A breach of contract occurs whenever a party who entered a contract fails to perform their promised obligations. Due to the frequency of breaches of contract, a robust body of law has grown to resolve the ensuing disputes.
The overarching goal of contract law is to place the harmed party in the same economic position they would have been in had no breach of contract occurred. As a result, the default remedy available for a breach of contract is monetary damages.
Generally, these damages are limited to what is listed in the contract and, unlike damages from tort cases, courts do not award punitive damages for breaches of contract. For example, if a party agrees to pay $50,000 to have their house painted but is only willing to hand over $10,000 once the painting is complete, the court will award the painters $40,000 in damages. This hesitancy to award punitive damages is due to the theory of efficient breach which argues that breaching contracts and paying damages is sometimes economically beneficial for society as a whole.
Nonetheless, in specific circumstances, a party may successfully recover more money than initially contracted for under the doctrine of reliance damages. Under this doctrine, a party who reasonably relied upon a contract that was later breached can be granted compensation for the reasonable expenses they incurred due to that reliance. For example, a party who purchases lifeguard equipment in reliance upon a pool construction contract’s fulfillment may be able to recover the costs of the lifeguard equipment in the event of a breach. Reliance damages are based upon the principle of promissory estoppel, and granting them is subject to the court’s discretion.
That said, parties harmed by a breach of contract have a duty to mitigate that harm. For example, before they could recover, the aforementioned lifeguard equipment buyer must first attempt to resell the equipment to a new buyer. Failure to satisfy the duty to mitigate will result in an inability to recover damages.
In scenarios where damages are insufficient, a court may instead award specific performance. Under the specific performance remedy, the breaching party must attempt to fulfill the terms of the contract as best as possible. Specific performance, however, is generally only awarded when dealing with one-of-a-kind assets like real estate.
Parties wishing to contract around the above remedies can do so through the use of liquidated damages provisions. These provisions establish in advance how much money a breaching party must pay and sidestep the expensive and time-consuming process of determining the actual damage caused by the breach. While liquidated damages clauses are generally allowed, a court may strike one down if the clause appears to be proxying for punitive damages or if the terms of the clause are unconscionable.
[Last updated in June of 2022 by the Wex Definitions Team]