Contract Defenses,
Discharge, and Remedies
DEFENSES TO CONTRACT
FORMATION OR ENFORCEABILITY
• A contract that is otherwise valid may be
unenforceable if:
– the parties have not genuinely assented to the
terms.
– the contract is not in the proper form.
Mistakes
Genuineness of Assent
Unilateral - Generally, the mistaken party is bound by the contract.
Bilateral - When both parties are mistaken about the same material fact,
such as identity, either party can avoid the contract. If the mistake
concerns value or quality, either party can enforce the contract.
Fraudulent misrepresentation - When fraud occurs, usually the innocent party
can enforce or avoid the contract. For damages, the innocent party must suffer an
injury.
Undue influence - Undue influence arises from special relationships, such as
fiduciary or confidential relationships, in which one party’s free will has been
overcome by the undue influence exerted by the other party. Usually, the
contract is voidable.
Duress - Duress is defined as forcing a party to enter a contract under the fear of
a threat-for example, the threat of violence or serious economic loss. The party
forced to enter the contract can rescind the contract.
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THIRD PARTY RIGHTS
• There are two important exceptions to the rule of
privity of contract.
– A party to a contract may transfer the rights arising
from the contract to another or to free himself or
herself from the duties by having another person
perform them. The first of these actions is referred
to as an assignment of rights and and the second,
delegation of duties.
– Where a contract involves a third party beneficiary
contract.
CONTRACT DISCHARGE
• In addition to performance, there are
numerous other ways in which a contact can be
discharged, including:
– Discharge by Agreement of the parties and
– Discharge based on impossibility of
performance.
Discharge by Performance
• A contract may be discharged by complete
(strict) or by substantial performance.
– In some case, performance must be to the
satisfaction of another.
• Totally inadequate performance constitutes a
material breach of contract.
• An anticipatory repudiation of a contract
allows the other party to sue immediately for
breach of contract.
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Discharge by Agreement
• Parties may agree to discharge their
contractual obligations in several ways:
By Rescission
By Novation
By Accord and
Satisfaction
The parties
mutually agree
to rescind
(cancel) the
contract.
A new party is
substituted for
one of the
primary parties
to a contract.
The parties
agree to render
performance
different from
that originally
agreed on.
Compensatory Damages
• Damages that compensate the nonbreaching party for injuries
actually sustained and proved to have arisen directly from the
loss of the bargain resulting from the breach of contract.
• In breaches of contracts for the sale of goods or land, the usual
measure of compensatory damages is an amount equal to the
difference between the contract price and the market price.
• In breached construction contracts, the measure of damages
depends on which party breaches and at what stage of
construction the breach occurs.
Measurement of DamagesBreach of Construction Contracts
Party in Breach
Time of Breach
Measurement of Damages
Owner
Before construction
begins
Owner
After construction
begins
After construction is
completed
Before construction is Generally, all costs
completed
incurred by owner to
complete construction
Owner
Contractor
Profits (contract price less
cost of materials and
labor)
Profits plus costs incurred
up to time of breach
Contract price
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Consequential Damages
• Damages resulting from special circumstances beyond
the contract itself; the damages flow only from the
consequences of a breach.
• For a party to recover consequential damages the
damages must be the foreseeable result of a breach of
contract.
• The breaching party also must have known at the time
the contract was formed that special circumstances
existed and that the nonbreaching party would incur
additional loss on breach of the contract.
Punitive Damages
• Punitive damages (also known as exemplary
damages) are awarded to punish the breaching
party and deter similar conduct in the future.
• These are usually not awarded in an action for
breach of contract unless a tort is involved.
Nominal Damages
• Nominal damages are those small in amount
(such as one dollar) that are awarded when a
breach had occurred but no actual damages
have been suffered.
• They are often awarded only to establish that
the defendant acted wrongfully.
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Liquidated Damages
• Damages that may be specified in a contract as the
amount to be paid to the nonbreaching party in the
event the contract is later breached.
• Clauses providing for liquidated damages are enforced
if the damages were difficult to estimate at the time
the contract was formed and if the amount stipulated
is reasonable.
• If construed to be a penalty, the clause will not be
enforced.
RESCISSION and RESTITUTION
Rescission
Restitution
• A remedy whereby a contract is
canceled and the parties are
restored to the original positions
that they occupied prior to the
transaction.
• When a contract is rescinded,
both parties must make
restitution to each other by
returning the goods, property,
or money previously conveyed.
• Available when fraud, a mistake,
duress, or failure of
consideration is present.
• Restitution prevents the unjust
enrichment of the defendant.
• The rescinding party must give
prompt notice of the rescission to
the breaching party.
SPECIFIC PERFORMANCE
• An equitable remedy calling for the ‘performance of the
act promised in the contract’.
• Specific performance is only available in special
situations, such as
– those involving contracts for the sale of unique goods or
land, or
– when monetary damages would be an inadequate remedy.
• Specific performance is not available as a remedy in
breached contracts for personal services.
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REFORMATION
• An equitable remedy allowing a contract to
be “reformed,” or “rewritten”, to reflect the
parties’ true intentions.
• Available when an agreement is imperfectly
expressed in writing.
RECOVERY BASED ON QUASI
CONTRACT
• An equitable theory imposed by the courts to prevent
unjust enrichment in a situation in which no enforceable
contract exists.
• The party seeking recovery must show:
– A benefit was conferred on the other party.
– The party conferring the benefit did so with the expectation of
being paid.
– The benefit was not volunteered.
– Retaining the benefit without paying for it would result in the
unjust enrichment of the party receiving the benefit.
ELECTION OF REMEDIES
• A common law doctrine under which a
nonbreaching party must choose one remedy
from those available.
• The purpose of the doctrine is to prevent
double recovery.
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THE SALE OF GOODS
• Article 2 in the UCC governs contracts for the
sale of goods (tangible, movable personal
property).
• The common law of contracts also applies to
sales contracts to the extent that the common
law has not been modified by the UCC.
Performance of a Sales Contract
• The basic obligation of a seller under a sales
contract is to transfer and deliver conforming
goods-- that is goods that conform to the
specifications of the contract.
• The basic obligation of a buyer is to accept
and pay for conforming goods in accordance
with the contract.
Remedies for Breach of Sales
Contracts
• When the buyer breaches a contact for the sale
of goods, the seller may stop or withhold
delivery of the goods, or recover damages or the
purchase price of the goods.
• When the seller breaches a sales contract, the
buyer may reject the goods, recover damages,
obtain specific performance, or cover and obtain
from the seller the extra cost of the cover.
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