Remedies — Contracts

A homeowner hires a contractor to build a deck for $8,000. The contractor buys materials, starts framing, and has $3,000 into the job. Finishing would cost another $2,000. Then the homeowner repudiates. Nothing more gets built. So what does the contractor collect? Not the $8,000. Not nothing.

$6,000. And the reason is the one idea this whole topic hangs on. Contract damages put the injured party where full performance would have, no better and no worse. That is the expectation interest, the North Star of remedies. Every other rule in this episode is either a way to calculate it or a limit on it. By the end you will run that number on any fact pattern the exam hands you.

Here is the route. First, the three interests a court can protect, and the expectation formula that dominates. Then the three gates every damages claim must pass. Liquidated damages, and mitigation. The equitable remedies, reformation and specific performance. Reliance and restitution, the fallbacks. And finally the parallel system the UCC runs for goods.

Start with the menu. Restatement (Second) of Contracts § 344 names three interests a court can protect. Expectation looks forward, giving you the value of what you were promised. Reliance looks backward, reimbursing what you spent relying on the promise. Restitution looks at the breacher, forcing them to hand back the benefit received.

Expectation is the default, and usually the largest. Reliance and restitution are the fallbacks when expectation is unavailable or too hard to prove. And you elect among them. No stacking. One satisfaction only.

Now the formula, and this one you memorize. Under § 347, damages equal loss in value, plus other loss, minus cost avoided, minus loss avoided. Loss in value is the gap between what you were promised and what you got. Other loss is incidental and consequential harm. Cost avoided is what you no longer have to spend. Loss avoided is value you salvaged.

Run it on the deck. Loss in value is the $8,000 price. Cost avoided is the $2,000 of work never done. That is $6,000. Check it the other way. Lost profit of $3,000, plus $3,000 already sunk into materials. Same answer. Now the contractor reuses $500 of those materials on another job. That is loss avoided, and the recovery drops to $5,500.

Next, sort every loss into the right box, because each box has its own rules. Direct damages are the value of the promised performance itself, the loss flowing naturally from this kind of breach. Incidental damages are the transaction costs of coping with the breach. Inspecting, storing, arranging a substitute deal. Consequential damages are downstream losses that turn on your particular situation.

Why does the sorting matter? Direct damages are essentially always recoverable if proven. Consequential damages must clear an extra hurdle. And hold one UCC wrinkle in reserve. A buyer may recover consequential damages. A seller ordinarily may not.

One more measuring problem, and construction is the classic. A builder finishes but deviates from the plans. Two ways to measure the owner's loss. Cost to complete or repair, or diminution in market value. Try one. A $60,000 pool, plans naming a brand of filtration pipe, and the builder installs a different brand of identical quality. Tearing out the pipe would cost $30,000.

$30,000, or nothing? Nothing, or close to it. Cost of completion is the norm, but courts switch to diminution in value when completion would involve unreasonable economic waste and the defect is minor and non-willful. Demolishing sound concrete to swap identical pipe is that waste.

Three firm outer limits. No punitive damages for breach of contract, however spiteful, unless the breach is also an independent tort like fraud. Attorney's fees follow the American Rule, so each side pays its own lawyers. And a proven breach with no proven loss gets nominal damages.

Now the three gates every damages claim must pass. Causation, the breach actually caused the loss. Foreseeability, the loss was foreseeable when the contract was made. Certainty, the amount is provable with reasonable certainty. A loss can be entirely real and still fail at the second gate or the third.

Causation is the cleanest defense, and candidates skip past it. A farmer buys a tractor for the spring planting window and the dealer delivers two weeks late. That same spring, flooding leaves the fields underwater for the whole window. The flood would have killed the crop anyway, so the late delivery caused nothing.

Foreseeability is the Hadley limit, and it is where consequential damages live or die. § 351 gives you two doors. General damages come through the first automatically, because they are losses anyone would expect from this kind of breach. Special damages come through the second only if the breacher had reason to know, when contracting, of the circumstances making the loss likely.

Two riders. Notice given after the deal is signed is too late. And the test is an objective reason to know. Most courts have rejected the old tacit agreement test.

Certainty polices the amount, and lost profits are the battleground. Older courts applied a flat new business rule. No track record, no lost profits. The modern majority abandoned that bar and treats it as a question of evidence. A new venture recovers lost profits if it proves them with reasonable certainty, through expert testimony, comparable operations, or market data.

Not mathematical precision. Just enough that the number is not a guess. And if the venture cannot get there, the fallback is reliance.

Now clauses that fix the number in advance. Courts like liquidated damages, because an enforceable clause lets the injured party collect without proving actual damages. A penalty is struck down instead, throwing the party back on ordinary proof. Two prongs decide which you have. Reasonable amount, judged as of contracting. And hard to estimate, because actual damages were difficult to calculate then.

Try it. A $50,000 supply contract, with a clause charging $250,000 if the buyer cancels, when everyone knew the largest realistic loss was about $10,000. Clause, or penalty? Penalty. Twenty-five times the plausible harm is not a forecast, it is a threat. UCC § 2-718(1) voids a term fixing unreasonably large liquidated damages. Substance controls, not the label.

One nuance the exam likes. Magnitude cuts one way. An unreasonably large sum is a void penalty, but an unreasonably small sum is tested under unconscionability instead. A $25 cap on a security system that fails during a break-in is attacked that way.

Now mitigation, and the name is the trap. The doctrine is avoidable consequences. It bars recovery for any loss the injured party could reasonably have avoided after the breach. People call it a duty to mitigate. There is no true duty. The rule simply denies recovery for the avoidable portion.

The standard is reasonableness. You take the steps a reasonable person would take, without undue risk, burden, or humiliation. Reasonable efforts that fail still leave full damages recoverable. A buyer facing non-delivery should cover. A seller facing rejection should resell. A builder told to halt should stop building.

Which is our deck contractor's problem too. Costs run up after a clear repudiation are avoidable, and avoidable costs are not recoverable.

Wrongful discharge is the tested application. A fired employee must use reasonable diligence to find comparable employment, and earnings a reasonable search would have produced are deducted. An executive on $150,000 a year who turns down a comparable role at $140,000 loses that $140,000. But comparable is the operative word. An entry-level clerk job two states away is not comparable.

And note who carries the burden. The employer must prove the comparable job existed and that the employee failed to pursue it.

One exception trips everyone. A car dealer with a large inventory contracts to sell a sedan for $30,000, on a $4,000 profit. The buyer breaches, and the dealer sells that same car to a walk-in customer for the same $30,000. So the dealer recovers nothing? No. $4,000.

This is the lost volume seller. With effectively unlimited supply, the dealer could have made both sales and earned two profits, so the resale is not a true substitute and mitigated nothing. It takes its lost profit under UCC § 2-708(2), not the zero price differential.

Reformation is the shortest stop, and not starred. It rewrites the document so it matches what the parties actually agreed, on clear and convincing evidence. The classic trigger is a scrivener's error, a lawyer typing $15,000 where the parties said $150,000. The parol evidence rule does not block it.

But reformation fixes a mistake in writing the deal down, never a mistake in the deal itself. A contractor who misbid its own costs has nothing to reform.

Specific performance orders you to do what you promised, instead of paying. It is equitable, and the gateway is that money damages are inadequate. That happens when the subject matter is unique, or the loss is too hard to measure or collect. Land is the paradigm, because every parcel is treated as unique.

For goods, UCC § 2-716 allows it where the goods are unique, or in other proper circumstances. A one-of-a-kind vintage car with no substitute on the market is the textbook case. And a buyer who cannot cover may replevy goods identified to the contract.

Uniqueness is only the gateway. You still need definite terms, feasibility without burdensome supervision, and no equitable defense. Laches, unclean hands, unfairness at formation, undue hardship. A buyer who sat silent for four years while the seller improved the land loses to laches.

One hard line. Courts will not specifically enforce a personal service contract. They will not order someone to work, partly because forcing labor raises a Thirteenth Amendment concern, and partly because supervising compelled work is impractical. But there is a workaround, heavily tested. The negative injunction.

Where an employee's services are unique or extraordinary, a court may enjoin them from working for a competitor during the term. The celebrated chef who quits to cook across town cannot be dragged back into her old kitchen, but she can be barred from the rival's. One limit. The injunction cannot leave her no way to earn a living. The same analysis governs a covenant not to compete, enforceable only if reasonable in duration, scope, and interest.

Now the fallbacks. Under § 349, reliance recovers what you reasonably spent preparing for or performing, restoring you to where you stood before the deal. It is also the standard measure in a promissory estoppel case. A start-up that spent $40,000 retrofitting its facility, and cannot prove its projected profits, recovers the $40,000.

One cap. The losing contract rule. The breaching party may prove the injured party would have lost money even on full performance, and that loss comes off. Reliance cannot escape a bad bargain.

Restitution measures something else entirely. Not your loss, but the benefit you conferred. Its engine is unjust enrichment, and nobody keeps a benefit they have not paid for. It can beat expectation on a losing contract, because restitution is not capped by the contract price. A contractor whose work on an underbid barn is worth $40,000 recovers that $40,000.

Here is the part candidates forget. Even a breaching party can recover in restitution. A landscaper who adds $12,000 of value and then walks off cannot sue on the contract it broke. But § 374 lets it recover the net benefit exceeding the owner's breach damages, never more than a pro rata share.

Restitution also fills the gap when no enforceable contract exists. Void, voidable, or barred by the Statute of Frauds, a party who performed recovers reasonable value in quantum meruit.

Last stop, the UCC. Article 2 runs a parallel system for goods, usually tested with the text supplied, so the skill is picking the right section. Each aggrieved party gets a substitute transaction measure, a market measure, and sometimes the goods or the price.

When the buyer breaches, the seller resells under § 2-706 and takes contract price minus resale price. Or contract price minus market price. And a seller gets incidental damages only. Never consequential. That asymmetry is a classic trap.

When the seller breaches, the buyer covers under § 2-712, buying substitutes in good faith without unreasonable delay, and takes cover price minus contract price. A buyer who does not cover uses market price when it learned of the breach, under § 2-713. And a buyer who accepted defective goods uses § 2-714. Value as warranted, minus value as accepted.

One last Code rule. Under § 2-719, parties may design their own remedies, like a repair or replace warranty. But if that remedy fails of its essential purpose, because months of repairs never fix the machine, the buyer reaches for the Code's ordinary remedies.

A word on authorities. This episode named no cases, and that was deliberate. The one name you heard, the Hadley rule, is a label for a principle, not a citation you need. NextGen remedies questions put you in the lawyer's chair. How much can the buyer recover? What is the seller's best remedy? Is this clause enforceable? The rules come from the Restatement (Second) of Contracts and UCC Article 2.

If you keep only three things, keep these. One, the expectation formula. Loss in value, plus other loss, minus cost avoided, minus loss avoided. Two, the three gates, because consequential damages die at foreseeability or certainty. Three, equity needs an inadequate legal remedy, and never compels personal service.

Now the traps, straight from the examiners' favorites. One. Awarding lost profits that flunk foreseeability. The loss must be foreseeable when the contract was made, and notice afterward is too late. Two. Forgetting the mitigation offset. Subtract what the injured party earned, or reasonably could have earned.

Three. Treating the duty to mitigate as a real duty. It is only a cap. Four. Enforcing a penalty because it is labeled liquidated damages, or striking a valid clause because the actual loss turned out small. Five. Giving a seller consequential damages under the UCC. A seller gets incidental only.

Six. Ordering specific performance of a personal service contract. Use a negative injunction. Seven. Forgetting that a breaching party can still recover in restitution for a net benefit. Eight. Awarding punitive damages for a plain breach. Never.

And work in a fixed order. Identify the interest, run the formula, prune it with foreseeability, certainty, and mitigation, then ask whether equity is on the table. These pieces are starred, so no statute is coming.

Time for the quick check, and this one comes straight from the BARGO question bank. A specialty printer agrees to print event programs for a planner for $3,000. The planner tells the printer only that the job is for programs. In fact the planner has a separate $20,000 contract with a corporate client, contingent on delivering those programs on time. The printer delivers a week late, the client walks, and the planner loses the $20,000.

Can the planner recover the $20,000 in lost profit? Option one. Yes, lost profit is a foreseeable result of any late delivery. Option two. Yes, the printer breached by delivering the programs a week late. Option three. No, the printer had no reason to know of the client contract. Pause here if you want a moment.

The answer is option three. Consequential damages like lost profit are recoverable only if foreseeable when the contract was made. That is the Hadley rule. General losses from any late delivery pass automatically. But a specific downstream deal is a special circumstance, recoverable only if the breacher had reason to know at contracting. This printer knew it was printing programs. Nothing more.

Option one overstates the rule. Not every lost profit is foreseeable, and special losses need notice. Option two confuses breach with damages. Breach is established, but foreseeability separately limits recovery. Notice after signing comes too late.

If you spotted the missing notice, you are reading these the way the examiners write them. There are thirty plus more questions on this topic alone.

Five things to take away. One. Expectation is the default, and the formula is loss in value, plus other loss, minus cost avoided, minus loss avoided. Two. Every claim passes causation, foreseeability, and certainty, and consequential damages die at those gates.

Three. A liquidated damages clause survives as a reasonable forecast of a hard to estimate loss, and dies as a penalty if it is not. Four. Avoidable consequences is a cap, not a duty, and the lost volume seller is the exception.

Five. Equity needs an inadequate legal remedy, which land always supplies and personal service never does. When expectation fails, reliance restores what you spent, and restitution disgorges what you gave.

Which is how our deck contractor ends up with $5,500. Not the price, not the profit, but exactly where full performance would have left them. Next time, Third Parties.

Practice this topic with more than 2,900 exam-style questions, free to start, at nextgenbargo.com. This episode is for education and exam preparation only, not legal advice, and we are not affiliated with or endorsed by the NCBE or any bar examining authority.