Remedies for Breach of Contract in the United States
Remedies for Breach of Contract: Summary
In this entry, Remedies for Breach of Contract covers:
- Contract Damages vs. Tort Damages
- Limits on Contract Damages
- Liquidated Damages
- When Monetary Damages Are Inadequate
Remedies for Breach of Contract: Main Elements
The coverage of Remedies for Breach of Contract includes the following main elements:
Contract Damages vs. Tort Damages
Find out an overview of this topic, in relation to Remedies for Breach of Contract, in the legal Ecyclopedia.
Limits on Contract Damages
There is information on this basic subject in the legal Ecyclopedia.
Liquidated Damages
Find out an overview of this issue following this link (topic).
When Monetary Damages Are Inadequate
There is information on this basic subject matter in this legal reference.
Contract Remedies Theory
Two kinds of remedies have traditionally been employed for breach of contract: legal relief and equitable relief. Legal relief normally takes the form of money damages. Equitable relief normally consists either of specific performance or an injunction – that is, the party in breach may be ordered to perform an act or to refrain from performing an act. A variety of different contractual remedies have traditionally been available – for example, replevin, reformation, recession, cancellation, or specific restitution. See D. Dobbs, Handbook, pp. 1-3; E. Farnsworth, Contracts, pp. 815-816. Damages, specific performance, and injunctions, however, are the types of remedies most commonly used to enforce a contract. In contrast, recession and cancellation are used to avoid enforcement of a contract and reformation is used to change the terms of a contract. (…) Contractual fundamental entitlements of the parties and arises as a result of the parties’ consent to transfer alienable rights. See Randy E. Barnett, “A Consent Theory of Contract,” Columbia Law Review, vol. 86 (1986), pp. 269-321.
Law Governing the Choice of Contract Remedies
The present rule governing legal and equitable remedies can be simply stated: Legal relief – money damages – is available as a matter of right. Equitable relief specific performance or injunction – is available at the discretion of the court upon a showing by the party seeking enforcement that legal relief is somehow “inadequate.” Put another way, money damages are the presumptive form of remedy for breach of contract. Specific performance orders and injunctions are exceptional forms of contract remedies. ‘while the rules governing the choice of remedies can be complex, the following summary should suffice for purposes of this discussion.
Money damages are said to be inadequate when they fail to fully compensate the victim of the breach, as, for example, when the item contracted for is “unique” and therefore unavailable from another source, or when the amount of monetary damages is difficult to prove. Traditionally, land is presumed to be unique and specific performance has therefore come to be the presumptive form of relief in such cases. For contracts involving other types, of property, the burden traditionally has fallen on the victim Of the breach to prove uniqueness of unavailability. Finally – these rules and presumptions notwithstanding – specific performance has traditionally been unavailable to enforce contracts for the provision of personal services, even if these services can be shown to be unique and damages therefore are in fact inadequate.
Courts have given two reasons for their reluctance to award specific performance. First, they have sought to avoid the task of administering specific performance decrees. It is sometimes difficult for a court to monitor the quality of performance or to assess claims that performance is not being appropriately provided. Partly for this reason courts have been somewhat receptive to imposing injunctions on parties in breach. “Instead of ordering that the act be done, as a court would in granting specific performance, the court orders forbearance from inconsistent action.” E. Farnsworth, Contracts, p. 824. For example, a person who promised to work for another might be barred from obtaining alternative employment elsewhere. In the analysis that follows, I shall not separately consider such orders. If a contract itself specifies that the party in breach should refrain from performing a given act – as it did in the famous injunction case of Lumley v. Wagner, 1 DeG. M. & G. 604, 42 Eng. Rep. 687 (Ch. 1852) – then an injunction is a form of specific performance. If there is no such term (either expressed or implied-in-fact) in the agreement then there is no consensual basis for such relief.
Second, specific performance decrees for breaches of personal services contracts have been thought to pose moral problems as well, “because they are perceived to be substantively unacceptable limitations on personal freedom.” Forcing someone to perform a contract strikes courts as involuntary servitude and is said by judges to be against “public policy.” See E. Farnsworth, Contracts, p. 838 (specific performance ‘may be refused on the ground that, though the act or forbearance that would be compelled is not against public policy, the use of compulsion to require that act or forbearance is against public policy.”) A “public policy’ rationale usually obscures rather than illuminates the true reasons for a judicial decision. While the involuntary nature of court-ordered labor or ‘servitude’ is obvious, it is less clear exactly why such an order is unjustified when the commitment being enforced was originally consensual. In Part III, the philosophical distinction between alienable and inalienable rights will be employed to provide support for this longstanding judicial sentiment.
Finally, a fundamental premise of contract damages has traditionally been that, while victims of a breach should be fully compensated for the injury caused by the breach, they should not be overcompensated – that is, they should not be placed in a better position than they would have been in had the contract been performed. If most victims would be completely and more efficiently compensated by money damages, and if specific performance was generally perceived by contract breakers as a more onerous sanction, then there is a risk that a general presumption favoring specific performance would give many if not most victims the ability to extort a premium in return for accepting money damages.
Problems With the Present Approach
Given that no system of proof is perfect, the allocation of the burden of proof has an important. effect on allocating the costs of error. The phrase ‘costs of error’ refers to “enforcing contracts that should not be enforced and . . . not enforcing contracts that should be enforced.’ Richard A. Epstein, “Unconscionability: A Critical Reappraisal,” Journal of Law and Economics, vol. 18 (1975), p. 300. Such errors of judgment are an inevitable product of using general rules of conduct, burdens of proof, and fallible fact finding. For example, by requiring more evidence that a contract existed before granting relief, fewer “false” contracts will be erroneously enforced. At the same time, however, more ‘true’ contracts will erroneously go unenforced. Conversely, by making the burden of proof less stringent, fewer ‘true’ contracts will erroneously go unenforced and more ‘false’ contracts will erroneously be enforced. See generally, George Sher, “Right Violations and Injustices: Can We Always Avoid Trade-offs?” Ethics, vol. 94 (1984), pp. 212-224.
The current approach to contract remedies places two burdens on victims of breach. First, to receive money damages, victims must prove with a fair degree of certainty that an injury has in fact been sustained and that the injury has a determinate value. But it may sometimes be difficult to prove what injuries have been sustained or to place an accurate monetary value on those injuries which can be proved. Therefore, a fully compensatory judgment may be hard to obtain. In contrast, by giving the victim what he bargained for, specific performance may in many cases better assure that the victim is fully compensated.
Second, to get specific performance, victims must somehow prove that money damages are inadequate. When money damages are in fact inadequate, but inadequacy cannot be proved or the court errs in assessing the evidence, the victim of breach suffers under the current approach. Suppose instead that the burden was reversed and the party in breach had to show why damages were adequate. With such a rule, the party in breach would suffer when damages are in fact adequate, but proof of adequacy cannot be made out or the court errs in assessing the evidence.
The burden of proving the existence of a contract and the fact of breach is properly placed on the victim of a breach. But when the victim has met these twin burdens and it comes time to choose among remedies, justice would seem to require that – as between the party who has been proved to have breached a contract and the innocent victim of the breath – the former should bear the greater risk of adjudicative error.
Moreover, a requirement that all victims of breach (except breaches involving land) show that money damages are inadequate may conflict with the reasonable expectations of many, if not most parties to contracts. Persons with common sense – that is, those who have not taken a first-year contracts class (or been counseled by a lawyer who has) – would naturally assume, for example, that when a good is purchased the purchaser obtains a right to the good. They would not assume that the seller has an option to deliver or pay damages – if damages can be proved – unless the victim can prove that the good is unique.
When such persons enter a contract, the terms of their bargain are unlikely to reflect the increased risk of enforcement error that, unbeknownst to them, contract law imposes on them. This becomes a problem when one party is knowledgeable about contract law and obtains the commitment of the ignorant party at a lower price than would be obtained if the rules of contract remedies better comported with common sense. While some disparity of information between parties is inevitable and irremediable information disparities concerning the law of contract itself should be minimized.
Finally, placing the burden of showing inadequacy of damages on the victim of a breach means that those victims who need specific performance must pay a higher price to obtain justice than those victims requiring only money damages – a burden that is magnified in a legal system that does not compensate successful parties for their legal expenses. One reason for such discrimination might be higher costs associated with enforcing a specific performance decree. But enforcement costs will not necessarily be higher for some categories of contracts – for example, contracts calling for the delivery of identifiable goods.
Why not, then, simply reverse the presumption? Why not make specific performance the presumptively favored form of relief as some have proposed? Notwithstanding the problems of administration and overcompensation discussed above, giving all victims of breach a presumptive right to specific performance might, on balance, be preferable to the present rule. Given the often serious problems of assessing the true extent of injuries arising from contract breaches and the other inefficiencies of obtaining contractual enforcement through the legal system, victims of breach would be better protected by a rule making specific performance more generally available. 15 And by having chosen to break their contracts, parties in breach can be said to have brought upon themselves whatever difficulties a reversal of the presumptive remedy would create.
There is one important obstacle to such a reversal. Such a rule would seem to at least presumptively require the specific enforcement of personal service contracts. Even if an “exception” of the sort that currently exists were created to exempt such contracts from specific enforcement, many judges are understandably reluctant to respect ad hoc and vague “public policy” limits on their power to grant relief to apparently deserving victims. As a result, when personal services are unique (as they often are) and money damages are therefore truly inadequate, courts are always sorely tempted to compel performance.
We might, however, resolve this obstacle to specific performance if we better understood why specific performance is appropriate in contracts involving the sale of goods and inappropriate in contracts involving personal services. In the balance of this paper, I hope to show how a “consent theory of contract,” which looks to an underlying theory of entitlements to explain contractual obligation, assists such an understanding.
Author: Randy E. Barnett. Copyright (c) 1986 Social Philosophy & Policy
References
See Also
- Contracts
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