1. Chapter 12
Third Parties, Discharge, and Remedies
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2. Learning Objectives
1. Explain the legal rights given to all beneficiaries.
2. Identify the legal rights given to incidental beneficiaries.
3. Explain the assignment of rights and the delegation of
duties.
4. Explain the nature of a novation.
5. Relate what constitutes satisfactory performance of a
contract.
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3. Learning Objectives
6. Outline the difference between complete and
substantial performance.
7. List the ways that a contract can be discharged by
nonperformance.
8. Clarify the concept of anticipatory repudiation.
9. Enumerate the types of damages available in the event
of a breach of contract.
10. Contrast specific performance with injunctive relief.
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4. Contracts and Third Parties
• Third party (outside party)
– a person who may in some way be affected by a
contract but who is not one of the contracting parties.
• Third party beneficiary
– A third party receiving benefits from a contract made
by others
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5. Intended Beneficiaries
• Intended beneficiary
– The contract was designed to benefit them
– Can enforce the contract even though not in privity
• some exceptions, varying among states
• Creditor beneficiary
– An outside third party to whom one or both
contracting parties owe a continuing debt of obligation
arising from a contract.
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6. Common Intended Beneficiaries
• Donee Beneficiaries
– A third party who provides no consideration for the
benefits received and who owes the contracting
parties no legal duty
• Insurance Beneficiaries
– Usually considered a donee beneficiary
– In some cases, can be both insurance and creditor
beneficiary
• Mortgage loan requiring mortgage life insurance policy
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7. Incidental Beneficiaries
• Incidental beneficiary
– Would substantially benefit if the agreement
were performed, but whose benefit was not
part of the contract
– Have no legal right to enforce the contract
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8. The Law of Assignment
• Assignment
–a transfer of a contract right
• Delegation
–a transfer of a contract duty
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9. Parties to Assignment
• Assignor
– The party who assigns rights or delegates duties
• Assignee
– The outside third party to whom the assignment is
made
• Obligor
– The remaining party to the original agreement
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10. From King to Gomez to Walker
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11. Consideration in Assignment
• Consideration not required for assignment
– But lack of consideration allows assignor to repudiate
anytime before execution
– Also allows creditors of assignor to rescind assignment
on grounds of fraudulent conveyance
• Fraudulent conveyance
– Transfer of property with the intent to defraud
creditors
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12. Form of Assignment
• Assignment may be accomplished through
written, oral, or implied agreements between the
assignor and the assignee
• Must observe the requirement provided by the
equal dignities rule
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13. Form of Assignment
Figure 14-1
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14. Notice of Assignment
• An assignment is valid at the time it is made
• To protect against subsequent assignments, the
assignee should give notice of the assignment to
the obligor
– The assignor may also give notice
• Once notified, the obligor should deal with the
assignee
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15. Notice of Assignment
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16. Subsequent Assignments
• If the assignor make a subsequent assignment of
the same right, the courts must decide which of
the two assignees has a superior right and claim
against the obligor
• Superior right usually given to first assignee, but
sometimes given to assignee who first gives
notice to obligor
– Depends on jurisdiction
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17. Rights and Duties of the Assignee
• The assignee has the same rights and duties as
the assignor did under the original contract.
• Assignee has duty to give notice to obligor
• Obligor given reasonable time to verify that
assignment is legit
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18. Liabilities and Warranties of the Assignor
• The assignor is obligated to any express and
implied warranties that serve to protect either the
assignee or the obligor
• Warranty
– a promise, statement, or other representation that a
thing has certain qualities.
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19. Liabilities and Warranties of the Assignor
• Warranties to Assignee
– Assignor bound to assignee by an implied warranty
that obligor will perform
• Unless no consideration exchanged (gift)
• Warranties to Obligor
– If assignor delegates duties to assignee,
– Assignor bound to obligor by implied warranty that
assignee will perform in complete and satisfactory
manner
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20. Restrictions on Assignments
• Restrictions on Personal and Professional Service
Contracts
– Artists, musicians, physicians, attorneys, ministers
• Restrictions Imposed by Original Contract
– Contract could forbid assignment/delegation
– Court may or may not uphold
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21. Restrictions on Assignments
• Restrictions Imposed by Law
– Members of armed services may only assign their pay
to spouse or family member
– Police officers and certain public officials restricted
from assigning pay or delegating duties they have
been especially chosen to perform
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22. Novation and Assignment
• If assignor is not released, all three parties are still
in privity.
• If all parties agree to release the assignor from
the contract, only the assignee and obligor in
privity. (Novation)
• Novation
– Replacing one member of a contract with another
– Replacing an existing debt/obligation with a new one
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23. Discharge by Performance
• Most contracts are discharged by performance
– the parties do what they agreed to do under the terms
of the contract
• What about when performance is:
– Untimely
– Unsatisfactory
– Partial
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24. Time for Performance
• If no time for performance is stated, contract
must be performed within a Reasonable time
– The time that may fairly, properly, and conveniently be
required to do the task, considering the circumstances
– Reasonable time varies and is decided by courts
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25. Time for Performance
• If time for performance is stated in the contract,
and it is clear that time is of the essence, courts
will generally enforce time.
• If time is stated, but it is not clear that time is
particularly important, courts can allow for
additional time to perform.
• Force Majeure (superior force) clause
– allows for intervention of unforeseen circumstances to
afford extra time (acts of God, strikes, war, etc.)
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26. Satisfaction of Performance
• Satisfactory performance
– The contracting parties have performed their
contractual duties according to the agreement
– Can be determined by personal taste or some
objective standard
• If no express definition of satisfaction, law implies
that:
– Services - done in a skillful manner
– Materials and goods - free from defects
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27. Complete and Substantial Performance
• Complete performance
– All the parties fully accomplish every term, condition,
and promise to which they agreed
– Terminates contract
• Substantial performance
– A party, in good faith, executes all promised terms and
conditions, with the exception of minor details that do
not affect the real intent of their agreement
– Offending party will have to reimburse for parts not
performed
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28. Contractual Conditions
• Condition precedent
– Requires the performance of certain acts or promises
before the other party is obligated to perform
– Unilateral contract
• Performance of condition precedent serves as acceptance of
offer
– Bilateral contract
• If condition precedent not performed, can lead to rescission
or termination of contract.
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29. Contractual Conditions
• Condition Concurrent
– Requires both parties to perform at the same time
– Ex: delivery and payment
• Condition subsequent
– Parties agree that the contract will be terminated
when a prescribed event occurs or does not occur
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30. Tender of Performance
• Tender of performance
– Offering to do what one has agreed to do under the
terms of the contract
• Tender of payment
– Presenting payment at the agreed time
• Making tender is important to demonstrate
willingness and ability to perform.
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31. Discharge by Nonperformance
• Nonperformance
– Failing to fulfill or accomplish a promise, contract, or
obligation according to its terms
– Discharge by:
•
•
•
•
agreement
operation of law
impossibility
breach of contract
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32. Discharge by Agreement
• Termination by Terms of the Contract
– Setting terms for termination in the contract
• Mutual Rescission
– Usually requires return of consideration received
• Termination by Waiver
– Voluntarily giving up your right to complain about a
party’s unsatisfactory performance (or failing to do so
within a certain amount of time)
– No return of consideration necessary
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33. Discharge by Agreement
• Novation
– Replacing one party with another
• Accord and Satisfaction
– A new agreement arising from a bona fide dispute in
contract terms
– Performance of the accord is the satisfaction
• General Release
– Document whereby a creditor releases a debtor from
obligations on a debt
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34. Discharge by Impossibility
• Conditions that arise subsequent to the making of
a contract may either void the agreement or make
it voidable by one of the parties
• When the exact subject matter of an executory
contract is destroyed, the performance obligation
may be discharged.
• Act declared illegal
• Death/insanity/disability of a party
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35. Discharge by Impossibility
• Frustration-of-purpose doctrine
– releases a party from a contractual obligation when
performing the obligations would be thoroughly
impractical and senseless
Ex: Pay premium price for hotel room near Panthers
Stadium for Superbowl, but game cancelled due to
entire team contracting H1N1.
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36. Discharge by Impossibility
• Commercial impracticability
– Courts may excuse the nonperformance of one party
to a contract because an unforeseen and very severe
hardship has arisen that would place an enormous
hardship on that party
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37. Syrovy Trust v. Alpine Resources, Inc.
Court of Appeals of Washington, 1992
• Syrovy agrees to sell all the timber that Alpine can
harvest from Syrovy’s property in two years for
$140,000
• Alpine harvests and pays $50,000
• Syrovy sues for remaining $90,000
• Alpine claims commercial impracticability due to bad
weather both winters and the fact that they couldn’t
log during hunting season
• Trial court grants summary judgment for Syrovy,
Alpine appeals
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38. Syrovy Trust v. Alpine Resources, Inc.
Court of Appeals of Washington, 1992
• Court:
– For commercial impracticability, events must be
unforeseen/unanticipated
– Difficulties assumed by a party at time of contracting
cannot form basis of commercial impracticability
defense
– Alpine are experienced loggers, able to foresee harsh
winter conditions, and there is no evidence that
performance was impossible
– Access problems are also foreseeable
– Affirmed in favor of Plaintiff, Syrovy.
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39. Discharge by Operation of Law
• Bankruptcy
– A discharge in bankruptcy will serve as a defense for
most, but not all, debts
• Statute of Limitations
– Doesn’t technically void a debt, but serves as a
defense for the debtor against collection attempts
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40. Discharge by Breach of Contract
• Deliberate Breach of Contract
– One of the parties fails to do what was agreed to
under the terms of the contract
• Anticipatory breach
– When a party to a contract either expresses or clearly
implies an intention not to perform the contract, even
before being required to act
• Abandonment of Contractual Obligations
– Stopping performance once it has begun
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41. Standard Damages in Contract Law
• Actual damages (Compensatory damages)
– The real financial loss suffered by the injured
party
• Bob contracts with Joe to purchase 100 bushels of
wheat at $20/bushel. Joe doesn’t deliver, so Bob
has to purchase elsewhere at $25/bushel. Bob
could sue for $5/bushel plus court costs.
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42. Standard Damages in Contract Law
• Incidental damages
– Cover any expenses paid out by the innocent party to
prevent further loss
– Ex: Expenses related to inspection, receipt,
transportation, care, and custody of goods rightfully
rejected
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43. Standard Damages in Contract Law
• Consequential damages (aka indirect/special)
– result indirectly from the breach because of special
circumstances that exist with a particular contract
– Must prove they were reasonably foreseeable at the
time the contract was made
– Ex: loss of operating revenue due to late completion
of construction
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44. Standard Damages in Contract Law
• Punitive (Exemplary) Damages
– Damages in excess of actual losses suffered by the
plaintiff awarded as a measure of punishment for the
defendant’s wrongful acts
– Fraudulent Misrepresentation
– Disparagement
– Violating an implied covenant of fairness and honesty
– Intentional interference with an existing contract
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45. Special Types of Damages
•
•
•
•
•
Nominal Damages
Present and Future Damages
Liquidated Damages
Damages Under Quantum Meruit
Speculative Damages
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46. Special Types of Damages
• Nominal Damages
– Token damages awarded to parties who have
experienced an injury to their legal rights but no actual
loss
– “you’re technically right, but you didn’t suffer any real
loss, so you win a dollar.”
• Present and Future Damages
– For present injuries and those that might be
reasonably expected in the future
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47. Special Types of Damages
• Liquidated Damages
– Agreed to in the original contract
– Must be realistic and in proportion to reasonably
expected losses
• Damages Under Quantum Meruit
– Used to assess damages in cases involving implied-inlaw or quasi-contracts
– Damages awarded are in an amount considered
reasonable in return for the benefits the one party
derived through the quasi-contract relationship
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48. Special Types of Damages
• Speculative Damages
– Losses that haven’t been suffered and that cannot be
proven
– Based on speculation, with no real foundation
– Courts won’t allow
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49. Mitigation of Damages
• Innocent/injured party has a duty to keep
damages to a minimum
• Exercise reasonable precautions to keep damages
from becoming unreasonably burdensome to
offending party
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50. Equitable Remedies
• A decree of specific performance
– Court order calling for the breaching party to do what
he/she promised to do under the original contract
– Used only when subject matter is unique or rare (land,
art, heirlooms, specific animals, etc.)
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51. Equitable Remedies
• Injunctive relief
– Temporary or permanent court order to refrain from
doing something
• Ex: Psystar issued temporary injunction ordering
them to stop selling products while case still in
court. Gives time to consider whether permanent
injunction should be issued, preventing further
damages to Apple.
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52. Litigation Costs
• Usually divided into two categories:
1. Attorney’s fees
• Each party pays their own, with exceptions,
depending on statutory law
2. Taxable expenses/costs
• Paid by losing party
• Filing costs, subpoena costs, copying costs,
etc.
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53. Question?
What is an outside party for whose benefit a
contract was not made but who would
substantially benefit if the agreement were
performed according to its terms and
conditions?
A. Intended beneficiary
B. Creditor beneficiary
C. Obligee beneficiary
D. Incidental beneficiary
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54. Question?
What is a person who may in some way be affected
by a contract but who is not one of the
contracting parties?
A. Primary party
B. Third party beneficiary
C. Third party
D. Secondary party
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55. Question?
What is a beneficiary in whose favor a contract is
made?
A. Intended beneficiary
B. Creditor beneficiary
C. Obligee beneficiary
D. Debtor beneficiary
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56. Question?
What is a transfer of a contract right?
A. Assignment
B. Duty
C. Transfer
D. Delegation
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57. Question?
What is a transfer of a contract duty?
A. Assignment
B. Duty
C. Transfer
D. Delegation
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58. Question?
What is the outside third party to whom the
assignment is made?
A. Assignee
B. Assignor
C. Obligee
D. Obligor
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59. Question?
What occurs when all the parties fully accomplish
every term, condition, and promise to which
they agreed ?
A. Satisfactory performance
B. Complete performance
C. Substantial performance
D. Absolute performance
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60. Question?
What occurs when all the parties fully accomplish
every term, condition, and promise to which
they agreed ?
A. Satisfactory performance
B. Complete performance
C. Substantial performance
D. Absolute performance
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61. Question?
Which contractual condition requires both parties
to perform at the same time?
A. Precedent
B. Concurrent
C. Subsequent
D. Concomitant
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62. Question?
What is failing to fulfill or accomplish a promise,
contract, or obligation according to its terms?
A. Dis-achievement
B. Non-achievement
C. Nonperformance
D. Unconditioning
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63. Question?
With __________ the parties to a contract mutually
agree to replace one of the parties with a new
party.
A. Mutual rescission
B. Termination by Waiver
C. Novation
D. Bankruptcy
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64. Question?
What are token damages awarded to parties who
have experienced an injury to their legal rights
but no actual loss?
A. Realistic damages
B. Normal damages
C. Nominal damages
D. Logical damages
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65. Question?
What is the time that may conveniently be required
to do the task that is to be done?
A. Reasonable time
B. Practical time
C. Logical time
D. Realistic time
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