Business Law: Breach of Contract and Remedies PDF

BUSINESS LAW: Text & Cases , 15th Ed. Chapter 19 Breach of Contract and Remedies 1  Introduction (1)  Remedy. – Is the relief provided for an innocent party when the other party has breached the contract. – Remedies are at law or...

BUSINESS LAW: Text & Cases , 15th Ed. Chapter 19 Breach of Contract and Remedies 1  Introduction (1)  Remedy. – Is the relief provided for an innocent party when the other party has breached the contract. – Remedies are at law or in equity. 2  Introduction (2)  Most Common Remedies. – Remedies at Law. Damages. – Remedies in Equity. Rescission and Restitution. Specific Performance. Reformation. Recovery Based on Quasi Contract. 3  19-1: Damages (1)  Damages are designed to compensate party for harm suffered as a result of another’s harmful act.  Innocent party is to be placed in the same position they would have occupied had the contract been fully performed. 4  Damages (2)  Collecting damages through court proceeding is expensive and time consuming.  Most cases are settled before trial. – Alternative Dispute Resolution. – Arbitration, negotiation, mediation. 5  Types of Damages (3)  Compensatory. – Covers direct losses and expenses.  Consequential. – Covers indirect and foreseeable losses.  Punitive. – To punish and deter wrongdoing.  Nominal. – To recognize wrongdoing when no monetary loss is shown. 6  Compensatory Damages (1)  Compensate nonbreaching party for loss of the bargain.  Compensate injured party for only damages sustained and proved.  “Make the person whole.”  Measure is difference in value of: – promised performance, and – value of actual performance.  See Example 19.1 at page 340. 7  Compensatory Damages (2)  Case In Point 19.2– The loss of NLNAC accreditation may have impaired students’ earning capacity. If so, the measure of damages for impairment of earning capacity is the difference between the amount which the plaintiff was capable of earning before his injury and that which he is capable of earning thereafter. Baird v. Owens Community College (2016). 8  Compensatory Damages (3)  Example: P contracts to provide services to D for month of June for $4,000. D cancels the contract. P is able to find another job for June which pays him $3,000. P’s sues and recovers compensatory damages of $1,000, plus expenses to find the second job called incidental damages. (See Example 19.3) 9  Compensatory Damages (4)  Sale of Goods: – Where seller breaches, buyer’s damages are the difference between contract and market price plus any incidental damages. – See Example 19.4 at page 342. – Where buyer breaches and seller has not yet produced the goods, seller’s damages are normally lost profits. 10  Compensatory Damages (5)  Sale of Land: – Specific performance is ordinarily the remedy since each parcel of real estate is unique. – If specific performance is not available (Land sold to another) or buyer has breached, damages are the difference between the contract price and market price of the land. This is the rule in the majority of states. Minority rule – if seller breaches and not deliberate, buyer only entitled to any down payment plus expense incurred such as title search and legal fees. (no benefit of bargain) 11  Compensatory Damages (6)  Construction Contracts: Owner breaches 1. Before performance has begun. Contractor can recover profits. 2. During performance Contractor can recover profits plus costs incurred. 3. After performance has been completed. Contractor can recover the entire contract price plus interest. 12  Compensatory Damages (7)  Construction Contracts: Contactor breaches - 1. Damages are cost of completion (including reasonable compensation for delay in performance) for either failing to undertake construction or for stopping work. 2. If contractor finishes late, damages are the loss of use. See Case in Point 19.5 at page 343. 13  Compensatory Damages (8)  Construction Contracts & Economic Waste. – Occurs when the cost of repairs or completing performance as required by the contract greatly outweighs the benefit to the owner. – Court will not award cost of completion. See CLASSIC CASE 18.1 Jacob & Youngs v. Kent (1921). – Court award difference in value as completed compared to value as specified in contract. 14 Measurement of Damages 15  Consequential (Special) Damages (1) 1. Foreseeable losses and damages. 2. Caused by special circumstances beyond the contract itself. 3. Breaching party is aware or should be aware, breach will cause the injured party additional loss. 4. Flows from consequences of a breach. 16  Consequential (Special) Damages (2)  Example: Seller fails to deliver goods, knowing that the buyer is planning to resell those goods immediately. Consequential damages are awarded for the loss of profits from the planned resale. See Example 19.7 at page 343. – The buyer can also recover compensatory damages, if goods are delivered late, for the differences between the contract price and the market value of the goods.  CASE 19.1 HDAV Outdoor, LLC v. Red Square Holdings, LLC (2019) – Plaintiff attempted to recover consequential damages of lost profits caused by a delay in delivery of a customized truck. 17  Punitive Damages  Purpose is to punish or deter future conduct by wrongdoer.  Generally, not available for mere breach of contract.  Usually tort (e.g., fraud) is also involved. 18  Nominal Damages  No financial loss.  Defendant is liable but only a technical injury.  Establish that defendant acted wrongfully. – Lawsuit brought as a matter of principle under theory that a breach of contract has occurred. – See Example 19.8 at page 345. 19  Mitigation of Damages (1)  When breach of contract occurs, the innocent injured party is held to a duty to reduce the damages that he or she suffered.  Duty owed depends on the nature of the contract. 20  Mitigation of Damages (2)  Example 1: Landlord must use reasonable means to find a new tenant if a tenant abandons the premises and fails to pay the rent.  Example 2: An employee who was wrongfully terminated owes a duty to seek out and accept similar employment if it is available. 21 Liquidated Damages Provisions (1)  Liquidated Damages. – A contract provides a specific amount to be paid as damages in the event of future default or breach of contract. Term means “determined, settled or fixed.” Purpose is to make injured party whole. – Example: Provision in construction contract requiring a payment of $300 per day for everyday the contractor is late in completing the project. 22 Liquidated Damages Provisions (2)  Penalties. – Specifies a certain amount to be paid in the event of a default or breach of contract. – Designed to punish/penalize the breaching party. – Courts will generally not enforce unless the court can determine that damages were difficult to estimate at the time the contract was entered into. – Court can limit to actual damages. 23 Liquidated Damages Provisions (3)  To determine if enforceable, court must address: 1. When the contract was entered into , was it apparent that damages would be difficult to estimate in the event of a breach? 2. Was the amount set as damages a reasonable estimate in the event of a breach and not excessive? – If the answer to both questions is yes, the provision normally is enforceable. (if no, provision is an unenforceable penalty) 24 Liquidated Damages Provisions (4)  Case 19.2 Kent State University v. Ford (2015) - At the time the contract was entered into “ascertaining the damages resulting from Ford's breach [was] difficult, if not impossible. Based on the record, we find that the damages were reasonable.” And the clause was not a penalty—“there was justification for seeking liquidated damages to compensate for Kent State's losses, and, thus, there was a valid compensatory purpose for the clause.” 25  19-2: Remedies in Equity  Sometimes damages (monetary) are an inadequate remedy.  Types: 1. Rescission and Restitution 2. Specific Performance 3. Reformation  Recovery bases on Quasi Contract. 26  Rescission and Restitution (1)  An action to undue or terminate a contract.  A remedy whereby a contract is canceled, and the parties are restored to the original positions that they occupied prior to the transactions (mutual rescission).  Discussed in Chapter 18 at page 332, Sec. 18-3a. 27 Rescission and Restitution (2)  Restitution requires that both parties return goods, property, or money previously conveyed. See Example 19.10 at page 348.  Unilateral rescission is available where there is fraud, undue influence, mistake (exceptions only for unilateral mistake), duress or misrepresentation or lack of capacity (breach of contract remedy). 28  Specific Performance (1)  Equitable remedy calling for the performance of the act promised in the contract.  Avoids problems inherent in a suit for damages: 1. No issue with collection of damages. 2. Do not need to find another contract. 3. Actual performance is more valuable than damages.  Normally not available unless legal remedy (monetary damages) is inadequate. – Land is unique. Goods are usually not. 29  Specific Performance (2)  Sale of Land. – Legal remedy (monetary damages) may not compensate the buyer adequately. Every parcel of land is unique. Location of real estate. – Monetary damages will be awarded when specific performance is unavailable. see Case In Point 19.11 at page 348. (Seller of land can also seek specific performance.) 30  Specific Performance (3)  Contracts for personal services. 1. Courts will not normally grant specific performance. 2. Courts do not want to have to monitor performance. 3. Would amounts to involuntary servitude. Unconstitutional – See Example 19.12 at page 348. 31  Reformation (1)  Available when parties have imperfectly expressed an agreement in writing.  Equitable remedy allowing a contract to be reformed or rewritten to reflect the parties’ true intentions. 32  Reformation (2)  Can occur when fraud or mutual mistake (clerical error) is present. – Example: A contract to purchase a parcel of land mistakenly refers to a different parcel. The court can reform the contract, so it conforms to the party’s intentions. 33  Reformation (3)  Oral Contracts. – Parties attempt to put an oral agreement into writing and make an error in stating terms. Court may allow oral evidence to correct terms.  Covenants-Not-to-Compete. – If written covenant-not-to-compete is for a valid business purpose, but time or area is unreasonable, court may reform covenant.  Case Analysis 19.3 Combs v. Elite Title Company, Inc. (2022) – Employer attempted to enforce a noncompetition agreement. 34  19-3: Recovery Based on Quasi Contract (1)  A fictional contract, no contract actually exist.  Equitable theory imposed by courts to obtain justice and prevent unjust enrichment.  Can be applied where parties have a contract which is unenforceable for some reason. 35  Recovery Based on Quasi Contract (2)  A party conferring a benefit on another party can recover in quantum meruit. – which means “as much as he or she deserves.” 36  Recovery Based on Quasi Contract (3)  Party seeking quantum meruit must show the following: 1. A benefit was conferred to the other party. 2. Party conferring did so with the reasonable expectation of being paid. 3. The benefit was not volunteered. 4. Retaining benefit without paying for it would result in unjust enrichment of the party receiving the benefit. 37  Example: Recovery Based on Quasi Contract (4)  Parties orally contract to build 2 oil derricks over a 3-year period.  After completing 1 derrick, buyer refuses to pay.  Contract is not enforceable under Statute of Frauds. (contract takes more than 1 year to complete.)  Completed derrick provides a benefit to buyer.  Under quasi contract, since 4 requirements are met, builder would recover under quantum meruit the reasonable value of the derrick. 38  19-4: Waiver of Breach (1)  Nonbreaching party is willing to accept a defective performance of the contract.  Generally, a waiver will not operate to waive subsequent, additional, or future breaches of contract. 1. See Example 19.16 at page 352. 2. A pattern of conduct that waives a number of successive breaches will operate as a continued waiver. 39  Waiver of Breach (2)  Nonbreaching party should give notice to the breaching party that full performance will be required in the future.  Nonbreaching party can still recover damages for defective performance, but contract is not terminated.  No damages for matter waived.  Businessperson often waive breaches of contract to obtain whatever benefit is still possible under the contract. See Example 19.15 at page 352. 40  19-5: Contract Provisions Limiting Remedies (1)  Exculpatory clauses (Chapter 14). – Provisions stating that no damages can be recovered. – Not viewed favorably by courts. i.e., employment contracts; unconscionable  Limitation of liability clauses. – Provisions that affect the availability of certain remedies, Case in Point 19.17 at page 353. Not enforceable if fraud or intentional misconduct. Home inspectors may be able to limit liability. 41  Contract Provisions Limiting Remedies (2)  UCC Allows Sales Contracts to Limit Remedies  Will address in Chapter 22. 42  Review: Types of Damages  Compensatory. – Covers direct losses and expenses.  Consequential. – Covers indirect and foreseeable losses.  Punitive. – To punish and deter wrongdoing.  Nominal. – To recognize wrongdoing when no monetary loss is shown. 43  Review: Remedies in Equity  Sometimes damages (monetary) are an inadequate remedy.  Types: 1. Rescission and Restitution 2. Specific Performance 3. Reformation  Recovery based on Quasi Contract. 44