One of the best pieces of advice I ever received in preparation for the FYLSE was to bring a copy of a contracts model answer discussing remedies to the FYLSE convention center to review before taking the plunge into the abyss. I cant remember the year of the model answer I picked but I remember that the model answer noted almost every remedy available. I stared at that model answer for ten minutes before walking into that convention center; it was the best last minute cram sessions I have ever had.
Not only did reviewing the model answer help awaken my brain, the test happens very early, but it also freshly placed all those contract remedies within memory distance. Remedies were always the hardest for me to memorize.
Damages Come in Many Shapes and Sizes
There are many factors that have to be reviewed when calculating damages in a contract analysis. There are liquidated damages, expectancy damages, consequential damages, limitations on those damages, and specific performance.
Just like you have an outline for contracts you need to have a sub outline for your remedies/damages discussion. I always start with liquidated damages because those are generally clearly established in the fact pattern and when they are noted, they are an excellent source of discusable issues.
When the parties to an agreement, before a breach happens, establish an amount of money that will adequately compensate an injured party for a potential breach, you have a liquidated damages clause. In order to recover on the liquidated damages clause the aggrieved party must show that at the time of formation the damages to be anticipated upon breach of the agreement were either uncertain or difficult to prove and the amount of money agreed upon by the parties was a reasonable estimate of the losses to be expected by a breach.
UCC 2-207 allows a contract for the sale of goods to specify liquidated damages in an amount that is reasonable in light of the anticipated or actual harm.
Remember, the liquidated damages must be a reasonable estimate of the expected losses. This means that if you have a fact pattern with a liquidated damages clause which is outrageous your more likely than not looking at a penalty. Imagine Bob and Sally have a valid enforceable contract where Bob will sell all his widgets to Sally for three years and Sally will purchase all Bob’s widgets for three years. The cost of widgets is .01 cents per widget and the total amount of widgets to be purchased will not exceed $1,000 worth of widgets in a year. In the written agreement is a clause that states “if either party breach this agreement the breaching party must pay $5 Million Dollars”.
Such a provision is likely to be interpreted by a court as a penalty because it was crafted to compel a party into performance through potential horrendous consequences due to a breach. This is not the purpose of damages; the purpose of damages is to place the aggrieved party in the same position as though the contract had been fully performed.
Remember, damages intended to place the aggrieved party in the same position as though the contract had fully been performed are called compensatory damages, nominal damages are awarded where there is a breach but no actual damages proven, and punitive damages which are designed to punish the breacher and are generally not available for breach of contract.
When attempting to identify the measure of damages you have three distinct analysis discussions to keep in mind: contracts involving the sale of goods, contracts involving sale of real property, and contracts involving services.
- Sale of Goods
- Buyer Breach – Difference between unpaid contract price and market price at time and place of contract (plus incidental and less unspent expenses)
- Resale – Resale done in good faith and in a commercially reasonable manner; but if goods have been identified to the contract and the buyer breaches by refusing to purchase and seller is unable to resell the seller can recover the full contract price.
- Loss volume – If the standard measure of damages (market price minus contract price) is inadequate to place the seller in as good a position as he would have been had there been performance, the seller may recover the profit which the seller would have made from full performance.
- Seller Breach – Market price at the time buyer learned of the breach and the contract price (incidental and consequential damages may be added, as well as expenses saved and spent calculated).
- Cover – A buyer may also cover through reasonably purchasing or contracting to purchase substitute goods (without unreasonable delay and as always, in good faith). Then the difference is the amount spent on the cover and the contract price (and incidental expenses if there are any).
- Sale of Property
- Buyer Breach – Difference between the contract price and the market price.
- Seller Breach – Difference between market price and the price agreed upon in contract.
- Employer Breaches Employment Contract – Recovery is lost wages due or payable minus any earnings or wages that could have been earned in alternative employment.
- Employee Breaches Employment Contract – Difference between compensation paid to a substitute employee and what would have been paid to the breaching employee.
- Construction Owner Breach – Recovery is the expected profit plus any cost expended on the construction up to the time of the breach.
- Construction Builder Breach – Recovery is the difference between the actual cost of completing construction and the contract price.
Damages contemplated by the contracting parties at formation may be recoverable if proven. Consequential damages are recoverable if they could be reasonably foreseen by the party possessing the knowledge and experience of the breaching party at formation. This means that if you have a fact pattern where both parties are aware of possible losses due to the breach of the agreement at the time of formation, this is sufficient to put the parties on notice that such losses would be the probable result of such breach (making them reasonably foreseeable and anticipated).
LIMITATIONS ON DAMAGES Damages must be proven with reasonable certainty and may not be “randomly generated”. Remember the point of damages is to place the parties back into a position they had been prior to or as if the contract had been formed; this means that damages that are too uncertain to be determined will not be randomly determined.
Reliance and Restitution
Reliance damages are costs expended by the party who is injured in in preparation for or partial performance prior to the breach. Reliance damages pretty much speak for themselves. If you have relied on the contract to be performed and put a lot of money and time into preparation of the performance you should be entitled to recover that amount back due to the reliance.
Restitution damages require the breaching party return to the injured party the value of the benefit conferred upon the breachor. Sometimes you hear restitution referred to as “recovery in quasi-contract” or “quantum meruit”. Just like everything in 1L there are special ways to look at special restitution recovery situations.
- Restitution in Breach of Contract – The value of the benefit conferred on the breaching party.
- Restitution for Breachor – The value of the benefit conferred by the breachor to the other party, minus any damages caused to that party by the breach (remember most jurisdictions will not allow a willful breachor restitution).
- Restitution for Services – The measure of reasonable value of the services plus any materials furnished if furnished.
I don’t remember specific performance being covered heavily in 1L but wouldn’t you know, it was on my FYLSE! Specific performance is designed to place the injured party in the position he would have occupied if the contract had been performed by making the breaching party render the promised performance. As you can imagine, courts do not like awarding this remedy.
Questions to identify if specific performance is available:
- Are the terms of the contract definite and certain to allow a court to determine what each party must do to render their promised performance?
- Is the remedy at law inadequate to compensate the injured party for the losses caused by the breach of the contract?
- Is specific performance even feasible; will the court have difficulty enforcing the decree or will the court have to extensively supervise the decreed performance?
- Is this a mutuality of remedy (meaning both parties are on equal footing, no one gaining a benefit and the other not)?
- Are there any defenses to enforcement through unclean hands, hardship, or latches?
Contract remedies may seem like a lot of work and a lot to remember but if you take it one step at a time, one fact pattern at a time, it slowly begins to make sense.
This is a brief overview.
Remember, the only way to really get this stuff down is to do it yourself. Print up some FYLSE past essays and begin practicing! You can do this!
The Queen Bee of 1L