Welcome

Business Law
Lecture Topic: Contracts (2)
 Defenses to Contract
Formation/Enforcement
• Fraud / misrepresentation
• Capacity
• Duress
• Mistake
• Statute of Frauds
• Statue of Limitations
 Capacity
Limits or bars a person from engaging in contracts for
incapacity or incompetence.
Examples:
- Age (below the age of consent)
- Insanity
- Intoxication (raises question of a knowing offer or
accept)
Choice of Remedy:
- void the contract -
ask court not to enforce agreement
- affirm the contract -
ask court to enforce contract
 Duress
• Threat of harm made to compel one to do something
against their will or judgment
1. Physical coercion
2. Economic coercion
• EX: one party refuses to release goods belonging to
other party until other party enters into an
unfavorable contract
• Generally contract can be voided if the agreement is
also unfair
• To be distinguished from simple “hard bargaining”
 Mistake
• Unilateral mistake - one party to a contract is mistaken
on terms or subject-matter
– Uphold contract unless non-mistaken party was aware
of mistake, tried to take advantage
• Mutual mistake - both parties to a contract are mistaken
on terms
– If both parties are intent on contract, court makes
interpretation
– If both parties were equally mistaken contract is void
– no “meeting of the minds”
Generally contract must be unfair so that it shouldn’t be
enforced
 Statute of Frauds
• Contract invalid unless there is some writing (written
evidence) signed by party to be bound
• Typical contracts falling under Statute of Frauds:
1. contracts not to be performed within one year
2. contracts for over certain amount (varies by
jurisdiction)
3. contracts to sell real property
• Statute of Frauds prevents perjured testimony about
important contracts
• Issue usually is often in unperformed contracts
– Part performance usually removes a transaction
from the Statute of Frauds
 Statute of Limitations
• Statute, sets maximum period that legal
proceedings may be initiated
• Civil law system term: period of prescription
• Policy:
– Ensures claims are quickly litigated when
evidence is fresh
– People can rest assured matters are ended
Example: Oral contracts 3 years
Example: Written contracts 6 years
 Remedies to Excuse Performance of
Contract
Traditional equitable remedies based on notions
of fairness
Impossibility of Performance
Frustration of Purpose
Waiver
Unconscionability
These remedies are asking court to “rewrite
agreement”
 Impossibility of Performance
• Excuse for non-performance based on change in
circumstances that makes contract performance
literally impossible
– Performance must not be difficult or costly, must
be no way for it to be accomplished
• Ex: house or car for sale is unintentionally
destroyed before conveyance
• Ex: tsunami destroys hotel, unable to serve
booked guests
Rationale: Changed circumstances were
underlying condition essential to contract
performance
 Frustration of Purpose
– Unforeseen event unanticipated at contract
formation which makes performance impossible,
illegal or vastly different from original intention
– Contract has little to no value to one party
• Ex: one party to contract dies and that party
was necessary to contract performance
• Ex: Law is passed which makes performance
illegal
 Waiver
• One party has indicates by words or
conduct they will not require a contract
provision to be observed
–Party is prevented from insisting that
provision which was ignored be followed
• Remember: “If You Snooze You Lose.”
 Exculpatory Clauses
Unconscionability - defense against enforcement of a
contract based on terms unfair to one party
Factors:
• Boilerplate language a.k.a adhesion contracts
• Lack of choice or superior bargaining ability (a take-
it-or leave it situation)
• Limitation of liability (especially torts)
• Remedy - Court may refuse to enforce the contract
or refuse to enforce offending clause
 Rules of Contract Interpretation
Numerous concepts for construing contract meaning
Common examples:
• Four Corners of Instrument/ Parol Evidence Rule -
Contract language is clear terms comes only from
written provisions of contract (Merger Clause?)
• Contract Construed Against Drafter - Ambiguities
caused by contract drafter must be resolved against
drafter
• Plain Meaning - Words understood as ordinary by
usage, definition given popular sense unless used in
technical sense or with contractually defined
meaning
 Rules of Contract Interpretation
• Usage of Trade - Words interpreted as usually
understood by persons in profession or business to
which they relate, unless used in different sense
• Course of Performance - Words in contract are
interpreted as previously understood by the parties in
course of current contract performance
• Prior Dealings - Words in a contract are interpreted as
previously understood by parties in course of previous
contract performance
 Additional Contract Aspects

• Accord and Satisfaction

• Assignment and Delegation
 Assignment and Delegation
– Ordinarily, only contracting parties have rights/duties with
respect to contracts
• Privity of contract: a contract cannot confer rights or
impose obligations upon any person who is not party to
the contract
– Similar concepts:
• Assignment: transferring one’s rights under an agreement
to another
– Example: I assigned my right to receive payments
under a contract to a finance company
• Delegation: transferring one’s obligations under an
agreement to another
– Example: As main building contractor I delegate the
performance obligations under contract to a
subcontractor
 Assignment
– Assignment - a party to the contract (assignor) transfers
rights to some third party (assignee)
• Common limits to assignment:
–Often assignment must be in writing
–Contracts can forbid assignment
• Examples:
• Assignment of wages
• Assignment of accounts receivable
• Transferable bill of lading: an assignment of title
– Ordinarily, only contracting parties have rights/duties
with respect to contracts
• Privity of contract
 Assignments
• Effect: Assignee has the right to demand
performance from original party (Obligor) to
contract
–Assignee “stands in the shoes” of assignor:
obligor can raise any defense to contract that
obligor could have raised against assignor
–Assignor usually must cooperate, assist in any
enforcement action by assignee

18
 Delegation of Duty
• Delegation - party to contract is freed from duties by having 3rd
party perform
• Delegating duty does not relieve party making delegation
from liability if party does not perform
• Duties that usually may not be delegated:
– When performance depends on personal skills or talents of
original obligor (Justin Bieber can’t delegate his concert
contract to you)
• Rationale: 3rd party performance will materially vary
– When special trust has been placed in the obligor
• Ex: Corporate officer/executor can’t delegate performance
– When the contract expressly prohibits delegation
 Accord and Satisfaction
• Purchase of release from debt obligation
– Payment is typically less than what is owed
• Accord is agreement to discharge original
obligation is separate contract from original
obligation
– Satisfaction is payment (consideration) which
binds parties to agreement
• Example: composition with creditors or
negotiation to pay past due account
• Often acceptance of partial payment intended as
accord will release full obligation
Issues in Failure to Perform Contractual
Duties
• Material Breach
• Substantial Performance
• Anticipatory Repudiation
 Material Breach of Contract
• Failure to perform material portion of contract
• Effect:
– Discharges non-breaching party's duty
– Creates right of action for damages
• Common Damages
–Expection i.e. lost profits
–Compensation
–Specific performance
 Material Breach of Contract
• Suggested definitions of material :
– Substantially harms the innocent party
• Significance, as opposed to trivial non-performance
– Material portion is one which goes to the “heart of the
bargain”
• “Knowing I would not get this promise, I would not
have made this agreement”
– Nature and consequences of breach in context of
contract
• Not receiving 1 promise lowers value of other
contract promises received
 Substantial Performance
• Partial breach or immaterial breach
– Slight or partial failure in performance which is not
material
• Does not excuse performance of non-breaching party
– Creates right of action for damages
• Common factors:
– How much benefit has the promisee received?
– Can owner use building/goods for intended purpose?
– Can the promisee be compensated with money
damages for any defects?
– Did the promisor act in good faith?
• Good Faith: honest effort to satisfy contract
 Anticipatory Repudiation
• Recognition of failure to perform contract
– Unequivocal indication that party will not
perform when performance is due
• Anticipatory breach gives non-breaching party
option to treat breach as immediate, terminate
contract, sue for damages (without waiting for
breach to actually take place)
• Aggrieved person has a duty to mitigate, or
reduce damages, by reasonable means
 Equitable Remedies
• Rescission - canceling a contract and returning
the parties to their pre-contract position
– Recession requires restitution
• Restitution - returning goods, property, or
money previously transferred in order to restore
the non-breaching party to pre-contract position
• Reformation - a remedy allowing the contract to
be re-written to reflect the true intent of the
parties
 Equitable Remedies
• Specific Performance - requiring the breaching party
to perform exactly as required
– Granted when money damages would be an
inadequate remedy
– Subject matter of the contract is unique
• Often not common: “monitoring” performance
is difficult
 Consequential Damages
• Damages resulting from special circumstances beyond
the contract itself
– Damages flow from consequences of breach
• Commonly damages must be the foreseeable result of a
breach of contract
– Parties must have known at the time contract was
formed that special circumstances existed and that a
breaching party would incur additional loss on breach
of the contract
• Hadley v Baxendale Rule

28
 Hadley v. Baxendale (1854)
• Issue: whether Hadley (the mill owner) could
recover for consequential damages— lost
profits—caused by Baxendale’s delay in
delivering a broken crankshaft Baxendale was
repairing
• Court held that Hadley could recover only if
Baxendale knew or should have known that mill
would have to be shut down while crankshaft
was being repaired
– Was Baxendale aware of this?
29
 Mitigation of Damages
• In a breach of contract claimant should use
reasonable efforts to avoid losses suffered
• Defendant should not be held liable for damages
which plaintiff could have reasonably avoided
– Claimants are not permitted to stand aside and
let damage accrue with view that it will simply
be recovered from defendant
• Mitigation of damages must be done if possible to
avoid economic waste
Remember: There are no answers only
arguments…………
• The Marrynot Hotel contracts with Bert’s Signs for signage
in front of their hotel. Bert agrees to build and erect a
large 4 x 6 meter sign bearing the logo of the Marrynot
Hotel above the hotel’s front entrance. The sign has neon
lighting spelling out the hotel’s name and is painted in the
hotel colors. Besides building and installing the sign, Bert’s
Signs agrees to maintain it for the contract period.
• Marrynot Hotel agrees to pay Bert’s Signs $500 each
month for the sign. The contract period is 5 years.
• Six months after the sign is installed someone throws a
tomato on the sign. The dried tomato leaves a stain on the
sign. Marrynot Hotel contacts Bert’s Signs to come and
clean the sign.
• Bert’s Sign’s do not respond for two months and do
nothing.
 Steve Bushman owns a game park, home to many wild
animals.
Marlin Derkins has a zoo and approaches Steve Bushman
about buying some wild cats from Bushman’s game park.
Derkins and Bushman enter into a contract which calls for
delivery of 5 animals. The contract provides that Marlin Derkins
will pay Steve Bushman $5,000 for each animal delivered at the
time of delivery. The contract recites all animals will be “Wild
Felines”. The delivery date is whenever Bushman can catch an
animal.
For the first delivery Bushman sends Derkins a 300 kilo
lion which he has captured. Happy, Derkins pays the $5,000. A
month later, Bushman captures a wild 100 kilo jaguar and he
ships it to Derkins who pays Bushman $5,000.
Bushman goes back hunting, but a spell of dry weather
makes hunting difficult. All Bushman can catch is a wild cat
weighing 1 kilo. He sends it to Derkins who refuses to accept the
cat or pay the fee. Bushman declines to hunt for more cats.
Bushman sues Derkins for damages, Derkins counter
sues. Who should win and under what theory?
• One day last February, Pam went skiing on Devil
Mountain. She had never skied before so she went to
the Rental Shop and rented a pair of skis.
• On the back of the rental form, in small letters is stated:
Skiers are reminded never to ski beyond their ability.
Devil Mountain assumes no responsibility whatsoever
for injuries that occur while skiing.
• Pam got on the chair-lift and went to the top of the
mountain the famous Sneaky Slope.
• Snow had covered a sign warning skiers to avoid Sneaky
Slope as it was dangerous.
• Pam sailed down the Sneaky Slope and soon fell,
breaking her leg in 4 places.
• Pam sues Devil Mountain. Can she win? Why or why
not?
 Acme Farms is one of many local farms which
sell high quality apples. Somsak is a baker and
makes a contract with Acme Farms to buy 1000
apples for $200 a bushel, which is the average
price for apples at that time.
The contract specifies that Somsak must have
the apples by February 10 so that he can make his
specialty apple pies to sell for Valentines’s Day.
On February 8, Acme Farms informs Somsak
that they will not be able to meet his order.
On February 15, Somsak files suit against
Acme Farms for breach of contract claiming lost
profits as he was not able to fulfill the orders on
Valentines’s Day owing to the non-delivery by
Acme.
What damages should Somsak receive?
THANK YOU
FOR YOUR
ATTENTION