breach of contract
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A breach of contract occurs whenever a party who entered a contract fails to perform their promised obligations. Due to the frequency of breaches of contract, a robust body of law has grown to resolve the ensuing disputes.
The overarching goal of contract law is to place the harmed party in the same economic position they would have been in had no breach of contract occurred. As a result, the default remedy available for a breach of contract is monetary damages .
Generally, these damages are limited to what is listed in the contract and, unlike damages from tort cases, courts do not award punitive damages for breaches of contract. For example, if a party agrees to pay $50,000 to have their house painted but is only willing to hand over $10,000 once the painting is complete, the court will award the painters $40,000 in damages. This hesitancy to award punitive damages is due to the theory of efficient breach which argues that breaching contracts and paying damages is sometimes economically beneficial for society as a whole.
Nonetheless, in specific circumstances, a party may successfully recover more money than initially contracted for under the doctrine of reliance damages . Under this doctrine , a party who reasonably relied upon a contract that was later breached can be granted compensation for the reasonable expenses they incurred due to that reliance. For example, a party who purchases lifeguard equipment in reliance upon a pool construction contract’s fulfillment may be able to recover the costs of the lifeguard equipment in the event of a breach. Reliance damages are based upon the principle of promissory estoppel , and granting them is subject to the court’s discretion.
That said, parties harmed by a breach of contract have a duty to mitigate that harm. For example, before they could recover, the aforementioned lifeguard equipment buyer must first attempt to resell the equipment to a new buyer. Failure to satisfy the duty to mitigate will result in an inability to recover damages.
In scenarios where damages are insufficient, a court may instead award specific performance . Under the specific performance remedy, the breaching party must attempt to fulfill the terms of the contract as best as possible. Specific performance, however, is generally only awarded when dealing with one-of-a-kind assets like real estate .
Parties wishing to contract around the above remedies can do so through the use of liquidated damages provisions. These provisions establish in advance how much money a breaching party must pay and sidestep the expensive and time-consuming process of determining the actual damage caused by the breach. While liquidated damages clauses are generally allowed, a court may strike one down if the clause appears to be proxying for punitive damages or if the terms of the clause are unconscionable .
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7.3 Breach of Contract and Remedies
Once a contract is legally formed, both parties are generally expected to perform according to the terms of the contract. A breach of contract claim arises when either (or both) parties claim that there was a failure, without legal excuse, to perform on any, or all, parts and promises of the contract.
Several inquiries are triggered when a breach of contract claims is initiated. The first step is to determine whether a contract existed in the first place. If it did, the following questions may be asked: What did the terms of the contract require of the parties? Were the contractual terms modified at any point? Did the breach actually occur? Was the claimed breach material to the contract? Does any legal excuse or defense to enforcement of the contract exist? What damages were caused by the breach?
Material vs. Minor Breach
The parties’ obligations and remedies for a breach of contract depend on whether the breach is considered material or minor.
When something substantially different from what was expected under the terms of the contract is delivered, the breach will be considered material. For example, the breach will be considered material if the contract promises the delivery of Christmas ornaments, but the buyer receives a box of candies. In the case of a material breach, the non-breaching party has the right to all remedies for breach of the entire contract and is no longer expected to perform their obligations. In considering whether a breach is material, courts will determine whether the non-breaching party still received a benefit, and if so, how much was received, adequate compensation for the damages, the extent of the performance (if any) by the breaching party, any hardship to the breaching party, the negligence or intent behind the behavior of the breaching party, and finally, the possibility that the breaching party will perform the remainder of the contract.
There are times, however, that despite the breaching party’s failure to perform some of the contract, the other party still receives a majority of the goods or services specified in the contract. In this case, the breach will be considered minor. For example, the breaching party may be late on delivering goods or services promised under a contract that does not specify a firm delivery date and that doesn’t state that time is of the essence. In this case, a reasonably short delay would likely only be considered a minor breach of the contract. Consequently, the non-breaching party would still be required to perform as pursuant to the contract. However, damages may be available to them if they suffered some harm as a result of the delay.
Typically, the remedies that will be available if a breach of contract is found are money damages, restitution, rescission, reformation, and specific performance.
Money damages include compensation for financial losses caused by the breach.
Restitution restores the injured party to status quo or the position they had prior to the formation of the contract, by returning to the plaintiff any money or property given pursuant to the contract. This type of relief is typically sought when a contract is voided by courts due to a finding that the defendant is incompetent or lacks capacity.
Rescission or reformation may be available to parties who enter into contracts by mistake, fraud, undue influence, or duress. Rescission terminates the duties of both parties under the contract, while reformation allows courts to equitably change the contract’s substance.
Specific performance compels one party to perform the promises stated in the contract as nearly as practicable. Specific performance is only mandated when money damages do not adequately compensate for the breach. Personal service, however, may not be used to compel specific performance, since doing so would constitute forced labor, i.e. slavery, which is in violation of the U.S. Constitution.
Inevitably, when valid contracts are created, the potential for breach exists. An understanding of what happens when a contract’s terms are breached is fundamental to an understanding of contract law.
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- Authors: Mirande Valbrune, Renee De Assis
- Publisher/website: OpenStax
- Book title: Business Law I Essentials
- Publication date: Sep 27, 2019
- Location: Houston, Texas
- Book URL: https://openstax.org/books/business-law-i-essentials/pages/1-introduction
- Section URL: https://openstax.org/books/business-law-i-essentials/pages/7-3-breach-of-contract-and-remedies
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