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Chapter Overview

Learning Objectives

After studying this chapter, you will be able to:

1. Describe how third parties acquire rights and duties on a contract.

2. Distinguish between assignments and third-party beneficiary contracts.

3. Describe what contractual duties may be assigned and delegated.

4. Describe the different ways a contract may be discharged.

5. Define the different types of damages.

6. Explain when specific performance would be available as a remedy.

6.1 Third Parties • Third-Party Beneficiaries • Assignments • Delegations

6.2 Performance and Discharge of Contracts • Discharge by Condition • Discharge by Performance • Timeliness • Anticipatory Breach • Impossibility of Performance • Commercial Impracticability • Frustration of Purpose • Discharge by New Agreement • Discharge by Operation of Law

6.3 Remedies for Breach • Damages • Specific Performance • Election of Remedies

6.4 Chapter Summary • Focus on Ethics • Case Study: Rosenberg v. Son, Inc. • Case Study: Campbell Soup Co. v. Wentz • Critical Thinking Questions • Hypothetical Case Problems • Key Terms

Third Parties, Performance and Discharge of Contracts, and Remedies

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CHAPTER 6Section 6.1 Third Parties

In this chapter we will examine several distinct concepts. First, we will look at the role of third parties in contracts. Up to this point, we have been largely concerned with only the two people who made the contract. However, sometimes outsiders who were not a part of the contract may acquire the right to the contract’s benefits, or a duty to perform the contract. The topics of third-party beneficiaries, assignments, and delegations deal with these matters.

Second, we will look at the various situations that arise after a valid contract has been made that may result in discharge of the contract. A discharge means that one or both of the contracting parties is excused from performance and/or liability on the contract.

Lastly, we will look at the remedies available in the event there is a breach of contract.

6.1 Third Parties

When considering the role of third parties, we must initially determine if we are focusing on the rights or responsibilities of the contract. If the focus is on the rights or benefits, the ways in which a third party might acquire those are if the outsider is an intended third-party beneficiary or if there has been an assignment of the contract by one of the original contracting parties. An assignment is the transfer of benefits or rights under a contract to a third party. If instead the focus is on whether a third party has a duty to perform on the contract, the issue is whether one of the con- tracting parties has delegated to the outsider.

If, for example, John agrees to paint Mary’s house for $1,000, Mary’s rights under the contract would include having her house painted (in a reasonable manner), and John’s rights under the contract would include being paid $1,000 for his labor. If John had, under the original terms of the contract, specified that he wished Mary to pay the $1,000 to Julio, Julio would be an intended third-party beneficiary. Mary would legally be obligated to pay him, and if she did not, it is Julio who would have the right to sue for breach.

If, on the other hand, John and Mary make that same contract, and two weeks later John transfers the right to the money to Julio, this is an assignment. Again, Mary is obligated to pay Julio, and if she fails, Julio has the right to sue her, not John. It is important to remem- ber that an assignment is only the transfer of a right, not a duty. In other words, John still has to paint Mary’s house.

If John gets Melissa to paint Mary’s house instead of doing it himself, that is a delegation of the contract (see Figure 6.1).

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CHAPTER 6Section 6.1 Third Parties

Now, let’s examine the different third-party situations in more detail.

Third-Party Beneficiaries A third party must be an intended beneficiary of the contract in order to acquire enforce- able rights. This means that the original contracting parties intended for the third person to benefit from their contract; it is at least part of the reason they made the contract.

Example 6.1. Peter contracts to paint Harry’s house, and specifies that he wants the payment to go to Ann, his girlfriend. Obviously, Peter intends for this contract to benefit Ann.

Example 6.2. James takes out an insurance policy with Acme Insurance Co., providing that in exchange for James paying monthly premiums, Acme will pay a benefit of $100,000 to James’s wife Francesca when James dies. The main purpose of the contract is to provide security for the wife.

So, both Ann and Francesca are intended beneficiaries. If Harry doesn’t pay Ann, or if the insurance company doesn’t pay Francesca, the third-party beneficiaries have the right to sue Harry and Acme for breach.

However, Ann and Francesca are what the law terms donee beneficiaries, who are get- ting the benefit essentially as a gift. Peter had no legal obligation to pay Ann money, and James has no legal obligation to insure his life for his wife’s benefit. Donee beneficiaries cannot prevent the parties from modifying the contract. Thus if James decided to cash in the policy, Francesca would be unable to prevent it.

MelissaJohn

Paint

Obligee Delegator

“I don’t feel like painting.”

The house John contracts to paint

Delegatee

Mary

“I’ll do it!”

The Delegation

Figure 6.1: Delegation of contractual duty

John and Mary are the original contracting parties. John can delegate the contractual duty to Melissa, but he will remain liable on the contract to Mary.

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CHAPTER 6Section 6.1 Third Parties

Another type of intended third-party beneficiary is a creditor beneficiary. Suppose James is in the process of buying a house, and he is getting a mortgage from Bigger Bank. Bigger Bank requires James, as a condition of getting a thirty-year mortgage, to also get an insurance policy that provides that if James dies without paying off the mort- gage, the insurance proceeds will go to Bigger to pay the balance of James’s loan. As a creditor beneficiary, Bigger Bank can not only sue Acme if the insurance company breaches, but Bigger can also prevent Acme and James from making any changes to the policy without Bigger’s consent.

While intended beneficiaries have rights on the contract, incidental beneficiaries do not. For example, suppose James dies and the insurance company refuses to pay Francesca. However, Francesca is so grieved at James’s death, she isn’t thinking about lawsuits; she’s crying a lot and drinking heavily. But Francesca’s son from her first marriage, Brady, who is unemployed and has moved back in with his mom, is furious about the insurance money. He wants to sue Acme for breach, reasoning that if the household got $100,000, they could afford premium cable, which would be a big benefit to him. But clearly James had no intent to benefit Brady with the insurance policy, or James would have named him a beneficiary. Thus Brady only incidentally benefits, and has no rights on the contract.

Consider the following:

Example 6.3. The Bright Boutique contracts with Renovators, Inc. for a $500,000 remodel on Bright’s Main Street location. Before Renovators begins the project, Bright suffers a sharp downturn in business and announces that the renovation is canceled. Antique Shoppe, which has the location next to Bright, is very disappointed, since Bright’s renovation would have resulted in Antique’s property value increasing. Could Antique sue suc- cessfully to enforce the contract?

The answer is clearly no. Antique Shoppe is an incidental beneficiary with no rights. Only Renovators, Inc. would have the ability to enforce the contract.

One tricky issue with third-party beneficiaries arises in the context of public service con- tracts. Members of the public are generally held to not be intended beneficiaries, for pub- lic policy reasons. For example, if the city of New York has a contract with Transit Union for Transit to supply bus and subway service, and Transit breaches by going on strike, can the several million people who had to take taxis while the strike was on sue Transit for breach? The law generally says no, because to allow the public here to be intended third parties would mean that the courts could potentially be clogged up with this one type of lawsuit, and also the cost of defending could bankrupt Transit, which potentially once

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CHAPTER 6Section 6.1 Third Parties

again leaves the city without bus and subway service! Thus as a matter of public policy, only the city of New York can sue Transit for breach.

Assignments An assignment occurs when after the contract is made, one of the parties transfers rights to a third person.

Example 6.4. Peter contracts to paint Harry’s house for $3,000. Then Peter assigns the contract to Ann. Peter is called the assignor, Ann is the assignee, and Harry the obligor, because he is obligated to give the benefit of the $3,000 now to Ann (see Figure 6.2).

Contract rights can generally be assigned, unless it would materially affect the obligor’s obligation. Paying money to one person is really no different than paying it to another, so Harry is obligated to pay Ann whether he likes it or not. But if Harry had attempted to assign the contract to Melissa, the assignment would be invalid. Harry’s benefit on the contract is to have his house painted, and painting Melissa’s house, which is in a different

Harry Peter

$3,000

Paint house

AssignorObligor

Assignee

Paints house

the right to the benefit

$3,000

The Contract The Assignment

Figure 6.2: Assignment of a contract

In the original contract, Harry has agreed to pay Peter $3,000 and in exchange Peter has agreed to paint Harry’s house. Then Peter assigns the right to the money to Ann.

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CHAPTER 6Section 6.1 Third Parties

location, is materially different than painting Harry’s house. Note that in this last exam- ple, Peter is now the obligor. If he refuses to paint Melissa’s house, he will not be liable for breach.

Of course, even if an assignment is valid, the obligor must have notice of it before he knows to perform for the assignee. For example, if Peter assigns to Ann but no one tells Harry, and when Harry’s house is painted he sends the check to Peter, Harry is not liable to Ann. Ann’s only recourse might be against Peter. This is because when an assignor makes an assignment, the assignor is also automatically making certain war- ranties to the assignee.

Example 6.5. Preston’s Plumbing Co. had a contract with Industrial Man- ufacturing Inc. to install new employee restrooms in Industrial’s factory. Industrial has not made the final $10,000 payment due on the contract. Preston doesn’t have either the time or the inclination for a lawsuit, so he assigns the debt to Community Credit, a collection agency, for consider- ation of $5,000.

Preston, as an assignor, is guaranteeing to Community that the debt is genuine, that it is not subject to any undisclosed restrictions, and that he, Preston, will not do anything to impair its value. If, for example, Preston forgot to tell Community that he had committed a partial breach by using the wrong plumbing fixtures, and that as a result Industrial has a valid claim that the full $10,000 is not what they owe, Community might be able to sue Preston for breach of warranty.

Note that even if the contract states it cannot be assigned, it often can be, as long as the obligor’s burden has not materially changed.

Example 6.6. Patrick’s Insurance Agency has a five-year lease with Latee- sha Landlord. The lease states it cannot be assigned without the landlord’s consent. In the third year of the contract, Patrick wants to sell his agency and assign the balance of the lease to the buyer, Alexsei. Since the assign- ment results in the same business renting the same space on exactly the same terms, the lease can be assigned, even if Lateesha doesn’t like it. Her burden or obligations have not changed in any significant way by simply having a different owner of the business paying the rent and occupying the space.

However, while an assignor can assign the benefits, he cannot transfer the liability on the contract to the assignee! This is why it is so easy to assign contracts. In the example above, if the rent does not get paid or damage is done to the premises, Lateesha can still sue Patrick.

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CHAPTER 6Section 6.1 Third Parties

Delegations A delegation is the transfer of the duties on a contract. Suppose Peter Painter has con- tracted to paint Harry Homeowner’s house for $3,000. One week before he is due to start painting the house, Peter falls off a ladder and breaks both his legs. He is unable to per- form for Harry. Luckily for Peter, his brother Paul offers to step in and paint the house.

In this situation, Peter is the delegator, Paul is called the delegatee, and Harry is the obligee, because he is entitled to have the duty performed for him (see Figure 6.3).

DelegatorObligee

Du ty Broken leg

Harry Peter

Paint job

“I’ll paint the house, bro.”

Paul DelegateePaint house

The Delegation

Figure 6.3: Delegation of a contractual duty

Harry and Peter are the original parties to the contract, but now Peter has delegated the painting of the house to his brother, Paul. If Paul paints the house the wrong color, Peter will still be liable to Harry. If Paul did not receive consideration for painting the house, he has no liability to either Peter or Harry.

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CHAPTER 6Section 6.1 Third Parties

Most duties can be delegated without the obligee’s consent, unless the nature of perfor- mance is personal. This is partly because the liability is not delegated. Consider the fol- lowing example:

Example 6.7. Peter contracts to paint Harry’s house for $3,000. The house is to be painted beige. Peter delegates to Paul. Paul paints the house pink.

Peter is liable to Harry. Basically, the delegator remains liable unless the obligee gives him a release of some type. Note that even if Harry agrees expressly to the delegation, that does not mean Harry is releasing Peter from liability.

What of Paul, the delegatee? Does he have any liability for the pink house? The answer is no, unless he received consideration for undertaking the delegation. In that case, Paul is actually breaching a contract with Peter, and since Harry was an intended beneficiary of that contract, either Peter or Harry could sue.

Example 6.8. Peter contracts to paint Harry’s house, then he pays Paul $1,500 to do the work for him. Paul paints the house the wrong color. Because Paul received consideration, if Harry sues Peter, Peter could sue Paul. If Harry chooses, he could bypass Peter and sue Paul as a third-party beneficiary of the Peter-Paul contract.

If Peter were to simultaneously assign and delegate the contract with Harry to Paul, the assignment portion serves as consideration for Paul’s undertaking the delegation.

However, if the duty is of a personal nature, or if the obligee was relying on individual- ized qualities of the delegator, the delegation would be invalid.

Example 6.9. Peter contracts to paint Harry’s portrait for $3,000. Peter now realizes he’s taken on too many commissions, and he delegates to Paul, who is also an excellent artist.

Harry need not accept performance from Paul, since he was relying on Peter’s personal style as an artist. Of course, if Harry chooses, he could consent to the delegation, in which case Harry is actually forming a new contract.

Example 6.10. Stephen contracts with Angela Attorney for representation in his upcoming trial. Although Angela can delegate research and drafting of documents to her law clerks working under her supervision, she cannot delegate the court appearance to another lawyer.

In the above example, the representation is nondelegable because Stephen is relying on Angela’s individual reputation and skills, as well as the fact that the attorney-client rela- tionship is one of special trust.

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CHAPTER 6Section 6.2 Performance and Discharge of Contracts

6.2 Performance and Discharge of Contracts

When we speak of discharge, we refer to that point when a party to a contract is no longer liable for breach. Often this occurs simply because the parties have performed the contract—that is, they have done everything they were supposed to do. But there are many other circumstances that may lead to a discharge, which we shall examine in this section.

Discharge by Condition Concurrent conditions are often implied in bilateral contracts. What is meant by this term is that each party has a duty to perform, and the duties are mutually dependent. For example, if Sam contracts to sell his bike to Ben for $100, Sam’s duty to deliver the bike is conditioned upon Ben’s tendering the money, and vice versa. If Sam’s bike is stolen, Ben is discharged from his duty to pay. If Ben cannot come up with the money, Sam is discharged from his duty to give Ben the bike.

A condition precedent would generally be expressly stated in a contract, as it requires completion of some event before a party becomes liable on the contract. For example, if Sam is selling Ben his house for $100,000, and the contract says it is contingent upon buyer’s obtaining financing, it means that if the condition is unfulfilled and Ben cannot obtain a mortgage, Ben is discharged from his obligation to buy the house.

A condition subsequent works the opposite way: the parties are presumed liable unless the condition is fulfilled. If the condition takes place, there is a discharge. For example, Tanya signs a one-year lease to rent an apartment from Larry Landlord. Because Tan- ya’s employer has told her she may soon be transferred out of state, Tanya negotiates for there to be a condition subsequent in the lease. This clause reads that the lease is for one year, unless the tenant is transferred out of state, in which case she is only liable for 30 days’ notice. If Tanya never does get transferred, she will remain liable for the entire year because the condition subsequent was not fulfilled.

Conditions of satisfaction are relatively rare, and need to be expressly agreed upon. If Peter contracts to paint Harry’s portrait to Harry’s personal satisfaction, and Harry in good faith really does not like the portrait, Harry is discharged—that is, he does not have to buy the portrait. The law uses a subjective test to judge satisfaction here, because the performance involves personal taste. If Peter contracted to paint Harry’s house white, to Harry’s personal satisfaction, the law would use an objective standard, and if a reasonable person would be satisfied with the paint job, Harry would not be discharged.

Discharge by Performance If Peter contracts to paint Harry’s house for $3,000, completes the work, and is paid for it by Harry, obviously the contract is discharged. On the other hand, if Peter was supposed to paint the house beige and he paints it pink instead, Harry is discharged by Peter’s material breach, and does not have to pay for the pink house.

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CHAPTER 6Section 6.2 Performance and Discharge of Contracts

But what if Peter paints almost all of the house the correct color, but doesn’t finish two window frames on the first floor? Could Harry successfully claim he is still discharged by Peter’s breach? Probably not. Luckily for Peter, the doctrine of substantial performance would likely apply here. This means that if Peter can show he substantially performed the contract in good faith, he should be able to collect the contract price minus the actual cost of damage from the breach. Looking at the whole contract, the breach here is quite minor. Harry can deduct the cost of having those two window frames painted, but he will have to pay Peter the rest of the $3,000.

Timeliness Suppose William contracts to sell Vic- toria 1,000 pillows for her new hotel, to be delivered by June 1, but the pillows don’t arrive until June 3. Is Victoria dis- charged, or must she still accept and pay for the pillows? The general rule is that if the late performance is still com- mercially reasonable, Victoria is not dis- charged. Absent special circumstances, the two-day delay is probably not very significant, and Victoria must accept and pay for the pillows.

But if the contract also includes the phrase, “time is of the essence,” the law generally finds that any lateness is a material breach. Thus Victoria would be excused from the pillow contract if the contract had this phrase.

Anticipatory Breach Suppose William, in the above situation, instead called Victoria on May 15 and informed her that he could not deliver the pillows on time. This is called an anticipatory breach or repudiation of the contract. The law treats an anticipatory breach the same as an actual, present breach, so Victoria now has three options: (1) she can tell William she is holding him to the deal, see if he delivers on time, and if not, sue him then; (2) sue him now, on May 15; or (3) simply buy the pillows from another supplier. Victoria should, however, inform William of her choice so as to avoid confusion.

Note that this doctrine does not apply to debts. If you tell the bank you’re terribly sorry, but you don’t think you’ll have the money for that student loan payment next month, the bank cannot charge you a late fee now. The bank must wait until you are actually delin- quent with the payment.

Businesses must ensure that shipments are made as contractually specified so as not to breach contract.

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CHAPTER 6Section 6.2 Performance and Discharge of Contracts

Impossibility of Performance If, after the parties have made the contract, a reasonably unforeseeable event occurs that makes it objectively impossibly to perform the contract, the contract is discharged. This means that it must be impossible for anyone, not just the contracting party, to perform.

Example 6.11. Simon contracts to sell his original Picasso painting to Bianca for $10 million. The painting is destroyed in a house fire. Simon is dis- charged and will not be liable to Bianca.

Example 6.12. Finley contracts to sell 100 bushels of corn to Bryan. Finley’s corn crop is destroyed by an unusually violent storm. Finley is not dis- charged, because someone else could deliver 100 bushels of corn, so there is no objective impossibility.

Contracts for personal services are generally discharged by death of either party, while contracts for goods or real estate are not. For example, if Peter contracts to paint Harry’s portrait, and either one of them dies before the portrait is painted, the contract is dis- charged. But if Peter contracts to sell Harry his house, the contract can still be performed by the estate, if one of them dies, and so it is not discharged.

Illegality obviously discharges a contract, since the law would not punish someone for obeying it! If Gina contracts to employ Oliver as manager of her casino, and then the state outlaws gambling, Oliver is out of a job.

Commercial Impracticability What if the unforeseen event simply makes it more difficult to perform? Whether the contract is discharged is mainly a question of degree. For exam- ple, if Omega Oil Company contracts to supply Alpha Airlines with jet fuel at a set price for the next two years, and then the price of fuel goes up 35 percent, is Omega discharged? The answer is no. Changes in market price are usually foreseeable, and the reason a company such as Alpha wants to make a two-year contract is to lock in their costs for that period of time.

But sometimes the costs and difficulty are extreme, and the unforeseen event is something more drastic. Consider the following:

When an earthquake or other catastrophic event occurs, it is likely that any number of contracts may be discharged due to impossibility of performance.

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CHAPTER 6Section 6.2 Performance and Discharge of Contracts

Example 6.13. Albert contracts with Natasha to excavate a foundation for a new home on his land for $1,000. Both Natasha and Albert assume that his land consists of sandy soil, as is common in his area. In fact, Albert’s land contains only two feet of sandy topsoil over several hundred feet of solid rock. In order to excavate the foundation to the agreed-upon depth of ten feet, Natasha would have to blast through solid rock at an expense to her of tens of thousands of dollars. Since the cost involved in completing this contract is much greater than anticipated by both parties, and since the unusual geology in the land was not foreseeable at the time that the con- tract was entered into, this contract would be discharged as commercially impracticable by many courts.

The elements of unforeseeability of the special circumstances and unreasonable expense are crucial to a case in which one of the parties is seeking to have the contract discharged for commercial impracticability. Merely that the contract will be more costly than antici- pated is not enough; nor will extreme cost be the basis for discharging a contract where the parties could have found out the special circumstances through a reasonable inspection.

Frustration of Purpose There are instances in which an unforeseeable event takes place after parties enter into a valid contract but before performance is rendered (e.g., while the contract is still execu- tory) that destroys the purpose of the contract. Under such circumstances, the parties are able to perform, but performance would be pointless and wasteful. Under such circum- stances, the courts may discharge a contract for frustration of purpose.

Example 6.14. Juan pays Jacob $500 to paint his car, and makes an appoint- ment to take the car to his shop three days later. The next day, a severe storm causes a tree to fall on Juan’s car, causing damage far in excess of the car’s market value. The contract is discharged, since its purpose has been frustrated by an unforeseen intervening event (the damage caused by the storm). Jacob could still paint the car, and may even wish to do so; but to allow this contract to be carried out would be wasteful and unreasonable.

Example 6.15. Julia contracts to rent Paul’s balcony, which overlooks the planned parade route for the upcoming royal wedding procession of Prince Boris and Lady Sophia, for $500. Unfortunately, the wedding is called off when Lady Sophia discovers Prince Boris’s infidelities. Julia’s contract with Paul is discharged due to frustration. She can still rent the balcony, but it would be silly to do so now!

Discharge by New Agreement A contract is an agreement, and the parties are free to agree to do something else if they wish to. For example, sometimes the parties simply agree they do not want to go through with the deal. This is a rescission, or cancellation, of the contract. Sometimes they might agree to change the consideration, which is an accord and satisfaction.

Example 6.16. Commercial Realty (CR) is a company that owns and rents to others commercial property. CR has contracted to rent the property at

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CHAPTER 6Section 6.3 Remedies for Breach

Whenever a promisor who is under an absolute duty to perform fails to render the promised performance, a breach occurs. The available remedies for breach of contract depend on the nature of the breach. Generally, when the breach by the promisor is a minor one that does not go to the heart of the contract, the promisee is under an obligation to honor her end of the bargain, but has the ability to sue for damages. If the breach by the promisor is a major one, the promisee’s duties under the contract are discharged, and she may also be able to sue for damages.

There are basically two types of remedies available to a party who suffers a breach of contract: damages and specific performance. Damages include various types of money awards meant to compensate the injured party for monetary losses suffered as a result of the breaching par- ty’s failure to perform, or for his imperfect performance. Specific performance, on the other hand, is not a mon- etary award, but rather an order by the court compel- ling the breaching party to actually honor the terms of his

6.3 Remedies for Breach

100 Elm Street to Bright Boutique on a five-year lease. Now CR decides it would really like to sell 100 Elm, and so it offers Bright another property, 66 Oak Avenue, at a reduced rent. Bright agrees, and moves into the Oak Avenue property. The previous lease is discharged.

Suppose in the previous situation, CR instead offered Bright $1,000 in consideration if Bright would simply let CR out of the Elm Street lease, and Bright accepts. This illustrates a valid release, which discharges the previous contract. Or if Bright wanted to get out of the lease and found Antiques Unlimited as a substitute tenant for CR, and CR agreed to accept Antiques and only look to Antiques to perform the lease, this new agreement would discharge Bright and is called a novation, an agreement to release one party from a contract and instead look to a third party.

Discharge by Operation of Law There are some things that, if they happen, have the effect of discharging a contract. For example, some debts are discharged through the debtor’s bankruptcy proceeding. Any contract obligation may be discharged if the statute of limitations, which is the time period for filing a lawsuit on the transaction, has expired. Lastly, if a party alters a legal document, such as changing the amount due on a check, that person forfeits any rights he had under the document.

In 2004, this billboard design was rejected by Clear Channel Communications, which stated that their contract with the antiwar group Project Billboard allowed them to reject it on grounds that it was contrary to public morals (because of the 9/11 attacks in New York City). Project Billboard disagreed that the sign violated the contract. The lawsuit was settled when both parties agreed to substitute a dove, the symbol of peace, for the bomb.

Project Billboard/Associated Press

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contract by rendering the promised performance. Specific performance is only awarded in exceptional cases where money damages would not properly compensate the victim of a breach. The specific remedies are examined in greater detail below.

Damages An award of compensatory damages is the most commonly available remedy to the vic- tim of a breach. It is a money award meant to place the nonbreaching party in the same condition he would have been in had the breaching party performed as agreed. Compen- satory damages include the cost of curing the breaching party’s defective performance, as well as the cost of any damages suffered by the nonbreaching party that were caused directly by the breach and should have been foreseeable to the breaching party. The fol- lowing example will illustrate:

Example 6.17. Makeesha contracts with Darren to renovate her club. The agreement calls for Darren to finish the work within 30 days of the contract signing. At the end of the 30-day period, Darren has not finished the work and can give no assurance as to when he will be able to complete it. Makee- sha is unable to open the club on time and must pay $5,000 to The Scream- ing Knees, a new group she’d contracted to play at the club’s previously scheduled reopening day. She can also prove that she will lose $2,000 per day in lost profits based on her profits prior to the renovation, and had to pay $7,000 to Jane’s Contracting Co. to finish the work. (Jane’s was the low- est price estimate from three contractors who provided written estimates to complete the work.)

Makeesha’s compensatory damages in the above example include the cost of having the new contractor finish the work, as well as all other foreseeable expenses that resulted directly from the breach and were caused by it, including the $5,000 payment to The Screaming Knees and the total amount of the loss of profits.

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In the Media: Second Chance for a Last Dance: How Much Is a Missed Wedding Photo Worth?

You may have thought a divorce was expensive (and you would be right), but a wedding, on average, is more costly. According to Livestrong.com (2012), the average cost of a contested divorce is around $15,000, while a 2011 Reuters.com article reports that the average cost of a wedding is $27,021—and that doesn’t include the honeymoon. The most expensive city in which to get married is New York, where it costs on average $65,824 to tie the knot.

Based on these numbers, it may not be surprising that a disgrun- tled New Yorker sued his wedding photographer for breach of con- tract because the photographer allegedly failed to take pictures of the last dance and the bouquet toss. Filed in 2009 by Todd Remis of Manhattan against H&H Photographers, the lawsuit sought not just $4,100 in damages for the original cost of the photographer’s services but the whole $48,000 to recreate the wedding and have another photographer take the pictures. Whether a refund of the entire contract price is a fair measure of compensatory damages, or whether consequential damages include recreating a wedding, or whether a wedding is unique enough to qualify as the remedy specific performance, may be moot points because Mr. Remis’s bride, Milena Grzibovska, had left him and filed for divorce in 2008. In fact, not only would recreating a wed- ding with one’s ex-wife be difficult, finding Milena would have been more trying, because she has since returned to her native Latvia and is incognito. Furthermore, the Grzibovska-Remis wedding took place in 2003. Having just fit his suit within the statute of limitations for breach of contract, Remis finds himself opposite Curt Fried, the 87-year-old co-founder of H&H Photographers, who in 1939 fled Nazi-occupied Vienna as a 15-year-old boy and was then drafted in the United States Army during World War II, where he learned photography. Much of the lawsuit was dismissed in 2011, including Remis’s claims for intentional infliction of emotional damage, but the basic breach of contract claim was allowed to go forward. According to the New York Times, Mr. Fried and his son Dan, who runs the business, have spent $50,000 in legal fees.

Compensatory damages are intended to provide the nonbreaching party a monetary value of what he or she expected to receive under the contract. Specific performance is only awarded in exceptional cases where money damages would not properly compensate the victim of a breach. In this case, the first question to answer is whether there was a breach of contract, and the second and much larger question is whether any reasonable remedy is available, in light of the change in the plaintiff’s circum- stances since the contract was allegedly breached.

Sources: http://www.nytimes.com/2011/11/03/nyregion/suit-against-photographer-seeks-re-creation-of-wedding-after- divorce.html?_r=1 http://www.cnn.com/2011/11/04/justice/new-york-wedding-photographer/

Todd Remis sued his wedding photographer for breach of contract because the photographer failed to take pictures of the last dance and bouquet toss.

iStockphoto/Thinkstock

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Liquidated damages are those that are spelled out in advance in the contract. For exam- ple, since a tenant’s not moving out in timely fashion can be a real headache for a landlord, sometimes a lease provides that the tenant will owe a certain sum for each day he holds over. As long as the amount seems reasonable, courts will usually uphold the liquidated damages clause.

Nominal damages are a very small amount, such as $1, awarded when the plaintiff has proven a breach but does not seem to have any economic loss. Punitive damages are only awarded in contracts cases in situations involving intentional and egregious breaches. The purpose of punitive damages is to incentivize the defendant and others in a similar posi- tion to not act this way in the future, as well as to punish this defendant for the present behavior.

Example 6.18. Ralph, famous consumer rights attorney, bought a reserved seat for a specific flight on Alpha Airlines. Alpha never disclosed that they were overbooking (selling more seats than were on the flight). When Ralph checked in for the flight, Alpha said there was no more room on the plane. Ralph sued, and won. Because Alpha had placed him on another flight that left only 40 minutes later, he was awarded just $1 in nominal damages, since he didn’t seem to have suffered economic harm. However, because the court felt that Alpha was acting fraudulently with this nondisclosure practice, and because the court felt that Alpha and other airlines needed to be more honest in their dealings with consumers, Ralph was also awarded $1 million in punitive damages.

Specific Performance There are instances in which money damages are simply not sufficient compensation in an action for breach of contract. In such situations, a court has the power to force the breach- ing party to actually perform the contract as promised. For a party to successfully seek specific performance as a remedy, she must show that the following circumstances exist:

1. The subject matter of the contract is unique, and a replacement is not readily obtainable;

2. Money damages would not properly compensate the nonbreaching party for her loss.

Contracts for which courts typically award specific performance include real estate and contracts involving the sale of art, antiques, and other rare commodities that are unique or very difficult to replace. No two pieces of real estate are the same, even though they may be of similar value and location, and the same holds true for artwork, rare coins, rare stamps, antiques, and similar articles. Personal service contracts, however, are not subject to specific performance, even though they are unique by their very nature. Courts will simply not force anyone to work for another against her will; only money damages are available to nonbreaching parties in such circumstances. Consider the following examples:

Example 6.19. Rosario, an artist, contracts to sell one of her paintings to Carl for $5,000. She then changes her mind. Carl can seek specific performance, since the painting is unique and money damages will not adequately com- pensate him for his loss.

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Example 6.20. Rosario contracts to paint Carl’s portrait for $5,000. She then changes her mind. Specific performance is unavailable as a remedy to Carl since a court will not force Rosario to paint the portrait against her will. His only remedy is compensatory damages; he can recover from Rosario the difference between the contract price and what he will have to pay another artist of similar skill to Rosario to paint his portrait. In the event that another artist whose skills equal or surpass Rosario’s is willing to paint his portrait for the same or a lower price, the remedy awarded by a court may simply be nominal damages.

Specific performance is an equitable remedy (a remedy available only at the discretion of a court and one that a plaintiff is not entitled to as a matter of law). A court will generally only grant an equitable remedy when the legal remedies (e.g., compensatory damages) will not sufficiently compensate the plaintiff. When unique items of very high value are involved, a court may at its discretion also issue an injunction (a court order) preventing the defendant from selling or moving the property that is the subject matter of the lawsuit pending a final resolution of the case. Like specific performance, injunctive relief is also an equitable remedy that a plaintiff may seek in appropriate actions.

Election of Remedies There are circumstances in which the aggrieved party in a breach of contract action has more than one remedy available. When that is the case, the victim of the breach of con- tract must select the remedy that he wants the court to award. Depending on the subject matter of the contract and the state involved, a person may have the option of asking for alternative remedies, such as asking for specific performance and compensatory damages in the alternative, or he may have to make a final binding selection as to which of several available remedies to ask for at the time of starting the lawsuit. Since the basic purpose of contract law is to compensate aggrieved parties for losses suffered as a result of breaches of contract, punitive damages are generally not available in contract actions. For the same reason, courts will not grant more than one remedy when a single remedy will suffice to put the aggrieved party in the same condition she would have been in had there not been a breach of contract. If both specific performance and compensatory damages are avail- able, as in the case of a breach of a contract for the sale of real estate, a court will award either specific performance or compensatory damages, but not both.

6.4 Chapter Summary

Once the parties have made a contract, any number of things can happen that may have a legal effect. Sometimes third parties may have already been granted rights on the contract, as is the case with intended third-party beneficiaries. If the rights are acquired after the contract is made, there would be an assignment situation. If duties have been passed off to a third party, there is a delegation. The rules involving these trans- actions are often difficult to sort through, and it is helpful to diagram the situation, label all the parties, and then consider the issue in terms of the appropriate terminology. Are we looking at whether an assignor is liable for breach of contract? Whether the contract may be delegated? Framing the issue in the right terms is crucial to resolving such problems, whether on a test or in real life.

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Contracts may also contain conditions that under some circumstances will lead to a dis- charge. In certain situations, such as buying a house, such conditions involving financing or the sale of the current residence of a buyer have become standard. There are also many external events that can discharge a contract, such as frustration or impossibility. And if there should be a breach of the contract, the innocent party will have a decision to make: to sue or not to sue? If he or she decides to sue the breaching party, there will be a further choice regarding the possible remedy to request. Monetary damages are the most com- mon breach of contract remedy, usually in the form of compensatory damages. Specific performance may be available if the contract subject matter is unique. Of course, having the right to sue does not always mean it is the best way to proceed. In many cases, the cost and time involved in litigation may mean the parties have considerable incentive to settle the case out of court. In others, the best course may be simply to chalk a breach up to experience, and move on without invoking legal proceedings at all.

Focus on Ethics

Ryan, a 69-year-old man with a ninth-grade education who was a widower and had been retired about ten years, fell behind on his mortgage payments and was facing foreclosure on his house. He was then approached by Weiner, whom he had never met before. Weiner was a real estate broker who was in the business of buying and leasing inner city properties. He said that he could help Ryan keep his house. Ryan later testified that Weiner said he would give Ryan a loan; Weiner said he offered to buy the house and rent it to Ryan. Weiner took Ryan to a lawyer’s office, where Ryan thought he was signing loan documents but in actuality was signing a deed granting the property to Weiner. Ryan testified he did not read the documents because he trusted Weiner. Over the years, Ryan paid him a total of $21,480, and Weiner expended $12,149.27 on the mortgage and utilities. However, Weiner never legally assumed the obligation to the bank to pay the mortgage, and Ryan remained liable although he now did not have title to the property.

Eventually Ryan decided he had paid enough, and sought to rescind the transaction. The court found that although Ryan may not have exercised a reasonable amount of care in his dealings with Weiner, Weiner was characterized as a manipulative and skillful predator. It concluded that Ryan should be allowed to rescind the transaction, although Weiner was entitled to subtract the mortgage and house expenses, plus reasonable interest from the sum Ryan had paid him. Weiner must repay the difference to Ryan.

Questions for Discussion

1. The law normally expects people to look after their own interests when they make a contract. Why do you think the court decided otherwise in this case?

2. There was no evidence that Ryan lacked capacity to contract. Do you think it is ethical to let him get out of the contract now? Many people make bad contracts. Where should the law draw the line, when it comes to helping them after the fact?

3. Do you think Mr. Weiner acted ethically in this situation? Did he act legally?

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Case Study: Rosenberg v. Son, Inc.

491 N.W.2d 71 (N.D. 1992)

Facts: Pratt contracted to buy a Dairy Queen from the Rosen- bergs. The terms of the sales contract for the franchise, inven- tory, and equipment were a purchase price totaling $62,000, a $10,000 down payment, and $52,000 due in quarterly pay- ments at 10 percent interest over a 15-year period. Pratt later assigned and delegated the contract to Son Inc. The contract included a “Consent to Assignment,” which the Rosenbergs signed. Pratt then moved out of state and had nothing more to do with the Dairy Queen.

Son Inc. then assigned and delegated the contract to Merit Corp. Merit made payments to the Rosenbergs, but payments ceased with over $17,000 still owing. Merit then declared bankruptcy. The Rosenbergs sued Pratt and Son Inc. for the unpaid balance plus interest.

Issue: Was Pratt, as an assignor and delegator, still liable on the contract to the Rosenbergs, the obligee/ obligor?

Discussion: The court first stated the general principles of law that would apply, noting it is a well- established principle in the law of contracts that a contracting party cannot escape its liability on the contract by merely assigning its duties and rights under the contract to a third party. If a release had been obtained from the Rosenbergs, Pratt would not be liable, but express language is needed to effect this waiver. While the Rosenbergs did consent to Pratt’s assignment and delegation of the con- tract, at no time did they agree that Pratt herself would no longer be held responsible on the contract.

Holding: Pratt was held liable on the contract. Neither an assignment nor delegation relieves the origi- nal contracting party of liability.

Questions for Discussion

1. Draw a diagram of the original contract and subsequent assignment. Who is the assignor? The assignee? The obligor?

2. Could Pratt have likely assigned the contract and delegated the duties without the Rosen- bergs’ consent? Why or why not?

3. Why is it considered fair to hold Pratt liable on the contract, even though she has no current association with the Dairy Queen?

4. Why do you suppose the Rosenbergs went after Pratt and Son Inc., rather than Merit?

Even though Pratt no longer had the Dairy Queen, as an assignor and delegator Pratt remained liable to the original owner for payment.

Steven Lane/Associated Press

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Case Study: Campbell Soup Co. v. Wentz

172 F.2d 80 (3rd Cir. 1949)

Facts: Per a written contract between Campbell Soup Company (a New Jersey company) and the Wen- tzes (carrot farmers in Pennsylvania), the Wentzes would deliver to Campbell all the Chantenay red cored carrots to be grown on the Wentz farm during the 1947 season. The contract price for the car- rots was $30 per ton. The contract between Campbell Soup and all sellers of carrots was drafted by Campbell and it had a provision that prohibited farmers/sellers from selling their carrots to anyone else, except those carrots that were rejected by Campbell. The contract also had a liquidated damages provision of $50 per ton if the seller breached, but it had no similar provision in the event Campbell breached. The contract not only allowed Campbell to reject nonconforming carrots, but gave Campbell the right to determine who could buy the carrots it had rejected. The Wentzes harvested 100 tons of carrots, but because the market price at the time of harvesting was $90 per ton for these rare carrots, the Wentzes refused to deliver them to Campbell and sold 62 tons of their carrots to a farmer who sold some of those carrots to Campbell. Campbell sued the Wentzes, asking for the court’s order to stop further sale of the contracted carrots to others and to compel specific performance of the contract. The trial court ruled for the Wentzes and Campbell appealed.

Issues: Is specific performance an appropriate legal remedy in this case or is the contract unconscionable?

Discussion: In January 1948, it was virtually impossible to obtain Chantenay carrots in the open mar- ket. Campbell used Chantenay carrots (which are easier to process for soup making than other carrots) in large quantities and furnishes the seeds to farmers with whom it contracts. Campbell contracted for carrots long ahead, and farmers entered into the contract willingly. If the facts of this case were this simple, specific performance should have been granted.

However, the problem is with the contract itself, which was one-sided. According to the appellate court, the most direct example of unconscionability was the provision that, under certain circumstances, Campbell may reject carrots, but farmers cannot sell them anywhere without Campbell’s permission. Though the contract was legal, it was wrong for Campbell to ask for the court’s help in enforcing this unconscionable bargain (one that “shocks the conscience of the court”). The court said that the sum of the contract’s provisions “drives too hard a bargain for a court of conscience to assist.”

Holding: The judgment of the trial court in favor of the farmers is affirmed.

Questions for Discussion

1. What were the terms of the contract between Campbell and the Wentzes? 2. Did the Wentzes perform under the contract? 3. Did the court find specific performance to be an adequate legal remedy in this case? 4. Why did the court refuse to help Campbell in enforcing its legal contract? 5. How could Campbell change its contract in the future so as to avoid the unconscionability

problem?

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Critical Thinking Questions

1. Why does the law allow contracts to be assigned, even in many situations where the contract itself says it is nonassignable?

2. Why are contractual duties freely delegable? 3. Explain how a new agreement between the parties can rescind a contract.

Hypothetical Case Problems

Case 1. Danielle contracts to sell her car to Benito for $7,000, but she specifies that he should pay the money directly to Commercial Credit Inc., because Danielle owes them money and she’s afraid she might be too tempted to go on a shop- ping spree if Benito gives her the cash.

A. Is this an assignment or a third-party beneficiary situation? B. If Benito forgets and sends the money to Danielle, will he be liable to

Commercial Credit?

Case 2. Jessica, famous sexy rock star, contracts to perform at Bill Billionaire’s New Year’s Eve party for $100,000. Jessica now assigns the contract to Ozzie, an aging heavy metal artist.

A. Must Bill accept the assignment? B. Who will perform at the party? C. Would Jessica be able to delegate the contract to another sexy female

singer, Brittany?

Case 3. ABC Co. orders a selection of standard office furniture from Woodworkers Inc. Woodworkers determines it cannot fulfill the contract in timely fashion, and delegates to another firm, Fab Furniture.

A. If Fab Furniture builds the furniture as specified in the contract, does ABC have to accept and pay for it?

B. If Fab Furniture breaches, can ABC sue Woodworkers? C. If ABC had contracted with Woodworkers because the firm was famous

for its cutting-edge, avant garde furniture design, would the delegation still be valid?

Case 4. Deon’s Ferrari is insured by the Acme Insurance Company. The policy states that for a loss to be covered, it must be reported within 30 days of the dam- age occurring, and that Acme must be given a reasonable chance to inspect the damage. Deon backs into a lamp post one night, damaging the car. He reports the incident to Acme, but then sells the car three days later.

A. What is the name for this type of clause? B. Will Acme be liable to pay for the loss? Why or why not?

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accord and satisfaction An agreement to substitute consideration on a contract, followed by an exchange of the new consideration.

anticipatory breach/repudiation When a party to a contract informs the other in advance that he does not intend to perform.

assignee The person who acquires rights on a contract he or she was not a party to.

assignment The transfer of benefits or rights under a contract to a third party.

assignor The person making an assignment.

commercial impracticability Where an unforeseen event makes it exceedingly difficult or costly to perform a contract, the contract may be discharged.

compensatory damages An award of money designed to compensate the wronged party for the economic loss suffered.

concurrent conditions Mutually depen- dent performance on a contract.

condition of satisfaction An agreement that one party will perform to another’s personal satisfaction.

condition precedent A condition that must be fulfilled before there is liability on a contract.

condition subsequent A condition that if fulfilled will end liability on a contract.

creditor beneficiary An intended benefi- ciary who receives the benefit because it is legally owed, who acquires both the right to sue in the event of a breach and the right to prevent the parties from modifying the contract.

Case 5. Bart’s Building Company contracts to build an office building for Acme Insurance. The contract states that the main reception room should be painted cream. Bart accidentally paints it white.

A. If Acme refuses to make the final $25,000 payment for the building proj- ect, claiming that Bart breached, what should Bart argue?

B. If you were the judge, how would you dispose of the case?

Case 6. Which of the following would be discharged due to impossibility? A. Lena contracts to sing in Cesar’s nightclub. Lena dies. B. Joshua contracts to sell his car to Amy. Amy dies. C. Jerrilyn contracts to sell her house to Ben. Jerrilyn’s house burns down. D. Anna contracts to sell “100 bushels of brussels sprouts grown in my mar-

ket garden” to Uptown Grocery. Anna’s market garden is wiped out in a hailstorm.

Case 7. Alisha contracts to sell her very rare 1920 Bugatti convertible automobile, her house, and 1,000 bales of hay to Rashid. She then breaches on all counts. What remedies are available to Rashid?

Key Terms

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delegatee A third person who undertakes duties on a contract he was not a party to.

delegation Transfer of duties on a contract to a third party.

delegator The person who transfers duties on a contract to a third party.

doctrine of substantial performance A legal doctrine indicating that the plain- tiff may recover the contract price from the defendant—minus the cost of any damages caused by the plaintiff’s own break—regardless of a minor contractual breach if the plaintiff can show that he or she substantially performed the contract in good faith.

donee beneficiary A person who receives an intended benefit as a gift. A donee has the right to sue for breach of contract but cannot prevent the parties from modifying or rescinding the contract.

frustration of purpose Where a contract is discharged due to an unforeseen event that means there is no longer a reason to perform the contract.

intended beneficiary A person for whose benefit the contract was made, who acquires the right to sue for breach.

liquidated damages Damages that are stated in a contract.

nominal damages A very small award, such as $1, used when a party has proven his cause of action but has not sustained economic loss.

novation An agreement to release one party from a contract and instead look to a third person to perform.

obligee A person who is entitled to receive performance.

obligor A person who is obligated to pro- vide a benefit or render performance.

punitive damages A monetary award designed to punish a defendant for inten- tional, egregious conduct.

release Giving up legal rights (also known as a waiver).

rescission Cancellation of a contract.

specific performance A remedy for breach of contract that forces the breaching party to actually perform the contract; granted only in cases of unique consideration.

time is of the essence A phrase in a con- tract that makes lateness a material breach.

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