14.1 Theory of Contract Remedies

To illustrate this, imagine that TechSoft Inc., agrees to create a sophisticated chatbot for another company, BusinessTech Enterprises, for $1 million. As TechSoft gets started working on the project, BusinessTech discovers that a new technology makes it possible to create a more accurate chatbot for $500,000, half the price. Because of this, BusinessTech decides to breach the contract. As long as the penalties for breach are less than $500,000 it makes financial sense to breach the contract. In addition, the breach also allows BusinessTech to use a newer and more accurate technology. TechSoft gets some money in the form of penalties for breach, and BusinessTech gets a cheaper and more advanced technology. A breach, in such a case, is economically and technologically smarter.

The focus of this Chapter is the way in which the law seeks to make the aggrieved party whole when there is a breach of contract.

Purpose of Remedies

The overall purpose of contract remedies is to ensure that contracts are enforced and that parties are held accountable for fulfilling their obligations under a contract. The existence of such remedies helps to promote trust and reliability in business transactions, and can provide a way to resolve disputes that may arise during the course of a business relationship. Contract remedies aim to put the non-breaching party in the position he or she would have been in had there been no breach. The purpose is not to punish the breaching party, but to make the non-breaching party whole.

Contract remedies can be either legal or equitable in nature, and they may include monetary damages, specific performance, or cancellation and restitution. Legal remedies are damages to compensate the non-breaching party for any losses suffered as a result of the breach. Damages are money paid by one party to another due to a breach. These remedies may include compensatory damages, which are intended to put the non-breaching party in the position they would have been in had the contract been fully performed, or consequential damages, which are intended to compensate the non-breaching party for any additional losses that were caused by the breach.

Equitable remedies, on the other hand, are designed to discourage, prevent, or remedy a breach of contract rather than to compensate for losses. One common equitable remedy is specific performance, which requires the breaching party to fulfill their contractual obligations. Another equitable remedy is cancellation and restitution, which allows the non-breaching party to cancel the contract and recover any payments or property that they provided to the breaching party. Finally, an injunction, or judicial order, can direct a party to stop doing something that would violate the contract. Both legal and equitable remedies are explored more fully throughout the Chapter.

Parties Have the Power—but Not the Right—to Breach

In view of the importance given to the intention of the parties in forming and interpreting contracts, it may seem surprising that the remedy for every breach is not a judicial order that the obligor carry out his or her undertakings. But it is not. Some duties cannot be performed after a breach, because time and circumstances will have altered their purpose and rendered many worthless. Some duties have a lesser value after a breach, and so the non-breaching party may no longer be interested in receiving the performance that was originally promised. If a Court were to order a contract be performed, it may require the parties to continue a relationship when neither are interested in or willing to do so.

Even when it would be theoretically possible for courts to order contracting parties to carry out their contracts, this remedy is rare. A party is permitted to breach a contract. As noted in the TechSoft example above, the law of remedies often provides the parties with an incentive to break the contract in order to make a good business decision. If breached, a contract that requires performance without exception will also require a court to manage and oversee that performance to assure it is acceptable under the original terms of a contract. This calls on courts to manage relationships – an admittedly difficult task. For example, take a contract for a construction contract for a large building project. Such a contract would include detailed specifications and timelines that the contractor must adhere to in order to complete the project according to the owner’s expectations. Now imagine that there is a breach of contract and the contractor fails to meet the specified requirements or timelines. If a court orders that the contractor continue to perform, the court can potentially be required to manage and oversee the performance of the contract. As part of the court’s order, there could be regular progress reports, site visits, or other measures to ensure that the project is proceeding as planned and that the contractor is meeting their obligations under the contract. And, it is certainly possible that the non-breaching party will not be satisfied with the performance of the contractor anyway, or be concerned about the quality of the work or other aspects of the deal that caused the breach in the first place. Thus, they would need a vehicle to lodge these complaints with the court. Now, think about this for a moment. Have you ever seen a judge at a construction site checking in to make sure that a contractor is hard at work on contracting duties? There is a reason you’ve never seen this – courts are ill equipped to provide this level of supervision when ordering that contractual duties are completed as opposed to breached. Providing remedies in the form of damages instead simply makes more sense in most breach situations.

For these reasons, the common law looks more toward compensating the promisee for his or her loss than toward compelling the promisor to perform. In short, the promisor has a choice: perform under the original contract or pay a court’s award in the event of breach. In general, the fundamental purpose of contract remedies is to put the non-breaching party in the position it would have been in had there been no breach.