Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning
Chapter 14Contracts and Sales:
Performance and Remedies
Its Legal, Ethical, and Global Environment
MARIANNE M. JENNINGS
7th Ed.
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DefensesDefenses
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• Both parties to a valid contract must have capacity, which includes age (18) and mental capacity.
• Age Capacity.– In most states age is 18.– Before that, the party is an infant or
minor.
Defenses: CapacityDefenses: Capacity
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• Capacity – Age. – Contracts are voidable—minor can get out at
his/her option.– Liable in quasi-contract for necessaries.– Some exceptions—student loans; military
service.• Case 14.1 Schmidt v. Prince George’s
Hospital (2001).– Did the minor consent?
Defenses: CapacityDefenses: Capacity
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• Person understands contracts are enforceable and significance of legal documents.
• Understands contracts involve costs and litigation.
• If declared legally incompetent-contracts are void!
• Otherwise, if no legal capacity, contracts are voidable.
Defenses: Mental Defenses: Mental CapacityCapacity
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• Elements:– Misstatement of a material fact.– Reliance.– Damages.
• Remedy can be rescission-contract is set aside.
• Must have been material.• Cannot be sales puffing (opinion).
MisrepresentationMisrepresentation
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• Elements:– Knowing and intentional use of false
information.– Knowing and intentional failure to disclose.– Many states have statutes exempting the
disclosure of a murder or AIDS victims as previous owners or residents.
• However, if there is an inquiry by the potential buyer, the information cannot be withheld.
FraudFraud
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• Fraud: The failure to disclose material information can be fraud or misrepresentation
• Case 14.2 Reed v. King (1983).– What does Mrs. Reed need to establish to be
entitled to recession and damages?– Would the information about the house make a
difference to you in making a buying decision?
FraudFraud
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• Duress – Contract Voidable.– Physical force or threats.– Party is deprived of a meaningful choice.– Has right of rescission.– Voidable.
• Undue Influence –Contract Voidable.– Must have confidential relationship.
• Attorneys/clients.• Elderly parents.
Duress – Undue Duress – Undue InfluenceInfluence
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• Illegal subject matter.– Contract is void.– Contracts in violation of criminal
statutes.• Examples: Contract to have someone
killed; contract to pay for a vote.
Illegality – Public Illegality – Public PolicyPolicy
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• Contracts in violation of licensing statutes must be competency-based as opposed to revenue-raising for contracts to be void.
• Contracts in violation of usury laws charging interest in excess of statutory maximum.
Illegality – Public Illegality – Public PolicyPolicy
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• Contracts in violation of public policy.– Exculpatory clauses—full liability
elimination is generally invalid.– Covenants not to compete must be
reasonable in time and geographic scope.
– Unconscionable contracts.
Illegality – Public Illegality – Public PolicyPolicy
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• Case 14.3 Water v. Min Ltd. (1992).– What are the possible defenses to this
contract?– What made the contract
unconscionable?– Is there any criminal conduct here?
DefensesDefenses
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• When is Performance Due.– Conditions precedent.– Conditions concurrent.– Conditions subsequent.
Contract PerformanceContract Performance
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• Standards for Performance.– Complete performance is required.– Substantial performance allowed in
contract cases.• Substantial Performance = Nonmaterial
Breach.
Contract PerformanceContract Performance
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• E-Commerce: Payments.– Digital Cash.– Digital Wallets.– Virtual Points.– Person-to-Person Payment.– Virtual Escrow.– Virtual Credit Card.
Contract PerformanceContract Performance
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• When Performance is Excused.– Impossibility—contract cannot be performed
• Example: Cannot build house if the land is washed away.
– Commercial impracticability—UCC-2-615. • Basic assumptions parties made are no longer
true.• Can protect themselves by putting in force
majeure clause—covers problems such as wars, embargoes, depressions.
Performance: ExcusePerformance: Excuse
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• Case 14.4 Sons of Thunder, Inc. v. Borden, Inc. (1997).– What impact does “good faith” have on
termination of a contract?– What are the damages when there is a
lack of good faith in the termination of a conduct?
Performance: Good Performance: Good FaithFaith
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• Novation.– Two original parties agree, along with
third party, to substitute one party for another.
• Accord and Satisfaction– Agreement reached to discharge a
disputed obligation.
Substitute Substitute PerformancePerformance
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• Types of Damages:– Compensatory—put party in same
position they would have been in without the breach.• Example: Sales—buyer has to buy car for
$7,000 as opposed to original $6,000—gets $1,000 in damages.
– Incidental damages, e.g., cost of finding the other car; attorney’s fees.
Contract RemediesContract Remedies
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• Types of Damages:– Consequential damages.
• Damages experienced in relation to third parties.
• Late fees or loss of income for delays.– Liquidated damages.
• Parties agree on damage amount in advance.
Contract RemediesContract Remedies
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• Assignments.– Original party to contract assigns his/her
benefits under the contract to another.• Example: Credit company sells credit contract for
present value to another who undertakes its collection.
– Assignee has same rights as original party.• Delegation.
– Transfer of obligations under contract.
Third Party RightsThird Party Rights
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Third Party RightsThird Party Rights• Third Party Beneficiary.
– Originally named in the contract to benefit from the contract.• Insurance beneficiaries are third party
beneficiaries.
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• Assuring Payment:– Use a bill of lading.
• Title to goods controlled.• Used in connection with letter of credit or
draft.– Letter of Credit issued by buyers bank to
seller.• Seller may draw on L/C to receive payment.
International IssuesInternational Issues
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• Assuring Performance:– Need force majeure clause.– Stability of currencies.
• Case 14.5 Lakeway Co. v. Bravos (1979).– How much did Lakeway lose once there was
devaluation.– How did the contract address the issue of
devaluation.
International IssuesInternational Issues