Remedies for Breach of Contract
What are the Remedies for Breach of Contract?
There are several remedies for breach of contract, such as award of damages, specific performance, rescission, andrestitution. In courts of limited jurisdiction, the main remedy is an award of damages. Because specific performance and rescission are equitable remedies that do not fall within the jurisdiction of the magistrate courts, they are not covered in this tutorial.
What Damages Can Be Awarded?
There are two general categories of damages that may be awarded if a breach of contract claim is proved. They are:
1. Compensatory Damages. Compensatory damages (also called “actual damages”) cover the loss the nonbreaching party incurred as a result of the breach of contract. The amount awarded is intended to make good or replace the loss caused by the breach.
There are two kinds of compensatory damages that the nonbreaching party may be entitled to recover:
A. General Damages. General damages cover the loss directly and necessarily incurred by the breach of contract. General damages are the most common type of damages awarded for breaches of contract.
Example: Company A delivered the wrong kind of furniture to Company B. After discovering the mistake later in the day, Company B insisted that Company A pick up the wrong furniture and deliver the right furniture. Company A refused to pick up the furniture and said that it could not supply the right furniture because it was not in stock. Company B successfully sued for breach of contract. The general damages for this breach could include:
• refund of any amount Company B had prepaid for the furniture; plus
• reimbursement of any expense Company B incurred in sending the furniture back to Company A; plus
• payment for any increase in the cost Company B incurred in buying the right furniture, or its nearest equivalent, from another seller.
B. Special Damages. Special damages (also called “consequential damages”) cover any loss incurred by the breach of contract because of special circumstances or conditions that are not ordinarily predictable. These are actual losses caused by the breach, but not in a direct and immediate way. To obtain damages for this type of loss, the nonbreaching party must prove that the breaching party knew of the special circumstances or requirements at the time the contract was made.
Example: In the scenario above, if Company A knew that Company B needed the new furniture on a particular day because its old furniture was going to be carted away the night before, the damages for breach of contract could include all of the damages awarded in the scenario above, plus:
• payment for Company B’s expense in renting furniture until the right furniture arrived.
2. Punitive Damages. Punitive damages (also called “exemplary damages”) are awarded to punish or make an example of a wrongdoer who has acted willfully, maliciously or fraudulently. Unlike compensatory damages that are intended to cover actual loss, punitive damages are intended to punish the wrongdoer for egregious behavior and to deter others from acting in a similar manner. Punitive damages are awarded in addition to compensatory damages.
Punitive damages are rarely awarded for breach of contract. They arise more often in tort cases, to punish deliberate or reckless misconduct that results in personal harm.
How are Compensatory Damages Calculated?
The calculation of compensatory damages depends on the type of contract that was breached and the type of loss that was incurred. Some general guidelines are:
Standard Measure. The standard measure of damages is an amount that would allow the nonbreaching party to buy a substitute for the benefit that would have been received if the contract had been performed. In cases where the cost of the substitute is speculative, the nonbreaching party may recover damages in the amount of the cost incurred in performing that party’s obligations under the contract.
Contracts for the Sale of Goods. The damages are measured by the difference between the contract price and the market price when the seller provides the goods, or when the buyer learns of the breach.
Are There Any Limitations on the Award of Compensatory Damages?
An important limitation on the award of damages is the duty to mitigate. The nonbreaching party is obligated to mitigate, or minimize, the amount of damages to the extent reasonable. Damages cannot be recovered for losses that could have been reasonably avoided or substantially ameliorated after the breach occurred. The nonbreaching party’s failure to use reasonable diligence in mitigating the damages means that any award of damages will be reduced by the amount that could have been reasonably avoided.