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Chapter 19
Breach of Contract and Remedies
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 per-
formance, and reformation. An award of damages is a remedy at law. The others are equitable remedies.
The basic remedy is damages. The most common type is compensatory damages, which are designed to put
an innocent party in the same position he or she would have been in if the contract had been fully performed (if no
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ADDITIONAL BACKGROUND—
Breach and Remedies
The Restatement (Second) of Contracts is an authoritative source for many of the principles discussed in
this chapter. Specific sections of the Restatement are noted throughout the text. After selected parts of the
text in which a section is noted, or is otherwise relevant, the full text of that section is set out. The following is
the section that relates to this part of the text—Restatement (Second) of Contracts, Section 235.
§ 235. Effect of Performance as Discharge and of Non-Performance as Breach
(1) Full performance of a duty under a contract discharges the duty.
(2) When performance of a duty under a contract is due any non-performance is a breach.
CHAPTER OUTLINE
I. Damages
ADDITIONAL BACKGROUND—
Damages
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 ex–
pectation interest as measured by
(a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus
(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.
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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
George was so embarrassed by his hand that he did not go back to high school. Throughout his life, he
was sensitive about his hand. He worked at various semi–skilled occupations, was a chauffeur for some
years, married late in life, and had no children. He died of a heart attack at the age of fifty-four.
A. TYPES OF DAMAGES
The broad categories are—
• Compensatory damages—To cover direct losses and costs.
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
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contract such as those incurred to obtain performance from another source) may also be
recovered.
CASE SYNOPSIS—
Case 19.1: Baird v. Owens Community College
Owens Community College in Ohio maintains a registered nursing program approved by the Ohio Board
of Nursing, which permits graduates to take the National Council Licensure Examination for their nursing
license. Owens lost its accreditation from the National League for Nursing Accreditation Commission
(NLNAC) in July, but did not tell its students until after classes for the fall semester had begun in September.
Carrianne Baird and other students filed a suit in an Ohio state court against the college, alleging breach of
contract. From a summary judgment in favor of the defendant, the students appealed.
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Notes and Questions
The court defined the measure of damages in this case as “the difference between the amount
which the plaintiff was capable of earning before his injury and that which he is capable of earning
Suppose that a plaintiff establishes a loss of diminished earning capacity in the nursing field but
has opted for a different career that is more financially rewarding. Is he or she still entitled to recover
damages? Yes, if a plaintiff establishes a loss of diminished earning capacity in the nursing field but has
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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
The usual measure is the difference between the contract price and the market price. When a
buyer breaches and the seller has not yet produced the goods, the measure is instead
normally lost profits on the sale.
c. Sale of Land
In most states, the measure of damages is the difference between the contract and market
d. Construction Contracts
The measure depends on which party breaches and when.
1) Breach by Owner
If the owner breaches before construction, normally the contractor may recover only the
2) Breach by Contractor
If the contractor breaches by failing to begin or by stopping in mid-project, the owner may
3) Breach by Both Owner and Contractor
If both parties fail to perform as their contract requires, a court will try to strike a balance
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2. Consequential Damages
These are foreseeable damages that flow from the consequences of a breach but that are caused
by circumstances beyond the contract. The breaching party must know or have reason to know that
special circumstances will cause the nonbreaching party to suffer the additional loss.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Consequential Damages
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 under a lease for copier equipment, which included the lessor’s agreement to maintain the
copiers, included consequential damages sustained by the lessee when the lessor breached the maintenance
provision and the lessee was held liable to its assignee of the equipment and the lease).
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
Generally, an injured party has a duty to mitigate damages. An award may be reduced by the amount
that could have been mitigated.
1. Rental Agreements
2. Employment Contracts
Most states require wrongfully terminated employees to take similar jobs if available.
C. LIQUIDATED DAMAGES VERSUS PENALTIES
A liquidated damages provision in a contract specifies a certain amount to be paid on a breach. If a
provision is construed as a penalty, it will not be enforced.
1. Enforceability
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CASE SYNOPSIS—
Case 19.2: Kent State University v. Ford
Gene Ford signed a contract with Kent State University in Ohio to work as the men’s basketball coach for
five years. The contract provided that if Ford quit before the end of the term, he would pay to the school
liquidated damages in an amount equal to his salary ($300,000), multiplied by the number of years remaining
on the contract. Four years before the contract expired, Ford quit Kent State and began to coach for Bradley
University at an annual salary of $700,000. Kent State filed a suit in an Ohio state court against Ford, alleging
breach of contract. The court enforced the liquidated damages clause, awarding the university $1.2 million.
Ford appealed.
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Notes and Questions
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? It is not
the function of the court to consider how a liquidated damages clause might affect the breaching party when
ADDITIONAL BACKGROUND—
Liquidated Damages and Penalties
The following is a section of the Restatement (Second) of Contracts that relates to the discussion of the
liquidated damages versus penalties in this part of the text—Restatement (Second) of Contracts, Section 356.
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§ 356. Liquidated Damages and Penalties
penalty.
(1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is
(2) A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the
2. Liquidated Damages Common in Certain Contracts
Liquidated damages provisions are frequently used in construction contracts and contracts for the
sale of goods.
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 con–
2. Restitution Is Not Limited to Rescission Cases
CASE SYNOPSIS—
Case 19.3: Clara Wonjung Lee, DDS, Ltd. v. Robles
Clara Wonjung Lee agreed to buy Rosalina Robles‘s dental practice and lease her dental offices in
Chicago, Illinois. After Lee took over the practice, the local media revealed that Gary Kimmel, one of Robles’s
dentists, had, among other things, illegally treated underage prostitutes in the practice’s offices after hours.
Lee filed a suit in an Illinois state court against Robles, seeking to rescind the contract. Lee alleged that
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A state intermediate court affirmed. Lee was entitled to rescission of the contract on the basis of fraud
because Robles’s nondisclosure was “designed to prevent Lee from gaining relevant information” that “would
have been material to a reasonable dentist’s decision to purchase the practice.”
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Notes and Questions
Could Lee have successfully maintained a tort action for fraud against Robles and obtained the
ADDITIONAL BACKGROUND—
Restitution
The following is an excerpt from a section of the Restatement (Second) of Contracts that focuses on the
requirement for restitution, which is covered in this part of the text—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 benefit on the other party by way of part performance or reliance.
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Illustrations:
restitution based on the improvements since making them conferred no benefit on A. * * *
1. A, who holds a mortgage on B’s house, makes a contract with B under which A promises not to foreclose
2. A contracts to sell B a machine for $100,000. After A has spent $40,000 on the manufacture of the
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