This class deals with the business law topics that appear on the CPA exam: Agency, Contracts, Debtor-Creditor Relationships, Government Regulation of Business, and Business Organizations. Students will gain an understanding of how these areas of the law affect businesses and their operations, with an eye on preparation for the business law portions of the REG section of the CPA exam. By the end of the class, students will be able to identify the legal principles that govern various business situations and apply those principles to an issue to determine the outcome when the law is applied to the facts of a scenario.
Contract Performance: Common Law
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Do curso por University of Illinois at Urbana-Champaign
Corporate & Commercial Law I: Contracts & Employment Law
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University of Illinois at Urbana-Champaign
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Module 3: Enforcing Agreements
In this module, we continue our discussion of contract law by focusing on the enforcement of agreements. We begin by examining who can enforce contracts, then discuss when contracts can be enforced in court, and end by looking into what types of awards courts will grant when a party has been the victim of a breach of a contract. Throughout this module, we will call special attention to different rules that apply to contracts for the sale of goods.
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Professor Michael R FrickeTeaching Assistant Professor
Department of Business Administration
[SOUND] In this lesson,
we're going to begin discussing the idea of contract performance.
Now, in this lesson, we're going to talk about contract performance under
the common law rules, meaning what is required of you in terms of how you
perform your duties under a contract.
[MUSIC]
So again, we're still deep in the weeds of our discussion of contracts.
Contracts are really, really, really important,
the most important topic in this course with regards to business.
Now, contract performance is the idea of
what are you responsible for in your contract?
And what remedies does the other party have if you
do everything you're supposed to do, if you do most of what you're supposed to do,
or if you do almost none of what you're supposed to do, what are the consequences?
So we're going to split this discussion of contract performance into two parts.
This part, we're going to talk about common law contract performance.
The rules that apply generally to most contracts.
And in the second part of this discussion, we're going to talk about contract
performance under UCC Article 2, with respect to the sale of goods.
This is a really important concept, and Article 2 provides us with some
unique rules in the context of sales of goods.
But that's next lecture.
This lesson we're going to talk about common law contract performance.
And really, there are three levels of contract performance.
Complete performance, substantial performance, and inferior performance.
So we're going to talk about what those are, what are the consequences of each?
Let's take an example that we'll use through out this lesson.
So say you own some land and you want to hire a contractor
to build a building on your land for your new office space.
And you give them some specifications.
You say, it has to be able to support the weight of this many employees in
the building.
We have to have a conference room big enough to hold this many people.
We really care about environmental friendliness and efficiencies,
so we're going to require it to have solar panels on the roof and
triple pane windows for efficiency, and all this kind of stuff.
Now, what's the best case scenario?
They do it.
They do what they're supposed to do.
And when parties do what they're supposed to do, it's so
great, and that's called complete performance.
Complete performance means the parties to the contract are very happy.
Lawyers, not so happy.
Happy parties, sad lawyers.
That's generally good for society, probably.
But lawyers love it when parties don't do what they're supposed to do,
because that's how lawyers make money.
So if you want to keep your lawyers employed,
don't do what you're supposed to do under your contracts.
If you want to put your lawyers out of business, do what you're supposed to do,
it's easy.
Complete performance, there's not really anything else to say about it,
do what you're supposed to do, everyone will be happy.
Now, what if in your building, that was being built for your office space,
the floors hold the number of people they're supposed to hold,
the conference room is the size it's supposed to be,
there are the solar panels on the roof, but
maybe instead of triple pane windows your contractor put in double pane windows?
Now, this is not a significant breach of the contact.
This is what's called a minor breach.
And in legal terms we call this substantial performance.
They did most of what they were supposed to do.
Was it complete performance?
No.
Was it a major material breach of the contract?
No, it was substantial performance.
Now, in the case of substantial performance,
the non-breaching party has a couple of options for what they can do.
Option number one is deduct the cost of fixing the problem
from the amount they pay.
So in our example, the contractor delivers the double pane windows instead of
the triple pane windows.
Well, it's pretty easy to figure out,
how much is it going to cost to replace those windows?
Or how much extra will our utility bills be because of this?
And just deduct that from the price that you pay them.
Now, the other option is to go ahead and pay the full contract price, and
then sue the other party for damages.
You can do either one of those things, but what you cannot do,
in the case of substantial performance, is just terminate the entire agreement.
Because the other party did most of what they were supposed to do.
I mean, the breach is minor, so you can't just terminate the contract.
Now, in the case of what's called inferior performance,
this is a material breach that frustrates the very heart and soul of the contract.
In that case, you can terminate the contract.
So for example,
in our scenario where you hire someone to build your office building for you.
Maybe they used the wrong type of concrete for the foundation, so
it's not string enough to hold all your employees and your equipment.
And maybe the conference room isn't big enough, and
there's no solar panels on the roof, and they used single pane on the windows,
and everything is wrong, that's inferior performance.
It's a material breach of the contract, and in that case, the non-breaching party,
again, has a couple of remedies, and they're different remedies.
The first one is you can accept the performance that was rendered and
sue for damages.
Now, accepting the performance that was rendered might mean, I was
supposed to get a building with these specifications that was worth $10 million,
what I really got was a totally different building with different specifications
that's maybe only worth $3 million.
So you can sue for the difference if you say, look, we can still use this,
not for what we intended to use it for, but we can use it for something.
So we'll take it, but we'll sue for the damages and the difference.
And not just difference in what you got and what you are supposed to get, but
also some other types of damages.
We'll talk about damages in different lesson.
Your other options, and this is the really drastic option, if you are the victim of
inferior performance you can actually rescind the contract and
sue the other party for something called restitution.
Now, this is a big deal.
Restitution means putting one party back in the place it was in
if the contract had never been signed in the first place.
So in our example, if you rescind the contract, terminate the agreement, and
sue for restitution, you would be demanding that the contractor who
delivered a building that was nowhere near what was required, restitution would mean
they tear that building down the ground and give you your vacant lot back so
you can hire somebody else to build the building you need.
That's sort of drastic, right?
But in the case of inferior performance, the victim,
the non-breaching party actually has the right to do that.
Because you shouldn't be held responsible for another party's breach,
so if they have a material breach, it's their job to put you
back in the position you were in before this whole mess, so
that you can get what you really want and what you really bargained for.
[SOUND]
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