Contracts

Damages

Damages for breach of contract fall into three categories:

Expectation = Prospect of gain from the contract. (Rest.2d §347)

Reliance = Detriment the injured party may have incurred by changing his or her position. (Rest.2d §349) Purpose of reliance damages is to restore the victim of breach to the position he or she would have been in if the contract had not been made. (Rest.2d §344(b).)

Restitution = Interest in the benefits the injured party has conferred upon the breaching party. (Rest.2d §344 (c).)

As a general rule, the objective of contract damages is to insure that the aggrieved or injured party should receive what he or she expected from the bargain. To the extent that an award of money can do so, the aggrieved party should be placed in the same position as though the contract had been fully performed. This is what is known as protecting the expectation interest of the parties. (Rest.2d §344(a))

An injured party may recover for a breach of contract the amount which will compensate the party "for all the detriment proximately caused by the breach, or which, in the ordinary course of things, would be likely to result from the breach." (Cal.Civ.Code §3300.)

Limitations on Damages

There are several limitations on awarding damages to make the non breaching party whole:

A party cannot recover for loss which he could have avoided  or mitigated through his reasonable efforts. (Rockingham Cty. v. Luten Bridge Co. 35 F.2d 301 (4th Cir. 1929); Rest.2d §350)

Damages are limited to those losses which were foreseeable, i.e., in the contemplation of the parties at the time the contract was entered into. (Hadley v. Baxendale. 9 Exch. 341(1854).) ; Rest.2d 351.) Special damages are recoverable when special circumstances exist which cause some unusual injury to the plaintiff. The plaintiff can only recover special damages if defendant knew or should have known of the special circumstances at the time the defendant entered into the contract.

In order to be recoverable, damages must be established with reasonable certainty. (Rest.2d §352; Cal.Civ.Code §3301.) In other words, damages which are speculative, remote, imaginary, contingent, or merely possible cannot be recovered. (McDonald v. John P. Scripps Newspaper (1989) 210 CA3d 100, 104.)

No damages will be awarded for the mental distress or emotional trauma that may be caused by a breach of contract. (Rest.2d §353.)

The injured party should not be in a better position as a result of the breach than he or she would have been if the contract had been fully performed. (Cal.Civ.Code §3358.) However, the quasi contractual remedy of quantum meruit allows a promisee to recover the value of services he gave to the defendant irrespective of whether he would have lost money on the contract and been unable to recover in a contract action. (United States v. Algernon Blair 479 F.2d 638 (4th Cir. 1973).)

Damages Under the UCC

How are damages measured for the seller's breach of a contract of sale?

When there is a repudiation of the contract by the seller the buyer may "cover" under UCC 2-711 (1)(a). Under UCC 2-712 he may recover as damages the difference between the cost of goods in substitution for those due from the seller and the contract price together with incidental or consequential damages or under UCC 2-713 he may have damages measured by the difference between the market price at the time of the breach and the contract price together with any incidental or consequential damages. The Code remedy of "cover" gives the buyer the right to recover the cost of a good faith purchase of substitute goods made without unreasonable delay. (UCC 2-712(1)(2)) The Code permits recovery of lost profits as consequential damages. (UCC 2-715) UCC 2-715(2)(a) bars consequential damages where the loss could have been avoided by "cover."

The objective of the law of contracts is not to punish the breaching party but rather to grant relief to the victim of the breach, by making him "whole" again. I.e., the purpose of awarding damages for breach is to put the victim in the position he would have been in had the contract been fully performed.

Seller's Damages When Buyer Breaches

Article 2 of the UCC contains four provisions that concern the recovery of a seller's general damages (as opposed to its incidental or consequential damages): 2-706 (contract price less resale price); 2-708(1) (contract price less market price); 2-708(2) (profit); and 2-709 (price). UCC 2- 708(1) provides for a measure of damages calculated by subtracting the market price at the time and place for tender from the contract price. If the goods have been resold, the seller can sue to recover damages measured by the difference between the contract price and the resale price under 2-706.

Loss of Profits

Loss of profits, present or future, as an element of special or consequential damages, may be recovered for a breach of contract if; 1) The loss is the direct and natural consequence of the breach, 2) It is reasonably probable that the profits would have been earned except for the breach, and 3) The amount of loss can be shown with reasonable certainty.

Lost Volume Sales

One that has a predictable and finite number of customers and that has the capacity either to sell to all new buyers or to make the one additional sale represented by the resale after the breach is known as a "lost volume seller." If the seller would have made the sale represented by the resale whether or not the breach occurred, damages measured by the difference between the contract price and the market price cannot put the lost volume seller in as good a position as it would have been had the buyer performed. In these cases the seller is allowed to recover as damages the profit on the lost volume sale. (Neri v. Retail Marine Corp. 285 N.E.2d 311 (N.Y. 1972).) Restatement 2d § 350, Comment d (1979) notes that if a seller would have entered into both transactions but for the breach, then the seller has lost volume as a result of the breach. Thus, lost profits are awarded to a lost volume seller, notwithstanding that the seller resells the item that a buyer contracted to buy, based on the principle that the seller was deprived of an additional sale and the corresponding profit by the buyer's breach.

Employment Contracts

An employee who was damaged as a result of a breach of an employment contract by the employer, has a duty to take steps to minimize the loss by making a reasonable effort to find comparable employment. If the employee through reasonable efforts could have found comparable employment, any amount that the employee could reasonably have earned by obtaining comparable employment shall be deducted from the amount of damages awarded to the employee. (Parker v. Twentieth Century-Fox (1970) 3 Cal.3d 176, 181-182.)

Liquidated or Agreed Damages

A provision for payment of a stipulated sum as liquidated damages will ordinarily be sustained if it appears that at the time the contract was made the damages, in the event of breach, will be incapable or very difficult of accurate estimation, that there was a reasonable endeavor by the parties to fix fair compensation, and that the amount stipulated bears a reasonable relationship to damages that will probably result and is not disproportionate to any damages reasonably to be anticipated. (Rest.2d § 356<) Stated another way, liquidated damage clauses are enforceable if 1) the amount fixed is a reasonable forecast of just compensation for any harm that would be caused by breach and 2) the harm that is caused by the breach must be uncertain or difficult to quantify. The view that liquidated damages clauses are enforceable so long as they do not constitute a penalty is sanctioned by UCC 2-718 and Calif Civ.Code §1671.

Border Between Tort and Contract Damages

The general rule is that punitive damages (as opposed to compensatory damages) are not recoverable for breach of contract, even if the breach is willful.  (See, UCC 1-305(1).) However, recent cases have tested the limits of this principle. In a cause involving tortious interference with an exisiting contract, the plaintiff may recover the full pecuniary loss of the benefits it would have been entitled to under the contract.  The plaintiff is not limited to damages recoverable in a contract action, but instead is entitled to the damages allowable under the more liberal rules recognized in tort actions.  (Rest.2d, Torts, § 774A.)  In Texaco, Inc. v. Pennzoil, Co. , 729 S.W.2d 768 (Tex.App.1987) the jury was held to have properly based its damage award on the replacement cost model.  The jury was correctly instructed that the measure of damages was the amount necessary to put Pennzoil in as good a position as it would have been in if its agreement with Getty had been performed.  The punitive damage award, which amounted to 40% of actual damages, was ruled not excessive.

Specific Performance

Specific performance is available when traditional substitutionary remedies (i.e. monetary damages) would be inadequate.  (See e.g., Rest.2d § 360, UCC 2-716) While a court may refuse to grant specific performance where such a decree would require constant and  long-continued court supervision, this is merely a discretionary rule of decision which may be ignored when the public interest is involved.  Specific performance will not be ordered when the party claiming breach of contract has an adequate remedy at law. (Rest.2d § 359) A remedy at law adequate to defeat specific performance must be certain, prompt, complete, and efficient to attain the ends of justice as a decree of specific performance.

Despite popular belief, there is no requirement that both parties be mutually entitled to the remedy of specific performance in order that one of them be given that remedy by the court. (Laclede Gas Co. v. Amoco Oil Co. 385 F. Supp. 1332 (E.D.Mo. 1974).)

Rescission of Contract

In lieu of monetary damages the parties may be entitled to the equitable remedy of rescission

For more information on nonsubstitutionary remedies, visit the Legal Remedies Home Page.

Print This Page Email Link to This Page © Republish or License This

© 2012 by lawschoolhelp.com and Craig A. Smith