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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?

Under what circumstancesis the remedy of


rescissionand restitutionavailable?

When do courtsgrant specificperformanceas a


remedy?

What is the rationaleunderlying the doctrine of


election of remedies?

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

A breach of contractentitlesthe nonbreachingparty to sue for monetarydamages.As you


read in Chapter 4, damagesare designedto compensatea party for harm sufferedas a
result of another'swrongful act. In the context of contract law, damagesare designedto
compensatethe nonbreaching party for the loss of the bargain. Often, courts say that
innocent partiesare to be placed in the position they would have occupied had the con-
hact been fully performed.2

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).

Compensatoryand punitive damageswere discussedin Chapter 4 in the context of tort


law. Here, we look at thesetypesof damages,as well as consequentialand nominal dam-
ages,in the contextof contractlaw.

CompensatoryDamages Damagescompensatingthe nonbreachingpartyfor the lossof


the bargainare known ascompensatory damages.These damagescompensatethe iniured
party only for damagesactuallysustainedand provedto have arisendirectly from the loss
of the bargain caused by the breach of contract. They simply replace what was lost
becauseof the wrong or damage.
The standardmeasureof compensatorydamagesis the differencebehveenthe value of
the breachingparty'spromisedperformanceunder the contractand the value of her or his
achralperformance.This amount is reducedby any lossthat the injured partyhasavoided.
FTxArvrprETll You conhact with Marinot Indushiesto perform certain personalservices
exclusivelyfor Marinot during August for a payment of $4,000.Marinot cancelsthe contract
and is in breach.You are able to find anotherjob during Augustbut can earn only $1,000.
You normallycan sueMarinot for breachand recover$1,000ascompensatory damages. You
may also recoverfrom Marinot the amount that you spentto find the other iob. El Expenses
that are direcdyincurredbecauseof a breachof conhact-such asthoseincurred to obtain
performancefrom another source-are called incidental damages. INCIDENTAT DAMAGES
damages variesby type of contract. Certain types Damagesawardedto compensate
The measurement of compensatory
for expensesthat are directly
of contractsdeservespecialmention-contracts for the saleof goods,contractsfor the sale incurredbecauseof a breachof
of land, and constructioncontracts. contract-suchas those incurredto
obtainperformance
from another
source.
SaIe of Goods. In a contract for the sale of goods, the usual measure of compensatory
damages is the difference between the contract price and the market price'r
f.€n-EMFiFlsA MediQuick Laboratoriescontracts with Cal Computer Industries to pur-
chaseten model UTS nehvorkseryersfor $8,000each.If Cal Computer fails to deliverthe
ten servers,and the current market price of the seryersis $8,950,MediQuick's measureof
damagesis $9,500 (10 X $950), plus any incidental damages(expenses)causedby the
breach. E If the buyer breaches and the seller has not yet produced the goods,

2. Restatement (Second) of Contracts,Section347;andSection1-106(l) of the Uniform CommercialCode (UCC).


3. This is the differencebehveenthe contract price and the rnarketprice at the time and place at which the goods
wereto be deliveredor tendered.[SeeUCC 2-708, 2-71], and 2-715(l), discussed in Chapter19.]
I66mmml
CONTRACTS

conpensator)'damagesnormall1,equal the seller'slost profitson the sale,rather than the


differencebehveenthe contractprice and the market price.

Sale of Land. Ordinarily,becauseeachparcelof land is unique,the reinedyfor a seller's


breach of a contractfor a saleof real estateis specificperformance-that is, the buyer is
arvardedthe parcel of propertyfor which he or she bargained(specificperfonnanceis dis-
(becausethe
cussednore ftrlly later in this chapter).When tl-risremedy is ur-ravailable
properh,hasbeen sold,for example)or when the buyer is the party breach,the mea-
in
sure of damagesis typically the difference behveen the contract price and the n'rarket
price of the lar-rd.The n-rajorityof statesfollow this rule.

Construction Contracts. The measureof dair-rages ir-ia builclir-rgor constructioncon-


on which party breachesand when the breach occurs.The owner
tract variesdeper-rdir-rg
Fora summaryof how can breach at three different stagesof the construction:
contractsmay be breached
and other informationon contract I Beforeperformancehasbegun.
law go to
2 During performance.
3 Ntei performancehas been completed.
If the owner breachesbeforeperformancehas begun,the contractor cat-trecoverottly
tlie profitstl'ratr,vouldl'ravebeen made on the contract(that is, the total contractprice less
the cost of rnaterialsand labor). If the owner breachesduring performance, the contractor
can recover the profits plus the costsincurred in partiallyconstructing the buiiding.If the
owner breach es after the construction has been completed, the contractot can recover the
entire contract price plus interest.
Wl-ren the contractor breachesthe construction contract-either by failing to begin
constructiorror by stoppingwork partwaythrough the project-the measureof dan-rages
is the costof completion,rvhich includesreasonable compensationfor any delayin per-
formance. If the contractor finisheslate, the measure of dan'ragesis the lossof use. The
ConceptSummary below sumnarizes the rules concernir-rgthe measurement of damages
CONSEQUENTIAL DAMAGEs in breachedconsfuuction contracts.
Special damages thatcompensate
for a lossthat doesnot directlyor
immediatelvresultfrom the breach Consequential Damages Foreseeable damagesthat result fron-ia party'sbreach of con-
(for example,lost profits).Forthe tract are referreclto as consequential damages, or specialdamages.Consecluentialdam-
plaintiffto collectconsequential agesdiffer from con'ipensatory clamages in that they are causedb,vspecialcircttmstances
damages, they must havebeen
beyond the contract itself. They flow fron'r the consequences, or results,of a breach.
reasonably foreseeableat the time
the breachor iniuryoccurred. WLen a sellerfails to delivergoods,knowing that the buyer is planning to use or resell

PARTYIN BREACH T IM E O F BR EA C H ME A S U R E ME N TOF D A MA GE S

0rruncr Beforeconstructionhas begun. Profits(contractpricelesscostof materialsand labor).

dlurner Duringconstruction. Profitsplus costsincurredup to time of breach.

Owner Afterconstructionis completed. Contractpriceplus interest.

{ontractor hasbegun.
Beforeconstruction Costabovecontractpriceto completework.

eontractor Beforeconstructionis completed. all costsincurredby ownerto complete.


Cenerally,
567
ENEffitr
ANDREMEDIES
BREACH

thosegoodsimnlediately,consequentialdamagesare awardedfor the lossof profits from


the plannedresale.
| .l , I

ls E X A M p t E l 5 . I l U l l l n o l e Co n tla cts lo n a ve e Sp e clllc llem sl l l P P eC i o l l er-one l l l at sne


desperatelyneedsto repairher printingpress.In her contractwith the shipper,Gihnore
statesthatshemustreceivethe item by Monday,or shewill not be ableto print her paper
andwill lose$1,000.If theshipperis late,Gilmorenorrnallycanrecover theconsequen-
tial damages by thedelay(thatis,the $3,000in losses),
causecl Ei
'fo recoverconsequential
darrages, the breachingpartymustknow (or havereasonto trEIH n sellerwho doesnot wish
to take on the riskof consequential
know)thatspecialcircumstances will causethenonbreaching partyto sufferan additional damages canlimitthe buyer's
1oss.4Seethischapter's LandmarkintheLawfeatureon the followingpagefor a discus- remediesvia contract.
sionof Hadleyv. Baxendale,a casedecidedin Englandin 1854.

B$sinessownersand managercshouldrealiuethat it is sometlmesirnpossible to


prex/entc$ntraetdisputes.Theyshould also understandthat cclleetlngdamages
thrcugha courtjudgmentrequireslitigation,which can be exp*nsiveand time
consarming. Furtherrncre,(ourt iudgrnentsare cften difficult to emforce,
particularlyif the breachingparty does nst have sufficientassetsto pay the
darcagesarrvarded.5 For these reasons,partiesgenerallychooseto settle thelr
€ontractdisputesbefsre trial ratherthan litigate in hopesof being alryarded-and
being able to collect-damages{or other remedies}.In sum,there is *ltisdo*nin
the cld saying,"a bird in the hand is worth two in the bsshj'
tr
Punitive Damages Recall from Chapter 4 that punitive damagesare designedto pun-
ish a wrongdoerand to set an example to deter similar conduct in the ftiture. Punitive
dan'iages, or exemplarydamages,generallyare not awardedin ar-raction for breach of con-
tract.Such damages haveno legitimateplacein contractlaw becausethey are,in essettce,
penalties,and a breach of contract is not unlawful in a criminal sense.A contract is sirr-r-
betweenthe parties.The law may compensateone partyfor the loss
ply a civil relatior-iship
of the bargain-no more and no less.
In a few situations,a person'sactionscan causeboth a breachof contractand a tort.
EilaTTLE t57l Two partiesestablishby contracta certain reasonablestar-rdard or duty of
care. Failure to live up to that standardis a breach of the contract. The same act that
breachedthe contract may also constitutenegligence,or it may be an ilitentional tort if,
for example,the breaching party committed fraud. In such a situation, it is possiblefor
the nonbreachingparty to recoverpunitive damagesfor the tort in addition to compensa-
tory and consequentialdan-rages for the breach of contract. E

Nominal Damages When no actual damageor financial lossresr-rlts from a breach of


contract and only a technical injury is involved, the court may award nominal damages NOMINAL DAMAGES
A smallmonetaryaward(oftenone
to tl-ieinr-rocentparty. Nominal damages awards are often small, sucl-ras one dollar, but
dollar)grantedto a plaintiffwhen no
they do establish that the defendant acted wrongfuliy. Most lawsuits for norninal damages actualdamagewas suffered.
are brought asa natter of principle under the theory tl-rata breachhasoccurred and some
damagesmust be imposedregardlessof actual loss.

. 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

The rulethat noticeof special("consequentialJ


circumstances must be givenif consequentialdamages
are to be recoveredwas first enunciatedin Hadley u
Baxendole,a a landmarkcasedecidedin 1854.

Case Background Thiscaseinvolveda brokencrankshaft usedin a flour mill run by


the Hadleyfamilyin Gloucester, England. The crankshaftattachedto the steamenginein
the mill broke,and the shafthad to be sentto a foundrylocatedin Greenwichso that a
new shaftcould be madeto fit the other partsof the engine.
The HadleyshiredBaxendale, a commoncarrier,to tlansportthe shaftfrom
Gloucester to Greenwich. Baxendale receivedpaymentin advanceand promisedto
deliverthe shaft the following day.lt was not deliveredfor severaldays,however.As a
consequence, the mill was closedduringthosedaysbecausethe Hadleyshad no extra
crankshafton hand to use.The Hadleyssued Baxendaleto recoverthe profitsthey lost
duringthat time. Baxendalecontendedthat the loss of profitswas "too remote."
In the mid-l8o0s,it was commonknowledgethat largemills,suchas that run by the
Hadleys,normallyhad more than one crankshaft in casethe main one brokeand had to
be repaired,as happenedin this case.lt is againstthis background that the parties
arguedtheir respectivepositionson whether the damagesresultingfrom loss of profits
while the crankshaftwas out for repairwere "too remote"to be recoverable.

The lssuebeforethe Courtand the Court'sRuling Thecrucial before


issue
the courtwas whetherthe Hadleyshad informedthe carrier,Baxendale, of the special
circumstances surrounding the crankshaft's
repair, in particular
that the mill would have
to shut down while the crankshaft was beingrepaired.lf Baxendale had been notifiedof
this circumstance at the time the contractwas formed,then the remedyfor breaching
the contractwould havebeenthe amountof damagesthat would reasonably follow
from the breach-including the Hadleys'lost profits.
In the court'sopinion,however,the only circumstances communicatedby the Hadleys
to Baxendaleat the time the contractwas made were that the item to be transported
was a broken crankshaftof a mill and that the Hadleyswere the ownersand operatorsof
that mill.The courtconcludedthat thesecircumstances did not reasonably indicatethat
the mill would haveto stop operationsif the deliveryof the crankshaft was delayed.

Today,the rule enunciotedby the court in


this cose still opplies. When domages ore oworded, compensotion is given only for those
injuries thot the defendont could reosonqbly hove foreseen os o probable result of the
usuol courseof eventsfollowing o breoch.lf the injury comploined of is outside the usuol
ond foreseeablecourseof events,the plointiff mustshow specificallythot the defendont
hod reason to know the focts ond foreseethe injury. Thisrule opplies to contractsin the
online environmentos well. For exomple,supposethot o Web merchont /osesbusiness
(ond profits) due to o computer system'sfailure. lf the foilure wos coused by
molfunctioning softwore, the merchont normolly moy recover the lostprofits from the
softwore maker if theseconsequentioldomoges were foreseeable.

To bcote information on the web concerningfhe Hadleyv.


Baxendaledecision,go to this text's Web siteot se/ecf
"Chopter | 5," and click on "URLsfor Londmorks!'
145(1854).
341,156Eng.Rep.
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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.

x * x For the breachof an obligation arising from contract,the measureof damages,


exceptwhen othetwiseexpressly providedby the lawsof this state,is the amount which will
com.pensate the party aggrietedfor all the detrimentproximatelycausedtherebyor which in
the ordinary courseof thi,ingswould be likely to result therefrom.No damagescan be recov--
eredfor a Lreachof contractif they are not clearlyascertainablein both their nature and
origin. lF,mphasisadded.l
A person injured by the wrongful acts of another has a du[, to mitigate or minimize
the damagesand must protect himself if he can do so with reasonableexertion or at tri-
fling expJnse,and can i..ou", from the delinquent party only such_damages as he could
not, wiih reasonableeffort, have avoided. The du$ to mitigate damages is sometimes
referredto as the doctrineof avoidableconEequences' fEmphasis added.]
The flower] court found that Hansontried to mitigatehis damagesby looking for other
farmland to rent, but was unsuccessful.The couri also found that Hanson was farming
4,000 acresincluding the land he leasedfrom Boeder,but had the manpowerand equip-
ment to farm up to 5,000acres.The court concludedthat even if Hansonwasable to find
other farmland to rent, it would not have been replacementland but land to expandhis
farming operation,and thereforeit would not have reduced his damages.
The euidencepresentedat trial supportsthe court'sfindings. Hanson testifiedihat he
was not awareof any farmland availablefor rent and he ran advertisementsin the iocal
newspaperslooking for farmland to rent. He also testifiedthat during the courseof the
l"^r., h" wasfarming a total of 4,000 acresbut he had the ability to farm 5,000acres,and
he was alwayslooking for more land to rent to expandhis farming operation.
BoederagreesihaiHanson attemptedto find other farmland to rent and adn'ritshe did
not presentany evidenceto rebut Hanson'sclaim ihat he was unable to find any other
land availableto rent.

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

provision.Liquidated damagesdiffer frorn penalties.A penalty specifiesa certain amount PENATTY


A contractualclausethat statesthat
to be paid in the event of a defar-rltor breach of contract and is designedto penalize the
a certainamountof monetary
breachingparty.Liquidated damagesprovisioirsnormally are enforceable.In contrast,if damageswill be paid in the event
a court finds that a provisioncalls for a penalty,the agreementas to the amount will not of a futuredefaultor breachof
and recovery will be limited to actual damages.6 contract.Thedamagesarea
be enforced,
ounishmentfor a defaultand not
To determinewhether a particular provisionis for liquidated damagesor for a penalty, a measureof compensation for the
the court must ans\\ethvo questions: contract'sbreach.Theagreement
as to the penaltyamountwill not
I At the time the contract was formed, was it apparentthat darnageswould be difficult will be
be enforced,and recovery
to estimatein the event of a breach? limitedto actualdamages.

2 Was the amount set as damasesa reasonableestimateof those potential damagesand


not excessive?7

If the answersto botl-rquestionsare yes,the provisionnormally will be enforced.If either


answeris no, the provisionnormallywill not be enforced.Liquidateddarnages provisions
are frequentlyusedin constructioncontractsbecauseit is difficult to estimatethe amount
of damagesthat would be causedby a delay in completing the work.

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.

6 . T his is als ot h e r u l e u n d e rt h e UCC. Se eUCC 2 - 7 1 8 ( l) .


7. Restatement (Second) ofContracts,Section356(l).
8. WinthropResources Corp.tt.EatonHydraulics,Inc., ]61 F.3d465 18thClr. 2004)
572IINIIUEI
CONTRACTS

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.

Consequential Specialcircumstances,of which the breach- The injuredpartyis giventhe entirebenefl


Damages ing partyis awareor shouldbe aware, of the bargain,suchas forgoneprofits.
causethe injuredpartyadditionalloss.

PunitiveDamages Damages are normallyavailable


onlywhen Thewrongdoeris punished,and othersare
a tort is also involved. deterredfrom committingsimilaracts.
NominalDamages Thereis no financialloss. Wrongdoingis established
without actual
damagesbeingsuffered.The plaintiffis awarded
a nominalamount(suchas gl) in damages.

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.

In some situations,damagesare an inadequateremedy for a breach of contract.In these


cases,the nonbreachingparty may askthe court for an equitableremedy.Equitable reme-
dies include rescissionand restitution,specificperformance,and reformation.

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.

RESTITUTION Restitution To rescinda contract,both partiesgenerallymust make restitution to each


An equitableremedyunderwhich other by returning goods,property,or funds previouslyconveyed.l0Ifthe physicalprop-
a personis restoredto his or her
originalpositionpriorto lossor erty or goodscan be returned,they must be. If the propertyor goodshavebeen consumed,
injury or placedin the positionhe restitutionmust be made in an equivalentdollar amount.
or shewould havebeenin hadthe Essentially,restitution involvesthe recaptureof a benefit conferredon the defendant
breachnot occuned.
that has unjustlyenrichedher or him. Andreapays$32,000to Myles in
return for his promiseto designa housefor her. The next day,Myles callsAndreaand tells
her that he hastaken a positionwith a largearchitecturalfirm in anotherstateand cannot
design the house. Andrea decidesto hire another architeci that afternoon.Andrea can
requirerestitutionof $12,000becauseMyleshasreceivedan un justbenefitof $32,000.E

Restitution Is Not Limited to RescissionCases Restitutionn'raybe required when a


contract is rescinded, but the right to restitution is not limited to rescissioncases.

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

Restitritionmay be sought in actions for breach of contract, tort


:ctions, and other actior-rs at law or in equity. Usually, restitution
ian be obtained when funds or property has been transferredby
nistake or becauseof fraud.An awardin a casemay include resti
hrtion of funds or propertyobtained through embezzlement,con-
'.ersion,theft, copyright infringement,or misconductby a party in
a confidential or otl-rerspecialrelationship.

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

identicalgoodscan be bought or sold in the mar- An equitableremedyrequiring


in suchsituationsbecausesubstantially
exactlythe performance that was
ket. Only if the goodsare unique will a court grant specificperformance.For instance, usuallygrantedonlywhen
specified;
paintings,sculptures,and rare booksand coins are often unique, and n-ionetarydamages monetarydamageswould be an
inadequateremedyand the subject
'n'ill not enable a buyer to obtain substantiallyidentical srrbstitutesin the market.
matterof the contractis unrque.

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

Courtof Appealsof Indiana,842 N.E.2d586 (2006).

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

C A SE1 5.2 -Con tinu ed

f N Il{E WORDS
0t THEC0URT
. . . vAtDtK,
Judge.

il ;;a. * * * contendsthat Low failed to preservethe remedy of specificper-


fDavid]
formance here becausehe failed to perform sufficiently r-rnderthe Agreement. * * * The
Estatearguesthat "in order to be entitled to specificperformance,the claimant has the bur-
den to provefull and completeperformanceon their part of the conhact." Low x * * argues
that specificperformancewasappropriatebecausehe either substantially performedhis obli-
gationsunder the Agreementor offeredto do so,and this, rather than full and complete per-
formance, is all that is required to presewea claim for specificperformance.
We agree with Low. Because Low offered to perform his obligations under the
Agreement,specificperformancewasa proper remedy.x * * The Estatearguesthat Low
is not entitled to the remedy of specific performance because he did not pay the
November 2004 property taxes.Low, however, * * * offered to make the tax payment
and the Estaterefusedhis offer.
The Estatealso contends* * * that specificperformancewas inappropriatebecause
Low failed to tender the purchaseprice listed in the Agreementand arrangefor a survey
of the land beforethe closingdate.* * * The Estate'sargumentassumesthat a party may
not be grantedspecificperformanceunlessthat party hasfully and completelyperformed
under the terms of the contract. On the contrary, x * * specificperformanceis an appro-
priate remedyto a pafi who has substantially performedunder the terms of the contract.
RegardingLow's payment of the purchaseprice, we note that Low * * * had obtained
financing before the closing date, and there is nothing x x * to indicate that he was not
prepared to meet his financial obligations at that time. Further, * * * shortly after
Stainbrook'sdeath,the Executorof the Estaterequestedthat Low withdraw his offer, and
Low declined to do so, indicating that he was preparedto go forward. RegardingLow's
failure to order a land survey,the Estatepresentsno evidenceto suggestthat this matter,
particularlyin isolation,reachesthe level of failure to perform under the Agreement,and
r".d"fll;r: to sanctionsuch a rule. [Emphasisadded.]

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.

DICISI0N AND REMEDY rne stateintermediate party'ssubstantial


performance is sufficient
to supporta
appellatecourt held that specificperformancewas an court'sorderfor specificperformance.Here,"Low both
appropriateremedyin this caseand affirmedthe lower offeredto performand substantiallyperformedhis
court'sorder.The appellatecourt explainedthat a contracting contractualobligationsl'
nextpage
C A S E15.2-C onti nues
gmfiHE
575
ANDREMEDIES
BREACH

t A S E t5. 2-Con tinu ed


' l_ t"

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

Contracts for Personal Services Personal-service contractsrequire one party to work


:,,rsonally for another party.Courts norrnally refuseto grant specificperformanceof con-
::its for personal services. This is because to order a party to perfornr personalservices
.:rinst his or her will arnounts to a type of involuntary servitude,which is contrary to
.-,- public policy expressed in the Thirteenth Amendment to the U.S. Constitution.
l,frrrlover, the courts do not want to monitor contracts for personalservices.
€TAMilE rJ^elIf you contraci with a brain sllrgeonto perform brain surgeryon yolr
,rd the sllrgeonrefusesto perform, the court will not compel (and you certainly would
.-.i ri'ant) the surgeonto perform under thesecircunstances.There is no way the court
-rn assuren-reaniigfulp.iforrr.lrtt.. in such a situation.l2@

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

arisesbecausethe law considersthat the partyacceptingthe benefitshasmade an implied


promise to pay for them. Generally,when one party confersa benefit on another party,
justice requiresthat the party receivingthe benefit pay a reasonablevalue for it.

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:

t The party conferreda benefit on the other party.


2 The party conferredthe benefit with the reasonableexpectationof being paid.
5 The pariy did not act as a volunteer in conferring the benefit.
4 The party receivingthe benefit would be unjustly enriched by retaining the benefit
w i th o u tp a yi n g for i t.

lgExAMprEls.filIn Example I 5.10,Ericson can sue in quasicontractbecauseall of the


conditionsfor quasi-contractualrecoveryhave been fulfilled. Ericson built the oil derrick
with the expectationof being paid. The derrick conferredan obviousbenefit on Peho
Industries,and PetroIndustrieswould be unjustly enriched if it was allowed to keep the
derrick without payingEricson for the work. Therefore,Ericsonshould be able to recover
the reasonablevaiue of the oil derrick that was built (under the theory of quantum

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

The reasonablevalue is ordinarilyequalto the


meruitl4-"as mllch ashe or shedeserves").
iair marketvalue. E

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 .

SuperiorCourtof NewJersey,Appel,late 485,841 A2d9O7 (2OO4)'


Division,366 N.J.Super.
la wiib r a r v.r u tg e r s.e d u /se a r c h.shi ml a

but are not limitedto, CA[s negligence,


ANDFACTS Suchcausesinclude,
BACKGROUND * * *
EricLucierand KarenHaley,first- errors,omissions, [or] breachof contractl'Lucier
homefor reluctantlysigned the contract. On CALsbehalf,Al Vasys
time home buyers,contracted buy a single-family
to
in BerlinTownship, performed the inspection and issued a rePort'The buyerspaid
SI2B,5OO fromJamesandAngela Williams
Limited CAL$385.Shortly after Lucier and Haley movedinto the house,
NewJersey. The buyersaskedCambridge Associates,
buyers they noticedleaks, which required roof rePairs estimatedto cost
(CAL),to performa home inspection. CAL presented the
$8,OOO to $10,000. They filed a suit in a New Jerseystatecourt
to
with a contractthat limitedcAljs liability "$500,or 50o/oof
againstCALand others, seeking damages for the loss.CALfiled
feesactuallypaidto CALby Client, whichever sum is smaller'
a motionfor summary judgmen! claiming that under the
"searchby partyname'" Division,"
Select'Appellate clause,its liability,if any,was limitedto one-
limitation-of-liability
a. Clickonthelinkto
in thefirstboxand"Williams" box Click half of the contract
in thesecond price, or $192.50.The courtgrantedthe
andtype"Lucier"
theopinion. School
University
Rutgers of Law motion.The plaintiffs
appealed to a stateintermediate appellate
on "submitForm" to access
in Camden, NewJersey, maintainsthisWebsite. court.

l N THE W Q RDS 0F T tl E C QU R T . " . L 1 SAJ,.A .D. D i vi si on]


[Judge,A ppel l ate
****
we beein our analysisof the enforceabiliq'of tl-relirnitation of liabilitv clausewith the
f.rndarneital propositionthat contractswill be enforcedaswritten. Ordiliarily, courtswill
not rewrite contractsto favor a party,for the PurPoseof giving that party a better bargain'
However, courts have not hesitated to strike limitecl liabilih- clausesthat are uncon-
C A S E1 5 . 3 - C o n t i n u e sn e x t Pa g e
scionableor in violationof public policy.
I78:tr[iIUET
CONTRACTS

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.

We also focus our inquiry on whether the limitation is a reasonableallocation of risk


betweenthe partiesor whether it runs afoul of the public policy disfavoringclauseswhich
effectivelyimmunize partiesfrom liability for their own negligentactions.To be enforce-
able, the amount of the cap on a party'sliability must be sufficientto provide a realistic
incentive to act diligently.
Applying theseprinciplesto the home inspectioncontractbefore us, we find the limi-
tation of liability provision unconscionable.We do not hesitateto hold it unenforceable
for the following reasons:(l) the contract,preparedby the home inspector,is one of adhe-
sion; (2) the parties,one a consumer and the other a professionalexpert, have grossly
unequal bargainingstatus;and (3) the substanceofthe provisioneviscerates the contract
and its fundamental purposebecausethe potential damagelevel is so nominal that it has
the practical effect of avoidingalmost all responsibilityfor the professional's
negligence.
Additionally,the provision is contraryto our state'spublic policy of effectuatingthe pur-
pose of a home inspection contract to render reliable evaluationof a home's fitnessfor
p"rf}r; and holding professionals to certain industry standards.

The foisting of a contract of this type in this setting on an inexperiencedconsumer


clearly demonstratesa lack of fair dealing by the professional.* x *
x x * If, upon the occasionaldereliction, the home inspector'sonly consequenceis
the obligation to refund a few hundred dollars (the smaller of fifu, percent of the inspec-
tion contractprice or $500), there is no meaningful incentive to act diligently in the per-
formance of home inspection contracts.To compound the problem, such excessively
restricteddamageallowanceis grosslydisproportionateto the potential lossto the home-
buyer if a substantialdefect is negligentlyoverlooked.The impact upon the homebuyer
can be indeed monumental, consideringissuessuch ashabitability,health and safety,and
0"1":t1*:Oligations.

Of course,we expressno comment on whether or not Vasysor CAL breachedany duty


to Lucier and Haley under their agreement.Our holding here is only that if they are
liable, the extent of any damagesfor which they should be liable is not limited by the
terms of 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.

KyleBrunoenters I One day,while Brunois preparingfor a difficultstunt,he


into a contractwith getsinto an argumentwith the directorand refusesto
X Entertainment to be performany stunts'CanX Entertainmentseekspecific
a stuntmanin a movie performanceof the contract?Why or why not?
that X Entertainmentis
2 Supposethat while performinga high-speedwheelieon a
producing. Bruno is widely known as the best motorcycle
motorcycle,Brunois injuredby an intentionallyrecklessact
stuntmanin the business,and the movie,XfremeRlders,has of an X Entertainmentemployee'Will a court be likelyto
numerousscenesinvolvinghigh-speedf reestylestreet-bike clause?Why or why not?
enforcethe limitation-of-liability
stunts.Filmingis setto beginAugustI and end by DecemberI
so that the film can be releasedthe followingsummer'Both 5 Whatfactorswould a court considerto determineif the
partiesto the contracthavestipulatedthat the filmingmust end gt millionliquidateddamagesclauseis validor is a penalty?
on time in orderto capturethe profitsfrom the summermovie 4 Supposethat therewas no liquidateddamagesclause
market.The contractstatesthat Brunowill be paid l0 Percent (or the court refusedto enforceit) and X Entertainment
of the net proceedsfrom the moviefor his stunts'The contract breachedthe contract.The breachcausedthe releaseof the
alsoincludesa liquidateddamagesprovision, which specifies
film to be delayeduntil aftersummer.CouldBrunoseek
that if Brunobreachesthe contract,he will owe X Entertainment consequential(special)damagesfor lost profitsfrom the
gl million.In addition,the contractincludesa limitation-of-
summermovie marketin that situation?Explain'
liabilityclausestatingthat if Brunois injuredduringfilming,
X Entertainment's liabilityis limitedto nominaldamages'Using
the information presented in the chapter,answerthe following
questions.

damaSes 566 of damages569


mitigation restitution372
consequential 575
damages565
incidental nominaldamages557 specific
Performance
damages570
liquidated penalty571
580llNIIUn
CONTRACTS

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.

Rescission l. Rescission-Aremedywherebya contractis canceledand the partiesare restoredto the


and Restitution originalpositionsthat they occupiedpriorto the transaction.Availablewhen fraud,a mistake,
(Seepages372-373.) duress,or failureof considerationis present.The rescindingpartymust give prompt noticeof
the rescissionto the breachingparty.
2. Restitution-When a contractis rescinded,both partiesmust make restitutionto eachother by
returningthe goods,property,or funds previouslyconveyed.Restitutionpreventsthe unjust
enrichmentof the parties.

SpecificPerformance An equitableremedycallingfor the performanceof the act promisedin the contract.Thisremedy


(Seepages373-375.) is availableonly in specialsituations-suchas those involvingcontractsfor the saleof unique
goodsor land-and when monetarydamageswould be an inadequateremedy.Specific
performanceis not availableas a remedyfor breachedcontractsfor personalservices.

Reformation An equitableremedyallowinga contractto be "reformed,"or rewritten,to reflectthe parties'true


(Seepage375.) intentions.Availablewhen an agreementis imperfectlyexpressedin writing.
58IEItrEETE
BREACH
ANDREMEDIES

RecoveryBased An equitabletheoryimposedby the courtsto obtainjusticeand preventunjustenrichmentin a


on QuasiContract situationin which no enforceablecontractexists.The partyseekingrecoverymust show the
(Seepages375-377.) following:
t. A benefitwas conferredon the other party.
2. The partyconferringthe benefitdid so with the expectationof being paid.
3. The benefitwas not volunteered.
4. Retainingthe benefitwithout payingfor it would resultin the unjustenrichmentof the party
receivingthe benefit.

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.

Electionof Remedies A common law doctrineunderwhich a nonbreachingpartymust chooseone remedyfrom those


(Seepage379.) available.Thisdoctrinepreventsdouble recovery.Underthe UCC,remediesare cumulativefor the
breachof a contractfor the saleof goods.

,-;,:';1;t.;
-,t
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."

I What is the differencebehveencompensatorydamagesand consequentialdamages?


What are nominal damages,and
when do courtsawardnon-rinaldanages?
2 What is the standardmeasureof compensatorydamageswhen a contractis breached?How are damagescomputeddiffer-
ently in constructioncontracts?
5 Under what circumstancesis the remedyof rescissionand restitutionavaiiable?
4 When do courtsgrant specificperformanceasa remedy?
5 What is the rationaleunderlyingthe doctrineof electionof remedies?

ANDcAsEpRoBtEMs
scENARros
HVIoTHETrcAr
ffi
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.