BUSN Chapter 13 Notes

Liquidated Damages versus Penalties

-A liquidated damages provision in a contract specifies that 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.) Liquidated damages differ from penalties. A penalty specifies a certain amount to be paid in the event of a default or breach of contract and is designed to penalize the breaching party. Liquidated damages provisions normally are enforceable. In contrast, if a court finds that a provision calls for a penalty, the agreement as to the amount will not be enforced, and recovery will be limited to actual damages

Employment Contracts

-In the majority of states, a person whose employment has been wrongfully terminated has a duty to mitigate damages incurred because of the employer's breach of the employment contract. -In other words, a wrongfully terminated employee has a duty to take a similar job if one is available. If the person fails to do this, the damages received will be equivalent to the person's former salary less the income he or she would have received in a similar job obtained by reasonable means. Normally, a terminated employee is under no duty to take a job that is not of the same type and rank.

Sale of Land

-Ordinarily, because each parcel of land is unique, the remedy for a seller's breach of a contract for ap sale of real estate is specific performance—that is, the buyer is awarded the parcel of property for which he or she bargained -When this remedy is unavailable (because the property has been sold, for example) or when the buyer is the party in breach, the measure of damages is typically the difference between the contract price and the market price of the land. The majority of states follow this rule.

Punitive Damages

-Punitive, or exemplary, damages, generally are not awarded in an action for breach of contract. Such damages have no legitimate place in contract law because they are, in essence, penalties, and a breach of contract is not unlawful in a criminal sense. -The law may compensate one party for the loss of the bargain—no more and no less. -In a few situations, when a person's actions cause both a breach of contract and a tort, punitive damages may be available. Overall, though, punitive damages are almost never available in contract disputes.

When Quasi Contract Is Used

-Quasi contract allows a court to act as if a contract exists when there is no actual contract or agreement between the parties. Therefore, if the parties have entered into a contract concerning the matter in controversy, a court normally will not impose a quasi contract. A court can also use the doctrine when the parties entered into a contract, but it is unenforceable for some reason. -Quasi-contractual recovery is often granted when one party has partially performed under a contract that is unenforceable. Quasi contracts provide an alternative to suing for damages and allow the party to recover the reasonable value of the partial performance.

Contract Provisions Limiting Remedies

A contract may include provisions stating that no damages can be recovered for certain types of breaches or that damages will be limited to a maximum amount. -The contract may also provide that the only remedy for breach is replacement, repair, or refund of the purchase price. -The contract can also provide that one party can seek injunctive relief if the other party breaches the contract -Provisions stating that no damages can be recovered are called exculpatory clauses -Provisions that affect the availability of certain remedies are called limitation-of-liability clauses. -The Uniform Commercial Code (UCC) provides that remedies can be limited in a contract for the sale of goods. -Whether a limitation-of-liability clause in a contract will be enforced depends on the type of breach that is excused by the provision. Normally, a provision excluding liability for fraudulent or intentional injury will not be enforced. Likewise, a clause excluding liability for illegal acts or violations of law will not be enforced. A clause excluding liability for negligence may be enforced in certain situations, however. When an exculpatory clause for negligence is contained in a contract made between parties who have roughly equal bargaining positions, the clause usually will be enforced.

incidental damages

All costs resulting from a breach of contract, including all reasonable expenses incurred because of the breach.

The measurement of compensatory damages varies by type of contract.

Certain types of contracts deserve special mention—contracts for the sale of goods, contracts for the sale of land, and construction contracts.

Consequential 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 and flow from the consequences, or results, of a breach. 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 (in addition to compensatory damages) for the loss of profits from the planned use or resale. For the nonbreaching party to recover consequential damages, the breaching party must know (or have reason to know) that special circumstances will cause the nonbreaching party to suffer an additional loss.

Sale of Goods

In a contract for the sale of goods, the usual measure of compensatory damages is the difference between the contract price and the market price. When the buyer breaches and the seller has not yet produced the goods, compensatory damages normally equal the seller's lost profits on the sale, rather than the difference between the contract price and the market price.

Mitigation of Damages

In most situations, when a breach of contract occurs, the injured party is held to a duty to mitigate, or reduce, the damages that he or she suffers. Under this doctrine of mitigation of damages, the required action depends on the nature of the situation.

Recovery Based on Quasi Contract

In some situations, when no actual contract exists, a court may step in to prevent one party from being unjustly enriched at the expense of another party. Quasi contract is a legal theory under which an obligation is imposed in the absence of an agreement. A quasi contract is not a true contract but rather a fictional contract that is imposed on the parties to prevent unjust enrichment.

Liquidated Damages in Construction Contracts

Liquidated damages provisions are frequently used in construction contracts because it is difficult to estimate the amount of damages that would be caused by a delay in completing the work.

Rental Agreements

Some states require a landlord to use reasonable means to find a new tenant if a tenant abandons the premises and fails to pay rent. If an acceptable tenant becomes available, the landlord is required to lease the premises to this tenant to mitigate the damages recoverable from the former tenant. The former tenant is still liable for the difference between the amount of the rent under the original lease and the rent received from the new tenant. If the landlord has not taken reasonable steps to find a new tenant, a court will likely reduce any award by the amount of rent the landlord could have received had he or she done so.

Equitable Remedies

Sometimes, damages are an inadequate remedy for a breach of contract. In these situations, the nonbreaching party may ask the court for an equitable remedy. Equitable remedies include rescission and restitution, specific performance, and reformation.

Construction Contracts

The measure of damages in a building or construction contract depends on which party breaches and when the breach occurs -If the owner breaches before performance has begun, the contractor can recover only the profits that would have been made on the contract—that is, the total contract price less the cost of materials and labor. -If the owner breaches during performance, the contractor can recover the profits, plus the costs incurred in partially constructing the building. -If the owner breaches after the construction has been completed, the contractor can recover the entire contract price, plus interest.

Types of Damages

There are basically four broad categories of damages: 1. Compensatory (to cover direct losses and costs). 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).

Determining Enforceability

To determine whether a particular provision is for liquidated damages or a penalty, the court must answer two questions: 1. At the time the contract was formed, 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 questions are yes, the provision normally will be enforced. If either answer is no, the provision usually will not be enforced.

Quasi Contract Requirements

To recover on a quasi contract theory, the party seeking recovery must show the following: 1. The party 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.

Nominal Damages

When no actual damage or financial loss results from a breach of contract and only a technical injury is involved, the court may award nominal damages to the innocent party. -Nominal damages awards are often small, such as one dollar, but they do establish that the defendant acted wrongfully. Most lawsuits for nominal damages are brought as a matter of principle under the theory that a breach has occurred and some damages must be imposed regardless of actual loss.

Damages that compensate the nonbreaching party for the loss of the bargain are known

as 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. -In general, the standard measure of compensatory damages is the difference between the value of the breaching party's promised performance under the contract and the value of her or his actual performance. This amount is reduced by any loss that the injured party has avoided.

The most common remedies available to a nonbreaching party under contract law include

damages, rescission and restitution, specific performance, and reformation. Courts distinguish between remedies at law and remedies in equity. Today, the remedy at law is normally monetary damages.

A breach of contract occurs when

one party fails to perform part or all of the required duties under a contract. Once one party breaches the contract, the other party—the nonbreaching party—can choose one or more of several remedies.

A remedy is the

relief provided to 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. There is a remedy available for nearly every contract breach.

Equitable remedies include

rescission and restitution, specific performance, and reformation

tort law damages are designed

to compensate a party for harm suffered as a result of another's wrongful act.

contract law, damages are designed

to compensate the nonbreaching party for the loss of the bargain.