Business Law Chapter 10

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required before an intended beneficiary's rights vest

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(1) the third party materially changes his or her position in justifiable reliance on the promise. (2) the third party brings a lawsuit on the promise. (3) the third party demonstrates her or his content to promise as the request of the promisor or promisee.

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creditor beneficiary

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one type of intended beneficiary. a creditor beneficiary benefits from a contract in which one party promises another party to pay a debt that the promisee owes to a third party.

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donee beneficiary

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another type of intended beneficiary. when a contract is made for the express purpose of giving a gift to a third party, the third party (the donee beneficiary) can sue the promisor directly to enforce the promise. the most common donee beneficiary contract is a life insurance contract.

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discharge

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the termination of an obligation. (1) in contract law, discharge occurs when the parties have fully performed their contractual obligations or when events, conduct of the parties, or operation of the law releases the parties from performance. (2) in bankruptcy proceedings, the extinction of the debtors dischargeable debts.

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condition precedent

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a condition that must be fulfilled before a party's performance can be required. the condition precedes the absolute duty to perform.

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condition subsequent

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when a condition operates to terminate a party's absolute promise to perform. the condition follows, or is subsequent to, the time that the absolute duty to perform arose.

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concurrent condition

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when each party's performance is conditioned on the other party's performance or tender of performance (offer to perform). these occur only when the contract calls for the parties to perform their respective duties simultaneously.

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express condition

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provided for by the parties agreement. although no particular words are necessary, express conditions are normally prefaces by the words if, provided, after, or when.

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implied conditions

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understood to be part of the agreement, but they are not found in the express language of the agreement.

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complete performance

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when a party performs exactly as agreed, there is no question as to whether the contract has been performed. when a party's performance is perfect, it is said to be complete. normally, conditions expressly stated in a contract must be fully satisfied for complete performance to take place.

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substantial performance

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a party who in good faith substantially all of the terms of a contract can enforce the contract against the other party under the doctrine of substantial performance. note that good faith is required. intentional failure to comply with the terms is a breach of the contract.

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breach of contract

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the nonperformance of a contractual duty

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breach of contract is material

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the breach is material when performance is not at least substantial. if there is a material breach, then the nonbreaching part is excused from the performance of contractual duties and can sue for damages resulting from the breach. any breach entitles the nonbreaching party to sue for damages, but only a material breach discharges the nonbreaching party from the contract.

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anticipatory repudiation

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before either party to a contract has a duty to perform, one of the parties may refuse to carry out her contractual obligations.

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discharge by rescission

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rescission is the process by which a contract is canceled or terminated and the parties are returned to the positions they occupied prior to forming it. for mutual rescission to take place, the parties must make another agreement that also satisfies the legal requirements for a contract. there must be an offer, an acceptance, and consideration.

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discharge by novation

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a contractual obligation may also be discharged through novation. a novation occurs when both of the parties to a contract agree to substitute a third party for one of the original parties. the requirements of novation are (1) previous valid obligation. (2) an agreement by all parties to a new contract. (3) the extinguishing of the old obligation. (4) a new contract that is valid.

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discharge by settlement agreement

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a compromise, or settlement agreement, that arises out of a genuine dispute over the obligations under an existing contract will be recognized at law. such an agreement will be substituted as a new contract, and it will either expressly or impliedly revoke and discharge the obligations under any prior contract.

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discharge by accord and satisfaction

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for a contract to be discharged by accord and satisfaction, the parties must agree to accept performance that is different from the performance originally promised.

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Novation

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occurs when both of the parties to a contract agree to substitute a third party for one of the original parties. A novation expressly or impliedly revokes and discharges a prior contract. the parties involved may expressly state in the new contract that the old contract is discharged.

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Accord

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a contract to perform some act to satisfy an existing contractual duty that is not yet discharged.

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satisfaction

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the performance of the accord agreement. an accord and its satisfaction discharge the original contract obligation.

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discharged by operation of law

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under certain circumstances, contractual duties may be discharged by operation of law. these circumstances included material alteration of the contract, the running of the statute of limitations, bankruptcy, and the impossibility or impracticability of performance.

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alteration of the contract

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to discourage parties from altering written contracts, the law operates to allow an innocent party to be discharged when the other party has materially altered a written contract without consent.

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statutes of limitations

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statutes of limitations restrict period during which a party can sue on a particular cause of action. after the applicable limitations period has passed, a suit can no longer be brought.

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bankruptcy

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a proceeding in bankruptcy attempts to allocate the debtors' assets to the creditors in a fair and equitable fashion. once the assets have been allocated, the debtor receives a discharge in bankruptcy. this will ordinarily bar enforcement of most of the debtor's contracts by the creditors.

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impossibility or impracticability of performance

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after a contract has been made, superevening events (such as a fire) may make performance impossible in an objective sense. this is known as impossibility of performance and can discharge a contract.

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frustration of purpose

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a theory closely allied with the doctrine of commercial impracticability. in principle, a contract will be discouraged if superevening circumstances make it impossible to attain the purpose both parties had in mind when they made the contract.

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damages

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compensate the nonbreaching party for the loss of the bargain. often, courts say that innocent parties are to be placed in the position they would have occupied had the contract been fully performed.

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compensatory damages

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damages that compensate the nonbreaching party for the loss of the bargain are known as compensatory damages. these damages compensate the injured party only for damages actually sustained and proved to have arisen directly from the loss of the bargain caused by the breach of contract.

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consequential damages

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forseeable damages that result from a party's breach of contract. also called special damages. They differ from compensatory damages in that they are caused by special circumstances beyond the contract itself. to recover consequential damages, the breaching party must know (or have reason to know) that special circumstances will cause the nonbreaching party to suffer an additional loss.

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punitive damages

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punitive, or exemplary, damages generally are not recoverable in contract law, even for an intentional breach of contract. because punitive damages are designed to punish a wrongdoer and set an example to deter similar conduct in the future, they have no legitimate place in contract law.

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nominal damages

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when no actual damage or financial loss results from a breach of contract and only a technical injury is involved, the court may award nominal damages to the innocent party. awards of nominal damages are often small, such as one dollar, but they do establish that the defendant acted wrongfully.

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mitigation of damages

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in most situations, when a breach of contract occurs, the innocent injured party is held to a duty to mitigate, or reduce, the damages that he or she suffers. under this doctrine of mitigation of damages, the duty owed depends on the nature of the contract.

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liquidated damages clause

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a liquidated damages provision in a contract specifies that a certain dollar amount is to be paid in the event of a future default or breach of contract.

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penalty clause

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specifies a certain amount to be paid in the event of a default or breach of contract and is designed to penalize the breaching party. liquidated damages provisions usually are enforceable. in contract, if a court finds that a provision calls for a penalty, the agreement as to the amount will not be enforced, and recovery will be limited to actual damages.

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restitution

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an equitable remedy under which a person is restored to his or her original position prior to loss or injury, or placed in the position he or she would have been in had the breach not occurred.

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specific performance

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an equitable remedy requiring the breaching party to perform as promised under the contract; usually granted only when money damages would be inadequate remedy and the subject matter of the contract is unique (example, real property). calls for the performance of the act promised in the contract.

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injunction

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a court decree ordering a person to do or refrain from doing a certain act or activity.

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force majeure clause

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a provision in a contract stipulating that certain unforeseen events---such as war, political upheavals, acts of god, or other events--will excuse a party from liability for nonperformance of contractual obligations.

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when a breach is waived

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under certain circumstances, a nonbreaching party may be willing to accept a defective performance of that contract. this knowing relinquishment of a legal right is called a waiver.

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limitation of liability clause

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provisions that affect the availability of certain remedies. a provision excluding liability for fraudulent or intentional injury will not be enforced. likewise, a clause excluding liability for illegal acts, acts that are contrary to public policy, or violations of law will not be enforced.