Enforcement of Contracts

Third party beneficiaries

Third party beneficiaries are people who benefit under a contract, but are not part to the contract. What rights do third party beneficiaries have? The answer depends on what type of beneficiary each of these parties is:

1. intended beneficiaries (specifically called out in the contract)
2. incidental beneficiaries (receive benefits by coincidence)

ONLY intended beneficiaries can enforce agreements as a third party, who must have been vested. Vesting means “affirmative acceptance or material alteration of position in anticipation of benefit”. ONLY if both benefit and third party were specifically identified, there are third-party beneficiaries.

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Assignment and Delegation

In a contract, each party has rights and duties. When transferring rights to some one else, we call it assignment. When transferring duties to some one else, we call it delegation. For assignment, generally parties to a contract are free to transfer rights to other people. Some exceptions include:

1. Anti-assignment clause
2. Personal service contract
3. Material alteration of duties
4. Future rights ( the rights not vested yet )

In the case of successive assignment, it really depends. First there is American Rule. The American Rule states that “the first assignment in time is effective”. But there is also English Rule, which states “the first person who give notice of an assignment is the person who actually have the rights”. Yet there is an exception called Tangible Token Rule, which states “if some right is represented by some tangible token, whoever actually has the token has the rights”.

For delegation, the general rule is that it is permitted. But after delegation, the delegator is still reliable for performance. Exceptions include:

1. Anti-delegation clause
2. Personal service contract
3. High-trust relationship (fiduciary relationship)
4. Material alteration of contract

Novation is the complete substitution of one party for another. All the parties plus the one being substituted in have to agree with it. You are free from all rights and all obligations under the contract.

Discharge: mutual agreement and conditions

The discharge means you are relieved from any further liability of the contract. It is one party to a contract either fully performed or there is no longer liable to perform any of duties, which is different from the termination of the contract. There are actually 4 ways to discharge you from contractual obligations without actually complete performance:

• Mutual agreement
  • Rescission (both parties decide to call it off, rescind the rest of the contract)
  • Substituted contract
  • Novation
  • Accord and satisfaction
• Conditions (can both cause and discharge obligations)
  • Condition precedent (the occurrence of some events will give rise to a duty).
  • Condition subsequent (the occurrence of some events will relieve a party from duty).
  • Concurrent condition (both party have to fulfill their obligations at the same time).

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Discharge by breach

If the other party commits a breach in a way that really frustrates the contract, then you (non-breaching party) are discharged from any obligations. Anticipatory repudiation is that non-breaching party can be discharged when one party tells clearly and unequivocally that he/she won’t perform according to the contract and the breach has not occurred yet.

Discharge by operation of law

There are several instances in which the law says “if this happens, the parties are released from their obligations”:

1. impossibility ( extremely impracticality will not discharge you, but force majeure clause will help mitigate)
2. statute of limitations (e.g. time)
3. material alteration of contract
4. bankruptcy filling

Contract performance

Contract performance is the idea about what you are responsible for in the contract. There are really 3 levels of contract performance:

1. complete
2. substantial (minor breach)
   • non-breaching party may
     • deduct the cost to fix the breach
     • pay entire contract price and then sue for the damage
   • non-breaching party can not terminate agreement
3. inferior (material breach)
   • non-breaching party can
     • accept the rendered performance and sue for damage
     • rescind the contract and sue for restitution

UCC Article 2 imposes specific duties of performance on sellers and buyers of goods. Common law performance rules usually apply, but UCC Article 2 supplements them.

• Sellers
  • primary rule: make tender of delivery
  • perfect tender rule – deliver exact goods called for by the contract
    • seller sent the non-conforming goods and has the opportunity to cure
    • buyer’s options:
      • reject the entire shipment
      • accept the entire shipment
      • reject part and accept part of it
    • exceptions:
      • if goods are damaged through no fault of the seller, then contract is voided.
      • in case of installment contract, each installment is treated separately
      • industry norm
• Buyers
  • inspect the goods
  • accept or reject the goods
  • pay
    • duty to pay arises once conforming goods have been accepted
    • duty to pay and time of payment can be different

Remedies for breach

There are a few general rules come first:

1. non-breaching parties have duty to mitigate their damages
2. parties have right to limit their damages (limitation of liabilities)

There are 2 categories of remedies available to the victims of a contract:

1. money damages
   • compensatory damages (the amount of money you expect to get, had the contract been fulfilled by the other party. You can always get it)
   • consequential damages (you can get it sometimes)
   • liquidated damages (if reasonable and agree-upon in advance)
   • punitive damages (never allowed by court)
2. equitable remedies
   • rescission and restitution
   • reformation (a court reforms the contract with clerical error)
   • injunction (stop someone from doing something)
   • specific performance (when subject matter of your contract is unique)

UCC Article 2 imposes specific remedies on sellers and buyers of goods.

If buyer breaches, seller’s remedies depends on where the goods are, at the time of breach.

• if buyer is in possession of goods, seller’s options include:
  1. sue for purchase price
  2. try to reclaim the goods
• if buyer does not have the goods, seller’s options include:
  1. refrain from shipping goods
  2. sell to another buyer
  3. stop delivery of goods in transit
  4. sue for money damages

If seller breaches the contract, what is buyer’s remedies?

1. sue for money damages
2. cover (buy substitute goods from a different seller)
3. obtain the goods from sellers if seller is insolvent
4. specific performance (for unique goods)

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Related Quick Recap

Sales Contracts: UCC Article 2

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