When you enter into a contract, it means that you make a legally binding agreement with one or more parties to perform (or refrain from performing) certain acts. Failing to “substantially” comply with the performance required by the terms of the contract may amount to a breach of contract. What are the consequences of a breach of contract?
Legal Consequences
Legal consequences typically refer to money damages. There are three primary measures of legal damages: “expectation damages,” “reliance damages,” and “restitution damages.” These types of damages are often referred to as “compensatory damages”—that is, their primary purpose is to compensate the harmed party for the economic loss they have suffered and put them in the position they would have been in had there been no breach.
Expectation damages provide the harmed party with the “benefit of the bargain.” That is, the court tries to put the harmed party in the position they would have been in had the breaching party fulfilled their obligations. Reliance damages provide the harmed party with compensation for expenses they incurred as a result of performing their obligations in reliance that the breaching party would perform their end of the deal too. Restitution damages provide the harmed party with compensation for any unjust enrichment the breaching party obtains by virtue of the breach.
You may have also heard the terms “incidental” and “consequential” damages. These are variations of the three primary measures of legal damages discussed above. There are also “punitive” damages, which are generally only awarded in extreme circumstances as specifically authorized by statute (and are typically not available in a breach of contract setting).
Equitable Consequences
Equitable consequences typically refer to an order by the court to do or refrain from doing some act. The court may order an equitable remedy when a legal remedy is inadequate. For instance, where a breach of contract involves the sale of a house, the harmed party may feel that a money award, no matter how large the amount, will never truly make them “whole.” In such a case, the court may enter an order of “specific performance” requiring the breaching party to transfer the house to the harmed party in exchange for the agreed-upon purchase price.
Limitation of Damages
Contract law provides parties with a lot of freedom to negotiate their own terms and conditions and determine how risks will be allocated. Therefore, parties may voluntarily agree to limit their damages. Parties to a breach of contract should look to the terms of the contract to determine whether there are any provisions that purport to limit damages.
Additionally, courts may limit damages based on issues related to causation, foreseeability, and doctrines like “economic-loss” and “mitigation.” The doctrine of mitigation, for example, provides that a harmed party has a responsibility to mitigate its damages. The party can’t run up the bill (or let it run up) so to speak purely because they do not believe they will have to foot the bill. They must attempt to keep damages to a minimum.
Finally, harmed parties generally cannot recover hypothetical future damages, only damages that have actually occurred.
Sale of Goods
Some contracts deal with the sale of goods covered by the Uniform Commercial Code (the “UCC”). Chapter 2 of the UCC provides a wide variety of rules related to contract damages for both buyers and sellers of goods.
Reputational Loss
A business owner who breaches a contract is not only likely to lose the patronage of the wronged party or parties but may also lose both professional and personal standing within the business community. At the heart of a breach of contract is a party’s failure to do something the party promised to do (or not do). Most business owners would like to avoid developing a reputation for breaking their promises.
Personal Consequences
Dealing with a breach a contract—and a lawsuit in general—can take a significant toll on a person’s physical energy and mental health due to the stress involved.
You should never enter into a contract without first ensuring that you can fulfill your obligations. On the other hand, if another party fails to fulfill a contractual obligation to you, you have the right to seek legal action.
Drafting Considerations
With the above consequences of breach in mind, a seller should take care to limit their exposure in the event of a breach. They might choose to include provisions that put a cap on the amount of damages, they might exclude certain damages, and they might try to shift certain risks of loss to the buyer.
The buyer on the other hand will likely attempt to remove or reduce caps and exclusion of damages, and they might ask for “indemnification” by the seller—that is, a promise by the seller that they will pay for certain costs and fees.
The information in this article is not intended as legal advice but provided for educational purposes only.