Chapter 19

Can the party who receives compensatory or consequential damages for breach of contract recover the attorney fees? The general rule on recovery of attorneys' fees, called the " is that the fees do not constitute damages and are not awarded to the party who wins a lawsuit. This rule can be overcome by a specific statute or by a contract provision providing for an award of fees to the prevailing party in litigation arising out of the contract.

"American Rule,

entitles the nonbreaching party to sue for monetary damages. In contract law, damages compensate the nonbreaching party for the loss of the bargain (whereas tort law damages compensate for harm suffered as a result of another's wrongful act). Often, courts say that innocent parties are to be placed in the position they would have

A breach of contract

Bob states he will purchase Kitty's golf cart for $2,000 if she brings it to his home on May 1st. On April 15, Bob called Kitty and told her he would not purchase the golf cart on May 1st. Kitty can consider Bob in anticipatory breach of contract and she is no longer required to deliver the golf cart on May 1st.

Anticipatory breach

Example Bob states he will purchase Kitty's golf cart for $2,000 if she brings it to his home on May 1st. On April 15, Bob called Kitty and told her he would not purchase the golf cart on May 1st. Kitty can consider Bob in anticipatory breach of contract and she is no longer required to deliver the golf cart on May 1st.

Anticipatory breach

When one party to a contract tells the other party that he or she will not perform the duties required of the contract when they become due, this notice is called anticipatory breach (repudiation). Upon receiving this notice of anticipatory breach, the non-breaching party is released from their obligations and he or she may sue the repudiating party at the time of notice instead of waiting until the performance is due.

Anticipatory breach

Failure to perform what the contracting party is obligated to perform.

Breach of Contract:

Lost profits of seller. Seller sells car to Buyer for $5,000 and obtains a $500 deposit. Buyer cancels sale, Seller keeps $500 and resells the car for $4,200. Seller incurs $300 expenses in the resale. Seller is entitled to $600 for lost profit plus incidental expenses. Original Price - Resale Price + Expenses - Deposit = Damages ($5,000 - $4,200 + $300 - $500 = $600)

Buyer Breach:

Compensatory Damages—designed to compensate non-breaching party for loss of the bargain.

Compensatory Damages

Example: Jackson owns a 2000 sq. ft. home and wishes to have porcelain tile installed. Brown estimated it would take 4 weeks to complete the work, if he worked exclusively on the job during that time. Brown enters into a written contract to install tile floor for Jackson starting September 1. They agree on $4,500 for the work. On August 30, Jackson tells Brown that he no longer wants to install tile because he is going to sell the home, which means Jackson is in breach of contract. Brown finds another job on September 7, but will only earn $3,000. Brown can sue Jackson for the difference of $1,500 in compensatory damages.

Compensatory Damages

These damages compensate the injured party only for damages actually sustained and proved to have arisen directly from the loss of the bargain caused by the breach of contract. They simply replace what was lost because of the wrong or damage and, for this reason, are often said to "make the person whole." Clarkson, Kenneth W.; Miller, Roger LeRoy; Cross, Frank B.. Business Law: Text and Cases (Page 338). Cengage Learning. Kindle Edition.

Compensatory Damages

Related to special circumstances that result because of the breach Foreseeability - breaching party should be aware of the special circumstances that will cause additional loss. Hadley v. Baxendale 156 Eng. Rep. 145 Exch. Ct. (1854)

Consequential (Special) Damages

Foreseeable damages that result from a party's breach of contract are called consequential damages, or special damages. They differ from compensatory damages in that they are caused by special circumstances beyond the contract itself. They

Consequential Damages

When a seller fails to deliver goods, knowing that the buyer is planning to use or resell those goods immediately, a court may award consequential damages for the loss of profits from the planned resale.

Consequential damages

Exculpatory and Limitation of Liability clauses No damages Damages limited to a maximum amount Require specific remedy such as replacement, repair or refund UCC Allows Sales Contracts to Limit Remedies (C22) Enforceability of Limitation-of-Liability Clauses: depends on type of breach excused by provision. Not enforced for: Fraud Intentional injury Illegal acts Acts contrary to public policy Exclusion of liability for negligence depends on the bargaining power of the parties.

Contract Provisions Limiting Remedies

Places the injured party in the position they would have held if the contract had been performed (Benefit of the Bargain) or restores the parties back to their original positions.

Contract Remedy:

are losses actually sustained (out-of-pocket), arising directly from breach.

Direct damages

Rescission and Restitution (Equitable) Specific Performance (Equitable) Reformation (Equitable)

Equitable

involves the plaintiff's recapture of a benefit conferred on the defendant that has unjustly enriched her or him. Clarkson, Kenneth W.; Miller, Roger LeRoy; Cross, Frank B.. Business Law: Text and Cases (Page 346). Cengage Learning. Kindle Edition.

Essentially, restitution

Consider (1) Were damages difficult to estimate when contract was made? (2)Was the amount set reasonable?

If the amount is designed to penalize, generally the provision will be unenforceable.

are expenses incurred by the non-breaching party because of the breach.

Incidental damages

B-Sharp Musical Productions, Inc. v. Haber, 27 Misc.3d 41, 899 N.Y.S.2d 792 (2010). Facts: B-Sharp Musical Productions, Inc., contracted with James Haber to provide a 16-piece band at Haber's son's bar mitzvah at a price of $30,000. Their contract contained a liquidated damages clause for payment of the entire contract price if Haber canceled the deal within ninety days of the date of performance. Haber did cancel the deal with less than ninety days to the bar mitzvah, but he refused to pay the liquidated damages of $30,000. B-Sharp filed a suit in a New York state court against Haber. The court issued a judgment in B-Sharp's favor. Haber appealed.

Liquidated Damages Provisions

Contracts provides specific amount agreed to be paid as damages in the event of future breach. Penalties:

Liquidated Damages Provisions

Example: Brown owns a shopping center and leases space to Jones for a period of 5 years. Jones moves out with 9 months left on the lease and does not pay Brown. Under the terms of the lease, Jones is liable for rent until another suitable tenant is found or the lease ends. Since the space needs some upgrades, Brown decides to use the next few months to work on the space and seeks damages in the full amount from Jones. Will Brown recover the full amount?

Mitigation of damages

When breach of contract occurs, the innocent injured party is has a duty to reduce the damages that he or she suffered. Duty owed depends on the nature of the contract. Award may be reduced by the amount that could have been mitigated.

Mitigation of damages

Damages - Compensatory (Direct & Incidental), Consequential, Nominal (Almost never Punitive) Rescission and Restitution (Equitable) Specific Performance (Equitable) Reformation (Equitable) Recovery Based on Quasi Contract

Most Common Remedies:

Example: Kami enters into a three-year consulting contract to work with Future Electronics. The contract pays $75,000 per year. After one year, Future terminates the contract without cause. Two days later, Kami finds another consulting job in the same city working for Sharp Electronics for three years with a payment of $100,000 per year. Since Kami did not suffer any monetary damages, she could file a civil lawsuit against Future Electronic based on their breach and recover $1.

Nominal Damages

No financial loss Small amount such as $1 Demonstrates wrongful action of the defendant

Nominal Damages

Example: Accountants have specific duties related to their profession. If an accountant enters into a contract with a client, breaches the contract and was also negligent in their duties, the client may recover compensatory damages for the actual loss and punitive for the tort of negligence.

Punitive Damages

Punish or deter future conduct. Awarded in tort cases In contracts, no crime is committed and does not harm society. Generally not available for mere breach of contract. Usually tort (e.g., fraud) is also involved.

Punitive Damages

Arises when no contract actually exists. Remedy created by courts to obtain justice and prevent unjust enrichment. Party conferring benefit can recover in quantum meruit ("as much as she deserves"). Requirements of Quasi Contract Benefit was conferred to the other party. Party conferring benefit reasonably expected to be paid. The benefit was not volunteered. Receiving benefit without paying for it would result in unjust enrichment.

Quasi Contract Recovery

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.

Reformation

Examples Fraud or Mutual Mistake - Parties agree to buy a Sheltie puppy but the contract states Sheltie kitten. Contract Incorrectly States the Oral Intentions of the Parties - Parties orally agree Sheltie puppy and when putting it in writing, it comes out Sheltie dog. Unreasonable Restrictions - Non Compete Covenants - Cannot work in the field for 5 years would be unreasonable. Court would reform to 1 year.

Reformation

Action or procedure to provide relief to the non-breaching party. Remedies for breach of contract are different from tort actions!!!

Remedy:

Example: Smith applies for an insurance policy that requires the insured be tobacco free. Smith sends Jackson, the insurance agent, a check for $525 to cover six months. When Smith is tested for tobacco, the test comes back positive. Jackson sends Smith a notice of rescission and a check covering the amount for the six-month policy period.

Rescission

When one party fails to perform, the other party may rescind (cancel) the contract. A contract is canceled and the parties are restored to the original positions that they occupied prior to the transactions. Rescinding party must give prompt notice to the breaching party. Restitution: Both parties must return goods, property, or money previously conveyed. If goods have been consumed, restitution is made in equivalent dollar amounts.

Rescission

Both parties must return goods, property, or money previously conveyed. If goods have been consumed, restitution is made in equivalent dollar amounts.

Restitution:

A reasonable ordinary person approaching this sign while driving need not speak the language nor possess any specialized knowledge to recognize that this sign signals the party to stop. A reasonable ordinary person needs no specialized knowledge to expect that if he or she breaches a contract, the non‑breaching party will suffer certain types of damages. The damages are predictable without specialized knowledge and can be categorized as direct damages. An English-only speaker needs to acquire specialized knowledge to recognize what this sign means. Our reasonable ordinary person also needs specialized knowledge to predict other types of damages that, if he or she breaches the contract, the non-breaching party will suffer. Those damages, contemplated only with specialized or intimate knowledge, are categorized as consequential damages. The amount is usually more than direct damages

Road Sign Test

difference between contract and market price. Buyer contracts to purchase 1000 fitness tracking devices for $40 each. Seller does not deliver. Buyer finds 1000 fitness devices for $45 each. Buyer is entitled for $5000 from the seller. Market Price $45 - Contract Price $40 = Difference $5 $5 x 1000 = $5,000

Seller Breach:

Equitable remedy that compels performance of the act promised in the contract. Provides remedy in cases involving: Sale of land Rarely provides a remedy for: personal services because courts will not force someone to perform a service against their will. Injunctions may be used to prevent the party from providing services for anyone else for the remainder of the contract term. sales of goods unless the article is of unusual age, beauty, unique history or other distinction.

Specific Performance

Damages depend on the laws of the state. 1. Specific performance because land is unique (Seller's Breach) 2. Difference between contract and market price (Buyer's Breach) Seller's non-deliberate breach results in refund of down payment and any reasonable expenses incurred, such as surveys, appraisals and inspections.

Specific Performance- Sale of Land

varies depending on type of contract, but generally defined as difference between value of promised performance and value of actual performance.

Standard Measure:

Randall contracts to perform certain services exclusively for Hernandez during the month of March for $4,000. Hernandez cancels the contract and is in breach. Randall is able to find another job during March but can earn only $3,000. He can sue Hernandez for breach and recover $1,000 as compensatory damages. Randall can also recover from Hernandez the amount that he spent to find the other job. Clarkson, Kenneth W.; Miller, Roger LeRoy; Cross, Frank B.. Business Law: Text and Cases (Page 341). Cengage Learning. Kindle Edition.

The standard measure

of compensatory damages is the dierence between the value of the breaching party's promised performance under the contract and the value of her or his actual performance. is amount is reduced by any loss that the injured party has avoided.

The standard measure

Compensates the injured party for the wrongful act of another.

Tort Remedy:

The non-breaching party accepts defective performance of contract. The party waiving the breach cannot take later action on that particular issue; the contract continues Parties may waive breaches because they are minor and/or the contract can still be fulfilled to the satisfaction of both parties

Waiver of Breach

Rescission and Restitution Specific Performance Reformation

When monetary damages are inadequate, courts can create equitable remedies.

Brown can also recover expenses incurred in finding a new job because of the breach of contract. These expenses are known

as incidental damages.

There is a two-step process to determine whether a breach of contract has resulted in . First, it must be established that there was a contract between the parties and a breach of that contract. Next, it must be proved that the breach caused damages. The

compensable damages

Brown can also recover expenses incurred in finding a new job because of the breach of contract. These expenses are known as

incidental damages.

Expenses that are caused directly by a breach of contract—such as those incurred to obtain performance from another source—are known as .

incidental damages.