Next Article: Efficient Breach of Contract
Back to: CONTRACT LAW
What remedies exist for breach of a contract?
A breach of contract action may result in any number of damages:
Compensatory Damages – Compensatory damages are court-awarded damages to put the plaintiff in the same position as if the contract had been performed. It includes lost profits on the contract and the cost of substitute performance. A party’s lost profits from the other party’s breach of contract are the expected gains from performance of the contract. This would generally mean the value received minus the costs incurred in performing. This calculation is known as the “expectation damages”.
- Example: You sign a contract to sell me supplies for my business. You back out of the contract and I have to purchase my supplier from another vendor. The cost to me to purchase the supplies from a new vendor is 15% higher than pursuant to our agreement. I have suffered damages of 15% of the contract value. Alternatively, if I backed out of the contract and my duties to purchase your supplies, you would have suffered expectation damages equal to the price of the goods minus your cost of supplying them to me.
Consequential Damages – These are court-awarded damages arising from unusual losses which the parties knew would result from breach of the contract.
- Example: I order cement from you to complete a large contract. I express to you that I intend to use the cement for the large construction contract and that time of deliver and quality of the goods is of utmost importance. You fail to deliver the cement and I am forced to purchase from another vendor. The cement arrives late and causes delays. I incur substantial penalties under the larger contract. Your breach of contract may have cost me compensatory damages equal to the price difference between our contract and the replacement vendor. The consequential damages, however, are the penalties incurred and any lost business as a result of your breach.
Liquidated Damages – Liquidated damages are damages specified in the contract in the event of non-performance by either party. Liquidated damages are appropriate where real damages for breach of contract are likely to be uncertain. In such a case, the parties decide to specify in the contract the damages in the event of breach. Courts will enforce these liquidated damage clauses unless they seem to penalize the defendant instead of merely compensating the plaintiff for uncertain losses.
- Example: I sign an agreement to provide you with consulting services. It is difficult to estimate the damage to your business if I fail to adequately perform. In the agreement we indicate that my failure to perform will result in damages of $1,000 to you. This liquidated damages clause is likely enforceable.
Nominal Damages – Nominal damages include a small amount awarded by the court to the plaintiff for a breach of contract, which causes no financial injury to the plaintiff.
- Note: In a tort action, a court may only award punitive damages if there is some finding of liability of the defendant. The court may not be able to find liability based upon tort theory in the absence of identifiable harm suffered by the plaintiff. If, however, the tort action is accompanied by a contract cause of action for the same conduct, the award of nominal damages for breach of contract may support a finding of punitive damages in the related tort action.
- Example: I enter into a contract to provide you with consulting services. I fail to perform and you hire someone else. In this situation, it is difficult to determine if your business incurred any damages. If you sue me, a court may award nominal damages against me indicating that I was legally wrong in failing to perform my contractual duties. A common nominal damages amount is between $1 – 100.
Specific Performance – Specific performance is a court-ordered, equitable remedy available when the subject matter of the contract is unique. A court order for specific performance directs a party to perform her duties under the contract. The court will only apply this remedy when the subject matter of the agreement is truly unique and irreplaceable. Specific performance is not available for service obligations.
- Example: You agree to sell me a Picasso painting that you inherited. At the last minute, you back out of the contract. I sue you to force you to sell me the painting. A court may order specific performance of the contract by ordering you to sell me the painting.
Rescission – Rescission means to undue a contract and return the parties to the position they were in prior to entering the contract. This generally means returning property sold in the condition it was transferred and a return of the purchase price. This remedy is not available for executed services contracts.
Discussion: How do you feel about the concept of consequential damages? Is it fair to impose that extent of liability on a party if it is not part of the subject matter of the contract? Why or why not?
Practice Question: Taylor enters into a contract with Winnie to supply her with reinforced steel. Winnie is going to use the steel in the construction of a new manufacturing facility for her business. Winnie backs out of the contract when she realizes that she can get the steel 10% cheaper from a competitor. If Taylor sues Winnie, what are his options for damages?
- In this situation, Taylor was going to make a profit by selling the steel to Winnie. Because of her backing out of the contract, she was unable to secure these profits. She would be able to sue Winnie for the amount of profits. This is known as actual damages, or “the benefit of the bargain”.