Contracts Chapter 20 Breach of Contract & Remedies

The key points in this chapter include:

1. The different types of damages.

2. Measures of damages for breach of different types of contracts.

3. The difference between liquidated damages and penalties.

4. Equitable remedies and when they are granted.

5. The doctrine of election of remedies.

Breach of contract is the failure to perform what a party is under a duty to perform. When this happens, the nonbreaching party can choose one or more remedies. Unless damages would be inadequate, that is usually what a court will award.

I. DAMAGES
Damages compensate a nonbreaching party for the loss of a bargain and, under special circumstances, for additional losses. Generally, the party is placed in the position he or she would have occupied if the contract been performed.

A. TYPES OF DAMAGES

1. Compensatory Damages
Damages compensating a party for the loss of a bargain-the difference between the promised performance and the actual performance.

a. Incidental Damages
Expenses that are caused directly by a breach of contract (such as those incurred to obtain performance from another source).

b. Measurement of Compensatory Damages

1) Contract for a Sale of Goods
The usual measure is the difference between the contract price and the market price. If the buyer breaches and the seller has not yet made the goods, the measure is lost profits on the sale.

2) Contract for a Sale of Land

a) Majority Rule
If specific performance (see below) is unavailable, or if the buyer breaches, the measure of damages is the difference between the land's contract price and its market price.

b) Minority Rule
If the seller breaches and the breach is not deliberate, the buyer recovers any down payment, plus expenses.

3) Construction Contracts

a) Owner's Breach Before, During, or After Construction
Contractor can recover (1) before construction: only profits (contract price, less cost of materials and labor); (2) during construction: profits, plus cost of partial construction; (3) after construction: the contract price, plus interest.

b) Contractor's Breach
Owner can recover for (1) stopping mid-project: cost of completion; (2) late completion: costs related to loss of use; (3) substantial performance: cost of completion, if there would be no substantial economic waste (if cost to complete does not exceed value that the extra work contributes.)

2. Consequential Damages
Damages giving an injured party the entire benefit of the bargain-foreseeable losses caused by special circumstances beyond the contract.The breaching party must know (or have reason to know) that special circumstances will cause the additional loss.

3. Punitive Damages
Damages punishing a guilty party and making an example to deter similar, future conduct. Awarded for a tort, but not for a contract breach.

4. Nominal Damages
Damages (such as $1) establishing, when no actual loss resulted, that a defendant acted wrongfully.

B. MITIGATION OF DAMAGES
An injured party has a duty to mitigate damages. For example, persons whose jobs have been wrongfully terminated have a duty to seek other jobs. The damages they receive are their salaries, less the income they received (or would have received) in similar jobs.

C. LIQUIDATED DAMAGES VERSUS PENALTIES

1. Liquidated Damages Provision
Specifies a certain amount to be paid in the event of a breach to the nonbreaching party for the loss. Such provisions are enforceable.

2. Penalty Provision
Specifies a certain amount to be paid in the event of a breach to penalize the breaching party. Such provisions are not enforceable.

3. How to Determine If a Provision Will Be Enforced
Ask: (1) When contract was made, was it clear damages would be difficult to estimate? (2) Was amount set as damages a reasonable estimate? If either answer is "no," provision will not be enforced.

II. RESCISSION AND RESTITUTION

A. RESCISSION
Rescission is an action to undo, or cancel, a contract-to return nonbreaching parties to the positions they occupied prior to the transaction. Rescission is available if fraud, mistake, duress, or failure of consideration is present. The rescinding party must give prompt notice to the breaching party.

B. RESTITUTION
To rescind a contract, the parties must make restitution by returning to each other goods, property, or money previously conveyed.

III. SPECIFIC PERFORMANCE
This remedy calls for the performance of the act promised in the contract.

A. WHEN SPECIFIC PERFORMANCE IS AVAILABLE
Damages must be an inadequate remedy. If goods are unique, a court will decree specific performance. Specific performance is granted to a buyer in a contract for the sale of land (every parcel of land is unique).

B. WHEN SPECIFIC PERFORMANCE IS NOT AVAILABLE
Contracts for a sale of goods (other than unique goods) rarely qualify, because substantially identical goods can be bought or sold elsewhere. Courts normally refuse to grant specific performance of personal service contracts.

IV. REFORMATION
Used when the parties have imperfectly expressed their agreement in writing. Allows the contract to be rewritten to reflect the parties' true intentions.

A. WHEN REFORMATION IS AVAILABLE
(1) In cases of fraud or mutual mistake; (2) to prove the correct terms of an oral contract; (3) if a covenant not to compete is for a valid purpose (such as the sale of a business), but the area or time constraints are unreasonable, some courts will reform the restraints to make them reasonable.

B. WHEN REFORMATION IS NOT AVAILABLE
If the area or time constraints in a covenant not to compete are unreasonable, some courts will throw out the entire covenant.

V. RECOVERY BASED ON QUASI CONTRACT
When there is no enforceable contract, quasi contract prevents unjust enrichment. The law implies a promise to pay the reasonable value for benefits received.

A. WHEN QUASI-CONTRACTUAL RECOVERY IS USEFUL
A party has partially performed under a contract that is unenforceable. The party may recover the reasonable value (fair market value).

B. ELEMENTS TO RECOVER IN QUASI CONTRACT
The party seeking recovery must show (1) he or she conferred a benefit on the other party, (2) he or she had the reasonable expectation of being paid, (3) he or she did not act as a volunteer in conferring the benefit, and (4) the other party would be unjustly enriched by retaining it without paying.

VI. ELECTION OF REMEDIES
A nonbreaching party must choose which remedy to pursue. The purpose of the doctrine is to prevent double recovery. The doctrine has been eliminated in contracts for the sale of goods [UCC 2-703, 2-711].

VII. WAIVER OF BREACH
Occurs when a nonbreaching party accepts defective performance.

A. THE EFFECT OF A WAIVER
A waiver keeps a contract going.

1. Past Breaches
A party waiving a breach cannot take later action based on the breach. In effect, the waiver erases the past breach.

2. Future Breaches
Normally, a waiver of one breach does not waive future breaches. It extends to future breaches, however, if a reasonable person would conclude that similar defective performance would be acceptable in the future.

B. LIABILITY FOR DAMAGES
A nonbreaching party can recover damages for defective performance.

VIII. CONTRACT PROVISIONS LIMITING REMEDIES

A. EXCULPATORY CLAUSES
A provision excluding liability for fraudulent or intentional injury or for illegal acts will not be enforced. An exculpatory clause for negligence contained in a contract made between parties who have roughly equal bargaining positions usually will be enforced.

B. LIMITATION-OF-LIABILITY CLAUSES
Provide that the only remedy for breach is replacement, repair, or refund of the purchase price (or some other limit). Such clauses may be enforced.

C. CONTRACTS FOR SALES OF GOODS
Remedies can be limited (see Chapter 24).