Remedies and Defenses for Breach
Episode #8 of the course Contract basics: Let’s make a deal! by James Wong
We worked our way through a breach analysis yesterday. Today, we’ll look at how courts deal with breaches and defenses.
Courts finding breach mostly award money damages, but it can also order the breaching party to do something specific.
Damages and the Duty to Mitigate
Courts will assess the harm to the non-breaching party and award compensatory damages. In contracts, this is usually enough money to pay for someone else to do the breaching party’s job, plus costs and hassle (such as filing the lawsuit) from the breach.
The court can also award consequential damages, also called “special damages” or “lost profits.” These are the losses that were reasonably foreseeable by the parties when they entered the contract. So, let’s say the carpet layer puts down the wrong carpet in a restaurant and the opening is delayed by a week. Not only will the award cover the cost of laying new carpet but also likely the lost profits from that week the restaurant couldn’t open—and maybe even costs for publicity to change the opening date.
Experienced negotiators often include liquidated damages clauses in contracts. These clauses limit the damages to what is agreed in the contract. So, let’s say there was such a clause in the carpet layer’s contract that limited damages to $10,000. That’s the maximum amount the carpet layer will have to pay. Usually, these are set high enough so there’s no incentive to be careless, but low enough that the breaching party doesn’t go broke.
Finally, courts will impose a duty to mitigate on the non-breaching party. It must take reasonable steps to reduce damages. In the carpet layer case, the restaurant should make sure there isn’t water damage to the wrong carpet or to the floor.
Sometimes, the contract is so unique that the court will require specific performance—i.e., the breaching party still has to do something. This happens frequently in contracts involving land sales. The court can make the seller sell the land because there’s an enforceable contract.
The other way is for courts to issue an injunction—that is, to prohibit something. So, if there’s a breach of a non-compete agreement in an employment contract, courts can force that employee to stop working for the competitor or it can stop a breaching party from using a company logo. By the way, in many jurisdictions, specific performance is ordered using the words of an injunction, such as, “The court prohibits Alison from not selling her land to Harmony.”
The third way is to grant a rescission. The contract is cancelled, and both parties give back whatever was given. Usually, both parties were mutually mistaken over something when they formed the contract. For example, a driver agrees to pick up a passenger at the New York airport and shows up at LaGuardia when the passenger is at Kennedy.
Defenses to Breach
Breach is bad. But can we somehow make the breach (and therefore, the damages or injunctions) go away? A good defense will cancel the contract.
Yesterday, we saw an example of the excuse of impossibility. Another typical defense is that there was no “meeting of the minds,” like where both sides were mistaken about a fact. “Paint the house” can mean applying color paint to the wall, or it might also mean doing a portrait painting of the house. Bad communication is more common than you think.
Lack of capacity is frequently used to challenge the parties or the subjects of the contracts. For example, minors have the option of walking away from their contracts.
Tomorrow, we’re going to throw a lot of that out of the window to enter the “no element no problem” world of the UCC.
See you then.
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