Contemporary Business and Online Commerce Law Henry R. Cheeseman Seventh Edition

Contemporary Business and Online Commerce Law Henry R. Cheeseman Seventh Edition

Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk Pearson Education Limited 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6 10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN 10: 1-292-02351-1 ISBN 13: 978-1-292-02351-9 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Printed in the United States of America

316

BREACH OF CONTRACT AND REMEDIES Finland Finland is a member of the European Union (EU), a regional organization of countries of Western and Eastern Europe. The EU has adopted measures to provide uniform contract law in specific economic sectors. The EU is working on developing a general uniform contract law for member countries. Douglas Toombs / Shutterstock LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Describe complete, substantial, and inferior performance of contractual duties. 2. Describe compensatory, consequential, and nominal damages awarded for the breach of traditional and e-contracts. 3. Explain rescission and restitution. 4. Define the equitable remedies of specific performance, reformation, and injunction. 5. Describe torts associated with contracts. CHAPTER OUTLINE INTRODUCTION TO BREACH OF CONTRACT AND REMEDIES PERFORMANCE AND BREACH Case 1 Chodos v. West Publishing Company, Inc. MONETARY DAMAGES LIQUIDATED DAMAGES Contemporary Environment Liquidated Damages Awarded for Breach of Contract at Trump World Tower RESCISSION AND RESTITUTION Case 2 Hickman v. Bates EQUITABLE REMEDIES Case 3 Alba v. Kaufmann TORTS ASSOCIATED WITH CONTRACTS Ethics Insurance Company Assessed Punitive Damages for a Bad Faith Tort From Chapter 14 of Contemporary Business and Online Commerce Law, 7/e. Henry R. Cheeseman. Copyright 2012 by Pearson Education. Published by Prentice Hall. All rights reserved. 317

BREACH OF CONTRACT AND REMEDIES Contracts must not be sports of an idle hour, mere matters of pleasantry and badinage, never intended by the parties to have any serious effect whatsoever. Lord Stowell Dalrymple v. Dalrymple, 2 Hag. Con. 54, at 105 (1811) INTRODUCTION TO BREACH OF CONTRACT AND REMEDIES Men keep their agreements when it is an advantage to both parties not to break them. Solon (c. 600 B.C.) breach of contract A contracting party s failure to perform an absolute duty owed under a contract. There are three levels of performance of a contract: complete, substantial, and inferior. Complete (or strict) performance by a party discharges that party s duties under the contract. Substantial performance constitutes a minor breach of the contract. Inferior performance constitutes a material breach that impairs or destroys the essence of the contract. Various remedies may be obtained by a nonbreaching party if a breach of contract occurs that is, if a contracting party fails to perform an absolute duty owed under a contract. 1 The most common remedy for a breach of contract is an award of monetary damages, often called the law remedy. Monetary damages include compensatory, consequential, liquidated, and nominal damages. If a monetary award does not provide adequate relief, however, the court may order any one of several equitable remedies, including specific performance, reformation, and injunction. Equitable remedies are based on the concept of fairness. This chapter discusses breach of contract and the remedies available to the nonbreaching party. PERFORMANCE AND BREACH If a contractual duty has not been discharged (i.e., terminated) or excused (i.e., relieved of legal liability), the contracting party owes an absolute duty (i.e., covenant) to perform the duty. As mentioned in the chapter introduction, there are three types of performance of a contract: (1) complete performance, (2) substantial performance (or minor breach), and (3) inferior performance (or material breach). These concepts are discussed in the following paragraphs. complete performance (strict performance) A situation in which a party to a contract renders performance exactly as required by the contract. Complete performance discharges that party s obligations under the contract. tender of performance An unconditional and absolute offer by a contracting party to perform his or her obligations under a contract; also known as tender. substantial performance Performance by a contracting party that deviates only slightly from complete performance. minor breach A breach that occurs when a party renders substantial performance of his or her contractual duties. Complete Performance Most contracts are discharged by the complete performance, or strict performance,of the contracting parties. Complete performance occurs when a party to a contract renders performance exactly as required by the contract. A fully performed contract is called an executed contract. Tender of performance, or tender, also discharges a party s contractual obligations. Tender is an unconditional and absolute offer by a contracting party to perform his or her obligations under the contract. Example Ashley, who owns a women s retail store, contracts to purchase high-fashion blue jeans from a manufacturer for $75,000. At the time of performance, Ashley tenders the $75,000. Ashley has performed her obligation under the contract once she tenders the $75,000 to the manufacturer. The manufacturer fails to deliver the blue jeans. The contract is not complete, therefore, Ashley can sue the manufacturer for breach of contract. Substantial Performance: Minor Breach Substantial performance occurs when there has been a minor breach of contract. In other words, it occurs when a party to a contract renders performance that deviates slightly from complete performance. The nonbreaching party may try to convince the breaching party to 318

BREACH OF CONTRACT AND REMEDIES elevate his or her performance to complete performance. If the breaching party does not correct the breach, the nonbreaching party can sue to recover damages by (1) deducting the cost to repair the defect from the contract price and remitting the balance to the breaching party or (2) suing the breaching party to recover the cost to repair the defect if the breaching party has already been paid (see Exhibit 1). Party A (Breaching Contract Party A breaches the contract (Substantial performance) Party B may 1. Recover damages Party B (Nonbreaching Exhibit 1 SUBSTANTIAL PERFORMANCE (MINOR BREACH) Examples Donald Trump contracts with Big Apple Construction Co. to have Big Apple construct an office building for $100 million. The architectural plans call for installation of three-ply windows in the building. Big Apple constructs the building exactly to plan except that it installs two-ply windows. There has been substantial performance. It would cost $5 million to install the correct windows. If Big Apple agrees to replace the windows and does so, its performance is elevated to complete performance, and Trump must pay the entire contract price. However, if Trump has to hire someone else to replace the windows, he may deduct this cost of repair of $5 million from the contract price of $100 million and remit the difference of $95 million to Big Apple. Inferior Performance: Material Breach A material breach of a contract occurs when a party renders inferior performance of his or her contractual obligations that impairs or destroys the essence of the contract. There is no clear line between a minor breach and a material breach. A determination is made on a case-by-case basis. Where there has been a material breach of contract, the nonbreaching party may rescind the contract and seek restitution of any compensation paid under the contract to the breaching party. The nonbreaching party is discharged from any further performance under the contract. 2 Alternatively, the nonbreaching party may treat the contract as being in effect and sue the breaching party to recover damages (see Exhibit 2). No cause of action arises from a bare promise. Legal maxim material breach A breach that occurs when a party renders inferior performance of his or her contractual duties. inferior performance A situation in which a party fails to perform express or implied contractual obligations and impairs or destroys the essence of a contract. Party A (Breaching Contract Party A breaches the contract (Inferior performance) Party B may 1. Recover damages or 2. Rescind the contract Party B (Nonbreaching Exhibit 2 INFERIOR PERFORMANCE (MATERIAL BREACH) Example A university contracts with a general contractor to build a new three-story classroom building with classroom space for one thousand students. The contract price is $100 million. However, the completed building cannot support more than five hundred students because the contractor used inferior materials. The defect cannot be repaired without rebuilding the entire structure. Because this is a material breach, the university may rescind the contract, recover any money that it has paid to the contractor, and require the contractor to remove the building. The university is discharged of any obligations under the contract and is free to employ another contractor to rebuild the building. However, the building does meet building codes so that it can be used as an administration building for the university. Thus, as an alternative remedy, the university could accept the building as an administration building, which has a value of $20 million. The university would owe this amount $20 million to the contractor. 319

BREACH OF CONTRACT AND REMEDIES CONCEPT SUMMARY TYPES OF PERFORMANCE Type of Performance Complete performance Substantial performance (minor breach) Inferior performance (material breach) Legal Consequence The contract is discharged. The nonbreaching party may recover damages caused by the breach. The nonbreaching party may either (1) rescind the contract and recover restitution or (2) affirm the contract and recover damages. Anticipatory Breach anticipatory breach A breach that occurs when one contracting party informs the other that he or she will not perform his or her contractual duties when due. Anticipatory breach (or anticipatory repudiation) of a contract occurs when a contracting party informs the other party in advance that he or she will not perform his or her contractual duties when due. This type of material breach can be expressly stated or implied from the conduct of the repudiator. Where there is an anticipatory repudiation, the nonbreaching party s obligations under the contract are discharged immediately. The nonbreaching party also has the right to sue the repudiating party when the anticipatory breach occurs; there is no need to wait until performance is due. 3 In the following case, the court found a breach of contract. CASE 1 Breach of Contract Chodos v. West Publishing Company, Inc. 292 F.3d 992, Web 2002 U.S. App. Lexis 10823 (2002) United States Court of Appeals for the Ninth Circuit Because West concedes that the manuscript was of high quality and that it declined to publish it solely for commercial reasons rather than because of any defect in its form and content, we hold as a matter of law that West breached its agreement with Chodos. Judge Stephen Reinhardt Facts Rafael Chodos is a California attorney who specializes in the law of fiduciary duty, which includes a party s obligation to act honestly and with loyalty when performing his or her legal duties to another. Chodos sent a detailed proposal and table of contents to Bancroft-Whitney, the leading publisher of legal texts, to write a treatise on fiduciary duties. The editors at Bancroft-Whitney were enthusiastic about the proposal and sent Chodos a standard-form author agreement that set forth the terms of the publishing contract. Chodos was to be paid 15 percent of the gross revenues from the sales of the treatise. Chodos and Bancroft-Whitney signed the agreement. For three years, Chodos wrote the manuscript. He significantly limited the time spent on his law practice and spent over 3,600 hours writing the manuscript. During this time, Chodos worked with editors of Bancroft- Whitney in developing and editing the manuscript. Midway through this period, West Publishing Group purchased Bancroft-Whitney, and the two companies merged. The Bancroft-Whitney editors, now employed by West, continued to work with Chodos on editing and developing the manuscript. Three years after beginning, Chodos submitted the final manuscript to West. West editors suggested changes to the manuscript, which Chodos completed. West sent Chodos a letter, apologizing for delays in publication and assuring him publication would take place within three months. However, one month after the promised publication date, Chodos received a letter from West s marketing department, stating that West had decided not to publish Chodos s manuscript because it did not fit with [West s] current product mix and because of concerns about its market potential. West admitted, however, that the manuscript was of high quality and that its decision was not due to any literary shortcomings of Chodos s work. Chodos filed a lawsuit against West, alleging breach of contract. The U.S. District Court granted summary judgment in favor of West. Chodos appealed. Issue Did West Publishing breach the author agreement it had with Chodos? 320