Professional Documents
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CHAPTTR
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56Menkeep
their CHA P IE R O UT T I I { E T E A RI { I I { G O B I E CI I V E S
-DAMAGES AFTER
READING
THISCHAPTER, BEABLE
YOUSHOULD TO
engagements ANSWER
THE
FOLLOWING
QUESTIONS:
REMEDIES
-EQUITABLE
it istothe
when BASED What is the differencebetweencompensatory
-RECOVERY
of
advantage ONQUASI
CONTRACT damagesand consequentialdamages? What are
nominal damages,and when do courtsaward
bothnotto PROVISIONS
-CONTRACT
LIMITING
REMEDIES nomi naldamages?
break
them.!! OFREMEDIES
-ELECTION What is the standardmeasureof compensatory
Solon, sixth cenhrry B.c.E. damageswhen a contract is breached?How are
(Atlienian legal reformer) damagescomputed differentlyin construction
contracts?
l f,l
I A I r the Athenian political leader Solon instrr-rctedcenturiesago in the chapter-opening
tfl l
| - - | quotation, a contract will not be broken so long as "it is to the advantageof both"
partiesto fulfill their contractual obligations.Normally, a person entersinto a conhact with
another to securean advantage.When it is no longer advantageousfor a party to fulfill her
or his conhactual obligations,that party rnay breach the contract.As noted in Chapter 14, a
breachof contract occurswhen a party fails to perform part or all of the reqr-rireddutiesunder
a contract.l Once a parf fails to perform or performsinadequately,the other party-the non-
breachingparty-can chooseone or more of severalremedies.
The most common remediesavailableto a nonbreachingparty under contract law
include damages,rescissionand restitution,specificperformance,and reforrnation.As dis-
cussedin Chapter l, courts distinguishbehveenremediesat law and remediesin equity.
Today,the remedyat law is normally monetarydamages.We discussthis remedyin the first
part of this chapter.Equitable remediesinclude rescissionand restitution,specificperfor-
mance,and reformation,all of which we examinelater in the chapter.Usually,a court will
not awardan equitableremedy unlessthe remedyat law is inadequate.In the final pages
of this chapter,we look at some speciallegal doctrinesand conceptsrelatingto remedies.
t6 4t m
CONTRACTS (Second)
L Restatement ofContracfs,Section235(2).
16'EIMtr
BREACH
ANDREMEDIES
of Damages
Types
There are basicallyfour broad categoriesof damages: ll'lTrtf{fiEElE The terms of a contract
must be sufficientlydefinitefor a
I Compensatory(to cover direct lossesand costs). courtto determinethe amountof
damagesto award.
2 Consequential(to cover indirect and foreseeablelosses).
5 Punitive (to punish and deter wrongdoing).
4 Nominal (to recognizewrongdoingwhen no monetarylossis shown).
{ontractor hasbegun.
Beforeconstruction Costabovecontractpriceto completework.
. e eC h a p t e r20 .
4. UCC 2-7 1 5 ( 2 )S
5. Colrts disposeof cases, A judgmentmay orderthe losingpartyto pay monetary
afteririals,by enteringjudgrnents.
damages to the winning party.Collectinga judgnent, horvever, can poseproblems.For exanple,the juclgrnent
debtorrnaybe irsolvent(unableto pay his or her bills when they come due) or haveonll a smallnet u'orth,or
exenptionlawsnay preventa creditorfrom seizingthe debtor'sassets to satis&a debt (seeChapter26).
568llNIIi@
CONTRACTS
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570EIIIE
CONTRACTS
CA S El5.l-Co ntin ue d
Justice.
. . . MARNa,
f N THEW0RDS0F THECOURT
x * * becauseHanson had an
fBoeder] claims Hanson did not mitigate his dan-rages
opportr-rnityto continue farming the Boeder land, which r'vould have substantially
*d."1.1n;t damages,and chose not to.
courtof North
rtresupreme
ANDREMEDY
DECISI0N ALNA t Y S I S - S o c i a l
F 0 RCRI T I CA
Dakotaaffirmedthe lower court'sjudgment'The state triedto
Consideration ouringthetriol,Boeder
supremecourt concludedthat the lower court did not retract his repudiotion of the leose to ollow Hanson to continue
misapplythe law in findingthat Hansonhad attemptedto forming for the restof the leaseterm. Should the court hove
mitigatehis damagesand that the evidencesupportedthe considered this on occeptoble way for Hanson to mitigate his
lower court'sfindingson lost profits. damoges?
tr
e sr suPe
[ i q u i d a t eDda m a gve s n a ltie s
TIQUIDATED DAMAGES
An amount,stipulatedin a contract, A liquidated damagesprovision in a contract specifiesthat a certain dollar amount is to
that the partiesto the contract be oaid in the evenl of a future default or breach of contract. (Liquidated means deter-
believeto be a reasonable
estimationof the damagesthat will
mined, settled,or fixed.) For example,a provisionrequiring a constructioncontractorto
occurin the eventof a breach. pay $300 for everyday he or she is late in completing the proiect is a liquidated damages
]7I GIMEE
BREACH
ANDREMEDIES
Should o court enforce d liquidated domoges clouse when the omount due under thot
clouse exceedsthe actuol value of the controcted goods so significantly thot it seems
unfoir? A court had to answerthis questionin a case involvingleasedequipment.Eaton
Hydraulics,Inc.,entereda contractto leasenearly$9 millionof computerequipmentfrom
Winthrop ResourcesCorporation,a computer leasingcompany.Four years later,Winthrop
suedEatonfor breachof contract, allegingthat Eatonhadfailedto meetnumerouspayment
obligations(oftenbecausethe paymentswere late),failedto properlymaintainthe equip-
ment,and failedto properlypackand shipthe equipmentbackto Winthrop.Theparties'con-
tract includeda liquidateddamagesclausethat provideda formula for calculatingthe
"CasualtyLossValue(CLV),"which would be the damagesin the eventof a breach.
Basedon this clause,Winthropclaimedthat Eatonwas liablefor morethan $4 millionin
damages. Eatonarguedthatthe CLVwasan unreasonable and unenforceable penalty.Eaton
presentedevidenceshowingthat when the leaseendedand the computerswere returned
to Winthrop,eachhad a fair marketvalueof about975.Thevaluecalculated underthe CLV,
however,was behrueen 9500 and gToo-considerably more than four times their market
value.The court rejectedEaton'sargument,notingthat the provisionwas "clearlynot a fair
marketvaluecalculation." The courtheld that the liquidateddamagesprovisionwas proper
becauseof "the speculative natureof the valueof the computersat terminationof the lease
schedules." The court reasonedthat Winthropand Eatonwere both sophisticated interna-
tionalcompanies that had negotiated this contractknowingthat the damagesfor breaching
it couldbe severaltimesthe fair marketvalueof the equipment.In essence,the courtwould
not considerwhetherthe amountdue underthe liquidateddamagesclausewasfair because
the partieswere sophisticatedbusinesses that had agreedon the methodof calculation.s
@
The Concept Summary on the next page summarizesthe rules on the availabilityof
the differenttypesof damages.
ti,rltittti*lii,.
REMEDY A VA IL AB IT IT Y RES
UtT
Compensatory A partysustainsand provesan injuryarising The injured,party.is compensated
for the
Damager directlyfrom the lossof the bargain. lossof the barsain.
Liquidated
0amages A contractprovidesa specificamountto The nonbreachingpartyis paid the amount
be paidas damagesin the eventthat the stipulatedin the contractfor the breach,unless
contractis laterbreached. the amountis construedas a penalty.
Rescission
andRestitution
As disctrssed
in Chapter 14,rescissionis essentially
an actionto undo, or cancel,a contract-
to return nonbreachingpartiesto ihe positionsthat they occupiedprior to the transaction.
When fraud, mistake,duress,or faiiure of considerationis present,rescissionis available.
The failure of one partyto perform under a contractentitlesthe other partyto rescindihe
contract.eThe rescindingparty must give prompt notice to the breachingparty.
9. The rescissiondiscussedhere refersto unilateral rescission,in which only one party u'antsto undo the contract.
ln mufual rescission,both partiesagreeto undo the contract.Mutual rescissiondischargesthe contract;unilateral
rescissionis generallyavailableas a rernedyfor breach of contract.
10. Restatement(Second)of Contracts,Section 370.
375GIEffitr
BREACH
ANDREMEDIES
Sp eci fPer
ic f ot m a n c e
The equitableremedyof specific performance callsfor the perfor-
nrance of the act promised in the contract.This remedy is often
:Llractiveto a nonbreachingparty becar,rse it providesthe exactbargain pron-risedin the Supposethot a seller controds to sell
;onhact. It also avoidssome of the problemsinherent in a suit for monetarydamages. some valuoble coins to a buyer. If
the seller breoches the contract,
Frrst,the nonbreachingparty need not worry about collecting the judgment. Second,the
would specificperformonce be on
nonbreachingparty need not look around for another contract.Third, the actual perfor-
oppropriate remedy for the buyer to
nance n-raybe more valuablethan the monetary damages.
seek?Why or why not?
Norn'raily,however,specificperformance_ will not be granted r-rnless the party'slegal (PhotoDisc/Cetty lmages)
remedy (monetarydamages)is inadequate.tlFor this reason,contractsfor the sale of
.oods rarely qualify for specificperformairce.Monetary damagesordinarily are adequate SPECIFI€ PERFORMANCE
Saleof Land A court will grant specificperformanceto a br-ryerin an action for a breach
contractinvolving the saleof land. In this situation,the legal remedyof monetarydam-
'rf
:ges will not cornpensatethe buyer adequatelybecauseevery parcel of land is unique;
,r'rbriously,
the buyer cannot obtain the sameland in the same location elsewhere.Only
,,r'henspecificperformanceis unavailabie(for exarnple,when the sellerhassold the prop-
erh'to sorneoneelse)will damagesbe awardedinstead.
Is specificperformancewarrantedwhen one of the partieshas substantially-but not
i1lr'-performed under the contract?That was the questionin the following case.
(Second)
ll. Restatement of Contracfs,Section359
I
i \:i-.S/
?, BAcKcRoU
;
ANND
DF A cT soveron Stainbrook,and he died.Stainbrook'sson David
;, 'qJrs*/. ; In April2004,Howard becamethe executorof his father'sestate.DavidaskedLow to
Stainbrook agreed to sellto TrentLow fortyacresof land in withdrawhis offerto buy the forty acres.Low refusedand filed
JenningsCounty,Indiana,for $45,000.Thirty-hruo of the acres a suit in an IndianastatecourtagainstDavid,seekingto enforce
were wooded and eightwere tillable.Underthe agreement, the contract.Thecourtorderedspecificperformance. David
Low was to payfor a surveyof the propertyand othercosts, appealedto a stateintermediateappellatecourt,arguing,
includinga tax paymentdue in November.Low gaveStainbrook amongotherthings,that his father'scontractwith Low was
a checkfor $1,000to show his intentto fulfillthe contract.They "ambiguous and inequitablel'
agreedto closethe dealon May I l, and Low madefinancial
On May 8, a tractorrolled
to meet his obligations. C A S E1 5 . 2 - C o n t i n u e sn e x t p ag e
arrangements
r74t!8tm!t
CONTRACTS
f N Il{E WORDS
0t THEC0URT
. . . vAtDtK,
Judge.
The Estatefinally arguesthat the trial court should not have awardedspecificperfor-
mance here becausethe Agreement between Low and Stainbrook was unfair. * * *
Since Low was hventy-hvoyearsold and Stainbrookwas eighty-nineat the time of con-
tract, and becausethe combined estimatesof propertyand timber valueswas as high as
$121,000.00and Low and Stainbrookhad agreedto a $45,000.00purchaseprice, the
Estatearguesthat the trial court should have found the contract to be unfair or uncon-
scionableand to have found that Low would be uniustly enriched by its execution.
* * * The Estatestipulatedat trial that
Stainbrookwas co*petent at the time of con-
tract, and evidence was presentedthat Stainbrook consulted a lawyer regarding the
Agreement and that he insistedupon severalhandwritten changesto the contract that
benefitedhis own interests.We find no supportfor the Estate'scontentionthat Stainbrook
was anything lessthan a party entirely capableof entering into this Agreement,nor for its
contention that the Agreementwas unfair.
rhecourt
tE= wHYls THlscAsEIMPORTAryT? hassubstontiollypertormed his contraclobligotionsor offered
reaffirmed the principle thot "[s]peciftcperformonce is to do sol'The court'sreasoningunderscoresthe importanceof
f!$
t iotter of coursewhen it involvescontractsto purchosereol focusing on the elementsof o principle to resolve a cosefoirly-
:stote."Thecourt alsoemphosizedthat "[o] porty seeking spe-
dficperformonceof o real estqtecontroctmust prove thot he
Reormat
f ion
l.;+omntiort is an equitablerernedyusedwhen the partieshaveimperfectlyexpressed tl-reir
.-:reementin writing. Reforrnationallowsa court to rewrite the contract to reflect the par-
:..s' lrue intentions.Courts order reformation rnost often when fraud or rnutual mistake
: present.fBExAMFG-r5sl If Keshancontractsto buy a forklift from Shelleybut the writ-
=1 contractrefersto a crane,a mutual rnistakehas occurred.Accordingly,a court could
;iorm tfie contract so that the writing conforms io the parties' original intention as to
'.iich pieceof equipmentis being sold' E
Courts frequently reform contractsin two other situations.The first occurswhen hvo
:ties who have made a binding oral contract agreeto put the oral contract in writing
-1t. in doing so, rnakean error in statingthe terrns.Universally,tlre courtsallow into evi-
*-1ce the correct terms of the oral contract,therebyreforming the written contract.The
..cond situation occurs when the partieshave executeda written covenantnot to cotn-
:.te (seeChapter I l). If the covenantnot to competeis for a valid and legitimatePurPose
.uch as the sale of a business)but the area or tirne restraintsare unteasonable,some
er-rtire
- rurts will reform the restraintsby making thern reasonableand will enforce the
- ,-ntractasreforn-red.Oiher courts,however,will ihrow the entire restrictivecovenantout
the remedies,includ-
.. illegal. Exhibit l5-l or-rthe following page grapl'ricallypreser-rts
rq reforr-nation,that are availableto ihe nonbreachingparty.
R..califrom Chapter B that a quasi contract is not a true contract but rather a fictional
:rrltLractthat is imposedon the partiesto preventunjust enrichment. Hence, a quasicon-
contract exists.The legal obligation
.:ct providesa baiis for relief when no er-rforceable
not set uP
l?. Similarly, courts often refuse to order specific performance of constructiotl contracts becanse coutts are
- , ' p e r a l e ar co l l sl ru cfi o l l su P Cr vi50ror
s ellgllleer s.
575llNIImEt
CONTRACTS
Ar eUse d
W h e nQ u a sCi o n tr a cts
Qr-rasicontract is a iegal theory under which an obligation is imposed in the absenceof
an agreement.It allowsthe courtsto act as if a contractexistswhen there is no actual con-
tract or agreementbehveenthe parties.The couris can alsouse this theory when the par-
ties have a contract,but it is unenforceablefor some reason.
FfiT.Efffiim Thefunction of a Quasi-contractualrecoveryis often granted when one party has partially performed
quasicontractis to imposea legal under a contractthat is unenforceable.It providesan alternativeto suir-rgfor damagesand
obligationon a partywho madeno
actualpromise. allows the party to recover the reasonable value of the partial performance.
lxExAMpLE r5Tol Ericson contractsto build two oil derricksfor Petro Industries.The der-
ricks are to be built over a period of three years,but the partiesdo not createa written
contract.Therefore,the Statuteof Fraudswill bar the enforcementof the contract.l3After
Ericson compleiesone derrick, Petro Industriesinforms him il-ratit will not Pay for the
derrick. Ericson can sue PetroIndustriesunder the theory of quasicontract. E
T h eR e q u ir e m eonfts Co n tr a ct
Qu a si
To recoveron a quasicontracttheory,the party seekingrecoverymust showthe following:
13. Contracts that by their terms cannot be performed within one year from the day after the date of contract
formation must be in writing to be enforceable (see Chapter 13).
r-
3il ffilTffiiErl
ANDREMEDIES
BREACH
for certain
-\ contract may include provisionsstatingthat no damagescan be recovered
hpes of breachesor thatdamageswill be limited to a maximum atnottnt. The contract
may also providethat the only remedyfor breach is replacenent, r-epair,or refund of the
pui.hrr. price. Provisionsstatingthat no damagescan be recoveredare calleclexculpatory
,lourn, (see Chapter ll). Provisionsthat affect tfie availability of certain remecliesare
calledlimitation-of-liabilityclauses. fi|.ftIll Exculpatoryclausesmay be
Whether thesecontractprovisionsar-rdclauseswill be enforcedclependson the type of heldunconscionable, dePending on
the relativebargaining positions
breachthat is excusedby the provision.For example,a clauseexch-rdingliability for neg- to
of the partiesandthe importance
ligence may be enforcedin some cases.When an exculpatoryclausefor negligenceis the oublicinterestof the business
cJntained in a contractmade betweenpartieswho have roughly equal bargainingporver, seekingto enforcethe clause.
the clauseusr-rally will be enforced.The Uniform Commercial Code (UCC) specifically
allows limitation-ofliability clausesto be included in contractsfor the sale of goods,as
ri.il1be discussed in detailin Chapter20.15A provisionexcludingliability-for fraudulent
or intentional injury, however,will not be enforced.Likewise,a clauseexcludingliabilit,v
tbr illegal actsor violationsof the law will not be enforced.
At iir,t. ir-rthe following casewasthe enforceabilityof a limitation-ofJiability clausein
a home-inspectioncor-rtract.
14. Pronouncedftuahrl-tuhmmehr-oo-rvuht
15.LI CC 2 - 7 1 9 .
CASE1 5.5 -Con t inued There is no hard and fast definition of unconscionability.x x x Unconscionabilityis
an amorphousconceptobttiouslydesignedto establisha broadbusinessethic. The standard
of conduct that the term implies is a lack of good faith, honesQin fact and observanceof
fair dealing. fEmphasisadded.]
In determiningwhether to enforcethe terms of a contract,we look not only to its adhe-
sive nature, but also to the subject matter of the contract,the parties'relativebargaining
positions,the degree of economic compulsion motivating the adhering party, and the
public interestsaffectedby the contract.Where the provisionlimits a party'sliability, we
pay particular attention to any inequality in the bargainingpower and statusof the par-
tieq as y.f ,, the substanceof the contract.
DECISI0N
ANDREMEDY
rhestate
intermediate F0RCRITICAt
ANALYSIS- Soc i al
appellatecourtheld that the provisionwas unenforceable. Consideration between
whot isthedifference
The limitation-of-liability
clausein the CALcontractdid not the limitation-of-liobility clause in this cose and on exculpotory
limit the plaintiffs'recovery.
The court reversedthe ruling of clouse (discussedin Chopter I I on poge 301)?
the lower courtand remandedthe casefor further
proceedings.
tr
579EIIUHtr
ANDREMEDIES
BREACH
the remedies
In many cases,a nonbreachingparty hasseveralremediesavailable.Because
law of contracts requires the-party to
may be inconsistentwith one"artother,the common
.hoor. which remedy to pursue.This is called elsction of remedies. ]\ lurpoge of the doc-
trine of electio,tof ,emediesis to preventdouble recovery' FExEMFIFEA )effersonagrees
remedya
his mind and repudiates the contract' llE t$ltfllfl Which
io sell his land to Adams.Then iefferson changes plaintiffelectsdePendson the
Adams receives
Adams can sue for compensatorydamagesor for specificperformance..If subjectof the contract,the
also be granted specific of defensesof the breachingPartY'
a"-"g.r as a result of th. br"".h, she sf,ould not l9rfoP.anle
anvtacticaladvantages of choosing
unfairly end up with both the land
the salescontractbecausethat would mean she would a particularremedY,and what the
to choosethe rem-
and the damages.The doctrine of election of remediesrequiresAdgs plaintiffcan Provewith resPectto
double recovery. l51 the remedy sought'
edy she wantsland it eliminatesany possibilityof ,
'In the reme-
contras! remediesunder ihe UCC are cumulative.They include-all of
or lease contract.lb We will examine
dies availableunder the UCC for breach of a sales
20, in the context of ihe remedies
the ucc provisionson limited remediesin chapter
availableon the breach ofa contractfor the saleor leaseofgoods.
le S""UCCZ-lO',naZ-tt.
AVAILABLE
COMMONREMEDIES PARTY
TO NONBREACHING
Damages The legalremedydesignedto compensatethe nonbreachingpartyfor the lossof the bargain.By
(See pages 365-372.) awardingmonetarydamages,the court triesto placethe partiesin the positionsthat they would
haveoccupiedhad the contractbeen fully performed.The nonbreachingpartyfrequentlyhas a
duty to mitigate (lessenor reduce)the damagesincurredas a resultof the contract'sbreach.
Damagescan be classifiedin the followingbroadcategories:
1. Compensotorydamages-Damagesthat compensatethe nonbreachingpartyfor injuries
actuallysustainedand provedto havearisendirectlyfrom the lossof the bargainresultingfrom
the breachof contract.
a. ln breachedcontractsfor the saleof goods,the usualmeasureof compensatorydamagesis
the differencebetweenthe contractpriceand the marketprice.
b. In breachedcontractsfor the saleof land,the measureof damagesis ordinarilythe same as
in contractsfor the saleof goods.
c. ln breachedconstructioncontracts,the measureof damagesdependson which party
breachesand at what stageof constructionthe breachoccurs.
2. Consequentialdamages-Damagesresultingfrom specialcircumstances beyondthe contract
itself;the damagesflow only from the consequences of a breach.Fora partyto recover
consequentialdamages,the damagesmust be the foreseeableresultof a breachof contract,
and the breachingpartymust haveknown at the time the contractwas formed that special
circumstances existedthat would causethe nonbreachingpartyto incuradditionallosson
breachof the contract.Also calledspecial damages.
3. Punitivedomoges-Damagesawardedto punishthe breachingparty.Usuallynot awardedin
an actionfor breachof contractunlessa tort is involved.
4. Nominal domoges-Damagessmall in amount (suchas one dollar)that are awardedwhen a
breachhas occurredbut no actualinjuryhas been suffered.Awardedonly to establishthat the
defendantactedwrongfully.
5. Liquidoteddomoges-Darnages that may be specifiedin a contractas the amount to be paid
to the nonbreachingpartyin the eventthe contractis breachedin the future.Clausesproviding
for liquidateddamagesare enforcedif the damageswere difficultto estimateat the time the
contractwas formed and if the amount stipulatedis reasonable. lf the amount is construedto
be a penalty,the clausewill not be enforced.
CONTRACT
DOCTRINES
RELATINGTO REMEDIES
ContractProvisions A contractmay providethat no damages(or only a limitedamount of damages)can be recovered
LimitingRemedies in the eventthe contractis breached.Clausesexcludingliabilityfor fraudulentor intentionalinjury
(Seepages377-378.) or for illegalactscannotbe enforced.Clausesexcludingliabilityfor negligencemay be enforcedif
both partieshold roughlyequal bargainingpower.Underthe UniformCommercialCode (UCC),
remediesmay be limited in contractsfor the saleof goods.
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Answtersfor the even-numberedquestionsin this Far Reviewsection can be found on this text's occomponyingWeb site ot
wrrvw.cengage.com/blaw/blt. Se/ecf"Chapter t5" ond click on "For Review."
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E5"t LiquidatedDamages.Carnackcontractsto sell his houseand paystlie deposit,but becauseher expectedfinancingof the
lot to Willard for $100,000.The termsof the contractcall lor $90,000balancelalls through,she breachesthe contract.'lwo
Willard to pay l0 percentof the purchaseprice asa deposit weekslater,Carnacksellsthe houseand lot to Balkovafor
towardthe purchaseprice, or asa down payment.The terms $105,000. Willard demandsher $10,000back,but Carnack
further stipulatethat should the buyer breachthe contract, refuses,claiming that Willard's breachand the contractterms
Carnackwill retain the depositasliquidateddamages.Willard entitle him to keeo the deposit.Discusswho is correct.