Breach of Contract: Legal Actions and Remedies

Some things are better on paper.

When we are in a hurry and have to jot down a few notes: paper. When we have time on our hands and want to get lost in our favorite book in hand: paper. When two entities have agreed on a few items in terms of doing business together? Put that on paper!

Contracts are the bedrock upon which legal relationships and business transactions are built.

These words on paper provide a structured framework, ensuring clarity, accountability and trust in various interactions and endeavors. Like the steel girders of a skyscraper, they support and hold together the intricate structures of our interconnected world, allowing for commerce, justice and order.

What happens when those supports begin to weaken or fail? Just as a faulty foundation can compromise the stability of a building, an ambiguous agreement resulting in an alleged breach of contract can destabilize relationships, lead to disputes and result in financial or legal consequences.

When there is a contract dispute which cannot be resolved by the parties themselves, there are usually two ways a business can pursue their rights or recover their losses:

  1. Mediation or Arbitration:

    Some contracts contain a dispute resolution clause that requires parties to attempt mediation or arbitration before escalating the matter to court. This means a neutral third party is presented with both sides of the argument and then either helps the parties to negotiate a compromise, as in mediation, or makes a binding decision on the matter, in the case of arbitration.  Even if mediation and arbitration are not required by contracts, parties are always free to voluntarily engage in these processes.

  2. Filing a Lawsuit:

    If one party to a contract believes that the other has breached the agreement and they cannot come to a resolution, they may decide to file a lawsuit in civil court. For example, in a contract where Company A fails to deliver machinery as agreed, Company B can bring the matter to a hearing where the judge’s legal authority can compel Company A  to deliver the machine or pay Company B damages for its breach.

Legal action could cost a significant amount of time and resources, which may be a factor in why many contracts require both parties to explore other remedies before escalating an issue to the courtroom.

Some common categories of legal damages or remedies that can be argued for in or out of court include:

Compensatory Damages: This is an outcome that aims to financially compensate the non-breaching party for the actual losses suffered due to the breach. This includes covering the costs, expenses, or losses incurred as a direct result of the broken agreement.  These expectancy damages put the party in a financial position it would have been in if the contract had not been breached.  It fulfills the non-breaching party’s “expectation” at the time it entered into the agreement.

Consequential Damages: Also known as special or indirect damages, these address losses that were not directly caused by the breach but were foreseeable consequences. They typically cover lost profits, additional expenses or secondary damages.

Specific Performance: In cases where monetary damages are inadequate or impractical, a court or arbitrator may order specific performance. This remedy compels the breaching party to fulfill their contractual obligations precisely as stipulated in the contract. Specific performance is often used when the subject matter of the contract is unique or cannot be adequately replaced, like a contract to purchase real estate.

Rescission: When a contract is fundamentally flawed, unenforceable, or cannot be performed as originally intended, rescission involves voiding the contract ab initio, treating it as though it never existed. Both parties are returned to their pre-contract positions relative to each other, all consideration exchanged by the parties is returned, and the parties have no further obligations to each other.

Injunction: This is a court order that either restrains a party from taking specific actions, or compels them to take specific actions, to prevent further breaches or enforce contract terms.  The Court enforces injunctions through its contempt powers, and it can even put parties in jail until they perform.

Quantum Meruit: Translated from Latin as, “what one has earned,” this remedy allows a party to recover a reasonable value for services or goods provided, even in cases where a contract was not fully formed or has been breached.  This prevents the breaching party from getting an unjust benefit or enrichment.  In these instances the Court determines what is fair compensation.

Restitution: Restitution aims to restore any benefits or payments that one party has conferred upon the other party in the event of a breach, ensuring that the non-breaching party is not left with uncompensated contributions.

Equitable Remedies: In addition to legal decisions, courts may grant various equitable remedies, such as specific orders, declaratory judgments which tell the parties what their obligations are to each other, or the reformation of the contract terms, to achieve fairness and justice.

In the world of business and legal relationships, the importance of contracts cannot be overstated. Having detailed expectations and contingencies outlined, written in black and white and legally binding, can help avoid misunderstandings and protect your interests whenever there is a breach of contract.

Understanding the remedies and legal structures which can provide financial compensation, restore benefits or compel performance when dealing with contracts is a smart business practice.

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