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ASSIGNMENT 01

REMEDIES FOR BREACH OF CONTRACT

COMMERCIAL AND INDUSTRIAL LAW MGM 21082

LECTURER IN CHARGE: MR. HM.NIJAM

SUBMITTED BY:

SM.SAJIR

SEU/IS/11/MG/020

FIRST SEMESTER, SECOND YEAR

FACULTY OF MANAGEMENT AND COMMERCE

SOUTH EASTERN UNIVERSITY OF SRILANKA

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REMEDIES FOR BREACH OF CONTRACT

INTRODUCTION

A contract is a legally enforceable agreement between two parties. Each party to a

contract makes a promise to either perform a certain duty or pay a certain amount. If one

party fails to act as promised, and the other party has fulfilled the duties under the contract,

the other party is entitled to legal relief.

A breach of contract is a failure to fulfill the duties under the contract terms. A

contract can be breached in the following ways:

• One party does not perform as he or she promised.

• One party does something that makes it impossible for the other party to perform the

duties under the contract.

• One party makes it clear that he or she does not intend to perform the contract duties.

BASIC TERMINOLOGIES

CONTRACT

Contracts are agreements between two or more parties enforced by the legal system.

Such contracts may be written or oral, although most contracts which expect to have legal

power are made in writing. Contracts must be made voluntarily and free from duress. If a

party fails to fulfill his or her terms in the contract, then that party is committing a breach of

contract.

BREACH

A breach of contract occurs when a party fails to do what they have promised to do.

This happens for many different reasons. For example, a party may misunderstand their

obligations, they may no longer have capacity to perform, or they may no longer be willing to

perform.

REMEDY

A legal remedy is a court order that seeks to uphold a person’s rights or to redress a

breach of the law. When one party breaches a contract, the other party may ask a court to

provide a remedy for the breach.

The court may order the breaching party to pay money to the non-breaching party.

This remedy is called damages. Alternatively, the court may order the party to do what they

promised to do under the contract. This remedy is called specific performance.

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What are the Remedies for Breach of Contract?

There are several remedies for breach of contract, such as rescission, award of

damages, specific performance, and restitution. In courts of limited jurisdiction, the main

remedy is an award of damages. Because specific performance and rescission are equitable

remedies.

Those remedies listed below

1. Damages

2. Contract Rescission

3. Specific Performance

4. Contract Reformation

1. Damages

Damages are monetary awards and can include,

A. Compensatory Damages

B. Liquidation Damages

C. Punitive Damages

D. Nominal Damages

E. Restitution

A) Compensatory Damages

These are damages for a monetary amount that is intended to compensate the

nonbreaching party for losses that result from the breach. The aim is to "make the injured

party whole again". There are two types of compensatory damages:

Expectation Damages: These are damages that are intended to cover what the injured

party expected to receive from the contract. Calculations are usually straightforward as they

are based on the contract itself or market values.

Consequential Damages: These are intended to reimburse the injured party for

indirect damages other than contractual loss; for example, loss of business profits due to an

undelivered machine. In order to recover, the injuries must "flow from the breach," i.e. be a

direct result of the breach, and be reasonably foreseeable to both parties when they entered

into the contract.

Illustration 1

Rockingham County v. Luten Bridge Co., 35 F.2d 301 (4th Cir. 1929)

Rockingham County, North Carolina (D) contracted with Luten (P) to construct a bridge.

Luten had completed very little work on the bridge when Rockingham County provided a

notice of cancellation of the contract. The plaintiff proceeded to complete the bridge and

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brought suit against the defendant for breach of contract. At trial, the judge instructed a

verdict for the full amount of the claim in Luten’s favor and Rockingham County appealed.

The plaintiff must mitigate damages. It is wasteful to complete a bridge when changed

circumstances have rendered it worthless to the party who contracted for its construction. The

law seeks to avoid creating disincentives for efficient breach. Therefore, the plaintiff’s

remedy is limited to the amount that it would have been able to recover as of the time notice

of repudiation was given.

B) Liquidation Damages

Liquidated damages are the amount of monetary damages that contracting parties

agree will be paid by the breaching party if the contract is breached. This amount is written

into the contract in a portion known as a liquidated damages clause.

Courts will often enforce liquidated damages clauses if the damages for breach of the

contract will be difficult to estimate. However, a court will not enforce a liquidated damages

clause if the clause is unfair or awards an excessive amount of money. Likewise, a court will

not award liquidated damages if the contract is based on fraud or mistake. If a court

determines that such a clause is unenforceable, the clause is void, and the non-breaching

party may sue for other contract remedies.

Examples of Enforceable Liquidated Damages

• Reasonable down payments

• Reasonable proportions of the entire contract price (such as 10%)

Damages that appear to be fairly calculated by the parties.

Illustration 2

City of Rye v. Public Service Mutual Insurance Co (1974).

Facts: The City of Rye (P) required the developers of a number of co-operative apartment

buildings to post a $100,000 bond and to pay $200 for each day after April 1971 that the

remaining units were not completed. The city sought to recover on the bond after 500 days. P

sued and the court denied P’s motion for summary judgment on the grounds that the bond

was a penalty. P appealed.

Issue: Under what circumstances will a liquidated damages clause be enforceable?

Holding and Rule: A liquidated damages clause will be enforceable so long as the amount is

a reasonable measure of the anticipated probable harm.

The court held that in this case, the most serious disappointments in expectation suffered by P

were not pecuniary in nature and therefore could not be measured in monetary damages.

There was nothing to show that either the sum of $200 per day or the aggregate amount of the

bond bore any reasonable relationship to the pecuniary harm likely to be suffered or in fact

suffered. There was no statutory authority for the city to exact harsh penal bonds from

developers.

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Disposition: Affirmed.

C) Punitive Damages

If you believe you have a personal injury claim, you might also be asking the question

“what are punitive damages?” Punitive damages have the two-fold purpose of punishing

defendants for their actions and deterring them from committing the acts again in the future.

These types of damages are very different from compensatory damages, which are meant to

reimburse the plaintiff for their economic loss or physical injury.

For example, in a personal injury suit, compensatory damages would cover items such

as the victim’s medical bills and hospital expenses, as well as any damage to property. The

court would then determine whether it would be appropriate to award the victim with punitive

damages in addition to or “on top of” compensatory damages.

D) Nominal Damages

Nominal damages are awarded in legal cases where the plaintiff has been injured but

did not incur any real-world economic or financial losses. They are not intended to

compensate the victim but rather are awarded to vindicate a plaintiff’s rights and to

acknowledge that they have been wronged. Nominal damages are also awarded where the

plaintiff’s did suffer economic loss but it cannot be calculated.

Nominal damages are typically small amounts of money, sometimes as low as $1,

which serves as an affirmation that the defendant’s conduct is not tolerated. “Nominal”

means “in name”, so the award is merely a token of recognition that there was a wrongdoing.

The most common instance where nominal damages are awarded is in a trespass

claim, where the defendant has walked across a neighbour’s property but the plaintiff did not

suffer any harm from the trespass. In this case a nominal damages award would be

appropriate.

Illustration 3

Dougherty v. Stepp, 18 N.C. 371 (1835).

Facts: Stepp (D) entered Dougherty’s (P) unenclosed property without Dougherty’s consent.

Stepp entered the property with a team to survey the land but there was no physical damage

to the property. Dougherty sued for trespass damages. At trial, the court held that there could

not be a trespass without some damage to the land. The jury found in favor of D and P

appealed on the grounds that the jury instructions were improper.

Issue: Is a defendant liable for trespass even if no physical damage is caused?

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Holding and Rule: Yes. Any unprivileged entry onto the land of another is a trespass even if

there is no physical damage. The court held that the law implies damages for every

unprivileged and unlawful entry onto the land of another even if there is nothing more than

the treading down the grass, herbage, or shrubbery.

Disposition: Reversed and remanded for new trial.

E) Restitution

Restitution seeks to compensate people who have been injured or suffered loss

because of another person's conduct. Restitution will be awarded only for out-of-pocket

expenses caused by the offender's conduct. Restitution will only be granted if the amount can

be calculated with certainty (based on evidence).

Restitution can be awarded in many types of civil cases. Some common examples

include:

• Personal Injury: For example, a victim who sues for damages for an assault can get

restitution for medical expenses and loss of wages, but not for emotional distress.

Emotional distress may be caused by the offender, but it is not an out-of-pocket

expense.

• Contract: For example, two parties make a contract and then one party breaches the

contract. Both parties can recover restitution for any out-of-pocket expenses they

incurred in preparing to perform the contract. In contracts, parties can also recover if

one party benefits from a breach of contract. The stipulation for loss can be optional

in those situations. For example, suppose that Bob and Jane agree that Bob will wash

Jane’s car in exchange for Jane driving Bob to work for a month. Assume that Jane

drives Bob to work for a month, but Bob refuses to wash the car. In this situation,

Jane has not suffered a loss. However, Jane can still collect restitution because Bob

wrongfully benefited from his breach of contract.

Illustration 4

Neri v. Retail Marine Corp. (1972).

Facts: Neri (P) paid a $4,250 deposit on the purchase of a $12,600 boat from Retail

Marine (D). Neri repudiated the sale one week later due to an upcoming operation. Neri

requested a refund of his deposit and D refused because the boat had already been delivered

from the factory. P sued to recover his deposit and D filed a counterclaim for $4,250 for lost

profits and expenses. D sold the boat four months later to a different customer for the same

price.

D proved that its expenses and expected profit was $3,250. The trial court entered

summary judgment to P minus $500 pursuant to UCC 20718 and D appealed.

Thus, the seller is entitled to its profit including reasonable overhead along with

incidental damages, due allowance for costs reasonably incurred and due credit for payments

or proceeds of resale. Due credit for payments or proceeds of resale is inapplicable to this

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retail sales contract as this provision pertains to the privilege of the seller to realize the junk

value of the items if it was manifestly useless to complete the operation of manufacture. P is

therefore entitled to restitution in the sum of $4,250 less $3,250 for lost profits and incidental

expenses.

2. Contract Rescission

Contract rescission refers to the termination or cancellation of a contract. It is

sometimes called “cancellation” or “overturning”. The word rescission comes from the word

“rescind” which means to cancel or annul. The purpose of contract rescission is to restore the

parties to their original status before the contract was made (the “status quo ante”).

Contracts must be rescinded entirely; that is, the entire contract must be cancelled, not

just one part. If only a portion of the contract is to be cancelled, this is usually accomplished

under contract reformation laws, not rescission laws. Rescission is often available as a

remedy in cases where there are issues with the way that the contract was formed.

Contract rescission is available under the following circumstances:

• Consent: Both parties must manifest their intent to have the contract rescinded. It is

best if they indicate their consent through an additional written document

• Issues with contract formation: The contract must be made under legal conditions, and

consent cannot be acquired by force or fraud. If the contract was formed under illegal

conditions, it may be rescinded. Common formation defects include:

• Fraud: The false representation may related either to the contract’s subject matter or

to matters related to the contract

• Lack of capacity: one of the parties lacks to the capacity to negotiate an agreement

due to illness, mental incompetence, intoxication, or being underage (under 18 years

old)

• Coercion/Duress/Undue Influence: A party cannot be forced to sign a contract under

threats of harm or under hostile conditions

• Mistake: Both parties must clearly understand all the terms in the contract

Illustration 5

Wood v. Boynton, (1885).

Facts: Wood (P) sold a gem for $1 to Boynton (D), a jeweler. Both parties believed the stone

to be topaz at the time of the sale. Boynton later learned that the stone was a diamond worth

$700. Boynton declined Wood’s offer to buy back the gem for $1.10 and Wood sued for its

return. At trial the court directed a verdict in favour of Boynton and Wood appealed.

Issue: Is a party to a contract entitled to rescission if both parties were mutually mistaken

regarding the value of the items sold and the seller has not committed fraud?

Disposition: Judgment affirmed.

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Notes: The real issue underlying this case is one of proof. P should have presented the

testimony of an expert to prove that no jeweler would have failed to recognize the gem as an

uncut diamond. The jeweler had examined the stone for some time before he made the offer

to buy it from P.

3. Specific Performance

Specific Performance is a court order stipulating that a party must fulfill their part of a

contract. This order comes about mainly when parties agree to a contract, and one party then

refuses to complete or even start his part of the contract.

Specific performance is commonly ordered when unique items are being exchanged

such as real estate, antiques, heirlooms, or artwork.

Specific performance is generally a legal tool that courts resort to only after

exhausting all other legal possibilities first. Most courts are generally reluctant to issue

specific performance for the sale of personal property. Usually money damages equal to the

value of the goods are awarded instead. In addition, performance of services such as

massages or house paintings are rarely ordered by the court because it is too difficult for the

court to oversee the performance.

Illustration 6

A agrees to buy and B agrees to sell a picture and two China Vases. A may Compel B

specifically to perform the Contract, for there is no standard for ascertaining the actual

damage which would be caused by its non-performance.

4. Contract Reformation

Contract reformation is a type of equitable remedy wherein the contract is rewritten in

a way that better expresses the intentions of the parties. For example, sometimes a breach of

contract may occur because the parties were mistaken as to one of the contract terms, such as

the delivery date or the definition of a word in the contract. In such cases, the contract may

then be rewritten or “reformed” in order to remedy the breach.

Contract reformation is only available if all of the following elements are satisfied:

• Valid contract: There must be a valid contract in existence. The contract must meet

all the requirements of a valid contract under contract laws. If the contract is void due

to illegality or other reasons, reformation may not be available

• Valid grounds for reformation: There must be a valid reason to rewrite the contract.

Generally there are two grounds which reformation may be based on:

Mistake- If the parties were mistaken as to the contract terms, a court may grant

reformation. Mutual mistakes will always be grounds for reformation. However,

unilateral mistakes lead to reformation only if one party was unaware of the mistake

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Misrepresentation- Contract reformation will be granted if one party made a

misrepresentation in the contract through fraud or deceit. Reformation will be granted

whether the misrepresentation was made innocently or intentionally

• No defenses available: A court will only grant contract reformation if there are no

defenses available. Some common equitable defenses include unclean hands and

laches

REFERENCE

1. http://www.legalmatch.com/law-library/article/types-of-damages-available-for-breach-

ofcontract.html

2. http://jec.unm.edu/education/online-training/contract-law-tutorial/remedies-for-breach-

ofcontract

3. http://www.legalmatch.com/law-library/article/what-are-compensatory-damages.html

4. http://www.legalmatch.com/law-library/article/liquidated-damages-lawyer.html

5. http://www.legalmatch.com/law-library/article/punitive-damages.html

6. http://www.legalmatch.com/law-library/article/nominal-damages-in-a-contracts-claim.html

7. http://www.legalmatch.com/law-library/article/restitution-lawyers.html

8. http://www.lawnix.com/cases/dougherty-stepp.html

9. http://www.lawnix.com/cases/neri-retail-marine.html

10. http://www.legalmatch.com/law-library/article/contract-rescission-lawyers.html