Following up on the prior week’s show discussing basic contract law, the June 20 edition of The Business Show could be called “When Contracts Go Bad”, as we discussed the primary remedies available in the event that one party to a contract breaches the contract.
There are four primary remedies that may be available when a breach of contract occurs:
1. Money Damages: when lawyers refer to “damages”, we are talking about the recovery of a monetary sum; we also sometimes refer to them as “money damages”. Money damages come in several varieties. “Compensatory damages” are damages for a monetary amount that is intended to compensate the non-breaching party for losses that result from the breach. The aim is to “make the injured party whole again”. There are two types of compensatory damages; namely, compensatory damages and consequential damages. Damages that are intended to cover what the injured party expected to receive from the contract are referred to as “compensatory damages”, and the calculations of these are usually straightforward as they are based on the contract itself or market values. “Consequential damages” are intended to reimburse the injured party for indirect damages other than contractual loss; lost profits are a classic example of consequential damages. In order to recover, the injuries must “flow from the breach,” i.e. be a direct result of the breach, and be reasonably foreseeable to both parties when they entered into the contract. Consequential damages are not always easy to prove, and oftentimes the contract itself limits the recovery of consequential damages.
Another type of money damages are “liquidation damages”, which are damages that are specifically stated in the contract. These are available when damages may be hard to foresee and must be a fair estimate of what damages might be if there is a breach. Both parties determine what would be an appropriate amount during contract negotiations.
“Punitive damages” are damages that are intend to punish the breaching party and to deter him or her from committing any future breaches. They are rarely awarded in contract cases.
2. Specific Performance: In a situation where monetary damages will not properly remedy the situation, equitable remedies are typically awarded. Chief among these is the equitable remedy of specific performance. A court decree that requires the breaching party to perform their part of the bargain indicated in the contract. For example, if the seller of real estate breaches the purchase agreement, given that real estate is unique, a court may find that damages are not sufficient as a remedy and can order the seller to close the sale of the transaction.
3. Injunction: An injunction is a type of equitable remedy in the form of a court order that requires a party to do or refrain from doing specific acts. A party that fails to comply with an injunction faces criminal or civil penalties, including possible monetary sanctions and even imprisonment.
4. Lien: In some cases, a party may be entitled to a lien. Liens are authorized by statute and the primary example of where a lien can serve as a remedy for breach of contract is a mechanics lien. When a contractor makes improvements to a property and the property owner fails to pay for the improvements, that constitutes a breach of contract and, so long as certain statutory requirements are met to perfect the lien (chief among these being pre-lien notice), the contractor can file a lien against the property and, if still not paid, ultimately commence a foreclosure of the lien.