1. Basic Business Law (BPP432/80) 2006 Fall Quarter Instructor: David Oliveiri Week 7: Facilitating Exchange; What Excuses Contract Performance; Rights When Transactions Break Down

2. Agenda “Transactional Breakdown” Performance, Breach, and Discharge Remedies

3. Learning Objectives Understand Valid Excuses for Nonperformance of a Valid Contract Understand How to Pass Risk to Other Party in a Valid Contract Understand Financial Interests Protected by a Valid Contract Understand When to Limit Damages Payable at Breach Understand How Breach and Compensate is a Financially Sound Strategy Understand When Money is Insufficient Compensation for a Contract Breach

4. Performance, Breach, & Discharge Assumption: Valid Contract in Place Basic Question: Have Parties Honored Commitments Common Scenario: –One Party Refuses to Perform –Claims Contractual Obligations Excused or Terminated –Other Party Cries “Foul” Legal Issue/Rules: Is Non-Performing Party’s Refusal Justified?

5. “I Will Transfer This Painting to You for $1,000,000.”

6. Acceptable Excuses For Not Proceeding With A Valid Contract Failure of an Agreed Condition “I’ve Already Performed My Obligations.” “You’ve Failed To Perform Your Obligations.” “We Agree To Do Something Else.” “ ‘The Law’ Excuses My Performance.”

7. Conditions Definition – An Event Whose Happening or Nonhappening Affects a Duty of Performance Types – Express or Implied Timing – Concurrent – “So Long As,” “While” – Requires Simultaneous Performance Precedent -- “Provided That,” “If,” “As Soon As,” “After,” “Upon,” “When” – Triggers Performance Subsequent – “Until” – Stops Performance Satisfaction – Subjective – Approval Based Upon Honestly Held Opinion Objective – Approval Based Upon Reasonableness [S&R 17 – Problem 10]

8. Conditions and Risk –What – Generally, Who Should Bear the Risk of Non-Performance of a Condition? –How – Before Contract –Catalog Risks –Determine Party to Bear Risks –Convert Risks to Conditions

9. Start-Up, Inc. Service/Maintenance Contract ― 25 Locations Two “Financially Equivalent” Bids –Flat Rate/Month –Cost+/Month How Can We Do Better? –What Are Risks? –Who Should Bear Risks? –What Should Contract Say?

10. Start-Up, Inc. What Are Risks? –Flat Rate – Quality, Responsiveness –Cost+ -- “Too Perfect,” Runaway Costs Who Should Bear Risks? Contractor! Why? What Should Contract Say? –Flat Rate – Specify Quality Standard, Set Responsiveness Standard –Cost+ -- Set Ceilings on Cost, Approval Thresholds, Quality Standard

11. Valid Excuses for Not Proceeding with a Valid Contract Failure of an Agreed Condition “I’ve Already Performed My Obligations.” –OR Tender/Offer of Performance Refused “You’ve Failed To Perform Your Obligations.” –Materiality Standard – Define in Contract! [S&R 17 --- Problem 6] “We Agree To Do Something Else.” “ ‘The Law’ Excuses My Performance.” –Impossibility – Destruction, Illegality [S&R 17 – Problem 2] –Bankruptcy – Automatic Stay, Discharge –Statute of Limitations – 6 Years

12. A Discharged A and B Discharged B Discharged Discharge of Contracts A Enters into Contract with B A fully performs B materially breaches A and B agree to substitute C for A A discharge in bankruptcy Failure of a condition Mutual recission of the contract Substituted contract Accord and satisfaction Subsequent illegality of the contract Impossibility of performance B fully performs A materially breaches A and B agree to substitute C for B B discharged in bankruptcy

13. Remedies – Upon Breach General Rule -- Injured Party May Recover “Benefit of the Bargain” Interests Protected EXPECTATION RELIANCE RESTITUTION PROTECTED BY MONETARY DAMAGES EQUITABLE REMEDIES RESTITUTION

14. Monetary Damages Compensatory Damages = Lost Contract Value + Incidental Damages + Consequential Damages – Savings Compensatory Damages = Lost Contract Value + Incidental Damages + Consequential Damages – Savings Hypothetical: C agrees to build O’s house for $100k. Material and labor cost to C is $80k. Profit is $20k. After the house is partly built ($50k of work expended) C repudiates and O spends $55k to finish the job. Hypothetical: C agrees to build O’s house for $100k. Material and labor cost to C is $80k. Profit is $20k. After the house is partly built ($50k of work expended) C repudiates and O spends $55k to finish the job. What is O’s Loss of Value? What are O’s Incidental Damages? Any Consequential Damages? Expenses Saved

15. Other Monetary Damage Measures Nominal Damages Reliance Damages Example: O repudiates after C has spent $50k on wages and materials. Damage to C? Example: O repudiates after C has spent $50k on wages and materials. Damage to C? Punitive Damages -- Generally, Not Allowed Liquidated Damages (vs. Penalty) [S&R 18 – Problem 2] [S&R 18 – Problem 2]

16. Limitations on Contract Damages Damages Must Be Foreseeable Damages Must Be Certain, Not Speculative Injured Party Must Mitigate Damages –Must S dispose of oil at $14 per on B’s breach? –UCC’s Lost Volume Seller Exception –Case of Shirley Maclaine, Bloomer Girl, and Big Country/Big Man Hypothetical: B contracts with S for 1,000 barrels of oil at $20 per, to be delivered in 90 days. On delivery date, oil is $14 per in the market. B refuses to go ahead with the deal. What are S’s damages?

17. Remedies in Equity – Where Monetary Damages Inadequate Specific Performance = f (Uniqueness) [S&R 18 – Problem 6] [S&R 18 – Problem 6] Injunctions = f (Uniqueness) [S&R 18 – Problem 4] [S&R 18 – Problem 4]

18. Equitable Remedies may be available No Compensatory Damages Restitution Reliance Damages Legal Remedies are available No Contract Remedies Are legal remedies adequate? Yes Is there a provision for reasonable liquidated damages? Yes Recovery of liquidated damages Yes No RemedyHas the contract been breached? No

19. Bottom Lines; Q&A Failure to Perform a Valid Contract is OK in Certain Circumstances Conditions Can Pass Financial Risk to Another Party in a Valid Contract The Principal Financial Interest Protected by a Valid Contract is the “Benefit of the Bargain” Liquidated Damages Provisions Can Define and Limit Damages Payable at Breach “Breach and Compensate” is a Financially Sound Strategy In Limited Circumstances Money is Insufficient Compensation for a Contract Breach