Contract remedies in the United States
April 2019 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION
Whether in litigation or arbitration, the available remedies and the corresponding limitations for breach of contract claims drive decisions about whether to pursue claims or settle. The law in the US provides remedies for breach of contract that are monetary (i.e., damages) and non-monetary (i.e., an injunction). There are potential limitations on remedies that need to be considered as well. This article reflects a brief summary of the principles at play when bringing suit to enforce a contract in the United States. Of course, the specific principles at issue in any particular dispute could vary, including depending on the nature of the contract, the state’s law that applies (e.g., New York, California or otherwise), and the forum where the dispute is to be decided.
Money damages are often sought as a remedy for a breach of contract. The types of money damages sought can include expectation damages, reliance damages and restitution.
Expectation damages. Expectation damages give the non-breaching party the value of its ‘expectation interest’ in the other party’s performance. In other words, through an award of money, the non-breaching party is put in the position that it would have been in if the breaching party had performed. For example, if a buyer contracts for services at a specific rate per hour and a minimum number of hours, but then never uses the services, the service provider has a claim for the contractual minimum minus any expense that the provider would have incurred in delivering the performance. In short, this is often referred to as giving a party ‘the benefit of its bargain’.
Reliance damages. Reliance damages approach the situation differently and instead aim to compensate the non-breaching party for harm suffered as a result of the breaching party’s failure to perform. For example, if one party has outlaid money in anticipation of a deal that the other party agrees to but fails to perform, then the non-breaching party may be entitled to recover that outlay – its ‘reliance interest’. In other words, reliance damages compensate a non-breaching party for losses suffered while reasonably relying on its counterparty’s promise to perform. Compensating a non-breaching party for its reliance interest puts that party in the same position that it would have been in had the contract never been formed.
Restitution. Restitution involves the damaged party receiving any benefit that it has conferred on the breaching party as a result of partial performance or reliance. For example, if a buyer pays for goods in advance of delivery and the seller fails to tender those goods, then the buyer is entitled to get its money back.
The above types of damages can be called ‘compensatory’, ‘actual’, or ‘direct’ damages. In other words, they are intended to compensate the damaged party for foreseeable harms. A related concept is incidental damages – a miscellaneous category for reasonable expenses associated with direct damages. For example, if a buyer receives goods that do not conform to contractual specifications, that buyer may be entitled to compensation in the form of incidental damages for transporting or storing those goods until the seller collects them.
In addition to the ‘direct’ damages, there are also consequential damages. These kinds of damages are not the direct result of the breach, but are nonetheless reasonably foreseeable. An example of damages that might be ‘consequential’ damages is a claim for lost profits. If a party breaches a contract and it is foreseeable that its counterparty will as a result lose out on related profits, then the non-breaching party might bring a lost profits claim under a theory of direct expectation damages.
If the potential for lost profits flowed from a circumstance that is not the direct result of the breach, then the lost profits still might be recoverable as consequential damages if they are reasonably foreseeable. In disputes, lost profit damages (and consequential damages generally) are often hotly contested, and the right answer often depends on the precise language of the contract, the relationship of the parties and the nature of the breach. Consequential damages may be rejected if they are too speculative or remote, i.e, the amount of damages is not reliably ascertainable, or there is only an attenuated connection between the alleged damages and the contract breach.
For money damages remedies, interest generally accrues at a rate set by statutory law, unless the parties agree to a different rate of interest. The rate of interest can vary depending on the particular state’s law that governs the dispute (compare the New York rate of interest, which is 9 percent, with the Delaware rate of interest, which is 5 percent over the Federal Reserve discount rate).
Some types of damages are generally not available for breach of contract claims. Punitive damages, for example, are generally not available for breach of contract. Punitive damages, as the name implies, are money damages assessed against a party for the purpose of punishing it rather than compensating anyone else. While punitive damages may be available in cases involving torts or violation of a person’s rights, contract law is viewed as a matter of compensation rather than a matter of punishment.
Similarly, damages that should have been mitigated may not be recoverable. A party asserting a breach of contract claim is generally required to mitigate its damages to the extent reasonably possible. Using reliance damages as an example, a court may find that a party cannot recover any damages for any money spent in reliance on a contract after it has become clear that the counterparty will not be performing its contractual obligations.
Likewise, attorneys’ fees are generally not recoverable by the prevailing party unless the contract specifies that the prevailing party in a dispute is entitled to its fees. This default principle, which is sometimes referred to as the ‘American Rule’ in contrast to the default fee-shifting principle in the UK, which is called the ‘English Rule’, provides that each party pays its own fees regardless of who wins.
There is another type of remedy for contractual breaches, which is a so-called ‘equitable’ remedy. For example, if a party to a non-disclosure agreement threatens to publicise the other party’s confidential information, a payment of money may not be enough to remedy the harm that will be caused. In such a case, the damaged party may seek an injunction to stop the breaching party from disseminating the confidential information any further. An injunction is a form of court order that, typically, requires a party to refrain from taking a specific action or compels a party to take a specific action.
If a seller breaches a contract for the sale of a specific piece of real estate or for the sale of a unique item, the buyer may be entitled to more than just damages. Under the right circumstances, courts may order specific performance – a mandate that the party breaching fulfil its obligations under the contract by transferring title to the real estate or the unique item to the buyer.
Other equitable remedies exist to address contracts that were entered based on mistaken facts or facts that were misrepresented (whether intentionally or unintentionally). In those scenarios, the parties may have agreed to contract terms that no longer make sense once the facts have been clarified. Courts have the power, in certain cases, to rescind the contract, i.e., invalidate the contract and unwind the parties’ performance or partial performance to reset them to their original positions, or to reform the contract, i.e., rewrite the contract to conform it to the parties’ true intentions.
While the above principles are common points of contract law in the United States, they do not necessarily apply to every case. Instead, they are ‘default’ rules that govern in the absence of a contrary agreement. Because contracts are, as a matter of principle, voluntary obligations, parties negotiating contracts have a significant amount of flexibility to set the terms for dealing with a breach.
For example, parties can (and often do) agree to contractual language barring claims for consequential damages. Parties can make damages claims even more predictable by agreeing to liquidated damages – a fixed amount of money owed for a breach. Setting liquidated damages can be tricky, and they will not work for every transaction. Typically, liquidated damages are set in situations where actual damages would be difficult to quantify. There are other types of damages limitations as well, including limitations on damages to a sum certain, such as the total amount received under a contract within one year. This kind of limitation may further limit the remedies available to a damaged counterparty.
Because contract parties have flexibility to modify prevailing ‘default’ principles of contract law, it is helpful to understand the default rules before agreeing to a contract. And once the parties have a live dispute, it is important to understand what can be sought in terms of damages and what limitations might have already been negotiated away.
Matthew Solum is a senior litigation partner at Kirkland & Ellis LLP. He can be contacted on +1 (212) 446 4688 or by email: email@example.com.
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