 This is Waylon Chow and welcome to Contract Law Fundamentals, Module 3a, Part D. In this part, we'll look at breach of contract and remedies, specifically the concept of privity of contract, the difference between a breach of warranty versus a breach of condition, and the different types of damages. The legal doctrine of privity of contract determines who can either sue or be sued on a contract. The people who are privy to a contract are the parties to a contract, and therefore only parties to a contract can sue or be sued. So if there is a third party that has some legal obligation or legal benefit arising from a contract, that third party cannot be sued or sue. Let's take an example of an agreement between a buyer and a seller, and the agreement is to sell a car for $5,000. The consideration exchange is that the seller promises to transfer ownership of the car in exchange for a promise from the buyer to pay $5,000 to the seller's sister. So there's a seller's sister there, and let's say the buyer fails to pay the sister, even though ownership has already been transferred to the buyer. So what are the seller's sister's legal rights here? Under the doctrine of privity of contract, the sister cannot sue the buyer due to the lack of privity. There are some exceptions to the rule of privity of contract. In some jurisdictions, including New Brunswick and other jurisdictions outside of Canada, they've decided that this doctrine of privity of contract doesn't make sense, it's stupid, it's unfair, and they've abolished privity by way of legislation. Another way of getting around the rule of privity of contract is by way of assignment. Let's change our scenario a little bit once again. So Daria asks, do you want to buy my Apple laptop for $500? Jamal this time says yes, but only if it includes your iPad. Daria says no way. And Jamal replies, okay, I'll take just the laptop for $500. The question again is, is there an agreement? If we look at a contract as a set of terms that create legal obligations on the part of the parties involved in the contract, if one of the parties fails to perform one of those terms or one of those obligations, it's considered to be a breach of contract. And that breach of contract can be one of two different types, a breach of condition versus a breach of warranty. A breach of condition is where there has been a failure to perform an important or essential term of the contract while a breach of warranty is the opposite, it's a failure to perform a less important or non-essential term of the contract. The difference between the two is significant because the legal consequences that flow from the breach are different. With a breach of condition, the innocent or non-breaching party has the option to do one of two things. That party can just walk away from the contract, cancel the contract and claim damages, or they can still continue with the contract but they still have the right to sue for damages from the breaching party. With a breach of warranty, the choices for the innocent party are much more limited. The innocent party has to continue with contract but does have the ability to sue or claim damages from the breaching party. Here are two examples of breach of contract involving Daria and Jamal. In the first example, in making a deal to sell her laptop to Jamal, Daria agreed to wipe or erase all of her documents from the hard drive of the laptop before giving it to Jamal. In that situation, it would most likely be a breach of warranty. The term that requires Daria to wipe all of her documents from the hard drive, I would not view that as being an essential term of the contract. It is something that Jamal can easily do himself or he can hire someone at Geek Squad to do it at minimal cost. He does have to incur to get Daria's documents wiped from the computer. He can claim those costs as damages from Daria. It would most likely be a breach of warranty, meaning that Jamal still has to continue with the contract in terms of buying the laptop from Daria. But he does have a right to claim damages that arise from that breach of contract. The second breach of contract example here involves the situation in making the deal for the laptop. Jamal says that for the price that he's agreed to pay, it's important to him that the laptop have a solid state drive. Daria states that the laptop indeed includes a solid state drive. However, it then turns out that it only has a regular hard drive, which is much slower than a solid state drive. In that example, that breach of contract would likely be considered to be a breach of condition for a number of reasons. The functionality of a solid state drive is usually quite important in how well a laptop performs. A solid state drive is usually much faster in retrieving data than a regular hard drive, and it generally makes a laptop work better. So in that sense, it can be said to be an essential or an important term of the contract. But also in this example, Jamal himself in the negotiation of the contract has pointed out that the need for a solid state drive is an important term for him in coming to an agreement to purchase the laptop. So for both of those reasons, it reinforces the conclusion that it is a breach of condition. So as a breach of condition, Jamal has the option to walk away from this deal to cancel the contract. So he can cancel the contract and not pay for the laptop and refuse delivery of the laptop. Or if he's already paid for the laptop, he can demand a refund of the laptop and then give the laptop back to Daria. When a court orders damages, what it's doing is it's ordering the breaching party, the party who breached the contract to pay some amount of money to the innocent party to compensate for that breach of contract. How those damages are determined will vary depending on the specific type of damages that are being awarded. This is a chart that summarizes a number of different kinds of damages. I won't go through this chart, but I did highlight in red the types of damages that we will examine. So those are expectation damages, nominal damages, liquidated damages, and punitive damages. Let's focus a little more on expectation damages, which is the most common form of damages. The purpose of expectation damages is to put the plaintiff in the same position as if the contract was properly performed. The mathematical expression of that is expectation damages equals the expected benefits from the contract minus the expected costs from the contract. I think to keep in mind in determining the amount of expectation damages apart from that formula is that a plaintiff has a duty to take reasonable steps to minimize losses. So what that means is that if a plaintiff fails to do anything to mitigate losses, what a court will do is that it will reduce the amount of damages that it will award to the plaintiff to the extent of the loss that could have been reasonably avoided. To get a better understanding of expectation damages, let's now look at this quick quiz question. Please pause this video for a few moments so that you may have a look at the question and to try to figure out what you think is the answer. The answer here is B, 20,000. So we get to 20,000 by calculating the expected damages being equal to the expected benefit. The expected benefit that Armand expected to receive if the contract had been performed would have been $100,000. He would have received $100,000 from Melanie. So that expected benefit is, we minus from that expected benefit the expected costs of Armand. His expected cost is $80,000. The widget cost him $80,000. So it's $100,000 minus $80,000, which gives us the $20,000.