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Chapter 19
BREACH OF CONTRACT AND REMEDIES
RESTATEMENT
A breach is the failure to perform the obligations required under a contract. A breach can occur when the party
fails to perform on the date performance is due, or it can occur through anticipatory repudiation which is a breach
in advance of the performance date. A breach can be cured if the non-breaching party waives its rights to timely
performance and allows the performance.
Once a breach has occurred, the non-breaching party has the right to remedies which include an action for
damages in the form of compensatory and consequential damages, and in some circumstances, punitive
damages. Other remedies available for breach include rescission of the contract, an action for specific
performance or an injunction to enforce a contract prohibition (as in a covenant not to compete).
The parties can limit the available remedies by agreement and provide formulas for damage in the event of a
breach including liquidated damage clauses, limitation of liability clauses and exculpatory or hold harmless
clauses. Courts examine these damage clauses before enforcing them to determine their fairness and
enforceability.
STUDENT LEARNING OUTCOMES
LO.1: Explain what constitutes a breach of contract and an anticipatory breach of contract.
LO.2: Describe the effect of a waiver of a breach.
LO.3: Explain the range of remedies available for breach of contract.
LO.4: Explain when liquidated damages clauses are valid and invalid.
LO.5: State when liability-limiting clauses and releases are valid.
INSTRUCTOR’S INSIGHTS
Break the chapter down into four components – related Learning Outcomes are indicated in ( ):
1. What constitutes a breach of contract?
Define breach of contract (LO.1)
2. When is a breach of contract waived?
Cover the issues of waiver and breach (LO.2)
3. What are the remedies for breach of contract and when are they used?
Discuss the remedies available when there is anticipatory repudiation (LO.3)
Explain rescission and when it is available (LO.3)
4. What types of contract provisions relating to remedies and damages can the parties agree to in their contract?
Explain limitation of remedies in contracts and their validity
CHAPTER OUTLINE
I. What Constitutes a Breach of Contract?
A. Definition of breach
B. Anticipatory breach
1. Anticipatory repudiation – a breach in advance of the performance date
2. The party states that performance will not be made when required
CASE BRIEF: Tips v. Hartland Developers, Inc.
961 S.W. 2d 618 (Tex. App. 1998)
FACTS: Hartland agreed to build an airplane hanger for Robert Tips for $300,000 payable in three
installments of $100,000. Tips’ representative told Hartland to stop work because Tips could no
longer afford payments. Hartland stopped work after being paid $200,000. Hartland sued for
breach and was awarded the remaining $100,000 less the cost of completion plus attorneys’
fees and interest.
ISSUE: What can Hartland recover for the anticipatory breach?
HOLDING: Hartland is entitled to the contract price less the cost of completion plus damages such as
REASONING: The case involved anticipatory repudiation, not substantial performance. Hartland did not
breach. Hartland was halted in his performance by the other side’s breach.
DISCUSSION POINTS: Have the students discuss the Tips v. Hartland Developers, Inc. case in which damages
are assessed for anticipatory repudiation of a contract.
II. When is a Breach of Contract Waived?
A. Cure of breach by waiver
B. Existence and scope of waiver
CASE BRIEF: Harms v. Northland Ford Dealers
602 N.W. 2d 58 (S.D. 1999)
FACTS: In 1995, Northland Ford Dealers, an association of dealerships, offered to sponsor a
“hole-in-one” contest at Moccasin Creak Country Club. A banner announced that a hole-in-one
would win a car, but gave no other details, and the local dealer parked a Ford Explorer near the
banner. Northland paid a $4,602 premium to Continental Hole-in-One, Inc. to insure the award
of the contest prize. The insurance application stated in capital letters that “ALL AMATEUR
MEN AND WOMEN WILL UTILIZE THE SAME TEE”. Jennifer Harms registered for the
tournament and paid her entrance fee. At the contest hole she teed off from the amateur
women’s red marker which was a much shorter distance to the pin than the 170 yards from the
men’s marker and made a hole-in-one. When she inquired about the prize she was told that
due to insurance requirements all amateurs had to tee off from the amateur men’s tee box, and
since she had not done so, she was disqualified. Harms, a collegiate golfer at Concordia
College sued Northland for breach of contract. Northland contends that under NCAA rules
accepting a prize or agreeing to accept a prize would have disqualified Harms from NCAA
competition.
ISSUE: Could Harms get the car?
REASONING: Northland must abide by the rules it announced, not by the ones it left unannounced that
disqualified all amateur women from the contest. This was a vintage unilateral contract with
performance by the offeree as acceptance. Harms earned the prize when she sank her winning
shot.
C. Waiver of breach as modification of contract
1. Repeated breaches and waivers may show modification (e.g., continued acceptance of late
payment)
2. Antimodification clause
a. Acceptance of late payment does not waive rights
D. Reservation of rights
1. Willingness to accept defective performance, but do not wish to give up any damage claim
III. What are the Remedies for Breach of Contract and When Are They Used?
A. Remedies upon anticipatory repudiation
1. Do nothing and wait an amount of time for performance
B. Remedies in general and the measure of damage (See Figure 19-1 in text)
1. Contract damages or damages for breach should place the injured party in the position he or she
2. The idea behind an action for damages is to place the injured party in the position he or she should
3. Monetary damages and specific performance are available
4. Monetary damages
a. Compensatory damages – provide non-breaching party with a restoration to original position,
b. Nominal damages – breach with minimum damages
c. Bring out that the usual remedy available for a minor breach of contract is damages unless the
d. Punitive damages (exemplary)
i. Punitive damages are not generally available to the injured party in a breach of contract
e. Direct and consequential damages
i. Direct loss: caused by the breach
ii. Consequential loss: must be within the defendant’s contemplation; foreseeable by
reasonable person
Students usually do not have a major difficulty determining direct loss, but do have some
problems in determining whether consequential loss is recoverable by the injured party. The
case of Hadley v. Baxendale (1854), 9 Ex. 341, 156 Eng. Rep. R. 145, is a mainstay to
illustrate this point. The plaintiffs operated a flour mill, and the mill’s crankshaft broke. The
plaintiffs contracted with the defendants to ship the crankshaft to another city, where a
duplicate shaft would be made. However, the defendants delayed delivery of the shaft for
CASE BRIEF: Birkel v. Hassebrook Farm Service, Inc.
363 N.W. 2d 148 (Neb. 1985)
FACTS: Jerry Birkel was a grain farmer. Hassebrook Farm Service, Inc., made a contract with Jerry to
sell to him and install a grain storage and drying bin. Jerry’s old dryer was traded in to the
seller. The new equipment did not work properly, and Jerry had to pay other persons for drying
and storing his grain. Jerry sued Hassebrook for damages and claimed the right to be repaid
what he had paid to others for drying and storage.
ISSUE: Can Jerry recover the drying and storage fees?
REASONING: Jerry was entitled to recover what he had paid others for drying and storage. Since Jerry had
traded in his old dryer to the seller, it was obvious to the seller that if the new equipment did not
work properly, Jerry would be forced to pay for alternative drying and storage to prevent the
total loss of his crops. The cost of such an alternative was therefore within the contemplation of
the seller when the contract was made, and so the buyer could recover this cost as an element
of damages for the seller’s breach of contract.
iii. Limitations on consequential damages
(a) Foreseeability
5. Mitigation of damages
a. Make the loss as small as possible by reasonable effort
CASE BRIEF: Fischer v. Heymann
12 N.E. 3d 867 (Ind. 2014)
FACTS: On February 4, 2006, the Heymanns agreed to buy a condominium from Fischer for $315,000.
Both parties signed a purchase and sale agreement. The Agreement authorized the Heymanns
to terminate if Fischer refused to fix any “major defect.” The Heymanns demanded Fischer fix
an electrical problem after an inspection report revealed electricity was not flowing to three
power outlets. The Heymanns thought this was a “major defect”. Fischer failed to timely
respond to their demand – even though she eventually fixed the problem for $117 on February
20th, by having an electrician push the reset button on three outlets and change a light bulb.
The Heymanns tendered a mutual release to void the Agreement. Fischer refused to sign the
release and sued for specific performances or damages. After the deal fell through in 2006,
Fischer attempted to mitigate damages by selling the condo, but the housing market entered a
major downturn. On February 13, 2007, she received an offer to purchase the condo for
$240,000, but her counter-offer of $286,000 was rejected. She eventually sold the condo in
November 2011 for $180,000. Fischer seeks damages for the difference between the Heymann
purchase price of $315,000 and the sale in 2011 of $180,000, plus the cost of maintaining the
condo from 2006 through 2011, and attorney’s fees for a total of $306,616.
ISSUES: Did the Heymanns breach the Purchase Agreement? If so, did Fischer properly mitigate damages?
REASONING: The $117 repair consisting of pushing the reset button on three outlets and the change of a light
bulb was not a “major defect” which would allow for the voiding of a contract. Accordingly, the
Heymanns were in breach of the Purchase Agreement. Fischer, the non-breaching party, had a
duty to mitigate the damage caused by the breach. Fischer acted unreasonably when she could
have mitigated damages and sold the condo for $240,000. She was awarded a total of $93,977,
not $306,616.
c. Excuse for failure to mitigate damages – non-breaching party can’t mitigate
6. Rescission
a. Right to rescind
i. Recovery for value given cannot be returned
b. Judicial rescission – party breaching refuses to recognize right of non-breaching party to end
performance
CASE BRIEF: ZAN, LLC v. Ripley Cove, LLC
751 S.E. 2d 664 (S.C. App. 2013)
FACTS: Buck owns Rookie IV, a boat requiring a dock slip 20 feet in width. Buck’s daughter, Susanne,
owns ZAN, LCC, and Buck has authority to act on behalf of ZAN. Buck wanted a boat slip out of
the Intercoastal Waterway. ZAN (Buck) agreed to purchase a slip for Buck’s boat and lot 3 for
Susanne. Just prior to the closing, Buck discovered that the slip designated as B1 was actually
two slips, B1 and B2, and Rookie IV would not fit into B1. Buck was informed by Ripley Cove’s
agent that the sellers owned B2 and that it would be no problem to give Buck the 20 foot
clearance he needed and to place two pilings in the adjoining slip. Buck then agreed to close on
the property. It was later discovered that at the time of the closing, Ripley Cove no longer
owned B2. Since Rookie IV could not fit into the slip, ZAN sued for rescission of the contract for
the lot and slip and damages. The trial court determined that ZAN proved its claims, awarded
$10,000 for breach of contract and negligent misrepresentation, but refused to rescind the
contract. ZAN appealed.
ISSUE: Was ZAN entitled to rescission of the entire contract?
REASONING: The main purpose of the contract was to provide Buck with a slip for Rookie IV. ZAN was
entitled to rescission of the contract in toto, both the slip and the land. A breach of contract claim
warranting rescission of the contract must be so substantial and fundamental as to defeat the
purpose of the contract. Such was the nature of the breach in this case
7. Action for specific performance
a. Available when subject matter is unique, and monetary damages would be inadequate
b. Some students believe that specific performance should always be a remedy available for the
injured party. Challenge their thinking with a hypothetical case similar to the following:
Months ago, A and B entered into a contract whereby A agreed to purchase, and B agreed to
sell, 1,000 crates of Valencia oranges at a price of x dollars per crate, with delivery no later than
a certain date. Just prior to the last day for delivery, A calls B and is informed that B has enough
Valencia oranges to make the delivery, but has decided to hold on to them, and offers 1,000
crates of navel oranges in their place. A wants to know what alternatives are available. Can A
Relief may be refused by the court when the contract is not definite; when there is an adequate
legal remedy exists (usually a monetary award); when it works an undue hardship or an
injustice on the defaulting party or the consideration is inadequate; when the agreement is
Generally not used for a personal service contract. Challenge the students by having them
solve the following problem:
Bill Slick has signed a contract to play professional basketball for the Magic Hoops.
The contract is for four years at $300,000 per year. Slick does not like the way things
are working out and quits halfway through the first year. What remedies are available
to the injured party? Can the Magic Hoops force Slick to play? Can they prevent Slick
8. Action for injunction
a. Used to prevent damages or a breach
9. Reformation of contract by a court
a. Contract is incorrect
CASE BRIEF: In re Owens Corning et al., Debtors in Possession
291 B.R. 329 (2003)
FACTS: New York Packaging Corp. (NYPC) manufactured plastic sheets used by Owens
Corning (OC) at its asphalt plants throughout the country as dividers to separate asphalt
containers and prevent them from sticking to one another. Janet Berry, a customer service
representative at OC called and received a price from NYPC of “ $172.50 per box,” with a box
containing 200 plastic sheets. Ms. Berry put the information into OC’s computer systems, which
in turn generated a purchase order. She mistakenly believed that the unit of measurement
designated as “EA” on the purchase order was per box, when it in fact was per sheet. As a
result, the purchase orders likewise reflected a price of $172.50 per sheet rather than per box.
The computer automatically calculated the total price of the purchase order and faxed it to
NYPC as $1,078,195.00, without Ms. Berry seeing the huge total price. NYPC filled the order
which included overrun sheets and billed OC $1,414,605.60. NYPC sought payment at the
contract price of $172.50 per sheet. It points out that the purchase order contained a “no oral
modification” clause and by its terms, the order was binding when accepted by NYPC. The
buyer contended that NYPC was attempting to take advantage of this huge and obvious
mistake, and the contract should be reformed.
ISSUE: May a court reform the terms of a contract even after performance of both parties?
HOLDING: Yes. Where a unilateral mistake is made and it is of such consequence that enforcing the
REASONING: A unilateral mistake was made by Ms. Berry which was or should have been known by NYPC.
OC used the sheets after their offer to return the sheets to NYPC was refused. Therefore the
contract could not be rescinded. The drafting error in this case was so huge that to enforce the
written contract would be unconscionable. No reasonable person would have drafted this
contract without laboring under a mistake as to the price and no honest and fair person would
have accepted it as written. Accordingly, the unit of measurement is amended to read “per box”
rather than “EA”, the “Order Qty” is amended to read “41 boxes of 200 sheets per box” and the
overall price is modified to read “$7,072.50” not $1,078,195.00.
IV. What Types of Contract Provisions Relating to Remedies and Damages Can the Parties Agree to in Their
Contract?
A. Limitation of remedies
1. Limit to right of repair or replacement
B. Liquidated damages
1. Formula or amount of damages agreed to in advance
2. Valid if
3. Can’t collect both compensatory and liquidated damages
Most students will be fascinated with the concept of liquidated damages. Bring to class examples of
liquidated damages provisions in contracts, and create situations to challenge the students to
determine whether the liquidated damages provisions would be enforceable in court. Emphasize
that such a provision will be enforced if the amount agreed to is reasonable under the
circumstances and, by the nature of the agreement, if it would be very difficult to determine the
actual damages. Remind them that if the liquidated damages provision is enforceable, it will be the
sole remedy of the injured party. Create a hypothetical case showing when liquidated damages
would be appropriate and when they would not. You may wish to use the following as a guide:
A, a chef, does some marketing research and decides to open a toy store. A and his CPA
project on income and expenses; perform site selection studies; and research product
lines, advertising approaches, etc. A locates L, who plans to construct a small shopping
Ask your students who wins and why. Typically, they will want to know such things as whether L knew
that a toy store was to be located there (yes), whether the contractor knew this, and whether the
contractor knew that occupancy by November 1 had been guaranteed. In most instances, the court
would award A losses that A could show resulted from the failure to gain occupancy by November 1.
These would include items like storage costs, but would they include the loss of profits? Loss of
C. Attorneys' fees
1. A significant factor in contract litigation
2. Go over Medistar example in textbook
D. Limitation of liability
1. Exculpatory clauses
2. Content and construction
a. Must be clear and unambiguous
3. Validity
a. Generally valid, particularly between experienced business people
CASE BRIEF: Hamill v. Cheley Colorado Camps, Inc.
262 P. 3d 945 (Colo. App. 2011)
FACTS: Fifteen year old Chelsea Hamill was injured when she fell off a horse at Camp Cheley,
and she brought a negligence and gross negligence action against the camp. The camp
contended that an exculpatory agreement signed by the mother of this minor child barred the
action for negligence against the camp, and the camp asserts no evidence supports the charge
of gross negligence.
ISSUE: Did the exculpatory agreement bar the action for negligence against the
camp?
REASONING: The parent’s decision to waive the child’s claims was voluntary and informed. Hamill’s mother
had sufficient information to allow her to assess the risks involved in horseback riding and the
extent of injury possible for the activity. The release stated the intent to release “all claims”
including prospective negligence claims. While an exculpatory agreement does not bar liability
for gross negligence, the record is devoid of evidence of gross negligence.
ANSWERS TO QUESTIONS AND CASE PROBLEMS
1. Waiver of breach; ethics of counterclaim. Textor may defend against the district's counterclaim by asserting
that the school district waived its right to assess the liquidated damages clause in the contract. The
Textor had a valid claim to pursue in the courts for payment for the grading work on the softball field. When
the school district's attorney reviewed the case, the possibility of an apparently viable counterclaim became
2. Mitigation of damages. Baker admitted that he breached his contract with New Boston. New Boston, however,
had an obligation to mitigate damages and it took no action to do so. The jury determined that New Boston
3. Basis for rescission. No. A contract will not be rescinded for a minor breach. The insignificance of the breach
was indicated by the amount involved ($863) compared with the amount that could be due under the contract
4. Liquidated damages. Because of the difficulty of forecasting the loss that might be caused by breach of a real
estate purchase contract, it is held that a liquidated damage clause of 10 percent of the sale price is valid
5. Specific performance of contract for the sale of stock; action by seller. No. Difficulty in valuation of stock alone
is not a sufficient ground for the granting of specific performance. The seller sought only money; therefore,
6. Effect of liquidated damages clause. The buyer could not recover the down payment and the seller could not
Authors’ Comment: No question was raised as to whether the liquidated damages clause was invalid. The
case thus states the law when a liquidated damages clause is binding. If it were decided that the clause was
7. Liquidated damages as contrasted with a penalty. No. Under the circumstances, it was clear that the amount
far exceeded the damages sustained. Therefore, the provision was void as a penalty clause, and the seller
8. Attorney's fees. Attorney fees are generally not allowable unless authorized by statute or contractual
agreement. A written contract must contain a clear and express provision regarding attorney fees in order for
9. Validity of limitation of liability. No. The court took the position that in such a contract, there could be no
limitation of liability unless the consumer was given the option of paying a higher rate in order to obtain
10. Liquidated damages. Actual damages were clearly ascertainable and not difficult to determine. The amount
sought was excessive. The court deemed the liquidated damages clause an unenforceable penalty and PDS
11. Validity of limitation of liability. The release provision of the contract under which the scuba diving course was
offered by Madison and YMCA provided “a complete defense ” to the plaintiff’s lawsuit. Under the course
12. Limitation of damages. Yes. The limitation satisfied the two requirements of (a) circumstances in which it
would be very difficult to determine the actual damages suffered and (b) the specification of an amount that
13. What is breach of contract?; interpretation of contract. Yes. The word “default” is to be given its ordinary,
usual meaning in the absence of any evidence that the parties used the word in a peculiar or different sense.
Because the contractor did not offer any evidence of such a special use, the usual meaning is controlling. By
14. Validity of limitation of liability. Judgment for the alarm company. The provision in the contract was clearly a
limitation of liability because the amount specified was not intended by the parties to bear any reasonable
relationship to the possible loss that could be sustained. The validity of the limitation of liability clause
15. Specific performance as a remedy. Judgment for Shepherd-Will. It is true that equity has for centuries
specifically enforced contracts for the sale of land. However, this means that initially there must be a
Note that parol evidence could not be introduced to indicate that there was an oral agreement as to which
five acres were intended, as that would be prohibited by the statute of frauds.
It may be pointed out that the written agreement of the parties could be held to give Emma an option to
select the acres she wanted. If that construction were made, she could have had those acres surveyed and
If a student questions whether the result of this decision is just, fair, ethical, the short answer is that
Anglo-American law has always been concerned with the protection of title to land. Therefore, the law will not
LAWFLIX
The Goodbye Girl (1977) (PG)
Richard Dreyfuss plays Elliott Garfield, a struggling Shakespearean actor who lands into New York with a
The students can review all aspects of contracts as the characters discuss subleases, rent payment, living
arrangements and food costs.
management system for classroom use.
