BLAW 341 Powerpoint 22 Notes Exam 2 PDF

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PPT 22: Contracts Breach of Contract: Failure to perform a contractually imposed legal obligation. Remedy: The relief a court provides an innocent party to enforce a right or to compensate for the violation of a right. Types of Remedies Potentially available when Contract is Breached A. Remedies at Law:  Monetary Damages  Equitable Remedies: (usually awarded only if remedy at law is inadequate)  Rescission  Restitution  Specific Performance  Reformation Breach of Contract and Damages  ANY breach entitles the nonbreaching party to sue for DAMAGES.  POLICY: Compensate the non-breaching party for “loss of the bargain”  Damages in contract Law: o Compensatory o Consequential o Nominal o Punitive damages--almost NEVER awarded in contract law Damages in Contract Law: Compensatory Damages Standard Measure of Compensatory Damages: A. Direct Losses PLUS B. Incidental Damages Total of A + B MINUS C. Mitigated Damages (A + B) – C = Total Compensatory Damages DEFINITIONS: A. Direct Losses: The difference between 1. The value of the breaching party’s PROMISED performance And (minus) 2. The value of the breaching party’s ACTUAL performance. A. Incidental Damages: Any expenses directly incurred due to the breach. C. Mitigated Damages: Any loss the injured party has avoided/mitigated.

Tim entered into a contract with Alice to restore her antique vehicle and repair the spare tire. The restoration included repair to the car’s spare tire. Tim agreed to perform all work for $12,000. Tim restored the vehicle, but failed to repair the spare tire. The spare tire would cost Alice $25.00 to fix, but she had to travel 500 miles from her home to find another mechanic who could fix this tire. The trip cost Alice $250. Alice’s compensatory damage award would be: $25.00 (direct loss =$12,000 minus $11,975) + $250.00 (incidental damages = costs of trip) $275.00 TOTAL Compensatory Damage Award In a breach of contract claim, can the non-breaching party obtain compensatory damages in an amount that is greater than the amount (s)he lost as a result of the breach? A. Yes B. No Ex: case in book where there is a VP of hallmark cards- and in severance package agrees not to disclose trade secrets or work for another card company for 18 months. After 18 months she gets another job- and while she was working she disclosed some of their trade secrets. When she then screwed up the trade secret part of the agreement Hallmark asked for damages of the 735k of her severance package- and her entire package of her first year of work at her new company- The VP appealed and said wait 735$k that is all they can get back and can’t get in a better position then they would have been in. Damagesi ncont r ac tl aw:c ompens at or ydamages

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Staples Store contracted with Office Inc. to purchase 10 new desk chairs at a cost of $200 each (total: $2,000.00). Office Inc. fails to deliver the desk chairs, and when Staples learns of the breach the cost of the desk chairs has risen to $300 (total: $3,000.00). After the breach, Staples sent employees to several suppliers around the country to search for replacement chairs. What is the proper measure of Staples’ compensatory damages?  $2,000  $3,000  $3,000 + incidentals  $1,000 + incidentals o sale of goods contract o staples is the buyer and office inc is the seller o Seller of good is the breach  Difference between contract price and market price + incidentals  If it doesn’t include incidentals it would still be 1k Staples Store contracted with Office Inc. to purchase 10 new desk chairs at a cost of $200 each (total: $2,000.00). Office Inc. costs to produce the chairs totaled $1,200 (and the Office Inc. expected to earn a total of $800 profit on the contract). Before Office Inc. delivers the desk chairs, Staples anticipatorily breaches the contract. What is the proper measure of Office Inc.’s compensatory damages? A. $2,000 B. $3,000 C. $800 + incidentals D. $1,000 + incidentals A. It is a sale of good contract B. Buyer is in breach – when buyer is in breach you have to identify whether or not the seller has given the goods- the seller has not produced the goods Katie entered into a contract with Linda for the purchase of Linda’s house for $300,000. However, Linda breached the contract and sold the house to Denny for $350,000. If Katie sues Linda for breach of contract, what is the measure of Katie’s compensatory damages? A. Specific performance B. $50,000 C. $300,000 D. $350,000 A. Want to put Katie in a position that she can go out and find a house just like Linda

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Construction – when you are an owner in property and hire somebody to build on that property

Case Example 15.3: What was proper measure of CONTRACTOR’s Damages where BOTH Owner and Contract OR failed to Perform? Jamison Well Drilling v. Pfeifer: Contractor agreed to install well and storage tank for $4130; Contractor SUED OWNER Contractor Breached During Performance (failed to install state mandated casing around well; well had to be abandoned and sealed) (Contractor’s Damage Calculation: see Column C on previous slide): Owner could not use well, but did use Storage Tank (value of tank = $970): Original Contract Price: $4130 Unacceptable work on well: $3160 (Owner’s damages $4130 - $970) Contractor’s TOTAL Damages: $970 (Contractor apparently did not ask for interest) Damages in Contract law: Consequential Damages  Consequential Damages (“Special” Damages): o Foreseeable damages that result from a party’s breach of contract but are caused by special circumstances beyond the contract itself. Consequential Damages (“Special” Damages):  Breaching party must either o KNOW (probable result of usual course of events) or o Have reason to know  of damages that result from breach but which are caused by special circumstances beyond the contract.

Gilmore, a newspaper owner, contracts with shipper to have a specific machine part shipped. Gilmore desperately needs the part to fix her printer. In the contract with the shipper, Gilmore explicitly states that she must receive the part by Monday or she will not be able to print her paper and will lose $3000 in lost profits. If the shipper fails to ship the part by Monday, can Gilmore recover from the shipper any compensatory damages plus the $3000 in lost profits? A. Yes A. It is clearly states B. Look for persiability B. No Damages in Contract law: Nominal Damages Nominal Damages: Awarded when a breach has occurred, but the non-breaching party has not suffered any actual damage or financial loss. Sun Farms agrees to sell Ben 5000 pounds of basil at a price of $2.00 per pound. The agreement does not specify that the basil must be from Sun Farm’s own crop. Sun Farm breaches the contract, but Ben is able to buy 5,000 pounds of basil on the open market for $1.00 per pound. If Ben sues Sun Farms for breach of contract, which type of damages below will the court award? A. Consequential Damages; B. Nominal Damages Mitigation of Damages  After a breach occurs, the injured party (non-breaching party) MUST exert reasonable effort under the circumstances to reduce/lessen/mitigate the damage that (s)he suffers. Mitigation of Damages: Examples--Employment Contract: If Employee wants Damages for Wrongful Termination I. Duty: Wrongfully Terminated Employee must make an effort to MITIGATE DAMAGES: A) Job hunt (reasonable effort) and B) Accept any job that is of the same type and stature II. Damage Calculation:  IF employee a) lands a new job OR b) fails to conduct a reasonable job search, then the damage calculation is (old job salary – new job salary)  IF employee searches but CANNOT FIND a new job, then the damages are the old job salary. Mitigation of Damages: Examples—RENTAL AGREEMENTS If Landlord wants damages from Tenant who abandons premises and fails to pay rent: I. Duty: Landlord must make an effort to MITIGATE DAMAGES: A) Use reasonable means to find a new tenant and B) Lease property to a suitable tenant II. Damage Calculations--OLD Tenant REMAINS LIABLE:

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IF Landlord reasonably searches but cannot find a suitable new tenant, then tenant’s damage = (Total rent that remains due under the original lease) IF Landlord finds a new tenant, then damage award old tenant must pay = Total rent that remains due under the original lease MINUS rent new tenant will pay for the time remaining under the original lease IF Landlord fails to search for a new tenant, then damage award old tenant must pay = Total rent that remains due under the original lease MINUS market value of rent for time that remains under the original lease)

Mitigation of Damages: Examples—RENTAL AGREEMENTS If Landlord wants damages from Tenant who abandons premises and fails to pay rent: I. Duty: Landlord must make an effort to MITIGATE DAMAGES: A) Use reasonable means to find a new tenant and B) Lease property to a suitable tenant II. Damage Calculations--OLD Tenant REMAINS LIABLE:  IF Landlord reasonably searches but cannot find a suitable new tenant, then tenant’s damage = (Total rent that remains due under the original lease)  IF Landlord finds a new tenant, then damage award old tenant must pay = Total rent that remains due under the original lease MINUS rent new tenant will pay for the time remaining under the original lease  IF Landlord fails to search for a new tenant, then damage award old tenant must pay = Total rent that remains due under the original lease MINUS market value of rent for time that remains under the original lease) Rick is a landlord. Rick leased an apartment to Sarah for $1,000/month for 12 months. Sarah paid for 6 months then vacated the apartment and told Rick she was terminating the lease. Rick immediately searched for a new tenant, and ultimately signed a new lease contract with Larry who was willing to pay $600 per month for the time remaining under Sarah’s original lease. If Rick sues Sarah for breach of the lease agreement, how much will Sarah have to pay? A. $2,400 B. $3,000 C. $6,000 D. $12,000 I. Liquidated Damages:  A fixed amount stipulated in the contract that a party agrees to pay in the event of breach  represents a reasonable estimate of damages;  ENFORCEABLE II. Penalties  A fixed amount stipulated in the contract that a party agrees to pay in the event of breach  Designed to PENALIZE one party for breach;  UNENFORCEABLE TEST:

A. At the time the contract was formed, was it apparent that damages would be difficult to estimate in the event of breach? B. Was the amount fixed as damages reasonable and not excessive? I. Enforceable Liquidated Damage: “YES” to both A and B II. Unenforceable Penalties: “No” to either A or B Kent State University v. Ford: 1. Coach Ford signed a 5 year contract to work as men’s basketball coach at $300,000 per year. 2. Employment agreement included a liquidated damages clause that stated if Ford quit before end of his term, Ford would pay University $300,000 multiplied by number of years remaining on his contract. 3. After first year, Ford left and took a job coaching at Bradley University for a $700,000 salary Kent State University v. Ford: Factors that showed 1) the difficulty of estimating damages at time of contract entry and 2) that damages were not excessive:  Potential loss in ticket sales;  Cost of drop in alumni and community support;  Recruitment difficulty;  Cost of search for new coach and coaching staff;  University’s statement that contract would be renegotiated before end of 5 year term;  Salary Bradley University was willing to pay Ford. -end: coach had to pay Types of Equitable Remedies:  Rescission and Restitution  Specific Performance  Reformation I.

Rescission:  Cancellation/Termination of the Contract  Available if one party fails to perform  Rescinding party must give prompt NOTICE  Rescission usually must be accompanied by Restitution

II. Restitution:  In a breach of contract case, a party who rescinds a contract must restore other party to the position other party would have been in had the parties not entered into the contract;  Restitution is also available as a remedy in a wide range of non-breach of contract actions. Restitution prevent unjust enrichment of rescinding party by requiring rescinding party to restore benefits received to the other party.

Case 15.3: Owner of dental practice know one of dentists had been under investigation by FBI and by a magazine for illegally treating underage prostitutes after hours. Owner failed to disclose info to prospective buyer of the dental practice. Buyer purchased property, learned of problem, then sued for rescission and WON rescission and damages or purchase price less (unpaid rent + a portion of buyer’s income during ownership of the practice).  When possible, goods, funds, or property must be returned;  If return is not possible (items have been consumed) an equivalent monetary amount must be returned  Restitution is available in a broad range of cases (not limited to contract rescission):  Examples: criminal actions, tort actions Advantage of Restitution: 1) May be available when damages are difficult to prove; 2) Can be used to recover specific property; 3) May result in a greater overall award than damages at law. Example of restitution in a criminal case: my college bookbag theft experience. Specific Performance:  Requires a breaching party to FULLY PERFORM its duties/obligations under the contract.  Available ONLY IF remedies at law (usually $$$) are INADEQUATE to remedy the breach of contract: Specific Performance is available as a remedy for breach of type of contract Below Breach of contract for  Sale of Land IF seller is in breach and property remains available  “Unique” goods for which substitutes are very difficult or impossible to find Specific Performance is NOT usually available as a remedy for breach of Types of contracts Below Breach of contract for  Sale of Goods  Personal Service Contracts  Sale of Land IF property is no longer available Ismael contracts to purchase 500 plain blue baseball style hats from Tom for $1000. If Tom fails to supply the hats to Ismael, Ismael may sue Tom for which of the following? A. Specific Performance B. Monetary Damages -if it was specific designed hat then maybe it would be specific performance

Artist Jillian has agreed to paint a portrait of Jack for $2000. However, Jillian and Jack have an argument, and Jillian refuses to complete the portrait. If Jack sues Jillian in court, which of the following damage award is the court likely to grant?

A. Specific Performance B. Monetary Damages Reformation: Parties have expressed their agreement imperfectly, and court may rewrite the contract (or portions) so that contract reflects parties’ actual intentions. Reformation is used most often in event of  1) FRAUD;  2) MUTUAL MISTAKE;  3) WRITTEN RECORDING of an ORAL CONTRACT incorrectly states the Parties’ Oral agreement;  4) Covenants not to Compete that contain Unreasonable Restraints on Trade. Quasi Contract REMINDER: A Court may impose a “QUASI CONTRACT” 1) only when the parties themselves have NOT entered into a valid enforceable contract, 2) but the court determines FAIRNESS necessitates the recognition of a contract 3) to prevent unjust enrichment. **promisary oristopal versus quasi contract Contract Provisions that Limit Remedies In a contract, the Parties may include: A. Exculpatory Clause:  A clause that states that NO DAMAGES can be recovered  No matter what happens-> you party can’t sue me  Court thinks that they are unfair and deemed to violate the public policy that everybody should be compensated for their losses B. Limited Liability Clause:  A clause that states damages will be limited in a particular way including limitations on the TYPE of remedies available and/or the maximum AMOUNT that a non-breaching party can request as damages.  Bruno is a stuntman working on a movie for Sony Pictures. Bruno is widely knows as the best motorcycle stuntman in the business. He has been in the business for years, and the best lawyers in the industry negotiated his contract. Bruno’s employment contract includes a limitation of liability clause that states that Sony Pictures is only required to pay nominal damages if Bruno is injured while filming. Bruno performs a stunt, but is injured by the reckless act of another Sony Pictures employee. If Bruno sues Sony Pictures for damages, will the court likely enforce the limitation of liability clause? A. Yes B. No A. Exculpatory causes will only be enforced if it is equal bargaining power B. Bruno and Sony pictures are equally bargaining power which would allow court to enforce limitation of liability clause

Part 2: Commercial Contracts in an International Setting Chapter 16 pp. 356 – 370 & Chapter 13 p. 321 International Contracts Clauses that EVERY International Contract should contain:  Choice of Language Clause  Forum Selection Clause International Contracts-- Clauses that EVERY International Contract should contain: CHOICE OF Law

Optional Clause that many International Contracts contain:  Arbitration Clause:  The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral awards (commonly referred to as the “New York Convention”) is an international convention on the enforceability of arbitration clauses in international contracts.  Over 100 countries have implemented the convention.  Convention requires arbitration IF:

1. 2. 3. 4.

Parties entered into a WRITTEN agreement to arbitrate; AND The agreement stipulates arbitration will occur in a signatory country; AND The agreement arises out of a commercial legal relationship; AND At least one party to the contract is NOT a U.S. citizen.

The Statute of Frauds in INTernational Sales Contracts: Convention on Contracts for the International Sale of Goods (CISG):  Governs international sales contracts between citizens of countries that have ratified the CISG;  NO Statute of Frauds  ALL contracts international sale of goods contract may be ORAL...