A contract is a binding agreement between the parties which obligates them to perform certain tasks.If one of the parties fails to perform without justifiable excuse, that party is in breach of contract and subject to civil liability. The reader should review our article on Binding Contracts and Legal Actions Predicated on Breach of Contract as well as The American System of Litigation before reading further.
To prove that a party has breached an agreement wrongfully is only half the task. The plaintiff must thereafter prove that damages were caused by the breach and prove with specificity what the damages constituted.
All too often we see parties outraged due to a breach of contract and confident that they can prove the breach who fail to understand that breaching an agreement is not a crime in the United States. Indeed, a party is entirely free to breach an agreement if that party is willing to pay the damages caused. To fully ascertain what relief is available, it is critical to examine what actual damages will be awarded by the court or arbitrator and the rules are both complex and extensive as to what damages lie for breach of contract. In order to perform an adequate Cost Benefit analysis of the value of commencing litigation, an understanding of measurement of damages available is essential.
This article shall outline the basic approach of the California courts in determining damages in a breach of contract action.
The Basic Measure:
When a contract has been breached, multiple remedies are available to the injured party. Contract law concentrates on fairness and restoring parties to their respective states had the contract never been entered into, or if the contract had been fulfilled. The legal system is designed to prevent double recovery, so a Plaintiff must choose one remedy.
The most common remedy is monetary compensation, or damages.How do the courts determine how much money is appropriate for recovery?
At times, the amount that may be recovered is established by statute or by case law, i.e. a formula is prescribed. In most situations, though, the measure of damages is not specified and must be determined more generally, as will be discussed below. Sometimes, because of particular circumstances, special or consequential damages may be available, but again, the amount may be limited.
When multiple remedies are available, the highest dollar amount is not necessarily the best to pursue. Remember, too, that contract law is distinct from tort law. Contract law does not allow for punitive damages (a monetary amount intended to punish the Defendant for intentional wrongdoing). Punitive damages are allowed only under tort law, such as when embezzlement or fraud can be established.
If certain conditions are met, a person may bring multiple causes of action – a contract cause of action and a tort cause of action – and therefore seek multiple remedies. Most courts and arbitrators discount the tendency in litigation for a party to over plead the case since all too often attorneys automatically include fraud or misrepresentation causes of actions in a standard breach of contract claim. It seldom benefits a party to simply throw in such causes of action.
Note that even when no actual enforceable contract exists, damages based on reasonable reliance may be available and should be considered. See our article on Contracts and the subsection on promissory estoppel.
The courts normally award monetary damages rather than order a party to perform (“specific performance.”) Indeed, aside from legal actions involving real property, the courts will only award specific performance if statutes require it or monetary damages are incapable of making the plaintiff whole and the burden is on the plaintiff to prove that specific performance is required. Real property often allows specific performance since the courts have concluded that real property is unique in its attributes and monetary damages will not compensate for the failure of the defendant to transfer of property.
Usually, a party cannot seek both specific performance and monetary damages and must “elect” remedies.
Statutory Measure of Contract Damages
In California, in very limited circumstances, statutory law specifies the measure of damages or grants specific performance (the court ordering performance under the agreement rather than awarding monetary awards.)
These circumstances usually are:
a) Obligation to pay money only;
b) Covenant of seisin, of right to convey, of warranty, or of quiet enjoyment in a grant of real property;
c) Covenant against encumbrances;
d) Contract to convey land;
e) Agreement to deliver quitclaim deed;
f) Agreement to purchase real property;
g) Leases of real or personal property;
h) Obligations of carriers of passengers, freight, and messages;
i) Warranty of agent's authority, or
j) Other statutory schemes governing the transaction.
General Measure of Contract Damages
If none of the above apply, then look to the general measure of contract damages prescribed by statute and/or case law. The following considerations apply.
a) Damages compensate the Plaintiff for the harm proximately (directly) caused by the breach.
b) Damages must have been contemplated by the parties, or be reasonably foreseeable at the time the contract was entered into. Contract damages do not usually allow recovery for unanticipated harm or injury, while tort damages may.
c) Damages must be clearly ascertainable. Proof of actual harm and its cause must be established. For example: future lost profits are commonly claimed, but how are they proved? If the contract does not specify fixed numbers (either in goods or the dollar-amount of services), then expert witnesses are brought in to testify to the likely amount of damages. Note that the damages for the average breach of contract would be the lost net profits, not gross profits.
d) Damages restore the Plaintiff to the position they would be in had the contract been fulfilled. In other words, Plaintiff is entitled to the benefit of (his or her) bargain, also known as “Expectation Damages.” Unless expressly provided by statute, Plaintiff may not recover an amount greater than what they would have gained had the contract been fulfilled.
e) Damages are based solely on the harm caused to the Plaintiff. Their measurement does not and should not factor in any savings or benefit to the defendant resulting from the breach.
f) On occasion, the measure of general damages for particular circumstances may have been established by case law. Some examples include breach of employment contract, breach of contract to construct improvements, or wrongful cancellation of insurance policy.
g) If there is no appreciable harm to the Plaintiff, nominal damages may be awarded in these two circumstances: 1) there is no loss to be compensated, but the law recognizes a legal wrong committed by the Defendant; or 2) the Plaintiff suffered a loss, but the extent of the harm and damages cannot be determined accurately by the evidence presented.
Special Damages, or Consequential Damages
If, as a result of the breach, the Plaintiff incurred some harm due to special circumstances concerning the contract, then the Plaintiff may be entitled to special damages as well as general.
Special damages are secondary or derivative losses resulting from special circumstances particular to that contract or to the parties. The availability of special damages is conditioned upon whether the special circumstances were known, or should have been known, by the Defendant at the time the Defendant entered into the contract.
Special damages are available only if either known or foreseeable, defined as:
a) Known: the special circumstances were communicated to or known by Defendant and Defendant could voluntarily assume the risk of liability (a subjective test). Simply entering into the contract is not a voluntary assumption of the risk.
b) Foreseeable: the special circumstances were such that Defendant should have known about the possibility of the loss (an objective test).
Limitation of Damages by Contract of Special Circumstances
When a contract is terminated according to its terms, damages are limited to those accrued prior to termination. If the contract contains a provision allowing termination without cause upon due notice, but the party breaches by terminating without allowing the notice period to expire, then damages are limited to those that could potentially accrue during the period of the required notice.
Sometimes, a contract contains a liquidated damages provision which specifies the amount of recovery. A provision for liquidated damages is often inserted into the contract when the exact amount of damages for a potential breach is sufficiently uncertain at the time the contract is entered into. To be enforceable, it must specify an amount which is reasonable to the circumstances at the time and the computation of damages must be so difficult that the parties are justified to insert such a liquidated damages clause. Absent both criteria being met, the court will not enforce such a clause.
When the breach of contract is partial, prospective damages are not available. Plaintiff may recover damages only from the time of nonperformance to the time of trial. Damages may not be recovered for anticipated future nonperformance.
The Duty to Mitigate Damages
The party claiming damage due to breach has a duty to take all reasonable steps necessary to mitigate the damages accruing. One cannot simply allow the situation to worsen without taking affirmative action to avoid unnecessary damage.
A typical example would be a roofer breaches a contract by failing to repair a leak on the roof and the owner of the property discovers water pouring into his office space. The owner cannot simply allow the water to ruin all the computer equipment on the floor, but should take those steps reasonable to safeguard the equipment. If the owner fails to do so, the roofer could advance the affirmative defense of failure to mitigate and would not be liable for the cost of repair to the computer equipment assuming he proved such failure. Note that the roofer would have the burden of proving failure to mitigate damages.
One cannot be forced to mitigate damages unreasonably. Thus, if you buy my product but fail to accept delivery, I cannot be forced to sell it to another person at a price that would cheapen the image of the product, etc. See our article on Contracts.
Tort Causes of Action for Breach of Contract, and Punitive Damages
When the conduct which equates to the breach of contract also violates an independent duty arising from the principles of tort law, then a tort cause of action may be brought in addition to the breach of contract.
Negligent breach of contract is usually not enough to bring a tort claim. The issue of negligence is usually irrelevant to the question of breach-the sole issue being whether a contract was breached, not why it was breached. The same damages would apply whether negligent or not.
However, in unusual situations, more grievous wrongs can lead to tort causes of action also being pled. Tort claims (and damages) which are permitted by California courts usually include: negligence in the performance of the contract which directly results in personal injury; the use of fraud to induce a party to enter into a contract; or wrongful discharge of the duty in violation of public policy.
As noted before, while Plaintiff may bring both a contract and a tort cause of action, plaintiff may not recover a duplicate award of damages. However, under the tort cause of action, plaintiff may recover punitive or exemplary damages in appropriate cases (see CC § 3924).
In situations where no enforceable contract exists, and therefore, expectation damages cannot be proven, recovery is possible based on quasi-contract. If Plaintiff sustains a loss because of Plaintiff’s reasonable reliance on the contract that was breached, reliance damages may be awarded to prevent the unjust enrichment of the Defendant. This is equitable relief in the sound discretion of the courts but as a practical matter, the court will want to see that the reliance was reasonable and the resulting damages predictable.
Reliance damages are intended to restore Plaintiff to the position occupied at the time parties entered into the contract. Reliance Damages cannot exceed the benefit of the bargain.
A famous attorney once quipped that many of his best judgments he had obtained after trial ended up uncollectable. “Good for wall paper and nothing else,” he said, “since once the defendants faced the size of the verdicts, they would usually close their doors.”
Implicit in the above boast is a sadder truth-that obtaining a verdict without recovering money may be good for the ego and for revenge, but does not result in a profit.
The same issue confronts the party who has suffered a breach of an agreement. It is essential to make sure that damages may be proven, that the measurement of damages will result in a beneficial result, that the cost benefit ratio of the litigation makes sense-and that the defendant will have sufficient assets to make the judgment collectable. See our article Debt Collection in Hard Times for a fuller discussion of the latter issue.
Contracts are a business tool allowing damages for breach. To make full and appropriate use of the tool, be sure to ask your attorney what damages can be obtained once the breach is demonstrated.