Chapter 12: Contracts— Breach and Remedies

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Chapter 1: Legal EthicsCHAPTER 12: CONTRACTS

—BREACH AND REMEDIES

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Learning Objectives1. What is the difference between

compensatory and consequential damages? What are nominal damages and when do courts award them?

2. What is the standard measure of compensatory damages when a contract is breached? How are damages computed differently in construction contracts?


Learning Objectives3. Under what circumstances is the

remedy of rescission and restitution available?

4. When do courts grant specific performance as a remedy?

5. What is a limitation-of-liability clause, and when will courts enforce it?

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

• Four broad categories of damages:–Compensatory. – Consequential. –Punitive. – Nominal.

Damages


• Compensatory Damages.– Compensates nonbreaching party for loss of the

bargain.– Out-of-pocket costs directly arising from breach. – Standard Measure: difference between value of

promised performance and value of actual performance.

Damages


• Compensatory Damages.– Measurement of Damages:• Sale of Goods: difference between contract and market

price.• Sale of Land: specific performance.• Construction Contracts.

–CASE 12.1 JAMISON WELL DRILLING, INC. V. PFEIFER (2011). Why did Pfeifer have to pay for the storage container?

Damages


• Consequential Damages.– Consequential (Special) Damages—foreseeable

losses.• Breaching party is aware or should be aware, cause the

injury party additional loss.• CASE 12.2 HADLEY V. BAXENDALE (1854). What was

the principle behind this decision?

Damages


Damages Punitive (Exemplary) Damages.–Deter wrongdoer; set example.

Nominal Damages.–No actual damage occurs, usually $1,

for a technical injury.


• Mitigation of Damages.– When breach of contract occurs, the innocent

injured party is held to a duty to reduce the damages that he or she suffered.

– Duty owed depends on the nature of the contract.

Damages


• Liquidated Damages vs. Penalties.– Liquidated Damages: specific amount

agreed to be paid as damages in the event of future breach.

– Penalties: designed to penalize, generally unenforceable.• CASE 12.3 B-SHARP MUSICAL PRODUCTIONS, INC. V.

HABER (2010). Why was the clause enforceable?

Damages


• Liquidated Damages vs. Penalties.– Enforceability. Court asks two questions:

• When contract was entered into, was it apparent

damages would be difficult to estimate in the event of a

breach?

• Was the amount set as damages a reasonable estimate

and not excessive?

Damages


Ex. 12-1 Measurement of Damages


Equitable Remedies Sometimes damages are inadequate

remedy. Court can create equitable remedies:

Rescission and Restitution


Equitable Remedies Rescission.– Remedy whereby a contract is

canceled and the parties are restored to the original positions that they occupied prior to the transactions.


Equitable Remedies Restitution: both parties must return

goods, property, or money previously conveyed. –Note: Rescission does not always call

for restitution. Restitution is called for in some cases not involving rescission.


Equitable Remedies Specific Performance.–Equitable remedy calling for the

performance of the act promised in the contract.–Provides remedy in cases involving

unique subject matter: • Sale of Land.• Contracts for Personal Services.


Equitable Remedies Reformation.– Equitable remedy allowing a contract

to be reformed, or rewritten to reflect the parties true intentions.

– Available when an agreement is imperfectly expressed in writing.

– Used when fraud or mutual mistake occurs.


Recovery Based on Quasi-Contract

When Quasi Contract is Used.– No actual contract exists, court will

create one in the interests of fairness and justice.

– Usually granted when one party has performed in good faith and the other has been unjustly enriched.



Recovery Based on Quasi-Contract.– To recover, party seeking recovery

must show:• Party conferred benefit on other party.• Party conferred the benefit with

reasonable expectation of payment.



Recovery Based on Quasi-Contract.– To recover, party seeking recovery

must show:• Party did not volunteer in performing.• Party receiving benefit would be unjustly

enriched by retaining benefit without payment.


• Exculpatory and Limitation of Liability clauses.

• UCC Allows Sales Contracts to Limit Remedies.

• Enforceability of Limitation-of-Liability Clauses: depends on type of breach excused by provision.

Contract Provisions Limiting Remedies


Ex. 12-2 Remedies for Breach

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Chapter 12: Contracts— Breach and Remedies