Business Law Chapter 13

Question 1

A breach may occur if one party:

Answer 1

1. expressly repudiates the contract (*When express repudiation occurs before the time agreed for performance, it is know as anticipatory breach).
2. simply fails to perform
3. makes it impossible for itself to perform (forces beyond control doesn’t count)

Question 2

Two types of failure of performance:

Answer 2

Substantial performance: performance that does not comply in some minor way with the requirements of the contract. (In this case, if the promisor already performed most of the obligations, the promise can’t seize upon a trivial failure of performance to avoid its own obligations)

Mistakes in performance: under circumstances that one paid the performance to the wrong party, it is still considered failure of performance to the original signer of the contract. They will have to perform again to avoid breaching of contract. However, the third party that received unfair benefit will need to repay the benefit they received by mistake (restitution).

Question 3

What happens if one of the 3 reasons for breach occurs

Answer 3

In the breach situations, the other party must CHOOSE to discharge the contract if they wish to (a discharge does not happen automatically) by INFORMING the other party that they are treating the contract as immediately terminated and is reserving its rights to sue for damages for breach.

Question 4

The non-breaching party loses the option to discharge under two circumstances:

Answer 4

1. If they proceed with the contract anyways
2. If they received the benefit of the contract, and only learned the breach after the other party’s performance is already completed.

Regardless of whether the contract is discharged or not, the non-breaching party can still claim damages.

Question 5

Minor Breach vs. Major Breach

Answer 5

Minor Breach: a breach of a non-essential term (warranties) of a contract or of an essential term in a minor respect. (ie, deliver 995 bags of chips for an order of 1000)

Major breach: A breach of the whole contract or of an essential term (conditions) so that the purpose of the contract is defeated. (ie, deliver a car with a different colored interior)

Question 6

Exemption Clause

Answer 6

The purpose of exemption clause is to protect companies from potential liabilities for breaching of contract.
A clause that exempts a party from liability.

Question 6

Three circumstances when a court will refuse to apply exemption clause:

Answer 6

1. Interpretation: If clause does not apply to circumstance. Ambiguities are interpreted against the drawing party=who drew the contract, because they had chance to make it clear and failed.
2. Unconscionable clauses: If clause was unconscionable at time of contracting … stronger party took advantage of weaker
3. Public policy & interest: If there is public policy reason against enforcement

Question 7

Remedies for Breached Contracts (3)

Answer 7

1. Damages
2. Equitable Remedies
3. Quantum Meruit

Question 8

Prerequisites to claim damages (2)

Answer 8

1. Loss must flow from the breach: must be in limits of what parties expected as a consequence of failure to perform. Can’t be an unusual or unexpected consequence as a result of failure to perform. Decision is based on when the contract is formed and not at the time of breach.
2. Mitigation of damages: action of injured party to reduce the extent of loss caused by other party’s breach (can’t over claim damages or make damages worst…injured party needs to demonstrate that it tried to make the best of the bad situation)

Question 9

Measuring Damages

Answer 9

1. Liquidated damages- an amount agreed on to be paid in damages by a party to a contract if it should commit a breach (this is to provide economic certainty). It has to be a genuine attempt to anticipate consequences of breach.
   Penalty clause: If found to be a penalty clause (a term specifying an exorbitant amount for breach of contract) which is intended to frighten a party to perform, the court will disregard it and award damages to the frightened party.
2. Nominal damages-used by the court to acknowledge a breach of contract where there is no real loss experienced by the non-breaching party.

Question 10

Types of Damages (5)

Answer 10

1. expectation damages
2. Consequential damages
3. General damages
4. Reliance damages
5. Punitive damages

Question 11

expectation damages

Answer 11

expected gross benefit of the contract-injured party’s costs of performing. It is the amount awarded for breach of contract based on expected benefits or profits (ie, limited edition baseball)

Question 12

consequential damages

Answer 12

secondary losses incurred by the non-breaching party that were foreseeable at the time of contracting. (ie, A sell parts of machine to B, delayed delivery, B can’t sell his whole machine to C. A responsible for B’s lost contract with C).

Question 13

General damages

Answer 13

non-monetary harm arising from breach (can’t be measured in monetary terms) but injured party still should be compensated. Court decides amount.

Question 14

Reliance damages

Answer 14

an alternative to expectation damages. costs of expenditures and wasted effort reasonably made in preparation for performance. (compensate for wasted time, effort, and expenses preparing, ie, a client cancels last minute on a contract with a management consultant who spent two month preparing customized material for the client. Consultant will be compensated for the lost effort, time and expenditure.)

Question 15

Punitive damages

Answer 15

punishment for malicious or bad faith behavior of the breaching party. (ie, insurance company refuse to pay for senior house’s fire damage, but sue them for arson.)

Question 16

Challenges in measuring damages

Answer 16

Mental anguish: courts recognize shock, humiliation, strife in tort law. In contract law courts are recognizing mental distress caused by a breach. Awarded based on whether it was reasonably foreseeable at the time contract was created.

Wrongful dismissal: when employee is fired mental anguish occurs, esp. if was there for long time. Plaintiff has to prove psychological damages.

Lost holidays: contracts for experiential benefits} it’s not enough to reimburse vacation, but also pay for anguish of wasted vacation, inconvenience, disappointment etc.

Question 17

Equitable Remedies

Answer 17

non-monetary remedies given only when damages alone will not adequately compensate for a loss. They are at the court’s discretion. Court decides whether to go beyond common law remedy for damages.

Question 18

3 types of equitable remedies

Answer 18

1. specific performance- an order of a specific act
2. injunction- a court order restraining a party from acting in a particular manner. The court normally order the contract to include a negative covenant (not to do sth). (Ie, a landlord can ask for an injunction for the renter not to use the space for a night club)
   - interlocutory injunction= temporary injunction-to restrain immediate harm
3. rescission-setting aside or rescinding a contract in order to restore the parties as nearly as possible t their pre-contract positions. (ie, decision to return defective goods instead of suing for cost of repair or replacement)

Question 19

Quantum Meruit

Answer 19

the fair amount a person deserves to be paid for benefit conferred. (common in construction contracts. The partially performing party may ask the court to assess the fair market value of the work already done and thereby receive compensation on a quantum meruit basis. Assessment based on benefit, not the cost of doing work).