© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 16 - 1

Chapter 16: Remedies for Breach of Traditional and

Online Contracts

Chapter 16: Remedies for Breach of Traditional and

Online Contracts

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 16 - 2

Performance and Breach• If a contractual duty has not

been discharged or excused, the contracting party owes an absolute duty (covenant) to perform the duty.

• Breach of contract occurs when a contracting party fails to perform an absolute duty owed under a contract.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 16 - 3

Types of Performance

Complete Complete PerformancePerformance

Substantial Substantial PerformancePerformance

Inferior PerformanceInferior Performance

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Complete Performance

• Most contracts are discharged by strict performance.

• A fully performed contract is an executed contract.

• Tender of performance discharges contractual obligations.

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Substantial Performance• This occurs when there is a

minor breach of contract.– Performance deviates slightly

from complete performance.– Nonbreaching party may

recover damages.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 16 - 6

Inferior Performance

• This is a material breach of contractual obligations.

• Nonbreaching party may rescind contract and seek restitution.

• Nonbreaching party is excused from any further performance.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 16 - 7

Summary: Types of Performance

Type of Performance

Legal Consequence

Complete Performance

The contract is discharged.

Substantial Performance (minor breach)

The non-breaching party may recover damages caused by the breach.

Inferior Performance (material breach)

The non-breaching party may either:

(1) Rescind the contract and recover restitution, or

(2) Affirm the contract and recover damages.

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Anticipatory Breach• A breach that occurs when one

contracting party informs the other that he or she will not perform his or her contractual duties when due.

• Also called anticipatory repudiation.

• Nonbreaching party’s duties are immediately discharged.

• Nonbreaching party may sue repudiating party at time of breach.

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Monetary Damages• A non-breaching party may

recover monetary damages from a breaching party.

• Monetary damages are available whether the breach was minor or material.

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Types of Monetary Damages

Compensatory Compensatory DamagesDamages

Consequential Consequential DamagesDamages

Liquidated Liquidated DamagesDamages

Nominal Nominal DamagesDamages

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Compensatory Damages• Award of money intended to

compensate a non-breaching party for the loss of the bargain.

• They place the non-breaching party in the same position as if the contract had been fully performed by restoring the “benefit of the bargain.”

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 16 - 12

Compensatory Damages (continued)

• The amount of that will be awarded for breach of contract depends on:– The type of contract involved,

and– Which party breached the

contract.

• Special types of contracts:– Sale of Goods– Construction Contracts– Employment contracts

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Mitigation of Damages• A non-breaching party is

under a legal duty to avoid or reduce damages caused by a breach of contract.

• The extent of mitigation depends on the type contract involved.

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Consequential Damages• Foreseeable damages that

arise from circumstances outside the contract.

• To be liable for these damages,– The breaching party must

know or have reason to know that the breach will cause special damages to the other party.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 16 - 15

Liquidated Damages• Damages to which parties to

a contract agree in advance if the contract is breached.

• To be lawful,– The actual damages must be

difficult or impracticable to determine, and

– The liquidated amount must be reasonable in the circumstances.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 16 - 16

Nominal Damages• Damages awarded when the

non-breaching party sues the breaching party even though no financial loss has resulted from the breach.

• Usually awarded in a small amount, such as $1.

• Cases involving nominal damages are usually brought on “principle.”

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 16 - 17

Enforcement of Remedies• If the breaching party

refuses to pay the court ordered judgment, the court may issue:– Writ of Attachment

– Writ of Garnishment

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Enforcement of Remedies (continued)

Writ of Attachment

• Orders the sheriff to– Seize property

in the possession of the breaching party that he or she owns, and

– To sell the property at auction to satisfy the judgment.

Writ of Attachment

• Orders the sheriff to– Seize property

in the possession of the breaching party that he or she owns, and

– To sell the property at auction to satisfy the judgment.

Writ of Garnishment

• Orders that– Wages, bank

accounts, or other property of the breaching party that is in the hands of third parties be paid over to the non-breaching party to satisfy the judgment.

Writ of Garnishment

• Orders that– Wages, bank

accounts, or other property of the breaching party that is in the hands of third parties be paid over to the non-breaching party to satisfy the judgment.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 16 - 19

Rescission and Restitution

Rescission• An action to

undo the contract.

• Available if there has been:– A material

breach of contract

– Fraud– Undue

influence– Mistake

Rescission• An action to

undo the contract.

• Available if there has been:– A material

breach of contract

– Fraud– Undue

influence– Mistake

Restitution• Returning of

goods or property received from the other party to rescind a contract.

• If the actual goods or property is not available, a cash equivalent must be made.

Restitution• Returning of

goods or property received from the other party to rescind a contract.

• If the actual goods or property is not available, a cash equivalent must be made.

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Equitable Remedies• Equitable remedies are

available if there has been a breach of contract that cannot be adequately compensated by a legal remedy.

• They are also available to prevent unjust enrichment.

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Specific Performance

• Court orders the breaching party to perform the acts promised in the contract.

• The subject matter of the contract must be unique.

• Specific performance of personal contracts are usually not granted because it will be difficult to monitor performance.

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Reformation

• Court rewrites a contract to express the parties’ true intentions.

• Usually used to correct clerical errors.

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Injunction

• Court order that prohibits a party from doing a certain act.

• Available in contract actions only in limited circumstances.

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Torts Associated With Contracts

• Intentional Interference with Contractual Relations

• Breach of the Implied Covenant of Good Faith and Fair Dealing

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Intentional Interference with Contractual Relations

• A tort that arises when a third party induces a contracting party to breach the contract with another party.

• The following elements must be shown:– A valid, enforceable contract between the

contracting parties.– Third-party knowledge of this contract.– Third-party inducement to breach the

contract.

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Breach of the Implied Covenant of Good Faith and Fair Dealing• Under this covenant:

– The parties to a contract are held to the express terms of the contract, and

– They are also required to act in good faith and deal fairly in all respects in obtaining the contract.

• A breach of this implied covenant is a tort for which tort damages are recoverable.