Business Law Chapter 11: Contract Remedies

Introduction to Remedies for Breach of Contract The right to enter into a contract carries with it an inherent right to sue for breach of that contract.

The Consequences of a Breach When one party to a contract breaches it, that breach relieves the other party of the duty to perform. Often the safest route for the nonbreaching party to take is to file suit against the other party and show how that party failed to perform as promised.

When a breach of contract occurs, there are two immediate options: the nonbreaching party can consider the contract rescinded and sue for damages or ignore the breach and continue to deal with the breaching party.

The Contract Provides a Framework for Remedies Contracts may provide language specifically authorizing certain types of actions for breach, or they may have language that limits the parties’ options.

Mutual Remedies There is no requirement that the parties enjoy identical remedies under a contract.

The Necessity of Damages The law is clear that any breach of a contract, no matter how slight, is actionable. A minor breach, under most circumstances, would not justify the costs of bringing suit.

Equitable remedies: when money will not satisfy A court can exercise its equity power to order an injunction, specific performance or other action that is normally not part of a court’s authority under its legal power.

A History of Equity Jurisdiction Under the English system which forms the basis of the American judicial system, law courts and equity courts were separate. In the United States, the separate powers of law and equity were combined into a single court system.

Jurisdiction Jurisdiction: The persons about whom and the subject matters about which a court has the right and power to make decisions that are legally binding.

“Clean Hands” This ancient doctrine of equity law requires that before a plaintiff can ask a court for an order sanctioning the other party, the plaintiff must show that he did not do anything wrong.

The U.S. System: Legal and Equitable Jurisdiction Together In the United States, a plaintiff is entitled to request that the court use both forms of jurisdiction in a single case.

Injunction When a party seeks an injunction, the party files an action with the court stating that the defendant's actions will result in serious and irreparable damage to the plaintiff.

The plaintiff asks the court to order an injunction, which uses the court's power to stop the defendant carrying out a specific action.

Specific performance Specific performance is a court order that requires a party to do that which he has already agreed to do in the contract.

Reformation When a party requests reformation, what the party is actually requesting is that the contract itself be changed to reflect the true intention of the parties.

Rescission Rescission is an action that cancels or voids the contract and places the parties back in the positions they were in prior to the creation of the contract.

Legal doctrines Courts use principles to guide them in their decisions in particular cases. Two such principles are quantum meruit and quantum valebant.

Quantum Meruit Quantum meruit is a Latin term that translates “as much as merited.” It is a legal doctrine that creates a presumption that a person who performs a service for another deserves to be paid.

Quantum valebant This term means, “as much as it is worth.” It arises in situations where goods are sold and the parties have not specified the sale price of the goods.

Monetary Damages Damages refer to the monetary, property, or personal losses suffered by the plaintiff.

Compensatory Damages Compensatory damages are designed to restore the plaintiff to his or her original condition, or to reimburse the plaintiff for her expenses.

Assessing monetary damages The court creates an award for the nonbreaching party that is the financial equivalent of what the party would have received if the contract had been fulfilled as promised.

General Rules Used by Courts to Assess Damages Judges are permitted to use some or all of these rules in any order that they see fit.

Rule Number One: Damages Must Be Foreseeable When assessing an award, the damages must be both reasonable and foreseeable as a direct consequence of breach of contract.

Rule Number Two: Damages Follow a Breach The parties understand that an award of damages is possible, should they breach the contract.

Rule Number Three: Damages Are Specific Usually, a court will require a “reasonable degree of certainty” in the final award of damages.

Rule Number Four: Mitigation A plaintiff is obligated to mitigate or lessen his damages whenever possible. In a contract case, this principle demands that when a contract is breached, the plaintiff must seek some alternative method of disposing of the property.

Damages Should Not Exceed the Total of the Contract. The final rule in assessing damages is that the ultimate award should not exceed the amount that the nonbreaching party would have received if the contract had been fully performed.

Punitive Damages Punitive damages are rare in contract cases. An award of punitive damages is the jury’s way of punishing the defendant for some action.

Nominal Damages Nominal damages refer to an award of a small or token amount to a plaintiff.

Consequential Damages Consequential damages are different from compensatory damages in that the final award amount contains not only the amount that would have been obtained under the contract, but also losses tied to a particular contract breach.

Liquidated Damages A liquidated damages clause is one in which the parties set out in advance what constitutes a breach and how the damages for this breach will be assessed.

Limiting Damages Through Agreement These arrangements are not looked on as favorably by the courts as are liquidated damages clauses. Courts are reluctant to impose a contract clause that eliminates a party’s right to seek redress through the court system.

Liquidated Damages under the UCC Under the UCC, any agreement between the parties that acts as a liquidated damages provision will be enforced if:

1.The stipulated amount is reasonable in relation to the actual damages incurred. 2.Proving damages without the clause is difficult. 3.The plaintiff would have no other remedy without such a provision.

Rights Under Bankruptcy Does a contract still apply when one party has filed bankruptcy? No.

What is Bankruptcy? Bankruptcy is a process that allows a person who is overwhelmed with debt to enter into a court-administered plan to either repay a portion of that debt or to cancel the entire amount.

Effect of Bankruptcy Bankruptcy relieves the debtor/party from all obligations made part of the bankruptcy petition.