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Chapter 18
CONTRACT REMEDIES
A. Interests Protected by Contract Remedies
B. Monetary Damages
1. Compensatory Damages
a. Loss of Value
b. Cost Avoided
c. Incidental Damages
d. Consequential Damages
2. Nominal Damages
3 Reliance Damages
4. Damages for Misrepresentation
a. Fraud
b. Nonfraudulent Misrepresentation
5. Punitive Damages
6. Liquidated Damages
7. Limitations on Damages
a. Foreseeability of Damages
b. Certainty of Damages
c. Mitigation of Damages
C. Remedies in Equity
1. Specific Performance
2. Injunctions
D. Restitution
1. Party Injured by Breach
2. Party in Default
3. Statute of Frauds
4. Voidable Contracts
E. Limitations on Remedies
1. Election of Remedies
2. Loss of Power of Avoidance
a. Affirmance
b. Delay
c. Rights of Third Parties
Cases in This Chapter
Merritt v. Craig
Arrowhead School District No. 75, Park County
Montana, v. James A. Klyap, Jr.
Real Estate Analytics, LLC v. Vallas
Madison Square Garden Corp, Ill. v. Carnera
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Explain how compensatory damages and reliance damages are computed.
Define (a) nominal damages, (b) incidental damages, (c) consequential
damages, (d) foreseeability of damages, (e) punitive damages, (f)
liquidated damages, and (g) mitigation of damages.
Define the various types of equitable relief and explain when the courts
will grant such relief.
Explain how restitutionary damages are computed and identify the
situations in which restitution is available as a contractual remedy.
Identify and explain the limitations on contractual remedies
TEACHING NOTES
A. INTERESTS PROTECTED BY CONTRACT REMEDIES
Contract remedies are available to protect one or more of the following interests
of the injured party: (1) the expectation interest; (2) the reliance interest;
or (3) the restitution interest.
B. MONETARY DAMAGES
*** Chapter Outcomes ***
Explain how compensatory damages and reliance damages are computed.
Define (a) nominal damages; (b) incidental damages; (c) consequential damages; (d)
foreseeability of damages; (e) punitive damages; (f) liquidated damages; and (g) mitigation
of damages.
Compensatory Damages
Designed to place the injured party in the position in which he would have been
had the contract breach not occurred (expectation interest). In general
compensatory damages are measured by taking the difference between the
value of the promised performance of the breaching party and the value of the
actual performance rendered by the breaching party. The value of the promised
performance minus the value of the actual performance equals the loss of value.
Incidental and consequential damages are added to the loss of value, while
expenses saved by nonperformance are subtracted.
Nominal Damages
Nominal damages are a small sum of money awarded where the contract has
been breached but the dollar loss is negligible or unproved.
Reliance Damages
The injured party may seek reimbursement for foreseeable loss caused by his
reliance on the contract; intended result is to place the injured party in as good a
position as he would have been in had the contract not been made; may include:
Damages for Misrepresentation
Fraud — Recovery is allowed in a tort action when fraud is used to induce a
party to enter into a contract; most states follow a "benefit of the bargain"
rule, a few states follow the "out of pocket" rule.
Nonfraudulent Misrepresentation — Where the misrepresentation is
Punitive Damages
Punitive damages (also called exemplary damages) are monetary damages in
addition to compensatory damages that are awarded to an injured party in
CASE 18-1
MERRITT v. CRAIG
Court of Special Appeals of Maryland, 2000
130 Md.App. 350, 746 A.2d 923, certiorari denied, 359 Md. 29, 753 A.2d 2
http://scholar.google.com/scholar_case?
q=746+A.2d+923&hl=en&as_sdt=2,34&case=10339288125936808164&scilh=0
Davis, J.
In the fall of 1995, during their search for a new residence, appellants [Benjamin and Julie
Merritt] inspected Craig’s property located at Pergin Farm Road in Garrett County [Maryland].
After viewing the residence, appellants advised Craig that they were interested in purchasing the
property; however, their offer was contingent upon a satisfactory home inspection. On November
5, 1995, appellants, their inspector, and appellee’s husband Mark Craig conducted an inspection
of the basement area of the residence, during which there was an examination of cistern and
water supply pipes. The examination revealed that the cistern had been used to store a water
supply reserve, but was not currently utilized.
The inspector advised appellants that the system he had observed was one which utilized a
submersible pump in the well from which water flowed to a pressure tank in the basement. The
pressure tank distributed water through the internal piping system of the house. There were also
appellants’ house from the second well on Craig’s guest house property. On June 14, 1996,
appellants and Craig had settlement on the property. Later that afternoon, Craig’s husband,
without appellants’ knowledge, excavated the inside wall of appellants’ house and installed a cap
to stop a leaking condition on the water line that he had previously cut.
Subsequently, appellants, while attempting to fill a water bed, noticed that the water supply
in their well had depleted. On July 13, 1996, appellants met with Craig to discuss a solution to
the water failure problem, believing that Craig was responsible for cutting a water line to their
house. Appellants agreed with Craig to conduct a flow test to the existing well and contribute
On February 11, 1997, appellants brought suit against Craig and other appellees in the Circuit
Court for Garrett County, seeking rescission of the deed to the property and contract of sale,
along with compensatory and punitive damages. During the course of the trial, the judge
dismissed appellants’ claim for rescission on the ground that they had effectively waived their
right to rescission. * * * At the close of trial, the jury returned a verdict in favor of appellants and
awarded compensatory damages in the amount of $42,264.76. Appellants were also awarded
punitive damages in the amount of $150,000. Subsequently, appellants filed a motion to alter or
amend the judgment requesting the court to grant rescission of the contract of sale and the deed,
which the circuit court denied on June 17, 1998.
* * *
* * * Under Maryland law, when a party to a contract discovers that he or she has been
defrauded, the party defrauded has either “a right to retain the contract and collect damages for
its breach, or a right to rescind the contract and recover his or her own expenditures,” not both.
[Citations.] “These rights [are] inconsistent and mutually exclusive, and the discovery put[s] the
relieved of all obligations under the contract while simultaneously securing the windfall of
compensatory and punitive damages beyond incidental expenses.
* * *
In sum, although whether appellants promptly repudiated the contract was not squarely
before the court, we are not persuaded by appellees’ assertion that appellants did not seek
rescission in a timely fashion. We hold that, under the facts of this case, appellants must elect the
form of relief, i.e., damages or rescission
* * *
We hold that * * * the appellants are entitled to be awarded punitive damages resulting from
Craig’s actions. A “[p]laintiff seeking to recover punitive damages must allege in detail in the
complaint the facts that indicate the entertainment by defendant of evil motive or intent.”
[Citation.] The Court of Appeals has held that “punitive damages may only be awarded in such
* * *
The jury believed that the representations made by Craig were undertaken with actual
knowledge that the representations were false and with the intention to deceive appellants. * * *
Moreover, the record reflects that the jury could reasonably infer Craig’s intention to defraud
appellants by her representation in the Disclosure Statement that there were no problems with the
water supply, and by subsequently making substantial changes in the water system by cutting off
a water line which supplied water to appellants’ residence immediately after appellants’ inspector
examined the system. Therefore, we hold that the circuit court was not in error in finding facts
from the record sufficient to support an award of punitive damages.
Craig also challenges the punitive damages award on the basis that the amount of the award
was excessive. * * *
Liquidated Damages
A contract may contain a liquidated damages provision by which the parties
agree in advance to the damages to be paid in case of a breach; will be enforced
if it is a reasonable projection of the loss that may, or actually does, result from
the breach.
CASE 18-2
ARROWHEAD SCHOOL DISTRICT NO. 75, PARK COUNTY,
MONTANA, v. KLYAP
Supreme Court of Montana, 2003
318 Mont. 103, 79 P.3d 250
http://scholar.google.com/scholar_case?case=643756738100095281 &q=79+p.3d+250&hl=en&as_sdt=2,34
Nelson, J.
Arrowhead School District No. 75 (District) is located in Park County south of Livingston
[Montana]. The District consists of one school, Arrowhead School (School).
For the 1997-98 school year, the School employed about eleven full-time teachers and
several part-time teachers. During that school year, the School employed Klyap as a new teacher
instructing math, language arts, and physical education for the sixth, seventh, and eighth grades.
In addition, Klyap, through his own initiative, helped start a sports program and coached flag
football, basketball, and volleyball.
* * * the School offered Klyap a contract for the 1998-99 school year on or about June 15,
1998, which he accepted by signing on or about June 30, 1998. This contract provided for a
clause in Klyap’s teaching contract for the stipulated amount of $4,100, 20% of the $20,500
salary. * * *
After Klyap resigned, the School attempted to find another teacher to take Klyap’s place.
Although at the time that Klyap was offered his contract the School had 80 potential applicants,
only two viable applicants remained available. Right before classes started, the School was able
to hire one of those applicants, a less experienced teacher, at a salary of $19,500.
* * * After a bench trial, the District Court determined the clause was enforceable * * *
because the damages suffered by the School [were] impractical and extremely difficult to fix.
Specifically, the court found the School suffered damages because it had to spend additional time
* * *
The fundamental tenet of modern contract law is freedom of contract; parties are free to
mutually agree to terms governing their private conduct as long as those terms do not conflict
with public laws. [Citation.] This tenet presumes that parties are in the best position to make
decisions in their own interest. Normally, in the course of contract interpretation by a court, the
court simply gives effect to the agreement between the parties in order to enforce the private law
of the contract. [Citation.] When one party breaches the contract, judicial enforcement of the
contract ensures the nonbreaching party receives expectancy damages, compensation equal to
what that party would receive if the contract were performed. [Citations.] By only awarding
expectancy damages rather than additional damages intended to punish the breaching party for
failure to perform the contract, court enforcement of private contracts supports the theory of
* * *
* * * Liquidated damages in a personal service contract induce performance by an employee
by predetermining compensation to an employer if the employee leaves. However, the employer
clearly prefers performance by the specific employee because that employee was chosen for hire.
The preference for performance by a specific person is reflected in the rule that personal service
contracts are not assignable. Further, because personal service contracts are not enforceable by
specific performance, [citation], liquidated damages are an appropriate way for employers to
protect their interests. * * *
* * *
After reviewing the facts of this case, we hold that while the 20% liquidated damages clause
is definitely harsher than most, it is still within Klyap’s reasonable expectations and is not unduly
oppressive. First, as the School pointed out during testimony, at such a small school teachers are
chosen in part depending on how their skills complement those of the other teachers. Therefore,
finding someone who would provide services equivalent to Klyap at such a late date would be
virtually impossible. This difficulty was born out when only two applicants remained available
and the School hired a teacher who was less experienced than Klyap. As a teacher, especially one
with experience teaching at that very School, Klyap would have to be aware of the problem
finding equivalent services would pose.
Second, besides the loss of equivalent services, the School lost time for preparation for other
activities in order to attempt to find equivalent services. * * * Further, the new teacher missed all
Therefore, because as a teacher Klyap would know teachers are typically employed for an
entire school year and would know how difficult it is to replace equivalent services at such a
small rural school, it was within Klyap’s reasonable expectations to agree to a contract with a
20% of salary liquidated damages provision for a departure so close to the start of the school
year.
Limitations on Damages
Limitations imposed upon monetary damages are intended to ensure that
damages:
• can be taken into account at the time of contracting
• are compensatory and not speculative (based on a guesswork), and
• do not include loss that could have been avoided by reasonable effort.
Foreseeability of Damages — Damages are recoverable only for loss that the
party in breach could have foreseen as a likely result of a breach when the
