Notes on Contract Remedies
By Eric Goldman
There are two primary types of remedies for contract breach: money damages and equitable remedies. This note also briefly discusses the restitution cause of action.
1. MONEY DAMAGES.
(a) Methods of Computing.
(1) Expectation interest. The goal is to put the non-breaching party in the position it would have been in had the contract been performed. This is the default measure of damages. Formula: lost profits plus incidental/consequential damages minus avoided expenses (Restatements Sec. 347).
In UCC cases, if seller breaches, the buyer has a choice. The buyer can “cover,” in which case the damages are the amount it costs to cover minus the contract price plus incidental/consequential damages minus avoided expenses (UCC 2-712) If the buyer doesn’t cover, then the buyer can recover seller’s profits plus incidental/consequential damages minus avoided expenses (UCC 2-713).
Cases illustrating the expectation interest: Hawkins, Hooker, Tongish (UCC), Rockingham County, Shirley Maclaine Parker
(2) Reliance interest. The goal is to put the non-breaching party in the position it would have been in had the promises never been made
Restatements Sec. 349: instead of expectation interest, damages can be computed based on expenditures incurred in preparing to perform or actually performing less any losses the breaching party can prove would have been incurred if the contract had been performed. To reiterate, the breaching party has the burden of proof to show offsetting losses.
The old rule was that all expenses incurred prior to contract signing were not the responsibility of the breaching party. However, the Restatements and the Reed case indicate that those expenses can be awarded, at least where the parties reasonably contemplate that such expenses would be wasted if the contract is breached.
Cases illustrating the reliance interest: Chicago Coliseum Club, Reed, Mistletoe
(3) Restitution interest. The goal is to put the breaching party back in the position it would have been in had the promises never been made. Where this is not possible, then restitution disgorges any unjust enrichment.
Restitution arises most directly in partially performed contracts. Restatements Sec. 373 applies when the breaching party has not completed performance and the non-breaching party seeks restitution following contract termination (such as in the case of a losing contract, where the expectation interest may be worse for the non-breaching party). In those cases, the non-breaching party can seek any benefit conferred on the breaching party. Case illustrating the principle: Bush v. Canfield (not assigned).
Restatements Sec. 374 applies when the breaching party has not completed performance and seeks restitution. In those cases, the breaching party can recover any benefit conferred on the non-breaching party less the damages from the breach. However, this default can be trumped by a liquidated damages provision allowing the non-breaching party to retain some or all of the benefit. Cases illustrating the principle: Neri (UCC), Britton, Vines
Restatements Sec. 371 specifies the formula for computing restitution: either the reasonable value of the benefit conferred (measured by replacement cost) or amount the benefited party’s value has increased.
(b) Limits on Damages.
(1) Foreseeability (limits on consequential damages).
General damages are those damages that every non-breaching party would suffer from a breach of the contract. The Hadley case describes them as damages arising naturally (i.e., according to the usual course of things from a contract breach). These are always awardable (i.e., they are always foreseeable).
In contrast, special damages are those damages that do not necessarily occur in every contract breach but do in fact occur with a particular non-breaching party. These damages, also referred to as consequential damages, are awardable only if the plaintiff’s special circumstances were “foreseeable.” Where such damages are awardable, they are computed as the amount that would ordinarily flow from contract breach in these special circumstances.
Restatements Sec. 351 restates these principles in a slightly different way. It says that damages may not be recovered if the breaching party did not have reason to foresee, at the time of the contract, the losses as a probable result of breach. It then gives two situations where losses are foreseeable: when they occur in the ordinary course of events (i.e., when they are general damages), or otherwise as a result of special circumstances the breaching party had reason to know. A breaching party would have reason to know of special circumstances communicated to and known by them. Depending on the facts, perhaps a breaching party would have reason to know of special circumstances in other ways.
We also have a specific application. Lost profits from business operations are a consequential damage in carriage contracts. However, consider the variation proposed by Martinez, which leaves it to the jury to decide if equipment’s “use value” is a general or consequential damage.
Cases illustrating the principle: Hadley, Martinez, Morrow (recall that Morrow articulates a defunct rule).
(2) Certainty of Harm.
Purely speculative damages cannot be awarded. Restatements Sec. 352: no recovery for damages that cannot be established with reasonable certainty.
Case illustrating this principle: Chicago Coliseum Club, Mistletoe (illustrating lack of certainty on offsetting losses)
(3) Avoidability of Harm (the mitigation “duty”)
A non-breaching party cannot recover for damages it could have reasonably avoided following notice that the other party is repudiating the contract. Restatements Sec. 350 describes this as damages that could have been avoided without undue risk, burden or humiliation.
We have a special rule for personal services contracts. In those cases, the employer can subtract the amounts the employer can prove that the employee actually earned or, with reasonable effort, might have earned from other employment that was not different or inferior.
We also have a special rule for UCC transactions (UCC 2-708). In cases involving a buyer’s breach, the seller gets the difference between the market price and the contract price plus incidental damages minus costs avoided. However, if this amount does not adequately compensate the seller, then the damages are lost profits plus incidental damages minus resale proceeds. However, in the case of a merchant, the resale proceeds are not subtracted due to the “lost volume” rule.
Cases illustrating mitigation: Rockingham County, Shirley Maclaine Parker, Neri. See also Wassenaar (no mitigation offset to liquidated damages).
(4) Contractual Limitations.
Some ways a party can contractually limit damages:
- waive consequential damages
- establish a dollar cap on liability
- restrict remedies to performance instead of cash (but beware of remedies that “fail of their essential purpose” [UCC 2-719])
- specify liquidated damages [note: this can also implicitly increase damages]
Liquidated damages will be enforced unless they are a penalty. Restatements Sec. 356 permits liquidated damages that are “reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.” Liquidated damages are not offset by mitigatable amounts.
(c) Miscellaneous Damages Rules.
- Punitive damages are not available for breach of contract
- Winning party usually cannot recover attorneys’ fees unless the contract says so
2. EQUITABLE RELIEF.
There are two primary types of equitable relief: specific performance (an order to perform in accordance with the contract) or an injunction. Because these remedies are equitable in nature, the judge can award or deny the remedy in his or her equitable discretion. Thus, a plaintiff who also engages in “bad” behavior (such as unclean hands or laches) may be denied equitable relief.
For a seller’s breach of a contract to sell real estate, specific performance is the standard remedy and should be awarded as a matter of course if sought by the buyer. Case explaining this principle: Loveless.
For a seller’s breach of contract to sell goods, money damages are the standard remedy. However, specific performance may be available in cases where money damages are inadequate, the item has particular sentimental or unique value, or alternatives are not readily available due to scarcity. The UCC codifies this in Sec. 2-716 when it says specific performance for goods is available when the goods are unique or in other proper circumstances. Note the alternative remedy of replevin may be available if the buyer can’t cover or the circumstances reasonably indicate that covering efforts will be unavailing. Cases illustrating these principles: Cumbest, Scholl, Sedmak.
For an employee’s breach of an employment agreement, specific performance is never available. However, a negative injunction restricting the party from working elsewhere may be available in situations where the employee has exceptional and unique knowledge, skill and ability. Case illustrating this principle: Dallas Cowboys.
3. RESTITUTION AS A CAUSE OF ACTION.
There are limited circumstances where the court will manufacture a fictional contract solely to avoid unjust enrichment. In these cases, the plaintiff’s cause of action is “restitution,” not breach of contract. One way to articulate the standard: when a person wrongfully secured or passively received a benefit that would be unconscionable to retain. Cases illustrating the principle: Cotnam, Martin.