Last month, we discussed how lawyers evaluate a breach of contract claim. This month, we focus on how damages are determined and calculated in these claims. Even when there is a clear breach of contract, it is not always clear what remedies are available. The first step is to determine what type of breach occurred. That may determine what remedies are available. For relatively innocuous breaches, remedies may be limited, or impractical to pursue. For more serious breaches, options may include forcing performance or multiple forms of monetary damage. We are always happy to advise you on your options.
What Type of Breach Has Occurred?
The law generally views breaches in four categories:
Nominal Breach: This type of breach is one with little or no damages. Generally, these claims are not pursued because there is either no harm to use to measure damages, or the amount in issue is simply not enough to justify making a claim. For example, if documents are to be delivered at 5:00 pm and they arrive at 5:30 pm with employee waiting time as the only harm, it simply is not worth pursuing.
Minor Breach: This type of breach occurs when one party fails to perform in some way, but stills provides the fundamental goods or services that were agreed to. For example, a contractor is nearly finished with construction of a retail store, but is behind schedule on a six-month project and finishes a week late. In this case, it is clear that the contract was breached, but the vast majority of performance was complete by the deadline. This will probably be considered a minor breach. The tenant paying for the construction may have a claim against the contractor for lost use of the property, but probably could not have terminated the construction contract in light of the substantial performance at the time completion was due.
Material breach: This type of breach is typically marked by performance fundamentally different from what was specified in the contract. An example would be a retailer who orders product from wholesaler for delivery by November 1 for the holiday sales season. The product does not arrive until December 15, too late to unpack, display, promote and sell most of the product by the end of the holiday season. In this case, the breach undermines the central purpose of the agreement, particularly if the contracted stated “time is of the essence” or gave the reason the delivery deadline was material.
Anticipatory Breach: This type of breach usually involves one party announcing that they do not intend to fulfill their end of bargain. Sometimes this is made clear by other conduct, but the hallmark is some type of communication that a party will not be performing when performance is eventually due. It is easy to imagine this being done in anger. However, this can be a strategic decision to give the other party a chance to find somebody else to do business with or otherwise prepare for the breach. It may help minimize damage and allow the breaching party to limit its risk.
In some contracts, specific terms dictate what events will be considered material. In some cases, a minor delay can cause significant damages, so a contract may specify that any delay is a material breach. However, if the contract is silent on an issue, the specific facts of your dispute to determine the type of breach. Generally, the more central the failure in performance is to the contract the more likely it will be a material breach.
What Remedies Are Available?
The type and amount of damages available is critical when deciding whether or not to take a case to court. A breach of contract that does not result in significant damages may not be worth pursuing, even if it has caused you a great deal of frustration. Specific performance and monetary compensation are the two general categories of contract remedies.
Specific performance involves forcing the breaching party to fulfill their obligations. A court will only enforce this remedy if there is a unique aspect of the situation for which monetary damages would not provide an adequate remedy. For example, if you agreed to purchase a tract of land, but the other party refuses to give you the title, a court might require specific performance because every piece of land is unique. Real estate is the typical context where specific performance is sought, and it is rarely appropriate in other contexts. In most cases, the relief is some form of monetary damages.
Compensatory Damages: This type of damage is intended to make the non-breaching party whole again. Compensatory damages typically come in two forms:
- Expectation damages are calculated based on what was supposed to be received under the contract. For example, you contracted to buy a product for $100 and the seller breached. You had not yet paid the original seller, but had to pay $150 for the product somewhere else. The buyer can recover the additional $50 from the original seller.
- Consequential damages are damages that are indirectly caused by the breach. For example, a supplier fails to deliver goods. You can purchase the goods at the same price from another supplier, but at a substantial delay. As a result, you lost customers, which resulted in lost profits for your business. You seek to recover the lost profits, which are consequential damages of the breach.
Liquidation damages are another way of measuring compensatory damages. These damages stated in the contract, which specifically says what the damages will be if there is a breach. They are often put into a contract in situations where actual damages may be difficult to quantify. Courts uphold liquidation damages if the damages actually are hard to quantify, but the clause makes a reasonable effort to actually estimate the compensatory damages. They will not enforce a clause that appears to be designed solely to punish the breaching party. Punitive damages are almost never awarded in contract cases.
Like any other aspect of a case, damages still must be proven. Consider a case involving the musician Prince and Revelations Perfume company, a judge found that Prince owed the company $3.9 million for failing to abide by an agreement to promote a perfume named after one of his albums. The damages were awarded for out-of-pocket expense that Revelations spent on the perfume, but a request for lost profits and punitive damages against Prince was denied. Revelations argued that the lost profits of $3 million were caused by Prince’s breach, but the court found the damages to be speculative and not based on independent research.
Determining the nature of a breach and estimating what the damages are help determine whether a case is worth litigating or not. This analysis is also important to determining whether you are still required to perform your duties under the contract. In all cases you still have a duty to mitigate damages, take reasonable steps to minimize your losses.
Chernoff Law can help you make the difficult decisions that arise in contract administration and disputes. We understand that every case has unique circumstances that require customized solutions. Contact Chernoff Law if you have questions about this article or need assistance with a contract dispute.