Legal Communication – Nicola Sarjeant
Contracts - Review
______+ ______+ ______= contract
· There needs to be a “meeting of the minds”
· The parties intend to enter legal relations
· Both parties have the legal capacity to contract
· There has been no fraud or duress
· The subject matter of the contact is lawful (not illegal)
Consideration[1]:
· must be bargained for between the parties, and is the essential reason for a party entering into a contract
· is a legal benefit to one party or a legal detriment (disadvantage) incurred by the other party
· must be of value (at least to the parties involved), and is exchanged for the performance or promise of performance by the other party of something they are not legally obligated to do (such performance itself is consideration). In a contract, one consideration (thing given) is exchanged for another consideration.
· can include not doing something that one is legally entitled to do (forbearance), such as "I will pay you $1,000 not to paint your house pink."
· must not be from the past
Is there consideration?
· As a graduation present, Susan’s grandma promises to take Susan to Thailand when she finishes university. (No)
· Karen learns that her favourite niece, Lisa, is going to drop out of university. Karen promises to give Lisa a car if Lisa finishes university and gets her degree. (Yes)
Ø What is the difference between the two cases above?
Ø What about these cases? Are they valid contracts? Why/why not?
· John says to Donna, "I'll pay you $50,000/year to manage my apartment building."
· Rick says to his daughter Karen, "I'm going to purchase a new yacht this week. I promise to give you my old yacht at that time."
· Martin’s uncle promises to pay Martin (aged 21) $10,000 if he doesn’t drink until he is 25.
· Teresa’s friend promises to pay her $100 if she doesn’t drive home drunk.
· Ken drives carelessly and injures Carol. Ken says to Carol, "I'll pay you $25,000 not to sue me." Carol accepts.
· Lee stole Bob's yacht. Harvey, the county sheriff, witnessed the theft. Bob tells Harvey, "I'll pay you $100 to arrest Lee." Harvey arrests Lee.
· Trent is driving down the road, and notices smoke coming from a car that has crashed. He stops and pulls Steve from the burning car. The next day, Steve says “You saved my life. I will pay you $5000/year for the rest of your life.” A few years later, Steve changes his mind and stops paying Trent the money.
Introduction to contract remedies
1. Before you read, discuss with a partner: How do you think a court decides the remedies for breach of contract?
For example, Eddy contracts to sell his car to Frank for $7500. Later, Frank changes his mind and tells Eddy he doesn’t want the car any more. Eddy can’t find anyone else to buy it for $7500.
· What would the remedy be in this situation?
· Does Eddy have any obligations?
Vocabulary
to mitigate – to lessen or to try to lessen the seriousness or extent of
to breach (a contract) – to break; to violate an obligation or duty
foreseeable – able to be understood or anticipated in advance
to compensate - give (s.o.) s.th. to reduce or balance the bad effect of loss, suffering, or injury
to compel – to force s.o. to do s.th.
status quo ante - the state of affairs that existed previously (Latin)
to rescind - to make a law, agreement, order or decision no longer have any legal effect
third party – s.o. who is not a party to an agreement or transaction
default – failure to perform a legal or contractual duty
The concept of damages is central to the topic of remedies for breach of contract. Damages can be defined as 'money awarded by a court in compensation for loss or injury'. The term should not be confused with the word damage, which means 'loss or harm which is actionable in law'.
There is a duty to mitigate damages and a party cannot recover losses it could have avoided through reasonable efforts.
2. Read through the whole text quickly and decide whether these statements are true or false:
a. The general purpose of remedies for breach of contract is to punish the breaching party. T / F
b. Actual damages are recovered for damage that is a natural result of the breach of contract. T / F
c. According to the foreseeability rule, damages are awarded when it can be proven that harm or injury could have been seen or known in advance by the breaching party when the agreement was made. T / F
d. Liquidated damages are agreed upon at the time the parties enter into the contract. T / F
e. Specific performance is a form of monetary damages. T / F
Remedies for Breach of Contract[2]
Most remedies involve money damages, but non-monetary relief is also available in some cases. The basic remedy for breach of contract in the Anglo-American legal system is pecuniary (financial) compensation to an injured party for the loss of the benefits that party would have received if the contract had been performed. These are called expectation damages or 'benefit of the bargain' damages. Certain damages are recoverable regardless of whether the loss was foreseeable, while the recovery of other damages depends on foreseeability.
Expectation damages or 'benefit of the bargain' damages:
1. Where the damage is the direct and natural result of the breach of contract, the breaching party will have to pay damages without regard to the issue of foreseeability. These are usually called actual damages.
2. Where the damage arises due to the special circumstances related to the transaction in question, damages are limited by the foreseeability rule, which states that they are only recoverable when it can be shown that the damage was foreseeable to the breaching party at the time the contract was entered into. These are usually called consequential (or special) damages. For example,
Reliance damages: Where it is not possible to prove expectation damages, the non-breaching party can seek reliance damages, where the compensation is the amount of money necessary to compensate him/her for any expenses incurred in reasonable reliance on the contract. The non-breaching party is thus returned to the status quo ante with no profit or benefit from the contract.
Restitution damages: Another measure of damages is restitution damages, which force the breaching party to give up any money benefit it obtained under the breached contract.
Liquidated damages: The parties to a contract may agree at the time they enter into the contract that a fixed sum of money shall be awarded in the event of a breach or to a formula for deciding the damages or for certain other remedies, e.g. right of repair. This type of damages is known as liquidated damages.
Punitive (or exemplary) damages: In some cases, a party will be able to obtain punitive or exemplary damages through the court which are designed to punish the breaching party for conduct which is judged to be particularly bad or morally wrong, e.g. fraud. This type of damages is normally only awarded where specifically provided by statute and where a tort in some way accompanies the breach of contract.
Specific performance: Where monetary damages would not be an adequate remedy, such as in a case where two parties enter into a real-estate contract and the seller decides to sell to a third party, the court may order specific performance. Specific performance involves an order by the court forcing the breaching party to perform the contract.
Finally, there are other remedies available; for example, if there has been a default by one party, the other party may rescind or cancel the contract. This constitutes an undoing of the contract from the very beginning. In addition, legislation such as sale of goods legislation also allows for various remedies, including a right to reject goods in certain cases and a right to return or demand repair or replacement.
Look back at the descriptions of different types of contract remedies above. Match the type of remedy to the situation.
· Acme Construction contracts to buy bricks from Bob’s Brick Co. for $10,000. Bob’s Brick Co. doesn’t supply the bricks. Acme has to buy the bricks from another company for $12,000. Bob’s Brick Co. must pay Acme $2000 in ______damages.
· Dylan agrees to sell his house to Angela for $250,000. Later he decides not to sell it to Angela. The court orders Dylan to sell the house to Angela. This is an example of ______
· Sylvie enters into a contract with Pierre to paint her portrait for $900. Pierre spends $200 on paint and supplies. Sylvie then changes her mind and says she doesn’t want the portrait. Sylvie must pay $200 in ______damages to Pierre.
· Speedy Delivery Company contracts to buy a delivery truck, for $25,000, from Tim’s Trucks. Speedy tells Tim that they need the truck by December 15, because they have a lot of deliveries to make for the Christmas season. Tim is unable to deliver the truck. Speedy buys another truck for $27,000, but they can’t get it until December 20. Because Speedy didn’t have a truck for 5 days, they lost about $300/day in profit. Tim has to pay ______damages in the amount of $2000, plus $1500 in ______damages.
· Karl enters into a contract with Pierre to paint his portrait for $1000. Pierre asks for deposit of $250 before he starts work. Later, Pierre decides he doesn’t want to paint the portrait. Pierre must pay Karl $250 in ______damages.
This is a famous case that still influences the law of damages. Hadley v Baxendale (1854) 9 Exch 341.[3]
Facts: In 1853, Mr. Hadley was a miller (grinding grain into flour). A part in Hadley’s mill broke, making the mill inoperable. Hadley hired Baxendale to transport the broken part to an engineer so that he could make a duplicate. Hadley’s employee told Baxendale’s clerk that the part must be sent immediately and Baxendale promised to deliver it the next day. Baxendale did not know that the mill would be inoperable until the new shaft arrived. Baxendale did not transport the part as promised, causing the mill to remain shut down for an additional five days. Hadley sued for £300 in damages due to lost profits.
This case eventually went to the English appeal court (Court of the Exchequer Chamber). Do you think the court allowed damages for lost profits? Why/why not?
[1] See Law.com < http://dictionary.law.com/definition2.asp?selected=305&bold=||||>; Outlaws Legal Service < http://www.outlawslegal.com/refer/contracts2.htm
[2] Adapted from Amy Krois-Lindner, International Legal English (Cambridge University Press, 2006)
[3] Summary adapted from < http://www.lawnix.com/cases/hadley-baxendale.html