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CHAPTER 15 CONTRACTUAL DISCHARGE AND REMEDIES DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

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Presentation on theme: "CHAPTER 15 CONTRACTUAL DISCHARGE AND REMEDIES DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)"— Presentation transcript:

1 CHAPTER 15 CONTRACTUAL DISCHARGE AND REMEDIES DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8 th Ed.)

2 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 2 TERMINATION OF THE CONTRACT Contracts can be terminated (discharged) in four ways: Contracts can be terminated (discharged) in four ways: – By Performance. – By Agreement of the Parties. – By Operation of Law. – By Nonperformance. Contracts can be terminated (discharged) in four ways: Contracts can be terminated (discharged) in four ways: – By Performance. – By Agreement of the Parties. – By Operation of Law. – By Nonperformance.

3 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 3 DISCHARGE BY PERFORMANCE Complete Performance. Complete Performance. – Exact fulfillment of the terms of the contract. Substantial Performance. Substantial Performance. – Minor deviations from contract specifications. – Two criteria must be met: 1) Breach must not have been material. 1) Breach must not have been material. 2) Breach must be non-willful and devoid of bad faith conduct. 2) Breach must be non-willful and devoid of bad faith conduct. Complete Performance. Complete Performance. – Exact fulfillment of the terms of the contract. Substantial Performance. Substantial Performance. – Minor deviations from contract specifications. – Two criteria must be met: 1) Breach must not have been material. 1) Breach must not have been material. 2) Breach must be non-willful and devoid of bad faith conduct. 2) Breach must be non-willful and devoid of bad faith conduct.

4 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 4 DISCHARGE BY AGREEMENT OF THE PARTIES Release. Release. Rescission. Rescission. Accord and Satisfaction. Accord and Satisfaction. Novation. Novation. Release. Release. Rescission. Rescission. Accord and Satisfaction. Accord and Satisfaction. Novation. Novation.

5 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 5 DISCHARGE BY AGREEMENT OF THE PARTIES Release. Release. – Discharging the legal rights one party has against another. – To be valid, should be in writing, supported by consideration, and should effect immediate relinquishment of rights or claims. Rescission. Rescission. – Voluntary, mutual surrender and discharge of contractual rights and duties whereby parties are returned to the original status quo. Release. Release. – Discharging the legal rights one party has against another. – To be valid, should be in writing, supported by consideration, and should effect immediate relinquishment of rights or claims. Rescission. Rescission. – Voluntary, mutual surrender and discharge of contractual rights and duties whereby parties are returned to the original status quo.

6 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 6 Accord and Satisfaction. Accord and Satisfaction. – Agreement to accept performance different from that required in original bargain. – When parties comply with the accord, satisfaction has occurred. Novation. Novation. – Creates a new contractual duty and involves substitution of a party who was neither owed a duty nor obligated to perform in the original bargain. Accord and Satisfaction. Accord and Satisfaction. – Agreement to accept performance different from that required in original bargain. – When parties comply with the accord, satisfaction has occurred. Novation. Novation. – Creates a new contractual duty and involves substitution of a party who was neither owed a duty nor obligated to perform in the original bargain. DISCHARGE BY AGREEMENT OF THE PARTIES

7 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 7 DISCHARGE BY OPERATION OF LAW Bankruptcy automatically discharges the party’s contractual obligations. Bankruptcy automatically discharges the party’s contractual obligations. Statutes of Limitations sets limits on the length of time a contracting party may wait to bring suit. Statutes of Limitations sets limits on the length of time a contracting party may wait to bring suit. Any contract materially altered by one party without the consent of the other will also be discharged. Any contract materially altered by one party without the consent of the other will also be discharged. Bankruptcy automatically discharges the party’s contractual obligations. Bankruptcy automatically discharges the party’s contractual obligations. Statutes of Limitations sets limits on the length of time a contracting party may wait to bring suit. Statutes of Limitations sets limits on the length of time a contracting party may wait to bring suit. Any contract materially altered by one party without the consent of the other will also be discharged. Any contract materially altered by one party without the consent of the other will also be discharged.

8 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 8 DISCHARGE BY NONPERFORMANCE Impossibility. Impossibility. Commercial Frustration. Commercial Frustration. Actual Breach. Actual Breach. Anticipatory Breach. Anticipatory Breach. Conditions. Conditions. Impossibility. Impossibility. Commercial Frustration. Commercial Frustration. Actual Breach. Actual Breach. Anticipatory Breach. Anticipatory Breach. Conditions. Conditions.

9 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 9 DISCHARGE BY NONPERFORMANCE Impossibility. Impossibility. – An unforeseen event or condition which precludes performance. – Conduct by one party which makes performance by the other party impossible is objective impossibility. – Subjective impossibility consists of nonperformance owing to personal impossibility. Impossibility. Impossibility. – An unforeseen event or condition which precludes performance. – Conduct by one party which makes performance by the other party impossible is objective impossibility. – Subjective impossibility consists of nonperformance owing to personal impossibility.

10 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 10 DISCHARGE BY NONPERFORMANCE Commercial Frustration. Commercial Frustration. – This doctrine excuses performance in cases where the essential purpose and value of the contract have been frustrated. – If the event causing the frustration could have been foreseen, no discharge allowed. Actual Breach. Actual Breach. – Occurs when one or more of the contracting parties fails to perform the obligations set up by the contract. Commercial Frustration. Commercial Frustration. – This doctrine excuses performance in cases where the essential purpose and value of the contract have been frustrated. – If the event causing the frustration could have been foreseen, no discharge allowed. Actual Breach. Actual Breach. – Occurs when one or more of the contracting parties fails to perform the obligations set up by the contract.

11 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 11 DISCHARGE BY NONPERFORMANCE Anticipatory Breach. Anticipatory Breach. – Involves giving advanced notice, through words or conduct, that one does not intend to fulfill a contract as written. – Anticipatory repudiation, UCC sanctions a demand that adequate assurances of due performance. Allows one to suspend performance for 30 days or until assurances are put forth. Anticipatory Breach. Anticipatory Breach. – Involves giving advanced notice, through words or conduct, that one does not intend to fulfill a contract as written. – Anticipatory repudiation, UCC sanctions a demand that adequate assurances of due performance. Allows one to suspend performance for 30 days or until assurances are put forth.

12 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 12 DISCHARGE BY NONPERFORMANCE Conditions. Conditions. – Conditions may result in nonperformance which justifies discharge. Condition is act/event that limits or qualifies a promise. Condition is act/event that limits or qualifies a promise. Condition must occur before promissor has a duty to perform or refrain from performing. Condition must occur before promissor has a duty to perform or refrain from performing. Conditions. Conditions. – Conditions may result in nonperformance which justifies discharge. Condition is act/event that limits or qualifies a promise. Condition is act/event that limits or qualifies a promise. Condition must occur before promissor has a duty to perform or refrain from performing. Condition must occur before promissor has a duty to perform or refrain from performing.

13 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 13 DISCHARGE BY NONPERFORMANCE Courts classify conditions in two ways: Courts classify conditions in two ways: – Timing. Conditions Precedent. Conditions Precedent. Concurrent Conditions. Concurrent Conditions. Conditions Subsequent. Conditions Subsequent. – Stems from the manner in which the conditions arise. Constructive (or implied) Conditions. Constructive (or implied) Conditions. Expressed Conditions. Expressed Conditions. Courts classify conditions in two ways: Courts classify conditions in two ways: – Timing. Conditions Precedent. Conditions Precedent. Concurrent Conditions. Concurrent Conditions. Conditions Subsequent. Conditions Subsequent. – Stems from the manner in which the conditions arise. Constructive (or implied) Conditions. Constructive (or implied) Conditions. Expressed Conditions. Expressed Conditions.

14 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 14 TYPES OF REMEDIES Legal Remedies (money damages): damages resulting from a court’s exercise of its power “at law.” Legal Remedies (money damages): damages resulting from a court’s exercise of its power “at law.” – Compensatory Damages. – Consequential Damages. – Punitive Damages. – Nominal Damages. – Liquidated Damages. – Mitigation of Damages.

15 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 15 TYPES OF REMEDIES Equitable Remedies: remedies arising from a court’s use of its powers of equity. Equitable Remedies: remedies arising from a court’s use of its powers of equity. – Rescission and Restitution. – Specific Performance. – Quasi Contract. – Reformation. – Injunction.

16 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 16 DAMAGESDAMAGES Most common legal remedy sought by injured party. Most common legal remedy sought by injured party. Courts ask, when computing damages whether breaching party, as a reasonable person, should have foreseen the injuries that would result from breach. Courts ask, when computing damages whether breaching party, as a reasonable person, should have foreseen the injuries that would result from breach. Most common legal remedy sought by injured party. Most common legal remedy sought by injured party. Courts ask, when computing damages whether breaching party, as a reasonable person, should have foreseen the injuries that would result from breach. Courts ask, when computing damages whether breaching party, as a reasonable person, should have foreseen the injuries that would result from breach.

17 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 17 DAMAGESDAMAGES Compensatory Damages. Compensatory Damages. – Sums of money which will place the injured party in the same economic position that would have been attained had the contract been performed. Consequential Damages. Consequential Damages. – Indirect or special damages arising from the effects of the breach itself. Compensatory Damages. Compensatory Damages. – Sums of money which will place the injured party in the same economic position that would have been attained had the contract been performed. Consequential Damages. Consequential Damages. – Indirect or special damages arising from the effects of the breach itself.

18 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 18 DAMAGESDAMAGES Duty to Mitigate. Duty to Mitigate. – To measure damages the courts place on the injured party the duty to mitigate (or minimize) these damages. Punitive Damages. Punitive Damages. – Imposed not to compensate the injured party but to punish the wrongdoer so as to deter future conduct. Duty to Mitigate. Duty to Mitigate. – To measure damages the courts place on the injured party the duty to mitigate (or minimize) these damages. Punitive Damages. Punitive Damages. – Imposed not to compensate the injured party but to punish the wrongdoer so as to deter future conduct.

19 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 19 DAMAGES Liquidated Damages. Liquidated Damages. – When parties agree in advance to a certain sum of money that will be paid to the injured party should breach of contract occur. Nominal Damages. Nominal Damages. – Small amount of compensation for the breach.

20 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 20 EQUITABLE REMEDIES Plaintiff’s eligibility to receive fairness depends on the absence of bad faith on the plaintiff’s part and similar factors. Plaintiff’s eligibility to receive fairness depends on the absence of bad faith on the plaintiff’s part and similar factors. Court’s power to award equitable remedies is discretionary. Court’s power to award equitable remedies is discretionary.

21 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 21 EQUITABLE REMEDIES Rescission and Restitution. Rescission and Restitution. – Voluntary agreement to rescind, or set aside the contract before rendering performance. – Can result from a material breach in which case a restoration of parties to the status quo is sought. – Restitution, or the return of goods, money, or property involved in the contract or recovery of a reasonable value of the services rendered is equitable. Rescission and Restitution. Rescission and Restitution. – Voluntary agreement to rescind, or set aside the contract before rendering performance. – Can result from a material breach in which case a restoration of parties to the status quo is sought. – Restitution, or the return of goods, money, or property involved in the contract or recovery of a reasonable value of the services rendered is equitable.

22 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 22 EQUITABLE REMEDIES Specific Performance. Specific Performance. – When restitution is inadequate or unjust. – Court compels the breaching party to perform according to the exact terms of the contract. Quasi Contract. Quasi Contract. – Creation of contract for the parties to prevent the unjust enrichment of one party. – One party knowingly has received a benefit to which party is not entitled. Specific Performance. Specific Performance. – When restitution is inadequate or unjust. – Court compels the breaching party to perform according to the exact terms of the contract. Quasi Contract. Quasi Contract. – Creation of contract for the parties to prevent the unjust enrichment of one party. – One party knowingly has received a benefit to which party is not entitled.

23 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 23 EQUITABLE REMEDIES Reformation. Reformation. – Rewriting a contract in order to remove a mistake and to make the agreement conform to the terms to which the parties originally agreed. Injunction. Injunction. – A court order directing a person to do or refrain from doing some specified act. Reformation. Reformation. – Rewriting a contract in order to remove a mistake and to make the agreement conform to the terms to which the parties originally agreed. Injunction. Injunction. – A court order directing a person to do or refrain from doing some specified act.

24 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 24 LIMITATIONS OF REMEDIES Contract language may actually limit remedy options available. Contract language may actually limit remedy options available. Uniform Commercial Code impact remedy options in sale of goods. Uniform Commercial Code impact remedy options in sale of goods. Contract language may actually limit remedy options available. Contract language may actually limit remedy options available. Uniform Commercial Code impact remedy options in sale of goods. Uniform Commercial Code impact remedy options in sale of goods.

25 © 2004 West Legal Studies in Business A Division of Thomson Learning BUSINESS LAW: Cases & Principles Davidson Knowles Forsythe 8 th Ed. 25 WAIVER OF BREACH Contracting party may agree to accept less than complete performance by waiving a breach of contract that is committed by another party. Contracting party may agree to accept less than complete performance by waiving a breach of contract that is committed by another party. Waiver eliminates the breach. Waiver eliminates the breach. Contracting party may agree to accept less than complete performance by waiving a breach of contract that is committed by another party. Contracting party may agree to accept less than complete performance by waiving a breach of contract that is committed by another party. Waiver eliminates the breach. Waiver eliminates the breach.


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