Week 7: Facilitating Exchange; What Excuses Contract Performance; Rights When Transactions Break Down Reading: S&R Chapters 17, 18 Outline : I. Contracts (Continued)… F. Performance, Breach, & Discharge – At this stage we’re assuming a valid contract is in effect. The question is whether a party has kept his or her promise. The common scenario is when one of the parties refuses to perform on the ground that her contractual obligations have been excused or terminated. The other party cries “foul” and the issue is whether the non-performing party’s refusal is indeed justified. Justification can be based on the circumstances outlined below. 1. Conditions – are all about “risk.” Who should bear the risk of non- performance of a condition? The party controlling the risk, generally, or the party risking forfeiture of value in the event of non-occurrence. a. Express Conditions [S&R 17 – Problems 10, 11] i. Satisfaction of Contracting Party ii. Satisfaction of Third Party b. Implied-in-Fact Conditions c. Implied-in-Law Conditions d. Concurrent Conditions e. Conditions Precedent f. Conditions Subsequent 2. Discharge by Performance 25 3. Discharge by Breach -- Contracts law, in general, favors the continuation of a contractual relationship once it has begun. So, to avoid opportunism (i.e. looking for an excuse not to perform) we need rules that distinguish between significant or “material” excuses and trivial or formalistic ones. a. Material Breach [S&R 17 – Problem 6] i. Prevention of Performance ii. Perfect Tender Rule b. Substantial Performance c. Anticipatory Repudiation [S&R 17 – Problem 8] 4. Discharge by Agreement of Parties 5. Discharge by Operation of Law a. Impossibility i. Destruction of Subject Matter[S&R 17– Problems1,5] ii. Subsequent Illegality iii. Frustration of Purpose [S&R 17 – Problem 2] iv. Commercial Impracticability b. Bankruptcy c. Statute of Limitations 26 G. Remedies – The general rule is that an injured party may recover from the breaching party a sum – called expectation damages, or the “benefit of the bargain” – sufficient to put him in as good a position as if the contract had been performed in full. 1. Interests Protected 2. Monetary Damages – [Example: C agrees to build O’s house for $100k. Material and labor cost to C is $80k. Profit is $20k.] a. Compensatory Damages i. Loss of Value – [Example: After house is partly built ($50k of work expended) C repudiates and O spends $55k to finish job. Damage to O?] ii. Incidental Damages iii. Consequential Damages iv. Expenses Saved b. Nominal Damages c. Reliance Damages – [Example: O repudiates after C has spent $50k on wages and materials. Damage to C?] d. Damages for Misrepresentation e. Punitive Damages -- Generally, not allowed. Is the breach and compensate scheme fair? Economically efficient? f. Liquidated Damages vs. Penalty [S&R 18 – Problem 2] g. Limitations on Damages – [Example: B contracts with S for 1,000 barrels of oil at $20 per, to be delivered in 90 days. On delivery date, oil is $14 per in the market. B refuses to go ahead with the deal. What are S’s damages?] i. Foreseeability of Damages ii. Certainty of Damages iii. Mitigation of Damages – [Example: 1. Must S dispose of oil at $14 per on B’s breach? 2. UCC’s Lost Volume Seller Exception. 3. Case of Shirley Maclaine, Bloomer Girl, and Big Country/Big Man.] 3. Remedies in Equity – The law of contracts compels performance in very limited circumstances. a. Specific Performance [S&R 18 – Problem 6] b. Injunctions [S&R 18 – Problem 4] 4. Restitution 5. Limitations on Remedies 27 .