Chapter 11
Contractual Obligations
11-1
Transfer and Discharge of Obligations
Transfer of Contract Rights/Duties
• Assignment: transaction by which a party
transfers contractual rights to another
I.e. One party may transfer to another the right to
collect a payment.
Example ~ What’s Your Verdict? Pg.191
Assignor: The party who transfers the contractual
right. (Boss Motors)
Assignee: The party who receives this contractual
right. (Palmout)
What’s Your Verdict? ~ Pg. 191
Is such a transfer of contract rights legal?
It was legal for Boss Motors to assign to the
finance company its rights to receive
Whipple’s payments in return for needed
cash. When Whipple was notified of the
assignment, he became obligated to pay the
finance company instead of Boss Motors.
Transfer of Contract Rights/Duties
• Obligor: one who owes a duty under a contract
In all assignments, the assignor guarantees to the
assignee that the assignor has a right to assign and
that the assigned right is legally enforceable.
However, the assignor typically does not promise that
the obligor will perform as promised in the original
contract.
IF the obligor breaches, the assignee must sue for
the breach.
Assignable Rights
A party may assign contractual rights to another as
long as performance is not materially changed.
• Performance: fulfillment of contractual promises as
agreed (Whipple’s payment was to be sent by mail
regardless of to whom, so the assignment was
proper).
Example:
Retailers and restaurants assign to issuers of credit cards
the right to collect the amounts due from customers who
have used the cards. In exchange, the credit card
companies immediately pay the retailers and restaurants.
Non-Assignable Rights
• Contractual rights may not be assigned if
performance requirements would be materially
changed as a consequence.
Form of Assignments
• Assignment of contractual rights usually is made
voluntarily by the assignor.
• While an assignment is valid whether oral or written,
putting an assignment in writing is always wiser.
• No consideration is necessary to make a valid
assignment.
Notice of Assignments
• Until notified that an assignment has occurred,
the obligor may continue to pay the assignor.
• After notification, the obligor is liable to the
assignee for performance.
• To protect newly acquired rights, the assignee
should promptly notify the obligor of the assignment.
Delegation of Contractual Duties
• Delegation of Duties: routine obligations of a
party that must be performed to fulfill a
contract can often be transferred to another to
perform.
• However, a person who delegates contractual
duties remains legally obligated and responsible
for proper performance even though someone else
may do the required work.
CHECKPOINT
Under what conditions may you assign
contractual rights to another person?
Contract rights may be assigned as long as
the performance requirements will not be
changed in a material way.
Discharge by Performance
• Performance is a series of activities that fulfills
the purpose of the contract.
• Time for Performance ~ the time for
completing a contract may be important to
both parties.
– If time is not stated, the court will say that all
duties must be completed within a reasonable
time.
– If time is stated, the court may still give more time.
Discharge of Contractual Obligations
~ By Performance
• Discharge of a contract is a termination of duties
that ordinarily occurs when the parties perform
as promised.
• Most contracts are discharged by complete
performance of the terms of the contract.
• Breach of Contract - Failure to provide complete
performance
By Performance
• Substantial Performance: when just about all the
duties are performed but a minor duty under the
contract remains.
• Anticipatory Breach: when a party who defaults
(fails to perform), notifies the other party to a
contract before the time of performance has arrived
that he or she will not perform.
• Timing of Performance: If a duty is not performed in
a reasonable time, the non-performance is
considered a breach. (e.g. shipping ripe tomatoes)
By the Initial Terms
When the parties prepare their contract, they may
agree that it will terminate:
1. On a specified date or upon the expiration of a
specified period of time (e.g. a fresh food supply contract
with a school terminates on the last day of school)
2. Upon the occurrence of a specified event (e.g. a
contract to have someone mow your yard until you return
from vacation)
3. Upon the failure of a certain event to happen (e.g. a
construction loan contract upon failure to get a required
building permit)
4. At the free will of either party upon giving notice (e.g.
when one partner decides to retire from business and gives
the required notice)
By Subsequent Agreement
• Parties who have made a contract may mutually
agree to change the contract/relationship by:
1. Rescission – By rescission the parties may agree to
unmake or to undo their entire contract from its very
beginning
2. Substitution – Parties may decide that the present contract
is not what they want, and so replace it with a new contract.
3. Accord & Satisfaction – Accord: an agreement to
substitute a new contractual obligation for an existing one if
the new obligation is satisfactorily performed. Satisfaction:
actual performance of new obligation
4. Novation – a party entitled to receive performance under a
contract may release the other party from the duty of
performance and accept a substitute party.
What’s Your Verdict? ~ Page 192
• Will the court order Jan to pay the original
amount or the $1,500?
An accord and satisfaction discharges the previous
obligation. If the performance in the accord is not
rendered, the old contract remains in effect.
• Jan failed to perform under the accord (to pay
$1,500 by January 15), and so the original
contract was not discharged. He still owes
$2,000.
By Impossibility of Performance
• Refers to extreme external conditions rather than
an obligor’s personal inability to perform.
• Examples:
–
–
–
–
a surprise war
Unexpected embargo
Natural disaster (flood or earthquake)
Unique subject matter in contract is destroyed before
delivery (Picasso is burned in a fire at auction house)
– Performance because illegal before rendered (installing
asbestos shingles on a new building)
– Death / disability of someone who was to provide personal
service that only that person could render
By Operation of Law
• A contract may be discharged or the right to
enforce it may be barred by operation of law
• Examples:
– Person’s debts are discharged in bankruptcy
– Time allowed for enforcement of the contract has
elapsed because of the statute of limitations
– Alteration: a material change in the terms of a
written contract (intentionally) without the consent
of the other party
By Tender of Performance
• Tender: a ready, willing and able offer to perform an
obligation
• Doing of an act:
– A tender that is made in good faith but is
rejected will discharge the obligation of the
one offering to perform.
• If the obligation requires payment of money:
– Rejection of a tender to pay money does not
discharge the debt nor does it prevent the creditor
from collecting later.
– Must consist of exact amount due in legal tender
(currency or coins)
11-2
Remedies for Breach of Contract
Breach of Contract
• What can happen if a contract is not
fulfilled?
– A breach of contract is when a person fails to
perform the duties spelled out by a contract.
– When a breach of contract occurs, one party
is injured and therefore the court will allow the
injured party to bring an action for damages.
Remedies for Breach of Contract
• Remedy: action or procedure followed to
enforce a right or to compensate for an
injury
Remedy for a Minor Breach
• Only remedy generally available for a
minor breach = MONEY damages
• Party injured by minor breach must
continue to perform the duties defined by
the contract.
• The amount of damages would be
whatever it took to complete the minor
duty left undone by the breaching party.
Remedy for a Major Breach
• If the breach is classified as a major breach,
then the injured party need not continue to
perform the duties defined by the contract.
1. Rescission and Restitution
• Rescission: allows the parties to treat the
contract as canceled
• Restitution: permits each party to recover
money or property (or the value thereof)
given to the other party.
Example:
If a seller of realty committed a major breach
by failing to deliver the deed, the buyer could
sue for restitution and recover any money
paid for the property.
2. Money Damages
Money damages may be:
• Compensatory: seeks to restore injured
parties to the same financial position they
were in prior to the breach.
• Consequential: the court tries to place
injured parties in the same financial
position they would have been in if the
contract had been performed.
2. Money Damages
• Punitive – awarded by courts under
certain circumstances, such as fraud or
when an intentional tort is involved in a
breach of contract.
• Liquidated – when parties to a contract
agree on a certain amount of monetary
damages that will be paid if a particular
contract breach occurs.
2. Money Damages
• Nominal – When courts, even when no
substantial harm has been done, award a
token amount to acknowledge that a
wrong has been committed. (Nominal
damages are granted in recognition of the
rights that have been violated).
3. Specific Performance
Is when the only appropriate remedy for
breach of contract is the decree
(order) that the breaching party do
exactly what was required under the
contract.
CheckPoint
• Explain the remedies available for a major
breach of contract.
• The available remedies are:
1. Rescission/restitution
2. Damages
3. Specific performance
What’s Your Verdict ~ Page 197
What remedies does Liu have from which to
choose, and what is her optimal remedy?
What’s Your Verdict? ~ Page 197
Liu can choose among the following remedies:
• Rescission and restitution: Canceling the
contract and returning whatever has been
received under it.
• Money damages: The payment of money to
compensate for injury
• Specific performance: A court order
commanding the breaching party to perform
what was promised in the contract.
What’s Your Verdict? ~ Page 197
• Liu’s optimal remedy would be specific
performance.
• The court would order McCall to transfer
title to the property with a properly signed
deed delivered to Liu.
Factors Affecting Choice of Remedy
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Conflict of Remedies
Duty to Mitigate
Waivers
Statute of Limitations
Bankruptcy
Conflict of Remedies
• A party injured by a breach of contract
must elect, or choose, a remedy when
suing.
• Electing to pursue one remedy will rule
out pursuing another.
Example:
Specific performance and damages cannot
be recovered for the same breach
because specific performance is not
available when damages are an adequate
remedy.
What’s Your Verdict? ~ Page 199
What remedies are available to the original
team?
Brushback’s original team could recover the
two months’ wages ($20,000) as restitution.
However, if the team elects this remedy,
they would lost the ability to sue for
damages and the ability to obtain an
injunction to stop Brushback from playing
for the competition.
Duty to Mitigate
• Mitigate the damages: Reasonable steps
that have to be taken by a party injured by a
breach of contract to minimize the harm
done.
Example:
In most states, a landlord must take reasonable
steps to re-rent an apartment vacated in breach
of a lease. If an injured party fails to take
reasonable steps to mitigate the damages, the
amount of potential recovery is lessened by the
amount that could have been mitigated.
Waiver
• Waiver: when a party intentionally and
explicitly gives up a contractual right.
Example:
If one party consistently sends late
payments and is not charged the late fee
specified in the contract, the rights to
collect a late fee on future payments may
be waived.
Statute of Limitations
• Statutes of limitations: if a suit is not
brought within a certain time after a legal
claim, such as breach of contract, arises.
• 4 years is a common time period for contracts
• 3 years is a common time period for torts
• Half the states allow more time to sue on
written contracts than on oral ones.
• Statute of limitations begins to run from the
moment there is a right to sue for a breach.
Bankruptcy
• Bankruptcy: legal proceeding whereby
a bankrupt’s estate is distributed
among various claimants in order to
discharge many of the bankrupt’s debts
and give the bankrupt a fresh financial
start.
• Debtors can get a fresh start, and creditors
share fairly in whatever assets are
available.
CheckPoint
• What does it mean to “mitigate the
damages”?
• A party injured by a breach of contract
must minimize the overall harm done by
any legal means possible or whatever
damages that could have been avoided
thereby will be subtracted from any
recovery.