Breach of Contract and Its Effects
Breach of contract occurs when either of the contract parties fails to perform its contractual obligations (Meiners, Ringleb, & Edwards, 2006, p. 264). Depending on the situation, breach of contract may be actual (or material) or anticipatory: a) actual (or material) breach takes place when a contract party really fails to perform its obligations under contract; b) anticipatory breach occurs when a contract party gives evidence of inability or unwillingness to perform the contract (Goldsmit International Business School, n.d., p.1). The party that commits breach of contract is called the guilt party, and the party that suffers from breach of contract is called the injured, or the innocent, or the aggrieved party (Samuel, n.d., p. 4).
Remedies and Their Main Types
In order to compensate for the losses of the innocent party after a contract breach has occurred, certain remedies are introduced. Monetary damages is a common law remedy that aims at putting the innocent party in the same financial position it would enjoy, should the breach of contract have never occurred. In cases when damages cannot compensate the losses adequately, equitable remedies are awarded. (Goldsmith International Business School, n.d., p.2).
Monetary Damages
Compensatory damages are imposed on the guilt party to compensate the injured party for the losses it suffered under the breach of contract: upon receiving the compensatory damages, the innocent party should find itself in the same financial position as if it got the benefit of the bargain initially planned in the contract (Goldsmith International Business School, n.d., p. 4).
Liquidated damages are stipulated by the contract parties in advance in the text of the contract itself, should the contract be breached: the sum of liquidated damages should be pre-estimated realistically, otherwise it would not be enforced by court; liquidated damages help to provide certainty for contract parties and to avoid complicated lawsuits (Gillhams Lawyers, 2008).
Nominal damages are awarded in case no real losses have been suffered by the innocent party as a result of breach of contract: as a rule, nominal damages constitute a symbolic sum as small as $1, but are rather imposed as a disciplinary measure brought “on principle”.
Punitive / exemplary / vindictive damages are awarded for emotional or mental suffering caused by breach of contract: such damages are awarded to punish the wrongdoer for willful or malicious behavior and to discourage similar actions in the future; in case of punitive damages, the principles of tort law apply. (Meiners et al., 2006, p. 269).
Rules Regarding Award of Damages
Compensation, not penalty: damages are devised to compensate the aggrieved party for its losses, rather than punish the guilt party for breach of contract.
Limited damages: in awarding damages, the court should aim at placing the innocent party in the same financial position it would enjoy, should the breach of contract never occur.
Damages for attributable losses: only the losses that resulted from the breach of contract should be compensated by the damages.
Mitigation of losses: the innocent party should take all the effort to mitigate its losses resulting out of breach of contract.
Stipulation for liquidated damages: contract parties are encouraged to stipulate a fixed amount of liquidated damages that should be paid in case the contract is not performed.
Cost of suit: the costs of the lawsuit can be recovered from the guilt party only at discretion of court. (Samuel, n.d., pp. 19-25).
Equitable Damages
In case monetary damages do not constitute a proper solution, breach of contract may be resolved by way of equitable damages:
Specific performance takes place when the court orders the guilt party to perform its contractual obligations.
Injunction implies that the court rules the guilt party to do or not to do a certain act:
- prohibitory injunction prohibits an action;
- mandatory injunction orders a certain action done;
- interlocutory injunction regulates party actions prior to the trial. (Gillhams Lawyers, 2008).
References
Gillhams Lawyers. (2008). Remedies: Breach of contract. Web.
Goldsmith International Business School. (n.d.). Breach of contract & remedies [PDF file]. Retrieved from Web.
Meiners, R.E., Ringleb, A.H., & Edwards, F. L. (2006). Contracts. In The legal environment of business (9th ed.) (pp. 242-276). Mason, Ohio: Thomson.
Samuel, A.D., Sr. (n.d.). Remedies for breach of contract [PDF file]. Web.