Unit 7 AS: Analyze a Contractual Situation

BLAW 2051 Unit 7

Discharge and Remedies

Generally, only the parties to a contract have a right to enforce that contract. There are important exceptions to this rule for third parties pertaining to assignment and delegation, and third-party beneficiaries.

Assignment and Delegation

An assignment within a contract is when a contracting party transfers the benefit of the contract to a third party outside the contract. The party to the contract, called the assignor, essentially assigns the right to the performance to a third- party, the assignee. Both the assignor and the assignee are entitled to enforce the contract. Most contract rights can be assigned, but there are some exceptions, including those rights where assignment is prohibited by law, public policy, by the language of the contract itself, or because the right is personal in nature.

A delegation within a contract is when a contracting party transfers the obligations to perform the contract promises to a third party outside the contract. The party to the contract, called the delegator delegates the duty to perform to a third- party, the delegatee. Both the delegator and the delegate remain liable under the original contract to perform the duty. As with assignment, there are some duties that can't be delegated, including instances where the delegation is prohibited by the contract, is personal in nature, or would materially vary the contract performance.

Third-Party Beneficiary Contracts

Some contracts are entered for the purpose of benefiting a third-party. Take, for example, the purchase and sale of life insurance. The intention of a person purchasing life insurance is to leave the money paid from the policy to their beneficiaries. This is a classic example of a third-party beneficiary contract. Not only can the parties to the contract enforce the contract, but so can the named third-party beneficiaries.

In order for someone to be an intended third-party beneficiary under a contract, they must be intended by the contracting party to benefit from the contract. At times, people that aren't parties to a contract may benefit from a contract even when they weren't even a thought when the contracting parties made their agreement. When this occurs, the third-party benefiting from the contract is called an incidental beneficiary, and may not enforce the original agreement.

Discharge and Remedies

People and organizations enter contracts because they want the benefits of the contracts they enter. Because of this, most contracts are successfully performed, and then discharged.

When a contract is discharged, it means that the obligations of the parties under the contract have come to an end. Performance of the contract is the method of discharge that contracting parties hope for, but there are ways to discharge a contract without performance.

Discharge by Performance

Discharge by performance occurs when parties do what they have promised to do under the contract. The offer of performance is known as 'tender.' At common law, perfect tender only discharged a contract. Today, a contract can be discharged with performance in these ways:

· Complete Performance (or Perfect Tender) – When the promises within a contract are performed with no defects at all. This type of performance is hard to achieve, practically speaking.

· Substantial Performance – When promises within a contract are performed with minor defects, also called minor breaches. Since there are defects in performance, a party can still be required to compensate the injured party for the effects of the breach, but the contract itself is still considered performed, as opposed to breached.

· Satisfactory Performance – When the promises within a contract are subject to the satisfaction of one of the parties. The contract is discharged when the other party accepts performance. In a TV infomercial you may hear the announcer say "Satisfaction guaranteed or your money back." This is an illustration of a contract that can be discharged through

satisfactory performance.

Discharge without Performance

When a contract is breached, the contract is discharged without performance. A breach occurs when one of the contracting parties fails to complete their promises under a contract. A material breach occurs when the failure pertains to a material aspect of a contract. When a breach of contract occurs, the non-breaching party is discharged from its obligation of continued performance. Moreover, the non-breaching party is most likely going to be entitled to damages from the breaching party.

There are several other ways that a contract may be discharged without performance. These include discharge by conditions, discharge by mutual agreement, and the many ways a contract may be discharged by operation of law.

Remedies

When a contract is breached, the non-breaching party may be entitled to remedies. There are several remedies associated with contract actions. Generally, these remedies are divided into two types – legal remedies (commonly monetary damages) and equitable remedies (commonly court ordered actions). Courts tend to look first at legal remedies to see if there is some amount of money that will compensate the injured party for the breach. In some instances, money won't suffice to cure the injury, and so equitable remedies might be appropriate.

The most commonly awarded form of damages are compensatory damages. This is an amount of money that will compensate the injured party from the effects of the breach. Compensatory damages are intended to put the Plaintiff in the position they would have been had the contract been performed. In other words, if the Plaintiff would have made

$500.00 had a contract been fully performed and discharged, the amount of compensatory damages is equal to

$500.00.

In addition to compensatory damages, it is possible, although less likely, for a court to award other types of damages. Consequential damages are special damages that are awarded for damages that are the indirect result of the breach. Imagine that a buyer and a seller agree to the sale of a car, but the buyer later breaches the contract. As a result, the seller pays $40.00 to an auto trader magazine to list the car for sale. These $40.00 are consequential damages to the breach of the automobile purchase contract.

Two other forms of monetary damages in contract actions are punitive damages and nominal damages. Punitive damages are damages awarded to punish the defendant for particularly reprehensible conduct in a contract breach. Because of this high standard, punitive damages are rare. Nominal damages are awarded when the amount of money that a Plaintiff has been damaged cannot be proved with reasonable certainty. In such cases, nominal damages may be awarded as a recognition of the breach.

In some instances, monetary damages will not suffice to make the Plaintiff whole, and so court may order an alternative type of damage or equitable remedy. There are many types of equitable remedies, including:

· Rescission and Restitution – Which will terminate the contract, and restore the parties to the position they would have been had the contract never been entered.

· Specific Performance – Which would result in a court ordering the defendant to fulfill the terms of the contract as originally agreed.

· Injunction – Which would result when a court orders a defendant to stop doing something that is violating the contract.

Conclusion

Ordinarily, only the parties to a contract have a right to enforce it. But, there are exceptions to this general rule in contracting where it is possible for third-parties to a contract to acquire rights under the contract. Most contracts are entered with hopes that they will be fulfilled, and so these contracts tend to be discharged by performance. However, contracts may also be discharged without ever being performed, including through material breach. In cases where a breach has occurred, legal and or equitable remedies may be available to the injured party.

(CSLO 2, CSLO 5)

References

Kubasek, N., Browne, M. N., Dhooge, L. J., Herron, D. J., Williamson, C., & Barkacs, L. L. (2015). Dynamic business law.

Chapter 19 – Third-Party Rights to Contracts Chapter 20 – Discharge and Remedies