference between the value of the promised performance and the actual performance, less any loss that the injured party could have avoided: mitigation of damages.

a. Specific performance b. When it is and is not available

a. Equitable remedy calling for the performance of the act promised in the contract. b. - Remedy in cases where the consideration is unique, e.g., sale of land, works of art, antiques - Not generally available for substantially identical goods that can be bought or sold in the market - Not available in contracts for personal services - Courts typically award equitable remedies only when there is not adequate remedy at law

a. What is a waiver of breach? b. Does it apply to subsequent, additional breaches?

a. If a non-breaching party accepts defective performance, the non-breaching party is said to have waived the right to full performance. And he or she cannot take later action on the theory that the contract was broken. b. Ordinarily, waiver will not operate to waive subsequent, additional breaches. However, if a non-breaching party repeatedly accepts defective performance -- repeatedly waives -- he or she will need to give notice to the breaching party that full performance will be required in the future to re-establish contract rights.

a. Exculpatory clauses b. Limitation of liability clauses

a. Provisions stating that no damages can be recovered for certain wrongs, e.g., negligence b. Provisions that affect the availability of certain remedies, e.g., consequential damages

a. Reformation b. when it is commonly used

a. Reformation allows a contract to be rewritten to reflect the parties' true intentions. b. •It applies most often when fraud or mutual mistake occurs, or when the terms of a covenant not to compete are unreasonable. •Reformation is often sought so that some other remedy may be pursued (if a contract for a sale of land mistakenly refers to the wrong property, for example, the contract may be reformed to conform to the parties' intentions, and specific performance can then be sought).

a. T or F: Restitution is available in other actions beside breach of contracts, such as when money or property is transferred through a mistake or fraud. b. T or F: Rescission always calls for restitution.

a. True b. False

a. Incidental damages b. Can these also be recovered as part of compensatory damages?

a. expenses that are caused directly by a breach of contract such as those incurred to obtain performance from another source b. Yes

a. Generally, an injured party has a duty to _______ damages b. How can this affect an award?

a. mitigate b. An award may be reduced by the amount that could have been mitigated.

a. Purpose of punitive damages b. Usually, when are they available?

a. punish or deter future conduct b. Generally not available for mere breach of contract. Usually tort (e.g., fraud) is also involved, especially an intentional tort

How consequential damages relate/compare to compensatory damages

compensatory damages are sometimes referred to as direct damages, consequential damages are sometimes referred to as indirect damages

What is the most typical remedy given as a result of breach of contract

damages, particularly compensatory, which are designed to put an innocent party in the same position he or she would have been in if the contract had been fully performed (if no breach had occurred).

How the courts can use reformation

used by courts to revise unreasonable covenant not to compete. Ex. too broad w/r/t scope of activity, geography, time

Party seeking quantum meruit must show the following

•(1) he or she conferred a benefit on another, •(2) he or she conferred the benefit with the reasonable expectation of being paid, •(3) he or she did not act as a volunteer in conferring the benefit, and •(4) the party receiving the benefit would be unjustly enriched by retaining it without paying for it.

Usual measure for compensatory damages for the contractor's breach of contract in a construction contract

•If the contractor breaches by failing to begin or by stopping in mid-project, the owner may recover the cost, including compensation for any delay, above the unpaid contract price to complete the work. •If the contractor finishes late, the owner may recover the loss of use. •If the contractor substantially performs, the owner may recover the cost of completion, if completion would involve no economic waste.

Usual measure for compensatory damages for the owner's breach of contract in a construction contract

•If the owner breaches before construction, normally the contractor may recover only the profit that would have been made on the contract. •If the owner breaches during construction, normally the contractor may recover the profit plus costs incurred to that point. •If the owner breaches after construction, normally the contractor may recover the contract price plus interest.

Usual measure for compensatory damages for a breach of contract involving the sale of goods

•The usual measure is the difference between the contract price and the market price. •When a buyer breaches and the seller has not yet produced the goods, the measure is instead normally lost profits on the sale.