Contracts, and what to do when they blow up

Today, I’m talking about contracts, and remedies for breach of contracts. This may be a bit arcane and seem outside the scope of my usual posts; but I’m planning on a couple of posts regarding breach of contract; specifically, contracts to make a will and long term leases. In the interest of keeping those posts to a digestible length I want a separate post on remedies for breach of contract.

Essentially, if someone enters into a contract and then does not deliver what was promised, there are three basic remedies, or ways to fix, the breach.

First, recision. Recision of a contract is where the contract is invalidated, and a court will try to restore both sides to the same position they were in prior to the contract or rescind the contract. This can’t always be done perfectly, and in some cases it can’t be done at all; but theoretically, both parties should wind up where they were before the contract. Recession is a relatively rare remedy, and the most common reasons for recession are either fraud or misrepresentation or impossibility of performance. Misrepresentation can be either deliberate or negligent, that is by mistake. I am not going to go into the details of what constitutes fraud or misrepresentation, this can be a very technical area and the details matter a lot. But, at least under some circumstances, if someone has misrepresented something in a contract, then a court may be able to set aside or vacate the contract. Be aware though, that in order to rescind a contract, the side asking that the contract be undone must normally offer whatever they received back; if they received money, they need to offer the money back; if they received property, they would be expected to return the property.

Impossibility is where the contract is impossible to perform as written. Once again, I’m not going to go into the details, what constitutes impossibility, who can raise the defense, what has to be shown, etc., is rather technical; but overall, it is relatively rare for courts to rescind contracts; very generally courts will try to find a way to uphold contracts, particularly where one party has already performed. In addition, recision is one of those things that usually has to be asked for very early in the contract; once parties have ‘changed position’ courts can be reluctant to trying to undo the deal. Nonetheless, under certain circumstances, recision may be available.

More commonly, if someone has breached a contract one of two remedies are likely; damages, or specific performance.

Damages are to compensate the party that did not breach the contract for what that party lost. The most common measure of damages is what is called “cover” , or the difference in cost or money between what the contract called for and what the person actually received or paid, depending on the nature of the transaction. Two examples:

A) Say you sign a contract to buy 50,000 6d nails from someone who sells nails. You’re a builder, you need those nails in order to build houses for sale. And, say, for the sake of argument, that the price quoted for those nails is $5,000. After you sign the contract and make arrangements to receive the nails, the seller tells you that he can’t deliver them at that price. Either he can’t deliver those nails at all, or that the price is $10,000. In the case where the seller says he can’t deliver them at all; you go out and buy the nails from someone else, but they cost you $8,000.

Your damages in this case are going to be the difference in price between what was agreed and what you actually paid; either $5,000 in the case where the supplier raised the price, or $3,000 in the case where you had to buy them from a different supplier. That difference is what is called “cover”; or your damages.

B) Say you’re the seller of something; you agree to sell and the buyer agrees to buy something at a price; the buyer then cancels the contract and does not complete the sale; your cover is likely to be the difference between what the buyer agreed to and what you actually sold it for. As an example, you agree to sell your house to someone for $100,000. You’re happy, that’s top dollar, you are getting what you want. But before the buyer completes the transaction, the bottom drops out of the real estate market; all of the sudden that $100,000 doesn’t look like such a good deal to the buyer. The buyer refuses to close on the deal. You go looking for a new buyer and eventually find someone to buy the property at $75,000. You lost $25,000 on the deal; your ‘cover’ is $25,000. That’s your damages.

Now, to complicate this just a bit; there may or may not be ‘incidental’ damages available; incidental damages are those damages beyond the difference in price; in the case of the builder and the nails, maybe the builder lost the sale of a house because he didn’t have the nails to build it; the loss of profit on the sale of the house is an incidental damage. In the case of the homeowner, say the homeowner had to pay additional insurance and taxes on the property until it was sold; that would be an incidental damage.

Are incidental damages recoverable in a contract dispute? This can get tricky; once again, details matter, but very generally, only those damages that were “foreseeable” at the time of making the contract are recoverable. Courts can draw some very fine lines regarding what was foreseeable, but frequently courts will find that most incidental damages are not recoverable in many contract disputes; but the facts matter very much. In addition, some contracts specifically disclaim incidental damages; most consumer contracts, contracts that people sign when buying things, or service agreements, either disclaim incidental damages entirely or limit them. Lastly, some statutes either allow or disallow incidental damages in certain circumstances. This can get complicated, and each individual case needs to be reviewed in light of the facts, the contract and the law.

Additionally, some contracts limit or set a level of damages at the outset, called
Liquidated Damages
. This also can get very complicated.

The other remedy that people sometimes seek in a contract dispute is specific performance. Specific performance is where one party is asking a judge to order the other side to do what was promised.

Specific performance is considered an extraordinary remedy; it is not available in all cases. Very generally, in order to get specific performance, you need to show that there is something special, something unique, about what you are seeking; if what you are seeking is available from other sources, specific performance is not usually going to be available. In the case of the nails I discussed above, nails are considered “fungible”; one nail is pretty much like any other nail; if one supplier can’t or won’t honor their contract to deliver nails at a set price, you can go out and buy other nails; the price may be more, but the nails themselves are pretty much the same. Specific performance is normally not available where the item is fungible, where the same or substantially similar thing is available on the open market.

What is specific performance available for? Unique things. The most common thing specific performance is available for is real estate; the law presumes that each piece of real estate is unique and a court will, under some circumstances, order the performance of a real estate contract. If I sign a contract for a particular house that I fell in love with, and the seller backs out of the deal, a court will likely order that the seller sell me the house at the price the seller agreed to.

A contract dealing with a one of a kind item, a painting, a custom made item, may be subject to specific performance. Additionally, certain types of contracts may give rise to specific performance; usually those contracts where someone agrees not to do something; typically a non-compete contract; if I sell you a business, and I agree not to compete with you for a certain period of time within a certain area, and then I go out and open up a competing business in violation of the contract, a judge may order me to specifically perform the non compete contract, usually by issuing an injunction prohibiting me from competing.

The availability of specific performance may also be governed by the contract itself; many real estate contracts provide for specific performance if the seller tries to back out; and many non compete contracts also provide for specific performance as a remedy.

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