Turnip Plaza Hotel Case

LearningTopic_ContractRemedies.docx

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Learning Topic

Contract Remedies

The US legal system is a common-law system, a type of system that originated in England after the Norman conquest of 1066 CE. The rulers of England, including William the Conqueror and his progeny, took measures to unify the country. One of the measures they took was to establish king's courts, which sparked the beginning of a body of common law, or generally applicable rules of law, throughout England and, eventually, its colonies. Over time, the common law was brought to America through English colonization, and the system of common law was adopted by the Founding Fathers of the United States.

In medieval English times, one could seek different remedies in different courts. Remedies, broadly construed, are the legal method by which rights are enforced or wrongs redressed. In medieval English times, king's courts resolved disputes by issuing an award of compensation to injured parties, often in the form of land, valuable property, or money. The king's courts eventually became known as courts of law, and the awards of compensation, remedies at law. Remedies at law, today, are mostly issued in the form of monetary amounts called damages, and are awarded through court orders.

It became apparent during the medieval period that there was sometimes no adequate remedy at law available to resolve a dispute, and so, over time, chancery courts, also known as courts of equity, were established. The remedies available in the courts of equity (called remedies in equity or equitable remedies) were non-monetary remedies, including specific performance, rescission, reformation, and injunction.

During the medieval period and still today, equitable remedies are typically available to the injured party only when remedies at law (e.g., monetary damages) are inadequate for resolving a dispute. Over time, and particularly during the nineteenth century, most states in United States adopted rules to combine the traditional courts of law and courts of equity, streamlining the process by making injured parties capable of seeking both monetary and equitable remedies in the same court.

Remedies are available for victims of breach of contract. When one party to a contract does not fulfill his or her legal obligations under the contract ("breaching the contract"), the other party may seek a remedy, or some combination of remedies, to make the injured party whole. Today, in the United States, the remedies available for breach of contract include both remedies at law (damages), and equitable remedies, and in most states, these remedies may be sought simultaneously in the same court. When there is a valid and enforceable contract, monetary and equitable remedies may be available.

Even when there is not a valid and enforceable contract, in some cases, remedies may be sought under other common-law theories, such as promissory estoppel, or pursuant to theories of quasi-contract. The following decision tree explains how contract remedies work in tandem with noncontract remedies.

Contract Remedy Decision Tree

As the decision tree shows, when there is a valid and enforceable contract, then monetary and equitable remedies may be sought. If there is not a valid and enforceable contract, then one should ask if a promise has been made in order to determine the appropriate theory to use. If a promise has been made, then one may seek a remedy under the theory of promissory estoppel. If a promise has not been made, then one may seek a remedy under the theory of quasi-contract. If there might be a contract, but this is not certain, then one may seek relief in the alternative (by requesting the court to determine if there is a contract and, if so, to issue contract remedies; or, if not, to issue noncontract remedies).

Thus, even if no valid and enforceable contract exists, there is still the potential, depending on the circumstances, for the injured party to seek remedies.

Breach of Contract

A party who is not relieved from her duty of performance and fails to perform her obligations under a contract is said to breach the contract. Breach entails a failure to perform material duties in accordance with the agreement. This can include a complete lack of performance, partial performance of the material duties, or performance that fails to meet the demanded standard. A breach by one party relieves the other party's duty of performance.

Ask Yourself

· Should different types of breach be treated differently? Why or why not?

· Joseph enters into a contract with Eric to build a deck on Eric's house. Joseph builds a deck that is weak, flimsy, and drastically varies from the design plans. Under what grounds might Joseph allege breach of contract against Eric?

Remedies

A breach of contract action may result in any number of damages.

Compensatory Damages

Compensatory damages are court-awarded damages to put the plaintiff in the same position as if the contract had been performed. It includes lost profits on the contract and the cost of substitute performance. A party's lost profits from the other party's breach of contract are the expected gains from performance of the contract. This would generally mean the value received minus the costs incurred in performing. This calculation is known as the "expectation damages."

For example, you sign a contract to sell me supplies for my business. You back out of the contract and I have to purchase my supplier from another vendor. The cost to me to purchase the supplies from a new vendor is 15 percent higher than pursuant to our agreement. I have suffered damages of 15 percent of the contract value. Alternatively, if I backed out of the contract and my duties to purchase your supplies, you would have suffered expectation damages equal to the price of the goods minus your cost of supplying them to me.

Consequential Damages

Consequential damages are court-awarded damages arising from unusual losses which the parties knew would result from breach of the contract.

For example, I order cement from you to complete a large contract. I express to you that I intend to use the cement for the large construction contract and that time of deliver and quality of the goods is of utmost importance. You fail to deliver the cement and I am forced to purchase from another vendor. The cement arrives late and causes delays. I incur substantial penalties under the larger contract. Your breach of contract may have cost me compensatory damages equal to the price difference between our contract and the replacement vendor. The consequential damages, however, are the penalties incurred and any lost business as a result of your breach.

Liquidated Damages

Liquidated damages are damages specified in the contract in the event of non-performance by either party. Liquidated damages are appropriate where real damages for breach of contract are likely to be uncertain. In such a case, the parties decide to specify in the contract the damages in the event of breach. Courts will enforce these liquidated damage clauses unless they seem to penalize the defendant instead of merely compensating the plaintiff for uncertain losses.

For example, I sign an agreement to provide you with consulting services. It is difficult to estimate the damage to your business if I fail to adequately perform. In the agreement we indicate that my failure to perform will result in damages of $1,000 to you. This liquidated damages clause is likely enforceable.

Nominal Damages

Nominal damages include a small amount awarded by the court to the plaintiff for a breach of contract, which causes no financial injury to the plaintiff. In a tort action, a court may only award punitive damages if there is some finding of liability of the defendant. The court may not be able to find liability based upon tort theory in the absence of identifiable harm suffered by the plaintiff. If, however, the tort action is accompanied by a contract cause of action for the same conduct, the award of nominal damages for breach of contract may support a finding of punitive damages in the related tort action.

For example, I enter into a contract to provide you with consulting services. I fail to perform and you hire someone else. In this situation, it is difficult to determine if your business incurred any damages. If you sue me, a court may award nominal damages against me indicating that I was legally wrong in failing to perform my contractual duties. A common nominal damages amount is between $1 and $100.

Specific Performance

Specific performance is a court-ordered, equitable remedy available when the subject matter of the contract is unique. A court order for specific performance directs a party to perform her duties under the contract. The court will only apply this remedy when the subject matter of the agreement is truly unique and irreplaceable. Specific performance is not available for service obligations.

For example, you agree to sell me a Picasso painting that you inherited. At the last minute, you back out of the contract. I sue you to force you to sell me the painting. A court may order specific performance of the contract by ordering you to sell me the painting.

Recission

Rescission means to undo a contract and return the parties to the position they were in prior to entering the contract. This generally means returning property sold in the condition it was transferred and a return of the purchase price. This remedy is not available for executed services contracts.

Ask Yourself

· How do you feel about the concept of consequential damages? Is it fair to impose that extent of liability on a party if it is not part of the subject matter of the contract? Why or why not?

· Taylor enters into a contract with Winnie to supply her with reinforced steel. Winnie is going to use the steel in the construction of a new manufacturing facility for her business. Winnie backs out of the contract when she realizes that she can get the steel 10 percent cheaper from a competitor. If Taylor sues Winnie, what are his options for damages?

Transcript

Efficient Breach

Efficient breach occurs when a party makes a conscious decision to breach a contract after balancing the costs of complying against fulfilling the contractual obligation. This normally arises in situations where a party will incur fewer losses or make more money by breaching the contract than the party would suffer in compensatory or consequential damages if sued.

Ask Yourself

· How do you feel about the concept of efficient breach? Should the decision of whether to breach a contract simply be an economic consideration or is there a moral consideration involved? Should morality or ethics play a role in business transactions? If so, to what extent and why?

· Wendy enters into a contract to sell a piece of equipment to Laura. Before the sale is finalized, Erwin offers to purchase the equipment from Wendy at a much higher price. Wendy evaluates whether to breach the contract with Laura and sell the equipment to Erwin at the higher price. What might Wendy consider in making her decision?

Licenses and Attributions

Business Law: An Introduction by TheBusinessProfessor.com, Jason M. Gordon & Colleagues has been adapted with permission from Jason M. Gordon. © Business Professor, LLC.