When the Deal Goes Sideways: Understanding Breach-of-Contract Remedies
When you enter into a contract with a vendor, a customer, or an independent contractor, you expect that they will uphold their end of the bargain. Inevitably, however, there will come a time when a contract is breached. What kind of remedies can a business pursue? This post outlines the basics of breach of contract remedies, exploring the different options of what can (and probably cannot) be done in the event of a breach.
The Economic Loss Rule: Tort v. Contract Law
Generally, when parties have a contract, damages as a result of a breach are going to be contract damages, not some sort of tort claim. For the most part, contract damages are governed by the economic loss rule. The rule mandates “that a party suffering only economic loss from the breach of an express or implied contractual duty may not assert a tort claim for such a breach absent an independent duty of care under tort law.”1 “Economic loss is defined generally as damages other than physical harm to persons or property.”2
So usually, when you have a contract and damages are caused because of it, you have a breach of contract claim, rather than a tort claim. This means that you usually can’t claim pain and suffering, or ask for damages because your life is not as good as it was before the breach. So, what types of damages are available for a breach of contract? Here are some of the more common remedies available.
The most common remedy for a breach of contract is money. Compensatory damages attempt to place the non-breaching party in the position it would have been in had the contract not been breached. For example, if a supplier fails to deliver promised goods by the contract date, and that costs your business $50,000 due to a delay in getting your product out the door, then the damages awarded would compensate you for that economic loss.
Depending on the factual situation, lost profits and other consequential damages may be available. In general, in order for damages to be available, they must be proven with reasonable certainty, and they must have been foreseeable at the time the parties entered into the contract.
Liquidated damages are damages that are decided on ahead of time. They appear in the contract as a specific figure that will be paid for harm in the event of a breach. These damages are often used in situations where figuring out (or proving) actual damages would be difficult. So, the parties agree in advance to their best guess of what damages should be awarded. For example, if a non-disclosure agreement is breached, it may be difficult to figure out exactly what the monetary damages are to the business. In such a situation, the parties might agree ahead of time that, in the event of a breach, the breaching party will owe liquidated damages of $10,000.
Liquidated damages must be written into the contract in advance, so they are not going to be awarded after the fact. They also cannot be a type of penalty for breaching the contract; the amount has to be a reasonable estimate of the real loss that the parties would expect to incur.
If no amount of monetary damages will really compensate the non-breaching party for its loss, sometimes equitable remedies may be available. Think of equitable damages as related to fairness. One potential equitable remedy is specific performance. Specific performance is where the court orders that the contract actually be performed. Specific performance is typically reserved for cases where the good or service under contract is unique and money is just not an adequate solution. One example is in a real estate sale, because no other piece of real estate will be just the same.
Similarly, a court may order the party to stop breaching the contract. With injunctive relief, the court tells a party to stop doing something (or start doing something). This is similar to specific performance, but instead the court might order a party not to work (like in a non-compete situation). Or, the court might order the party to stop disclosing trade secrets or soliciting a company’s former employees.
A word about non-economic damages. Sometimes, when a contract is breached and you feel scorned, you may want to make the other side pay for the pain and suffering and the emotional damage you suffered as a result. For some people, emotional harm and mental anguish are real effects of a breach of contract. You may lose sleep or experience increased stress when a business partner fails to deliver, for example. But despite the fact that a breach of contract may keep you up at night, for the most part, a court is not going to award pain and suffering in the typical business dispute. Contract damages must be foreseeable at the time the contract is made in order for them to be available. This fact means you do not get noneconomic damages for most business contracts. That is because the parties in an ordinary business contract situation are not thinking about non-economic damages in the event of the breach. They are focused on the monetary impact. Remember the economic loss rule discussed above.
While you may not expect that a deal will go sideways, it happens. It is important to prepare for that possibility when the contract is initially drafted and executed. Not only might having a good contract incentivize performance, but it can also make getting the remedy easier. For example, if a contract provides for $15,000 in liquidated damages upon breach, and also specifies that the breaching party must pay for the attorney fees and costs of the non-breaching party, the other side might think twice about not living up to its end of the bargain. And, in that situation, if the other side does breach, having the remedies clearly spelled out will make it easier to see what is at stake and whether it is worth it to litigate.
1Town of Alma v. AZCO Construction, Inc., 10 P.3d 1256, 1264 (Colo. 2000).
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Because of the generality of the information on this site, it may not apply to a given place, time, or set of facts. It is not intended to be legal advice, and should not be acted upon without specific legal advice based on particular situations