chapter 2 the law of contract

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Chapter 2 The Law of Contract

Contract Discharge

And

Remedies

合同的解除和救济

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Facing a Legal Problem

The Deleons contract with a construction company to build a house. The contract specifies Brand X plasterboard. The builder cannot obtain Brand X, and the DeLeons are on holiday hiking in the mountains in France and are unreachable. The builder decides to install Brand Y instead, which she knows is identical in quality and durability to Brand X. All other aspects construction conform to the Contract. Does this deviation constitute a breach of contract? Can the buyers (the DeLeons) avoid their obligation to pay the builder because Brand Y plasterboard was used instead of Brand X?

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Discharge by Performance

Complete Performance 完整的履行 :A party renders performance exactly as required by the contract. That party’s contractual duties are discharged.

Substantial Performance 实质的履行 :A party renders performance that deviates only slightly from complete performance. There is a minor breach. The nonbreaching party may recover damages caused by the breach.

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Discharge by Agreement

1. Mutual rescission. The parties mutually agree to rescind an executory contract.

2. Substituted contract. The parties enter into a new contract that revokes a prior contract.

3. Novation. The parties agree to the substitution of a third party for one of the original parties. The exiting party is relieved of liability, and the entering party is obligated to perform the contract.

4. Accord and satisfaction. The parties agree to settle a contract dispute. The satisfaction of the accord discharges the original contract.

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Example 2-15

You contract with A. Logan Enterprises to sell it your office-equipment business under an installment sales contract requiring twelve monthly payments. Logan later decides not to buy the business but knows of another party, MBI Corporation, interested in doing so. All three of you get together and agree to a new contract under which MBI agrees to purchase your business.

Is the original contract discharged and replaced with the new contract?

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Example 2-16 Shea obtains a judgment against Marla for

$4,000 in cash. Later both parties agree that the judgment can be satisfied by Marla’s transfer of her automobile to Shea. This agreement to accept the auto in lieu of $4,000 in cash is the accord.

If Marla transfers her automobile to Shea, this performance is the satisfaction. If Marla refuses to transfer her car, is the accord breached? Would Shea have any recourse against Marla?

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Discharge by Impossibility

1. Impossibility of Performance. The contract is objectively impossible to perform because of an event.

2. Force Majeure clause. The parties stipulate in the contract what events will excuse performance

3. Commercial Impracticability. The contract is impractical for the promisor to perform because of an event.

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Discharge by Operation of Law

1. Statute of limitations. A contract that is not

brought within the stipulated limitations period discharges contractual duties.

2. Bankruptcy. Discharge in bankruptcy relieves the debtor of legal liability to pay the discharged debts.

3. Alteration of a contract. If a party to a contract intentionally alters it materially, the innocent party may opt either or discharge the contract or to enforce it on its original or altered terms.

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Monetary Damages

An award of money ---A nonbreaching party may recover monetary damages from a breaching party.

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Compensatory Damages

补偿性赔偿金 Compensates a nonbreaching party for the

loss of the bargain. It places the nonbreaching party in the same position as if the contract had been fully performed.

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Example 2-16

MediQuick Laboratories contracts with Cal Computer Industries to purchase ten Model X-15 computer workstations for $8,000 each. If Cal Computer fails to deliver the ten workstations, and the current market price of the workstations is $8,150 each, what would be MediQuick’s measure of damages?

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Key

MediQuick’s measure of damages is $1,500(10$×150), plus incidental damages. In cases in which the breach is by the buyer, and the seller has not as yet produced the goods, compensatory damages normally equal the lost profits on the sale, not the difference between the contract price and the market price.

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Consequential Damages

special damages 间接性赔偿金 Compensates a nonbreaching party for

foreseeable special damages. The breaching party must have known or should have known that these damages would result from the breach.

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Example 2-17

Gilmore contracts to have a specific item shipped to her—one that she desperately needs to repair her printing press. Gilmore tells the shipper that she must receive the item by Monday or she will not be able to print her paper and will lose $750. If the shipper is late, what can Gilmore recover?

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Key

Gilmore can recover the consequential damages caused by the delay (the $ 750 in losses).

Note: To be liable for consequential damages, the breaching party must know or have reason to know that the breach will cause special damages to the other party.

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Liquidated Damages (1)

约定赔偿金 Damages payable upon breach of contract that

are agreed on in advance by the contracting parties. Liquidated damages substitute for actual damages.

a. The actual damages must be extremely difficult or impracticable to determine.

b. The liquidated amount must be a reasonable estimate of the harm that would result from the breach.

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Liquidated Damages

A liquidated damage clause is considered a

penalty if actual damages are clearly determinable in advance or the liquidated damages are excessive or unconscionable. A penalty is unenforceable and the nonbreaching party may recover actual damages.

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California and Hawaiian Sugar Co. (C & H) V. Sun Ship, Inc United States Court of appeals, Ninth Circuit

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1. C&H), a California corporation, is an agricultural cooperative owned by 14 sugar plantations in Hawaii. It transports raw sugar to its refinery in California. Sugar is a seasonal crop, with 70 percent of the harvest occurring between April and October. C&H requires reliable seasonal shipping of the raw sugar from Hawaii to California. Sugar stored on the ground or left unharvested suffers a loss of sucrose 蔗糖 and goes to waste.

2. After C&H was notified by its normal shipper that it would be withdrawing its services as of January1981,C&H commissioned the design of a large hybrid vessel.... After substantial negotiation, C&H contracted with Sun Ship, Inc. a Pennsylvania corporation, to build the vessel for $25,405,000.

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3. The contract, which was signed in fall of 1979, provided a delivery date of June 30,1981. The contract also contained a liquidated damage clause calling for a payment of $17,000 per day for each day that the vessel was not delivered to C&H after June 30,1981. Sun ship did not complete the vessel until March 16, 1982. The vessel was commissioned in mid-July 1982 and christened the Moku Pabu.

4.During the 1981 season, C&H was able to find other means of shipping the crop from Hawaii to its California refinery. Evidence established that actual damages suffered by C&H because of the nonavailability of the vessel from Sun Ship were $368,000.

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5. When Sun Ship refused to pay the liquidated damages, C&H filed suit to require payment of $4,413,000 in liquidated damages under the contract. The district court entered judgment in favor of C&H and awarded the corporation $4,413,000 plus interest. Sun ship appealed.

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Is the liquidated damage clause enforceable, or is it a penalty clause that is not enforceable?

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1. Contracts are contracts because they contain enforceable promises. Absent some overriding public policy, those promises are to be enforced. Parties who agree to pay damages of a fixed amount normally have a good sense of what damages can occur, and the courts are reluctant to override their judgment.

2. In this case, the court of appeals stated: “Proof of this loss is difficult. Whatever the loss, the parties had promised each other that $17,000 per day was a reasonable measure. When sophisticated parties with bargaining parity have agreed what lack of this prize would mean, and it is now difficult to measure what the lack did mean, the court will uphold the parties’ bargain.”

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The court of appeals held that the liquidated damage clause was not a penalty and was therefore enforceable. Affirmed.

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Nominal Damages

象征性的损害赔偿金 Damages awarded against the breaching

party even though the nonbreaching party has suffered no actual damages because of the breach. A small amount (e.g, $1) is usually awarded. It is usually awarded “on principle”.

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Punitive Damages

exemplary damages 惩罚性赔偿金 They are generally not recoverable in an

action for breach of contract. Punitive damages are designed to punish and make an example of wrongdoer for the purpose of deterring 使…不敢 , 阻止 similar conduct in the future.

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Julie Gourley (Gourley ) v. State Farm Mutual Automobile Insurance Co. (State Farm)California Court of Appeals (1990)

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1. In late 1981, Gourley was a passenger in an automobile that was struck by an out-of-control vehicle driven by an uninsured drunk driver. She was not wearing a seat belt at the time of the accident, suffered a fractured right shoulder…. Gourley made a claim under the uninsured motorist coverage in her automobile policy with State Farm.

2. Medical evidence showed that Gourley had some permanent disability.. and might require surgery in the future. She demanded the policy limit of $100,000 in September 1982, State Farm’s attorney, Barry Allen, advised Gourley that State Farm would contest the proximate cause of the injuries based on Gourley’s failure to wear her seat belt. Evidence showed that under California law the seat belt issue was not a defense. State Farm offered a settlement of $20,000. Gourley refused it.

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3. When Gourley reduced her demand to $60,000, State Farm responded with a counteroffer of $25,000. Since the parties could not reach a settlement, the case went to arbitration 仲裁 . In October 1984, the arbitrator awarded Gourley $88,137, which State Farm promptly paid.

4. Gourley sued state farm for breach of the implied covenant of good faith and fair dealing in handling the claim and sought actual damages for emotional distress and punitive damages. The jury awarded her $15,765 in actual damages and $1,576,000 in punitive damages. State Farm appealed.

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Did State Farm’s conduct amount to a bad faith tort for which punitive damages could be awarded?

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1.There is an implied covenant in every insurance contract that the insurer will do nothing to impair the insured’s right to receive the benefit of the contractual bargain. That is, the insurer is expected to promptly pay to the insured all sums due under the contract.

2. A major motivation for the purchase of insurance is the peace of mind that claims will be paid promptly. Withholding benefits is unreasonable if it is without proper cause . In reaching its decision, the appellate 上诉的 court state: “The jury could reasonably find” intentional bad faith.

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3. Gourley presented substantial evidence that State Farm adopted a stonewall of see-you-in-court attitude as exhibited by grossly insufficient offers to settle. The evidence was sufficient to support the jury’s finding of bad faith… State Farm… argues the evidence was insufficient as a matter of law to support the award of punitive damages. Not so. To support an award of punitive damages, the plaintiff must show oppression, fraud, or malice. There was ample evidence to support an award of punitive damages.

DecisionThe appellate court held that state Farm’s actions in not settling the claim under the policy limits by asserting an illegal defense (failure of Gourley to wear a seat belt) constituted bad faith. Affirmed.

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Rescission &Restitution

Rescission: an action to undo, or cancel a contract---to return non-breaching parties to the positions that they have occupied prior to the transaction.

Restitution: the capture of a benefit conferred on the defendant through which the defendant has been unjustly enriched

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Equitable Remedies

1.Specific performance

2.Reformation

3.Quasi contract

4.Injunction