Chapter 13: Nature of Contracts and Contract Remedies

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
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Chapter 13:
Nature of Contracts and
Contract Remedies

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Learning Objectives
• Describe elements needed for a contract.
• Recognize the sources of contract law.
• Contrast various classifications of contracts.
• Understand enforcement of contracts.
• Understand performance of contracts.
• Distinguish between various legal remedies
for breach of contract.
• Discern the equitable remedies for
breach of contract.

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13.0 In the News
Compass iTech, LLC Willfully and
Maliciously Misappropriated eVestment's
Trade Secrets
http://bvtlab.com/F84gc
A jury found that Compass iTech, LLC acted
willfully and maliciously, with an intent to defraud,
and intentionally interfered with eVestment's
contract.
• Discuss the various legal remedies of the case.
• Discuss why punitive damages are assessed in this
case. Are they excessive?

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13.1a Contract Defined
A promise or set of promises that are
enforceable in court
• A contract contains a present undertaking or
commitment concerning future conduct of
the parties.
• The law enforces the commitment by
providing a remedy if the commitment is not
performed.
• Form is usually not important.

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13.1b Elements Necessary to
Create a Contract
• An agreement that is a manifestation of
the parties’ mutual assent
• A bargained-for consideration
• An agreement between two or more
parties
• A legal purpose consistent with law and
public policy

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13.1c Sources of Contract Law
Judge-made
• Case law
• Uncodified - not based on statutes
Uniform Commercial Code
• Commercial transactions
• Primarily sale or lease of goods

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13.1d Enforcement Theory Regarding
Contractual Obligations
Freedom of contract
• Parties are entering into an agreement that is
the product of their free will.
Adhesion Contracts
• Unequal bargaining power by one party
Procedural and Substantive Unconscionability
• Unfairness with how the contract is formed
• Unfairness in the result of the supposed
bargain

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13.1d Critical Thinking (Slide 1 of 2)
Case: Chalk
Plaintiffs brought a class action lawsuit against
defendants’ telecom companies on various
theories including negligence, contracts of
adhesion, and fraud relating to the use of data
cards in certain laptop computers. Defendants
sought to assert mandatory arbitration clause in
the service contracts but the court held the clauses
are substantively unconscionable under Oregon
law, and that the service contracts were contracts
of adhesion.

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13.1d Critical Thinking (Slide 2 of 2)
• Was there unequal bargaining power between
the plaintiffs and the defendants? Why?
• Did the court find the class-action waiver
provision procedurally unconscionable? Why?
• Did the court find the class-action waiver
provision substantially unconscionable? Why?
• Do you think it is unethical for a corporation to
include language in a contract that prohibits a
customer from pursuing a class-action lawsuit
against the corporation?

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13.2a Bilateral and Unilateral Contracts
Bilateral contracts: promises
exchanged between the parties
Unilateral contracts: promise for
performance
• One promise, one duty, one right

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13.2b Express and Implied-in-Fact
Contracts
Express contracts: stated orally or in
writing
Implied-in-fact contracts: created by
conduct
• One party expects to be paid and the other
expects to pay.

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13.2c Implied-in-Law Contracts
• Not true contracts (quasi-contracts)
• Legal fictions courts use to prevent
wrongdoing and unjust enrichment of one
party.
• Not based on the consent of two parties
• Based on equity and morality to achieve
justice
• Remedies
– Restitution
– Quantum meruit

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13.2d Enforcement Terminology
Valid contract: meets all requirement for a
contract.
Void contract: not enforceable by either party
Voidable contract: One or more of the parties
have the power to end the contract.
Enforceable contract: One party is entitled to
a monetary judgment or to specific performance
because other party failed to keep a promise.

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13.2e Performance Terminology
Executed contract:
fully performed by the contracting parties
Executory contract:
yet to be performed

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13.3a Introduction to Legal Remedies
• Breach of contract occurs when one of
the parties fail to perform as promised.
• Remedies
– Legal remedies involve the recovery of
monetary damages.
– Equitable remedies are requests for
something other than money.

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13.3b Nominal Damages
• Monetary award is typically $1.
• Symbolizes vindication for the wrong
created by the breach
• Recognizes a technical injury

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13.3c Compensatory Damages
• Designed to compensate for the loss
• Damages must be a direct, foreseeable
result of the breach.
• Purpose is to make the injured party
whole
• Does not include attorney’s fees and
court costs unless provided for in the
contract

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13.3d Compensatory Damages:
Special Aspects
• Injured party is duty bound to mitigate
the damages—to take reasonable
steps to reduce the actual loss to a
minimum.
• Willfully and substantially breached
• Unintentional breach

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13.3e Consequential Damages
• Caused by special circumstances
beyond the contract
• Evidence that breaching party knew or
had reason to know that special
circumstances existed and would
cause the other party to suffer
additional losses if the contract were
breached

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13.3d Critical Thinking
Case: Lewis Jorge
A construction firm contracted with a school district,
but the district alleges a breach of the contract. The
district demanded payment out of the performance
bond posted by the firm. This, in turn, prevented the
firm from being able to secure bonding for other
projects, causing them lost profits.
• What is the difference between general and special
damages?
• What is the test for awarding special damages?

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13.3f Punitive Damages
• Also known as exemplary damages
• Monetary damages used to reward one
party and punish the other’s conduct.
• Also used to deter others from similar
conduct in the future
• Bears no relationship to actual damages
• Can be awarded if contract breach is
fraudulent, oppressive, or malicious

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13.3g Liquidated Damages Clause
• Parties state the money damages
applicable if the contract is breached.
• Enforced if the amount is reasonable
compensation for damage
• Not enforced if the amount is
considered a penalty for failure to
perform

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13.3f Critical Thinking (Slide 1 of 2)
Case: H&R Block
Liquidated damages are enforceable if the
amount fixed is a reasonable forecast of loss
and the harm is of a type that is difficult to
calculate. The court found the damages for
breach of the client covenants are proper, but
not the damages for violating the non-
solicitation clause.

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13.3f Critical Thinking (Slide 2 of 2)
• At what point in time should
“reasonableness” of the liquidated
damages provision be made?
• What test does the court apply to
determine whether the liquidated damages
provision is unreasonable?

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13.4a Introduction to Equitable
Remedies
Equitable remedies are requests for
something other than money.
• Allowed when money doesn’t provide
adequate relief
– Specific performance.
– Rescission
– Restitution

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13.4b Specific Performance
Requires breaching party to perform the
contract
• Used in contracts involving real and
personal property
• Rests in the decision of the court
• UCC requires specific performance when
goods sold are unique or in other proper
circumstances.

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13.4c Rescission
Involves one party seeking the court to
undo the contract
• The party desires to be returned to
precontractual position.
• The party seeking rescission must return
what was received in substantially as good
condition as it was when received.

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13.4d Restitution
Prevents any party from being unjustly
enriched when a contract has been
annulled
• Places parties in the position they were in
prior to the contract
• Goods and property must be returned if
not consumed.
• The party must pay reasonable value of
goods consumed or services used.

Chapter 13: Nature of Contracts and Contract Remedies

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Chapter 13: Nature of Contracts and Contract Remedies