Breach of Contract Remedies
Interests The Law Seeks To Protect
We get asked all the time whether a claim for breach of contract can include things like emotional distress, punitive damages, and other types of damages. Generally, a claim for breach of contract will only afford the complaining party a remedy for the damage actually caused by the breach. Non-economic harm, such as emotional distress, is generally not compensable in a breach of contract case. Those types of damages are what you typically find in a tort action (personal injury).
The Restatement (Second) of Contracts lays out three "interests" that the court will seek to protect if another party to the contract breaches its obligations:
- Expectation Interest
This is the "benefit of the bargain" type of remedy. That is, the non-breaching party is entitled to receive the benefit he was promised under the contract. In other words, he is entitled to be put in as good of a position as he would have been had the contract been performed (ie had no breach occurred). We had a case where a contractor had been hired to complete remediation repairs on a customer's property following a hail storm. The total contract price was about $20,000. Before the contractor had spent any money purchasing materials or scheduling his labor forces the customer breached the contract by telling the contractor it chose to hire someone else. The contractor would have spent about $14,000 in expenses performing the contract, so it was projected to make a profit of around $6,000.00. This $6,000 represents the contractor's expectation interest because it now avoided those expenses as a result of the breach. The easiest way to think of this type of a scenario is by labeling it "lost profits."
- Reliance Interest
This type of remedy can be thought of as putting the non-breaching party in the same position he would have been without ever having made the contract. Imagine the same scenario described above, but at the time the customer breached the agreement the contractor had already spent $5,000 on material that could not be returned and otherwise has no (or at least much less) value now. If the remedy sought were his reliance interest, the court would award him $5,000 and put the contractor in the same place he would have been had the contract never been made. Obviously, under the circumstances described, the contractor would prefer to recover his expectation interest because it will yield him more money. However, imagine that it would have cost him $17,000 to perform, in which case his "lost profits" would only be $3,000. Under those changed facts it is clear that it would be better to pursue his reliance interest.
- Restitution Interest
This type of remedy is when the court awards damages equal to the benefit that has been given to the breaching party. In other words, the court seeks to restore or return the value given back to the non-breaching party. Again, using our scenario from above, imagine that the contractor had started the work and it wasn't until it was halfway done that the customer threw the contractor off the job and breached the contract. Obviously the customer has received something of value - half of the job was completed. Whatever the value of half the job, say $10,000, represents the contractor's restitution interest.
The courts will generally award the prevailing party with a money judgement. That is, the breaching party will owe the non-breaching party a sum of money. However, there are instances when a court may give an order for a party to do some act or refrain from doing some other act. When the court issues an order it is referred to as "specific performance." In other words, the court is telling the breaching party that it must go perform under the contract it earlier breached. Here are the types of remedies a court may grant to protect the interests of an innocent party mentioned above:
- Money Judgment
This is the most common type of remedy in a breach of contract action. The court awards money to the non-breaching party to compensate it for the damage suffered by the other party's breach.
- Specific Performance
In somewhat rare cases the court may order the performance of a contract or enjoin its non-performance. Courts generally do not like to issue orders of specific performance, but in certain circumstances they might. For example, if there is a contract to sell a piece of land and the seller breaches its contract prior to delivery of the deed, the court may order the seller to convey the property to the purchasing party. Land and property sales are a frequent example of when a court may order specific performance because land and property are thought to be especially unique. That is, the non-breaching party can never really be made whole by being awarded money because nowhere else can the innocent party obtain that specific piece of land or property. In other words, it is just thought of as unjust to deprive it of the benefit of the contract because no amount of money can compensate for the loss sustained by the breach.
- Declaring Rights and Duties Under The Contract
This type of action is what is known as a "declaratory judgment." The court is not awarding either party money or ordering specific performance - it is just making a determination as to the relative rights and obligations of the parties. An action of this type may be brought when the parties disagree as to what their contract actually says - usually because of an ommission, error, or a poorly drafted contract. The parties can ask the court to declare what their respective rights and duties are so that they can avoid breaching the contract.
Mitigation Of Damages
Even if a party breaches a contract and causes damage to the other party, the non-breaching party is generally under an obligation to limit the amount of damage it sustains by the breach, which in turn reduces the amount that the non-breaching party can seek to recover in an action for breach. For example, in a contract for the sale of goods, if the buyer breaches the contract and fails to take delivery of the items, the seller is required to make reasonable efforts to sell them to another party. Now, he may go sell them for less than what he was promised under the contract, in which case he may bring an action against the breaching party to recover the difference. However, if he sells them to another buyer for the same amount (or even a higher amount), has the seller been damaged by the buyer's breach? Most likely not, but there are unique situations in which seller's have successfully recovered from a breaching buyer, even when the seller has been able to sell the items to another buyer. Those types of actions are rare and typically include rare items with a limited market. The theory is a "lost opportunity" theory - arguing that there are only a limited numner of buyers for the product and the breach effectively reduced the overall possible sales of the seller.
The same holds true if it is the seller who breaches the contract. In those cases, the buyer is under an obligation to buy the same items and make reasonable efforts to obtain them at the same price. This is referred to as "covering" the contract. However, if the buyer is forced to purchase those same items from another seller for a higher price, he is generally entitled to recover the difference in cost. Again, just as in our example above, if the buyer is able to obtain the same goods for less than what he was required to pay under the contract, has he suffered any damage as a result of the seller's breach? Most likely not.
Many people are deterred from pursuing breach of contract claims, especially when the amount of money involved is relatively little, because the cost of litigation can be very high. However, the breach of contract attorneys at Johnson, Tabor & Johnson Law are often able to resolve contract issues and settle disputes without pursing claims in a court. If a contract has been breached or you are accused of breaching a contract, call today for a free consultation at 402-506-4444.