2nd Ed.

Chapter 11
Contracts and Sales:
Performance and Remedies
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May not be scanned, copied or duplicated, or posted
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Defenses

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11-1 May not be scanned, copied or duplicated, or posted

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Defenses: Capacity
• 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

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11-2 May not be scanned, copied or duplicated, or posted

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Defenses: Capacity
• 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

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11-3 May not be scanned, copied or duplicated, or posted

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Capacity, Necessities and
Parents
• Case 11.1 Yale Diagnostic
Radiology v. Estate of Fountain
(2003)
– What was the nature of the medical care?
– Why was there money available for
payment?
– Why does the court see unfairness in
excusing the minor and the minor’s parent?

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11-4 May not be scanned, copied or duplicated, or posted

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Defenses: Mental
Capacity
• 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
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11-5 May not be scanned, copied or duplicated, or posted

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Misrepresentation
• 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)
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11-6 May not be scanned, copied or duplicated, or posted

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Reliance
• means that a person pursues some
course of action because of his faith in
the assertion made to him.
• There must have been a causal
connection between the assertion and
the complaining party’s decision to
enter the contract.

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11-7 May not be scanned, copied or duplicated, or posted

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• If the complaining party (1) knew that
the assertion was false or (2) was not
aware that an assertion had been
made, there is no reliance.

© 2013 Cengage Learning. All Rights Reserved.

11-8 May not be scanned, copied or duplicated, or posted

to a publicly accessible website, in whole or in part.
Fraud
• 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

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11-9 May not be scanned, copied or duplicated, or posted

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Fraud
• Fraud: The Failure to Disclose Material
Information Can Be Fraud or
Misrepresentation
• Case 11.2 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?
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11-10 May not be scanned, copied or duplicated, or posted

to a publicly accessible website, in whole or in part.
Duress
• Duress – Contract Voidable
– Physical force or threats
– Party is deprived of a meaningful choice
– Has right of rescission
– Voidable
• Case 11.3 A.V. ex rel Vanderhye v.
iParadigms, LLC (2009)
– Against whom would the claim of duress be
made?
– Why can the school require the use of the
software?
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11-11 May not be scanned, copied or duplicated, or posted

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Undue Influence
• Undue Influence –Contract
Voidable
– Must have confidential relationship
• Attorneys/clients
• Elderly parents

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11-12 May not be scanned, copied or duplicated, or posted

to a publicly accessible website, in whole or in part.
Illegality – Public Policy
• Illegal Subject Matter
– Contract is void
– Contracts in violation of criminal
statutes
• Examples: Contract to have someone
killed; contract to pay for a vote

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11-13 May not be scanned, copied or duplicated, or posted

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Illegality – Public Policy
• 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

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11-14 May not be scanned, copied or duplicated, or posted

to a publicly accessible website, in whole or in part.
Illegality – Public Policy
• 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

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11-15 May not be scanned, copied or duplicated, or posted

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Contract Performance
• When Performance is Due
–Conditions precedent
–Conditions concurrent
–Conditions subsequent

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11-16 May not be scanned, copied or duplicated, or posted

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Contract Performance
• Standards for Performance
– Complete performance is required
• Substantial performance allowed
in contract cases
– Substantial Performance =
Nonmaterial Breach

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11-17 May not be scanned, copied or duplicated, or posted

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Contract Performance
• E-Commerce: Payments
– Credit Cards
– Digital Cash
– Person-to-Person Payment (or
PayPal)

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11-18 May not be scanned, copied or duplicated, or posted

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Performance: Excuse
• 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

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11-19 May not be scanned, copied or duplicated, or posted

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Performance: Good Faith
• Case 11.3 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?

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11-20 May not be scanned, copied or duplicated, or posted

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Substitute Performance
• 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
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11-21 May not be scanned, copied or duplicated, or posted

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Contract Remedies
• 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
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11-22 May not be scanned, copied or duplicated, or posted

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Contract Remedies
• Types of Damages:
– Liquidated damages
• Parties agree on damage amount in advance
– Consequential damages
• Damages experienced in relation to third
parties
• Late fees or loss of income for delays

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11-23 May not be scanned, copied or duplicated, or posted

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Third Party Rights
• 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
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11-24 May not be scanned, copied or duplicated, or posted

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Third 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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11-25 May not be scanned, copied or duplicated, or posted

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International Issues
• 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
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11-26 May not be scanned, copied or duplicated, or posted

to a publicly accessible website, in whole or in part.