Back To CourseBusiness 103: Introductory Business Law
22 chapters | 172 lessons | 13 flashcard sets
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Ashley is an attorney. She has taught and written various introductory law courses.
You're hosting a big event in a few months, and you need party favors. We make a business contract. I'm going to sell you 100 pairs of custom sunglasses. You're going to pay me $20 per pair for a total of $2,000. I tell you that I have exactly 100 pairs of the special lenses you request. You make a down payment that is equal to half of your bill, or $1,000, now. You don't get any of your sunglasses yet, but I promise to fulfill your order within the next 12 weeks. You need the sunglasses by then in order to have them at your special event, and our contract says this.
This type of contract is a common ingredient in everyday business matters. Contracts serve to formalize and secure business dealings. Contracts also protect the parties in the agreement, because the contract obligations are legally binding. This means that, if a party fails to complete his or her obligations under the contract, legal ramifications will result.
A breach of contract claim is a frequent type of civil lawsuit. A breach of contract occurs when one party to the contract fails to uphold his or her legal obligations under the contract. Sometimes, a contracting party will have a reasonable presumption that a breach of contract will occur. In some instances, a party acts or makes statements that are contrary to his or her obligations under the contract. Fortunately, the other party doesn't have to wait until the contract is actually breached.
The party who has intent to complete the contract is commonly called the innocent party. This party can take certain legal actions to better secure the contract and protect his or her interests. Let's take a look at the legal action available when an innocent party reasonably expects a breach of contract.
There are times when an innocent party anticipates that the other party will breach the contract. This is known as anticipatory repudiation, or anticipatory breach. Anticipatory repudiation occurs when a party communicates that he or she won't fulfill the contract obligations by the deadline.
Once the innocent party is notified that a breach is likely, that party can file a civil lawsuit for damages and terminate the contract. There's no need to wait for the actual breach of contract. This means that the innocent party can initiate a lawsuit for anticipatory repudiation before the contract deadline, but that party must be able to prove two things:
For example, let's look at our contract for your custom sunglasses. Let's say that, one month after executing our contract, you call me to check on your order. I tell you that I forgot about your order, and I already used 20 pairs of the special lenses you requested to fulfill another person's order. This means I only have enough supplies for 80 pairs of sunglasses, and you ordered 100 pairs. I tell you that I won't be able to fulfill your order by the deadline, because now I'll have to order more lenses from the manufacturer.
This is repudiation, because I've made a statement saying that I can't fulfill the contract by the deadline. This breach will cause you a loss, because now you have to find someone else who can fulfill the order by the deadline, and you'll have to pay that person.
As a businessperson, it's helpful to recognize when there are grounds for anticipatory repudiation. Generally speaking, there are three types of repudiation. Repudiation occurs when:
Let's look again at our contract for the custom sunglasses. I clearly told you that I can't fulfill the obligations due under the contract, because now I don't have the correct supplies available before the contract deadline. I've also acted in a manner that's inconsistent with the intent to fulfill our contract, because I used my limited supplies to fulfill another order. I've also sold the property that was the subject of our contract. My repudiation meets criteria under each of these types.
The intent to breach the contract must be plain and obvious. An innocent party can't base an anticipatory repudiation lawsuit on an ambiguous statement or communication. It's also important to note that the words of repudiation might not be the repudiating party's last words on the matter. The repudiation doesn't always automatically trigger grounds for a lawsuit.
The repudiating party can retract, or take back, his or her repudiating statement or communication. A retraction is a statement that disavows, recants or reverses a previous statement. In anticipatory repudiation, a retraction acts to reinstate the contract, unless the repudiation caused damage to the innocent party, or caused the innocent party to make other arrangements.
Let's take another look at our contract. You called to check on our contract, and I told you that I couldn't fulfill your order for 100 pairs of custom sunglasses by the contract deadline. I used some of the needed supplies to complete another order. Now I'll need to order more supplies, and that will take longer than the contract deadline. A few days later, I call you back to say that I've located the needed supplies, and will now be able to meet my obligations under our contract.
This is a retraction. Our original contract is reinstated, with all the same terms, unless you've already sustained a loss, or made other arrangements because of my repudiation. Let's say that you tried, but couldn't find anyone else to fulfill your order in time. You've wasted some of your free time and you're irritated with me, but you haven't spent any extra money, and you haven't been successful in making other arrangements.
When a party repudiates a contract, then retracts his or her repudiation, it's understandably inconvenient for the innocent party. A contract is meant to formalize and secure an agreement, but repudiation brings insecurity and distrust.
After a retraction, the innocent party has a right to request a promise, or guarantee, that the repudiating party truly intends to fulfill the obligations due under the contract. This is called a demand for assurances, or a request for assurances.
A demand for assurances is a written provision that requests the repudiating party to provide adequate assurance that he or she will fulfill the obligations due under the contract. In effect, the repudiating party must provide evidence that he or she intends to fully complete the contract this time.
Under the law in most states, the assurance must be provided within 30 days of the demand. Otherwise, the innocent party can terminate the contract and sue for any loss incurred. Also, while waiting to receive the assurance, the innocent party can usually suspend his or her obligations due under the contract.
Let's go back to the contract you and I made. After I call you to tell you that I'll fulfill your order after all, you're not quite sure what to believe. You need the sunglasses in the next six weeks, but you don't trust me. You send me a letter that requests assurance that I'll fulfill our contract. Now, I'll have to provide you with evidence that I intend to fully complete the contract. I'll have to provide this evidence within the next 30 days.
Remember that I still have 80 pairs of the lenses you need. This means that I can produce most of your order while waiting on the other 20 pairs of lenses to be delivered to me. So, I get busy constructing your custom sunglasses. Within 30 days, I deliver 50 pairs of custom sunglasses to you. This is how many you've already prepaid for, and it will be considered a reasonable assurance that I intend to fulfill our contract.
Let's review. Sometimes a contracting party will have a reasonable presumption that a breach of contract will occur. The party who has intent to complete the contract is commonly called the innocent party. This party can take certain legal actions to better secure the contract and protect his or her interests, rather than waiting for the actual breach to occur.
Anticipatory repudiation is when a party communicates that he or she won't, or can't, fulfill the contract obligations by the deadline. The innocent party can initiate a lawsuit for anticipatory repudiation before the contract deadline. However, note that the repudiating party can issue a retraction. This is a statement that disavows, recants or reverses a previous statement. A retraction acts to reinstate the contract, unless the repudiation caused damage to the innocent party, or caused the innocent party to make new arrangements.
After a retraction, the innocent party has a right to request a promise that the repudiating party truly intends to fulfill the obligations due under the contract. This is called a demand for assurances. The repudiating party usually must provide evidence that he or she intends to complete the contract within 30 days of the innocent party's demand. Otherwise, the innocent party can terminate the contract and sue for any loss incurred.
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Back To CourseBusiness 103: Introductory Business Law
22 chapters | 172 lessons | 13 flashcard sets