Contract Performance

Why may an otherwise valid contract still be unenforceable?

if the parties have not genuinely agreed to its terms. in other words, a lack of voluntary consent can be used as a defense to the contract’s enforceability.

When may voluntary consent be lacking?

a mistake, misrepresentation, undue influence or duress is present.

What choices do parties, who demonstrate that they did not truly agree to the terms of a contract, have?

They can choose either to carry out the contract,

or to rescind (cancel) it and thus avoid the entire transaction.

Mistakes

Mistakes made when contracts are formed. There are two types: mistakes of fact and mistakes of value or quality.

What certain mistake makes a contract voidable?

only a mistake of fact makes a contract voidable. also, the mistake must involve a material fact—a fact that a reasonable person would consider important when determining a course of action.

Mistakes of Fact

a contract defense occurring when a person acts under an erroneous belief about a circumstance, negating the essential understanding of an agreement

it means honest, reasonable misunderstanding of reality—not the law—that makes an action unintentional, such as accidentally taking a similar-looking bag.

there are two types of mistakes of fact, unilateral and bilateral

What are the two exceptions, when there’s an unilateral mistake of fact, allowing a contract to be unenforceable?

1. the other party to the contract knows or should have known that a mistake of fact was made.

2. the error was due to a substantial mathematical mistake in addition, subtraction, division, or multiplication and was made inadvertently and without gross (extreme) negligence. if, for instance, a contractor's bid was significantly low because of a mistake in totaling the estimated costs, any contract resulting from the bid normally may be rescinded.

of course, in both situations, the mistake must still involve some material fact.

Unilateral mistakes of fact

its made by only one of the parties. in general, a unilateral mistake does not give the mistaken party any right to relief from the contract. normally, the contract is enforceable. but there are two exceptions.

Bilateral Mistake

a mutual misunderstanding concerning a basic assumption on which the contract was made. when both parties are mistaken about the same material fact, the contract can be rescinded by either party, although it is usually the adversely affected party who takes that step.

a word or term in a contract may be subject to more than one reasonable interpretation. if the parties to the contract attach materially different meanings to the term, a court may allow the contract to be rescinded because there has been no true "meeting of the minds."

Mistakes of Value/Quality

if a mistake concerns the future market value or quality of the object of the contract, the mistake is one of value, and the contract is normally enforceable.

Why don’t mistakes of value affect the enforceability of contracts?

Value is variable.

depending on the time, place, and other circumstances, the same item may be worth considerably different amounts. when parties form a contract, their agreement establishes the value of the object of their transaction for the moment.

each party is considered to have assumed the risk that the value will change in the future or prove to be different from what was originally thought. without this rule, almost any party who considered a bargain unfair could argue mistake.

Material

information that would reasonably influence a person's decision to enter a contract.

Elements of fraudulent misrepresentation

1. a misrepresentation of a material fact must occur.

2. there must be an intent to deceive.

3. the innocent party must justifiably rely on the misrepresentation.

4. to collect damages, a party must have been harmed as a result of the misrepresentation.

Fraudulent misrepresentation

also a tort, the presence of fraud also affects the authenticity of the innocent party’s consent to the contract. when an innocent party is fraudulently induced to enter into a contract, the contract normally can be avoided, because that party has not voluntarily consented to its terms. the person making the misrepresentation must know or believe that the assertion is false or knows that there is no basis (stated or implied) for the assertion

ordinarily, the innocent party can either rescind the contract or enforce it and seek damages for any harms resulting from the fraud.

Scienter

knowledge of misrepresentation with intent to deceive

Misrepresentation by words or actions

must have a misrepresentation of a material fact occurring. misrepresentation can occur by words or actions. the statement “this sculpture was created by Michelangelo” is a misrepresentation of fact if another artist sculpted the statue.

misrepresentation also occurs when a party takes specific action to conceal a fact that is material to the contract.

Intent to Deceive

also called scienter or “guilty knowledge,” generally signifies that there was an intent to deceive. it clearly exists if a party knows that a fact is not as stated. its knowledge on the part of the misrepresenting party that facts have been misrepresented.

it also exists if a party makes a statement that they believes not to be true or makes a statement recklessly, without regard to whether it is true or false.

its met if a party says or implies that a statement is made on some basis, such as personal knowledge or personal investigation, when it is not.

Justifiable Reliance on the Misrepresentation

reasonably justifiable reliance on the misrepresentation of fact. the deceived party must have a justifiable reason for relying on the misrepresentation. also, the misrepresentation must be an important factor (but not necessarily the sole factor) in inducing the deceived party to enter into the contract.

reliance is not justified if the innocent party knows the true facts or relies on obviously extravagant statements (such as "this pickup truck will get fifty miles to the gallon").

the same rule applies to defects in property sold. If the defects would be obvious on inspection, the buyer cannot justifiably rely on the seller's representations. if the defects are hidden or latent, however, the buyer is justified in relying on the seller's statements.

Injury to the innocent party

most courts do not require a showing of injury in an action to rescind a contract. these courts hold that because rescission returns the parties to the positions they held before the contract was made, a showing of injury to the innocent party is unnecessary.

in contrast, to recover damages caused by fraud, proof of harm is universally required. the measure of damages is ordinarily equal to the property's value had it been delivered as represented, less the actual price paid for the property.

(additionally, because fraud actions necessarily involve wrongful conduct, courts may also sometimes award punitive damages, which are not ordinarily available in contract actions.)

Undue Influence

undue influence arises from relationships in which one party can greatly influence another party, thus overcoming that party's free will. a contract entered into as a result of excessive or undue influence lacks voluntary consent and is therefore voidable.

in various types of relationships, one party may have the opportunity to dominate and unfairly influence another party. minors and elderly people, for instance, are often under the influence of guardians (persons who are legally responsible for them). if a guardian induces a young or elderly ward (the person whom the guardian looks after) to enter into a contract that benefits the guardian, the guardian may have exerted undue influence.

Where can undue influence arise?

undue influence can arise from a number of fiduciary relationships, such as physician-patient, parent-child, or guardian-ward relationships. when a contract enriches the dominant party in a fiduciary relationship (such as an attorney in an attorney-client relationship), the court will often presume that the contract was made under undue influence.

Essential feature of undue influence

that the party being taken advantage of does not, in reality, exercise free will in entering into a contract.

it’s not enough that a person is elderly or suffers from some physical or mental impairment. there must be clear and convincing evidence that the person did not act out of free will.

similarly, the existence of a fiduciary relationship alone is insufficient to prove undue influence.

Duress

the use of threats to force a part to enter into a contract. in addition, blackmail or extortion to induce consent to a contract constitutes duress.

duress is both a defense to the enforcement of a contract and a ground for the rescission of a contract.

How to establish duress

there must be proof of a threat to do something that the threatening party has no right to do. generally, for duress to occur, the threatened act must be wrongful or illegal, and it must render the person incapable of exercising free will.

a threat to exercise a legal right, such as the right to sue someone, ordinarily does not constitute duress.

Third Party

one who is not a direct party to a particular contract normally does not have rights under the privity of contract.

Privity of contract

A contract is a private agreement between the parties who have entered into it, and traditionally these parties alone have rights and liabilities under the contract. This principle is referred to as privity of contract.

What are the exceptions to the rule of privity of contract?

one exception allows a party to a contract to transfer the rights or duties arising from the contract to another person through an assignment (of rights) or a delegation (of duties).

another exception involves a third party beneficiary contract—a contract in which the parties to the contract intend that the contract benefit a third party.

Assignment

the transfer of contractual rights to a third party.

in an assignment, when rights under a contract are assigned unconditionally, the rights of the assignor are extinguished.

the third party (the assignee) has a right to demand performance from the other original party to the contract. the assignee takes only those rights that the assignor originally had, however.

Delegation

just as a party can transfer rights through an assignment, a party can also transfer duties.

as a general rule, any duty can be delegated. There are, however, some exceptions to this rule.

What are the two parties in a bilateral contract that have corresponding rights and duties?

in a bilateral contract, the two parties have corresponding rights and duties. one party (the obligee) has a right to require the other to perform some task, and the other (the obligor) has a duty to perform it.

the transfer of contractual rights to a third party is known as an assignment.

the transfer of contractual duties to a third party is known as a delegation.

An assignment or a delegation occurs after the original contract was made.

Assignee

the third party receiving the rights.

Assignor

the party assigning the rights to a third party.

What rights cannot be assigned

1. the assignment is prohibited by statute.

2. the contract is for personal services, such as tutoring.

3. the assignment significantly changes the risk or duties of the obligor.

4. the contract prohibits assignment.

Why are assignments important

because they are used in many types of business financing. banks, for instance, frequently assign their rights to receive payments under their loan contracts to other firms, which pay for those rights

What can Contractual Prohibition not prevent being assigned?

right to receive money, rights in land, assignment of negotiable instruments(checks, etc), assignment of right to damages in sales of goods, and assignment of right to payment in sale of goods.

Delegator

the party delegating the duties.

Delegatee

the party to whom the duties are delegated.

What is done with duties during delegation?

duties are not assigned, however—they are delegated.

Is a special form required to create a valid delegation of duties?

No. no special form is required to create a valid delegation of duties. as long as the delegator expresses an intention to make the delegation, it is effective. the delegator need not even use the word delegate.

In what situations is the delegation of duties prohibited?

1. when special trust has been placed in the obligor.

2. when performance depends on the personal skill or talents of the obligor.

3. when performance by a third party will vary materially from that expected by the obligee.

4. when the contract expressly prohibits delegation.

Who is held liable in a delegation of duties?

If a delegation of duties is enforceable, the obligee must accept performance from the delegatee. A valid delegation of duties does not relieve the delegator of obligations under the contract, however. Although there are many exceptions, the general rule is that the obligee can sue both the delegatee and the delegator if the duties are not performed.

Obligee

a party that has a right to require the other to perform some task.

Obligor

a party that has a duty to perform the task that is required by the obligee.

Third party beneficiary

another exception to the doctrine of privity of contract arises when the contract is intended to benefit a third party.

when the original parties to the contract agree that the contract performance should be rendered to or directly benefit a third person, the third person becomes an intended third party beneficiary of the contract.

What rights does the intended beneficiary have?

as the intended beneficiary of the contract, the third party has legal rights and can sue the promisor directly for breach of the contract.

What is the difference between intended beneficiaries and incidental beneficiaries?

the law distinguishes between intended beneficiaries and incidental beneficiaries.

an incidental beneficiary is a third person who receives a benefit from a contract even though that person's benefit is not the reason the contract was made. because the benefit is unintentional, an incidental beneficiary cannot sue to enforce the contract.

only intended beneficiaries acquire legal rights in a contract.

What is the most common way to discharge contractual duties?

is by performance of those duties.

for example, a buyer and seller enter into an agreement via e-mail for the sale of a 2019 Lexus for $48,000.

this contract will be discharged by performance when the buyer pays $48,000 to the seller and the seller transfers possession of the Lexus to the buyer.

Discharge

the termination of an obligation. in contract law, discharge occurs when the parties have fully performed their contractual obligations or when events, conduct of the parties, or operation of law releases the parties from performance. in bankruptcy proceedings, the extinction of the debtor's dischargeable debts. the termination of an obligation.

Is the duty to perform strictly absolute?

The duty to perform under any contract may be conditioned on the occurrence or nonoccurrence of a certain event, or the duty may be absolute.

Conditions of performance

in most contracts, promises of performance are not expressly conditioned or qualified. instead, they are absolute promises. they must be performed, or the parties promising the acts will be in breach of contract.

in some situations, however, performance is contingent on the occurrence or nonoccurrence of a certain event.

a condition is a qualification in a contract based on a possible future event. the occurrence or nonoccurrence of the event will trigger the performance of a legal obligation or terminate an existing obligation under a contract. if the condition is not satisfied, the obligations of the parties are discharged.

Condition precedent

a condition that must be fulfilled before a party's performance can be required. the condition precedes the absolute duty to perform. life insurance contracts frequently specify that certain conditions, such as passing a physical examination, must be met before the insurance company will be obligated to perform under the contract.

in addition, many contracts are conditioned on an independent appraisal of value.

for example, Restoration Motors offers to buy Charlie's 1960 Cadillac limousine only if an expert appraiser estimates that it can be restored for less than a certain price.

thus, the parties' obligations are conditioned on the outcome of the appraisal. If the condition is not satisfied —that is, if the appraiser deems the cost to be above the specified price their obligations are discharged.

Discharge by Performance

the great majority of contracts are discharged by performance. the contract comes to an end when both parties fulfill their respective duties by performing the acts they have promised. performance can also be accomplished by tender.

once performance has been tendered, the party making the tender has done everything possible to carry out the terms of the contract. if the other party then refuses to perform, the party making the tender can sue for breach of contract.

There are two basic types of performance: complete performance and substantial performance.

Tender

an unconditional offer to perform by a person who is ready, willing, and able to do so. a seller who places goods at the disposal of a buyer has tendered delivery and can demand payment. a buyer who offers to pay for goods has tendered payment and can demand delivery of the goods.

Complete Performance

when a party performs exactly as agreed, there is no question as to whether the contract has been performed. when a party's performance is perfect, it is said to be complete. normally, conditions expressly stated in a contract must fully occur in all respects for complete performance (strict performance) of the contract to take place. any deviation breaches the contract and discharges the other party's obligations to perform.

most construction contracts, for instance, require the builder to meet certain specifications. If the specifications are conditions, complete performance is required to avoid material breach.

if the conditions are met, the other party to the contract must then fulfill the obligation to pay the builder.

What is the problem that spawned the doctrine of substantial performance?

if the parties to the contract did not expressly make the specifications a condition, however, and the builder fails to meet the specifications, performance is not complete. what effect does such a failure have on the other party's obligation to pay?

Substantial Performance

a party who in good faith performs substantially all of the terms of a contract can enforce the contract against the other party under the doctrine of substantial performance.

courts decide whether the performance was substantial on a case-by-case basis, examining all of the facts of the particular situation.

What are the basic requirements for performance to qualify as substantial performance?

1. the party must have performed in good faith. intentional failure to comply with the contract terms is a breach of the contract.

2. the performance must not vary greatly from the performance promised in the contract. an omission, variance, or defect in performance is considered minor if it can easily be remedied by compensation (monetary damages).

3. the performance must create substantially the same benefits as those promised in the contract.

What is substantial performance’s effect on duty to perform?

if performance is substantial, the other party's duty to perform remains absolute (except that the party can sue for damages due to the minor deviations).

in other words, the parties must continue performing under the contract (for instance, making payment to the party who substantially performed).

if performance is not substantial, there is a material breach, and the nonbreaching party is excused from further performance.

What is substantial performance’s measure of damages?

because substantial performance is not perfect, the other party is entitled to damages.

the measure of the damages is the cost to bring the object of the contract into compliance with its terms, if that cost is reasonable under the circumstances. if the cost is unreasonable, the measure of damages is the difference in value between the performance that was rendered and the performance that would have been rendered if the contract had been performed completely.

Performance to the Satisfaction of Another

contracts often state that completed work must personally satisfy one of the parties or a third person.

when the subject matter of the contract is personal, the obligation is conditional, and performance must actually satisfy the party specified in the contract. for instance, contracts for portraits, works of art, and tailoring are considered personal because they involve matters of individual taste. therefore, only the personal satisfaction of the party fulfills the condition—unless a court finds that the party is expressing dissatisfaction simply to avoid payment or otherwise is not acting in good faith.

most other contracts need to be performed only to the satisfaction of a reasonable person unless they expressly state otherwise. when the subject matter of the contract is mechanical, courts are more likely to find that the performing party has performed satisfactorily if a reasonable person would be satisfied with what was done.

Material Breach of Contract

A breach of contract is the nonperformance of a contractual duty. The breach is material when performance is not at least substantial. When there is a material breach, the nonbreaching party is excused from the performance of contractual duties. That party can also sue the breaching party for damages resulting from the breach.

What happens if a breach of contract is minor?

If a breach is minor (not material), the nonbreaching party's duty to perform can sometimes be suspended until the breach has been remedied, but the duty to perform is not entirely excused. Once the minor breach has been cured, the nonbreaching party must resume performance of the contractual obligations.

What does the breach entitle the non-breaching party?

to sue for damages, but only a material breach discharges the nonbreaching party from the contract. The policy underlying these rules allows a contract to go forward when only minor problems occur but allows it to be terminated if major difficulties arise.

Anticipatory Repudiation

before either party to a contract has a duty to perform, one of the parties may refuse to carry out that party's contractual obligations.

when an anticipatory repudiation occurs, it is treated as a material breach of the contract, and the nonbreaching party is permitted to bring an action for damages immediately. the nonbreaching party can file suit even though the scheduled time for performance under the contract may still be in the future. until the nonbreaching party treats an early repudiation as a breach, however, the repudiating party can retract the anticipatory repudiation by proper notice and restore the parties to their original obligations.

Why is an anticipatory repudiation treated as a present, material breach?

an anticipatory repudiation is treated as a present, material breach for two reasons.

first, the nonbreaching party should not be required to remain ready and willing to perform when the other party has already repudiated the contract.

second, the nonbreaching party should have the opportunity to seek a similar contract elsewhere and may have a duty to do so to minimize the loss.

What’s the time for performance?

if no time for performance is stated in a contract, a reasonable time is implied. if a specific time is stated, the parties must usually perform by that time. unless time is expressly stated to be vital, though, a delay in performance will not destroy the performing party's right to payment.

What happens when time is expressly stated to be “of the essence” or vital?

the parties normally must perform within the stated time period, because the time element becomes a condition. even when the contract states that time is of the essence, however, a court may find that a party who fails to complain about the other party's delay has waived the breach of the time provision.

Discharge by Agreement

any contract can be discharged by agreement of the parties. the agreement can be contained in the original contract, or the parties can form a new contract for the express purpose of discharging the original contract. it takes form through discharge by mutual rescission, novation, settlement agreement, or a release.

Rescission

the process by which a contract is canceled or terminated, and the parties are returned to the positions they occupied before forming it.

How does a mutual rescission take place?

to take place, the parties must make another agreement that also satisfies the legal requirements for a contract. there must be an offer, an acceptance, and consideration. ordinarily, if the parties agree to rescind the original contract, their promises not to perform the acts stipulated in the original contract will be legal consideration for the second contract (the rescission).

How are agreements to rescind most executory contracts are enforceable if the agreement is made orally and the original agreement was in writing?

agreements to rescind most executory contracts are enforceable, even if the agreement is made orally and even if the original agreement was in writing. under the Uniform Commercial Code (UCC), however, agreements to rescind a sales contract must be in writing when the contract requires a written rescission.

agreements to rescind contracts involving transfers of realty also must be evidenced by a writing.

when one party has fully performed, an agreement to cancel the original contract normally will not be enforceable unless there is additional consideration.

because the performing party has received no consideration for the promise to call off the original bargain, additional consideration is necessary to support a rescission contract.

When does a novation occur?

when both of the parties to a contract agree to substitute a third party for one of the original parties. it expressly or impliedly revokes and discharges a prior contract.

the parties involved may expressly state in the new contract that old contract is now discharged. if the parties do not expressly discharge the old contract, it will be impliedly discharged if the new contract’s terms are inconsistent with the old contract’s terms. it is this immediate discharge of the prior contract that distinguishes a novation from both an accord and satisfaction and an assignment of all rights.

What are the requirements of a novation?

1. a previous valid obligation.

2. an agreement by all parties to a new contract.

3. the extinguishing of the old obligation (discharge of the prior party).

4. a new contract that is valid.

Discharge by settlement agreement

a compromise, or settlement agreement, that arises out of a genuine dispute over the obligations under an existing contract will be recognized at law. the agreement will be substituted as a new contract and will either expressly or impliedly revoke and discharge the obligations under the prior contract. in contrast to a novation, a substituted agreement does not involve a third party. rather, the two original parties to the contract form a different agreement to substitute for the original one.

Accord and satisfaction

this is when the parties agree to accept performance that is different from the performance originally promised. the accord is the agreement. in the Accord, one party undertakes to give or perform, and the other to accept, in satisfaction of a claim, something other than that on which the parties originally agreed. Satisfaction is the performance (usually payment) that takes place after the accord is executed. a basic rule is that there can be no satisfaction unless there is first an accord.

What context does an accord and satisfaction often relate to?

an accord and satisfaction often relates to the payment of a debt. in this context, the amount of the debt must be in dispute for accord and satisfaction to occur. if a debt is liquidated, accord and satisfaction cannot take place.

a liquidated debt is one whose amount has been agreed on or exactly determined. with an unliquidated debt, the amount of the debt has not been agreed on, and reasonable persons may differ over the amount owed.

Release

a contract in which one party forfeits the right to pursue a legal claim against the other party. it bars any further recovery beyond the terms stated in the release.

a release is generally binding if it is made in good faith (honestly) and is accompanied by consideration. in many states, the release must also be signed.

clearly, it is better to know the extent of the injuries or damages before signing a release.

Discharge by Operation of Law

under specified circumstances, contractual duties may be discharged by operation of law. these circumstances include material alteration of the contract, an applicable statute of limitations, bankruptcy, impossibility or impracticability of performance, and frustration of purpose.

Material Alteration of the Contract

to discourage parties from altering written contracts, the law allows an innocent party to be discharged when the other party has materially altered a written contract without consent.

Statutes of Limitation

statutes of limitations restrict the period during which a party can sue on a particular cause of action. after the applicable limitations period has passed, a lawsuit can no longer be brought.

the limitations period for bringing lawsuits for breach of oral contracts usually is two to three years, and for written or otherwise recorded contracts, four to five years. parties generally have ten to twenty years to file for recovery of amounts awarded in judgments, depending on state law.

lawsuits for breach of a contract for the sale of goods generally must be brought within four years after the cause of action has accrued. by their original agreement, the parties can reduce this four-year period to not less than one year, but they cannot agree to extend it.

Bankruptcy

a proceeding in bankruptcy attempts to allocate a debtor's assets to creditors in a fair and equitable fashion. once the assets have been allocated, the debtor receives a discharge in bankruptcy. a discharge in bankruptcy ordinarily prevents the creditors from enforcing most of the debtor's contracts. partial payment of a debt after discharge in bankruptcy will not revive the debt.

Impossibility of performance

after a contract has been made, supervening events (such as a fire) may make performance impossible in an objective sense. the doctrine of impossibility of performance applies only when the parties could not have reasonably foreseen, at the time the contract was formed, the event that rendered performance impossible.

What is the difference between objective impossibility and subjective impossibility?

Objective impossibility ("It can't be done") must be distinguished from subjective impossibility ("I'm sorry, I simply can't do it").

An example of subjective impossibility occurs when a party cannot deliver goods on time because of freight car shortages or cannot make payment on time because the bank is closed. In effect, in each of these situations the party is saying, "It is impossible for me to perform," not "It is impossible for anyone to perform." Accordingly, such excuses do not discharge a contract, and the nonperforming party is normally held in breach of contract.

What are the three basic types of situations that may qualify as grounds for the discharge of contractual obligations based on impossibility of performance?

1. when one of the parties to a personal contract dies or becomes incapacitated prior to performance.

2. when the specific subject matter of the contract is destroyed.

3. when a change in law renders performance illegal.

Temporary Impossibility

an occurrence or event that makes performance temporarily impossible operates to suspend performance until the impossibility ceases. once the temporary event ends, the parties ordinarily must perform the contract as originally planned.

sometimes, the lapse of time and the change in circumstances surrounding a contract make it substantially more burdensome for the parties to perform the promised acts. in that situation, a court might hold that the contract is discharged.

Commercial Impracticability

courts may also excuse parties from their performance when it becomes much more difficult or expensive than the parties originally contemplated at the time the contract was formed.

for someone to invoke the doctrine of commercial impracticability successfully, however, the anticipated performance must become significantly more difficult or costly. The added burden of performing not only must be extreme but also must not have been known by the parties when the contract was made.

Frustration of Purpose

closely allied with the doctrine of commercial impracticability is the doctrine of frustration of purpose.

in principle, a contract will be discharged if supervening circumstances make it impossible to attain the purpose both parties had in mind when they made the contract. as with commercial impracticability the supervening event must not have been reasonably foreseeable at the time the contract was formed.

there are some differences between these doctrines, however. commercial impracticability usually involves an event that increases the cost or difficulty of performance. in contrast, frustration of purpose typically involves an event that decreases the value of what a party receives under the contract.

Can you sue for damages in the context of contract law?

Yes, damages can compensate the nonbreaching party for the loss of the bargain. often, courts say that innocent parties are to be placed in the position they would have occupied had the contract been fully performed.

What are the 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).

Compensatory Damages

damages that compensate the nonbreaching party for the loss of the bargain. 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." courts will not award damages in an amount that leaves the nonbreaching party in a better position than if the contract had not been breached.

What is the standard measure of compensatory damages when a contract is breached?

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 that party's actual performance. this amount is reduced by any loss that the injured party has avoided.

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.

What is the measure of compensatory damages for sales of goods?

in a contract for the sale of goods, the usual measure of compensatory damages is an amount equal to 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 lost profits on the sale, not the difference between the contract price and the market price.

What is the measure of compensatory damages for sale of land?

Ordinarily, because each parcel of land is unique, the remedy for a seller's breach of a contract for a sale of real estate is specific performance. That is, the buyer is awarded the parcel of property that was bargained for. When the buyer is the party in breach, the measure of damages typically is the difference between the contract price and the market price of the land. The same measure is used when specific performance is not available (because the seller has sold the property to someone else, for example). The majority of states follow this rule.

A minority of states follow a different rule when the seller breaches the contract and the breach is not intentional. These states limit the prospective buyer's damages to a refund of any down payment made plus any expenses incurred (such as fees for title searches, attorneys, and escrows). Thus, the minority rule effectively returns purchasers to the positions they occupied prior to the sale, rather than giving them the benefit of the bargain.

What is the measure of compensatory damages for construction?

the measure of damages in a building or construction contract varies depending on which party breaches and when the breach occurs.

1. Breach by owner. The owner may breach at three different stages-before performance has begun, during performance, or after performance has been completed. If the owner breaches before performance has begun, the contractor can recover only the profits that would have been made on the contract. (Profits equal 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.

2. Breach by contractor. When the construction contractor breaches the contract—either by failing to begin construction or by stopping work partway through the project—the measure of damages is the cost of completion. The cost of completion includes reasonable compensation for any delay in performance. If the contractor finishes late, the measure of damages is the loss of use.

3. Breach by both owner and contractor. When the performance of both parties—the construction contractor and the owner—falls short of what their contract required, the courts attempt to strike a fair balance in awarding damages.

Consequential Damages

foreseeable damages that result from a party’s breach of contract. they differ from compensatory damages in that they are caused by special circumstances beyond the contract itself. they 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 for the loss of profits from the planned resale.

Punitive Damages

Punitive damages generally are not awarded in lawsuits for breach of contract. Because punitive damages are designed to punish a wrongdoer and set an example to deter similar conduct in the future, they have no legitimate place in contract law. A contract is simply a civil relationship between the parties. The law may compensate one party for the loss of the bargain —no more and no less. When a person's actions cause both a breach of contract and a tort (such as fraud), however, punitive damages may be available.

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. Awards of nominal damages 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.

Mitigation of Damages

in most situations, when a breach of contract occurs, the innocent injured party is held to a duty to mitigate, or reduce, the damages suffered. under this doctrine of mitigation of damages, the duty owed depends on the nature of the contract.

for instance, 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 is found, 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 made by the amount of rent the landlord could have received had this step been taken.

How do liquidated damages differ from penalties?

liquidated damages differ from penalties. although a penalty also specifies a certain amount to be paid in the event of a default or breach of contract, it is designed to penalize the breaching party, not to make the innocent party whole. liquidated damages provisions usually 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.

Liquidated damage 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.)