Contract remedies

Contractual Remedies

A crucial topic in contract law are remedies. If one party breaches a contract, then the non-breaching party is entitled to enforce it.

There are two basic types of remedies that courts can grant:

The first and more common type are damages, that is monetary compensation.

The second type are equitable remedies.

Damages

Damages are contract law’s main remedy.

Their purpose is to compensate the non-breaching party by giving them the benefit of their bargain.

We can distinguish between different types of damages. If applicable to the specific situation, one or more of the following types of monetary damages may be claimed cumulatively by a plaintiff, that is at the same time and in addition to one another.

Compensatory Damages

The first category, compensatory damages, put the non-breaching party in the same position that it would have been in if the contract had been performed as promised by the other party.

The measure of compensatory damages is the difference between the value of the contract as originally promised, and the value of the contract actually received. This is often referred to as the “loss in value” that is being compensated for.

For instance, if goods are involved, then the loss in value would be the current market price of the goods minus the original contract price.

Alternatively, if a party “covers” – that is it buys substitute goods because the goods it contracted for were not delivered – then the loss in value would be the cost of covering minus the original contact price.

Suppose that someone buys a laptop from a computer store, but the store does not deliver the device. The damages would be equivalent to either the difference between the agreed price and the current market price of the laptop, or the difference between the agreed price and the price that the purchaser paid to buy the laptop from another dealer.

Incidental Damages

A second category are incidental damages.

These damages cover ordinary expenses that directly arise from the breach and that are incurred by the non-breaching party.  They will be offset by any losses that were avoided by the non-breaching party.

Common examples of incidental damages include additional costs of shipping, storage, and advertising that arise because a non-breaching party has to make new arrangements as a consequence of the other party’s failure to perform. 

Consequential Damages

The final category are consequential damages.

These damages pertain to special losses caused by the breach. The most common example of consequential damages is a loss of profits.

Since these damages can be potentially quite large and unexpected for the other party, they can only be claimed if they were reasonably foreseeable when the contract was made and provided that they can be measured with reasonable certainty.

This principle is illustrated in the classic English case of Hadley v Baxendale:

The plaintiff in this case was Hadley, who operated a mill that produced flour and other grain-based products. At one point, a mechanical component of the mill’s steam engine broke and Hadley arranged to have a new one made. However, the engineering business that agreed to make the new crankshaft required that the broken one be sent to them in order to ensure that the new one would fit  properly.

Hadley therefore contracted with another business, represented by Baxendale, to deliver the crankshaft to the engineers by a certain date, in order to enable the work on the new crankshaft.

However, Baxendale failed to deliver in a timely manner, which caused a delay in making the new crankshaft, which in turn caused Hadley to lose business as he wasn’t able to operate the mill without the new part.

Hadley sued for the profits he lost due to Baxendale’s late delivery and won in the lower court. Baxendale appealed, contending that he did not know that Hadley would suffer any particular damage by reason of the late delivery.

The question raised by the appeal was whether Baxendale could be held liable for damages that the defendant was not aware would be incurred from a breach of the contract.

The court held that Baxendale would not be liable for consequential damages.

The court stated that Hadley’s loss of profits could not reasonably be considered a consequence of the breach of contract that would have been fairly and reasonably contemplated by the parties when they entered into the contract.

The general rule following from the case is still applicable today. A party is liable for all losses that the party could have reasonably foreseen, including lost profits, but not for those that the party could not have reasonably foreseen.

Equitable Remedies

When money damages, which are the usual legal remedy, are inadequate and would not fully compensate for a breach, then an equitable remedy in the form of non-monetary damages may be awarded by a judge.

Equitable remedies include specific performance, rescission and restitution, reformation, liquidated damages, and promissory estoppel.

Specific Performance

 The equitable remedy of specific performance requires that the contract be performed as promised.

It is only applicable, or will only be granted by a court when the subject matter of the contract is so unique that money damages will not suffice.

This could be the case, for instance, when someone buys unique objects such as antiques, art work, or real estate. A court could order a non-performing seller to transfer or sell these items to the buyer instead of awarding monetary damages.

Recission and Restitution

Rescission and restitution means that a contract is terminated, the agreed obligations come to an end, and the parties are ordered to return any benefits that they received from the other party, so that both are in the same position as before the contract.

Rescission and restitution apply, in particular, in some of the instances that we already talked about previously. This includes when a contract is avoided due to fraud, duress, mistake, or based on other reasons.

The purpose of restitution is to prevent unjust enrichment. That is, when one of the parties is enriched at the expense of the other.

Reformation

Another equitable remedy is reformation.

This is an option when a contract does not accurately reflect the true intent of the parties.

It entails re-writing the contract, or adjusting the contractual language of a specific provision, by the court, in order to reflect the true intentions of the parties.

It is typically used when there is a typographical error in the contract.

Liquidated Damages

Liquidated damages are damages that the parties agree on in advance of a breach.

They will be contained in specific contract clauses that address the issue of damages, and they may specify the exact amount that will be owed by a party that is in breach of the contract.

Liquidated damages can be useful when actual damages are hard to ascertain. They are permissible as long as the amount agreed upon is not considered a penalty, which would be the case if the agreed amount is unreasonably large.

Promissory Estoppel

Promissory Estoppel, which we covered at the outset of the course, is also a type of equitable remedy.

In situations where an enforceable contract does not exist, a party can sometimes be awarded reliance damages under promissory estoppel. This protects a party’s reasonable and detrimental reliance upon a promise.

This is what happened, for example, in the case of Hoffman v. Red Owl Stores, which we discussed earlier.