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Business Law

Principles and Practices

Goldman, A., & Sigismond, W. (2014). Business Law: Principles and Practices (9th ed.). So Western Cengage Learning.

Cengage Advantage Books

PRINCIPLES AND PRACTICES

The Termination of Contracts: Breach of Contract CHAPTER PREVIEW

Breach of Contract

Remedies for Breach of Contract Legal Remedies Equitable Remedies

Defenses for a Breach of Contract Suit Fraud Duress Undue Influence Mistake

Effect of Fraud, Duress, ahd Undue Influence on a Contract

Breach of Contract

LEARNING OBJECTIVE~ Define breach of contract and

differentiate between an actual breach and an anticipatory breach.

Another way in which a contract ends is by breach. The first part of this

chapter discusses breach of contract along with the various remedies

available to an injured party for the breach. The second part of this chapter

deals with defenses that a party offers for not performing on the contract.

Facts Marl ina, an up and coming actress from a small town, got her first break after graduating from a well-known college as a theatre major. She auditioned and then signed a contract on January 30, 2010, to play a major role in a serious summer production drama for the "Upcoming Production Company" (UPC). The contract called for a guaranteed salary of $8,000 for a twelve-week run during the months of June, July, and August. The play was to run seven nights a week. Marlina had turned down other opportunities, claiming that the UPC summer theatre play would give her more public exposure . In preparation for upcoming role in the play, she took a three-week refresher course in acting through a well-known theatrical school. On March 2010, she was notified by UPC of their intention not to go through with her contract because they (UPC) had discovered an actress they felt was more naturally adapted to the role than she (Marlina). Marlina sued UPC but made no attempt to secure a similar position with another production company, although positions for the same role were proven to be substantially the same as the role UPC offered to her and for approximately the same salary.

At Trial Upcoming Production Company indicated that Marlina had a legal duty to reduce her damages; that is, attempt to search for or actually find employment substan- tially similar to that offered by UPC in their contract with her. Marlina claimed that she did not look for other opportunities because in her opinion there were none as valuable to her career plans as the one offered by UPC; in her mind, all other opportunities were inferior. UPC, however, offered researched facts and figures that showed there were opportunities equal to the UPC opportunity, including sal- ary, and that it was only Marlina's opinion that she could not do better.

Questions 1. The UPC stated that Marlina had a legal duty to search for employment

substantially similar to that offered by them. What is the legal terminology used to identify this duty?

2. Was Marlina correct in not looking for substantially similar employment? Why or why not?

3. If Marl ina found employment elsewhere that was substantially similar to that offered by UPC, could she still sue for damages for breach of contract? And should she win, what formula would be applied to determine the amount of damages to which she was entitled?

A person who suffered a loss as the result of a breach of contract may sue the breaching party for monetary damages . Do not assume that a contract will be carried out exactly as written. After the contract is signed, one party may view her situation differently and want to change some of its terms, but you may ob- ject. The party requesting changes may simply say, I am not going through with this contract. The attitude of that party amounts to a breach. A breach occurs

reach : when one or all parties fa il to :Jeriorm the obligations requ ired by a contract

anticipatory breach: breach of contract occurring before stated time of performance

when, without excuse, one or more parties fail to perform some or all of the obligations required by a contract. Contracts are usually breached after the per- formance date. Sometimes, however, a contract is breached before the perfor- mance date. This failure to perform is called an anticipatory breach. Before t he time for performance stated in the contract, one party says, "I'm not going ro perform." When that happens, most courts allow the injured party to immedi- ately declare the contract ended, sue for any damages caused by this breach, and seek other alternatives . The injured party may also choose to wait, hoping tha~ the breaching party will undergo a change of mind and allow performance ro occur on schedule. The breaching party does have the right to back out of the decision to breach the contract and continue his or her obligation by givi nc proper notice. This may occur, however, as long as the nonbreaching party has not made arrangements with another party.

Remedies for Breach of Contract

LEARNING OBJECTIVE~ Summarize the remedies for breach

of contract, both legal and equitable.

remedy: course of action an injured party may take to get satisfaction for breach of contract

material breach: violation of contract so substantia l that it destroys the value of the contract and therefore excuses further performance by the injured party

waiver: voluntary surrender of a given right

For any breach, the injured has certain remedies . A remedy is a course of actior::. available to the nonbreaching party (the party hurt by the breach) to obtain sat- isfaction, in court if necessary, for an injury caused by breach of contract. A rem- edy may be either legal or equitable. In a legal remedy, the injured party is awarded money damages. When money alone does not provide satisfaction to the injured party, courts will provide an equitable remedy (discussed later in this chapter). Money damages are the most frequently granted remedy for breach of contract in a court of law.

If the breach is material, the injured party may treat the contract as ende, and thereby be relieved from her or his duty to perform. The injured party ma;- also sue for money damages for this breach. A material breach is an inexcusa ble failure to perform substantially the obligations required by a contract.

Metzinger signed a contract to work for a marketing research company beginning June 1. On June 1, the company refused to allow Metzinger to begin work. By preventing Metzinger from beginning work, the company created a material breach. The contract was discharged. In addition, Metzinger may sue the company for money damages for breach of contract. . Since there are no clear-cut rules, a court will often decide whether a m are-

rial breach has occurred. Most breaches of contract, however, are minor breacheJ. If a breach is minor, the contract is not ended. Both parties must still perform. but the injured party may sue for damages.

Munson, a mechanic, agreed to replace parts on Tracy's motorcycle by June 10. Completion of the work, however, was delayed until June 20. Because the delay amounted to a minor breach, the contract remains in force, but Tracy may sue for any damages incurred because of the later completion date.

The injured party may waive his or her rights when the other party breache5 the contract. A waiver is the voluntary surrender of a given right. As a result o: this waiver, the contract is canceled. To be on the safe side, the breaching parr: should ask for a written release. The written release, however, must be supporm- by consideration, except in those states where an agreement in writing needs n consideration.

Legal Remedies Once a contract has been breached, the injured party has the right to sue fo- money damages. Damages, determined either by the parties to a contract or by J. court, are awarded to compensate the injured party financially for her or his los-

·gate the damages: duty to hold ~ages down once a breach of - act occurs

sequential damages: indirect -:'lages awarded for breach of -tract because they were or

- :Jid have been foreseeable by the :aching party

therefore, they must be established with reasonable certa inty. Sometimes the injured party attempts to make a profit from the breach of contract, which is unfair. The money damages awarded should, by law, place the injured party in the position she or he would have been in if the contract had been carried out. Damages may be:

1. Compensatory (to cover direct losses) 2. Consequential (to cover indirect losses that are foreseeable) 3. Punitive (to punish and deter similar future conduct) 4. Nominal (a small amount to recognize a breach occurred, but no actual

damages suffered) 5. Liquidated (an amount specified in the contract)

You may remember that compensatory and punitive damages were covered in Chapter 4 in relation to tort law. In this chapter, these same damages, as well as nominal and consequential damages, will be discussed again, but in relation to contract law.

Compensatory Damages Damages awarded to the injured party as compensation for a direct (actual) loss or injury caused by the breach of contract are called compensatory damages. The right to recover compensatory monetary damages for breach of contract, which can be determined by the courts with reasonable certainty, is always avail- able to the injured party.

As soon as the breach occurs, the injured party has a duty to mitigate the damages. That is, the injured party must make a reasonable effort to minimize the amount of damages and prevent them from increasing. Mitigation is required to ensure that the damages awarded do not exceed the amount necessary to com- pensate the injured party. A measure of recovery applied to a breached employ- ment contract is generally the amount of salary promised under the breached contract minus the amount of salary the employee could earn or has earned at the new place of employment that is substantially similar to the employee's origi- nal place of employment. This measure of recovery concept can be applied to other circumstances as outlined in the problem below. A failure to mitigate dam- ages may operate as a complete bar to recovery in a breach of contract suit.

On June 1, you hired a roofer for $6,000 to replace a twenty-five-year- old roof that was beginning to cause water problems on the inside of your house. You signed a contract for the roofer to begin the job on June 20. He agreed. The roofer, however, never came to complete the job. You took your time finding another roofer. In the meantime, heavy rains caused damage to the interior of your house. Finally, on August 1, you hired another roofer to complete the job but at a cost of $7,000, which was $1,000 more than the contract price of the original roofer that you hired. You then sued the original roofer for the damages done to the interior of your house.

In this example, you would be entitled to damages of $1,000, the difference between the price specified in the contract with the original roofer and the price charged by the second roofer that you hired. It is not likely that you could recover for the rain damage unless you could show that it was not reasonably possible to procure any other roofer to complete your roof. In the absence of such proof (you took your time finding another roofer), the duty to mitigate damages would keep you from collecting more than $1,000.

In addition to damages, the losing party also pays court costs (e.g., witness fees and filing fees). Each party pays her or his own attorney's fees.

Consequential damages do not arise directly out of a breach. They are indi- rect damages and arise from special circumstances based on whether the breach- ing party to a contract knew or should have known that a loss would result from

liquidated damages: damages set in advance by the parties and stated in the contract

nominal damages: damages awarded for breach of contract when no real loss or injury occurs

the breach. This is called the foreseeability test. Included as special circumstances are lost profits and injury to persons. If, for ex ample, a car dealer delivers to a buyer a used car purchased under contract that has defective brakes, and injuries result, the buyer may be able to collect consequential damages as part of his or her award for compensatory damages.

Liquidated Damages The amount of damages awarded to an injured party in case of a breach may be agreed to by the parties in advance (fixed amount) and stated in the contract . This amount is called liquidated damages.

Kerry signed a lease renting an apartment for one year from Snider. A clause in the lease stated that the security deposit of $250 would be forfeited as liquidated damages if Kerry gave up the apartment before the end of the lease.

A liquidated damages clause will be enforced if the court determines that the amount is a reasonable forecast (the best approximation and not a guess) of the loss that may result or does result from the breach. In the example, $250 is the amount needed by Snider to prepare the apartment for new tenants.

A court will not enforce a liquidated damages clause if the amount appears to be a penalty to deter a breach of contract. The court will ignore it and instead award whatever compensatory (actual) damages could be proven.

Westside Health Group contracted with Comnetix Computer Systems to maintain Westside Health Group's computer system. Westside's staff depends on the proper operation of its computer system at all times. A liquidated damages clause in the contract provided that Comnetix pay $1,000 for each day that Comnetix was late responding to a service call, regardless of the time of day or night. On March 3, Comnetix was notified that Westside's computer system failed, but Comnetix did not respond until March 6. Westside Health Group sued Comnetix under the liquidated damage provision of the contract.

In this example, if as a result of the lawsuit by Westside it was determined by the court that the liquidated damage clause was inserted in the contract only to deter a breach of contract (as opposed to a good faith effort to estimate probable damages), that clause will be deemed a penalty and will be declared void.

The theory behind a liquidated damages clause is to save the cost of litigat- ing the case-that is, going to court and having the parties to the lawsuit appear along with their witnesses, and convening a jur y to hear testimony. A liquidated damage clause is particularly helpful if it is difficult to assess actual damages.

Nominal Damages The court awards nominal damages, usually a very small amount such as $1. fixed without regard to the actual loss, when an injured party establishes that a contract has been breached but fails to prove that he or she has suffered act ual damages.

Samuels, owner of the Uptown Automotive Station, made a contract to buy twenty cases of motor oil from the Apex Wholesale Company at $25 per case. When Apex breached the contract and did not deliver the motor oil, Samuels purchased the same number of cases at $21 per case from another wholesaler. Because Samuels suffered no actual loss, only nominal damages would be awarded in a suit against Apex.

Nominal damages may also be awarded to an injured party who has sued to establish a court decision (precedent) concerning her or his rights in a legal dis - pute that may occur in the future.

"'eScission: voluntary mutual ~·render and discharge of each c.rty's contractual rights under a .::'1tract

specific performance: court order squ iring a party to carry out a

:ontract according to its original terms

Punitive Damages Money damages awarded to the injured party in the contract (in addition to com- pensatory damages) to punish the breaching party for wrongful conduct and to deter similar future conduct by that party are called punitive damages (or exem- plary damages). Punitive damages are generally not awarded in breach of con- tract suits. The modern trend, however, is for state statutes to allow pun itive damages when evidence shows that the breaching party also committed a tor t by maliciously, fraudulently, or willfully causing the breach. One example is an in- surance company that without cause denies a legitimate insurance claim.

Equitable Remedies As noted earlier in the chapter, equitable remedies are allowed by courts when money damages will not adequately compensate the injured party for her or his loss or are not available or determinable. Equitable remedies include:

1. Rescission (call the contract off) 2. Specific performance (force the breaching party to go through with the

contract) 3. Injunction (the breaching party to the contract is ordered to refrain from

carrying out his o't her part of the agreement)

Rescission When a breach occurs, the parties may choose to call off (cancel) their contract and end further performance. This step is called rescission. Rescission consists of a voluntary mutual surrender and discharge of each party's contractual rights under a contract. In this case, a mutual rescission has occurred. If a con- tract is rescinded, both parties must return any consideration received under the contract (goods, property, or money). Once rescission has occurred, the original contract no longer exists and both parties are restored to the original position that they occupied prior to the formation of the contract. Rescission is often used as a remedy by an injured party when the breaching party induced this injured party to enter into a contract by fraud, duress, or undue influence, or when the breaching party wished to exercise his or her right as a minor to rescind. This is called a unilateral rescission since only one party wishes to back out of the contract. Rescission must be accomplished promptly so that both parties can be restored as nearly as possible to their original positions (status quo).

Rescission is the easiest when the contract is executory. For example, Ralph and Hopkins mutually agree to call off their contract to have Ralph build a pool for Hopkins before the pool is started. Problems often occur if the parties at- tempt to rescind a bilateral contract where one party fully performed his or her duties under the contract.

Specific Performance When money damages are not adequate and do not fairly compensate for a loss, and rescission is not the proper remedy, the injured party may sue for specific performance. Specific performance is a court order forcing the breaching party to carry out the contract according to its original terms. Specific performance is generally granted only if the subject matter of the contract is rare or unique and an identical item cannot be purchased elsewhere. For example, a contract for the sale of real property will generally be enforced because each piece of land is con- sidered unique and unlike any other piece. Consequently, money damages will not compensate the buyer. Specific performance will also be granted in contracts for the sale of such personal property as rare paintings and books, antiques, rel - ics, and heirlooms. It is difficult to put a value on a priceless work of art or an heirloom.

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Mansfield contracted to sell Downing a castle-like home located on a mountain overlooking a large body of water. Mansfield changed his mind and refused to close the sale.

In this example, land is considered unique and not interchangeable. There- fore, the court could require Mansfield to sell the property to Downing as prom- ised. Downing could accept compensatory damages or could simply rescind the contract. He may not, however, be satisfied with these remedies because he ha his mind set on this unique home, and to him, nothing else is comparable.

The courts will not order specific performance in a personal services con- tract (one involving a person who has special skills and talents). It is in no one' best interests to force one party to work for someone else. For example, a mu si- cian who has played with a band and who refuses to continue with that band cannot be forced to remain even though under contract. The musician, however. could be sued for damages for breach of contract.

Injunction In special cases where damages, rescission, and specific performance will not ad- equately compensate for a breach of contract, the court may grant an injunction to the injured party. As you recall from Chapter 4, an injunction is a court order that forbids a person from doing a certain act.

Rivera was the heavyweight boxing champion. He agreed with Liberty Arena to fight the winner of the Schultz-FreeZing match for the title of heavyweight champion of the world. To keep Rivera in top shape and to prevent his being injured before the title fight, his contract with Liberty Arena prevented him from fighting anyone else prior to that bout. In violation of this agreement, Rivera, having been promised a large sum of money by a sports management group, agreed to fight another heavyweight boxer before the title bout at Liberty Arena. When Liberty Arena found out about his plan, it brought suit against Rivera and asked the court for an injunction to prohibit Rivera from fighting prior to the title match.

In this example, the court most likely would have granted the injunction, as it was the fairest remedy. Liberty Arena, which held Rivera's contract for the championship fight, did not want money damages or a rescission of the contract; it wanted Rivera to fight. There was a lot of money at stake in the title fight, and it would have been unreasonably difficult determining and proving how exten- sive Liberty Arena's damages would have been.

Answer True (T) or False (F). 1. Money damages are the usual remedy for a breach of contract. T F 2. Contracts are usually breached after the date set for performance. T F 3. Money damages are intended to place the injured party in the same

position he or she would have been in if the contract had been carried out. T F

4. Specific performance is an equitable remedy. T F 5. If a contract is rescinded, the parties may keep the consideration

received. T F

RYou t eac

Johnson owned several apartment buildings in a large city. He entered into a contract on May 1 with Gibbins to paint the interiors of these apartments for an agreed price. Gibbins was to begin the project on June 1. On May 25, Johnson notified Gibbins that he changed his mind and had no intention of allowing him to paint the apartments as agreed, and Johnson refused to pay him any compensation.

Questions 1. What course of action, if any, does Gibbins have against Johnson? 2. Is Johnson discharged from the contract because the breach occurred before

June 1, the date when Gibbins was to begin painting? 3. If Gibbins has a course of action, to what type of damages is he entitled?

tenses for a Breach of Contract Suit

_EARNING OBJECTIVE ~ - cribe the defenses available to

an injured party for not performing on the contract.

~ d: entering into a contract :: tionally by making a false

;:. em ent or concealing a ;.eri al fact

When a breach of contract occurs, the injured party has a right to sue the party who broke the contract. The breaching party (the defendant in the lawsuit) may offer one of many defenses for not performing on the contract. As you recall, defenses are reasons offered by a defendant (the party being sued) that are meant to release her or him from blame or responsibility. In a breach of contract suit, the defenses offered are intended to excuse the breaching party from further liability under the contract. You have already learned of some actions that affect the per- formance of the terms of a contract (lack of competency, impossibility, illegal pur- pose, and lack of proper form). These actions may be used as defenses. Other defenses are fraud, duress , undue influence, and mistake. In these cases, the breaching party claimed that he or she actually did not agree to the terms.

Fraud A person who persuades another to enter into a contract by making a false state- ment about a material fact or by concealing a material fact is guilty of fraud. In simple terms, fraud consists of deception. Such a contract is voidable by the vic- tim of the fraud. That is, the victim may refuse to go through with the contract and may use fraud as a defense if sued for breach of contract. The following ele- ments all are necessary to establish fraud:

1. A false statement or concealment of a material fact must be made. 2 . The false statement or concealment must be intentional. 3. The victim actually relied on the false statement or concealment. 4. The victim must offer proof of damages.

False Statement or Concealment of a Material Fact The false statement, oral or written, must be about a material fact. A material fact is one that is important enough to influence another 's decision. A mere state- ment of opinion or a prediction is not fraud. For example, a salesperson's state- ment that "this TV set is the best you can buy for the money" is an opinion (called sales puffing), not a fact . A statement such as "with this mower you can cut an acre of lawn on less than a gallon of gasoline," however, is a statement of fact that can be tested.

A person who conceals a material fact is also guilty of fraud. The conceal- ment must prevent the victim from discovering the truth about material facts.

Rommel and Associates, CPAs, audited the financial statements of the McGill Company. The financial statements contained misstatements that resulted in a material overstatement of McGill's net worth. The lead CPA

was aware of these misstatements but, nevertheless, at McGill's request. expressed in writing an unqualified opinion that the net worth as stated on the books was correct. McGill had requested this falsification so as to obtain a bank loan. Based on this report, McGill was temporarily approved for a $1 million loan by Charter Bank and was given a $200,000 advance as part of the agreement pending the bank's pre-loan investigation. During Charter's investigation of McGill, it discovered the falsification. Charter canceled the remaining amount promised to McGi as a loan and demanded the return of the $200,000. McGill refused. Charter successfully sued McGill, claiming fraud. Both Rommel and Associates and McGill would also be subject to crimina/liability.

Generally, silence is not fraud. A person does not have to volunteer all the de- tails to the other party. Although in a sense this is concealment, the law allows [- as part of the bargaining process. Today, however, many jurisdictions insist o nonconcealment and honesty in business transactions; if a person's silence cre- ates a false impression about certain facts, that person has a duty to speak ouL.. Buying a house is a good example of how silence could amount to fraud, espe- cially if the buyer's questions relating to defects in the house are not answere properly.

Intentional Misstatement or Concealment The speaker must know that what is said or done is false and must deliberately intend to mislead the victim. (This aspect of fraud is the most difficult to prove.

Arden, an automobile tire dealer, sold four new tires to Limrick. To make the sale, Arden told Limrick that the tires were guaranteed for 50,000 miles. Actually, Arden knew that the average life of that brand was only 20,000 miles. When Limrick discovered the truth, he would not go through with the purchase and tried to return the tires. Arden refused to accept them and sued Limrick. Because Arden had deliberately lied about the tires, Limrick can use fraud as his defense.

Fraud also occurs when a person who should have known the facts of a sit u- ation carelessly makes a statement without really knowing whether it is true or not (reckless use of the truth).

Kotch, a door-to-door salesperson for the Home Utility Company, sold Arnold an expensive set of kitchen utensils. Arnold made the purchase because Kotch told her that the utensils were solid copper. As it turned out, the utensils were only copper plated. The salesperson did not know that the utensils were only copper plated and never checked with the company to find out. Because Kotch should have checked with the company, Arnold may claim fraud as a defense in a breach of contract suit.

Reliance on False Statement or Concealment The victim of fraud must actually rely on the false statement or concealment and suffer a loss or injury. There is no fraud if the victim is not deceived because he or she makes an independent investigation but enters into the contract anyway. There has been no reliance on the false statement or concealment.

Delmar, an automobile dealer, received in trade a car that had been damaged in an accident. He explained to Tinker that the car had been thoroughly repaired and that many parts had been replaced. When Tinker took the car for a trial run, she had it examined by a mechanic.

'lf ' •"f'" "'c•<''~'!J'It' W ~- < • • 't- q ; ~ ~ • o cil\' 0 . '. .. ' " - •. .

- ress: forcing one to enter into a : ract by using violence or threats

1olence

d ue influence: power or nance used to make persons

er into a contract against their will

The mechanic told Tinker that the frame had been badly bent and that the repair job had not completely straightened it. Nevertheless, because of its low price, Tinker bought the car. Because Tinker did not rely on Delmar's statement, she cannot claim fraud if she later tries to get out of the contract.

Victim Must Offer Proof of Damages The victim of fraud is entitled to bring a lawsuit. Unless the victim has suffered actual legal damages (compensatory damages) as a result of the fraud and can of- fer proof of these damages, however, a court would award only nominal damages.

Duress Valid contracts are made by persons who enter into them of their own free will. Duress occurs when one person compels another to enter into a contract through physical force (e.g., pointing a gun at a person or taking a person's hand and making the person sign a written contract) or by other improper threats so ex- treme that a victim loses all ability to assent voluntarily. Because it involves the use of physical force or improper threats, duress destroys a person's free will to decide whether or not to enter into a contract. This type of duress is rather un- common, but it renders the agreement voidable by the victim. Under modern law, threats include economic pressure if it is wrongful.

Duff, owner of an apartment complex, wrongfully threatened to terminate Romano's present lease and to initiate eviction proceedings against her if she refused to sign a new three-year lease at a much higher rent. Duff did so knowing that Romano was physically handicapped and bedridden. Because Duff's actions amounted to duress, Romano, who signed the lease, can cancel if she wishes.

The threat by one person to bring a lawsuit against another person to enforce a legal claim is not duress. Assume, for example, that a friend owed you money but refused to pay. If you threatened to sue your friend in small claims court un- less payment was made, your friend could not refuse to pay by claiming duress. You have a right to use whatever legal means are available to collect the debt.

Undue Influence Undue influence is the power or dominance that one person has-and uses for personal advantage-over another person. No force or threats are used, as in du - ress, but the stronger-minded person can exercise so much influence that the vic- tim ends up doing whatever the other person wishes. A contract entered into because of undue influence is voidable by the victim.

Undue influence is often difficult to determine. Mere persuasion is not undue influence. The victim must be incapable of using her or his own free will. Undue influence may arise when the parties have a close confidential or personal rela - tionship. Examples of such relationships are those between lawyer and client, doctor or nurse and patient, parent and child, and husband and wife.

Paton, an elderly woman, lived with her son, who was Paton's only child and sole support. The son persuaded Paton to sell him some land worth $150,000 for $50,000. Shortly before the transfer of title, Paton discovered that her son was going to resell the property to Vestel for $175,000 for construction of an apartment complex. The mother refused to go through with the sale. In the breach of contract suit that followed,

unilateral mistake: error about certain facts made by only one party to a contract

mutual mistake: error about certain facts made by both parties to a contract

the court found that the son had taken advantage of his mother's trust in him to persuade her to sell the land. Paton could avoid the contract.

Mistake People often attempt to back out of a contract because they claim that they m ade a mistake (misunderstood, misinterpreted, or drew a wrong conclusion) abou certain facts in a contract. Not all mistakes, however, will allow people to avoid the contracts they made. A mistake made by one party is called a unilateral mis- take. A mistake by both parties about the facts is called a mutual mistake. M osr mistakes are unilateral. A unilateral mistake may be caused by ignorance, forge t- fulness, poor judgment, or carelessness. As a general rule, if only one party ha made the mistake (a unilateral mistake), the contract remains in force. The con- tract would be voidable, however, if the nonmistaken party knows or reasonably should have known of the mistake (because the mistake was substantial) or if the mistake was caused by the fault of the nonmistaken party. In addition, some courts allow rescission when the effect of the unilateral mistake makes enforce- ment of the contract unconscionable.

By mail, Farley offered to sell Sprinkler, a medical student, a set of medical encyclopedias for $195. Sprinkler immediately mailed a letter of acceptance. When she received the acceptance, Farley discovered that she had typed $195 instead of $295, as she had intended. Farley refused to mail the books to Sprinkler, who sued. Because this mistake by Farley was due to her carelessness, it had no effect on the contract. Sprinkler most likely could enforce the contract for $195.

In the following case, however, there was an extremely large math error.

jason Corporation, a building contractor, offered to sell Marcus, another contractor, some used construction equipment. When preparing the written offer, jason's secretary typed the price as $15,600 instead of $156,000. Marcus received this offer in the mail and quickly accepted it. When jason received the acceptance from Marcus, however, he noticed the error and refused to sell the equipment to jason at the $15,600 price. Marcus sued for breach of contract.

Here, a court would argue that Marcus, being a contractor himself, should have known that the price was a mistake; therefore, the court would not allow the sale at $15,600. To honor the contract at the lower amount would, in the eyes of the court, permit Marc us to take unfair advantage of Jason.

Certain types of mutual mistakes can serve as defenses in breach of contrac t suits because they show there has been no meeting of the minds. They are mutual mistakes about the existence of the subject matter and mutual mistakes about the identity of the subject matter.

Mutual Mistake About the Existence of the Subject Matter The subject matter must exist at the time the contract is made. If it does not , there can be no contract. The offeror cannot offer to sell something that doesn't exist. Likewise, the offeree cannot accept an offer for something that no longer exists.

You made a contract to sell a friend your motorboat, which was stored at a marina near your summer home. Unknown to both of you, the marina and the boat were destroyed by fire two days earlier. Nonetheless, your friend, who had spent a lot of money building a boathouse, sued for damages. Because the boat had been destroyed, you can claim mutual mistake as a defense.

Mutual Mistake About the Identity of the Subject Matter If bot h parties are mistaken about the subject matter that is t he basis of the con- tract, there can be no meeting of the minds and therefo re no contract.

Rapp owned two racehorses, one younger than the other, but both named Pogas Song. Rapp offered to sell her racehorse to Peters. In making the offer, Rapp had the older horse in mind. Peters accepted, thinking that he was buying the younger horse. Learning of the error, Peters sued to force Rapp to sell him the younger horse. Rapp, because of the mutual mistake about the identity, cannot be forced to sell Peters the younger horse.

If one or both persons make a mistake (unilateral or mutual) about the value or quality of the subject matter, this mistake in judgment will not excuse either party from carrying out the contract .

You sold your friend an old ring for $10; neither of you knew its true value. Later, you discovered that the ring was considered a piece of antique jewelry worth $500. You demanded the return of the ring. Your friend is entitled to keep the ring.

ffect of Fraud, Duress, and Undue Influence on a Contract

LEARNING OBJECTIVE~ Recall how fraud, duress, and

undue influence affect a contract.

Fraud, duress~ and undue influence make a contract voidable. The victim of one of these acts also has remedies. The victim may either rescind or ratify the contract.

If the contract is rescinded, the victim must return any consideration re - ceived and is entitled to recover anything given as consideration, by a lawsuit if necessary. The victim may also sue for damages.

If the victim chooses to ratify, the contract is as valid as if no fraud , duress, or undue influence had occurred. As with rescission, the victim may sue for dam - ages for actual loss or injury suffered.

You were induced to purchase a used car through fraud. Before you purchased the car, the dealer stated that the engine had recently been rebuilt. Actually, it had not. After you bought the car, you had engine troubles and the car stopped running.

In this example, if you wanted to keep the car, you could choose to ratify the contract and sue the dealer for damages . In this case, damages would be the cost of repairing the engine.

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Fill in the blanks to complete each statement. 1. A person who wishes to bring an action against another based on fraud must

first show that there has been either a false statement or a concealment of a (an) fact.

2. A person who forces another to enter into a contract through violence or threats is guilty of ___ _

3. An error about certain material facts made by one party to a co ntract is called a mistake .

4. Fraud, duress, and undue influence make a contract ___ _ 5. are reasons offered by a defendant that release her or him from

liability or responsibility .

Key Points in Chapter • • • In addition to discharge, another way in which a contract ends is by breach of contract. This occurs when one or all parties fail to perform an obligation according to the terms of the contract. Although breaches of contract usu- ally occur after the date for performance, some take place before the performance date. This t ype of breach is called an anticipatory breach.

For any breach, the injured party has a course of ac- tion called a remedy. Remedies available to the injured party are either legal or equitable. In a legal remedy, the injured party is awarded money damages. Money dam- ages may be compensatory, liquidated, nominal, or puni- tive. Equitable remedies are provided by a court when money does not adequately compensate the injured party for his or her loss. Equitable remedies include rescission, specific performance, and injunction.

A material breach-that is, one that is substantial- usually ends a contract, and the injured party no longer needs to perform. In addition, the injured party can sue

Important Legal Terms ____ _

anticipatory breach

breach

consequential damages

duress

fraud

liquidated damages

material breach

mitigate the damages

Questions and Problems for Discussion

1. Connors and Ferris entered into a contract in which Connors was obligated to deliver certain goods to Ferris by March 8. On March 1, Connors told Ferris that he would not deliver the goods called for in the contract. The reason for refusing to deliver the goods was simply a change of mind at this time. Connors told Ferris that he would think more about it and possibly deliver the goods sometime in the future. Can Ferris successfully sue Connors immediately or must he wait to see what Connors decides to do?

2. What kind of restriction is placed on a person who is entitled to compensatory damages?

3. If parties wish to rescind a contract, what action must they take?

4. What is the theory behind a liquidated damages clause in a contract?

5. Tina Townsend, age 25, a well-known comic, signed a contract for $20,000 with Stillman to

for damages. A minor breach does not end a contract. Both parties must still perform, but the injured part y may sue for damages. As soon as a breach occurs, the nonbreaching party has a duty to mitigate the damages- that is, to make a reasonable effort to hold down the amount of damages. Instead of suing, the injured party may elect to waive his or her rights (not sue) when the other party breaches the contract.

The defendant in a breach of contract suit may claim such defenses as fraud, duress, undue influence, and mu- tual mistake. These four acts make a contract voidable by the victim. In some cases, they make the contract void and excuse the victim from further liability under the con- tract.

A victim of fraud, duress, or undue influence may either rescind the contract and recover any consideration given or ratify the contract and sue for actual damages suffered.

mutual mistake

nominal damages

remedy

reSClSSlOn

specific performance

undue influence

unilateral mistake

wa1ver

perform at Stillman's Country Dinner Theater for five nights.Because Townsend had a drinking problem, a clause in the contract stipulated that she should not take a drink for the five nights she was to perform. Another clause stated that if Townsend were to drink and appear for her performances in an intoxicated condition, 10 percent of her salary would be withheld as liquidated damages. After having several drinks, Townsend made her opening night appearance. Reviewers in the local newspapers described her as "a very stumbling but entertaining alcoholic." Despite the reviews, Townsend's performances filled the theater to capacity each night of her five-night engagement. Stillman, however, still withheld $2,000 of Townsend's salary, although she had appeared in an intoxicated state only on opening night. Townsend brought an action against Stillman to recover the

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$2,000 withheld from her salary. Should she recover the money?

- In purchasing a new automobile, Blacklaw ordered it with no extra equipment except power steering. She did not read the contract presented to her before signing it. She learned later that the car included power steering, radio, air conditioning, and tinted glass. What effect, if any, did Blacklaw's mistake have on the contract?

- Flynn, who received a ring from his uncle's estate through a properly executed will, sold it to a jeweler fo r $400. At the time of purchase, the jeweler in go od faith indicated to Flynn that he (jeweler) was unaware of the value of the ring. Several weeks later, Flynn discovered that the ring was worth at least $3,000 and now asks to recover possession from the jeweler. Should Flynn be entitled to recover the ring? Dunes called the Sauna Resort Hotel and made a reservation for his family of four for July 6-12. A letter of confirmation signed by the hotel manager stated: "This is to confirm your reservation for the period July 6 to July 12 inclusive. The rate for the Fernwood Cottage No. 10 Accommodation (American Plan) you requested is $600. A $100 deposit is required in advance to guarantee this accommodation. Please sign the original of this confirmation letter and return it to this office with the required deposit. Keep the other copy for your files." Dunes immediately signed and returned the letter along with a certified check for $100. In settling Dunes's account at checkout time, the manager discovered that a typing error had been made in the quoted price of the accommodation listed in the confirmation letter. The quoted price should have been $700, not $600. Dunes refused to pay the additional $100 when requested to do so by the hotel manager. Can the Sauna Resort Hotel require Dunes to pay this additional amount based on the hotel's error? Deveney, who had been hired by Rollins Community College as a marketing instructor, was asked to provide the college with a copy of his MBA master of business administration) degree, which

he did. Six months after Deveney began teaching, the director of personnel discovered that Deveney had no MBA of his own as required by the college. ~eveney had instead "borrowed" a retired person's _ 1BA diploma and had cleverly removed the retired

erson's name and inserted his own. What action ca n the college take? The seniors at Washington College booked their Gra duation Ball at the Washington Plaza Hotel for une 1. The student activities director signed the

r-ontract and sent a deposit of $500 to the hotel as

required to guarantee the booking. Two weeks before the ball, the seniors decided instead to hold the affair at the new convention center just down the street from the Washington Plaza Hotel. The student activities director went along with the change and signed another contract with the manager of the convention center. The student activities director then called the Washington Plaza Hotel and canceled. What action, if any, can the hotel take?

11. Cooper Manufacturing Co. contracted with Bright Computers to maintain Cooper's computer system. Cooper's manufacturing process depends heavily on its computer system operating properly at all times. A liquidated damages clause in the contract provided that Bright Computers pay $1,000 to Cooper for each day that Bright was late responding to a service request. On December 8, Bright was notified that Cooper's computer system was "down." But Bright did not respond to Cooper's service call until December 11. If Cooper sues Bright under the liquidated damage provision of the contract, what should the result be?

12. Strouse bought a used motorcycle from Biker's World and agreed to pay for it in monthly installments. When Strouse asked about mileage, the salesperson stated that the motorcycle had been driven only 4,000 miles, had never been raced, and needed no major engine repairs. In fact, the motorcycle had been driven over 6,000 miles, had been entered in several racing contests, and needed major engine repairs. Strouse soon discovered the salesperson's misrepresentations, returned the motorcycle, and refused to make any more payments. In a breach of contract suit, can Strouse claim fraud as a defense?

13. Johnson interviewed for a position with an automobile agency and was offered the job, which he accepted. The contract called for Johnson to begin work on June 1, 2008. On June 1 when he reported for work, he was told that his job offer had been revoked but that he could reapply at a later time. Does Johnson have a legal action against the automobile agency?

14. Benson, a homeowner, made a contract with a roofer to repair her roof, which had begun to leak slightly. Several months after the contract was made, the roofer still had not come to do the job, nor had Benson contacted him to ask when he was coming. In the meantime, the condition of the roof deteriorated to the point where heavy rains severely damaged the interior of Benson's house. Benson then sued the roofer for breach of contract, claiming that since he did not show up to repair the roof, he should be liable for the interior damage caused by the heavy rains. Is Benson correct?

Cases for Review

1. Robert and Sandra Bell hired McCann to build a house for them at a contract price of $45,000. McCann then changed his mind and refused to build, claiming that he would make no profit. The Bells then advertised for bids from other contractors. The lowest bid was $54,500, which the Bells accepted. They then brought suit against McCann for the difference between the original contract price and the market price ($54,500 - $45,000), less the extras of $4,562 that were discussed but had not been included in the contract. Thus, the Bells were awarded $4,938 in damages by the trial court. McCann appealed, claiming that the trial court applied an improper measure of damages. Do you agree with McCann? (Bell v. McCann, 535 P.2d 233)

2. Watts Construction Co. was awarded a construction contract with Cullman County to complete a County Water Works Improvement Project. One section of the contract provided that it would not become effective unless and until approved by a certain federal agency, namely, the Farmers Home Administration, U.S. Department of Agriculture. The agency's approval was delayed, which in turn delayed the initiation of the project. In response to this delay, Watts Construction Co. requested a 5 percent increase in the contract price due to seasonal and inflational price increases. In his letter to Cu llman County, Watts stated, "If this is not agreeable with you, please consider this letter a withdrawal of our bid." Cullman County refused to pay the additional 5 percent and hired another company to take on the project. Watts then informed the county that he was willing to perform the contract at the original price (without the 5 percent price increase) but with certain modifications. The county refused and Watts sued for breach of contract. Should he be successful? (Watts Construction Co. v. Cullman County, 382 So.2d 520)

3. Wolf was a popular sportscaster for ABC. He breached his contract and signed on with CBS where he was going to be paid a much higher salary. Wolf's ABC contract required him to negotiate a renewal contract in good faith with ABC during the last ninety days of his contract. The ninety-day period ended and in fact his entire contract expired with ABC, but with no good faith renewal negotiations on Wolf's part. Wolf then signed on with CBS. ABC now seeks an injunction against Wolf to prevent his leaving ABC and working for CBS. Should ABC be successful in obtaining an injunction? (American Broadcasting

Companies, Inc. v. Wolf, Court of Appeals, NY, 420 N.E. 2d 363)

4. Knutton, owner of a music company, entered into _ contract with Cofield, a restaurant owner, in wh i--- a jukebox was to be installed in Cofield's restaurant, with the parties sharing the receipts. The contract provided that if Cofield discontinue, using the jukebox before the expiration of the contract, Cofield would pay Knutton a sum of money for the unexpired term of the contract base- on the average of the amount paid from the time the jukebox had been installed. Prior to the expiration of the contract, Cofield disconnected rh.: jukebox and installed one belonging to another company. Knutton sued for damages for breach of contract. Cofield, however, claimed that the damages being sought were a penalty and not liquidated damages. Was Cofield correct? (Knutt or. v. Cofield, 273 N.C. 355)

5. Burns and his wife bought a new car from a dealer and financed it through the Manhattan Credit Co. The finance company assured Burns that it would take care of the insurance but in fact did not arrange for enough coverage. A few months after the car was purchased, the car was damaged beyond repair, and the insurance wasn't enough to cover the damage. Burns and his wife sued to cance. the contract of sale because of the false statements made by the finance company regarding the insurance coverage. Can the sale be legally canceled? (Manhattan Credit Co. v. Burns, 230 Ark. 418, 323 S.W.2d 206)

6. Palmer was a retail florist. He sold his business to Flower Haven and agreed not to engage in the retai. florist business in his city for five years. Before the end of the five years, Pa lmer went back into the business, and Flower Haven sued for an injunction. Can Palmer be stopped from going into the flowe r business again before the end of five years? (Assu me that five years is reasonable.) (Flower Haven, Inc. v. Palmer, Colo. 502 P.2d 424)

7. Klyap, a math, language arts, and physical education instructor for grades 6 through 8, was employed by the Arrowhead School District, which was considered a rural district in Montana. His contract included a liquidated damages clause for breach of contract. The teacher's handbook contained information about this liquidated damages clause (of which Klyap was aware) and how it would be applied. The clause was a little hars her than the standard one often found in contracts, and the damages upon breach would be relatively high- namely 20 percent of his salary.

Two weeks before the next school year was to begin, he resigned from teaching and coaching after working for the school district for one year. There were 80 applicants for his job. Each of the 80 applicants were interviewed, which took time, especially since the person hired also had to assist in the reorganization of the sports program. This seemed like an impossible task so close to the opening of school. A replacement teacher was finally hired one week before school opened. The school district sued Klyap based on the liquidated damage clause contained in the contract. At trial in

a lower court, the school district offered evidence that the task of hiring a replacement was difficult because of the time factor and the fact that it had to hire a less experienced teacher. The lower court concluded that the school district had done everything to mitigate its damages under the liquidated damage clause. Consequently it ruled in favor of the school district. Klyap appealed. Should he win on appeal? (Arrowhead School District Park County Montana v. James A. Klyap Jr., Supreme Court of Montana, 318 Mont.103, 79 P.3d 250)