Contracts:
Third Party Rights, Discharge,
Breach and Remedies
Chapter 10
Privity Of Contract
• As a general rule, only the parties to a
contract owe any duties and enjoy any
rights arising from the contract.
Privity Of Contract
• Exceptions:
– Third-Party Beneficiary
• The law distinguishes between intended and
incidental third-party beneficiaries.
• Only intended beneficiaries acquire
actionable legal rights in a contract.
Third-Party Beneficiaries
• Intended Beneficiary
– A third party for whose benefit a contract is
formed.
– Rights vest when:
• Third party consents
• Third party alters their position in reliance
• Conditions for vesting are satisfied
– Example: life insurance.
Third-Party Beneficiaries
• Incidental Beneficiary
– A third party who benefits from the
performance of a contract, but whose
benefit was not the reason the contract
was formed.
– Example: include construction contracts.
Privity Of Contract
• Exceptions:
– Assignment - a party to the contract (the
assignor) transfers his or her rights to
some third party (the assignee).
– Delegation - a party to the contract frees
himself or herself from duties by having
some third party perform those duties.
Assignment of Rights
• Generally, all contracts may be assigned,
BUT
– Some assignments may be prohibited by
law or by contract.
– Not allowed if for personal services or to
a personal standard.
– Not allowed if it would materially alter
duties of party.
Liabilities of Parties
• The assignor remains liable if the assignee
fails to perform.
• The other party may sue both the assignor
and the assignee.
• Assignee acquires no greater rights than
held by assignor.
Delegation of Duty
• Delegating a duty does not relieve party
making the delegation form liability if party
does not perform.
Delegation of Duty
Duties that may not be delegated
• Performance depends on the skill of the
obligor.
• Special trust has been placed in the obligor.
• Performance by a third party will alter the
expectation of the duty contract.
• Contract expressly prohibits delegation.
Discharge, Performance, and
Tender
• Discharge - the termination of a party’s
obligations arising under a contract.
• Discharge occurs either when:
– Both parties have performed their
contractual obligations.
– Events, conduct of the parties, and/or
operation of law release the parties from
their obligations to perform.
Discharge, Performance, and
Tender
• Performance
– Fulfilling one’s contractual duties.
• Tender
– An unconditional offer to perform an
obligation by a person who is ready,
willing, and able to do so.
Contractual Performance
• Complete vs. Substantial Performance
– In order to qualify as substantial
performance, the party’s performance
must not vary greatly from that promised
in the contract, and it must create
substantially the same benefits as those
promised in the contract.
Contractual Performance
• Complete vs. Substantial Performance
– If one party substantially performs, the
other party’s duty to perform remains
absolute, but the other party may be
entitled to recover damages for the
substantially performing party’s failure to
fully perform.
Breach And Repudiation
• Breach of Contract
– A party’s failure, without legal excuse, to
substantially perform the obligations he
or she has promised to perform.
– If a party’s breach is non-material, the
non-breaching party’s duty to perform
may be suspended until the breach is
remedied or cured.
Breach And Repudiation
• Anticipatory Repudiation
– An action by a party to a contract that
indicates that he or she will not perform a
contractual obligation due to be
performed in the future.
– Such a repudiation will excuse the nonrepudiating party from performing under
the contract.
Discharge By Agreement
• Rescission - the process by which the
parties cancel a contract and return one
another to their pre-contract status.
• Novation - substituting a new contract for
an old one thereby terminating the parties’
rights and duties under the old contract.
• Accord and Satisfaction - an agreement
between the parties to accept different
performance than originally promised.
Discharge By Impossibility
• A party may be relieved of his or her
contractual duties when performance
becomes either impossible or totally
impracticable through no fault of either
party to the contract.
• An objective standard is used.
• Temporary impossibility only may allow
delay of performance.
• Force Majeure clause
Impossibility Of Performance
• Temporary Impossibility
– A change in circumstances that makes
performance temporarily impossible will
suspend but not excuse performance.
Suing For Damages
• A breach of contract entitles the nonbreaching party to sue for money damages.
Types Of Monetary Damages
• Compensatory Damages - compensate the
non-breaching party for the injuries or
losses actually sustained due to the breach.
• Consequential Damages - indirect losses
which were reasonably foreseeable.
• Punitive Damages - designed to punish a
wrongdoer.
• Nominal Damages - awarded if no actual
damages are provable.
Mitigation, Liquidated Damages,
And Penalties
• Mitigation of Damages
– In most situations, when a breach of
contract occurs, the non-breaching party
has a duty to take whatever action is
reasonable to minimize the damages
caused by the breach.
Mitigation, Liquidated Damages,
And Penalties
• Liquidated Damages
– Contract provisions specifying a certain
sum of money to be paid by the breaching
party in the event that he or she fails to
perform as required.
– Generally based on a reasonable estimate
of the value of the promised performance.
– Cannot be a penalty
Equitable Remedies
• In addition to money damages, there are
several equitable remedies available.
Equitable Remedies
• Rescission - canceling a contract and
returning the parties to their pre-contract
position. Recession requires restitution.
• Restitution - returning goods, property, or
money previously transferred in order to
restore the non-breaching party to his or her
pre-contract position.
Equitable Remedies
• Specific Performance - requiring the
breaching party to perform exactly as
required (only granted only when money
damages would be an inadequate remedy
and the subject matter of the contract is
unique).
• Reformation - a remedy allowing the
contract to be re-written to reflect the true
intent of the parties.
Contracts:
Third Party Rights, Discharge,
Breach and Remedies
End of Chapter 10