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Chapter Summary: Contract Performance, Breach, and Remedies

Third Party Rights

Assignments-An assignment is the transfer of rights under a contract to a third party. The third party to whom the rights are assigned has a right to demand performance from the other original party to the contract. Generally, all rights can be assigned.
Delegations-A delegation is the transfer of duties under a contract to a third party, who then assumes the obligation of performing the contractual duties previously held by the one making the delegation. Except in a few situations, most duties can be delegated.
Third party beneficiaries-A third party beneficiary is one who benefits from a contract between two other parties. If the party was an intended beneficiary, then the third party has legal rights and can sue the promisor directly to enforce the contract. If the contract benefits the third party unintentionally, then the third party cannot sue to enforce the contract.

Performance and Discharge

Conditions of performance-A condition is a possible future event, the occurrence or nonoccurrence of which will trigger the performance of a contract obligation or terminate an existing obligation. Conditions that may be present in contracts include conditions precedent, conditions subsequent, and concurrent conditions.
Discharge by performance-A contract may be discharged by complete (strict) performance or by substantial performance. In some instances, performance must be to the satisfaction of another. Totally inadequate performance constitutes a material breach of contract. An anticipatory repudiation of a contract allows the other party to sue immediately for breach of contract.
Discharge by agreement-Parties may agree to discharge their contractual obligations in several ways:
By mutual rescission-The parties mutually agree to rescind (cancel) the contract.
By novation-A new party is substituted for one of the primary parties to a contract.
By settlement agreement-The parties agree to a new contract that replaces the old contract as a means of settling a dispute.
By accord and satisfaction-The parties agree to render and accept performance different from that on which they originally agreed.
By release-One party forfeits the right to pursue a legal claim against the other, barring further recovery.
Discharge by operation of law-Parties' obligations under contracts may be discharged by operation of law by contract alteration, statutes of limitations, bankruptcy, impossibility or impracticability of performance, or frustration of purpose.
Damages

Types of damages-Damages are the legal remedy designed to compensate the nonbreaching party for the loss of the bargain. By awarding monetary damages, the court attempts to place the parties in the positions that they would have occupied had the contract been fully performed. There are four broad categories of damages:

Compensatory damages compensate the nonbreaching party for injuries actually sustained and proved to have arisen directly from the loss of the bargain resulting from the breach of contract.
Consequential damages cover indirect and foreseeable losses.
Punitive damages punish and deter wrongdoing.
Nominal damages recognize wrongdoing when no monetary loss is shown.

Mitigation of damages-The nonbreaching party frequently has a duty to mitigate (reduce) the damages incurred as a result of the contract's breach.

Liquidated damages-Specified in a contract as the amount to be paid to the nonbreaching party in the event of a breach. Clauses providing for liquidated damages are enforced if the damages were difficult to estimate at the time the contract was formed and if the amount stipulated is reasonable. If the amount is construed to be a penalty, the clause will not be enforced.

Waiver of breach-A party's willing acceptance of defective performance of a contract may operate as a waiver of the breach. The party waiving the breach cannot take later action on it.

Contract provisions limiting remedies-A contract may provide that no damages (or only a limited amount of damages) can be recovered in the event the contract is breached.
Equitable Remedies

Rescission and restitution-Rescission is a remedy whereby a contract is canceled and the parties are restored to the positions that they occupied before contract formation. When a contract is rescinded, the parties must make restitution to each other by returning the goods, property, or funds previously conveyed.

Specific performance-An equitable remedy calling for the performance of the act promised in the contract. It is available only in special situations in which monetary damages would be an inadequate remedy.

Reformation-An equitable remedy allowing a contract to be "reformed," or rewritten, to reflect the parties' true intentions.
Recovery Based on Quasi Contract

An equitable theory imposed by the courts to obtain justice and prevent unjust enrichment in a situation in which no enforceable contract exists. The party seeking recovery must show the following:

A benefit was conferred on the other party.
The party conferring the benefit did so with the expectation of being paid.
The party conferring the benefit did not volunteer the benefit.
The party receiving the benefit would be unjustly enriched if allowed to retain the benefit without paying for it.