Chapter 17
Contracts — Breach of
Contract and Remedies
Introduction
Damages.
Rescission and Restitution.
Specific Performance.
Reformation.
Recovery Based on Quasi Contract.
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§1: Damages
Types of Damages:
Consequential Damages.
• Breaching party is aware or should be aware, cause
the injury party additional loss.
Punitive Damages.
• Available when tort is also involved.
Nominal Damages.
• No financial loss.
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§2: Mitigation of Damages
When breach of contract occurs, the
innocent injured party is held to a duty to
reduce the damages that he or she
suffered.
Duty owed depends on the nature of the
contract.
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Liquidated Damages vs. Penalties
Liquidated Damages.
A contract provides a specific amount to be
paid as damages in the event of future default
or breach of contract.
Penalties.
Specify a certain amount to be paid in the event
of a default or breach of contract and are
designed to penalize the breaching party.
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§2: Rescission and Restitution
Rescission.
A remedy whereby a contract is canceled and
the parties are restored to the original positions
that they occupied prior to the transactions.
Restitution.
Both parties must return goods, property, or
money previously conveyed.
Note: Rescission does not always call for
restitution. Restitution called for in some cases
not involving rescission.
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§3: Specific Performance
Equitable remedy calling for the
performance of the act promised in the
contract.
Remedy in cases where the consideration
is:
Unique;
Scarce; or
Not available remedy in contracts for personal
services.
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§4: Reformation
Equitable remedy allowing a contract to
be reformed, or rewritten to reflect the
parties true intentions.
Available when an agreement is
imperfectly expressed in writing.
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§5: Recovery Based on
Quasi Contract
Equitable theory imposed by courts to obtain
justice and prevent unjust enrichment.
Quantum meruit. Party seeking recovery must
show the following:
A benefit was conferred to the other party.
Party conferring did so with the reasonable expectation
of being paid.
The benefit was not volunteered.
Retaining benefit without paying for it would result in
unjust enrichment of the party receiving the benefit.
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§6: Election of Remedies
Doctrine created to prevent double
recovery.
Nonbreaching party must choose which
remedy to pursue.
UCC rejects election of remedies.
Cumulative in nature and include all the
available remedies for breach of contract.
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§7: Waiver of Breach
A pattern of conduct that waives a number of
successive breaches will operate as a continued
waiver.
Nonbreaching party can still recover damages,
but contract is not terminated.
Nonbreaching party should give notice to the
breaching party that full performance will be
required in the future.
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§8: Contract Provisions
Limiting Remedies
Exculpatory clauses.
Provisions stating that no damages can be
recovered.
Limitation of liability clauses.
Provisions that affect the availability of certain
remedies.
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Case 17.1: Fujitsu v. Federal Express
(Mitigation of Damages)
FACTS:
Fujitsu shipped a container of silicon wafers from
Japan, to Ross in Austin, TX using FedEx.
The next day, the container arrived in Austin and
was held for clearance by the U.S. Customs
Service. Meanwhile, Ross told FedEx it was
rejecting the shipment and that FedEx should return
the goods to Fujitsu at Ross’s expense.
The goods left Austin in good condition, but when
they arrived in Japan, Fujitsu found the goods
covered with an oily residue. Fujitsu reported the
damage to FedEx.
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Case 17.1: Fujitsu v. Federal Express
(Mitigation of Damages)
FACTS (cont’d)
Fujitsu’s insurance company directed FedEx to
dispose the entire container of chips without
opening the bags.
Fujitsu filed suit for breach of contracts and the
court found FedEx liable for $726,640 in damages.
FedEx appealed arguing that Fujitsu failed to
mitigate its damages.
HELD: AFFIRMED. FOR FUJITSU.
Fujitsu could not mitigate its damages because
because the chips could only be opened in a clean
room, which was not possible with the oily residue
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on the bags.
Case 17.2: Atel Financial v.
Quaker Coal Company
(Liquidated Damages)
FACTS:
Atel leased heavy mining equipment to Quaker
Coal Company, a Kentucky firm engaged in coal
mining.
The lease provided for liquidated damages in “an
amount equal to the present value of all monies to
be paid by Lessee during the remaining Basic
Term or any successive period then in effect, plus
* * * the anticipated residual of the Equipment.”
Later, Quaker asked Atel to temporarily forego
payments so that Quaker could refinance its
debts. Atel agreed.
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Case 17.2: Atel Financial v.
Quaker Coal Company
(Liquidated Damages)
FACTS (cont’d)
Months later, when Quaker was over $700,000 in
arrears, Atel declared a default and demanded
liquidated damages.
Two weeks later, Quaker finalized its debt
restructuring and sent Atel a check for all
outstanding invoices. The next day, Atel sued
Quaker for breach of contract.
By the time of trial, Quaker had made all past due
payments.
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Case 17.2: Atel Financial v.
Quaker Coal Company
(Liquidated Damages)
HELD: FOR QUAKER.
Court denied Atel’s request for liquidated damages
and entered a judgment in favor of Quaker.
Court considered the liquidated damages clause
to be a penalty clause.
“[A] liquidated damages clause will generally be
considered unreasonable, and hence
unenforceable, if it bears no reasonable
relationship to the range of actual damages that
the parties could have anticipated would flow from
a breach.”
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Case 17.3: Maglica v. Maglica
(Quasi-Contract)
FACTS:
Maglica founded a machine shop business, Mag
Instrument, in 1955. In 1971, he and Halasz began to
live together, holding themselves out as man and wife,
but they never married.
Halasz worked with Maglica to build Mag Instrument,
although on its incorporation in 1974, all shares were
issued to Anthony. Maglica, as president, and Halasz,
as secretary, were paid equal salaries.
In 1978, the business began manufacturing the “Mag”
flashlights, and thanks to ideas and hard work on
Claire’s part, the business boomed.
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Case 17.3: Maglica v. Maglica
(Quasi-Contract)
FACTS (cont’d)
The couple split in 1992, and Halasz sued Maglica
seeking a recovery based on quantum meruit.
The jury awarded Claire $84 million, based on the
business’s benefit from her services. Maglica
appealed.
HELD: REVERSED. FOR MAGLICA.
Remanded for recalculation of award.
Claire could recover for the value of her services,
but not for the benefit conferred on the business.
In this case, the court will not impose “a highly
generous and extraordinary contract that the
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parties did not make.”