The Basics of Breach of Contract Remedies
The concept of remedies for breach of contract is an essential area of knowledge for any legal practitioner, as it represents the most important type of business law issue resolved by private contract. When there is a breach of the material terms of a contract (or, usually, its most material terms), it is imperative to know what kind of relief the non-breaching party can obtain and how that relief can be obtained. Understanding the remedies available for breach of contract is not only necessary to win a breach of contract lawsuit; it can also help an attorney evaluate whether a case should be brought in the first place, or whether litigating the case will be worth it.
A breach of contract occurs whenever a contracting party refuses to perform what they have promised to a counterparty – essentially whenever one party fails to uphold their end of the given bargain. A breach of contract could theoretically result from anything from the "wrong" party winning a game of rock-paper-scissors , up to and including the total refusal of a party to perform their contractual duties.
Contractual agreements set out the rights and obligations of each party, and so the appropriation of contractual remedies for a breach of contract is especially important. The non-breaching party is entitled to the relief to which they are legally entitled as a result of the breach, meaning that they are entitled to obtain the result that they would have received had the breaching party performed. This is the general goal of contract remedies, which typically involve an attempt to calculate an amount of money that will make up the difference between what was promised and what was actually received. Tied in with this general goal in contract remedies is the notion of judicial efficiency and fairness to both parties, as the courts wish to avoid overcompensating a non-breaching party just as much as they wish to avoid under-compensating them.
Monetary Damages: The Remedy Most Often Pursued
Monetary damages are the most common form of remedy for breach of contract. They generally fall into two types – compensatory and consequential damages, though other forms of monetary damages such as punitive and nominal damages may be available in some cases.
Compensatory Damages
The goal of compensatory damages is to put the non-breaching party in the position it would have been in had the breach not occurred. These damages come in several varieties – Compensatory damages are based on the foreseeability of damages, that is, whether the breaching party should have known those damages could occur at the time of the contract formation, and whether the party had a duty to mitigate damages.
Consequential Damages
Consequential damages are those damages that arise due to special circumstances or factors beyond the basic breach of contract. They are often speculative in nature and must be clearly proven. For example, if a party breaches a contract to provide a product to a buyer, the buyer could seek additional profits it lost in relying on the breaching party to deliver the good for resale elsewhere when another supplier may have provided the goods at a lower price or without delay.
Punitive Damages
Punitive damages are non-compensatory damages which focus on punishing the breaching party. In most breach of contract cases an award of punitive damages is not appropriate, but there are some exceptions – typically when the breach also constitutes fraud, bad faith, or antitrust violations.
Nominal Damages
Nominal damages are small sums of money (generally) awarded when there is no legally recognized loss suffered by the non-breaching party but there is a breach of contract. The best example of this type of damage award is when both parties file for breach of contract when the performance is poor, but not intentionally so. For example, if there is a contract for the sale of a hundred widgets at $10 per widget, but the seller only delivers 95 widgets, the buyer could bring an action for breach. The buyer would technically have a legal right to damages for the five widgets it did not receive. However, it may not be worth the time and expense of going to court to recover that amount. Therefore, nominal damages exist to ensure that even the "little guy" has recourse to recover a small amount of money.
Specific Performance: An Equitable Remedy
In some cases, monetary damages will not be an adequate remedy for a breach of contract. For example, when the subject matter of the contract is unique, or where a party to the contract has a special interest in having the contract performed, rather than suing for money damages, the court may order the breaching party to fulfill its contractual obligations. Specific performance is typically an available remedy in the case of a contract of unique or irreplaceable goods; however, in the United States, specific performance is used less frequently than it is in other countries. The contract must have been breached prior to specific performance being ordered. Specific performance would ordinarily not be used where the contracting parties, after breach of contract, have acted in a manner suggesting that they are satisfied with the breach. The remedy of specific performance is not available if the specific goods that are the subject of the agreement are inherently worthless.
Rescission: Undoing the Contract
In certain circumstances, a court may unwind the contract. This remedy is called rescission. Rescission unwinds the contract, terminating it entirely and returning both parties to the position they would have been in had the contract never existed.
Example: A sells B a car for $10,000. Prior to the sale, A tells B falsely that the car has a red paint job when it actually has a blue paint job. Because B relied on this false information in making the purchase decision, B may be entitled to a refund of the purchase price.
Whether or not a court will grant a party a remedy of rescission depends on the facts of the case. Simply being unhappy with a deal you made will not necessarily entitle you to return the product or service purchased and recover your payment.
Two conditions under which a court will allow a party to rescind the contract: (1) the contract is voidable and (2) there is an equitable reason to grant the remedy. A contract may be voidable if:
In addition to the contract being voidable, a court will grant rescission only if there is an equitable reason to do so. In other words, an innocent party, who is a victim of fraud, error or mistake, may be entitled to a remedy of rescission, while another party, who simply regrets a deal he made, is not.
In the example above, the car buyer is entitled to a refund of his payment for the automobile, but the car seller is not entitled to receive back the vehicle he sold.
Some contracts contain terms that allow a party to return the product or service received and receive a full refund of his payment. For example, most department stores carry a 30-day no questions asked return policy that will allow you to return most merchandise (in its original packaging and within 30 days of purchase) for a full refund. This policy is a form of rescission.
Many people mistakenly believe that if they are unhappy with a deal they made, there is a legal right of recission that will allow them to return the product or service and recover their payment. As a general rule, this is not true. A party is not entitled to a remedy of rescission unless the contract was voidable and there is an equitable reason to grant the remedy.
Reformation: Correcting the Contract’s Terms
In some cases, even when a contract is otherwise valid, the court can intervene and re-write the contract. This "reformation" is a remedy available in circumstances in which the language of the contract – whether due to misrepresentation or mutual mistake – does not accurately reflect the actual intent of the parties. Generally, reformation is used to correct contracts that do not comply with the statute of frauds (discussed earlier).
Consider, for example , a case where one party has agreed to sell a car at the price of $30,000. Unfortunately, the buyer is somewhat hard of hearing, and only hears the $10,000 price drop. He thinks the price is now $0. Reformation may allow the judge to interpret (or re-write) the contract based on the true intention of buyer and seller alike to re-establish the contract price at $30,000.
As with rescission, the court cannot offer a remedy of reformation if doing so would unfairly prejudice the interests of a third party.
Legal Issues to Consider in Obtaining Remedies
Any discussion of remedies for breach of contract should also include legal issues specific to the application of such remedies. For example, if the remedy sought is rescission of the contract, one needs to consider whether the breach is material or if the innocent party seeking rescission has materially breached its own obligations under the contract.
Similarly, if the remedy sought is specific performance, the contract terms may be relevant to determining whether specific performance is even a possible remedy. One example of this can be a contract which specifies specific performance shall not be available as a remedy in the event of a breach. In that case, the court will quite likely honor the contract as reflected in the contract terms and deny the remedy of specific performance.
Another potential hurdle which may exist to the availability of a specific performance remedy is whether money damages are also available under the contact terms and also an adequate remedy for the harm alleged. In addressing the issue of whether certain damages are available, courts are again generally going to honor the contract terms. A review of the contract may indicate that certain damages which are then sued for will not be a possibility under the contact.
Yet another potential hurdle in seeking a remedy for breach of contract involves consideration of contingency events which may have occurred after the execution of the contract which would have made the contract uneconomical for the party which is now suing for breach.
The most reliable way to get the legal factors right and avoid the potential obstacles in pursuing a remedy for breach of contract is to consult a knowledgeable and experienced attorney, preferably one who is specialized in the particular type of contract involved in the potential claim.
Alternative Dispute Resolution Mechanisms
Alternative dispute resolution (ADR) is a popular choice for parties seeking remedies for breach of contract because it offers a flexible, cost-effective way to resolve disputes outside of the court system. Among the most common forms of ADR are mediation and arbitration.
Mediation is not legally binding unless the parties reach an agreement during the session, which both sides must sign. The process entails the two parties meeting with a neutral third-party mediator in an effort to find a satisfactory resolution. Mediation is often the first step in formal dispute resolution and tends to be much quicker than arbitration or litigation. Additionally, because the process is private, it can help preserve the parties’ relationship.
Like mediation, arbitrations are not legally binding unless the parties consent to the terms, but they tend to be a more formalized proceeding, similar to a mini-trial. In an arbitration, the parties present their evidence and arguments to a neutral third-party arbitrator who then makes a decision for the case. An arbitration is overseen by a private arbitrator, whereas mediation occurs without supervision and focuses on a mutually agreeable outcome.
While some contracts require the parties to pursue litigation, many others mandate that they first explore alternative dispute resolution.
Final Thoughts on Choosing the Right Remedy
The above five responses to remedying a breach of contract are Responsive. A Non-responsive response is no response at all, and dealing with a breach of contract by ignoring it is also an option. Sometimes, the best response is to just cut your losses and move on.
Choice of a remedy depends on the contract. In most cases, injunctive relief and specific performance will be governed first by the contract itself, and secondarily by statute. Liquidated and consequential damages might also be spelled out in the contract, as may limitations on the plaintiff’s recovery, such as indivisible contracts, limitation of liability clauses, waiver, limitations periods, and the like. Even where damages are not spelled out in the contract, any limitation on the plaintiff’s recovery may be a bar to the more preferred remedies.
On the other hand, if the contract is silent, it’s always an option to seek both injunctive and specific performance.
Regardless of the contract , in deciding the appropriate remedy for a breach of contract it’s always good to carefully consider the facts. Did the breach occur because of one party’s mistake or obfuscation? Can either party weather the storm? Is the breach minimal or major? Were the injuries remote or immediate? Was the breach minor in nature or so gross as to destroy the contract as a whole? Is the breach a complete repudiation of the contract by one party? Will the parties be able to relax and work through their differences and reach a resolution if they continue their relationship? Or is the breach just a small step in a series of large stomping steps by one of the parties to destroy the contract? What’s the damage-money versus time-the parties are suffering due the breach, and what’s the monetary value of the desired injunctive relief or specific performance?
All these factors can help you to ascertain whether it’s better to plow ahead with injunctive relief, specific performance, liquidated damages, expectation damages, consequential damages, or a non-response.