Chapter 23 Contract Remedies
Lawrence Emmenbolu, Chad Presnell
Breach of Contract: This is the refusal or failure of a party to perform an obligation imposed
by a contract, without a legitimate legal excuse. In the case of a breach, the victim (non-breaching party)
is discharged from all further obligations of the contract. Examples may include situations where a job is
not completed, failing to pay in full or on time, not delivering the right goods, delivering defective goods,
or indicating in advance that a party will not perform (anticipatory breach).
Usually, a lawsuit for breach of contract is
instigated by the victim, and then the court awards
remedies designed to place the injured party in the
position they would be in if not for the breach. Remedies
for breach of contract include: - discharge, damages,
arbitration (if the parties so provide) and specific
performance (requiring breaching party to perform an
action).
For example: KirkMart, a stereo store signed a
contract and paid Soney, a stereo manufacturer to
deliver 100 stereos on June 1st. If Soney does not
deliver the stereos on June 1st, or delivers the
wrong type of stereos; Soney has breached the
contract and KirkMart can sue for damages.
Discharge: If you and I have a contract and I breach it, you are thereby discharged. This means you no
longer have any obligation to proceed further with the contract.
I. Damages
In breach of contract, these are remedies that represent the loss directly and naturally resulting
from the breach. Thus, it excludes speculative or possible losses that cannot be shown to have directly
resulted from the breach. The aim of damages is not to punish non-performers for failing to live up to
the terms of the contract, but to remedy the injuries or any distress caused by such failure. Suing for
damages is the usual remedy for breach of contract.
General Types of Damages:
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For example McCrapys contracts to buy potatoes
from Jenkings Farms. Jenkings fails to deliver the
potatoes and hence breaches the contract. McCrapys
finds he can buy potatoes from Myrtle potatoes, and
at a cheaper rate. He buys the potatoes and Myrtle
delivers. If McCrapys sues Jenkings for breach of
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contract, he will get only nominal damages.
He was
actually better off in his contract with Myrtle.
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Nominal Damages
Compensatory Damages
Punitive Damages
A. Nominal: These types of damages occur when the plaintiff is able to prove that there was a breach of
contract, but is unable to prove that there are any losses sustained due to the breach of contract.
Nominal damages are intended as a proclamation that the conduct of the defendant should not be
tolerated. This damage award reflects a plaintiff's contract rights have been violated through a breach of
conduct. The court typically awards one dollar ($1) nominal damages, to signify the wrong done by the
defendant to the plaintiff.
Some people enter into cases knowing that they will receive nominal damages, but do so in
order to establish a precedent in a dispute that is likely to reoccur in a continuing relationship. In some
cases, a case with nominal damages may lead to punitive damages; this is unusual in contracts except in
cases of fraud.
B. Compensatory: These damages are awarded for the direct and foreseeable consequences of the
defendant's wrongful act. It attempts to put the victim of the breach in the same financial situation that
he or she would have been in if the contract was not broken.
Compensatory damages typically remedy two results of a contract breach:
1. Gains Prevented
2. Losses Sustained
For example, Uncle Sammy and KB contractors
have a contract to build a house for $100,000. KB
contractors half finish the house and stop working
on it for no good reason, there is a deliberate
breach of contract. Uncle Sammy will not have to
pay anything to KB contractors.
Gains Prevented means that when the
defendant breached the contract, they prevented
the plaintiff from achieving a profit of some sort.
Losses Sustained means that the plaintiff actually
lost money due to the defendant’s breach. The
amount of compensatory damages, usually determined by jury, should not be so much that the plaintiff
profits from the breach. As stated earlier, compensatory damages put the plaintiff into the financial
position he would have been in had the defendant honored the contract.
Speedy motors contracts to sell a car to Davis for
$20,000. Davis refuses to take the car and Speedy
has to sell the car to Susan for $18,000. Speedy
sues for breach of contract. Speedy will get $2000
plus all expenses for making the second sale.
Speedy could collect more damages if they can
prove that they could have made two sales.
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For example, Uncle Sammy and KB
contractors have a contract to build a
house for $100,000. KB finishes the
house a week late, and Uncle Sammy has
to stay in a hotel and pay for storage for
his furniture. Uncles Sammy sues for
breach of contract. KB contractors is
liable for all of Uncle Sammy’s hotel and
storage expenses, and any other expenses
incurred because the house was not
finished on time.
to stay in a hotel and pay for storage for his furniture. Uncles
Consequential damages, a type of
compensatory damages, may also be
awarded. Consequential damages are those
that have resulted from the breach but are
unexpected or unforseeable. That is, the loss
suffered by a plaintiff may have been caused
by the misconduct of the defendant, but,
nonetheless, is instead a result of the
defendant's action. The defendant is liable for
these damages only if he/she knows about
them (or should know about them) before the
breach. The jury also considers loss of profit in
Sammy sues
for breach of contract. Kb contractors is liable
consequential
damages.
for all of Uncle Sammy’s hotel and storage expenses, and any
other
expenses
incurred
because
the house was
not finished
Concept
Check:
Explain
how
the concept
of Gains
Prevented applies to both of the following situations.
on time.
Steve has a used computer for sale. Rob contracts to buy it for $700 but later refuses to take or pay for the
breach of contract. Uncle Sammy will not have to pay
computer.
Steve
puts
an ad in the paper that costs $10. Later he is able to sell the computer to Pam for $625.
anything
to KB
contractors.
He can sue Rob $75 in losses ($700-$625) plus the $10 amount for the ad.
Xonix Computers sells a high end server to Rob for $3000. Rob backs out and will not pay. Later that day, Xonix
sells the same computer to another buyer for $3000. It looks like Rob might be liable for only nominal
damages. But if Xonix can prove that if Rob had not backed out and Xonix had several such computers in stock,
Rob might be liable for the $3000 minus the cost that Xonix paid for it—essentially lost profit and overhead.
C. Punitive (Exemplary) Damages: In most cases, the awarding of compensatory damages
meets the requirements of justice. Normally, punitive damages are not given in contract cases.
However, there are cases where compensatory damages are inadequate. In instances where the
defendant’s conduct is found to be an intentional tort as well as a breach of contract, the court may also
allow an award of punitive damages in addition to compensatory damages. Punitive damages are
damages that are paid to the plaintiff as punishment to the defendant, not to compensate the plaintiff.
The purpose of these damages is to prevent or deter the offender from similar conducts in the future as
well as deter others from engaging in those behaviors. They aren't based on actual financial loss or pain
and suffering like compensatory and consequential damages, but are intended to make an example out
of the breaching party and punish them for their unjust behavior. Punitive damages are not usually
awarded in contract lawsuits; however, if the breach constitutes fraud, or is accompanied by a malicious
tort, punitive damages will be awarded. Punitive damages have been characterized as quasi-criminal
because they are a cross between criminal
Example: Villain motors, a car manufacturer, knowingly make
and civil law. Although they are awarded to
their Deceit 2000 model with inferior brake systems. The cars
a plaintiff in a private civil lawsuit, they are
are tested by Villain’s engineers, and the brakes fail
numerous quality control tests. Harry Potty, a car dealer
not compensatory and are similar to a
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buys contracts with Villain to supply 50 of the deceit 2000
cars. Villain receives payment and delivers, knowing that the
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brakes are bad. Harry Potty later finds out about this after
several customers have been in fatal accidents. Harry Potty
can sue for breach of contract and get punitive damages.
They have to prove though that Villain motors knew that the
brakes were faulty.
criminal fine. One of the most common circumstances where punitive damages are awarded is in a case
of bad faith insurance. Bad faith insurance is when a legitimate claim is filed (by an insured party), but
denied; without any reasonable basis for denying the claim. The insurance company breaches the
contract, and the insured party can then file a law suit for the damages. The damages could include
money that should have been paid on the claims, and may include additional expenses that arise out of
suing the insurance company (like court costs and attorneys fees).
IV. Limitations on Damages
Limitations are put in place so that damages are awarded to victim(s) to compensate their loss
without rewarding any negligent behavior on the injured party’s part. Limitations ensure that the
injured party does its part in limiting the amount of the damages incurred. There are three main
limitations:
1) Foreseeablity
2) Rule of Certainty
3) Rule of Mitigation
A. Foreseeablity
Example: A manufacturing company sends a part
out for emergency repair using UPS and expects
the part to be delivered the next day. Assuming
that UPS is unaware that this part keeps a division
of the manufacturing company from running; if
UPS fails to deliver the part on time, then UPS
cannot be held liable for the lost profits. Since the
loss of profit was not foreseeable at the inception
of the contract.
The breaching party will not be held liable unless they could see that a breach in the contract
would lead to a loss.
B. Rule of Certainty
In order for damages to be recovered by a plaintiff, the individual must show the amount with
reasonable certainty. If a claim contains a portion of damages that are speculative in nature, that
amount will not be recoverable, but the remaining amount will be.
C. Rule of Mitigation
A plaintiff cannot recover damages that could have been mitigated, or made less severe. In
other words, if the plaintiff could have taken reasonable actions to make the loss smaller or avoid it
acompletely, the defendant is not liable for that amount.
D. Liquidated Damages
During contract formation, both parties may agree on a certain amount of damages for the
injured party to receive if a specific breach of contract occurs. These are known as liquidated damages,
and will be upheld in court if they
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Example: Revisiting the Magenta Floyd example from the Rule of Certainty section,
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suppose Magenta Floyd and BigDeal have a liquidated damage clause stating that the
amount of royalties will be estimated at 25% of the band’s salary or $250,000. Upon
contract formation, both parties believe the figure to be a reasonable estimate, and
the amount of concert tickets, music, and merchandise is difficult to forecast; both
requirements are met. When BigDeal repudiates the contract, Magenta Floyd will
receive their $1 salary million and $250,000 in liquidated damages.
meet two requirements.
1. The amount is a reasonable estimate of just compensation for the injured party and must be
seen as not punitive.
2. The damages caused by the breach of contract must be difficult to quantify
The damages may be related to a deposit, or based off of a specific formula. It is important to
note that the goal of liquidated damage clauses is to make the injured party whole, not to punish for
breach of contract.
As the example shows, liquidated damage clauses eliminate the difficulty in the future of estimating
damages and can save involved parties considerable frustration.
V. Cancellation/Rescission
There are two common scenarios when a contract may be cancelled. If a contract is formed, but
one party refuses to complete its part, then the other party is not obligated to fulfill its end of the
bargain.
Also, if both parties agree to
terminate a contract, then it is cancelled.
This is a rescission.
Example 1: Allan signs a contract with Zelda to purchase
her car for $10,000. Zelda decides that she wants the car
instead and tells Allan she will not turn it over to him.
Allan has no obligation to pay her the $10,000, and he may
sue for breach of contract
The court may also choose to undo a
contract, in effect cancelling it. This practice is commonly referred to as rescission. The goal is to
maintain the status quo by returning the parties to their condition prior to the contract. The courts may
use rescission if there is fraud, misrepresentation, unwarranted influence, mutual mistakes, an
impossible scenario, extreme bias, insufficient terms, or unreasonable adversity associated with the
provided result.
VI. Specific Performance
Example 2: Allan signs a contract with Zelda to purchase
her car for $10,000. Zelda decides that she wants the car
instead and decides not to turn it over. At the same time,
Allan has a rough weekend in Las Vegas and has gambled
away the money he was going to use to purchase the car. If
both parties agree to cancel the contract, then neither
party has an obligation to the other, nor is there any
breach of contract.
When a breach of contract
occurs, the injured party can request in
the judgment that defendant be forced
to carry out its duties as stated in the contract. This right of specific performance is generally used when
awarding monetary damages alone would be insufficient to cover the harm suffered by the plaintiff. The
judge would likely not grant the right if it requires the use of excessive court supervision or other
resources unless it was in the public interest, nor if another satisfactory remedy was already available.
Specific performance is usually not applied to contracts involving construction, service, or
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employment. It may occur with goods if they are unique and not available from another seller (e.g. art,
historical items, etc) or if the seller does not have a sufficient source of money to fairly compensate the
buyer after he has already paid. The right is common in real estate deals (e.g. a buyer has a contract to
purchase a house at a certain price, but the seller refuses). However, if the seller has sold the same
house multiple times, only one of the buyers can get the house.
Study Table 1: Legal Remedies
Remedy
Availability
Result
Nominal Damages
The injured party has not
suffered a financial loss.
Usually the plaintiff is awarded
$1 and wrongdoing is proven
but without damages.
Compensatory
Damages
Injured party proves that the
injury arose as a direct result of
the breach of contract
Compensated to make victim
whole. Includes gains
prevented and losses
sustained.
Punitive Damages
Only available when the breach
of contract involves a tort or
bad faith insurance
Wrongdoing is punished to set
an example for other who
would commit the same crime.
Liquidated
Damages
Sets a reasonable
predetermined amount to be
paid in the event that the
contract is breached.
Breaching party pays the
contracted amount, if
qualifications are met. Cannot
be punitive.
Consequential
Damages
When circumstances that the
breaching party is aware of or
should be aware of cause the
other party injury.
The injured party is given all
the damages they knew of.
Study Table 2: Equitable Remedies
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Remedy
Availability
Result
Specific Performance
The case situation is special,
monetary damages is
unnecessary, and/or there is
no readily available substitute
The breaching party has to fulfill
the terms stated in the contract.
Unless extreme court supervision
required
Injunction
Put in place when there is an
apparent threat of breach of
contract. ( before breach has
taken place)
Court orders for one party either
do or not do a particular action.
Rescission
Made available by breach of
contract, mutual agreement,
or by state statute.
The contract is cancelled. Each
party goes through restitution
Restitution
Takes place after rescission
has been agreed to by both
parties
Each party returns any benefits
or cash equivalent, and returns to
the position they were before
entering the contract.
Problem Sets
1. Assume a buyer and a contractor contract to build a house for $100,000. Determine the legal
outcome of the following breaches:
a. The contractor finishes the house. It is fine and is on the buyer’s property. Buyer won’t pay.
b. The contractor finishes the house. It is fine and is on the contractor’s property. Buyer won’t take
the house.
c. The contractor is half finished with the house and the buyer announces that the buyer won’t take the
house. The house in on the buyer’s property. The contractor has projected total costs on the
completed house at $80,000.
d. The contractor is halfway finished with the house and the buyer announces they buyer won’t take the
house. The house in on the contractor’s property. The contractor has projected total costs on the
completed house at $80,000.
e. The contractor finishes the house, but is one week late in completion. The buyer has to stay in a
motel and have their furniture stored.
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f. The contractor finishes the house, but it is a wood frame house rather than a brick house as agreed
upon with the buyer.
g. The contractor has half finished the house and stops work due to financial difficulties. The buyer hires
another contractor that finishes the house for $60,000.
h. The contractor has half finished the house and stops work due to financial difficulties. The buyer hires
another contractor that finishes the house for $45,000.
i. The contractor has half finished the house and stops work for no good reason. The buyer has to higher
another contractor to finish the job for $60,000.
Answers
1. a) The buyer owes the contract price of $100,000 as there is no reason for the breach.
b) The buyer is liable for the expenses in making the second sale. They may also be liable for lost profits
if the contractor could have sold two homes. This falls under the gains prevented theory.
c) This is a situation where mitigation comes in to play. The contractor should stop construction to
mitigate the damages. The contractor can sue for expenses incurred, which is half way of the completed
cost, and the profits lost due to gains prevented. The contractor can sue for $40,000 + $20,000
respectively.
d) Finishing the house so it can be sold to someone else is the best way to mitigate in this situation.
Damages would depend on the reasonable selling price to another buyer and possibly the profits lost if
two sales could have been made.
e) This is a reasonable amount of extended time in a construction situation. The buyer will be stuck
with these costs.
f) The buyer can refuse to take this house as it is a substantial breach of the contract. The buyer would
also not have to pay anything.
g) Since this is not a deliberate breach, the fist contractor is still entitled to payment. The original
contractor will be paid $40,000 due to ensure the buyer only has to pay $100,000 for the home. This
keeps the buyer from sustaining any loses.
h) This is still not a deliberate breach, so the original contractor is still entitled to payment. They will
receive $50,000 and the buyer gets the benefit of the bargain with the second contractor, meaning the
buyer saves $5,000.
i) This is a deliberate breach of contract and the original contractor gets nothing.
2. Goods Contracts: Buyer Breaches
a) The seller contracts to sell a car to Charlie for $30,000. Charlie gets the car but doesn’t pay for it.
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b) The seller contracts to sell a car to Charlie for $30,000. Charlie refuses to take the car. The seller
then sells the car to Baker for $29,000.
c) The seller contracts to sell an antique car to Charlie for $30,000. Before delivery, the market price
for such cars drops by one-third. Charlie refuses to take the car. The seller ends up keeping the car.
d) A homebuilder contracts with a carpenter to build some custom-made cabinets for a subdivision.
When the cabinets are partially built, the homebuilder announces that he doesn’t want them
anymore. The contract was for $20,000. The carpenter has spent $3,000 on labor and $4,000 on
materials so far but can sell some of the material as scrap for $500. The carpenter cannot sell the
cabinets to anyone else but expected to make a $5,000 profit on the deal.
Answers
2. a) Charlie should pay the contract price of $30,000.
b) The seller can sue Charlie for the $1,000 in accordance with the losses sustained theory. The seller
may also be able to get more under the gains prevented theory if they can prove they would have been
able to sell two cars.
c) The seller can sue Charlie for the contract price, $30,000, less the current fair market value, $20,000.
The seller would then sue for $10,000. This would fall under the theory of gains prevented.
d) The carpenter can use the theories of losses sustained and gains prevented in this situation. This
means he can sue for his expenses plus his expected profit less his gain from the sale of the scrap. This
ends up coming out to $5,000 profit + $7,000 labor and materials - $500 in scrap totaling a suit for
$11,500.
3. Goods Contracts: Seller Breaches
a) The seller contracts to sell a car to Charlie for $30,000 but then doesn’t deliver the car. It will cost
Charlie $33,000 to buy the car at another dealer. Charlie buys the car at that price.
b) The seller contracts to sell a car to Charlie for $30,000 but then doesn’t deliver the car. It will cost
Charlie $33,000 to buy the car at another dealer. Charlie doesn’t buy the car.
c) The seller contracts to sell a car to Charlie for $30,000. The car is supposed to have cruise control
but doesn’t. It will cost Charlie $200 to have it installed.
Answers
3. a) Charlie can sue the original seller for his losses sustained of $3,000 of the additional purchase price.
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b) Charlie can sue for the Fair market value of $33,000 less the contract price of $30,000 and receive
$3,000.
c) Charlie can sue for $200 in an accordance of not sustaining a loss.
4. At Will Employment
A common type of employment is at will employment. These are typically pretty loose terms of
employment that gives the employers plenty of latitude when making personnel decisions.
In recent years, “at will” employees have been winning more cases of implied contracts with their
employers. These so called implied contracts mean that the employer has made the employee feel like
they are doing a good job and will continue to have a job as long as they perform well.
“Without cause” is another phrase that has been showing up in employment lawsuits. This one is easily
understood too. It is the next step in at will employment basically stating that there needs to be a cause
for employment to be terminated.
Wrongful termination suits happen when an employer breaks an employment contract by firing an
employee. They also can happen when an employee is terminated in violation of state or federal laws.
For example, it is wrongful termination to fire someone protected by the whistle blower legislation or by
anti-retaliation laws.
Consider the following case. Mike has been an employee at Widgets Inc. for five years and does not
have any bad marks on his record. He has always received top scores on his evaluations.
a. One day Mike’s boss says that Mike is the best employee he has ever had and knows that he will be
around for a long time. The next week the company decides to downsize and Mike is terminated.
b. Mike blows the whistle on the company for illegal activities. Two weeks later the company decides to
terminate his employment without reason.
c. Mike has a great month of sales but the company takes a downfall and terminates Mike’s
employment before they pay his commission in an effort to save some money for the company.
Answers
4. a) Mike can argue that due to his always positive marks and his boss’s enthusiasm towards his future
with the company, he felt that it was implied that he will have a job there as long as he keeps up the
good work. Mike could be able to sue for reinstatement at his job or possibly for some amount of
wages.
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b) If the company cannot give a legitimate reason for the termination, Mike would be protected by
federal whistle blower legislation. He could sue to have his job back or for lost wages and probably
some future wages.
c) Mike can sue for this money because he had an implied contract stating that he will be paid
commissions unless he did something against company policy to cause his termination.
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