Chapter 8: Contracts: Third Parties, Performance, and Remedies

Week 8. Chapter content to be written. The description below sets out what the chapter will cover.

The last of the three contract chapters covers what happens after a contract is formed. It deals with how contracts can involve people who did not sign them, what it means to perform or breach, how contractual obligations end, and what a court can do when one side does not keep its promise.

8.1 Planned Sections

Third-Party Rights. Assignment of rights and delegation of duties, including which rights and duties cannot be transferred and the effect of anti-assignment clauses. Intended and incidental beneficiaries, and when a beneficiary's rights vest.

Performance and Breach. Conditions precedent and subsequent. Complete performance, substantial performance, and performance to the satisfaction of another. Material and minor breach, and anticipatory repudiation.

Discharge. Discharge by performance, by mutual rescission, novation, accord and satisfaction, and by operation of law. Impossibility, commercial impracticability, and frustration of purpose, including how courts treated pandemic-era disputes and how force majeure clauses are drafted.

Damages. Compensatory damages and the expectation interest, consequential damages and the Hadley v. Baxendale foreseeability rule, incidental damages, punitive damages (rarely available in contract), nominal damages, the duty to mitigate, and liquidated damages versus penalties.

Equitable Remedies and Limits on Remedies. Rescission and restitution, specific performance (and why it is usually reserved for land and unique goods), reformation, and recovery based on quasi contract. Clauses that limit remedies, and election of remedies.

8.2 Featured Case

Hadley v. Baxendale, (1854) 9 Ex. 341, 156 Eng. Rep. 145. The Hadleys' mill shut down when its crankshaft broke. They hired Baxendale's carrier company to take the broken shaft to an engineer as a pattern for a new one. The carrier delayed delivery, and the mill stayed closed for several extra days. The court refused to award the lost profits. Damages for breach are limited to losses that arise naturally from the breach or that both parties reasonably had in mind when they made the contract, and the carrier had not been told the mill could not run without the shaft.

Why this case: The foreseeability rule for consequential damages comes from this case and still applies in every U.S. jurisdiction. It also shows students why telling the other side about special circumstances when the contract is made matters in practice.

Discussion question: If you were the mill owners, what could you have said or written at the time of contracting to recover your lost profits?

8.2.1 Short Case Summaries

• Jacob & Youngs, Inc. v. Kent, 230 N.Y. 239, 129 N.E. 889 (1921). A builder installed pipe from a different manufacturer than the contract specified, though it was of equal quality. That was substantial performance, and the owner's damages were the difference in value (almost nothing), not the cost of tearing out walls to replace it. (Performance and breach)
• Taylor v. Caldwell, (1863) 3 B. & S. 826, 122 Eng. Rep. 309. A music hall rented for concerts burned down before the performances. Both parties were excused because performance had become impossible. (Discharge: impossibility)

8.3 Planned Features

• A damages calculation exercise based on a broken supply contract.
• A clause drafting exercise: writing a force majeure clause and a liquidated damages clause for a small business.
• Key terms: assignment, delegation, intended beneficiary, condition precedent, substantial performance, material breach, anticipatory repudiation, novation, impracticability, frustration of purpose, consequential damages, mitigation, liquidated damages, specific performance.