Contracts: Third Party Problems: Assignment of Rights

• Assignment of Rights – where 1 person under a contract assigns rights/benefits to someone else.

• Two people make a contract; later on, 1 person transfers his rights under the contract to a third party.

• BAR TIP: An assignment of rights transfers only rights, not obligations (frequently tested). By contrast, an assignment of an entire contract transfers both rights and obligations.

• Example: Batman contracts to provide security for Gotham City for $200,000. Batman assigns his rights to the $200,000 payment to Robin.

• Vocab:

• Assignor: the person who later transfers his rights under a contract.

• Assignee: the person to whom the rights are transferred.

• Obligor: the person who owes the assigned performance.

• Compare with TPB – there are different triggering facts.
• TPB: a 3 parties are involved from the beginning
• Assignment: 2 people contract and a third person appears later on.

• Requirements for Making an Effective Assignment

• Gift assignments are valid.
• Consideration is not required to make the assignment valid.
• However, lack of consideration will affect revocability.

• Must have language of present assignment, NOT future assignment.

• Restrictions on Assignment.

• Contract language controls: distinguish a clause that merely prohibits assignment from a clause that completely invalidates assignment.

• The Batman-Gotham City contract provides, “Rights under this contract are not assignable.” Batman assigns the right to payment to Robin anyway. Can Robin collect from Gotham City? Yes. This language merely prohibits assignment. It says don’t do it. Batman will be liable to Gotham City for breach of contract, but the assignment itself is still valid.

• Same facts, except that the contract states, “All assignments under this contract are void.” This language completely invalidates the assignment. It means not only, “don’t do it,” it also means, “it won’t be valid if you do.”

• Assignment cannot substantially change the duties of the obligor.

• A requirements contract is assignable as long as the assignee’s requirements are not out of line with the assignor’s requirements..

• Gotham City contracts to buy all the kryptonite it needs in 2008 from a distributor. Gotham City later assigns its rights under the contract to Metropolis. Does this substantially change the duties of the obligor (the distributor)? Requirements contracts are assignable as long as assignee’s requirements are not out of line with the assignors.

• Rights of an Assignee

• Asignee can sue the obligor for breach of contract, but is subject to the same defenses the obligor could have raised against the assignor.

• Payment by the obligor to the assignor is effective unless the obligor is aware of the assignment.

• Multiple Assignments.

• Gratuitous (“gift”) assignments: the last gratuitous assignee in time prevails because a later gift assignment revokes an earlier one. [LAST IN TIME].

• Batman assigns the right to payment from Gotham City to Robin as a Chanukah gift. Batman later assigns the same right to charity. To whom should Gotham City make payment? The later gift assignment to charity wiped out the earlier assignment to Robin.

• Assignments for consideration

• General rule: the first assignee for consideration prevails because assignments for consideration are much more durable in nature. [FIRST IN TIME]

• [Narrow] Exception to the first in time rule: A later assignee for consideration prevails over earlier assignees if (1) he does not know of the prior assignments and (2) is the first to obtain payment from – or a judgment against – the obligor.

Contracts: Third Party Problems: Delegation of Duties

• Delegation of Duties – where a person transfers his burdens under a contract.

• General rule: contractual duties may be delegated without the consent of the person to whom performance is owed (the “obligee”)

• Exceptions:

• Contract language controls
• If the contract languages prohibits delegation, the duty could not be delegated. If delegation occurs, it would be a breach.
• If the contract prohibits assignment, then delegation is not allowed, either.

• Duties involving special skill or reputation cannot be delegated.

• The delegating party remains liable to the obligee (compare with Novation).

• The delegate is also liable to the obligee if the delegate received consideration.

Contracts: Third Party Problems

• Third-Party Beneficiary Law – where 2 people enter a contract with the intent to benefit a third party.

• Third-party Beneficiary (TPB) can enforce the contract.

• Examples: Insurance contracts; other intended beneficiaries.

• Vocab:

• Third-party beneficiary: a person who did not make a contract, but still has rights under it because the contract was intended to benefit him.

• Promisor: the person who promises to perform for the third party.

• Promisee: the person who secures the promise.

• Intended/incidental beneficiary: A third party named in the contract is an intended beneficiary; otherwise, he’s an incidental beneficiary.

• Only an intended beneficiary has legal rights. Not an incidental beneficiary.

• Creditor/donee beneficiary: If the promisee’s main reason for entering the contract is to discharge a debt owed to the third party, the third party is a creditor beneficiary; otherwise, he is a donee beneficiary. [Note: most TPB’s are donee beneficiaries.]

• The promisor and promisee can rescind or modify the contract until the rights of the third party beneficiary have vested.

• Vested: when TPB learns of the contract and relies on it. The contract cannot be rescinded or modified without the consent of TPB.

• Exception: where the language of the contract lets the promisee change beneficiaries.

• Rights of a TPB.

• TPB can sue the breaching promisor even though there is no privity of contract between them

• Promisor can raise the same defenses against the TPB it could have raised against the promisee.

• Only a creditor beneficiary can sue the promisee, not a donee beneficiary.

• The promisee can recover from the breaching promisor.

Contracts: Remedies: Monetary: Avoidable Damages

• Avoidable damages: Cannot recover damages you could have avoided with reasonable effort (the rule of mitigation).

• Kay Pasa is fired in violation of her contract. She makes $900/week. Her former employer alleges that Kay can get a comparable job paying $800/week. What are Kay’s damages? $100/week. Comparable means the same kind of job in the same city. If Kay doesn’t take the job, her damages will be reduced accordingly.

Contracts: Remedies: Monetary: Consequential Damages

• Consequential damages: damages that are (a) special to this particular plaintiff and (b) reasonably foreseeable by the breaching party at the time of the contract. [common law & article 2] – (limited by a foreseeability requirement].

• Miller contracts with UPS to ship a broken mill shaft to a mill shaft maker for $100. UPS does not perform. Miller pays DHL $150 to ship the shaft. What are Miller’s damages? $50 in expectation damages. Miller was supposed to spend $100 and had to pay $150 for services. $150-100 = $50.

• Same facts, except that UPS delays in shipping the shaft. Miller does not have another shaft. As a result, the mill is shut for 9 extra days. Can Miller recover its $2,000 in lost profits? These damages are special to this Miller. Most mill operators will have more than 1 shaft. It all boils down to whether this was reasonably foreseeable by UPS at the time of the contract. If UPS couldn’t reasonably foresee this result, UPS is not liable. UPS is only liable if it was told about them or if it was reasonably foreseeable.

• House hires me to paint his beach house for $3,000. Before I agree, he tells me that he’ll lose $500 in rent if I don’t finish by Friday. I repudiate the contract. House can’t get anyone to paint by Friday & loses the rent. He later pays $3,400 to get the job done. What are House’s damages? House has $400 in expectation damages. This is the extra $ he had to pay to get the house painted. He has also suffered $500 in consequential damages. Rent was special to the house, and foreseeable. $900 in damages.

Contracts: Remedies: Monetary: Incidental Damages

• Incidental damages: Cost of caring for/transporting goods after breach & cost of arranging a substitute transaction [common law & article 2] – available to both buyer and seller.

• Classic has to store and insure the car after Izzy breaches. Classic also advertises the car for sale after Izzy’s breach. Classic can recover these costs from Izzy. They are incidental damages which are always recoverable – there’s a foreseeability requirement.

Contracts: Remedies: Monetary: Expectation Damages

• Expectation damages: A sum that leaves an injured party in as good a position as full performance (benefit of the bargain). It is the usual measure of damages.
  

• Common Law Damages

• I agree to paint House’s house for $10,000. I breach. He pays another painter $13,000 to paint the house. How much can house recover from me for the breach? $3,000. House expected to pay $10,000 but he paid $13,000. I must give him $3,000 back in order to make him whole.

• Same facts, except that House refuses to pay me after I have started painting his house. I have already spent $5,000. I expected to clear $1,500 in profit. What are my damages? $6,500. My expected profit was $1,500. Instead, I am $5,000 in the hole, so $1,500 + 5,000 = $6,500.

• Damages under Article 2 (formulas)

• Buyer’s damages: sellers tend to breach in rising markets, so replacement goods will cost a buyer more. Article 2 makes up the difference: [cover – contract] or [market – contract].

• B contracts to buy carpeting for $2,500. S does not deliver. The market price for similar carpeting is $2,700. What are B’s damages if B pays $2,800 for the same carpeting? $300. The difference between the cost of the substitute (the cover) and the contract. $2800 – 2500 = $300. The fact that B paid more than the market price is okay as long as B used good faith.

• Same facts, except that B pays $6,000 for much better carpeting. Can B recover the $3,500 difference between the cover price and the contract price? If not, what are B’s damages? No. B cannot use S’s breach to benefit itself at the seller’s expense. Here, B is limited to the difference between the market price and the contract price ($200)

• If B does not buy any carpeting at all, he is entitled to $200 (market price – contract price).

• WRINKLE: If B keeps the goods, even though they are not perfect: B contracts to buy an antique rug for $4,000. B later discovers it’s not antique. B keeps it anyway. The rug is worth $2,000. Had it been antique, it would be worth $7,000. What are B’s damages? $5,000. The difference between the value of goods as promised ($7,000) and the value of goods delivered ($2,000). All you need to do is fulfill B’s expectation. If B makes a good deal, B is entitled to the benefit of the bargain.

• Seller’s damages: buyers tend to breach in falling markets, so a seller won’t be able to get as much for the goods. Article 2 makes up the shortfall: [contract – resale] or [contract – market]

• Seller has to use good faith. If S resells in good faith after buyer breach its Contract price – resale.

• If S does not resell in good faith, or doesn’t resell at all, S gets Contract price – market price.

• WRINKLE: Lost Volume seller – who loses profits even though he resells the goods. Where seller has theoretically unlimited supply. It could have had two sales rather than 1. Seller’s damages are its lost profits on the sale, not the contract price.

Contracts: Remedies: Monetary: Liquidated Damages

• Liquidated damages: Liquidated Damages Clause is in the contract to set what the damages will be in the event of a breach. It’s permissible if damages were difficult to estimate and the provision is a reasonable forecast of probable damages.

• Look to see if the clause is enforceable on its face, or whether it involves an impermissible penalty.

• If damages are flexible and graduated (per diem), they are okay. Also consider whether they are common in the industry. (i.e. in construction contracts for missing a deadline).
• 1 size does not fit all. There must be proportionality. A fixed figure is not valid.

Contracts: Remedies: In Rem: Adequate Assurances (A2)

• Adequate Assurance (Article 2) – Right to request assurance. A party with reasonable grounds for insecurity (nervousness) may request in writing adequate assurance from the other party.

• If the other party does not provide adequate assurance, this can be treated as an anticipatory repudiation of the contract. However, an anticipatory repudiation can be retracted to the extent the other party had not relied on it.

• S contracts to sell B goods on credit. Later, S learns that B is missing payments to other suppliers. Can S demand that B pay cash? No. A party cannot use this provision to re-write the contract, or to demand a particular kind of assurance—all that S is entitled to here is adequate assuranace.

Contracts: Remedies: In Rem: Entrustment

• Entrustment (Article 2) – an owner who entrusts her property to a merchant who deals in goods of the kind has no rights against a BFP.

• An entrusting owner has no right to get her property back from a later BFP. The owner’s only right is to sue the merchant for conversion.
• BAR TIP: Fact pattern is always the same—owner takes jewelry or car in to be repaired by a merchant who also sells that particular kind of good.

Contracts: Remedies: In Rem: Right to Reclaim

• Right to Reclaim: Unpaid Seller’s Right to Reclaim Goods under Article 2

• Gen Rule: unpaid seller has no rights under Article 2 in goods it has delivered to the buyer.

• [narrow] exception: unpaid seller has a right to reclaim goods from the buyer if: (1) the buyer was insolvent when it received the goods and (2) seller demands return within 10 days of B’s receiving the goods.

• Seller has no right to reclaim goods from a third party where B has already sold goods to a third party.

• Exception: Seller has a right to reclaim goods at any time if the buyer misrepresented its solvency to the seller in writing within 3 months before delivery. (Policy: we will not let B benefit from his written misrepresentation).

Contracts: Remedies: In Rem: Specific Performance

• Specific Performance: equitable remedy, available only if monetary damages are clearly inadequate to compensate the injured party. Depends on the subject matter of the contract. [relief of last resort]

• BAR TIP: Specific performance is almost never the right answer on MBE.

• Real Property: Available for real property. Real property is unique.

• Sale of Goods (Article 2): only available if the good is unique or the buyer cannot cover (art, antiques, custom goods) – when similar goods are not available in the marketplace.

• Service contracts: generally not available. The court is not going to force someone to work.

• However, courts are willing to bar an employee from working for a competitor -- negative specific performance.

Contracts: Remedies

In Rem Remedies ("the thing itself") - non-monetary remedies

• Specific Performance
• Right to Reclaim
• Entrustment
• Adequate Assurances

Monetary Damages

• Liquidated Damages
• Expectation Damages
• Incidental Damages
• Consequential Damages
• Avoidable Damages
  

Contracts: Excuse of Performance Based on Later Events: Failure of an express condition

• Failure of an express condition will excuse non-performance.

• Express condition: contract language that does not create an obligation, but limits obligations created by other contract language (“if” “so long as” “when” “provided” “on the condition that” “unless”). Strict compliance required.

• Satisfaction clauses: apply a reasonable person standard unless the contract deals with art or matters of personal taste, aesthetics.

• Conditions precedent/concurrent/subsequent: a matter of timing.

• If it rains on 7/2 – condition precedent (something happens before)

• As long as Derek keeps the clubs in good repair – condition concurrent (runs along side performance)

• Until the Mets win the World Series– condition subsequent

• BAR TIP: On the bar exam, you are most likely to encounter a condition precedent.

• Occurrence of a condition may be excused by the later action (or inaction) of the person who is protected by the condition.

• Failure to cooperate may excuse the occurrence of a condition

• B agrees to buy S’s house for $300,000 provided that B gets a $200,000 mortgage at 5% or less. B makes no effort to get a mortgage. B refuses to buy the house. When S sues B for breach of contract, B asserts that the condition wasn’t satisfied: he didn’t get a mortgage. Who wins? The SELLER. The buyer is protected by the condition, and he said or did something to acquire the condition. But he failed to look for a mortgage. The buyer loses the protection of the condition and has to go through with the deal.

• Waiver may excuse the occurrence of a condition

• Owner’s duty to make monthly payments is conditioned on Builder’s providing an architect’s certificate for the work. Owner tells Builder he will pay without a certificate. The next month, Builder does not provide a certificate. Owner refuses to pay. BUT the owner has to pay. The owner was protected by the condition—and he gave up – or waived that protection. The builder relied on O’s statement, therefore O loses the protection of the condition.

Contracts: Excuse of Performance Based on Later Events: A later unforseen event

• A later unforeseen event that renders the seller’s performance impossible (common law) or impracticable (Article 2) may provide the seller with an excuse for non-performance.

• BAR TIP: Impossibility/impracticability rarely excuses the seller on MBE.

• Destruction of something necessary for performance
• Common Law
• Caldwell leases his hall to Taylor for a concert on June 1. The hall burns down on May 26. Taylor sues Caldwell for breach of contract. Caldwell is excused from performing because destruction of the concert hall makes his performance impossible.
• Article 2 (same general rule, but look out for 2 trick questions)

• Were the goods “identified” to this particular contract?

• Did the buyer bear the risk of loss? (trick question)

• Jerry contracts to sell his Corvette for $26,000. After Jerry tenders the car, but before buyer takes it, a flood destroys the car. Under the risk of loss rules, must Buyer pay for the car? Yes. Jerry is not a merchant here. Risk of loss transferred to buyer when Jerry tendered the car. Buyer has to pay for the contract price.

• S contracts to sell B 100 bales of hay for $800. After the contract, but before the risk of loss has passed to B, fire destroys S’s hay. Is S’s performance excused by the fire? No. Unlike Jerry’s corvette, hay is fungible, not distinctive, and easily replaced. S is not excused from performing.

• Death or incapacity of a person essential for performance – unless there is some evidence that the person who died or became incapacitated had special talents, it will not be an excuse for performance.

• Supervening government regulation or order

• Frustration of purpose (buyer’s remedy)

• Phoebe rents Joe’s apartment for Thanksgiving for its great view of the Macy’s Thanksgiving Day parade. Joe knows why Phoebe is renting his place. The parade is cancelled 2 days before Thanksgiving. Is Phoebe’s performance excused by frustration of purpose? Yes. (1) at the time of the contract, Joe knew what Phoebe’s purpose was. (2) A later unforeseen even thwarts that purpose.

• Phoebe agrees to rent Joe’s store. Joe knows that Phoebe’s purpose in renting the store is to operate a coffee shops. A month later, Starbucks announces that it is operating a coffee shop right next door. Is Phoebe’s performance excused by frustration of purpose. No. Phoebe can still open up a coffee shop. Mere lack of profits is not enough to arise to rise to level of frustration of purpose.

Contracts: Excuse of Performance Based on Later Events: A later agreement between the parties

• A later agreement between the parties may provide an excuse for non-performance.

• Rescission - an agreement to cancel the contract

• For a rescission to be effective, each party must have some performance remaining otherwise, there would not be any consideration for the rescission agreement.

• Modification – [takes effect now] an agreement replacing an existing contract with a new contract

• Mike borrows $2,000 from Susan and promises to repay her with interest. Later she agrees to discharge the debt now if Mike promises to fix her hot tub. Mike makes the promise. What are Susan’s rights if Mike does not fix her hot tub as promised? She can only sue Mike on the hot tub deal because Mike’s duty to pay her the $2,000 was excused by the modification agreement which takes effect immediately.

• Accord – [takes effect then] (an agreement to accept a stated performance in future satisfaction of an existing duty) and Satisfaction (performance of the accord).

• Same facts, except they agree that if Mike fixes Susan’s hot tub, then she will discharge the debt. What are Susan’s rights if Mike does not fix her hot tub as promised? Then Susan can sue him either on the hot tub deal or the original debt. The original debt is not excused until the accord is satisfied.

• Novation – an agreement substituting a new party for an existing one.

• All parties to the contract will agree to the substitution. The new party, the existing party and the other existing party.

• BAR TIP: Look for questions that distinguish between a Novation and a mere delegation of duties.

Contracts: Excuse of Performance Based on Later Events: Other party's anticipatory repudiation

• The other party’s anticipatory repudiation may provide an excuse for non-performance.

• Operates just like a material breach. If I tell Martha that I am not going to pay her for her work on my house upon completion, as agreed, she can stop work and sue me for damages.

• An anticipatory repudiation can be retracted as long as it has not been relied on.

• Repudiation by conduct can also excuse performance.

Contracts: Excuse of Performance Based on Later Events: Other party's breach

(Does non-performing-party have an excuse that the law will recognize?)

• The other party’s breach may provide an excuse for non-performance

• Sale of goods: If tender is not perfect, the buyer can accept all the goods, reject all of the goods, or accept any commercial units and reject the rest. Whichever option to buyer chooses, she can still get damages from the seller.

• Common law contracts: damages are available for any breach of contract, but only a material breach excuses the injured party from having to perform.

• I hire Martha to decorate my house. She finishes, except for 1 bathroom. What are my rights against Martha? Martha breached the contract, so I can get damages from her, but I am not excused from paying her the contract price. Martha substantially performed.

• What if Martha quit after she decorates only the foyer? It’s a material breach. I not only get damages, I am excused from paying the contract price. HOWEVER, Martha can still recover in quasi-contract for the reasonable value of the benefit conferred.

• Martha contracts to decorate 10 identical cabanas for $90,000. She decorates 3 cabanas, then quits. Can Martha recover under the contract for painting the 3 cabanas? No. 3 out of 10 is a material breach. She can’t recover on the contract, but she can still recover in quasi-contract for the reasonable value of the benefit conferred.

• What if the contract proves for payment of $9,000 per cabana instead of $90,000 for all 10? It’s a divisible contract because payment is on a per unit basis. We do substantial performance on a per-unit basis, too. Martha gets 3x9,000 (the contract price for the 3 cabanas she decorated). Here, her compensation is expressly stated in the contract on a per unit basis.

Contracts: Performance: Performance of Common Law Contracts

• Performance of Common Law Contracts: performance does not have to be perfect. Substantial performance is all that is required [cannot commit a material breach].

• Almost is good enough

Contracts: Performance: Performance of K's for Sale of Goods: Buyer's Payment Obligation

• Buyer’s Payment Obligation – seller can insist on payment in cash. If seller insists on cash, buyer will have additional reasonable time to get it.