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Legal Guide to Contract Breaches and Remedies

By
Boruch Burnham, Esq.
/
January 21, 2024

Contract breaches are not always clear-cut; they often exist along a continuum, from minor deviations to significant failures that fundamentally undermine the agreement. In this guide, we will discuss the various types of contract breaches, explore the range of remedies available, and also touch upon the distinct variations under the Uniform Commercial Code (UCC).

Types of Contract Breaches

Material Breach: A material breach, sometimes referred to as a fundamental breach, is a severe violation of the contract that strikes at the heart of the agreement's purpose. This type of breach occurs when one party fails to perform a substantial contractual obligation, undermining the contract's fundamental objective. The severity of a material breach typically allows the non-breaching party to terminate the contract and seek damages.

Immaterial Breach: An immaterial breach (sometimes referred to as a minor breach) is when the breach does not fundamentally undermine the contract's purpose, and the breaching party has substantially performed its part of the agreement. In such cases, the non-breaching party is still obligated to fulfill their duties under the contract but will be entitled to any damages arising from the breach.

Anticipatory Breach: An anticipatory breach, or anticipatory repudiation, happens when one party clearly indicates they will not fulfill their contractual duties before the performance is due. This breach allows the non-breaching party to consider the contract breached immediately, seek remedies, and potentially terminate the contract without waiting for the actual time of performance.

Damages and Remedies for Breach

In breach of contract cases, the type of damages awarded hinges on the nature and extent of the breach, the party at fault, and the resulting consequences.

Expectation Damages: Expectation damages are intended to put the non-breaching party in the position they would have been in if the contract had been fully performed. This means compensating them for any lost benefits or profits directly resulting from the breach.

Reliance Damages: Reliance damages are awarded to reimburse the non-breaching party for expenses or losses incurred while preparing for or performing the contract. Unlike expectation damages, reliance damages are not focused on the benefits that would have been received had the contract been fully performed, but rather on putting the non-breaching party back in the position they were in before the contract was made in the first place. For example, if someone hires a contractor to renovate a house and the contractor backs out after the work has started, the homeowner could claim reliance damages for the expenses already incurred, like the cost of materials or any preparations made based on the contractor's promise.

Restitution: Restitution is primarily concerned with preventing unjust enrichment. It is awarded when one party has conferred a benefit upon another party in the course of performing a contract, and it would be inequitable for the benefitted party to retain that benefit without paying for it. Restitution is often used when a contract is voided or unenforceable, or when a party has partially (but not substantially) performed. That is, a party who substantially performed should be entitled to what they were due under the contract minus the damages caused by the breach. On the other hand, a party who has not substantially performed (i.e. materially breached) may only be able to recover damages representing the value they conferred to the non-breaching party.    

Consequential Damages: Consequential damages refer to secondary losses that arise as a foreseeable result of a breach, not directly from the breach itself. For instance, if a company misses critical deadlines due to a software vendor's failure to deliver, the company can claim consequential damages for lost future revenue, in addition to direct damages like the cost of replacement software.

Liquidated Damages: Liquidated damages are a pre-determined sum stipulated in a contract, payable by a breaching party to compensate the non-breaching party for any anticipated losses arising from the breach.

Specific Performance: Specific performance is an equitable remedy courts use to require that a breaching party fulfill the obligations under the contract (rather than allowing them to simply pay monetary compensation). This remedy is generally used in connection with real estate transactions and where other unique items or services are involved such that monetary damages cannot adequately compensate the non-breaching party.

Injunction: An injunction is a court order directing a party to do or refrain from doing specific acts. This remedy is meant to prevent irreparable harm or to maintain the status quo during the resolution of a legal dispute. For example, if a former employee attempts to use confidential information in violation of a non-disclosure agreement, an injunction can be sought to prevent the misuse of this information.

Rescission: Rescission essentially cancels the contract and releases both parties from their obligations. This is an ideal option for unwinding/voiding contracts that were formed under duress, fraud, or misrepresentation.

Reformation: Reformation involves modifying the contract to reflect what the parties actually intended. This remedy may be applied in cases where the written contract has errors or does not fully express the agreement's terms.

Understanding Breaches and Remedies under the Uniform Commercial Code (UCC)

Now that we have discussed the various types of contract breaches and the legal remedies available under common law, let's examine them under UCC which governs contracts for the sale of goods, encompassing a wide range of transactions, from the sale of tangible products to mixed transactions involving both goods and services.

The Perfect Tender Rule: One fundamental principle of the UCC is the "perfect tender rule." Traditionally, under the perfect tender rule, a seller would be in breach if they did not deliver goods that conformed exactly to the terms of the contract in every aspect—quantity, quality, delivery time, and other specifications. However, in practice, minor deviations might not always constitute a breach, especially if they don't significantly affect the overall value or usability of the goods. For example, slight variations in product specifications that are generally acceptable in the trade or that do not materially alter the value of the goods might not be seen as breaching the contract.

The Right to Cure: The UCC affords sellers the “right to cure” in certain circumstances, meaning that if the initial delivery of goods is non-conforming, the seller may have an opportunity to correct the issue by delivering conforming goods within the contract's time for performance.

Installment Contracts: In cases involving installment contracts, where goods are to be delivered in multiple installments, a breach in one installment does not necessarily constitute a breach of the entire contract. Each installment is treated as a separate contract, and a breach in one installment only gives rise to remedies for that specific breach. For example, if a buyer agrees to purchase 1000 laptops to be delivered in monthly installments of 100, a breach in the first delivery does not automatically void the entire contract; it only pertains to the first installment.

Buyer's Remedies Under the UCC

When it comes to damages, the UCC takes an approach that generally aligns with the principles of expectation remedies as discussed above in the sense that the non-breaching party should be in as good a position as they would have been had the contract been fully performed. 

Thus if a buyer receives goods that do not conform to the contract's requirements in terms of quantity, quality, or other specifications, they can reject the goods and sue for damages, which would be the difference between the contract price and market price.

The buyer also has the “right to cover,” which means that when a seller breaches the contract, the buyer can purchase substitute goods from another source and recover from the seller the difference between the contract price and the price they had to pay for the substitutes.

Alternatively, a buyer can choose to accept non-conforming goods as is, and seek damages for the difference between the value of the conforming goods (had they been delivered exactly to the specifications agreed to in the contract) and the value of the non-conforming goods as accepted by the buyer.

The UCC provides that buyers are entitled to both incidental and consequential damages. Incidental damages cover expenses directly related to the breach, such as costs incurred in obtaining substitute goods. Consequential damages, on the other hand, refer to losses that occur as a secondary effect of the breach, such as lost profits or additional operational costs that arise from not having the goods as promised. These damages are meant to compensate the buyer for the financial impact of the breach, beyond just the immediate cost of the goods themselves, and are recoverable provided they were foreseeable and directly linked to the breach. contract

Seller’s Remedies Under the UCC

Under the UCC, if a buyer fails to fulfill their contractual obligations, such as not paying on time or refusing to accept conforming goods, the seller can cancel the contract and sue for the difference between the contract price and the market value of the goods at the time of the breach.

Alternatively, the seller can resell the goods to a third party and then claim any losses from the original buyer, (such as the difference between the original contract price and the resale price), plus any additional costs incurred due to the buyer's breach.

Note that if the goods are unique or cannot be resold easily, the seller may claim the full contract price from the buyer as damages. This is especially relevant in cases involving custom-made or specially ordered items, such as shirts with team logos or purpose-built furniture ordered to spec.

Finally, the seller has the right to recover incidental damages resulting from the buyer's breach, which may include costs incurred in caring for and preserving the goods after the breach, expenses in connection with the return or resale of the goods, and any other reasonably incurred expenses directly resulting from the buyer's failure to fulfill the contract terms. 

Understanding and effectively handling contract breaches requires not only knowledge but also practical legal expertise. If you find yourself in a situation where you need to address a breach or enforce a contract, Through AAL’s directory, you can find a number of attorneys with extensive experience in practicing contract law who can provide you with tailored advice and effective solutions, ensuring your contractual matters are handled with expertise and care.

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