421
Chapter 18
Breach of Contract and Remedies
See Separate Lecture Outline System
INTRODUCTION
This chapter is concerned with the remedies available on a breach of contract to a nonbreaching party. A breach of
contract is a failure to perform what a contracting party is under an absolute duty to perform. When a party fails to perform
adequately, a wronged party can sue to obtain a remedy. A remedy is the means employed to enforce a right or to redress an
injury.
The most common remedies in contract law include damages, rescission and restitution, specific performance, and
reformation. An award of damages is a remedy at law. The others are equitable remedies.
422 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ADDITIONAL RESOURCES—
VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 14.
Business Law Digital Video Library
The Business Law Digital Video Library at www.cengage.com/blaw/dvl offers a variety of videos for group or
individual review. Clips on topics covered in this chapter include the following.
• Ask the Instructor
• Drama of the Law
Breaches & Remedies—Building for a Better Tomorrow—Contracting for a skilled service with time constraints can
be pressure packed for both parties. When the skilled worker breaches to work on a better job, the remedy for that
breach is troublesome.
• LawFlix
Midnight Run—Liability: Contract Negotiation, Formation, Statute of Frauds; Hiring a Bounty Hunter.
CHAPTER OUTLINE
I. Damages
Damages are designed to compensate the injured party for the loss of the contract or give the injured party the benefit
of the contract—that is, an innocent party is to be placed in the position he or she would have been in if the contract
had been fully performed.
ADDITIONAL BACKGROUND—
CHAPTER 18: BREACH OF CONTRACTS AND REMEDIES 423
Restatement (Second) of Contracts, Section 347
The following is the section of the Restatement (Second) of Contracts that relates to and is cited in this part of the
text—Restatement (Second) of Contracts, Section 347.
§ 347. Measure of Damages in General
Subject to the limitations stated in §§ 350-53, the injured party has a right to damages based on his expectation
interest as measured by
(b) any other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not having to perform.
ADDITIONAL BACKGROUND—
The Famous Case of the “Hairy Hand”
To illustrate the principle that nonbreaching parties are to put in the position that they would have been in had
their contracts been fully performed, professors have long introduced students to the famous case of the “hairy hand.”
The case concerns an unsuccessful operation on a boy’s scarred hand. Damages assessed against the doctor were
based on the difference between the value to the boy of the hand that the doctor had promised and the value of the
hand in its condition after the operation.
Sometimes forgotten in a dry discussion of the underlying principle is the boy whose hand was operated on. The
boy, George Hawkins, suffered an electrical burn when he was 11 years old. The resulting scar was small and did not
significantly affect the use of the hand. A doctor persuaded George to undergo surgery, emphasizing the social
problems that the scarred hand might create. The operation was performed shortly after George’s eighteenth
birthday. The skin graft was taken from George’s chest. There was infection and considerable bleeding. George was
hospitalized for three months. The graft covered the thumb and two fingers and soon was matted with hair. Movement
of the hand was greatly restricted. The jury awarded George $3,000 (approximately $24,000 in today’s dollars). After
424 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
CHAPTER 18: BREACH OF CONTRACTS AND REMEDIES 425
A. TYPES OF DAMAGES
1. Compensatory Damages
Compensatory damages compensate the injured party for the loss of the bargain (for injuries arising directly
from the loss). Incidental damages (expenses that are caused directly by a breach of contract such as those
incurred to obtain performance from another source) may also be recovered.
a. Standard Measure
The measurement of compensatory damages varies by type of contract. The standard measure is the
difference between the value of the promised performance and the actual performance, less any loss
that the injured party could have avoided.
b. Sale of Goods
sale, not the benefit of the bargain.
d. Construction Contracts
The measure depends on which party breaches and when.
1) Owner’s Breach
If the owner breaches before construction, normally the contractor may recover only the profit
2) Contractor’s Breach
If the contractor breaches by failing to begin or by stopping in mid-project, the owner may
recover the cost, including compensation for any delay, above the unpaid contract price to
complete the work. If the contractor finishes late, the owner may recover the loss of use.
2. Consequential Damages
Consequential damages are foreseeable damages that flow from the consequences of a breach but that are
426 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
CASE SYNOPSIS—
Case 18.1: Hadley v. Baxendale
The Hadleys ran a flour mill. The crankshaft attached to the steam engine in the mill broke, causing the mill to shut
down. The shaft had to be sent to a foundry to be fixed. Baxendale was a common carrier who transported the shaft.
The Hadleys claimed that they told Baxendale the mill was stopped and the shaft must be sent immediately. Baxendale
promised to deliver the shaft the next day, but it was not delivered for several days, during which time the mill was
closed. The Hadleys sued to recover the profits lost. The court ruled in the Hadleys’ favor, and Baxendale appealed.
…………………………………………………………..……………………………………………………………………
Notes and Questions
Students should know this case by name. Its significance should be emphasized. It is an excellent case for students
to choose positions and argue one side or the other. For example, ask students: Did the court apply correctly or
misapply the rule announced in the case? Many argue that it misapplied the rule—notice was given (Hadley insisted
that he told Baxendale that the mill was out of operation), and any reasonable person would know that profits were
ANSWER TO “THE E-COMMERCE DIMENSION”
QUESTION IN CASE 18.1
If a Web merchant loses business due to a computer system’s failure that can be attributed to malfunctioning
software, can the merchant recover the lost profits from the software maker? Explain. The merchant could normally
recover the lost profits from the software maker if the consequential damages were foreseeable. In other words, the
same rule that applies to events in the brick-and-mortar world applies to similar occurrences in the virtual world.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases involving consequential damages include the following.
• Mnemonics, Inc. v. Max Davis Associates, Inc., 808 So.2d 1278 (Fla.App. 5 Dist. 2002) (the damages recoverable
3. Punitive Damages
4. Nominal Damages
Nominal damages may be awarded to establish that a breaching party acted wrongfully even though no
financial loss resulted from the breach.
B. MITIGATION OF DAMAGES
C. LIQUIDATED DAMAGES PROVISIONS
A liquidated damages provision in a contract specifies a certain amount to be paid on a breach.
1. Liquidated Damages versus Penalties
If a provision is construed as a penalty, it will not be enforced.
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 356
§ 356. Liquidated Damages and Penalties
(1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in
(2) A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is
2. Enforceability
perform would cause that kind of loss).
428 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
CASE SYNOPSIS—
Case 18.2: B-Sharp Musical Productions, Inc. v. Haber
B-Sharp Musical Productions, Inc., contracted with James Haber to provide a 16-piece band at Haber’s son’s bar
mitzvah. Their contract contained a liquidated damages clause for payment of the entire contract price if Haber
canceled the deal within ninety days of the date of performance. Haber did cancel the deal with less than ninety days
to the bar mitzvah, but he refused to pay the price. B-Sharp filed a suit in a New York state court against Haber. The
court issued a judgment in B-Sharp’s favor. Haber appealed.
A state intermediate appellate court affirmed. “The subject provision of the contract is an enforceable liquidated
effort to rebook could not be reasonably expected.”
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Notes and Questions
An appeal is frivolous if it is groundless, devoid of merit, or demonstrates bad faith,. Under this definition, was
Haber’s appeal frivolous? No. Haber argued on appeal that the contract had been printed in the wrong size font. The
court found this argument to be without merit—Haber failed to establish the size of the type in the original contract—
but not in bad faith. Haber also appealed the inclusion of his wife as a defendant when she had not signed the contract.
The court granted Haber’s request that she be dismissed as a party. If the appeal had been frivolous, what might have
been the appropriate remedy? The remedy varies in each case, depending on the circumstances. Here, if the appeal
had been frivolous, B-Sharp might have been awarded attorneys’ fees and court costs.
ANSWERS TO QUESTIONS AT THE END OF CASE 18.2
1. In deciding whether a clause is a liquidated damages clause or a penalty clause, should the courts ever consider
the circumstances that caused the nonperforming party to breach the contract? Explain. It is not the function of the
court to consider how a liquidated damages clause might affect the breaching party when determining whether the
clause is enforceable. There are countless reasons why breaching parties do not perform their contracts. If the courts
took these reasons into account when deciding on the enforceability of liquidated damages clauses, it would
Illustrations:
2. Why did the court determine that the contract clause at issue was an enforceable liquidated damages clause and
not an unenforceable penalty clause? When determining whether a liquidated damages clause should be enforced,
the courts usually consider two questions: (1) Were the damages difficult to estimate at the time the contract was
formed? (2) Were the damages set forth in the clause reasonable and not excessive? If the answers to both questions
II. Equitable Remedies
A. RESCISSION AND RESTITUTION
Rescission is essentially an action to cancel a contract. When fraud, mistake, duress, undue influence,
misrepresentation, or lack of capacity to contract is present, a contract may be rescinded unilaterally. A failure to
perform entitles the nonbreaching party to rescind. A rescinding party must give prompt notice to the breaching
party.
1. Restitution
Generally, to rescind, the parties must make restitution by returning goods, property, or money conveyed.
If the actual goods or property can be returned, they must be. If they cannot be returned, restitution must
be made in an equivalent amount of money.
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 370
§ 370. Requirement That Benefit Be Conferred
A party is entitled to restitution under the rules stated in this Restatement only to the extent that he has conferred a
1. A, who holds a mortgage on B’s house, makes a contract with B under which A promises not to foreclose the
2. A contracts to sell B a machine for $100,000. After A has spent $40,000 on the manufacture of the machine but
3. A promises to deposit $100,000 to B’s credit in the X Bank in return for B’s promise to render services. A deposits
4. A contracts to work full time for B as a bookkeeper. In breach of this contract, A uses portions of the time that he
5. A, a social worker, promises B to render personal services to C in return for B’s promise to educate A’s children. B
2. Restitution Is Not Limited to Rescission Cases
Restitution is available in other situations, such as when money or property is transferred through a mistake
or fraud. Other examples are listed in the text.
ANSWER TO VIDEO QUESTION LTR. A
In the video, Eddie (Joe Pantoliano) and Jack (Robert DeNiro) negotiate a contract for Jack to find the Duke, a mob
accountant who embezzled funds, and bring him back for trial. Assume that the contract is valid. If Jack breaches the
contract by failing to bring in the Duke, what kinds of remedies, if any, can Eddie seek? Explain your answer. Assuming
that the contract is valid, Eddie has several choices of remedies he can pursue. He could seek to rescind (cancel) the
ADDITIONAL BACKGROUND—
CHAPTER 18: BREACH OF CONTRACTS AND REMEDIES 431
Rescission Statutes
The Federal Trade Commission and many states have rules or statutes allowing consumers to unilaterally rescind
contracts made at home with door–to-door salespersons. Rescission is allowed within three days for any reason or for
no reason at all under such statutes as those beginning with California Civil Code Section 1689.5. Illustrating these
statutes, the following is the text of Cal. Civ. Code § 1689.6, with notes and references.
CIVIL CODE
DIVISION 3. OBLIGATIONS
PART 2. CONTRACT
TITLE 5. EXTINCTION OF CONTRACTS
CHAPTER 2. RESCISSION
§ 1689.6. Right to cancel home solicitation contract or offer
(a) In addition to any other right to revoke an offer, the buyer has the right to cancel a home solicitation contract or
offer until midnight of the third “business day” after the day on which the buyer signs an agreement or offer to
purchase which complies with Section 1689.7.
(b) Cancellation occurs when the buyer gives written notice of cancellation to the seller at the address specified in the
agreement or offer.
(c) Notice of cancellation, if given by mail, is effective when deposited in the mail properly addressed with postage
1985 Main Volume Credit(s)
(Added by Stats.1971, c. 375, p. 740, § 2. Amended by Stats.1973, c. 554, p. 1077, § 2.)
HISTORICAL NOTES
HISTORICAL AND STATUTORY NOTES
1985 Main Volume Historical and Statutory Notes
The 1973 amendment substituted “ ‘business day’ “ for “calendar day (excluding Sunday)” in subd. (a); and inserted
the words “as provided with the contract or offer to purchase” in subd. (d).
REFERENCES
WEST’S CALIFORNIA CODE FORMS
1985 Main Volume West’s California Code Forms
See West’s California Code Forms, Civil.
432 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
CROSS REFERENCES
1985 Main Volume Cross References
Buyer, see Commercial Code § 2103.
Discount buying services, see § 1812.100 et seq.
Emergency repairs or services exempt from this section, see § 1689.13.
Fixtures exempt from this section after sale or encumbrance of realty, see § 1689.9.
Home solicitation contract or offer defined, see § 1689.5.
Seller, see Commercial Code § 2103.
Tenders required of buyer on cancellation, exceptions under this section, see § 1689.11.
Tenders required of seller on cancellation, exceptions under this section, see § 1689.10.
Waiver of this section prohibited, see § 1689.12.
LAW REVIEW COMMENTARIES
1991 Pocket Part Law Review Commentaries
Small Claims Court: How to coach your client to success. Douglas M. Carnahan and Maxine J. Calatrello, 13 L.A.Law. 27
(May 1990).
1985 Main Volume Law Review Commentaries
Consumer protection; home solicitation contracts or offers. (1974) 5 Pacific L.J. 303.
Right to cancel a home solicitation contract. (1972) 3 Pacific L.J. 633.
LIBRARY REFERENCES
1985 Main Volume Library References
Trade Regulation K862.1.
C.J.S. Trade-Marks, Trade-Names, and Unfair Competition § 237.
ANNOTATIONS
NOTES OF DECISIONS
In general 1
Limitation of actions 3
Purpose 2
Signing of contract 4
1. In general
Mere fact that seller appeared at buyers’ home in response to phone call from buyers was insufficient to remove
CHAPTER 18: BREACH OF CONTRACTS AND REMEDIES 433
Aluminum Products Co. v. Scott (1977) 139 Cal.Rptr. 329, 71 C.A.3d 245.
Id.
2. Purpose
Legislative purpose in enacting § 1689.5 et seq. which requires that home solicitation contracts contain notice of
3. Limitation of actions
One-year statute of limitations was applicable only to filing of cause of action and, while it might have merit as defense
4. Signing of contract
Under home solicitation statute, buyers had right to cancel contract for replacement of main sewer line to vacant
house owned by buyers, where contract was signed at that house and not at plumber’s appropriate trade premises.
Louis Luskin & Sons, Inc. v. Samovitz (App. 2 Dist.1985) 212 Cal.Rptr. 612, 166 C.A.3d 533.
B. SPECIFIC PERFORMANCE
Specific performance provides the exact bargain promised in a contract (performance of the promised act).
Specific performance is not granted unless the legal remedy (damages) is inadequate. Contracts for the sale of
goods rarely qualify—the legal remedy is ordinarily adequate because substantially identical goods can be bought
or sold in the market. If goods are unique, specific performance will be ordered.
ADDITIONAL BACKGROUND—
Restatement (Second) of Contracts, Section 359
§ 359. Effect of Adequacy of Damages
(1) Specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation
(2) The adequacy of the damage remedy for failure to render one part of the performance due does not preclude
specific performance or injunction as to the contract as a whole.
1. Sale of Land
Because each parcel of land is unique, specific performance of a contract to buy land will likely be ordered.