Defenses, Remedies/Damages, and Third-Party Issues

Question 1

What are the defenses to a Breach of Contract claim?

Answer 1

1. Incapacity
2. Misrepresentation
3. Duress

Question 2

What are the two types of incapacity?

Answer 2

1. Infancy/Minors

2. Mental Incompetence

Question 3

What is infancy or minority?

Answer 3

Infancy is the time period before a person reaches the age of majority, which is the age of 18.

Question 4

What is the general rule regarding infancy?

Answer 4

Minors may enter into a contract, but the contract is voidable at the option of the minor.

Question 5

What is the power of avoidance/disaffirmance?

Answer 5

The minor has the option of voiding the contract. Also, the contract in regards to all others is still enforceable.

Question 6

What are the obligations of the minor upon avoidance?

Answer 6

The minor must return the goods that are still in his possession when he disaffirms, but he is not liable for damage, wear and tear, or any other depreciation in value of the goods.

If the minor is not in possession of the goods because he sold them, then the minor will be obligated to turn over the proceeds of the sale.

If the contract was for something non-returnable (services), then the minor is under no further obligation to return or compensate the other party.

In a minority of jurisdictions, the minor must make the other party whole, such as, depreciation, damages, or compensating for services rendered.

Question 7

What is ratification?

Answer 7

For most contracts that minors enter into before reaching the age of majority, the minor may ratify that contract upon reaching the age of majority.

To ratify, the minor must make any manifestation to the other party of an intention to be bound by the original contract.

Silence is not enough. The minor must use the services or goods.

Question 8

What are necessaries?

Answer 8

They are those items considered necessary for survival. This includes food, clothing, shelter, and medical care. Fact-specific analysis.

Question 9

What is the rule for a minor’s necessaries?

Answer 9

The minor’s contract is voidable, but the other party has the right in quasi-contract to recover for the reasonable value of the goods or services provided.

Question 10

What is misrepresentation by a minor?

Answer 10

In a minority of jurisdictions, if a minor misrepresents his age, the minor is equitably estopped from proving his real age.

Question 11

What is mental incompetence?

Answer 11

If a person was mentally incompetent at the time of contract, the contract is void or voidable depending on the way incompetence is proven.

Question 12

What are the types of incompetence absent an adjudication of incompetence?

Answer 12

1. Cognitive defects - A person will be deemed mentally incompetent and lacking capacity to enter a contract if the person is unable to understand in a reasonable manner the nature and consequences of the transaction.
2. Volitional defects - Mental incompetence can be established if: a. a person is unable to act in a reasonable manner in relation to the transaction; and b. the other party has reason to know of this condition.

Question 13

What are the legal consequences of the mental incompetence defense?

Answer 13

If there has been an adjudication of mental incompetence, contracts are altogether void.

If there has been no adjudication, the contract is voidable at the option of the incompetent party.

An incompetent party may ratify the contract if he becomes competent later. This can be done with oral or written manifestation to be bound by the original contract.

If the incompetent party disaffirms the contract and has received some benefit under the contract, then he is required to make the other party whole by paying the reasonable value of the goods or services.

As to necessaries, the rules are the same for incompetent parties as for minors.

Question 14

What are the types of misrepresentation?

Answer 14

1. Fraudulent misrepresentation
2. Non-fraudulent misrepresentation.
3. Fraudulent nondisclosure

Question 15

What are the elements of fraudulent misrepresentation?

Answer 15

1. A misrepresentation:
   The defendant must have made an assertion that was inconsistent with existing facts. This includes oral or written misrepresentations, fraudulent conduct such as concealment, half-truths. Misrepresentations are not broken promises or opinions/guesses. However, professional opinions are treated as a representation of the facts.
2. Scienter:

The person must know it to be false, or know that he does not know of the falsity. This includes an intent to mislead; that is, the party made the assertion a. for the purpose to mislead, or b. know it to be substantially certain to mislead.

3. Materiality:

Objective materiality - A misrepresentation is objectively material where such an assertion is likely to induce a reasonable person to enter into a contract.
Subjective materiality - a misrepresentation is subjectively material if the party making the assertion had reason to know that it was likely to induce the particular aggrieved party into entering the contract.

4. Reasonable reliance

Question 16

What is non-fraudulent misrepresenation?

Answer 16

This is negligent and innocent misrepresentation.

1. A misrepresentation
2. Materiality of the misrepresentation
3. reasonable reliance
4. Negligent - The defendant would have known the assertion was false had he exercised reasonable care. Innocent - The defendant made an assertion not in accord with existing facts.

Question 17

What is fraudulent nondisclosure?

Answer 17

The defendant is silent when he had a duty to disclose.

1. Nondisclosure was material to the contract.
2. Reasonable reliance
3. A duty to disclosure and a failure to fulfill it.

There is a duty where:

1. Relationship of trust and confidence
2. Party made an assertion that was true at the time of making but has been rendered untrue
3. If the obligation of good faith would require disclosure

Question 18

What are the remedies for misrepresentation?

Answer 18

For all types of misrepresentation,

1. Use as a shield - All can be used as defenses to a breach of contract claim.
2. Use as a sword - All can be used in a tort action for rescission and for damages from reliance.

For fraudulent and non-fraudulent misrepresentation, a party may live with the contract and sue for the benefit of the bargain.

For fraudulent misrepresentation only, a party may seek punitive damages.

Question 19

What are the elements of duress?

Answer 19

1. a threat
2. that is wrongful in nature.
3. no reasonable choice but to succumb to the threat.

Question 20

For duress, when is there a threat?

Answer 20

A threat is a manifestation of intent to inflict harm on the other person, made in words or by conduct.

Question 21

For duress, when is a threat wrongful in nature?

Answer 21

There are three circumstances:

1. if what is threatened is a crime or tort.
2. if what is threatened is a criminal prosecution or bad faith civil process.
3. if what is threatened is a bad faith breach of a contract.

A good faith breach is a demand that is due to increased burden caused by unanticipated circumstances.

Question 22

For duress, when is there no reasonable choice but to succumb to the threat?

Answer 22

In case of economic duress, there is no reasonable choice:

1. when there are no adequate and reasonably priced substitutes for the services or goods.
2. when the threatened breach would cause the aggrieved party to break his own contracts.
3. when the alternative of acquiescing to the threat and then suing for damages is inadequate to redress substantial harms to the aggrieved party.

Question 23

What are the legal consequences of a successful duress defense?

Answer 23

Contracts made under physical compulsion are void.

Contracts entered into under other forms of duress are voidable at the option of the aggrieved party.

The aggrieved party is entitled to restitution of any benefits conferred and required to return excess value of benefits.

Question 24

What are the elements of undue influence?

Answer 24

1. Unfair persuasion used:

discussion of the transaction at an unusual or inappropriate time,
consummation of the transaction at an unusual place,
insistent demands that the transaction or business be finished immediately,
extreme emphasis on the untoward consequences of delaying the transaction,
the use of multiple persuaders against the target of persuasion,
absence of third-party advisors to the target of persuasion,
statements that there is no time to consult financial advisors or attorneys.

2. The other party was vulnerable to such persuasion:

Where the mental infirmity is due to age or illness.
Where the vulnerability is due to some recent trauma or event
Where there is a relationship of trust or confidence.

Question 25

What are the legal consequences of a successful undue influence defense?

Answer 25

Contractual obligations are voidable at the option of the aggrieved party.

The aggrieved party is entitled to restitution but must return excess benefits.

Question 26

What are the elements of unconscionability?

Answer 26

1. Procedural unconscionability

2. Substantive unconscionability

Question 27

What is procedural unconscionability?

Answer 27

The bargaining process that produced the contract in question created an absence of meaningful choice for the aggrieved party.

Such circumstance:

1. “Near miss cases” of other defenses.
2. Absence of bargaining power.
3. fine print terms.

Question 28

What is substantive unconscionability?

Answer 28

The contract terms are unreasonably unfavorable to the aggrieved party.

Such circumstances:

1. Grossly excessive price
2. Grossly disproportional consequences for a minor breach
3. Provisions binding on party but not the other
4. Provisions which are grossly unfair.

Question 29

What are the legal consequences of a successful unconscionability defense?

Answer 29

The courts may:

1. refuse to enforce the contract;
2. excise the offending clause and enforce the remainder of the contract; or
3. limit the application of the offending clause so as to avoid an unconscionable result.

Question 30

What are the contexts of a public policy defense?

Answer 30

1. Where the subject of the contract itself is specifically prohibited by law.
2. Where a contract is formed for purposes of committing a crime.
3. Where contract performance would constitute a tort.
4. Where the contract performance would violated certain values and freedoms designated by the state.

Question 31

What are the sources of public policies?

Answer 31

Legislation

Judicial decisions. These include policies based on:

1. moral and social values
2. economic considerations
3. protection of governmental processes and institutions.

Question 32

What happens when a defense of public policy is made?

Answer 32

The public policy defense is almost invariably invoked as a defense in an action by one of the parties seeking enforcement of a contract against the other, and when it is successful: the defendant wins, irrespective of whether he was the party who promised to perform the public policy violation or the party paying for it.

EXCEPTION: Where one party is much more egregiously in the wrong than the other party, it may be possible for the more innocent party to secure restitution of the benefits conferred.

The contract subject to the defense of public policy is voidable at the option of the defending party.

Question 33

What are the likely contexts for a public policy defense?

Answer 33

1. Non-compete agreements
2. sales of goods via bribery
3. sales of goods intended for unlawful use
4. liability limitation provisions
5. unlicensed goods or services

Question 34

What are monetary damages at common law?

Answer 34

1. Expectation Damages
2. Reliance Damages
3. Restitutionary Damages

Question 35

What are expectation damages under the common law?

Answer 35

This means the aggrieved party will be entitled to the amount hat will restore him to the position he would have been in had the contract been fully performed.

Question 36

What is the formula of expectation damages under common law?

Answer 36

Loss of value + any incidental and consequential costs - any payments received - any costs saved.

Question 37

What are the limitations on the Right to recover expectation damages at common law?

Answer 37

The aggrieved party may not be able to recover the full amount of expectation damages in the following situations:

1. Where the cost of performance greatly exceeds the market value of the performance;
2. Where expectation damages cannot be calculated with reasonable certainty;
3. Where damages are unforeseeable (Hadley rule - a breaching party will be liable for general damages (naturally flow) but not for special or consequential damages unless the breaching party knew or had reason to know)
4. Where damages can be mitigated.

Question 38

What are reliance damages at common law?

Answer 38

The measurement of damages for the reliance interest of an aggrieved party is calculated by determining the amount of money necessary to restore the aggrieved party to the position he was in prior to the contract.

Question 39

What is the formula for reliance damages?

Answer 39

Any expenditures made in preparation for performance or in actually performing - any loss which the breaching party can prove, with reasonable certainty, that the aggrieved party would have suffered if the contract was fully performed.

Question 40

What are restitutionary damages at common law?

Answer 40

The measurement of damages for an aggrieved party is the value of the benefits conferred on the breaching party during the course of the contract.

Question 41

What is the formula for restitutionary damages?

Answer 41

Courts will measure the restitutionary damages by either:

1. the reasonable value of the benefit conferred; or
2. the extent to which the other party’s property has increased in value because of the performance rendered.

Question 42

What are the limitations to restitutionary damages?

Answer 42

If the aggrieved party has fully performed under the contract, then the party is limited to expectation damages.

The aggrieved party can recover restitutionary damages through part performance or reliance.

Question 43

What is a liquidated damages clause?

Answer 43

A contractual provision that provide for damages of the parties’ choosing.

Question 44

When is a liquidated damages clause enforceable?

Answer 44

Such a provision is enforceable if the court finds it to be a valid liquidated damages clause, and unenforceable if the court finds that it constitutes a penalty.

Question 45

When is a liquidated damages clause valid?

Answer 45

The test contains three prongs:

1. Did the parties intend the clause to operate as a liquidated damages clause or a penalty?
2. Was the clause reasonable at the time of contracting in relation to the anticipated harm?
3. Was the clause reasonable n relation to the harm and losses that actually occurred due to the breach?

Question 46

What about anticipated vs. actual harm?

Answer 46

When a particular clause satisfies the second prong but not the third prong, the majority of courts hold that the clause is valid. A minority holds that the clause is an unenforceable penalty.

Question 47

What are the monetary damages under the UCC?

Answer 47

1. Seller’s Remedies

2. Buyer’s Remedies

Question 48

What are the Seller’s Remedies?

Answer 48

If a Buyer breaches, the seller is free to cancel the contract and to withhold delivery of any yet to be delivered goods. Also, the seller may recover damages.

If some or all of the goods have been delivered and accepted, the seller is entitled to collect the contract price for those goods.

If some or all of the goods have been been delivered (wrongful rejection/repudiation):

Seller Resells:
He can recover the difference between the contract price and resale price. The resale must be in good faith and in a commercially reasonable manner.

Seller Does Not Resell:
He can recover the difference between the contract price and market price.

Not matter if there is a resell, a seller is entitled to incidental damages, minus the amount of expenses avoided.

Lost Volume Sellers:
A lost volume seller is one whose supply exceeds the demand.
The UCC permits lost volume seller to recover the profit they would have made on the lost sale. To recover:
1. that he could have made the sale to both the breaching buyer and resale buyer;
2. that it would have been profitable for the seller to make both sales; and
3. that he probably would have made the additional sale to the resale buyer even absent the buyer’s breach.

Question 49

What are the Buyer’s Remedies?

Answer 49

If Buyer Covers:

His damage measure is the difference in the contract price and cover price. Cover must be in good faith and without unreasonable delay.

If Buyer Does Not Cover:

His damages are measured as the difference in the contract price and market price.

No matter if the buyer covers, he may recover incidental and consequential damages. His damages will be reduced by the amount of expenses avoided because of the breach.

If Buyer Receives Non-conforming Goods:

The Buyer may recover the difference in the value of the Goods contracted for and the value of the Goods received.

Question 50

What is UCC Section 2-703/

Answer 50

“Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates with respect to a part or the whole, then with respect to any goods directly affected and, if the breach is of the whole contract (Section 2-612), then also with respect to the whole undelivered balance, the aggrieved seller may:

(a) withhold delivery of such goods;
(b) stop delivery by any bailee as hereafter provided (Section 2-705);
(c) proceed under the next section respecting goods still unidentified to the contract;
(d) resell and recover damages as hereafter provided (Section 2-706);
(e) recover damages for non-acceptance (Section 2-708) or in a proper case the price (Section 2-709);
(f) cancel."

Question 51

What is UCC Section 2-709?

Answer 51

“(1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price:

(a) of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and
(b) of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing. (2) Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold. (3) After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated (Section 2-610), a seller who is held not entitled to the price under this section shall nevertheless be awarded damages for non-acceptance under the preceding section."

Question 52

What is UCC Section 2-706?

Answer 52

“(1) Under the conditions stated in Section 2-703 on seller’s remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this Article (Section 2-710), but less expenses saved in consequence of the buyer’s breach.

(2) Except as otherwise provided in subsection (3) or unless otherwise agreed resale may be at public or private sale including sale by way of one or more contracts to sell or of identification to an existing contract of the seller. Sale may be as a unit or in parcels and at any time and place and on any terms but every aspect of the sale including the method, manner, time, place and terms must be commercially reasonable. The resale must be reasonably identified as referring to the broken contract, but it is not necessary that the goods be in existence or that any or all of them have been identified to the contract before the breach.
(3) Where the resale is at private sale the seller must give the buyer reasonable notification of his intention to resell.
(4) Where the resale is at public sale:
(a) only identified goods can be sold except where there is a recognized market for a public sale of futures in goods of the kind; and
(b) it must be made at a usual place or market for public sale if one is reasonably available and except in the case of goods which are perishable or threaten to decline in value speedily the seller must give the buyer reasonable notice of the time and place of the resale; and
(c) if the goods are not to be within the view of those attending the sale the notification of sale must state the place where the goods are located and provide for their reasonable inspection by prospective bidders; and
(d) the seller may buy.
(5) A purchaser who buys in good faith at a resale takes the goods free of any rights of the original buyer even though the seller fails to comply with one or more of the requirements of this section.
(6) The seller is not accountable to the buyer for any profit made on any resale. A person in the position of a seller (Section 2-707) or a buyer who has rightfully rejected or justifiably revoked acceptance must account for any excess over the amount of his security interest, as hereinafter defined (subsection (3) of Section 2-711).”

Question 53

What is UCC Section 2-708?

Answer 53

“(1) Subject to subsection (2) and to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (Section 2-710), but less expenses saved in consequence of the buyer’s breach.
(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (Section 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.”

Question 54

What is UCC Section 2-710?

Answer 54

“Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach.”

Question 55

What is UCC Section 2-711?

Answer 55

“(1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (Section 2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid:

(a) "cover" and have damages under the next section as to all the goods affected whether or not they have been identified to the contract; or
(b) recover damages for non-delivery as provided in this Article (Section 2-713). (2) Where the seller fails to deliver or repudiates the buyer may also:
(a) if the goods have been identified recover them as provided in this Article (Section 2-502); or
(b) in a proper case obtain specific performance or replevy the goods as provided in this Article (Section 2-716). (3) On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them in like manner as an aggrieved seller (Section 2-706)."

Question 56

What is UCC Section 2-712?

Answer 56

“(1) After a breach within the preceding section the buyer may “cover” by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

(2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (Section 2-715), but less expenses saved in consequence of the seller’s breach.
(3) Failure of the buyer to effect cover within this section does not bar him from any other remedy.”

Question 57

What is UCC Section 2-713?

Answer 57

“(1) Subject to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the seller’s breach.
(2)Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.”

Question 58

What is UCC Section 2-714?

Answer 58

“(1) Where the buyer has accepted goods and given notification (subsection (3) of Section 2-607) he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller’s breach as determined in any manner which is reasonable.

(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.
(3) In a proper case any incidental and consequential damages under the next section may also be recovered.”

Question 59

What is UCC Section 2-715?

Answer 59

“(1) Incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.

(2) Consequential damages resulting from the seller’s breach include:
(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and
(b) injury to person or property proximately resulting from any breach of warranty.

Question 60

What is UCC Section 2-716?

Answer 60

“(1) Specific performance may be decreed where the goods are unique or in other proper circumstances.

(2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just.
(3) The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.”

Question 61

What is UCC Section 2-717?

Answer 61

“The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.”

Question 62

What are the equitable remedies?

Answer 62

1. Specific performance

2. Injunction

Question 63

What is specific performance?

Answer 63

It is an extraordinary remedy that is available only where a monetary award would be inadequate to grant relief to the aggrieved party.

Generally available:

1. Unique Items
2. Real Property

Generally unavailable:

1. Personal services
2. Ongoing cooperation between the parties.

Equity Considerations:

1. whether the aggrieved party has “clean hands;”
2. whether the terms of the contract are fair;
3. whether the terms of the contract in question are sufficiently definite;
4. whether performance by the aggrieved party can be reasonably assured; and
5. whether specific performance would be in the public interest.

Question 64

How does the UCC change the common law specific performance?

Answer 64

Liberalizes the uniqueness requirement:
1. The goods are unique or in other proper circumstances.

Liberalizes the “capable of immediate performance” requirement:
2. Even if there is required ongoing cooperation so long as the requisite inability of a party to cover can be established.

Question 65

What are injunctions?

Answer 65

They are orders by the court prohibiting the breaching party from taking particular action.

This is most common in the employment context.

Midterm relief:
A negative injunction will be available to prevent the employee from competing directly or indirectly with his former employer if the employee’s services are unique or extraordinary.

Post-Employment Relief:
A negative injunction with post-employment competition is determined by these factors:
1. Is there a significant business justification for enforcing post-employment restraints?
2. Is the scope of the non-compete clause reasonable in duration and geographical scope?
3. Is there an express provision?

Oklahoma Contracts Distinction - By statute in Oklahoma, a person who enters into a non-competition agreement with an employer, orally or in writing, is only prohibited from directly soliciting the sale of goods, services, or a combination of goods and services from the established customers of the former employer. Any other contractual provision between an employer and employee in violation of the statute is void and unenforceable.

Question 66

What are some other remedies?

Answer 66

1. Promissory estoppel - Courts will award either expectation or reliance damages.
2. Restitution and Unjust Enrichment

Question 67

When are there remedies from restitution and unjust enrichment?

Answer 67

A party who bestows benefits on another may seek to recover the value of those benefits in an action for restitution.

Question 68

What contexts do remedies for restitution and unjust enrichment arise?

Answer 68

1. Benefits Conferred under a Failed Contract - When a party bestows a benefit under a failed contract, the party may recover the value of the services or goods.
2. Benefits Conferred by a Breaching Party - The modern rule says that a breaching party may recover the amount of benefit that he conferred on the aggrieved party less any damages to the aggrieved party.
3. Emergency Benefits Conferred by a Health Care Professional - A person who bestows a benefit without request is considered a volunteer or officious intermeddler who is not entitled to recover. However, Doctors and other health care professions who provide emergency health care to a patient are entitled to the reasonable value of the services or goods.
4. Benefits Conferred by Mistake - A party who mistakenly confers benefits to another party is entitled to restitution under consideration of the following:
5. the blameworthiness of the error;
6. whether the recipient was aware of the error in time to prevent it, and
7. whether the recipient availed himself of the benefits at issue.

Question 69

What are agreed-to remedies?

Answer 69

Parties may contract out of the legal and equitable remedies available under the law.

These usually take two forms;

1. liquidated damages clause; and
2. provisions limiting or excluding damages (these are enforceable unless they are unconscionable. Personal injury limitation is prima facie unconscionable).

Question 70

Under the First Restatement, what are the types of beneficiaries?

Answer 70

1. Creditor beneficiary - When a promisee seeks a performance from the promisor that will benefit a third party, and the promisee’s purpose is to satisfy a debt or other obligation owed by the promisee to the third party.
2. Donee Beneficiary - When a promisee seeks a performance from the promisor that will benefit a third party, and the promisee’s purpose is to make a gift to that performance to the third party.
3. Incidental Beneficiary - Third parties who will benefit from a promisor’s performance as a practical matter, but who may not meet the test for creditor or donee beneficiaries.

The test to determine the difference is whether the promised performance is intended to benefit the third party beneficiary. For the First Restatement, the test is merely a reasonably apparent purpose of the promisee.

Question 71

Under the Second Restatement, what are the types of beneficiaries?

Answer 71

The Second Restatement combines the first two beneficiaries into one category.

1. Intended Beneficiary - Where the promised performance will satisfy an obligation of the promisee to pay money to the beneficiary and where the promisee intends to give the beneficiary the benefit of the promised performance.
2. Incidental Beneficiary - Third parties who will benefit from a promisor’s performance as a practical matter, but who may not meet the test for intended beneficiaries.

The test to determine the difference is whether the promised performance is intended to benefit the third party beneficiary. For the Second Restatement, the test is the mutual intention of the parties.

Question 72

What are the third party beneficiary rights?

Answer 72

An incidental beneficiary does not enjoy any right to seek enforcement of the contract.

Against the Promisor:

An intended beneficiary has a right to secure enforcement from a breaching promisor..

Against the Promisee:

An intended beneficiary has no rights against the promisee.

An intended beneficiary will only have rights against the promisee resulting from the promisor’s failure to perform based on whether or not here is an independent obligation between the promisee and intended beneficiary.

Generally, this only occurs with creditor beneficiaries.

Question 73

When does the right to sue vest in an intended beneficiary?

Answer 73

The parties to a contract are free to modify or rescind it by mutual consent, and they may modify or rescind an intended beneficiary without the beneficiary’s consent unless and until the beneficiary’s rights under the contract have vested.]

Vesting occurs when:

1. the beneficiary brings suit on the matter;
2. the beneficiary changes his position in justifiable reliance on the contractual promise;
3. the beneficiary manifests his assent to the contract at the request of either the promisee or the promisor or
4. the rights of the beneficiary have vested under an express term of the contract providing for such vesting.

Question 74

What defenses are available to a promisor?

Answer 74

Any valid defenses the reneging promisor would have to the enforcement of the contract.

A promisor may not assert defenses based on separate transactions with the promisee.

Question 75

What are the promisee’s rights against the promisor?

Answer 75

When the promisor does not perform, the promisee has a claim for breach of contract against the promisor.

If the promisor’s performance is intended to benefit a donee beneficiary, the promisee will not have suffered any economic loss for the nonperformance and, therefore, may be unable to recover more than nominal damages.

If the promisor’s performance is intended to benefit a creditor beneficiary, the promisee may secure specific performance of the promisor’s obligation. No double liability, therefore, a promisee to recover damages against the promisor unless the promisee has already made payment to the beneficiary to cover the default.

Question 76

What is an assignment of rights?

Answer 76

It is a transfer of a right to receive a performance under a contract.

To make an effective assignment of a contract right, the owner of that right must:

1. manifest an intention
2. to make a present transfer of an existing right.

Question 77

What rights can be assigned?

Answer 77

The general rule is that all rights are assignable subject to the following exceptions:

1. a right is not assignable if the assignment would materially alter the risks to or obligations of the other party to the contract;
2. a right is not assignable if the obligor has a personal interest in rendering the performance in question to the obligee and not to a third party;
3. a right is not assignable if the assignment would violate applicable law or public policy; and
4. a right is not assignable if assignment is prohibited by the contract.

An assignment in violation of contractual restriction as a breach of contract but not as a basis for nullifying the obligor’s performance obligation to the assignee.

Absent contractual language or circumstances suggesting a contrary intention of the parties, a contractual prohibition against assignment of the contract:

1. will bar a delegation of contractual duties but not an assignment of contractual rights;
2. will not apply to a. rights that accrue to the assignor as a result of a breach of contract by the obligor, or b. rights that accrue to the assignor upon complete performance by the assignor; and
3. can be invoked by the obligor but not by the assignor.

Question 78

What is an assignment for value and gratuitous assignment?

Answer 78

An assignment for value is where the assignee acquires the assignor’s contractual rights in exchange for payment or a promise thereof to the assignor.

It is valid against the obligor and cannot be revoked by the assignor.

A gratuitous assignment is where the assignor assigns contractual rights to the assignee without consideration for such transfer has the following legal effects:

1. A gratuitous assignment is valid and binding against the obligor, who cannot raise the defense of insufficient consideration.
2. Between the assignor and the assignee an executory gift is revocable, but an executed gift is not. A gift is executed when there is an intention to presently transfer the gift with actual or symbolic delivery.

An assignor is estopped from revoking the assignment if the assignee acts to his detriment in reliance upon the assignment.

Question 79

What are the rights and obligations of the parties after assignment?

Answer 79

Rights of Assignee against the Obligor

The assignee gets whatever rights to the contract his assignor had, and the assignee takes subject to whatever defenses the obligor could have raised against the assignor.

The obligor’s payment to assignor is a defense unless the obligor has been notified that the payments are owed to the assignee.

A right for setoff or counterclaims, if not out of a separate transaction, can be raised against the assignee.

If one of the original parties agrees that he will not raise a defense against an assignee, the agreement is enforceable with two limitations:

1. Real defense; and
2. the agreement is invalid if the obligor was the buyer or lessee of consumer goods.

Rights of Assignee against Assignor

An assignor impliedly warrants that:

1. he will do nothing to defeat or impair the value of the assignment and has no knowledge of any fact that would do so;
2. the right as assigned actually exists and is not subject to any limitations or defenses against the assignor other than those stated or apparent at the time of the assignment; and
3. any writing evidencing the rights that are being delivered to the assignee to induce him to accept the assignment is genuine.

Rights among Successive Assignee

The assignor is liable to all assignees for assigning the same right twice.

The first assignee prevails over subsequent assignee. In a minority of jurisdictions, under the Second Restatement, a subsequent assignee who has paid value and took the assignment in good faith will prevail if he: a. obtains payment from the obligor; b. covers a judgment on the debt; c. enters into a new contract with the obligor; or d. receives delivery of a tangible token or writing from the assignor, the surrender of which is required by the obligor’s contract.

Question 80

What is a delegation of duties?

Answer 80

It is when a third party agrees to satisfy a performance obligation owed by one of the parties to a contract.

Question 81

What are the rights of the obligee against the delegator?

Answer 81

A delegation does not relieve the delgator from his obligations under the contract. The delegator remains liable for the performance.

A novation is where a delegator is relieved from the obligations under the contract. This requires a clear promise by the obligee to release the delegator in return for the liability of the delegatee.

Question 82

What is the liability of the delegatee?

Answer 82

When the delegatee has agreed to perform the delegator’s contract obligations, he is liable to the delegator if he does not do so.

Under the third party beneficiary theory, the delegatee is also liable to the obligee, because the obligee is an inteded beneficiary of the promise made to the delegator.

Question 83

What duties are delegable?

Answer 83

All obligations are delegable.

The exceptions fall into the following two categories:

1. when the performance in question is personal and the recipient must rely on qualities such as the character, reputation, taste, skill, or discretion of the party who is to render performance; or
2. when the contract prohibits delegation.

Contract provisions barring delegation are fully enforceable. The effect of a delegation of a nondelegable duties:

1. At common law, an immediate breach and gives the right to sue.
2. Under the UCC, reasonable grounds for insecurity, and the other party has a right to demand adequate assurances from the assignee.