Chapter 17: Breach and Remedies 19
Chapter 17
Breach and Remedies
Introduction
This chapter is concerned with the remedies available on a breach of contract to a nonbreaching party. A breach of contract is a failure to perform what a contracting party is under an absolute duty to perform. When a party fails to perform adequately, a wronged party can sue to obtain a remedy. A remedy is the means employed to enforce a right or to redress an injury.
The most common remedies available in contract law include damages, rescission and restitution, specific performance, and reformation. An award of damages is a remedy at law. The others are equitable remedies.
The basic remedy is damages. The most common type is compensatory damages, which are designed to put an innocent party in the same position he or she would have been in if the contract had been fully performed (if no breach had occurred). An understanding of this concept is essential to an understanding of what a nonbreaching party is normally entitled to on a breach of contract. Your students should realize that there is ordinarily no penalty for breaching a contract over and above restoring a nonbreaching party to the position he or she would have been in if the contract had been fully performed.
Additional Background—Breach and Remedies
The Restatement (Second) of Contracts is an authoritative source for many of the principles discussed in this chapter. Specific sections of the Restatement are noted throughout the text. After selected parts of the text in which a section is noted, or is otherwise relevant, the full text of that section is set out. The following is the section that relates to this part of the text—Restatement (Second) of Contracts, Section 235.
§ 235. Effect of Performance as Discharge and of Non-Performance as Breach
(1) Full performance of a duty under a contract discharges the duty.
(2) When performance of a duty under a contract is due any non-performance is a breach.
Chapter Outline
I. Damages
Damages are designed to compensate the injured party for the loss of the contract or give the injured party the benefit of the contract—that is, an innocent party is to be placed in the position he or she would have been in if the contract had been fully performed.
Additional Background—Damages
The following is a section of the Restatement (Second) of Contracts that relates to the discussion of the measure of damages in this part of the text—Restatement (Second) of Contracts, Section 347.
§ 347. Measure of Damages in General
Subject to the limitations stated in §§ 350-53, the injured party has a right to damages based on his expectation interest as measured by
(a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not having to perform.
A. Types of Damages
The broad categories are—
• Compensatory damages—To cover direct losses and costs.
• Consequential damages—To cover indirect and foreseeable losses.
• Punitive damages—To punish and deter wrongdoing.
• Nominal damages—To recognize wrongdoing without a showing of a monetary loss.
1. Compensatory Damages
Compensatory damages compensate the injured party for the loss of the bargain (that is, for injuries proved to have arisen directly from the loss). Incidental damages (expenses that are caused directly by a breach of contract such as those incurred to obtain performance from another source) may also be recovered. The actual measure varies by type of contract.
Case Synopsis—Case 17.1: Hallmark Cards, Inc. v. Murley
Janet Murley, vice-president of marketing for Hallmark Cards, Inc., was terminated when her position was eliminated as part of a corporate restructuring. She was paid $735,000 in severance. Later, Hallmark filed a suit in a federal district court against Murley, alleging that she had disclosed confidential information to a subsequent employer. Hallmark was awarded damages that included the $735,000 payment and $125,000 that Murley received from her subsequent employer. Murley appealed.
The U.S. Court of Appeals for the Eighth Circuit held that the award of the $125,000 was improper. “In an action for breach of contract, a plaintiff may recover the benefit of his or her bargain” but “the law cannot elevate the non-breaching party to a better position *** had the contract been completed on both sides.”
......
Notes and Questions
Murley retained Hallmark-related documents on her private computer for five years after her termination but deleted them forty-eight hours before an inspection of her hard drive. How might Hallmark have discovered these facts? Hallmark might have used the techniques and procedures of discovery to learn what Murley had done and when she had done it. Information stored electronically can be the object of a discovery request. Electronic evidence, or e-evidence, consists of all computer-generated information. E-evidence can reveal significant facts that are not discoverable by other means—such as who created a file and when, and who accessed, modified, or transmitted it. A party usually must hire an expert to retrieve e-evidence.
Before the trial in the Hallmark case, during discovery, Hallmark learned that a computer company called LuciData had made a copy of Murley's hard drive. LuciData forwarded that copy to Hallmark's computer expert. At the trial, the expert testified that in the two days leading up to LuciData's review, sixty-seven documents had been deleted from Murley's computer, eight of which plus one folder related to Hallmark.
In this case, what was the basis for Hallmark’s suit against Murley? How much did Hallmark seek to recover in the form of damages? Janet Murley was Hallmark Cards, Inc.’s vice-president of marketing until Hallmark eliminated her position. Murley and Hallmark entered into a separation agreement under which she agreed not to work in the greeting card industry for eighteen months, disclose or use any confidential information, or retain any business records relating to Hallmark. In exchange, Hallmark offered Murley a $735,000 severance payment. After the non-compete agreement expired, Murley accepted a consulting assignment with Recycled Paper Greetings (RPG) for $125,000. Murley disclosed to RPG confidential Hallmark information. On learning of the disclosure, Hallmark filed a suit in a federal district court against Murley, alleging breach of contract. Hallmark sought $860,000 in damages, including the $735,000 severance payment and the $125,000 that Murley received from RPG.
What were Murley’s arguments against the amount of damages that Hallmark requested? With respect to the $735,000 severance payment, Murley argued that Hallmark was not entitled to a return of its full payment under the parties' separation agreement because Murley fulfilled some of the material terms of that agreement (for example, the non-compete provisions). With respect to the $125,000 that Murley received from RPG, Murley argued that Hallmark could not legitimately claim entitlement to her compensation by RPG for consulting services that were unrelated to Hallmark.
Did the court award Hallmark the amount that it sought in damages? A jury awarded Hallmark the amount that it sought in damages, and the trial court issued a judgment that included this amount. On appeal, the U.S. Court of Appeals for the Eighth Circuit affirmed the judgment in Hallmark’s favor but vacated the award of damages. The appellate court remanded the case to the lower court to reduce the award of damages to include only the amount of Hallmark’s severance payment. “Hallmark's terms under the separation agreement clearly indicated its priority in preserving confidentiality. At trial, Hallmark presented ample evidence that Murley not only retained but disclosed Hallmark's confidential materials to a competitor in violation of the terms and primary purpose of that agreement.” But the appellate court concluded that Hallmark could not legitimately claim entitlement to Murley’s compensation from RPG for services that were not related to Hallmark. “In an action for breach of contract, a plaintiff may recover the benefit of his or her bargain as well as damages naturally and proximately caused by the breach and damages that could have been reasonably contemplated by the defendant at the time of the agreement. [But] the law cannot elevate the non-breaching party to a better position than she would have enjoyed had the contract been completed on both sides.”
What would be the measure of damages if Murley were liable for negligence? Compensatory damages is the usual measure of damages for an injury in negligence. In fixing damages in actions based on negligence that arise in a situation involving a breach of contract, the amount is whatever puts the plaintiff in as good a position as he or she would have been in if the defendant had not breached the contract. The value that the non-breaching party lost or the amount that the non-breaching party had to pay is an acceptable measure, just as it is acceptable for a breach of contract.
Additional Background—
The Famous Case of the “Hairy Hand”
To illustrate the principle that nonbreaching parties are to put in the position that they would have been in had their contracts been fully performed, professors long introduced students to the famous case of the “hairy hand.” The case concerns an unsuccessful operation on a boy’s scarred hand. Damages assessed against the doctor were based on the difference between the value to the boy of the hand that the doctor had promised and the value of the hand in its condition after the operation.
Sometimes forgotten in a dry discussion of the underlying principle is the boy whose hand was operated on. The boy, George Hawkins, suffered an electrical burn when he was 11 years old. The resulting scar was small and did not significantly affect the use of the hand. A doctor persuaded George to undergo surgery, emphasizing the social problems that the scarred hand might create. The operation was performed shortly after George’s eighteenth birthday. The skin graft was taken from George’s chest. There was infection and considerable bleeding. George was hospitalized for three months. The graft covered the thumb and two fingers and soon was matted with hair. Movement of the hand was greatly restricted. The jury awarded George $3,000 (approximately $24,000 in today’s dollars). After the Supreme Court of New Hampshire ordered a new trial, the case was settled for $1,400 ($11,200 in today’s dollars). George’s father took him to specialists in Montreal to see if the appearance of the hand could be improved, but was advised that nothing could be done.
George was so embarrassed by his hand that he did not go back to high school. Throughout his life, he was sensitive about his hand. He worked at various semi-skilled occupations, was a chauffeur for some years, married late in life, and had no children. He died of a heart attack at the age of fifty-four.
Dr. McGee, the doctor who convinced Hawkins to undergo the surgery that changed his life, had a somewhat different career. After the operation, McGee’s medical practice flourished. He was very popular and served as mayor of Berlin, New Hampshire, the scene of the events in the case. He formed McGee’s Symphony Orchestra as a hobby and performed throughout the area.a
______
a. Robert, “Hawkins Case: A Hair-Raising Experience,” 66 Harvard Law Review 1 (1978).
a. Standard Measure
The standard measure of compensatory damages is the difference between the value of the breaching party’s promised performance and the value of the actual performance reduced by any loss the injured party avoided.
b. Sale of Goods
The usual measure is the difference between the contract price and the market price. When a buyer breaches and the seller has not yet produced the goods, the measure is lost profits on the sale, not the difference between the contract and market prices.
c. Sale of Land
When the damages remedy applies to the breach of a contract for a sale of land, in most states, the measure is the difference between the contract and market prices of the land.
d. Construction Contracts
The measure here depends on which party breaches and when—
• Breach by owner—If the owner breaches before construction, normally the contractor may recover only the profit that would have been made on the contract. If the owner breaches during construction, normally the contractor may recover the profit plus costs incurred to that point. If the owner breaches after construction, normally the contractor may recover the contract price plus interest.
• Breach by contractor—If the contractor breaches by stopping in mid-project, the owner may recover the cost of completion, including compensation for any delay. If the contractor finishes late, the owner may recover the loss of use.
• Breach by both owner and contractor—If the contractor substantially performs, the owner may recover the cost of completion, if completion would involve no economic waste.
Additional Cases Addressing this Issue —Consequential Damages
Cases involving consequential damages include the following.
• Mnemonics, Inc. v. Max Davis Associates, Inc., 808 So.2d 1278 (Fla.App. 5 Dist. 2002) (the damages recoverable under a lease for copier equipment, which included the lessor’s agreement to maintain the copiers, included consequential damages sustained by the lessee when the lessor breached the maintenance provision and the lessee was held liable to its assignee of the equipment and the lease).
• Austin Homes, Inc. v. Thibodeaux, 821 So.2d 10 (La.App. 3 Cir. 2002) (the damages recoverable under a contract to build a house included consequential damages that were nonpecuniary, because the nature of the contract was to gratify a nonpecuniary interest and under the circumstances the builder knew, or should have known, that a failure to perform would cause that kind of loss).
2. Consequential Damages