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Chapter 17 Contracts


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Title: Chapter 17 Contracts

Chapter 17Contracts Breach of Contract and
  • Damages.
  • Rescission and Restitution.
  • Specific Performance.
  • Reformation.
  • Recovery Based on Quasi Contract.

1 Damages
  • Types of Damages
  • Consequential Damages.
  • Breaching party is aware or should be aware,
    cause the injury party additional loss.
  • Punitive Damages.
  • Available when tort is also involved.
  • Nominal Damages.
  • No financial loss.

2 Mitigation of Damages
  • When breach of contract occurs, the innocent
    injured party is held to a duty to reduce the
    damages that he or she suffered.
  • Duty owed depends on the nature of the contract.

Liquidated Damages vs. Penalties
  • Liquidated Damages.
  • A contract provides a specific amount to be paid
    as damages in the event of future default or
    breach of contract.
  • Penalties.
  • Specify a certain amount to be paid in the event
    of a default or breach of contract and are
    designed to penalize the breaching party.

2 Rescission and Restitution
  • Rescission.
  • A remedy whereby a contract is canceled and the
    parties are restored to the original positions
    that they occupied prior to the transactions.
  • Restitution.
  • Both parties must return goods, property, or
    money previously conveyed.
  • Note Rescission does not always call for
    restitution. Restitution called for in some cases
    not involving rescission.

3 Specific Performance
  • Equitable remedy calling for the performance of
    the act promised in the contract.
  • Remedy in cases where the consideration is
  • Unique
  • Scarce or
  • Not available remedy in contracts for personal

4 Reformation
  • Equitable remedy allowing a contract to be
    reformed, or rewritten to reflect the parties
    true intentions.
  • Available when an agreement is imperfectly
    expressed in writing.

5 Recovery Based on Quasi Contract
  • Equitable theory imposed by courts to obtain
    justice and prevent unjust enrichment.
  • Quantum meruit. Party seeking recovery must show
    the following
  • A benefit was conferred to the other party.
  • Party conferring did so with the reasonable
    expectation of being paid.
  • The benefit was not volunteered.
  • Retaining benefit without paying for it would
    result in unjust enrichment of the party
    receiving the benefit.

6 Election of Remedies
  • Doctrine created to prevent double recovery.
  • Nonbreaching party must choose which remedy to
  • UCC rejects election of remedies.
  • Cumulative in nature and include all the
    available remedies for breach of contract.

7 Waiver of Breach
  • A pattern of conduct that waives a number of
    successive breaches will operate as a continued
  • Nonbreaching party can still recover damages, but
    contract is not terminated.
  • Nonbreaching party should give notice to the
    breaching party that full performance will be
    required in the future.

8 Contract Provisions Limiting Remedies
  • Exculpatory clauses.
  • Provisions stating that no damages can be
  • Limitation of liability clauses.
  • Provisions that affect the availability of
    certain remedies.

Case 17.1 Fujitsu v. Federal Express(Mitigation
of Damages)
  • Fujitsu shipped a container of silicon wafers
    from Japan, to Ross in Austin, TX using FedEx.
  • The next day, the container arrived in Austin and
    was held for clearance by the U.S. Customs
    Service. Meanwhile, Ross told FedEx it was
    rejecting the shipment and that FedEx should
    return the goods to Fujitsu at Rosss expense.
  • The goods left Austin in good condition, but when
    they arrived in Japan, Fujitsu found the goods
    covered with an oily residue. Fujitsu reported
    the damage to FedEx.

Case 17.1 Fujitsu v. Federal Express(Mitigation
of Damages)
  • FACTS (contd)
  • Fujitsus insurance company directed FedEx to
    dispose the entire container of chips without
    opening the bags.
  • Fujitsu filed suit for breach of contracts and
    the court found FedEx liable for 726,640 in
  • FedEx appealed arguing that Fujitsu failed to
    mitigate its damages.
  • Fujitsu could not mitigate its damages because
    because the chips could only be opened in a clean
    room, which was not possible with the oily
    residue on the bags.

Case 17.2 Atel Financial v. Quaker Coal
Company(Liquidated Damages)
  • Atel leased heavy mining equipment to Quaker Coal
    Company, a Kentucky firm engaged in coal mining.
  • The lease provided for liquidated damages in an
    amount equal to the present value of all monies
    to be paid by Lessee during the remaining Basic
    Term or any successive period then in effect,
    plus      the anticipated residual of the
  • Later, Quaker asked Atel to temporarily forego
    payments so that Quaker could refinance its
    debts. Atel agreed.

Case 17.2 Atel Financial v. Quaker Coal
Company(Liquidated Damages)
  • FACTS (contd)
  • Months later, when Quaker was over 700,000 in
    arrears, Atel declared a default and demanded
    liquidated damages.
  • Two weeks later, Quaker finalized its debt
    restructuring and sent Atel a check for all
    outstanding invoices. The next day, Atel sued
    Quaker for breach of contract.
  • By the time of trial, Quaker had made all past
    due payments.

Case 17.2 Atel Financial v. Quaker Coal
Company(Liquidated Damages)
  • Court denied Atels request for liquidated
    damages and entered a judgment in favor of
  • Court considered the liquidated damages clause to
    be a penalty clause.
  • A liquidated damages clause will generally be
    considered unreasonable, and hence unenforceable,
    if it bears no reasonable relationship to the
    range of actual damages that the parties could
    have anticipated would flow from a breach.

Case 17.3 Maglica v. Maglica(Quasi-Contract)
  • Maglica founded a machine shop business, Mag
    Instrument, in 1955. In 1971, he and Halasz
    began to live together, holding themselves out as
    man and wife, but they never married.
  • Halasz worked with Maglica to build Mag
    Instrument, although on its incorporation in
    1974, all shares were issued to Anthony.
    Maglica, as president, and Halasz, as secretary,
    were paid equal salaries.
  • In 1978, the business began manufacturing the
    Mag flashlights, and thanks to ideas and hard
    work on Claires part, the business boomed.

Case 17.3 Maglica v. Maglica(Quasi-Contract)
  • FACTS (contd)
  • The couple split in 1992, and Halasz sued Maglica
    seeking a recovery based on quantum meruit. The
    jury awarded Claire 84 million, based on the
    businesss benefit from her services. Maglica
  • Remanded for recalculation of award.
  • Claire could recover for the value of her
    services, but not for the benefit conferred on
    the business. In this case, the court will not
    impose a highly generous and extraordinary
    contract that the parties did not make.
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