Remedies for Breach of Contract

1. The Goal of Remedies: Protecting Three Key Interests

Before we dive into specific remedies, it's essential to understand the underlying theory—the "why" behind them. The fundamental purpose of contract remedies is not to punish the breaching party, but to make the non-breaching party whole.

The law does this by protecting one of three "interests" of the non-breaching party. Understanding these interests will help you see the logic behind each type of remedy.

To summarize the video's key points:

• Expectation Interest: This is the most common. It aims to put the non-breaching party in the position they expected to be in if the contract had been fully performed. This is often called getting the "benefit of the bargain."
• Reliance Interest: This aims to put the non-breaching party back in the position they were in before the contract was made. It compensates them for expenses incurred in "relying" on the promise. This is a fallback position, often used when expectation damages are too speculative or uncertain.
• Restitution Interest: This aims to prevent the unjust enrichment of the breaching party. It forces the breaching party to give back any benefit they received from the non-breaching party.

Most of our discussion today will focus on remedies that protect the expectation interest, as this is the primary goal of contract law.

2. Legal Remedies: Monetary Damages

The most common remedy for a breach of contract is an award of money, known as damages. These are designed to compensate the non-breaching party for their losses.

The Main Categories of Monetary Damages

Expectation damages are typically broken down into three categories. It's crucial for a future lawyer to distinguish between them.

As the video explained:

• Compensatory (or General) Damages: These cover the direct losses that naturally flow from the breach. They compensate for the lost value of the performance itself. The formula is often:
  • Value of promised performance - Value of actual performance received.
• Incidental Damages: These are the reasonable costs incurred in dealing with the breach, such as the costs of finding a replacement supplier or storing rejected goods.
• Consequential (or Special) Damages: These are the indirect losses that result from the breach, such as lost profits. A key rule is that consequential damages are only recoverable if they were foreseeable to the breaching party at the time the contract was made. In Hadley v. Baxendale, the mill owner couldn't recover lost profits because the shipping company didn't know (and had no reason to know) that a delay in shipping the crankshaft would shut down the entire mill.

Calculating Expectation Damages: A Practical Example

Now that you know the categories, let's see how they are calculated in practice. We'll return to the "Law Simply Explained" video, which uses a detailed hypothetical to walk through the calculation.

The core formula from the video, the comparative method, is:
$\text{Expectation Damages}=(\text{Expected Position if Contract Performed})-(\text{Actual Position after Breach})$

In the painter example:

• Expected Position: +$500 (He expected to receive $5,000 and spend $4,500).
• Actual Position: -$2,500 (He spent $2,500 but received $0).
• Damages: $500 - (-$2,500) = $3,000.

An award of $3,000 takes the painter from his actual position of being $2,500 in the hole to his expected position of being $500 ahead.

Other Types of Damages

While expectation damages are the norm, courts can award other types.

In summary:

• Nominal Damages: A small sum (e.g., $1) awarded when a breach occurred but caused no actual financial loss. It serves to vindicate the plaintiff's rights.
• Liquidated Damages: An amount pre-agreed upon by the parties in the contract to be paid in the event of a breach. Clauses for liquidated damages are enforceable only if the amount is a reasonable forecast of the actual harm and the harm is difficult to ascertain. If the amount is excessively high, it's considered an unenforceable penalty.
• Punitive Damages: Intended to punish the wrongdoer, not compensate the victim. They are very rarely awarded in contract cases, unless the breach also constitutes a tort (like fraud).

3. Equitable Remedies: When Money Is Not Enough

Sometimes, no amount of money can truly make the non-breaching party whole. In these situations, a court may grant an equitable remedy, which typically involves ordering a party to do something or to stop doing something.

Specific Performance

What if the contract was for something unique, like a one-of-a-kind piece of art or a specific parcel of land? In such cases, money is an inadequate substitute. The buyer wants the thing they bargained for.

To recap, a court will only order specific performance if:

1. Money damages are inadequate (e.g., the subject of the contract is unique).
2. The terms of the contract are certain enough for the court to enforce.
3. It is feasible for the court to supervise the performance.

Notably, courts will never order specific performance of a personal service contract (e.g., forcing an employee to work), as this would violate the principle against involuntary servitude.

Rescission and Restitution

Sometimes the goal isn't to enforce the contract, but to undo it entirely. This is rescission.

• Rescission is the remedy of canceling or unwinding the contract. It's often granted in cases of fraud, misrepresentation, or mistake.
• Restitution is the accompanying remedy that requires each party to return any benefit the other has conferred on them. For example, if a contract is rescinded, the buyer must return the goods and the seller must return the payment. As we saw earlier, restitution can also be a standalone remedy to prevent unjust enrichment.

Conclusion

Today we've surveyed the landscape of contract remedies, from the common award of money damages to the extraordinary use of court orders. Understanding these remedies is crucial for advising clients on the potential outcomes of a contract dispute.

Key Takeaways:

• The primary goal of contract remedies is to fulfill the non-breaching party's expectation interest by giving them the "benefit of the bargain."
• Monetary damages are the default remedy. They are categorized into compensatory (direct loss), incidental (costs of dealing with the breach), and consequential (indirect but foreseeable losses like lost profits).
• Equitable remedies are available when money is inadequate. Specific performance compels a party to perform their obligations, typically in contracts for unique goods or land. Rescission undoes the contract, and restitution returns any benefits conferred.
• Parties can pre-determine damages through a liquidated damages clause, but it must be a reasonable estimate of actual harm to be enforceable.

In our next lesson, we will continue this theme by examining how parties try to shape their own remedies within the contract itself, focusing on the enforceability of limitation of liability clauses.