CHAPTER 6: HOW CONTRACTS COME TO AN END

CHAPTER 6.1

Transferring and Ending Contracts

ENDING A CONTRACT

A contract is discharged when it comes to an end

Contracts can be discharged voluntarily in two ways: By performance By agreement

DISCHARGE BY PERFORMANCE

Performance A series of activities that fulfills the

purpose of the contract

Complete performance represents a stage in which all the terms have been carried out properly

4 CHARACTERISTICS OF PERFORMANCE

Time for Performance Satisfactory Performance Substantial Performance Tender of Performance

TIME FOR PERFORMANCE

Time to complete performance may be important to one or both parties

If time is not stated in contract and there is a question, court will say all duties under contract must be completed in a reasonable time.

Reasonable--> determined by what is suitable, fair, and proper to the goal of the contract.

TIME FOR PERFORMANCE

Example: A reasonable time for selling tomatoes, for

instance, is not the same as a reasonable time for selling a house.

If there is a time limit stated, the court may still give more time if asked to do so by one of the parties.

Time limit should be included in the contract to avoid misunderstanding among the parties--> using the words time is of the essence in the contract

SATISFACTORY PERFORMANCE

Sometimes the contract will say nothing about satisfaction, sometimes a contract may say the work must be done in a satisfactory manner.

Satisfactory: to meet demand of requirement

SATISFACTORY PERFORMANCE

In a lawsuit, the court will use the reasonable person test to measure whether the contract was performed in a satisfactory manner.

The jury will decide what is satisfactory If there is no jury, the judge will

decide Sometimes, one party will agree to

perform services to the other party's satisfaction

SATISFACTORY PERFORMANCE EXAMPLE

Marc Marcel, an artist, agreed to paint Julie's portrait "to her satisfaction" for $500. When the painting was completed, all of Julie's family and friends thought it was beautiful, however, Julie thought it was hideous!

She felt the nose was too long and the mouth was too big. In most states Julie would not have to pay for it since it was not to her satisfaction.

SUBSTANTIAL PERFORMANCE

Both parties in a contract must fully perform their parts of the bargain.

Someone who has not fulfilled their part in most cases will not win a lawsuit against the other for money owed/damaged

Exception: Substantial Performance Definition: A situation in which a party has, in

good faith, completed the major requirements of a contract, leaving only a few minor details unfinished.

SUBSTANTIAL PERFORMANCE

The court will allow that person to recover the amount agreed upon under the contract, minus the cost of completing the job.

Often applied to construction contracts

SUBSTANTIAL PERFORMANCE EXAMPLE

Jake reports that Zoning Enterprises will have to tear down the new Ramirez Hotel on Michigan Ave because they installed the wrong type of tile in the bathrooms.

The doctrine of substantial performance would prevent such a drastic and unfair result.

Ramirez would have to pay Zoning Enterprises for the construction of the building. The hotel may deduct any damages.

TENDER OF PERFORMANCE

A party can fulfill the terms of a contract by performing an act or by paying money.

Tender: an offer to do what you agreed to do under a contract

It is important to make tender even if you know the other party will not perform his or her part of the contract

If neither party has made tender, neither can bring a lawsuit forward

TENDER OF PAYMENT

An offer to pay a certain amount to fulfill a contract

If a person makes a tender of payment that is rejected, that person is NOT excused from the debt.

He or she is only excused from paying additional interest on the debt.

TENDER OF PAYMENT EXAMPLE

Keith Hanson owed Carla Miller $500, which was due on the 1st of August.

Hanson did not tender payment until after the first of August.

Miller refused to take the money at that time and said, "you didn't pay the money when it was due, now I'm going to sue you and make it cost you plenty."

Miller can collect $500 plus interest at the legal rate for one month.

DISCHARGE BY AGREEMENT

Means that people can end a contract by mutual agreement

This can be done by mutual release or by accord and satisfaction

MUTUAL RELEASE

Agreement between two parties to end a contract

Whatever the parties agreed to do in the first place, they can later agree NOT to do.

ACCORD AND SATISFACTION

A contract can also be discharged when one party agrees to accept a different performance from the other party

One contract is substituted for another

It is often used to settle an honest disagreement on an amount owed

INVOLUNTARY DISCHARGE

Some contracts are discharged involuntarily despite what the parties intend to do.

Example: death, illness, illegality, etc

There are 2 ways contracts are discharged 1. Impossibility of Performance 2. By Operation of Law

DISCHARGE BY IMPOSSIBILTY OF PERFORMANCE

A contract becomes legally impossible to perform

Definition: May be allowed in case of death or illness that prevents the performance of a personal service contract; the destruction of the exact subject matter, or the means for performance; and illegality, or situation in which the performance of a contract becomes illegal

DEATH OR ILLNESS IN A PERSONAL SERVICE CONTRACT

Death or illness of a party of a contract may be an excuse for non-performance

This is true ONLY if the contract requires the personal service of the person who has died or become ill.

DESTRUCTION OF THE EXACT SUBJECT MATTER

If the means or subject matter that is needed to perform the contract is destroyed through no fault of either party, the contract is discharged.

Destruction must occur after the contract is entered, but before it is carried out.

DESTRUCTION OF SUBJECT MATTER EXAMPLE

Brian has been negotiating a contract for the purchase of a unique printing press from Mr. Smith. The price had been set and the printing press was delivered the next day.

That night however, the press was destroyed when the delivery truck went off a cliff. The contract would be discharged because of the destruction of the particular subject matter identified in the contract.

DISCHARGE BY OPERATION OF LAW

At times, the best interest of society demand that a contract be terminated.

The law declares contracts discharge by operation of law.

4 ways: Wrongful Alteration Statute of Limitations Debt and Statue of Limitation Bankruptcy

WRONGFUL ALTERATION

Wrongful Alteration One party’s wrongful acts will discharge a contract Example: altering or changing a contract

STATUTE OF LIMITATION

Statute of Limitation Establishes a time limit for suing in a civil case. Based on the date when the breach occurred or was discovered.

Each state has their own laws

DEBT AND STATUTE OF LIMITATION

The debt may be renewed If a debtor make a partial payment

or admits that the debt exists after the time period has passed, the debt is renewed for another time period set by the state statute

In some states, this new agreement must be in writing

BANKRUPTCY

Congress has set procedures for discharging a debtor’s obligations.

Obligation still exists, but a debtor can not be imprisoned for failure to pay

Certain debts CANNOT be discharged: Student loans Debt for taxes Alimony Child support Maintenance

BREACH OF CONTRACT

When a person fails to perform the duties spelled out by a contract.

When a breach of contract occurs, one party is injured

Injuries may not be physical, but it does not mean that they are not real.

The injured party may demand justice

TRANSFER OF CONTRACTUAL RIGHTS & DUTIES

When people establish contracts, they receive: Rights Benefits Acquire Duties Detriments (something

you give up) Sometimes these rights and duties are

moved to someone else Taking on more work that you can handle

may required you to shift some of those duties to other qualified parties

ASSIGNMENT AND TRANSFER OF RIGHTS An assignment is the transfer of a right under

a contract.

This can be done as long as the contract doesn’t specifically say it cannot be done.

Party who transfer right Assignor Party who get the right Assignee Assignee is a third party person who is not a

party to the original contract

ASSIGNMENT AND TRANSFER RIGHT EXAMPLE

Anthony entered into a contract with Kathy to rebuild the front steps of her house for $1800.

The carpenter was pleased to get the work because he owed his landlord $1800.

Before beginning the work, Anthony assigned the right to receive payment for the work to his landlord.

When payment was due, Kathy paid the $1800 to the landlord directly.

HOW RIGHT MAY BE ASSIGNED

No consideration is necessary for an assignment to be valid.

The Law does NOT say how one party may assign a right to somebody else.

It is best to put it in writing because oral assignments (transferring rights) can be difficult to prove

ASSIGNING RIGHTS EXAMPLE

Suppose you owe money to a bank under a contract (loan).

Now suppose your bank assigns the right to receive your money to another bank.

Would you want to know about the change?

YES! And you would want it in writing so when you send the money, you know you’re doing the right thing

WHAT RIGHTS MAY BE ASSIGNED?

Most rights may be assigned (transferred) unless the assignment changes the obligation of the other party to the contract in an important way.

Example: Suppose Anthony assigned the right to received

the $1800 to his landlord for the work he did on Kathy’s house, but Anthony did a poor job.

Kathy can raise the defense of a “poor job” if she was sued by the landlord for the money owed.

DELEGATION AND TRANSFER OF DUTIES Delegation

Transferring of a duty under a contract This SHOULD NOT be confused with an

assignment Assignment is a transfer of RIGHTS Delegation is a transfer of DUTIES In a transfer of duties, a party to a

contract trust another person to do the job in his or her place

EXAMPLE

Ivan cannot meet all of his printing contracts. When it came time to print a newsletter for a high school, he transferred his contract obligation to another printer who was not a party to the original contract.

This is a legal form of subcontracting This could not be done ONLY if Ivan told

the school he would personally do the printing

SUBCONTRACTING

Handing over the duty of doing the work to someone else

You may not delegate duties, however if any of the following has occurred: A party agrees to perform personally The contract calls for the exercise of

personal skill and judgment The contract itself prohibits delegation

DELEGATING

If you have the right to delegate a contractual obligation and decide to do so, choose your third party carefully!

You retain responsibility for any job duties that you subcontract or assign to a third party.

NOVATION

You do not need permission of the other party to assign contract rights or delegate duties to a third person.

If you do receive permission, and the other party agrees to deal with the assignee (person taking on the work), the resulting contract is called a NOVATION.

Novation- original party replaced by new party Terms of contract remain the same Change required consent of all parties involved

THIRD PARTIES

Contract is a binding agreement between parties The relationship is termed privity of contract Usually parties to a contract have standing

to sue if needed A third person may enforce a contract

when it is made specifically to their benefit.

Third Party Beneficiary a person who is not a party to a contract but can still benefit from the contract

CHAPTER 6.2: VOIDABLE CONTRACTS AND REMEDIES

INTRO

If a contract appears to meet all elements of a contract, what could still prevent the contract?

Sometimes what seems to be valid, turns out to be nothing of the kind!

In these situations, the agreement is defective.

Several circumstances may lead to this situation such as: Fraud, Misrepresentation, Duress, and Undue Influence

Breach of

Contract

Duress

Undue Influenc

e

DamagesFraud

Equitable

Remedies

FRAUD

Deliberate deception intended to serve an unfair and unlawful gain.

If the seller lied, you may be able to get your money back. You may have to sue for damages.

The law allows the injured party to get punitive damages

FRAUD

To win a lawsuit based on fraud, five elements must be shown.

1. False representation of fact (a lie) 2. Person who lied must know it was a lie

3. Lie must be made with intent 4. Innocent party must rely on the lie 5. Innocent party must experience loss

FALSE REPRESENTATION

Law says the lie must be about a material fact that is really important.

It CANNOT be a promise of something or just an opinion.

Example: If your friend tells you he is going to turn back the odometer on his car to get a better price, he is committing fraud.

KNOWLEDGE OF LIE

Person telling the lie has to know it’s a lie.

Innocent party has to show in court that they had actual knowledge that he or she was lying.

LIE INTENDED TO BE RELIED UPON

To prove fraud, the innocent party must show that the liar told the lie knowing the other party would hear it, believe it, and act on it.

The lie was told to tempt the other party into the false contract.

LIE ACTUALLY RELIED UPON

To prove fraud, the innocent party has to show that he or she depended on the lie.

Sometimes the defrauding party lies, but the other party pays no attention to the lie. If that happens, there are no grounds

for a lawsuit

RESULTING LOSS

If the innocent party does not lose anything in the deal, there is no loss, there is no fraud.

FRAUD SCENARIO #1

Casey is selling her car. Lisa shows an interest in buying the car. Lisa asks Casey about the condition and she tells Lisa the car is in PERFECT condition (knowing the brakes need to be repaired).

Lisa buys the car, leaves and gets into a car accident due to a problem with the brakes.

Can Lisa sue Casey for fraud?

SCENARIO #2

Casey is selling her car. Lisa shows an interest in buying the car from Casey. Lisa asks Casey if she can take it for a test drive. Casey says sure. So Lisa drives the car around to the back of the building and brings it to A-Rod who checks it out.

A-Rod tells Lisa car looks great, the brakes just need to be repaired. So, as soon as you buy it bring it around back and Ill repair the brakes.

Lisa buys the car from Casey, as she is driving around to the back of the building, she gets in a car accident due to a problem with the brakes.

Can Lisa sue Casey?

INNOCENT MISREPRESENTATION

Occurs when a person involved in negotiating a contract says something that they believe to be true, that turns out to be false.

The innocent party has the right to get out of the contract in this scenario.

MISTAKE, DURESS AND UNDUE INFLUENCE Sometimes a person enters into a

contract with a mistaken idea of what is at stake.

Later when they realize the error, they try to get out of the agreement.

Sometimes they are able to get out, sometimes not.

UNILATERAL MISTAKE

An error on the part of one of the parties to the contract.

Usually a person cannot get out of the contract just because of the mistake… The law wants people to pay attention to their business deals.

BILATERAL MISTAKE

Error made on both parties to the contract. Also called mutual mistake

Often when the mistake is bilateral, either one of the parties can get out of the contract.

Example: Suppose you order the 2005 VHS version of the Fantastic Four film. When the tape arrives, it is the 1993 version. This is a bilateral subject matter mistake. You were buying 2005 version, the seller was selling the 1993 version.

DURESS

Act of destroying someone’s free will by force, threat, or bodily harm.

These types of agreements are void or voidable

Two types of duress Physical duress Economic duress

PHYSICAL DURESS

When actual physical force is used to cause a person to enter into a contract…Contract is void

When the threat of force is used… contract is voidable

ECONOMIC DURESS

An act that threatens a person’s income or business that makes that person enter into a contract without real consent.

3 things need to be proven for a contract to be void 1. Other party placed them in poor economic

position 2. Victim had no other choice 3. Victim’s submission was reasonable under

circumstances

UNDUE INFLUENCE

An action or series of overly persuasive actions that make inappropriate use of one person’s position of power over another person to create an agreement that is very favorable to the person with all the power.

3 things need to be true for the contract to be void 1. existence of care-giver type relationship 2. use of excessive pressure by the caregiver 3. contract heavily favors caregiver

REMEDIES AND DAMAGES

Remedy Legal means of enforcing a right or correcting a wrong

Injured party has 3 options 1. Accept the breach 2. Sue for money damages 3. Ask the court for an equitable remedy

ACCEPT THE BREACH

If one party breaches a contract, the other party has an excuse not to perform. Contract can be considered discharged

This is the best choice if no damages have been suffered

DAMAGES

Payment recovered in court by a person who has suffered an injury.

If you sue for damages, but you have not suffered any loss, the amount you would will would be about $1. Court costs would be much higher!

2 typed of damages Money Damages Punitive Damages

MONEY DAMAGES

If the injured party suffers a loss, you may sue for money damages resulting from the breach of contract.

The money damages should place you in the position you would have been in if the contract would have been carried out.

To recover damages, the innocent party must still made tender- do what they agreed to do

PUNITIVE DAMAGES OR RESCISSION

Punitive damages Money payments for damages that go

beyond what the innocent party actually lost and are designed to punish the wrongdoer.

You cannot receive punitive damages due to misrepresentation You would seek rescission (cancelling

contract)

EQUITABLE REMEDIES

Sometimes the remedy of money damages isn’t enough to repay the injured party for the breach of contract.

In this case the injured party may seek equitable remedy.

2 types: Specific Performance Injunction

SPECIFIC PERFORMANCE

Asks the court to order the other party in a contract to do what he or she agreed to do.

Can only be used when money damages are not sufficient to give relief.

INJUNCTION

Court order that prevents a party from performing a specific act.

Only available in special circumstances when money damages will be inadequate to compensate the injured party.

Can be temporary or permanent.

One who disobeys an injunction can be held in contempt of court.