Today’s Lesson Breach of Contract and Remedies
At the conclusion of this lesson, the student
should be able to: Determine a breach of contract Explain the various remedies for breach of contract Differentiate between the different remedies for breach of contract
Overview Contract
Agreement, Consideration, Capacity, Legality
Breach
Non-performance Failure to perform an absolute duty required under the contract.
Remedy
Relief provided to the innocent party
Breach of Contract What is it? How does it occur?
be sure to be able to distinguish between a breach and situation where party says other is breaching when in actuality a defense has been raised to enforcement
e.g., Statute of Frauds, Genuineness of Assent
Failure to perform agreement, or failure of
consideration
Performance and Breach If a contractual duty has not been discharged
or excused, the contracting party owes an absolute duty (covenant) to perform the duty. Breach of contract – If a contracting party
fails to perform an absolute duty owed under a contract.
Breach of Contract Breach of contract may be either actual or
anticipatory. Actual breach – occurs where one party refuses to
form his side of the bargain on the due date or performs incompletely. Anticipatory breach – occurs where one party
announces in advance of the due date for performance that he intends not to perform his side of the bargain. The innocent party may sue for damages immediately the breach is announced.
Types of Performance Complete Performance
Substantial Performance
Inferior Performance
Summary: Types of Performance Type of Performance
Legal Consequence
Complete Performance The contract is discharged.
Substantial Performance (minor breach)
The non-breaching party may recover damages caused by the breach.
Inferior Performance (material breach)
The non-breaching party may either: (1) Rescind the contract and recover restitution, or (2) Affirm the contract and recover damages.
Remedies... At Law classic compensation for injury limited to land items of value money
In Equity based on principles of justice and fairness relief provided through specific performance injunctions rescission and restitution
Remedies at Law Damages is the basic remedy for breach of
contract. It is a common law remedy that can be claimed as of right by the innocent party. Compensation for loss of the Benefit of the Bargain Most common remedy “... innocent party to be placed in the position they would have occupied had the contract been fully performed...”
Four Types of Damages Compensatory Damages
Punitive Damages
Consequential Damages
Nominal Damages
Four Types of Damages Compensatory Consequential Punitive Nominal
(Specials)
Compensatory Damages Award of money intended to compensate a
non-breaching party for the loss of the bargain. They place the non-breaching party in the same position as if the contract had been fully performed by restoring the “benefit of the bargain.”
Compensatory Damages (continued) The amount of that will be awarded for
breach of contract depends on:
The type of contract involved, and Which party breached the contract.
Special types of contracts:
Sale of Goods Construction Contracts Employment contracts Land contract
A. General Damages. General damages cover the loss directly and necessarily incurred by the breach of contract. General damages are the most common type of damages awarded for breaches of contract.
Example: Company A delivered the wrong kind of furniture to Company B. After discovering the mistake later in the day, Company B insisted that Company A pick up the wrong furniture and deliver the right furniture. Company A refused to pick up the furniture and said that it could not supply the right furniture because it was not in stock. Company B successfully sued for breach of contract. The general damages for this breach could include:
• refund of any amount Company B had prepaid for the furniture; plus • reimbursement of any expense Company B incurred in sending the furniture back to Company A; plus • payment for any increase in the cost Company B incurred in buying the right furniture, or its nearest equivalent, from another seller.
B. Special Damages. Special damages (also called “consequential damages”) cover any loss incurred by the breach of contract because of special circumstances or conditions that are not ordinarily predictable. These are actual losses caused by the breach, but not in a direct and immediate way. To obtain damages for this type of loss, the nonbreaching party must prove that the breaching party knew of the special circumstances or requirements at the time the contract was made. Example: In the scenario above, if Company A knew that Company B needed the new furniture on a particular day because its old furniture was going to be carted away the night before, the damages for breach of contract could include all of the damages awarded in the scenario above, plus:
• payment for Company B’s expense in renting furniture until the right furniture arrived.
Four Types of Damages Compensatory
Consequential Punitive Nominal
(Specials)
Consequential Damages Foreseeable damages that arise from
circumstances outside the contract. To be liable for these damages,
The breaching party must know or have reason to know that the breach will cause special damages to the other party. Defendant must be able to reasonably foresee injury as a probable result.... injury or damage?
Four Types of Damages
Compensatory
Consequential
Punitive
Nominal
Punitive Damages Punitive Damages. Punitive damages (also called “exemplary
damages”) are awarded to punish or make an example of a wrongdoer who has acted willfully, maliciously or fraudulently. Unlike compensatory damages that are intended to cover actual loss, punitive damages are intended to punish the wrongdoer for egregious behavior and to deter others from acting in a similar manner. Punitive damages are awarded in addition to compensatory damages. Punitive damages are rarely awarded for breach of contract.
They arise more often in tort cases, to punish deliberate or reckless misconduct that results in personal harm.
Punitive Damages (continued) Damages that are awarded to:
Punish the defendant Deter the defendant from similar conduct in the future Set an example for others
Generally, punitive damages are not
recoverable for breach of contract.
Four Types of Damages
Compensatory
Consequential
Punitive
Nominal
Nominal Damages Damages awarded when the non-breaching
party sues the breaching party even though no financial loss has resulted from the breach. Usually awarded in a small amount such as $1. Cases involving nominal damages are usually brought on “principle.”
Nominal Damages (continued) Understanding Nominal Damages ď Ž
When a plaintiff sues in court, he must have legal grounds for the lawsuit and he has to be seeking some remedy. The remedy he is seeking is usually monetary, except in rare cases where an "equitable remedy" like an injunction is sought. The monetary remedy is going to be based on the loss he endured. For example, if Joe and Ann have a contract, Ann breaches and Joe suffers a $1,000 loss as a result of Ann's breach, then Joe may be awarded $1,000 in damages because that was the amount of loss he suffered.
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Sometimes, however, a person wants to sue but didn't actually suffer any sort of tangible or actual loss. He still needs to seek a remedy, because courts can only hear cases where there is an actual controversy and some kind of relief is being sought. So, he may sue, the court may hear the case and decide for the plaintiff, and "nominal damages" may be awarded.
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Why would the plaintiff bother to do this? There are a number of reasons. Sometimes, he wants vindication that he was right. Sometimes, an award of nominal damages will also allow him to obtain punitive damages, which are damages designed to punish a defendant, rather than compensate a plaintiff. In other cases, the plaintiff may be suing because he is fighting for a cause, like if he believes his Constitutional Rights are being violated.
Mitigation of Damages A non-breaching party is under a legal duty to
avoid or reduce damages caused by a breach of contract. Injured party must use reasonable means to mitigate loss The extent of mitigation depends on the type contract involved. i.e. employment, rental apartments.
Liquidated Damages Sum certain... calculable... determined...
specified amount Cannot be punitive... as already noted penalties have no place in contract law The Test:
When contract entered into, was it apparent that damages would be difficult to estimate in event of breach? Was amount set reasonable and not excessive? Estimation of damages? Reasonable?
Liquidated Damages Damages to which parties to a contract agree
in advance if the contract is breached. To be lawful,
The actual damages must be difficult or impracticable to determine, and The liquidated amount must be reasonable in the circumstances.
Liquidated Damages (continued) Many businesses include liquidated damages
in their commercial contracts, which help to:
Provide certainty, Avoid lawsuits, and Provide an incentive to enter into contracts.
Remedies... At Law classic compensation for injury limited to land items of value money
In Equity based on principles of justice and fairness. relief provided through specific performance injunctions rescission and restitution reformation
Equitable Remedies ď Ž Equitable remedies are available if there has
been a breach of contract that cannot be adequately compensated by a legal remedy. ď Ž They are also available to prevent unjust
enrichment.
Equitable Remedies Usually only awarded if legal remedies are inadequate
Specific Performance Injunctions Rescission & Restitution
Reformation
Let's focus on the three main equitable remedies imposed by
courts:
Rescission Specific performance Reformation
Rescission happens when a previously existing contract was
retracted because it was breached. The contract can be rewritten in a different way so that both parties are satisfied with the terms. An example will help make this concept clearer.
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Marty and Sarah settled on a real estate contract for an oceanfront condo. Marty drafts a contract that includes the sale price, address and everything included in the price. After thinking about it, Marty decided he wants to keep a few things included in the price, like his favorite bird feeder, a shrub and his mailbox.
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When Sarah arrived at her new home, she noticed a few things missing. Upset by this, she contacted Marty and demanded the things be returned or a new contract be made excluding the items from the price. What actually happened was the original contract was rescinded because Marty breached it by taking items that were included in the contract for the sale of the condo. No harm was done. As long as both parties agree to the rescission of the old contract, it's easy to make a new one.
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Sometimes the court will require specific performance from the breaching party, making the party do everything promised in the contract. In the condo sale between Marty and Sarah, had Sarah really wanted those sentimental items Marty took, the courts could require that Marty return them to the home and place them in their original setting. In other words, Marty would have to specifically perform what he promised to do in the original contract.
Contract reformation is a bit more
complicated. It requires that there be an existing contract that needs to be re-written in a more clear way. A few elements are necessary for a reformation to occur: A valid contract exists. There are grounds for reformation, including a mistake or misrepresentation. There is no other defense available to the parties.
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This is worth further exploration. Contract reform simply means re-doing the contract so that it is easier to understand. This could happen for a couple of reasons. A mistake or an error in the terms in the contract, like the wrong address in a real estate contract, is definitely a reason for reformation. A wrong address could create a world of other problems down the road. Misrepresentation is a more important issue. This includes deceitful or fraudulent distortion of terms in the contract. It doesn't have to be intentional either. When Marty created the contract for the condo sale, he never mentioned that the condo taxes have not been paid in years. After a title search came back showing $10,000 taxes were due, Sarah asked to reform the contract to exclude the taxes from her balance due to Marty when they close on the house. Don't be confused with a breach of contract. Marty did not neglect to perform a promise. He neglected to include the back taxes. He actually misrepresented the total cost of buying the home by not including the past due taxes. A new contract will be written to either include the back taxes or include a clause stating that Marty must pay them from his profit.
Injunctions “... forbids defendant to do some act... which
he is threatening or attempting to commit, or restraining him in the continuance thereof, such act being unjust and inequitable, injurious to the plaintiff, and not as such as can be adequately redressed by an action at law...”
Sometimes a court will order an injunction that requires a party to either do something or stop doing something for a period of time or indefinitely. In other words, the court wants everything to return to the status quo. A marina owner may file an injunction against a boat slip renter if the boat or owner poses a threat to the other boats in the marina. Captain Clay has a boat dock contract with the Municipal Marina. He docks his boat there each night after fishing. Each night, he cleans his catch and leaves the bones and skin for the pelicans. This may be a good thing for the seabirds, but a bad thing for people who stroll along the boardwalk in the evening. Some have even slipped and fell into the water because of Clay's careless fish cleaning ways. The marina owner has a right to ask the court to stop the lease agreement with Clay because his antics are causing chaos on the docks. Once he removes his boat, the marina will be back to the status quo - a peaceful place to relax.
Injunctions Not a typical remedy in contract disputes Difference between positive and negative Some use in a negative fashion in personal
services contracts
e.g., Contract dispute between a performing artist and promoter... prohibition on performing in same area for a different promoter
Requirements for an Injunction Remedies at law inadequate, thus causing irreparable harm... Plaintiff must demonstrate at least a reasonable likelihood of success at trial Threatened injury to the plaintiff outweighs the threatened harm the granting of the injunction may inflict on the defendant Whether by granting the preliminary injunction the public interest would be disserved
Rescission and Restitution Purpose of rescission is restitutionary
a dissolution or “undoing” of the contract... restoration of the parties to their positions before the contract was entered into
“status quo ante”
If not mutually decided upon, the rescission
must be grounded in something that makes the contract voidable
Example: genuineness of assent problems
Contracts That May Lack Genuineness of Assent Contracts Entered Into on the Basis of
Mistakes Misrepresentation Undue Influence Duress
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Restitution is another equitable remedy and involves restoring a breached party back to his original state, whether it is financially or in action. Remember Marty and Sarah's condo sale? Once they cut through all of the red tape in the condo sale, Sarah was ready to start her new life in her home. She contracted Mitch to paint the place. She emailed him the specific paint color, Toadstool Green, along with the product code.
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Mitch forgot to take Sarah's email to the paint store and relied on memory only. He thought she asked for Moonlight Steel and proceeded to buy the paint and start the job. When Sarah returned home from work, she was shocked at the color of the walls. This wasn't the green she hoped for. In fact, it wasn't green at all. But all Sarah could see was red. She was fumed by the painter's mistake and demanded justice.
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A court may impose restitution in this case. By this, the judge may require that Mitch repaint the walls to the color Sarah requested in the contract at his expense. Sarah will not receive a financial reward for the error in memory, but having the walls repainted to the color she wanted or to the original color will restore her.
Rescission and Restitution Rescission An action to undo the contract. Available if there has been:
A material breach of contract Fraud Undue influence Mistake
Restitution Returning of goods or property received from the other party to rescind a contract. If the actual goods or property is not available, a cash equivalent must be made.
Reformation Another Equitable Remedy... Differs from R&R most significantly in that it
does not try to undo the contract... ... but rather attempts to reform, correct or
modify the contract so that it accurately reflects the agreement of the parties
Reformation Plaintiff must show by “clear and convincing”
evidence that the parties had reached agreement on a term and that because of a mutual mistake (or unilateral mistake + misconduct by the other) the term wasn’t included.
e.g., “scrivener’s error”- A clerical error in a legal document