What Are Contract Remedies?
A contract remedy is the goods or services received in exchange for the promise of performance in a contract. Both the person that has failed to uphold their end of the contract, as well as the aggrieved romantic partner may ask what the parties are legally entitled to regarding the other party’s contractual obligation.
For example, suppose your boyfriend decides he cannot afford to pay your college tuition and therefore will not marry you. The contract remedy for your boyfriend is to give you money to pay for tuition. Your contract remedy is to receive this remedy directly from the person that broke the contract, or your ex-boyfriend.
The law in the field of contract law has recognized a few different contract remedies. Accordingly, we can say contract remedies can be divided into two categories: legal and equitable remedies.
Legal remedies include compensatory and consequential damages. Compensatory damages require the breaching party to pay the non-breaching party the difference between the contract price and the market price of the contract subject . So, for our lost college tuition example, suppose your boyfriend uses your money for a new video game and now his mom sends him $100 to purchase video games rather than sending him money for you to go to college. This means his mom would have to pay you to cover your contract remedy.
In contrast, equitable remedies exist to ensure a party upholds their contractual agreement and provides a non-monetary remedy in reliance on the contract. In last week’s post, Lost College Tuition, I focused primarily on the theory of quantum meruit, an equitable remedy that aims to restore the injured party the reasonable value of the lost benefit. It is in the realm of quantum meruit where contract remedies overlap with fiduciary obligations. In the case of an engagement, the parties owe a duty of good faith to one another and cannot unjustly benefit from the engagement itself.
Contractual remedies can be legal or equitable in the area of remedies. Legal remedies compensate the non-breaching party through the payment of damages. Equitable remedies provide relief to the non-breaching party through the enforcement of a court ordered decree forcing the breaching party to uphold their end of the contract and fulfill the promise made to the aggrieved party.
Types of Contract Remedies
Compensatory damages are the most common form of contract remedy. Their purpose is to make the non-breaching party "whole" by providing a monetary award that places them in the position they would have been in if the contract had been fully performed. Compensatory damages may be divided into general and special damages. General damages are awarded without requiring specific proof of loss. These are losses that are presumed to have occurred because the parties contemplated them at the time of contract formation. For example, if a contract requires a contractor to construct a new fence, general damages may include the cost of the fence alone, without regard to any other factors, such as the degree to which the property owner would be damaged by a breach. A mobile phone contract, for instance, should not require a user to buy a new phone if he or she terminates the contract early, but a good faith evaluation of the damages associated with a breach should consider the actual circumstances of the alleged breach. Special damages, on the other hand, are the consequence of the unique circumstances of the contractual relationship. If a customer who has a history of extremely late payments under a previous contract with a cable company claims that the cable company has breached its latest contract with her by demanding payment early, general damages would neither include nor rule out any penalty for late payment, as in the previous contract. To put it simply, general damages are for breaches that could be expected, while special damages are only obtainable through specific demonstration of unique and unforeseeable circumstances.
Punitive damages are less common and are not awarded for mere breach, but rather occur when the breaching party’s conduct is outrageous, reckless, intentional or willful. In contract disputes, these damages are rare because of the intent and conduct requirement. Even where intent is clear, any damages ultimately awarded must relate to the value of the terms of the contract. In general, even intentional fraud, oppression or malice toward the other party will not result in an award of punitive damages, for breach of contract.
Nominal damages are given when non-breach of contract is proven, but no actual harm can be shown. This type of contract remedy is the lowest set of damages possible and is typically limited to small amounts. Nominal damages can be awarded in a contract dispute when a party claims to have been affected by an issue, but cannot prove the extent of harm caused.
Specific performance is a contract remedy that is typically awarded in cases in which a party seeks to compel fulfillment of a contract when monetary damages would be insufficient to make the non-breaching party whole. Courts will only award specific performance when a court can provide adequate remedy by requesting specific performance. Courts are less likely to require specific performance in a dispute over employment contracts and real estate contracts because money can be awarded as an acceptable substitute for employment and because real estate is unique in nature. A court may, however, grant a party’s request for a specific performance in a real estate dispute if the property is not easily replaceable and the party cannot be easily compensated with a monetary settlement. An example would be a rare Picasso painting bought by a collector, who could not be easily compensated for anything more than the original purchase price.
Restitution is a contract remedy awarded to the non-breaching party if he or she has conferred a benefit upon the breaching party that the breaching party has either retained, or is ignorant to the fact of the benefit. Restitution is intended to prevent the unjust enrichment of one party at the expense of another. If an injured party has made a partial payment to the other party under a valid contract, restitution allows the injured party to recover the amount paid as damages for breach.
Compensatory Damages: The Recovery of Financial Harm
Compensatory damages are a common remedy awarded for breach of contract claims. They serve to reimburse an injured party for its actual losses, providing a clear monetary value for the claim. This is often the desired result in a contract dispute, as it allows for an immediate damage recovery. Like other remedies, compensatory damages are measured by the following elements:
Without measuring all three of these elements, the plaintiff cannot be made whole for its loss. When calculating the measure of damages, the court will look at the losses incurred by the plaintiff that were both foreseeable and specifically enumerated in the contract. As such, damages can be calculated in two basic ways: Notably, direct losses are generally measured by whether a party failed to receive what it rightly bargained for under the terms of the contract. In other words, the court will look at what the contract would have enabled the plaintiff to do in the absence of breach. Thus, the court looks at what would have occurred had the defendant delivery on its side of the bargain. If a plaintiff is seeking a recovery for direct losses, it typically seeks compensation for more than the market value of the contract as a whole. Under general equitable principles, a contractual party is always in a better position if it can simply pay its debts rather than sue in court. Therefore, when determining a party’s direct losses, the court will look at what the party would have received for the contract as a whole, or its value as a whole, rather than the value of its individual pieces. Special damages, on the other hand, are a function of intended reliance on the part of the party seeking recovery. Thus, the court will look at how the plaintiff intended to benefit from the contract to envision how a breach may have ruined its plans. Unlike compensatory damages, special damages are unpredictable and will usually only occur when a party has lost a particular opportunity as a result of the other party’s breach. For this reason, recoveries for special damages are generally limited to path of recovery for consequential damages, but not both.
Punitive Damages: More Than Just Compensation
Punitive damages: making a point beyond compensation
Beyond the scope of recompense and expectation damages is the further Reach and utility of punitive and example damages which may be available in some circumstances. Orders for punitive or example damages are made over and above compensation and serve the identifiable purpose of punishing a party for their misconduct and aiming to deter the conduct of that party and even others who consider engaging in conduct which we see as being offensive to the proper functioning of the commercial sphere. So for example, if a party’s misconduct in breach of a contract is such that it ought to be considered as willful or deliberate or of some egregious character with respect to the contractual rights which will be abrogated by the course of that conduct, there may be available as an aspect of exemplary damages, a vicarious award for the general community or the extent to which another may in similar circumstances be judged unworthy of engagement or rebuked or to which there may be a distaste, disgust or aversion by the general community. The rationale in support of the availability of such an award was articulated by Dawson and McCarthy JJ in the case of Tacoma v Oei [1985] 2 NSWLR 757 at 763: "Such an award of damages serves the more general purpose of marking by way of example the fact that a recognisable and distinguishable moral infraction has been perpetrated by the tortfeasor". The case of Tacoma v Oei is itself interesting because it identifies the extent to which exemplary damages might be awarded, and even how having regard to the extent to which the offence is in the area of trespass or the superinducing of liability of a person to whom there might not have been a liability in tort, the further breach of the duty is added on top.
Specific Performance: The Enforcement of Agreement Terms
Specific performance is an equitable remedy that can be ordered by a court in the case of a breach of contract. When specific performance is ordered, the court will require the parties to comply with the terms of their agreement. Specific performance is not ordered in every case and is a very specific type of remedy. In fact, specific performance does not apply to all contracts, only those that are unique and for which monetary damages are insufficient.
How specific performance works in a breach of contract case: Specific performance will likely be ordered when it involves property that is rare, special or one of a kind. For example, real estate is such a unique and special property that it is often not possible to substitute it with an equally adequate property . With contracts on fine art, jewelry, other tangible property, or even to perform services, it may be difficult to discover another source for the property or service or an alternate property or service may not be as adequate as the agreed-upon property or service. In these cases, courts may order specific performance.
However, not all transactions involving property will be subject to specific performance. Courts have at least four major reasons for declining to issue such an order as follows: Exceptions to Specific Performance: While specific performance is a common contractual remedy in real estate transactions, there are still limitations on when it may be ordered by the court.
Limitations and Defenses to Remedies for Breach of Contract
The limitations of contract remedies can have a significant impact on judicial enforcement of those remedies. Although the law contemplates several forms of remedies for specific performance, consequential damages, punitive damages and liquidated damages may not be available to the non-breaching party in all cases. As an example, although the non-breaching party may be entitled to specific performance in most actions, the court may conclude that money damages are an adequate remedy in some cases. The courts are reluctant to order specific performance of personal services contracts because the law is intolerant of involuntary servitude in modern society. Employment contracts, for example, are not subject to specific performance.
The doctrine of impossibility may also limit remedies. Impossibility arises when an unforeseen event renders impossible performance of a contract. The standard is high. Impossibility of performance is not satisfied by evidence that performance would be unduly burdensome or even impossible with some effort. An example is a home improvement contract that requires the contractor to obtain a permit. If the permit cannot be obtained, it may be said that performance is impossible.
Impracticability may also lessen the aggrieved party’s remedies. An event that disrupts the normal practice of the industry may amount to impracticability. An example is price volatility of raw materials. In many contracts, the parties agree to assume income risk and include a force majeure clause. Such agreements allocate the risk of varying economic conditions and relieve the breaching party from performance.
Unconscionability may also limit contractual remedies. When a contract or one of its clauses is so one-sided or unfair as to shock the conscience of the court, the contract may be declared void or voidable. Such defenses are highly dependent on the facts and circumstances of each case.
Selecting the Appropriate Remedy: Practical Aspects
The question of what remedy is appropriate arises at the commencement of a disputed, and continues to occur throughout the litigation process, including at trial. Selecting the most appropriate remedy entails consideration of several factors including the nature of the breach, the damages resulting from the breach, and the intent of the party that breached the contract. For example, in some circumstances specific performance may be ordered instead of recovery for money damages when the unique character of the breach makes money too inadequate. Indeed, the Chancellor of the Delaware Court of Chancery has described the remedy of specific performance as "the standard remedy for a contractual breach involving a transfer of real property." Monmouth Racetrack Co., LLC v. New Jersey, 863 A.2d 1, 24 (Del. Ch. 2004).
The intent of the breaching party also plays a critical role in determining what remedy will be applied. The Court of Chancery relies upon the "deliberate breach" rule to determine when a party’s contract "is so wanting in good faith that it is appropriate to award a remedy more in keeping with the parties’ expectations than with the actual terms of their bargain." In re Domestic Bancorp., Inc., 691 A.2d 929, 932 (Del. Ch. 1996). Under this rule a court will not, in its discretion, grant preclusive remedies for breaches, especially when the breaching party did not act deliberately in breaching the contract. The rationale for this rule is that granting a remedy at law would make the aggrieved contracting party more than whole, and allow it to gain an unbargained for benefit. Id. (citing Restatement (Second) of Contracts at ยง 371 comment a).
Conclusion: Effective Strategies for Responding to Breaches
In conclusion, as discussed throughout this post, there are a variety of potential solutions available to the non-breaching party where a contract has been breached, including, but not limited to evaluation and facilitation of specific performance, injunctive relief, and recoupment and set-off. As discussed herein, each of these tools have varying requirements for the party seeking the remedy, which also depend on applicable state law . However, the overarching consideration in any contract dispute is that a party should always evaluate and specifically plead all potential contractual and statutory remedies, as there may be additional tools available that a party is unaware of or did not pursue.
We hope that this overview of potential contract remedies and breaches has provided some insight into the consideration process when a breach appears likely.
