Chapter 14 Remedies for Breach of Contract Introduction

Chapter 14 Remedies for Breach of Contract.

Introduction There are three levels of performance of a contract: complete, substantial, and inferior. Complete (or strict) performance by a party discharges that party’s duties under the contract. Substantial performance constitutes a minor breach of the contract. Inferior performance constitutes a material breach that impairs or destroys the essence of the contract. Various remedies may be obtained by a nonbreaching party if a breach occurs. The most common remedy for a breach of contract is an award of monetary damages. If a monetary award does not provide adequate relief, however, the court may order any one of several equitable remedies, including specific performance, reformation, and injunction. Equitable remedies are based on the concept of fairness.

Performance and Breach If a contractual duty has not been discharged or excused (i. e. relieved of legal liability), the contracting party owes an absolute duty to perform the duty. Complete Performance Most contracts are discharged by the complete performance, or strict performance, of the contracting parties. Complete performance occurs when a party to a contract renders performance exactly as required by the contract. A fully performed contract is called an executed contract. Note that tender of performance also discharges a party’s contractual obligations. Tender is an unconditional and absolute offer by a contracting party to perform his or her obligations under the contract.

Performance and Breach Cont. Substantial Performance: Minor Breach Substantial performance occurs when there has been a minor breach of the contract. In other words, it occurs when a party to a contract renders performance that deviates slightly from complete performance. The nonbreaching party may try to convince the breaching party to elevate his or her performance to complete performance. If the breaching party does not correct the breach, the nonbreaching party can sue to recover damages by (1) deducting the costs to repair the defect from the contract price and remitting the balance to the breaching party or (2) suing the breaching party to recover the cost of repair the defect if the breaching party has already been paid.

Performance and Breach Cont. Inferior Performance: Material Breach A material breach of a contract occurs when a party renders inferior performance of his or her contractual obligations that impairs or destroys the essence of the contract. There is no clear line between a minor breach and a material breach. A determination is made on a caseby-case basis. Where there has been a material breach of contract, the nonbreaching party may rescind the contract and seek restitution of any compensation paid under the contract to the breaching party. The nonbreaching party is discharged from any further performance under the contract. Alternatively, the nonbreaching party may treat the contract as being in effect and sue the breaching party to recover damages.

Performance and Breach Cont. Anticipatory Breach Anticipatory breach (or anticipatory repudiation) of contract occurs when the contracting party informs the other party in advance that he or she will not perform his or her contractual duties when due. This type of material breach can be expressly stated or implied from the conduct of the repudiator. Where there is an anticipatory repudiation, the nonbreaching party’s obligations under the contract are discharged immediately. The nonbreaching party also has the right to sue the repudiating party when the anticipatory breach occurs; there is no need to wait until performance is due.

Monetary Damages A nonbreaching party may recover monetary damages from a breaching party. Monetary damages are available whether the breach was minor or material. Several types of monetary damages may be awarded. These include compensatory, consequential, liquidated, and nominal damages. Compensatory Damages Compensatory damages are intended to compensate a nonbreaching party for the loss of the bargain. In other words, they place the nonbreaching party in the same position as if the contract had been fully performed by restoring the “benefit of the bargain”. (See pp 369 -370 of the book for examples and discussion)

Monetary Damages Cont. Consequential Damages In addition to compensatory damages, a nonbreaching party can sometimes recover consequential damages, or special damages, from the breaching party. Consequential damages are foreseeable damages that arise from circumstances outside a contract. To be liable for consequential damages, the breaching party must know or have reason to know that the breach will cause special damages to the other party.

Monetary Damages Cont. Liquidated Damages Under certain circumstances, the parties to a contract may agree in advance to the amount of damages payable upon breach of contract. These damages are called liquidated damages. To be lawful, the actual damages must be difficult or impracticable to determine, and the liquidated amount must be reasonable in the circumstances. An enforceable liquidated damages clause is an exclusive remedy, even if actual damages are later determined to be different. A liquidated damages clause is considered a penalty if actual damages are clearly determinable in advance or if the liquidated damages are excessive or unconscionable. If a liquidated damages clause is found to be a penalty, it is unenforceable. The nonbreaching party may then recover actual damages.

Monetary Damages Cont. Nominal Damages A nonbreaching party can sue a breaching party to a contract for nominal damages even if no financial loss resulted from the breach. Nominal damages are usually awarded in a small amount, such as $1. Cases involving nominal damages are usually brought on principle. Enforcement of Remedies If a nonbreaching party brings a successful lawsuit against a breaching party to a contract, the court will enter a judgment in his or her favor. This judgment must then be collected. If the breaching party refuses to pay the judgment, the court may: --Issue a writ of attachment ordering the sheriff or other government officer to seize property in the possession of the breaching party that he or she owns and to sell the property at auction to satisfy the judgment. --Issue a writ of garnishment ordering that wages, bank accounts, or

Rescission and Restitution other property of the breaching party that is in the hands of third parties be paid to the nonbreaching party to satisfy the judgment. Federal and state laws limit the amount of the breaching party’s wages or salary that can be garnished. Rescission and Restitution Rescission is an action to undo a contract. It is available where there has been a material breach of contract, fraud, duress, undue influence, or mistake. Generally, to rescind a contract, the parties must make restitution of the consideration they received under the contract. Restitution consists of returning the goods, property, money, or other consideration received from the other party. If possible, the actual goods or property must be returned. If the goods or property have been consumed or are otherwise unavailable, restitution must be made by conveying a cash equivalent. The rescinding party must give adequate notice of the rescission to the breaching party. Rescission and restitution restore the parties to the positions they occupied prior to the contract.

Equitable Remedies Equitable remedies are available if there has been a breach of contract that cannot be adequately compensated through a legal remedy. They are also available to prevent unjust enrichment. The most common equitable remedies are specific performance, reformation, and injunction. Specific Performance An award of specific performance orders the breaching party to perform the acts promised in a contract. The courts have the discretion to award this remedy if the subject matter of the contract is unique. Such as land contracts (because every piece of real property is considered to be unique), works of art, antiques, etc. Specific performance of personal service contracts is not granted because the courts find it difficult or impracticable to supervise or monitor performance of such a contract.

Equitable Remedies Cont. Reformation is an equitable doctrine that permits the court to rewrite a contract to express the parties’ true intentions. Injunction An injunction is a court order that prohibits a person from doing a certain act. To obtain an injunction, the requesting party must show that he or she will suffer irreparable injury if the injunction is not issued.

Torts Associated With Contracts The recovery for breach of contract is usually limited to contract damages. A party who can prove a contract-related tort, however, may also recover tort damages. Tort damages include compensation for personal injury, pain and suffering, emotional distress, and possibly punitive damages. Generally, punitive damages are not recoverable for breach of contract. They are recoverable, however, for certain tortious conduct that may be associated with the nonperformance of a contract. These actions include fraud, intentional conduct, and other egregious conduct. Punitive damages are in addition to actual damages and may be kept by the plaintiff. Punitive damages are awarded to punish the defendant, to deter the defendant from similar conduct in the future, and to set up an example for others.

Torts Associated With Contracts Cont. The major torts associated with contracts are intentional interference with contractual relations and breach of the implied covenant of good faith and fair dealing. Intentional Interference with Contractual Relations A party to a contract may sue any third person who intentionally interferes with the contract and causes that party injury. The third party does not have to have acted with malice or bad faith. This tort usually arises when a third party induces a contracting party to breach a contract with another party. The following elements must be shown: 1. A valid, enforceable contract between the contracting parties. 2. Third-party knowledge of this contract. 3. Third-party inducement to breach the contract. A third party can contract with the breaching party without becoming liable for this tort if a contracting party has already breached the contract because third party cannot be held to have induced a preexisting breach.

Torts Associated With Contracts Cont. Breach of the Implied Covenant of Good Faith and Fair Dealing Several states have held that certain contracts contain an implied covenant of good faith and fair dealing. Under this covenant, the parties to a contract are not only held to the express terms of the contract but are also required to act in “good faith” and deal fairly in all respects in obtaining the objective of the contract. A breach of this implied covenant is a tort for which tort damages are recoverable. This tort, which is sometimes referred to as the tort of bad faith, is an evolving area of the law.