Chapter 13

1. Chapter 13 Remedies

2. Remedies • Legal Remedies: to compensate the other party with money for breach of the contract, with compensatory, nominal, consequential, punitive, and/or liquidated money damages • Equitable Remedies: Granted only when money damages will not be adequate, • specific performance, injunction

3. Compensatory • Purpose: To place the injured party in a position as good as the one he would have occupied had the other party performed as he was supposed to under the contract. • Compensatory damages are all out-of-pocket expenses including loss of value, incidental damages, and consequential damages, minus the cost avoided by the injured party (savings) • Loss of value is the difference between the value of the promised performance , and the value of the actual performance, i.e., Seller is to deliver widgets, which are valued at $5000, but they are defective when delivered, and worth only $3000. Buyer may then recover $2000 in damages from S

4. Compensatory Damages • Compensatory damages flow from the wrongful conduct of the breaching party. • Damages are intended to place the injured party in as good a position as if the breaching party had not breached and had performed the contract as the plaintiff reasonably expected. • The usual measure of compensatory damages is the amount of money necessary to compensate the non-breaching party for the breach.

5. Compensatory Example • Harry owned a warehouse, & contracted with Drew to construct a road to the warehouse. The contract price was $42,324. After Drew completed the work, some cracks appeared in the road, causing improper drainage. Harry hired another contractor to do the repairs, costing Harry an additional $5,000. Harry refused to pay. Drew sued to recover the contract price. Result? • Answer: Drew wins and can recover $37,324, the contract price minus the costs of repairs. A contractor who has substantially performed the work is entitled to be paid, subject to any deduction for reasonable costs of repair for any deficiencies proved by the owner.

6. Consequential Damages • Consequential damages are special damages, which are foreseeable and result from circumstances outside the contract, which the breaching party must know will cause a special damage, i.e., lost profits • EX. Tom’s printing press breaks down and he needs a new part. Tom contracts to buy the new part which must be delivered no later than Nov 15 because if delivered any later, he won’t have time to complete a $100,000 Christmas card order. The Seller knows Tom needs the part by the 15th, and he told Tom it wouldn’t be a problem The part is not delivered until Dec and Tom loses the order. Tom receives $100,000 in consequential damages.

7. Nominal Damages • Nominal damages are awarded by jurors when a breach of a contract is proven by the plaintiff, but the plaintiff did not really suffer actual damages, or cannot prove any actual damages (loss). Generally speaking, nominal damages are very small and sometimes as little as $1 is awarded! In fact, several years ago the brand new, aspiring USFL football league sued the NFL in an antitrust suit. The jurors awarded the USFL $1 in nominal damages.

8. Example, Nominal damages • In order to boost his acting career, John agreed with Playgirl that it could publish a picture of him posing naked at Lion Country Safari as the centerfold of Playgirl magazine, without compensation. The magazine was published, with John as the centerfold, but no immediate career boost resulted. In April 1974, Playgirl wished to use the photo in its annual edition entitled Best of Playgirl. Playgirl and John entered into a contract whereby John’s picture was to occupy1/4 of the front cover of the annual edition. Due to Playboy’s editorial mix-up, John’s picture did not appear & John sued for breach of contract. • RESULT: John received nominal damages of $100 from Playgirl. The jurors acknowledged that Playgirl breached its contract, however they did not believe John proved that he suffered a loss, or reasonably certain damages. John could not prove that even if the picture had appeared, John’s acting career would have been boosted.

9. Incidental Damages • Damages which arise directly out of the breach. • Incidental damages make up part of compensatory damages • Ex: Agnes employs Bob for 9 months for $20,000 to supervise construction of a factory, but fires him without cause after 3 weeks. Bob spends $350 attempting to find comparable employment. He may recover the $350, plus any other actual loss he suffers for being unemployed. However, don’t forget, he must not sit around home and collect a paycheck for not working. He has a duty to mitigate damages and look for another job even though he had been fired without cause.

10. Punitive Damages • Awarded to punish the wrongdoer. Usually NOT allowed in contract cases, (except maybe if there was fraud, or something like a willful and malicious action, like an intentional refusal to pay valid medical claims of an insured) • For purposes of the CPA exam, assume that punitive damages are NOT awarded for a breach of a contract. • Punitive damages (usually huge amounts) are common in tort cases (i.e., awarded to victims injured by the Pinto rear-end collisions because Pinto knew the entire time that its gas tank was in a dangerous place, and didn’t want to correct it)

11. Liquidated Damages • The parties to a contract agree in advance to the damages to be paid in the event there is a breach, instead of suing for actual damages for a breach of a contract. • Liquidated damages should reasonably forecast the probable loss due to a breach. • Very common in construction contracts, i.e., Sue is the owner of a restaurant which is being built. The contractor and Sue agree in advance that Sue will receive $2000 a day in liquidated damages for every day the construction goes beyond the deadline. • Ex. An academic building is not completed on the date as originally scheduled The builders are currently in the penalty phase for FGCU’s new Academic Building, and are paying liquidated damages. • Parties to a contract must choose if they want a liquidated damages clause in the contract, or keep their right to sue for actual damages in the event there is a breach.

12. Liquidated Damages Example Text, # 2, CH 18 • Answer: (a)The contention that the agreement as to $1000 a day is a penalty is not a good argument. This is a legitimate liquidated damages provision. The agreed amount is reasonable, considering the cost of the apartment building and that damages are not readily ascertainable. • (b) Steven does not have to prove damages. One of the purposes of a liquidated damages provision is to eliminate the necessity of proving damages.

13. Liquidated Damages, #14 • Answer: Judgement for insurance company. A contract may contain a liquidated damages provision, but the sum agreed upon must be a reasonable measure of the anticipated harm. The amount of the bond was not a reasonable estimate of probable monetary harm or damage to the city but was rather a penalty. The harm which the city contends it would suffer is minimal and speculative. Since the agreement to pay $200 a day was actually a penalty provision, the court will not enforce it.

14. Liquidated Damages, # 5 • Pam wins.The $10,000 deposited as security for performance of all of Pam’s covenants in the lease, to be retained by Louis in case of any breach on P’s part, was a provision for a penalty rather than one for liquidated damages. For the slightest infraction of the lease by Pam, she would forfeit $10,000. This amount does not bear a rational relationship to such actual damages as might accrue in the event of any breach of the contract.Louis is limited to recovery of damages for breach of contract as if the liquidated damages clause were absent.

15. Mitigation of Damages • If a breach of contract occurs, the injured party is required to take reasonable steps to mitigate (reduce or lessen) damages he may sustain. • The injured party may not recover damages for loss that he could have avoided without undue risk or burden. • The non-breaching party must refrain from piling up losses after a breach. • The non-breaching party must not incur further costs, and must make reasonable efforts to limit losses by obtaining substitute goods at a reasonable price. EX- Sam is to buy widgets for $1000 from Bob. Bob breaches at the last minute. Sam has a duty to look elsewhere and make an attempt to purchase them elsewhere. If Sam can get them for $1200 from Pat, Sam will recover $200 from Bob. There are no damages for the aggravation that Sam suffered because of Bob’s breach.

16. Mitigation of Damages, # 3 • Jane may not recover the purchase price, but is entitled to recover such damages as she sustained not enhanced by her act in manufacturing the second lot of 500 shirts. When Sharon notified Jane that she could not use or dispose of the other 500 shirts and directed Jane to discontinue manufacturing them under the contract, Jane should have sought to minimize the damages.

17. Mitigation of Damages, # 16 • Judgment for Ballard. The general rule is that an employee’s damages for employer’s breach of contract will be mitigated by the amount she would earn if she found similar employment immediately after termination. The burden of showing the availability of such employment, however, is on the breaching party. The defendant (breacher) must assert that the employee-plaintiff had a duty to mitigate,and prove that there was other available employment.

18. Mitigation, # 12 • Judgment in part for Copenhaver. Although Berryman is liable for the monetary loss sustained by Copenhaver, C must exercise reasonable efforts in an attempt to minimize damages. C suffered no damages after the 6 month period because all his equipment was in use in other locations and was generating at least as much income. Moreover, C failed to prove that he could have expanded to the new locations had Berryman not breached the contract. Therefore, C may recover only $3525.84 as damages for losses sustained during the 6 month period.

19. Specific Performance • An equitable remedy, awarded where monetary damages are not an adequate remedy. Awarded when the contract is unique,ie, rare painting , land. • Ex. A court might order a Seller to specifically perform a contract for the sale of land if the Seller changes his mind & tells the Buyer he won’t sell. • Ex. X contracts to sell his unique coin collection to Y for $5000. Y pays the $5000 but X decides he wants to give the collection to his son instead, and X offers to return the $5000, plus $100 for Y’s trouble. Y does not want the money back - he wants the coins! Y can successfully sue X for specific performance of the contract and require X to transfer the coin collection for $5000.

20. Specific Performance, # 6 • A. Decision for Anne. Where shares of stock have no market value and are not on the market for sale, money damages are not an adequate remedy for breach of contract. For the sale of a part of these corporate shares , the purchaser may obtain specific performance of the contract. • B. Decision for Mary. Specific performance is denied where the remedy at law is adequate. Money damages may be awarded here in a lawsuit. Shares of U.S. Steel are readily available on the market. • Decision for Anne. A contract for the sale of land may be enforced by specific performance. Land is always unique, it is not the same as another parcel. The lack of commercial value, or its underdeveloped condition, are immaterial.

21. Injunction • A formal court order enjoining (commanding) a person to refrain from doing a specific act. • Equitable remedy • An employer may get an injunction to enjoin a former employee from breaching a non-compete clause.

22. Injunctions/Specific Performance, # 4 • A. An injunction against Stuart’s performing for Elaine would probably be granted if Elaine is a competitor of Charlotte’s and if Stuart’s services are unique or extraordinary. • Specific Performance should not be granted because a promise to render personal services will not be specifically enforced. This would allow for involuntary servitude (slavery)

23. Rescission • Rescission cancels a contract and returns the parties to a position they would have occupied if the contract had not been made. • Rescission may be brought about by mutual consent of the parties, conduct of the parties, or the court will “un-do” the contract. • Rescission is appropriate if: • a mutual mistake in contract formation • A material breach, unjustified failure to perform • A minor rescinds contract (disaffirms) • A unilateral mistake due to fraud, duress or undue influence • The other party knew or should have known of the mistake. The mistake was so obvious that a reasonable person must suspect that a mistake was made.

24. Reformation • When parties to a contract have an imperfect written understanding, reformation allows the contract to be rewritten to reflect the parties’ true intention.

25. Restitution • Restitution is the act of returning the consideration, value, to the aggrieved (innocent) party. • The purpose of restitution is to restore the aggrieved party to the position he occupied before the contract was made. • Minors might have to make restitution if they return damaged goods.

26. Election of Remedies • Parties may seek as many remedies as they like, and may choose whatever they desire.