CHAPTER 11 Contractual Obligations and their Enforcement
CHAPTER 11 Contractual Obligations and their Enforcement
CHAPTER 11 Contractual Obligations and their Enforcement
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Chapter <strong>11</strong><br />
<strong>Contractual</strong> <strong>Obligations</strong><br />
<strong>and</strong> Their <strong>Enforcement</strong><br />
<strong>11</strong>-1 Transfer <strong>and</strong> Discharge of<br />
<strong>Obligations</strong><br />
<strong>11</strong>-2 Remedies for Breach of<br />
Contract<br />
Law for Business <strong>and</strong> Personal Use<br />
Chapter <strong>11</strong><br />
© South-Western, a part of Cengage Learning Slide 1
<strong>11</strong>-1 Transfer <strong>and</strong><br />
GOALS<br />
Discharge of <strong>Obligations</strong><br />
• Identify what rights can be assigned <strong>and</strong><br />
what duties delegated<br />
• Describe the various ways in which<br />
contractual obligations may be discharged<br />
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Chapter <strong>11</strong><br />
© South-Western, a part of Cengage Learning Slide 2
THE TRANSFER OF CONTRACT<br />
RIGHTS AND DUTIES<br />
• Assignment<br />
• Transfer of contractual right to another party<br />
• Assignor<br />
• Party who transfers the contractual right<br />
• Assignee<br />
• Party who receives the contractual right<br />
• Obligor<br />
• The one who owes a duty under contract<br />
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Chapter <strong>11</strong><br />
Slide 3
What’s Your Verdict Page 191<br />
• Whipple bought a highpowered<br />
sports coupe from<br />
Boss Motors for $32,000.<br />
After a down payment of<br />
$2,000, the balance, plus<br />
interest, was to be paid by<br />
mail in installments over 48<br />
months. Boss Motors<br />
needed cash to purchase<br />
new cars. It immediately<br />
sold Whipple’s contract to a<br />
finance company, Palmout<br />
Inc. It told Whipple to mail<br />
all payments to Palmout.<br />
• Is such a transfer of<br />
contract rights legal<br />
• Yes<br />
• What term describes<br />
this transfer<br />
• Assignment<br />
• Who is the assignor<br />
• Boss Motors<br />
• Who is the assignee<br />
• Palmout Inc.<br />
• Who is the obligor<br />
• Whipple<br />
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Chapter <strong>11</strong><br />
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THE TRANSFER OF CONTRACT<br />
RIGHTS AND DUTIES<br />
• Assignable rights<br />
• May assign contractual rights as long as<br />
performance will not be changed materially<br />
• Non-assignable rights<br />
• You cannot assign contractual rights if<br />
performance requirements are materially<br />
changed<br />
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Chapter <strong>11</strong><br />
© South-Western, a part of Cengage Learning Slide 5
THE TRANSFER OF CONTRACT<br />
RIGHTS AND DUTIES<br />
• Form of assignments<br />
• Usually voluntarily by the assignor<br />
• Can be oral or written (some require written)<br />
• Notice of assignments<br />
• Until notification, obligor continues to pay assignor<br />
• After notification, obligor is liable to the assignee<br />
• Delegation of contractual duties<br />
• Can delegate duties (routine tasks), but person<br />
remains legally responsible for proper performance<br />
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DISCHARGE OF CONTRACTUAL<br />
OBLIGATIONS<br />
• By performance<br />
• Terms to Know (page 193)<br />
• Discharge<br />
• Breach of Contract<br />
• Substantial Performance<br />
• Defaults<br />
• Anticipatory Breach<br />
Continued on the next slide<br />
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Chapter <strong>11</strong><br />
© South-Western, a part of Cengage Learning Slide 7
DISCHARGE OF CONTRACTUAL<br />
OBLIGATIONS<br />
• Timing of performance<br />
• If timing not stated, then duty must be performed with a<br />
reasonable time<br />
• Example: shipping tomatoes vs. shipping furniture<br />
• If contract identifies performance date,<br />
• If performance occurs shortly after the date, this will normally<br />
be considered a minor breach<br />
• If contract states that „time is of the essence”, failure to<br />
perform by that date could be considered a major breach<br />
• Note: Courts look at the subject matter <strong>and</strong> specific<br />
circumstances to determine if “time is of the essence”, not<br />
just the words in the conract.<br />
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DISCHARGE OF CONTRACTUAL<br />
OBLIGATIONS<br />
• By the initial terms<br />
• Parties may agree in <strong>their</strong> contract when it will<br />
terminate<br />
• By subsequent agreement<br />
• Rescission (both parties agree to undo <strong>their</strong> contract)<br />
• Substitution (both parties agree to replace it with a new contract)<br />
• Accord <strong>and</strong> satisfaction (agreement to substitute a new<br />
contractual obligation for an existing one <strong>and</strong> the actual performance)<br />
• Novation (a third party is added to contract as substitute for one of the<br />
parties – all 3 parties have to agree)<br />
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Slide 9
What’s Your Verdict Page 192<br />
• Jen borrowed $2,000 from<br />
Effriham to buy a new<br />
keyboard for his b<strong>and</strong>. Jen<br />
agreed to pay the money<br />
back plus interest on Dec<br />
1 st . When Jen did not pay,<br />
Effriham, who needed<br />
money to pay bills,<br />
suggested that if Jen would<br />
pay $1,500 by Jan 15 th , he<br />
would call the loan paid in<br />
full. Jen agreed.<br />
• This is considered Accord<br />
• Even though Jen agreed,<br />
she failed to make the<br />
$1,500 payment. Effriham<br />
then brought a lawsuit<br />
against Jen for payment of<br />
the debt.<br />
• Was there Satisfaction<br />
• Will the court order Jen to<br />
pay the original amount<br />
of $2,000 or the amount<br />
under the accord of<br />
$1,500<br />
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Slide 10
DISCHARGE OF CONTRACTUAL<br />
OBLIGATIONS<br />
• By impossibility of performance<br />
• Extreme external conditions (strike by employees,<br />
weather related events, etc.)<br />
• Destruction of unique subject matter<br />
• By operation of law<br />
• One of the parties files for Bankruptcy<br />
• Material alteration of the terms by one party<br />
without consent of the other party<br />
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DISCHARGE OF CONTRACTUAL<br />
OBLIGATIONS<br />
• By tender of performance<br />
• Tender: a ready, willing <strong>and</strong> able offer to perform<br />
an obligation<br />
• If duty requires:<br />
• Doing an act: if tender is rejected, the obligation will be<br />
discharged<br />
• Payment of money: if tender is rejected, it does not<br />
discharge the debt<br />
• It does relieve the debtor of future court costs or interest<br />
charges<br />
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Slide 12
<strong>11</strong>-2 Remedies for Breach of<br />
GOALS<br />
Contract<br />
• Name <strong>and</strong> describe various remedies possible<br />
for minor or major breach of contract<br />
• Discuss the factors that affect the choice of<br />
remedies<br />
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REMEDIES POSSIBLE FOR<br />
BREACH<br />
• Remedy: legal means to fix breach<br />
• Remedy for a minor breach<br />
• Not significant in relation to the contract<br />
• Only remedy is money damages<br />
• Remedies for a major breach<br />
1. Rescission <strong>and</strong> restitution<br />
• Intended to place parties in the same legal position as<br />
before they entered into contract<br />
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REMEDIES POSSIBLE FOR BREACH<br />
2. Money damages<br />
• Compensatory<br />
(actual)<br />
• Consequential<br />
(actual +<br />
foreseeable injuries)<br />
• Punitive (to punish)<br />
• Liquidated (agreed<br />
to by parties in<br />
contract)<br />
• Nominal (token<br />
amount)<br />
3. Specific performance<br />
• Order requiring parties<br />
to perform exactly as<br />
per the contract<br />
• Available when subject<br />
matter is unique<br />
• Ex. Purchase of antique<br />
custom made 1932<br />
Rolls Royce<br />
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Slide 15
What’s Your Verdict Page 197<br />
• Liu contracted to buy 160 acres of l<strong>and</strong> from McCall.<br />
She planned to build an amusement park on the<br />
l<strong>and</strong> as it was near the junction of two interstates<br />
<strong>and</strong> had adequate utilities <strong>and</strong> population density.<br />
• When McCall learned of her plan, he refused to<br />
transfer the title.<br />
• What remedies are available to Lui<br />
• Rescission <strong>and</strong> Restitution<br />
• Money Damages<br />
• Specific Performance<br />
• What is Lui’s optimal (best) remedy<br />
• Specific Performance<br />
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Slide 16
What’s Your Verdict Page 199<br />
• Jim Brushback, an unknown baseball pitcher, signed<br />
a contract to play his rookie year for a major league<br />
team for $120,000. After 2 months, Brushback had<br />
won all four games he’d started with 37 strikeouts<br />
<strong>and</strong> an earned-run average (ERA) of 1.75. He then<br />
contracted with a competitive team for $4 million a<br />
year for the next five years, thereby breaching his<br />
rookie contract.<br />
• What remedies are available to the original<br />
team<br />
• Restitution or Specific Performance<br />
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FACTORS AFFECTING CHOICE OF<br />
REMEDY<br />
• Conflict of remedies<br />
• Party injured has a choice – choosing one will<br />
eliminate the other choices<br />
• Duty to mitigate<br />
• Injured parties are required to take reasonable<br />
steps to minimize the harms<br />
• Waivers<br />
• Intentionally <strong>and</strong> explicitly giving up a contract<br />
right (creditor says “I will accept your late<br />
payment without a late charge”)<br />
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FACTORS AFFECTING CHOICE OF<br />
REMEDY<br />
• Statute of limitations<br />
• Time period to bring a lawsuit (4 years for<br />
contracts <strong>and</strong> 3 years for torts)<br />
• No remedy if time period has expired<br />
• Bankruptcy<br />
• Permits the discharge (or excusing) of debts<br />
• If a party files for bankruptcy, the other party will<br />
lose any remedy (or it will be limited)<br />
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Slide 19
Remedies For Breach Of Contract<br />
Law for Business <strong>and</strong> Personal Use<br />
Chapter <strong>11</strong><br />
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PREVENT LEGAL DIFFICULTIES<br />
In the execution of contracts . . .<br />
• As a prospective assignee, determine whether the<br />
assignor is subject to any defense that may affect<br />
your claim. Do this by promptly checking with the<br />
obligor (debtor). Remember that you, as the<br />
assignee, acquire only the rights as the assignor<br />
possessed.<br />
• If you are an assignee, be sure to notify the obligor<br />
(debtor) of the assignment as soon as practicable.<br />
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PREVENT LEGAL DIFFICULTIES<br />
• Be aware that “time is of the essence” in many<br />
contracts. If a contract calls for performance by a<br />
certain time, failure to perform may be a breach of<br />
contract. When appropriate, include this requirement<br />
in your contract, <strong>and</strong> clearly state that failure to<br />
perform at the time agreed upon may be treated as<br />
a breach.<br />
Continued on the next slide<br />
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PREVENT LEGAL DIFFICULTIES<br />
• Remember that hardship <strong>and</strong> higher costs do not<br />
make performance impossible. Bad weather, fires,<br />
strikes, inability to obtain materials, or similar<br />
difficulties could cause hardship. To be protected<br />
against damages for failure to fulfill a contract because<br />
of such events, include in the contract a clause to that<br />
effect.<br />
• Negotiate, <strong>and</strong> if possible, mediate or voluntarily<br />
arbitrate, before you litigate. A lawsuit should be the<br />
final resort because it is costly in time, money, <strong>and</strong><br />
goodwill.<br />
Continued on the next slide<br />
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PREVENT LEGAL DIFFICULTIES<br />
• Always keep accurate records <strong>and</strong> be prepared to<br />
show that you actually suffered a monetary loss from<br />
a breach of contract. Make <strong>and</strong> keep evidence of a<br />
reasonable effort to mitigate the damages.<br />
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