The type and texture of contracts that parties can form are extremely diverse. Correspondingly, the remedies for a breach of contract are also diverse, but it is the circumstances surrounding one’s contract that will determine which remedy applies.
What remedies are contracting parties entitled to in the event of breach?
Liquidated Damages
In some contracts, the parties agree to a set amount to be paid out if something goes wrong. This contractually agreed-to payout is known as “liquidated,” or “agreed,” damages, and it takes precedence over any other remedies that would have otherwise been available. Liquidated damages are acceptable so long as the amount agreed-to in the contract is a reasonable estimation of the harm caused by breach, even if the liquidated damages amount is not quite accurate. To put it in simpler terms: liquidated damages must reasonably approximate the damages caused by breach.
Imagine that two persons enter into a contract. One of them will perform monthly maintenance on the other’s appliances for $100 every month. Perhaps there is a liquidated damages provision giving $200 as a remedy for breach. This liquidated damages amount would probably be seen as reasonable, as one could argue that it accounts for an instance of breach and an extra month to allow for the maintenance person to find a replacement client.
At first it may seem that liquidated damages opens the door for contracting parties with greater bargaining power to bully those contracting parties with less bargaining power into accepting a liquidated damages remedy in order to do business. In reality, however, the use of liquidated damages benefits the legal system. Because contracting parties agree to a set payout, this reduces the risk of expensive, lengthy litigation to determine the actual damages amount in the event of breach. Further, because material terms are already explicitly laid out in the initial contract, liquidated damages may also encourage early settlement.
Of course, you may find yourself in a situation where the liquidated damages provision of your contract is not a reasonable estimation of the harm caused by breach. If the liquidated damages amount is too large (or perhaps, too small), then the court may step in and require that actual damages for breach be shown.
Specific Performance
In certain circumstances, a mere damages remedy will not suffice. In such cases, the court may require that the defendant actually push forward and fulfill their end of the contract. This is known as specific performance.
Generally, specific performance is a potential remedy in cases where the product or service involved in the contract is unique and irreplaceable, such that a money remedy would not allow the victim to secure a suitable alternative. Some examples of unique services or products include a performance by an artist or the purchase of a parcel of real estate.
It is worth noting that it is much easier to prove that money damages are “inadequate” with regard to real estate, as real property is presumed unique. With other products and services, however, your attorney will have to work hard to prove that a damages remedy is inadequate.
Importantly, the court may weigh against specific performance if it would simply not be feasible to enforce it. There are numerous structural reasons enforcement might be “infeasible,” but the courts are also hesitant to enforce specific performance in situations where the defendant would have to work closely with the plaintiff in order to fulfill their contractual obligations. For example, the court may weigh against specific performance in a employment contract litigation if the defendant would have to work side-by-side with the plaintiff for an extended period of time. The courts are certainly aware of the psychological stresses that defendant would have to contend with in operating in close proximity of the plaintiff who brought the suit against them.
Rather than risk protracted litigation, many contracting parties will agree to specific performance as the sole remedy for breach. This specific performance remedy can be written directly into the contract, and by doing so, the parties ensure that the contract will be completed.
Rescission, or Acting as Though the Contract Never Existed
Rescission allows for a contracting party to revoke, or rescind, the contract even after it has been signed and executed. Perhaps the simplest way to think about rescission as a remedy is to look at it as a way for one party to prevent an ongoing contract from further harming them. Rescission is not a damage remedy – it is an equitable remedy – but after rescission is complete, one may bring a suit to recover any money owed by other contracting parties.
It is not uncommon for one of the parties to bring a suit to recover money owed after rescission is complete. A contract may be rescinded after products and services have already been exchanged, and so, even if the contract is rescinded, there may be unpaid debts to account for between the two parties.
California Civil Code section 1689 lists the specific circumstances under which a contract may be rescinded. Though the following list is not exhaustive, under section 1689, a contract may be rescinded when:
- Both parties consent to rescission.
- Consent of the rescinding party to enter the contract was obtained by mistake, fraud, undue influence, duress, or menace.
- Consideration fails due to the fault of the non-rescinding party.
- Consideration becomes void from any cause.
- For example, if a minor entered into a contract, any consideration that the minor gave would be void, as minors cannot legally enter contracts.
- The contract is unlawful for causes that do not appear in its terms or conditions and the parties are not equally at fault.
- The contract would have a negative effect on the public interest.
Rescission is a remedy that requires timely action. If you believe that you may have a case in which rescission is a legitimate option, it is crucial that you file a lawsuit as soon as possible.
Standard Damage Remedies
Standard damage remedies for breach of contract fall into one of the following categories: 1) expectation, 2) reliance, and 3) restitution. Let’s examine them in turn.
Expectation Damages
Expectation damages are a measure of the potential monetary gain that the victim of breach would have been entitled to had the contract been fulfilled. Expectation damages are measured by the difference between the monetary amount actually earned or given during the course of the contract, contrasted with the amount that would have been earned or given had the contract been fulfilled rather than breached. In effect, expectation damages repairs the breach of contract for the injured party by financially “completing” the contract. It is usually calculated by balancing lost profits and incidental damages against expenses that were avoided through non-performance of the contract.
Reliance Damages
Whereas expectation damages attempt to place the injured party in the monetary position where they would have been had the contract been fulfilled, reliance damages attempts to repair breach by placing the injured party in the monetary position where they would have been had the contract never been formed. In effect, reliance damages compensate the injured party for the damages suffered as a result of relying on the breaching party’s promise to fulfill their end of the contract.
For example, imagine that a man enters a contract to sell his car in good condition, and reasonably spends money on maintenance and cleaning for his car to prepare it for sale. If the would-be buyer breaches the contract and decides not to purchase the car, then the buyer may be liable for reliance damages for the maintenance/cleaning, so long as those damages can be proven with reasonable certainty.
Restitution Damages
In some breach of contract cases, primarily in partial performance cases, restitution damages may be available as a remedy. Restitution damages attempt to fix the monetary imbalance of breach by affecting the monetary position of the breaching party – not the injured party. The breaching party is put in the position it would have been in had the contract never been formed. In effect, any monetary benefits the breaching party enjoyed as a result of the contract are “returned” to the injured party. Consider, for example, a situation in which a carpenter offers his services to a client. The carpenter is hired to build handmade cabinets in the client’s home over the course of a week. Imagine that, halfway through the week – and after the carpenter has already completed several built-in cabinets – the client refuses to pay for work completed and refuses to pay for the finished project. The carpenter may then sue for restitution damages, so that he can receive payment for the “value received” by the breaching client for the cabinets already built.
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Contracts are highly malleable, and can be written so as to provide for certain remedies, as desired. Understanding the potential remedies for a breach of contract is an important step towards drafting a contractual agreement that is suitable for all involved parties.