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  1. 1. Chapter 7: Basic Contract Law David Baumer, Spring 2003
  2. 2. Contract Law <ul><ul><li>Contracts evolved from the common law </li></ul></ul><ul><ul><ul><li>Each state has its own common law precedents </li></ul></ul></ul><ul><ul><ul><li>Dissatisfaction with differences across state led to the Uniform Commercial Code (UCC) </li></ul></ul></ul><ul><ul><ul><ul><li>UCC has been adopted by all 50 states and will be discussed next chapter </li></ul></ul></ul></ul><ul><ul><ul><li>Currently we are dealing with another watershed event: E-commerce </li></ul></ul></ul><ul><ul><ul><li>Lawyers and legislators are scrambling to provide a universally accepted contract law of E-commerce </li></ul></ul></ul>
  3. 3. Contract Law <ul><li>A contract is: </li></ul><ul><ul><li>A promise or set of promises, the breach of which the courts will provide a remedy for </li></ul></ul><ul><ul><li>When the two parties agree to a contract, it creates a legally recognized duty to perform </li></ul></ul><ul><ul><li>Not all agreements are recognized as legally binding </li></ul></ul><ul><ul><ul><li>A promise to make a gift is not binding </li></ul></ul></ul>
  4. 4. Elements of a Contract <ul><li>Valid contracts possess the following: </li></ul><ul><ul><li>An agreement between the parties: an offer and acceptance </li></ul></ul><ul><ul><li>Consideration --each party must do something that they were not previously obligated to do </li></ul></ul><ul><ul><li>Both parties have capacity to contract </li></ul></ul><ul><ul><li>Formation and performance of the contract are legal and not against public policy </li></ul></ul>
  5. 5. Contractual Nomenclature <ul><ul><ul><li>Valid, void, voidable and unenforceable </li></ul></ul></ul><ul><ul><ul><ul><li>A valid contract is one recognized as binding in law </li></ul></ul></ul></ul><ul><ul><ul><ul><li>A void contract is not recognized at all such as a gambling contract </li></ul></ul></ul></ul><ul><ul><ul><ul><li>In a voidable contract one of the parties can not perform without liability--a victim of fraud </li></ul></ul></ul></ul><ul><ul><ul><ul><li>A contract is unenforceable if there are no legally enforceable remedies--an oral real estate agreement </li></ul></ul></ul></ul><ul><ul><ul><li>In a bilateral contract, both parties exchange promises </li></ul></ul></ul><ul><ul><ul><li>In a unilateral contract a promise is made for performance--e.g., reward contracts </li></ul></ul></ul>
  6. 6. Types of Contracts <ul><ul><ul><li>Executory and executed </li></ul></ul></ul><ul><ul><ul><ul><li>A executory promise is a promise for future performance </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>If the contract has been executed, both parties have performed </li></ul></ul></ul></ul></ul><ul><ul><li>Express and Implied </li></ul></ul><ul><ul><ul><li>An express contract can be written or oral </li></ul></ul></ul><ul><ul><ul><ul><li>In an express contract the duties of the parties are clearly elucidated </li></ul></ul></ul></ul><ul><ul><ul><li>An implied contract is implied by conduct </li></ul></ul></ul><ul><ul><ul><ul><li>After receiving treatment from a doctor, you will be asked to make arrangements for payment </li></ul></ul></ul></ul>
  7. 7. Quasi Contracts <ul><ul><ul><ul><li>The plaintiff is suing for quantum meruit (the fair market value of her services) </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>The plaintiff performed valuable services </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>The defendant knowingly received these services </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>The plaintiff expected to get paid if the services were used by the def. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>The def. was unjustly enriched </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Quasi contract has been used by writers who claim movies were made based on ideas they told directors- Coming to America </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Quasi contract is sometimes used by small firms to try to salvage an inadvertent or bungled knowledge transfer to a larger firm </li></ul></ul></ul></ul>
  8. 8. Elements of a Contract <ul><li>Agreement </li></ul><ul><ul><li>Offer and Acceptance </li></ul></ul><ul><ul><ul><li>The offeror must have intent to make an offer </li></ul></ul></ul><ul><ul><ul><ul><li>Intent is judged under an objective standard --What would a reasonable person believe under the circumstances? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Most advertisements are an invitation to bargain as are items submitted for auction </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>If the offer is very specific, then maybe it will be termed an offer </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Many advertisements made on the Internet are offers </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Customers can make an immediate contract </li></ul></ul></ul></ul></ul>
  9. 9. Offer and Acceptance <ul><ul><ul><li>The terms of the offer must be clear and definite </li></ul></ul></ul><ul><ul><ul><ul><li>Under the common law of contracts, at a minimum the offer must contain Price, Quantity, the Parties and the Subject Matter of the contract. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Must contain all material terms </li></ul></ul></ul></ul><ul><ul><ul><li>The offer must be communicated to the offeree </li></ul></ul></ul><ul><ul><ul><ul><li>and the offeree knows of the offer before performing </li></ul></ul></ul></ul><ul><ul><ul><ul><li>If an offer is made to the offeree, a third party cannot accept the offer </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Offers can be directed to classes of offerees </li></ul></ul></ul></ul>
  10. 10. Acceptance <ul><ul><ul><li>Just like an offer, the acceptance must have: </li></ul></ul></ul><ul><ul><ul><ul><li>Intent to be bound by the offeree </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Again judged by objective standard </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>In general, silence is not deemed an acceptance unless the parties had prior dealings </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Acceptance must be complete and unconditional </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>An acceptance that contains conditions or additional terms is a counteroffer and thus a rejection of the offer </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Acceptance must be communicated to the offeror </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Offeree should use the same medium used by the offeror to make the offer if nothing is said in the offer </li></ul></ul></ul></ul></ul>
  11. 11. Acceptance <ul><li>An acceptance must be timely </li></ul><ul><ul><li>If the offeror accepts in the manner invited by the offer or uses the same medium if there is no specified method </li></ul></ul><ul><ul><ul><li>The acceptance is effective upon dispatch by the offeror </li></ul></ul></ul><ul><ul><ul><li>Mailbox rule has been made irrelevant generally by faxes and E-commerce </li></ul></ul></ul>
  12. 12. Termination of an offer <ul><ul><ul><li>The offeror can revoke the offer at any time (with some limited exceptions) </li></ul></ul></ul><ul><ul><ul><ul><li>Thus an offeror can make an offer that is good for 10 days and then revoke it after 5 days </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Revocations must be communicated to the offeree </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Offers and revocations are effective when received </li></ul></ul></ul></ul><ul><ul><ul><li>Among the exceptions to the common law rule that an offeror can revoke an offer at anytime are: </li></ul></ul></ul><ul><ul><ul><ul><li>promissory estoppel and the </li></ul></ul></ul></ul><ul><ul><ul><ul><li>UCC firm written offer by merchants rule (discussed in next chapter). </li></ul></ul></ul></ul>
  13. 13. Promissory Estoppel <ul><ul><li>An offer is irrevocable if the conditions for promissory estoppel take place: </li></ul></ul><ul><ul><ul><li>(1) offeror knows or should know the offeree will rely on the offer made by the offeror </li></ul></ul></ul><ul><ul><ul><li>(2) the offeree does rely and </li></ul></ul></ul><ul><ul><ul><li>(3) relies to his detriment and </li></ul></ul></ul><ul><ul><ul><li>(4) injustice can only be avoided by enforcing the promise </li></ul></ul></ul><ul><ul><li>Damages under P.E. are based on costs of reliance </li></ul></ul>
  14. 14. Termination of the offer <ul><ul><li>If the offeree rejects the offer or makes a counteroffer , the offer is terminated </li></ul></ul><ul><ul><li>Will occur when the offer is deemed lapsed after a reasonable period of time </li></ul></ul><ul><ul><ul><li>What is reasonable depends upon the industry </li></ul></ul></ul><ul><ul><li>An offer could expire by operation of law </li></ul></ul><ul><ul><ul><li>Death or incapacity of offeror or offeree </li></ul></ul></ul><ul><ul><ul><li>Supervening illegality </li></ul></ul></ul><ul><ul><ul><li>Destruction of the subject matter </li></ul></ul></ul>
  15. 15. Consideration <ul><li>Consideration </li></ul><ul><ul><li>Is the exchange element in a contract </li></ul></ul><ul><ul><li>In order to support a promise made by the promisor, the other party (the promisee) must do something that constitutes consideration </li></ul></ul><ul><ul><ul><li>The promisee must incur a legal detriment </li></ul></ul></ul><ul><ul><ul><li>Examples of consideration: </li></ul></ul></ul><ul><ul><ul><ul><li>Make a promise in exchange for a promise </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Transfer something of value </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Give up something of value such as a legal claim </li></ul></ul></ul></ul>
  16. 16. Consideration <ul><ul><li>Generally the courts do not consider the adequacy of consideration </li></ul></ul><ul><ul><ul><li>unless they decide the bargain is unconscionable </li></ul></ul></ul><ul><ul><ul><li>Consideration does not exist if the other party has a preexisting duty to perform by law or contract </li></ul></ul></ul><ul><ul><ul><ul><li>In general past consideration is not consideration </li></ul></ul></ul></ul><ul><ul><ul><li>Consideration does not exist if the promise made by the promisee is illusory </li></ul></ul></ul><ul><ul><ul><ul><li>If the promisee maintains an unlimited right to cancel at any time for any reason, the promise is illusory </li></ul></ul></ul></ul>
  17. 17. Consideration <ul><ul><li>There are some promises that are enforceable without consideration </li></ul></ul><ul><ul><ul><li>A promisor is liable under the theory of promissory estoppel (PE) </li></ul></ul></ul><ul><ul><ul><li>Note with PE it is not a contract and therefore the damages are based on reliance costs of the promisee and are generally less than if the negotiations had resulted in a contract </li></ul></ul></ul>
  18. 18. Capacity <ul><li>Both parties to a contract must have capacity to contract </li></ul><ul><ul><li>There are three categories of people who do not have capacity </li></ul></ul><ul><ul><ul><li>Minors--under 18 </li></ul></ul></ul><ul><ul><ul><li>Intoxicated people--must not comprehend the transaction </li></ul></ul></ul><ul><ul><ul><li>Mentally deficient either due to age or disease </li></ul></ul></ul>
  19. 19. Capacity <ul><li>Minors can enter into a contract but </li></ul><ul><ul><li>The contract is voidable at the option of the minor </li></ul></ul><ul><ul><ul><li>When a minor voids a contract it is called disaffirming a contract </li></ul></ul></ul><ul><ul><ul><li>Upon turning 18 the minor has a limited right to disaffirm or else the contract is deemed ratified </li></ul></ul></ul><ul><ul><ul><ul><li>If the minor makes a payment after turning 18 the contract is ratified </li></ul></ul></ul></ul><ul><ul><ul><ul><li>A minor cannot ratify a contract while still a minor </li></ul></ul></ul></ul>
  20. 20. Capacity <ul><ul><li>If a minor disaffirms , the minor must return the consideration if he has it </li></ul></ul><ul><ul><ul><li>There are an increasing number of contracts that are binding on minors, though these exceptions vary from state to state </li></ul></ul></ul><ul><ul><ul><ul><li>Contracts with the army, insurance contracts, educational loans, bank account agreements are examples </li></ul></ul></ul></ul><ul><ul><ul><ul><li>A minor is liable for the FMV of necessaries: food clothing and shelter and tools etc for an emancipated minor </li></ul></ul></ul></ul>
  21. 21. Capacity <ul><ul><li>A contract is voidable if at the time the contract was agreed to, a party was too intoxicated to understand the terms of the contract </li></ul></ul><ul><ul><ul><li>If a person has been judged incompetent , then all contracts with the person are void </li></ul></ul></ul><ul><ul><ul><li>If the person is, in fact, insane, the person can claim lack of capacity even though the courts have not ruled the person is incompetent by appointing a guardian </li></ul></ul></ul>
  22. 22. Legality <ul><ul><ul><li>Contracts can be illegal by statute or by public policy </li></ul></ul></ul><ul><ul><ul><ul><li>In either event, the agreement is void </li></ul></ul></ul></ul><ul><ul><ul><ul><li>There are a number of agreements that have been ruled illegal by statute in various states: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Gambling, illegal drug sales, usurious loan agreements, contracts with unlicensed professionals </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Increasingly, illegal contracts are taking place in cyberspace-- e.g., prescriptions drugs sold online. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Under public policy a number of bargains are void </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Exculpatory agreements such as agreements not to sue employers under workmen’s compensation </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Contracts to excuse intentional actions </li></ul></ul></ul></ul></ul>
  23. 23. Legality <ul><li>Public policy constraints </li></ul><ul><ul><li>The contract is unconscionable </li></ul></ul><ul><ul><ul><li>Look at superior education and legal representation one side and relative ignorance on the other side </li></ul></ul></ul><ul><ul><ul><li>A contract by a third party to pay a governmental employee is illegal </li></ul></ul></ul><ul><ul><ul><li>Contracts in restraint of trade </li></ul></ul></ul><ul><ul><ul><ul><li>Covenants not to compete agreed to in employment contracts must be reasonable </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Must be reasonably limited in time and space </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Cyberspace may make spatial obsolete </li></ul></ul></ul></ul>
  24. 24. Taints on an Agreement: Mistake <ul><ul><li>An agreement is voidable if there is a mutual mistake of a material fact </li></ul></ul><ul><ul><ul><li>A fact is material if knowledge of the true fact would have changed the decision of the parties to contract </li></ul></ul></ul><ul><ul><ul><li>If one party knows or should have known the other party was mistaken, then the agreement is voidable </li></ul></ul></ul><ul><ul><ul><li>Often occurs when bids are submitted and there is a typo </li></ul></ul></ul>
  25. 25. Taints on an Agreement: Fraud <ul><ul><ul><li>If a contract is fraudulent , it is voidable at the option of the victim </li></ul></ul></ul><ul><ul><ul><li>Fraud in contract has the same elements as fraud in tort: </li></ul></ul></ul><ul><ul><ul><ul><li>Misrepresentation of an important fact </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Scienter </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Intent to defraud </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Justifiable reliance by the victim </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Damages are caused by the fraud </li></ul></ul></ul></ul><ul><ul><ul><li>An innocent misrepresentation of a material fact makes the contract rescindable </li></ul></ul></ul>
  26. 26. Genuineness of Assent <ul><li>A contract is voidable if </li></ul><ul><ul><li>It is the product of duress </li></ul></ul><ul><ul><ul><li>A party signed a contract because of threat of force, criminal prosecution, or blackmail </li></ul></ul></ul><ul><ul><li>It is the product of undue influence </li></ul></ul><ul><ul><ul><li>The victim is either in a weakened mental state or the other party has a confidential relationship </li></ul></ul></ul><ul><ul><ul><li>The bargain is objectively unfair </li></ul></ul></ul><ul><ul><ul><li>There was no consultation with outside counsel </li></ul></ul></ul>
  27. 27. Writing requirements <ul><ul><li>Oral contracts in general are enforceable </li></ul></ul><ul><ul><ul><li>For certain contracts, the contract must be in writing </li></ul></ul></ul><ul><ul><ul><ul><li>Contracts involving real estate </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Contracts that cannot be performed within one year </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Surety contracts </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Marriage contracts </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Contracts for the sale of goods where the value exceeds $500 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Contracts where an executor is personally liable for the debts of the deceased </li></ul></ul></ul></ul>
  28. 28. Writing Requirements <ul><li>There are some exceptions to the exceptions </li></ul><ul><ul><li>Oral promises of sureties to obligors are enforceable by obligees </li></ul></ul><ul><ul><li>In some states there are part performance exceptions for oral real estate agreements, </li></ul></ul><ul><ul><ul><li>where the buyer takes possession, makes improvements, and pays some or all of the purchase price </li></ul></ul></ul><ul><ul><ul><li>Promissory estoppel </li></ul></ul></ul><ul><ul><ul><li>UCC exceptions--discussed in next chapter </li></ul></ul></ul>
  29. 29. Writing Contracts <ul><ul><li>Sufficiency of the writing </li></ul></ul><ul><ul><ul><li>The agreement must have all material terms </li></ul></ul></ul><ul><ul><ul><li>Must be signed by the defendant </li></ul></ul></ul><ul><ul><ul><li>Names of the parties, consideration, and the subject matter of the contract are required terms </li></ul></ul></ul>
  30. 30. Parol Evidence Rule <ul><ul><li>Excludes prior or contemporaneous evidence that conflicts with a written agreement </li></ul></ul><ul><ul><li>If the written agreement is incomplete, oral evidence may be introduced </li></ul></ul><ul><ul><ul><li>The corporate party often tries to negate an inference that the agreement is incomplete by putting in an integration clause </li></ul></ul></ul><ul><ul><ul><li>A party can always introduce evidence of fraud or misrepresentation or mistake </li></ul></ul></ul>
  31. 31. Performance, Discharge and Breach of Contracts <ul><ul><li>Most contractual obligations are discharged by performance </li></ul></ul><ul><ul><li>If performance fails in its essential purpose , it is material breach </li></ul></ul><ul><ul><ul><li>A material breach relieves the non-breaching party from the obligation to pay the breaching party </li></ul></ul></ul><ul><ul><ul><li>By inserting a time is of the essence clause, late performance becomes a breach </li></ul></ul></ul>
  32. 32. Delegations of Duties <ul><ul><ul><li>If the promisor is a company, it may delegate responsibility for performance to employees </li></ul></ul></ul><ul><ul><ul><ul><li>If the contract performance is inadequate, the business, not the employee, is liable for breach of contract </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Most contracts can be delegated except if the personality or talents of the promisor are unique </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>In some cases there are statutory or public policy constraints on delegations </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Delegations are a very common event </li></ul></ul></ul></ul></ul>
  33. 33. Assignments <ul><li>Many contracts can be assigned </li></ul><ul><ul><ul><li>Once the assignment takes place the assignee can enforce the contract against the obligee </li></ul></ul></ul><ul><ul><ul><ul><li>The assignee takes the benefits of the contract subject to the defenses the obligor has against the assignor </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Assignments are common in car loans. The car dealer is the assignor, the customer is the obligor and the bank is the assignee </li></ul></ul></ul></ul><ul><ul><ul><li>In general, contracts can be assigned unless the assignment or delegation would make performance by the third party more difficult or disagreeable </li></ul></ul></ul>
  34. 34. Third Party Beneficiaries <ul><ul><li>If your parents pay a soccer camp to provide soccer training for you </li></ul></ul><ul><ul><ul><li>You are the 3rd party beneficiary </li></ul></ul></ul><ul><ul><ul><ul><li>The purpose of the contract is to benefit you </li></ul></ul></ul></ul><ul><ul><ul><li>If the soccer camp did not perform, you or your parents could sue </li></ul></ul></ul><ul><ul><ul><li>If you are an incidental beneficiary , you have no right to sue if the promisor breaches </li></ul></ul></ul><ul><ul><ul><ul><li>A garden store has no right to sue if a supplier of a beekeeper fails to deliver </li></ul></ul></ul></ul>
  35. 35. Material Breach and Obligation to Perform <ul><ul><ul><li>If a promisor materially breaches a contract, the promisee is absolved of her obligation to perform </li></ul></ul></ul><ul><ul><ul><ul><li>Same is true if there is an anticipatory breach -- </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>contractual obligations of the non-breaching party are eliminated, but </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>If a party announces it will not be able to perform, </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>the other contracting partner need not pursue legal action immediately, </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>but instead could continue performing in hopes that the anticipatory breacher will in fact perform </li></ul></ul></ul></ul></ul>
  36. 36. Discharge by Agreement <ul><ul><li>The parties can decide to rescind the contract </li></ul></ul><ul><ul><ul><li>Each party agrees not to perform and neither party is liable </li></ul></ul></ul><ul><ul><ul><li>A novation occurs when a new party is substituted </li></ul></ul></ul><ul><ul><ul><ul><li>If A and B have a contract, and A agrees that C can fulfill B’s obligations under the contract, a novation takes place </li></ul></ul></ul></ul><ul><ul><ul><li>Satisfaction and Accord </li></ul></ul></ul><ul><ul><ul><ul><li>The same parties change the agreement </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The accord is the new agreement and the satisfaction occurs when the new consideration is received </li></ul></ul></ul></ul>
  37. 37. Discharge Due to Impossibility <ul><li>Impossibility </li></ul><ul><ul><li>If performance is objectively impossible due to war or embargoes, the promisor is discharged without liability </li></ul></ul><ul><ul><li>If there is a subjective impossibility due to events that are foreseeable, the obligation to perform is not discharged </li></ul></ul><ul><ul><ul><li>If the promisor made a bad bid, he cannot claim he cannot perform because he is not making any money </li></ul></ul></ul>
  38. 38. Discharge Due to Operation of Law and Conditions <ul><ul><li>By Operation of Law </li></ul></ul><ul><ul><ul><li>Bankruptcy, death of a party, destruction of the subject matter </li></ul></ul></ul><ul><ul><ul><li>Discharge by condition </li></ul></ul></ul><ul><ul><ul><ul><li>Condition precedent --if the condition does not take place the promisor does not have to perform </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Condition subsequent-- if the condition takes place the obligation to perform ceases </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Most executory bilateral contracts have concurrent conditions </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>If one party does not perform, the other party’s obligation to perform ceases </li></ul></ul></ul></ul></ul>
  39. 39. Impracticability and Compensatory Damages <ul><ul><li>The UCC equivalent of impossibility </li></ul></ul><ul><ul><ul><li>It is more liberal and allows for more excuses for nonperformance </li></ul></ul></ul><ul><ul><ul><ul><li>Strikes and bad weather may qualify </li></ul></ul></ul></ul><ul><ul><li>Remedies </li></ul></ul><ul><ul><ul><li>Generally the remedy in contract law is money damages </li></ul></ul></ul><ul><ul><ul><li>The theory of compensatory damages is to put the nonbreaching party in the position he would have occupied if the contract had been performed </li></ul></ul></ul>
  40. 40. Remedies <ul><ul><ul><li>Damages: Compensatory </li></ul></ul></ul><ul><ul><ul><ul><li>In sale of goods contracts, damages are often calculated as the difference between the market price and the contract price time quantity: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Damages = (P m - P k )Q k in this case, the seller is likely to be the defaulting party </li></ul></ul></ul></ul></ul><ul><ul><ul><li>In addition reliance and restitution costs are sometimes recoverable </li></ul></ul></ul><ul><ul><ul><ul><li>Reliance: Costs associated with relying on promises of the promisor </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Restitution: Recovering consideration </li></ul></ul></ul></ul>
  41. 41. Consequential Damages <ul><ul><li>Consequential damages </li></ul></ul><ul><ul><ul><li>Damages that are the result of the contract breach but are unusual in some way </li></ul></ul></ul><ul><ul><ul><ul><li>Lost profits are an example of consequential damages </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The non-breaching party must apprise the breaching party of the consequential damages in order to recover </li></ul></ul></ul></ul><ul><ul><ul><ul><li>In some cases there is an obligation to notify the breaching party before the breach of the possibility of consequential or unusual damages </li></ul></ul></ul></ul>
  42. 42. Liquidated Damages <ul><ul><li>Liquidated Damages </li></ul></ul><ul><ul><ul><ul><li>In many contracts damages are difficult to calculate so the parties agree in advance what damages are </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>If the parties provide a reasonable estimate of damages, liquidated damages clauses are enforceable </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>If the liquidated damages clause is judged excessive it will not be enforced as a penalty </li></ul></ul></ul></ul></ul>
  43. 43. Remedies <ul><li>Punitive damages in contracts are very rare </li></ul><ul><li>The nonbreaching party is expected to mitigate damages </li></ul><ul><ul><li>Landlords whose lease has been breached cannot refuse to lease to another tenant </li></ul></ul><ul><ul><li>Wrongfully discharged employees cannot turn down comparable job offers from 3rd parties </li></ul></ul>
  44. 44. Equitable Remedies <ul><ul><li>Specific Performance </li></ul></ul><ul><ul><ul><li>The remedy is appropriate if the promisee attaches great value to the consideration </li></ul></ul></ul><ul><ul><ul><ul><li>The consideration must be unique </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Jewelry, works of art, real estate, family heirlooms </li></ul></ul></ul></ul><ul><ul><ul><li>Injunctions </li></ul></ul></ul><ul><ul><ul><ul><li>The courts will freeze the action if irreversible damage may occur with a continued breach </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The plaintiff generally has to demonstrate that he will likely prevail in trial that the defendant is breaching the contract </li></ul></ul></ul></ul>