Breach of Contract and Remedies

Breach of contract

—once duty to perform exists, nonperformance is breach unless duty is discharged

Breach of contract - CL

CL

• Material breach (nonbreaching party does not receive substantial benefit of bargain)— allows nonbreaching party to withhold any promised performance and to pursue remedies for breach, including damages

• Minor breach (breaching party has substantially performed)—nonbreaching party entitled to pursue remedies for nonmaterial breach (damages) but must perform under contract

Breach of contract - UCC

Generally, seller must strictly perform all obligations under contract or be in breach

• Material breach only applies to installment contracts or when parties stipulate it in contract

Anticipatory repudiation - CL

Promisor repudiates before performance is due—repudiation must be clear and unequivocal through words or acts

Anticipatory repudiation - CL Nonbreaching party’s options:

Nonbreaching party’s options:

• Treat repudiation as breach

• Ignore repudiation and demand performance of promisor but suspend any performance by promisee if it would increase promisor’s damages

• If date of performance has not passed and only performance left is payment, must wait for actual breach before filing suit

Anticipatory repudiation - CL Retraction of repudiation

Retraction of repudiation—can be retracted until promisee acts in reliance on repudiation, accepts repudiation, or commences action for breach of contract

Anticipatory repudiation - CL Unilateral contracts

anticipatory repudiation does not apply.

Anticipatory repudiation - UCC

UCC

• Anticipatory repudiation occurs when there has been unequivocal refusal of buyer or seller to perform or when reasonable grounds for insecurity arise and other party fails to provide adequate assurances within reasonable time (not to exceed 30 days)

• Retraction of repudiation—permitted if other party has not canceled contract or materially changed position

Anticipatory repudiation - Prospective inability to perform

party’s expectations of performance may be diminished by event occurring after contract formation

UCC

• Party can demand assurances if reasonable grounds for insecurity about other party’s ability to perform (and may suspend performance until provided); demand must be in writing

• Failure to provide adequate assurances within reasonable time (limited to 30 days) treated as repudiation

Remedies—damages for breach of contract

1. Expectation damages

2. Consequential damages and foreseeability

3. Incidental damages

4. Liquidated-damages and penalties

5. Punitive damages

6. Nominal damages

7. Attorney’s fees

8. Mitigating damages

Expectation damages

In general

• Intended to put nonbreaching party in same position as if contract had been performed

• Must be calculated with reasonable certainty

• Expectation damages = loss in value + other loss − cost avoided − loss avoided

  • If using this formula, plaintiff should not recover separately calculated consequential and incidental damages

Expectation damages - Partial performance

Partial performance—partially performing party recovers work performed + expectation damages for work not yet performed

Expectation damages - Defective performance

• Construction contracts—damages; generally cost to correct defect

• Sale of goods—damages equal to difference between value of goods as warranted and actual value of tendered nonconforming goods

• Real estate—damages for failure to perform = difference between contract price and market value; damages for late delivery = fair market rental value

Expectation Damages - Economic waste

—applies to construction contracts

• Occurs when cost to fix or complete construction is clearly disproportional to any economic benefit or utility gained as result; court can award damages equal to diminution in market price of property

• If breach is willful and only completion of contract will give nonbreaching party benefit of its bargain, court can award damages to fix or complete construction, even if it results in economic waste

Expectation Damages - UCC breach-of-warranty damages

UCC breach-of-warranty damages—difference between value of goods accepted and value they would have had if they had been as warranted (often, repair costs)

Consequential damages and foreseeability - Direct damages

Direct damages—necessary and usual result of defendant’s wrongful act (i.e., “loss of value”)

Consequential damages

—damages that result from breach but arise out of special circumstances unique to parties to contract; must be reasonably foreseeable to breaching party (but need not be usual result of defendant’s conduct), caused by breach, and reasonably certain in value to be recovered

• DE Distinction—consequential damages deemed to not flow directly from breach but are considered damages of which defendant should be aware

Consequential Damages - Foreseeability

• Unforeseeable—not recoverable unless breaching party had reason to know about possibility of unforeseeable consequential damages

• Damages are recoverable if they are natural and probable consequences of breach, if they were contemplated by parties at contract formation, or if they were otherwise foreseeable

Consequential Damages - Causation

—defendant’s defense that plaintiff’s losses would have occurred regardless of defendant’s breach.

Consequential Damages - Reasonable certainty

Reasonable certainty

• Dollar amount of damages must be proven with reasonable certainty

• If lost profits are too speculative, courts may limit recovery to reliance damages (reasonable expenditures made concerning contract)

Consequential Damages - Limitation by agreement

Limitation by agreement

• Agreement to expressly exclude or limit consequential damages is generally enforceable

• DE Point of Law—damages limitations are generally enforceable, but public policy will not permit a contractual provision to limit other party’s remedy when intentional misrepresentation involved

Consequential Damages - UCC

UCC

• Only buyers can seek consequential damages under UCC; sellers are permitted to seek consequential damages based on CL or other statutes

• Limitation of consequential damages for personal injury in the case of consumer goods is prima facie unconscionable

• Limitation of damages when loss is commercial is not prima facie unconscionable

Incidental damages

—compensation for commercially reasonable expenses incurred as result of other party’s breach

Incidental damages - Seller’s breach

Seller’s breach—expenses incurred in inspection, receipt, transportation, care, and custody of goods rightfully rejected; expenses in effecting cover; and any other reasonable expense incident to delay or other breach

Incidental damages - Buyer’s breach

Buyer’s breach—any expenses incurred in stopping delivery; in transportation, care, and custody of goods after buyer’s breach; regarding return or resale of goods; or otherwise resulting from breach

Liquidated-damages and penalties

—damages stipulated by parties to contract as reasonable estimation of actual damages to be recovered if breach occurs

Liquidated-damages and penalties - Enforceability

Enforceable if:

• Parties intended to agree in advance to damages that might arise from breach

• Stipulated amount was reasonable at time of contract, bearing some relation to damages that might be sustained and o Actual damages would be uncertain in amount and difficult to prove.

• DE Distinction—liquidated-damages provisions unenforceable if amount at issue is unconscionable or not rationally related to any measure of damages a party might reasonably conceive

Punitive damages

—rarely available in contract actions but may be available if conduct constituting breach is also recoverable under tort theory

• DE Point of Law—punitive damages generally not available in breach-of-contract cases unless conduct amounts to independent tort; may be allowed in some cases involving denial of insurance claims; emotional distress damages available in contract cases only if plaintiff proves physical injury or intentional infliction of emotional distress

Nominal damages

—when no damages are alleged or proven

Attorney’s fees

—in contract, not recoverable absent express agreement or specific law

Mitigating damages

• Party to contract must avoid or mitigate damages to extent possible by taking steps that do not involve undue risk, expense, or inconvenience

• Nonbreaching party held to standard of reasonable conduct to prevent loss

• Services contract—party is generally not required to accept any type of employment (only employment of same type as party was contracted to perform)

• Failure to mitigate reduces damages that may be recovered by nonbreaching party

Restitutionary damages (restores to party the benefit conferred on other party)

Measured by either reasonable value of defendant obtaining that benefit from another source or increase in defendant’s wealth from receiving that benefit

Restitutionary damages - Recovery by nonbreaching party

• Nonbreaching party may recover for any benefit conferred on breaching party by way of part performance or reliance

• Nonbreaching party may not recover restitution if nonbreaching party has fully performed and only remaining performance by other party is payment of definite sum of money

Restitutionary damages - Recovery by breaching party

• If plaintiff has not substantially performed, plaintiff cannot recover under contract, but if defendant benefited from plaintiff’s performance, plaintiff can recover restitution for benefit conferred less defendant’s damages for breach

• Plaintiff generally cannot recover if plaintiff’s breach was willful or if contract provides that nonbreaching party may retain value of breaching party’s performance as liquidated damages

Reliance damages (reasonable out-of-pocket expenses incurred by nonbreaching party)

• Recoverable if nonbreaching party incurs expenses in reasonable reliance upon promise that other party would perform

• Party cannot recover both reliance and expectation damages

Specific performance—equitable remedy is possible when damages are inadequate remedy

Factors considered to determine whether damages are adequate:

• Difficulty of proving damages with reasonable certainty

• Hardship to defendant

• Balance of equities

• Wishes and understandings of parties

• Practicality of enforcement

• Mutuality of agreement

• DE Point of Law—performance of personal services contract will not be affirmatively and directly enforced because of difficulties in compelling performance

Specific performance - Real property

Real property—specific performance granted because real property is considered unique

• DE Distinction—specific performance for real property contract is extraordinary remedy; party seeking it must show by clear and convincing evidence that (1) valid contract exists; (2) party is ready, willing, and able to perform, (3) balance of equities tips in party’s favor; and (4) party has no adequate legal remedy

Specific performance - UCC

UCC—specific performance may be granted to buyer when goods are rare or unique

Specific performance - Equitable defenses—laches

Equitable defenses—laches (prejudicial delay in bringing action) or unclean hands (nonbreaching party guilty of some wrongdoing in transaction) may be raised by breaching party

UCC remedies - Buyer’s remedies

Buyer’s remedies—when seller fails to perform or makes nonconforming tender

1. Failure to tender goods

• Cancel contract—if breach of installment contract goes to entire contract

• Recovery of payments—upon cancelation, buyer is entitled to recover payments made for tender; on rejection or revoked acceptance, also gets security interest in goods in buyer’s possession

• Damages—market price minus contract price plus incidental and consequential damages

• Cover—buyer may purchase similar goods elsewhere and recover replacement price minus the contract price

• Specific performance—for unique goods

• Replevin—buyer can obtain undelivered goods from seller if at least partial payment is made or buyer is unable to effect cover

UCC remedies - Nonconforming tender (Buyer’s remedies)

Nonconforming tender—buyer has right to accept or reject all or part of goods (and the right to inspect before making that decision)

• Rejection

• Acceptance

• Right to cure

UCC remedies - Nonconforming tender—Rejection

Rejection—buyer can reject goods if he gives notice to seller within reasonable time and before acceptance and is then entitled to return of any payments made or to seek same remedies as if no tender was made

UCC remedies - Nonconforming tender—Acceptance

Acceptance—buyer accepts goods by expressly stating acceptance, using goods, or failing to reject goods; to recover damages, buyer must give seller timely notice of breach; damages measured by difference between value of nonconforming goods and value of conforming tender (usually cost of replacement or repair) plus consequential and incidental damages

UCC remedies - Nonconforming tender—Right to Cure

Right to cure—seller has right to cure defective tender if time of performance under contract has not yet elapsed or seller had reasonable grounds to believe that buyer would accept despite nonconformity

UCC remedies - Seller’s remedies (Right to price)

Right to price—seller may recover full price if buyer has accepted goods; conforming goods are destroyed or lost after risk has shifted to buyer; seller cannot reasonably sell identified goods

UCC remedies - Seller’s remedies (Right to reclaim goods)

Right to reclaim goods—from insolvent buyer if he makes demand within 10 days after buyer receives goods

UCC remedies - Seller’s remedies (Stoppage of goods in transit)

Stoppage of goods in transit—permitted if buyer breaches or is insolvent

UCC remedies - Seller’s remedies (Wrongful rejection by buyer)

Wrongful rejection by buyer—seller can collect damages, resell goods, or recover price, and, if seller is “lost volume” seller, lost profits; seller can also collect incidental damages

Risk of loss - Unidentified goods

Unidentified goods—if goods are damaged or destroyed and there is no breach, risk of loss is on seller until seller satisfies delivery obligations (and then risk shifts to buyer)

• Shipment contract—risk of loss passes to buyer when seller gives possession of goods to carrier and makes proper contract for their shipment

• Destination contract—risk of loss passes to buyer when seller tenders goods at place specified in contract

Risk of Loss - Identified goods

Identified goods—seller is excused if goods are totally destroyed through no fault of seller before risk of loss is shifted to buyer

Risk of Loss - Effect of breach of contract

Effect of breach of contract

• Seller’s breach—if seller delivers nonconforming goods, risk of loss remains on seller until buyer accepts or there is cure

• Buyer’s breach—if buyer breaches or repudiates after goods are identified but before risk of loss shifts, then risk immediately shifts to buyer (to extent of lack of insurance coverage by seller)

SoL on breach of sales contract or warranty

• Four years after cause of action accrues

  • Generally, cause of action accrues when breach occurs, regardless of whether aggrieved party knows

• Parties may reduce four-year limitations period to not less than one year, but they may not extend it

SoL on breach of sales contract or warranty - DE Distinction

DE Distinction—general SoL rules (i.e., three years for common-law claims and four years for Article 2 claims) can be extended if (1) contract is executed under seal (20 years) or (2) written contract involves at least $100,000 and specifies longer timeframe (20 years or less); Article 2 contracts for less than $100,000 may not be extended beyond four years.