Chapter 16: Breach of Contract and Remedies

Performance and Breach

• Breach of contract is a contracting party’s failure to perform an absolute duty owed under a contract

• If a contractual duty has not been discharged (i.e., terminated) or excused (i.e., relieved of legal liability), the contracting party owes an absolute duty (i.e., covenant) to perform the duty

• Types of performances:

  1. Complete performance (strict performance)

  2. Substantial performance (minor breach)

  3. Inferior performance (material breach)

1. Complete Performance

• Complete (strict) performance is a situation in which a party to a contract renders performance exactly as required by the contract

  • Complete performance discharges that party’s obligations under the contract

• A fully performed contract is called an executed contract

• Tender of performance is an unconditional and absolute offer by a contracting party to perform his or her obligations under a contract

2. Substantial Performance: Minor Breach

• Substantial performance is performance by a contracting party that deviates only slightly from complete performance

  • There is a minor breach

• The nonbreaching party may try to convince the breaching party to elevate its 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 cost 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 to repair the defect if the breaching party has already been paid

3. Inferior Performance: Material Breach

• Material breach occurs when a party renders inferior performance of his or her contractual duties

  • Inferior performance is a situation in which a party fails to perform express or implied contractual obligations and impairs or destroys the essence of a contract

• There is no clear line between a minor breach and a material breach

  • A determination is made on a case-by-case basis

• Nonbreaching party is permitted to:

  1. Rescind contract and seek restitution

     • The nonbreaching party is discharged from any further performance under the contract

  2. Sue to enforce contract and seek damages

Anticipatory Breach

• Anticipatory breach of a contract occurs when a contracting party informs the other party in advance that it will not perform the 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

• Monetary (dollar) damages are an award of money from a breaching party

• Available to nonbreaching party upon:

  • Minor breach

  • Material breach

• Types

  • Compensatory

  • Consequential

  • Nominal

  • Liquidated

Compensatory Damages [Monetary]

• Compensatory damages are an award of money intended to compensate a nonbreaching party for the loss of the bargain

• Purposes:

  • To place the nonbreaching party in the position it would have had if contract had been fully performed

  • Restore “benefit of the bargain”

• Amount awarded depends on:

  • Type of contract

  • Party that breached the contract

Sale of a Good

• Compensatory damages for a breach of a sales contract involving goods are governed by the Uniform Commercial Code (UCC)

• Plaintiff may receive the difference between contract price and market price of the goods at the time and place the goods were delivered

  • Example Cougar Corp contracts to buy a piece of land from Huskico for​ $100,000. Huskico does not deliver the land to Cougar Corp when it is required to do so. Cougar Corp purchases similar land from another seller but has to pay​ $110,000 because the current market price for the land has risen. Cougar Corp can recover $10,000 (difference between $110,000 and $100,000).

Construction Contract

• A construction contract arises when the owner of real property contracts to have a contractor build a structure or do other construction work

• Breach before construction:

  • Contractor can recover the profits they would have made on the contract if the owner breaches the construction contract before construction begins

  • Owner can recover the difference between contract price and cost of work completed by another contractor

• Breach during construction

  • Owner can recover the difference between contract price and cost of work completed by another contractor

Employment Contract

• Employee can recover lost wages or salary

• Employer can recover the cost to hire a new employee plus any reasonable increase in salary paid to the replacement

Consequential Damages [Monetary]

• Consequential (special) damages are foreseeable damages that arise from circumstances outside the 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

Disclaimer of Consequential Damages

• A disclaimer of consequential damages is a contract provision that states that a breaching party is not responsible to pay disclaimed consequential damages

• Disclaimer of consequential damages is mostly lawful

Nominal Damages [Monetary]

• Nominal damages are damages awarded when the non-breaching party sues the breaching party even though no financial loss has resulted from the breach

  • Usually awarded in a small amount, such as $1

• Cases involving nominal damages are usually brought on principle

• Disfavored by most courts

Liquidated Damages [Monetary]

• Liquidated damages are damages that parties agree in advance that certain damages will be available if contract is breached

  • Actual damages must be difficult or impracticable to determine

  • Liquidated amount must be reasonable in the circumstances

  • These damages are lawful if they do not cause a penalty

• An enforceable liquidated damages clause is an exclusive remedy even if actual damages are later determined to be different from the liquidated damages

Penalty

• Considered a penalty if actual damages can be determined in advance

  • A penalty is a fine that is imposed of liquidated damages are excessive or unconscionable or if actual damages are clearly determinable in advance and make the liquidated damage clause unenforceable

• If a liquidated damages clause is found to be a penalty, it is unenforceable

  • The nonbreaching party may then recover actual damages

Case 16.1: Liquidated Damages

• Case

  • Burke v. 401 N. Wabash Venture, LLC

  • U.S. Ct. of Appeals for the 7th Cir., 716 F.3d 432

• Facts

  • A buyer paid a 20% down payment on a condo in Chicago

  • The buyer did not go through with the transaction and wanted his down payment back

  • The district court found that the down payment constituted valid liquidated damages

• Issue

  • Is the liquidated damages clause enforceable?

• Decision

  • The U.S. court of appeals affirmed the district court’s decision that enforced the liquidated damages agreement permitting the developer to retain the plaintiff’s deposit

Mitigation of Damages

• If a contract has been breached, the law places a duty on the innocent nonbreaching party to make reasonable efforts to mitigate (i.e., avoid or reduce) the resulting damages

• Mitigation of damages is a nonbreaching party’s legal duty to avoid or reduce damages caused by a breach of contract

  • Extent of mitigation depends on the type of contract

• If an employer breaches an employment contract, the employee:

  • Must try to mitigate damages

  • Should try to find substitute employment

  • Can accept only comparable employment

Rescission and Restitution

• Rescission is an action to undo a contract

  • Available if 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 is the return of goods or property received from the other party to rescind a contract

  • If the actual goods or property are not available, a cash equivalent must be made

• Adequate notice must be given

• Rescission and restitution restore the parties to the positions they occupied prior to the contract

Equitable Remedies

• An equitable remedy is a remedy that is available if there has been a breach of contract that cannot be adequately compensated through a legal remedy

  • Also available to prevent unjust enrichment

• Types: (1) specific performance, (2) reformation, and (3) injunction

Remedy 1: Specific Performance

• Specific performance is remedy that orders the breaching party to perform the acts promised in the contract

• The courts have the discretion to award this remedy if the subject matter of the contract is unique (ex: works of art, antiques, items of sentimental value, rare coins, stamps, heirlooms)

• Specific performance is available to enforce land contracts because every piece of real property is unique

• Specific performance of personal service contracts is not granted because the courts would find it difficult or impracticable to supervise or monitor performance of such a contract

Remedy 2: Reformation

• Reformation is an equitable doctrine permitting the court to rewrite a contract to express the parties’ true intentions

• Usually available to correct clerical errors in contracts

Remedy 3: 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

Case 16.2 Specific Performance

• Case

  • Alba v. Kaufmann

  • S.C. of N.Y., Appellate Division, 27 A.D.3d 816 (2006)

• Facts

  • Buyers of a house were prepared to close, but sellers had a ”change of heart” and no longer wanted to go forward with the transaction

• Issue

  • Is an order of specific performance of the real estate contract warranted in this case?

• Decision

  • The appellate court, as a matter of law, granted the Albas’ motion for summary judgment and ordered Kaufmann specifically to perform the real estate contract

Arbitration of Contract Disputes

• Arbitration is a form of ADR in which the parties choose an impartial 3rd party to hear and decide their dispute

  • A nonjudicial, private resolution of a contract dispute

• Arbitration agreements often stipulate binding arbitration, an agreement between the parties to a dispute whereby they agree that the decision and award of the arbitrator cannot be appealed to the courts

• The Federal Arbitration Act (FAA) is a federal statute that provides for the enforcement of most arbitration agreements

  • Promotes the arbitration of contract disputes whether the dispute involves federal or state law

Case 16.3 Arbitration of a Contract Dispute

• Case

  • Mance v. Mercedes-Benz USA

  • U.S. Dist. Ct. for the Northern Dist. Of California, 901 F.Supp.2d 1147 (2012)

• Facts

  • Plaintiff experienced problems with a car he bought from defendant

  • The contract for the purchase required all claims or disputes to be decided by arbitration

• Issue

  • Is the arbitration clause enforceable?

• Decision

  • The U.S. district court held that the arbitration clause was enforceable and granted Mercedes-Benz’s motion to compel arbitration

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

• The major torts associated with contracts are (1) intentional interference with contractual relations and (2) breach of the implied covenant of good faith and fair dealing

(1) Intentional Interference with Contractual Relations

• Intentional interference with contractual relations is a tort that arises when a third party induces a contracting party to breach the contract with another party

  • The third party does not have to have acted with malice or bad faith

• Elements:

  1. A valid, enforceable contract between the contracting parties

  2. The third-party’s knowledge of this contract

  3. The third-party’s 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, and thus, the third party cannot be held to have induced a breach of the other parties’ contract

(2) Breach of the Implied Covenant of Good Faith and Fair Dealing

• Covenant of good faith and fair dealing is an implied covenant under which the parties to a contract not only are held to the express terms of the contract but are also required to act in “good faith,” deal fairly in all respects in obtaining the objective of the contract

• Implied in contracts where the parties have a special relationship that involves a fiduciary duty

  • Contracts between insurance companies and insureds, publishing agreements between publishers and authors, and employment contracts are often included under this implied covenant

• A breach of this implied covenant is a tort for which tort damages are recoverable, also known as a tort of bad faith