Business Law II – Week 2 Lecture 1

Contractual Remedies

The next issue concerns discharge of contractual responsibilities and remedies available if a party breaches the contract.

There are several ways that a party can discharge contractual duties. The most common method is performance. When the parties do what they contracted to do, the contract is terminated. Normally a failure by one party to complete his or her duties will work to relieve the other side of having to meet a duty of performance. However, sometimes this can work unfairness when one party meets most of her duties. The courts, therefore, consider whether there was substantial performance. If there is substantial performance, the other party will still be held to her obligations. The non-breaching party will still be able to get damages, however, for any loss occasioned by the breach. There are other scenarios that will also work to discharge contractual duties. If performance is conditioned on a certain event and that event never occurs, the contract will be discharged by the failure of the condition. Additionally, the contract may be discharged by an agreement to make a mutual recession, or the parties may agree to a novation. A novation will substitute a new party for an original party. However, this requires the agreement of both parties.

In addition, there are various legal doctrines that may work a discharge. The statute of limitations governs how long a party has to enforce a breach of contract action. This period of time will vary from state to state. Finally, the doctrines of impossibility or impracticability may operate a discharge if certain conditions are met. Impossibility of performance will discharge duties when performance becomes impossible in an objective sense, such as where a party in a personal contract dies or a change in law renders performance illegal. And commercial impracticability may discharge a party from performance when circumstances arise that make performance extremely difficult or costly. Furthermore, those circumstances must have been unforeseen at the time of contract formation.

Contractual remedies are available when there is a breach of contract. The most common form of redress are damages. There are several types of damages:

· Compensatory damages compensate the injure party for the loss of the bargain. The standard for compensatory damages is the difference between the value of the promised performance and actual performance minus whatever could be mitigated by the non-breaching party. For example if Johnny hires Mark to paint his house for $500 and Mark breaches the contract and it costs Johnny $600 to find a new painter, the compensatory damages would be $100 dollars.

· Consequential damages are foreseeable damages that flow from the consequences of a breach that are caused from circumstances beyond the contract. The breaching party must know or have reason to know that the special circumstances will cause the nonbreaching party to suffer additional loss. By way of illustration, ABC Corp. hires XYZ Repair to repair a factory machine for $500. XYZ breaches the contract and as a result ABC Corp has to shut down for a week and loses $20,000 because there is no way to get a replacement machine. In this case, that $20,000 represents potential consequential damages. Whether ABC Corp. may collect those will depend on whether XYZ was told (or should have known) about the $20,000.

· Punitive damages are designed to punish wrongful conduct. They are typically not awarded unless a tort, such as fraud, is also involved.

· Liquidated damages are contractual provisions that set the damages in advance of a breach. To be enforceable, the damages must have been difficult to estimate and the estimate must be reasonable.

In addition to damages, there are some other equitable remedies. In some cases, the parties may be entitled to rescission or a canceling of the contract. These are available for example when fraud, mistake or duress exists. If recession is permitted, the parties must give restitution of returning goods or money conveyed to the other party. Finally, specific performance, or requiring the other party to perform the contract, may be awarded only where money damages are inadequate, for example in situations involving rare goods or for a parcel of land.