Contractual Obligations and Their Enforcement

CHAPTER 11

Contractual Obligations and Their Enforcement

The Transfer of Contract Rights and Duties

Assignment—the transfer of a right a party may have under a contract to another party Assignor—party who transfers the right Assignee—party who receives the right

From the perspective of the courts, the assignee “stands in the shoes of the assignor” Assignee receives exactly the same contractual rights

and duties as the assignor had—no more, no lessIf a contractual right is transferred, it does

not affect the legal rights of the other party to the contract


In all assignments, the assignor guarantees to the assignee that the assignor has the right to assign and that the assigned right is legally enforceable

The assignor does not promise that the obligor (the one who owes a duty under the contract) will perform as promised in the original contract If the obligor breaches, the assignee, not the assignor,

must sue for breach


Assignable Rights Generally, a party may assign contractual rights to another,

provided performance will not be materially changed Performance is the fulfillment of contractual promises as agreed

Non-Assignable Rights Contractual rights may not be assigned if performance

requirements would be materially changed as a consequence A right created under a contract that prohibits transfer of the

contractual rights Claims for damages for personal injuries Claims against the United States Rights to personal services, especially those of a skilled nature,

or when personal trust and confidence are involved Assignments of future wages, as limited by state statutes


Form of Assignments Assignment of contractual rights usually is made

voluntarily by the assignor. While an assignment is usually valid whether oral or

written, a written assignment is always wiser Some state statutes require that certain assignments be

written 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


Delegation of Contractual Duties The routine obligations of a party that must be

performed to fulfill a contract often can be transferred to another to perform Delegation of duties

A person who delegates contractual duties remains legally obligated and responsible for proper performance even though someone else may do the required work

A person cannot delegate duties to another where performance requires unique personal skill or special qualifications

A contract creating a duty can prohibit delegation

Discharge of Contractual Obligations

By Performance Discharge—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 Significance of breach determines what the non-

breaching party can do in response When one party fails to perform a crucial duty under a

contract, the other party may treat such a failure as a major breach and regard his/her own obligation as discharged


By Performance continued Substantial performance—when just about all of the

contractual duties are performed but a minor duty under the contract remains There has only been a minor breach therefore, it does not

discharge the duties of the non-breaching party the way a major breach does

The party who has substantially performed can sue and recover what was due; less the cost of completing the remaining work

If the failure was deliberate, however, the non-breaching party may treat it as a major breach


By Performance continued Default—failure to perform Anticipatory breach—a party defaults and notifies the

other party to a contract before the time of performance has arrived that he/she will not perform The non-breaching party may wait until the time of

performance or may treat the notice as evidence of a breach of contract and immediately sue for damages


By Performance continued Timing of Performance

Contracts often identify a duty but don’t say when it must be performed In this case, the duty must be performed within a

reasonable time If it is not, this is a breach

• A judge or jury determines a reasonable time after examining the circumstances in each case

In other instances, the contract identifies a date for performance• Most courts will rule that performance shortly after the date is

only a minor breach If a contract states that performance is to occur by a

specific date and that “time is of the essence” failure to perform is considered a major breach

Discharge of Contractual Duties

By the Initial Terms When parties prepare their contracts, they may agree

that it will terminate: On a specified date or upon the expiration of a specified

time period Upon the occurrence of a specified event Upon the failure of a certain event to happen At the free will of either party upon giving notice


By Subsequent Agreement The parties who have made a contract may later

mutually agree to change either the terms of the contract or the nature of their relationship They may do so without any liability for breach in any of

the following ways Rescission—parties may agree to unmake or undo their

entire contract form its very beginning Accord and Satisfaction—parties may decided that the

present contract is not what they want, and so replace it with a new contract

Novation—a party entitled to receive performance under a contract may release the other party from the duty of performance and accept the substitute party


By Impossibility of Performance Generally, impossibility of performance refers to extreme

external conditions rather than an obligor’s personal inability to perform Examples:

Surprise war Unexpected embargo Earthquake

Impossibility of performance also may be used to discharge contractual obligations when events on a smaller scale interfere Unique subject matter identified in the contract is destroyed

before it can be delivered A performance becomes illegal before it can be rendered The death or disability of someone who was to provide a

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 Debts 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 without the consent of the other party—the alteration must be: Material—thus changing the obligation in an important way Made intentionally—not by accident or mistake Made by a party to the agreement or by an authorized agent Made without the consent of the other party


By Tender of Performance Tender–a ready, willing, and able offer to perform an

obligation If the duty requires the 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 the payment of monies, rejection of an offer to pay the money does not discharge the debt nor does it prevent the creditor from collecting later Relieves the debtor of court costs or future interest

charges that might become due• Tender must consist of the exact amount due in currency

or coins—legal tender

Remedies for Breach

Remedy—the action or procedure followed to enforce a right or get damages for an injury to a right

Remedy for a Minor Breach Money damages

The party injured by a minor breach generally must continue to perform the duties defined by the contract

The amount of damages would be whatever it took to complete the minor duty

They could be deducted from the money due the breaching party

They could be recovered by suit if the victim had already paid

Remedies for Breach

Remedies for a Major Breach If the breach is classified as major, then the injured

party need not continue performing the duties defined by the contract

In addition, the victim may choose among the following remedies: Rescission and restitution Money damages Specific performance

Remedies for Breach

Remedies for a Major Breach Rescission and Restitution

Rescission—allows the parties to treat the contract as cancelled

Restitution—permits the injured party to recover money or property (or the value thereof) given to the defaulting party

Remedies for Breach

Remedies for a Major Breach Money Damages

Compensatory—seeks to place the injured parties in the same financial position they would have been if there had no breach

Consequential—court tries to place the injured parties in the same financial position they would have been in if the contract had been performed—grants money for the foreseeable injuries caused by the breach

Punitive—added to other money damages—used to punish or make an example of the defendant

Liquidated—parties to a contract sometimes agree that a certain amount of money will be paid if a certain breach occurs

Nominal—token amount even when no substantial harm has been done

Remedies for Breach

Remedies for a Major Breach Specific Performance

Sometimes the only remedy for breach of contract is to order that the breaching party do exactly what was required under the contract

Generally available when the subject of the contract is unique such as in the purchase of a 1932 Rolls Royce or a specific parcel of land

Courts are reluctant to grant specific performance in situations where they would have difficulty supervising the result Courts can issue an injunction prohibiting the defaulting party

from working for anyone else during the period of time agreed to under the contract

Specific performance is an equitable remedy—the court will not award the remedy unless the party seeking it is blameless and has acted reasonably and fairly throughout the transaction

Factors Affecting Choice of Remedy

Conflict of Remedies Electing to pursue one remedy will rule out pursuing

another Specific performance and damages cannot be recovered

for the same breach Rescission and restitution cannot be combined with

damages

Duty to Mitigate A party injured by a breach of contract is required by

law to take reasonable steps to minimize the harm done

If the 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

Factors Affecting Choice of Remedy

Waivers Sometimes a party intentionally and explicitly gives

up a contractual rightStatute of Limitations

Statutes in all states deny any remedy if suit is not brought within a certain time after a legal claim arises

Bankruptcy Under the U.S. Constitution, Congress has established

uniform laws on bankruptcies that permit the discharge of debts Debtors can get a fresh start, and creditors share fairly

in whatever assets are available

Marriage and Contracts

Marriage is a legal union of two people No law specifies a minimum age for dating, although

there are still state laws setting a minimum age for marriage without parental permission (typically 18)

No law restricts marriage partners with one exception, close relatives may not marry


Contractual Elements of Premarital Relationships If one party proposes marriage and the other accepts,

a binding contract results If both later mutually agree to end their engagement, the

law considers their agreement void and never to have existed

If only one party wants out of the contract and refuses to perform, a breach-of-promise suit may be brought by the other party

When a relationship breaks down, gifts given by one party to the other may create legal problems Engagement rings may be ordered to be returned Some states allow the woman to keep the ring if the

man breaks off the engagement


Contractual Elements of Premarital Relationships Statutory Requirements

Each state has its own requirements for marriage Most couples begin the process by obtaining a marriage

license (revenue license) Some states require a blood test to show that applicants

are free of communicable diseases A mandatory waiting period of three days form

application issuance is common Once the license has been issued, any authorized

religious or civil officials can perform the ceremony


Contractual Elements of Marital Relationships Marital Consortium

Mutual duties of married couple If either spouse suffers and injury that prevents the

fulfillment of these marital duties, the other can sue the party who caused the harm for damages of the “loss of consortium”

The most important duty of both spouses is to provide for the support, nurture, welfare, and education of their children

Rights and Duties of Parenthood Parents are obligated by law to support their children until

they reach adulthood An exception is an emancipated minor Financial support is a joint obligation Both parents in a married couple have custody rights to their

children


Contractual Elements of Marital Relationships Property Rights and Duties

Property acquired during the marriage may be kept in the name of one or both of the married couple

Either marital partner can buy or sell property of all types in his or her own name and have sole control of the respective earnings and credit

Keeping a spouse from getting property rights can be accomplished through a prenuptial agreement Give up any future claim they might have to part or all of the

other’s property The actions of one spouse may incur a liability for the other

Stay-at-home spouse—person working is responsible for the debts incurred by the other spouse in purchasing food, clothing, medical care, furniture, and any other household necessities


Common Law Marriage Have their roots in the American frontier Many pioneers could not follow the legal methods for

becoming husband and wife Law recognized common-law marriages that occurred

when a single man and a single woman lived together, shared property, and held themselves as husband and wife for a prolonged time period (usually 10 years)

Today about ¼ of states fully allow common-law marriages

Ending the Marriage Contract

By annulment Annulment—a court order that cancels a marriage

because of a problem that existed from the beginning of the marriage

Annulments serve to end marriages considered to be either voidable or void

Voidable: Refusal to have children Fraudulent grounds

Void Created when laws are violated by the matrimonial union


By Divorce Dissolution of the marriage Court action that terminates the marriage and divides

the property and responsibilities between parties Separation

First step toward divorce Spouses maintain separate living quarters, but marital

rights and obligations remain intact No Fault Divorce

In a no-fault divorce proceeding, there is no assignment of fault for the dissolution

Irreconcilable differences


Typical Issues in a Divorce Division of Property

In most states, marital property laws are based on English Common Law

Property brought into a marriage by a spouse will remain that spouse’s property should the marriage end

During the marriage, whatever is earned, inherited, or received as a gift remains the property of the spouse who earned or received it

States that do not follow this are called community property states Half of all property acquired by the marital partners during

marriage is presumed to belong to each Property owned by either spouse at the time of the marriage or

received by gift or inheritance during the marriage remains each spouse’s own

Most state laws provide some type of equitable distribution of marital property upon the dissolution of the marriage


Typical Issues in a Divorce Child Custody and Support

Concerned with the division of the physical and other cares and control responsibilities for a child

The welfare of the child is the most important consideration in determining who will have custody of the child

Considerations: Parents’ wishes as to custody Child’s wishes as to custody Child’s relationship with parents, siblings, and others who may

affect the child’s best interest Child’s adjustment to home, school, and community Physical and mental health of all persons concerned

Joint Custody—both parents remain involved Child support—parents are obligated to provide a dependant

child with appropriate maintenance

Ending the Marital Contract

Typical Issues in Divorce Alimony

Support paid by the wage earner of the family to the other spouse

Usually paid at regular intervals In some cases may be a lump-sum Not intended to penalize the person ordered to pay Factors considered by the court:

Paying spouse’s income Financial responsibilities Earnings outlook Current debts Number of dependants

Documents

Contractual Obligations and Their Enforcement