Chapter 18: Breach of Contract and Remedies

The UCC allows sales contracts to limit remedies

The UCC provides that in a contract for the sale of goods, remedies can be limited.

Quantum meruit

"As much as he or she deserves"

Categories of damages

1. Compensatory (to cover direct losses and costs - "make the person whole") 2. Consequential (to cover indirect and foreseeable losses) 3. Punitive (to punish and deter wrongdoing) 4. Nominal (to recognize wrongdoing when no monetary loss is shown)

Reformation - imperfect contract

A court-ordered correction of a written contract so that it reflects the true intentions of the parties

Exculpatory clause

A clause that releases a contractual party from liability in the event of monetary or physical injury, no matter who is at fault.

Enforceability of Limitation of Liability clauses

A provision excluding liability for fraud or intentional injury will NOT be enforced. A clause excluding liability for illegal acts, acts that are contrary to public policy, or violations of law will not be enforced

Liquidated damages provision

A provision in a contract that specifies a certain dollar amount is to be paid in the event of a future default or breach of contract (liquidated means determined, settled, or fixed). They are common in construction contracts, also in the sale of goods, contracts with entertainers and professional athletes.

Limited liability clause

A provision that affects the availability of certain remedies

Equitable remedy

A remedy allowed by courts in situations where remedies at law are not appropriate. Remedies in equity are based on settled rules of fairness, justice, and honesty, and include injunction, specific performance, recission and restitution, and reformation.

Recission - undo or terminate K

A remedy whereby a contract is canceled and the parties are returned to the positions they occupied before the contract was made; may be effected through the mutual consent of the parties, by their conduct, or by court decree.

Penalty

A sum inserted into a contract, not as a measure of compensation for its breach but rather as punishment for a default. The agreement as to the amount will not be enforced, and recovery will be limited to actual damages .

Liquidated damages

An amount, stipulated in the contract, that the parties to a contract believe to be a reasonable estimation of the damages that will occur in the event of a breach.

Specific performance - calls for the performance of the act promised in the contract

An equitable remedy requiring the breaching party to perform as promised under the contract; usually granted only when money damages would be an inadequate remedy and the subject matter of the contract is unique (for example, real property)

Restitution - returning goods, property, or funds

An equitable remedy under which a person is restored to his or her original position prior to loss or injury, or placed in the position he or she would have been in had the breach not occurred.

Waiver

An intentional, knowing relinquishment of a legal right. When a waiver of a breach of contract occurs, the party waiving the breach cannot take any later action on it, and the contract continues as if the breach had never occurred.

Contracts for personal services

Courts generally refuse to grant specific performance of personal-service contracts because it is a form of involuntary servitude.

Oral contracts and covenants not to compete

Courts will reform the written version of an oral contract if there is an error in stating the terms. Covenant not to compete - mostly illegal! However, if the written covenant not to compete is for a valid and legitimate purpose but the time constraints or area are unreasonable, the court will reform the restraints making them reasonable and will enforce the entire contract as reformed.

Incidental damages

Expenses caused directly by a breach of contract, such as those incurred to obtain performance from another source.

Consequential damages

Foreseeable damages that result from a party's breach of contract (also called special damages). They are caused by special circumstances beyond the contract itself. They flow up from the consequences, or results, of a breach. Ex. Loss of profits. To recover, the breaching party must know that special circumstances will cause the non-breaching party to suffer an additional loss.

Construction contracts and economic waste

If the contractor substantially performs, a court may use the cost-of-completion formula, but only if requiring completion will not entail unreasonable economic waste.

Remedies at law

Normally monetary damages

Economic waste

Occurs when the cost of repairing or completing the performance greatly outweighs the benefit to the owner.

Pleading in the alternative

Plaintiff can change their mind - or the judge can choose the best remedy - before judgement is made

Election of remedies

The requirement that the non-breaching party choose which remedy to pursue. This is to prevent double recovery.

Enforceability

To determine if a particular provision is for liquidated damages or for a penalty, a court asks two questions: 1. When the contract was entered into, was it apparent that damages would be difficult to estimate in the event of a breach? 2. Was the amount set as damages a reasonable estimate and not excessive? If the answers to both are yes, the provision normally will be enforced. If the answer is no, the provision will usually NOT be enforced.

Nominal damages

When no actual damage or financial loss results from a breach of contract and only a technical injury is involved. Awards of nominal damages are very small, but they do establish that the defendant acted wrongfully (usually brought as a matter of principle)

Quasi contract

a legal theory under which an obligation is imposed in the absence of an agreement, used when there is no actual contract or agreement between the parties. To recover, plaintiff must show the following: 1. The party has conferred a benefit on the other party 2. The party conferred the benefit with the reasonable expectation of being paid 3. The party did not act as a volunteer in conferring the benefit 4. The party receiving the benefit would be unjustly enriched if allowed to retain the benefit without paying for it

Punitive damages

are generally not recoverable in contract law, do not have a legitimate place in contract law. The exceptions are a breach of a duty of care clause, fraud, or bad faith.

The most common remedies available:

damages, recission, restitution

Remedies in equity, or equitable remedies

recission and restitution, specific performance, reformation

Compensatory damage measure

the difference between the value of the breaching party's promised performance, and the value of the actual performance - reduced by any loss that the injured party has avoided. Sale of goods - the measure is an amount equal to the different between the contract price and the market price. When the buyer breaches and the seller has not yet received the goods, compensatory damages normally equal profits lost. Sale of land - specific performance - the buyer is awarded the parcel of property for which she or he bargained. When this remedy is unavailable, the measure of damages is the difference between the contract price and the market price of the land Construction contracts - the measure of damages depends on whether it's before, during, or after performance has been completed. Breach before: the contractor can only recover profits that would have been made (K price - cost of materials & labor). During: contractor can recover profits plus costs incurred in partially constructing the bldg. After: contractor can recover entire contract price, plus interest.

Mitigation of damages

the innocent injured party is held to a duty to mitigate, or reduce, the damages that he or she suffers

Remedy

the relief provided for an innocent party when the other party has breached the contract. It is the means employed to enforce a right or to redress an injury