What Happens When a Contract Is Breached?

A breach of contract occurs when a party fails, without legal excuse, to perform a duty required by the agreement. The next question is always what the injured party can recover. Contract remedies are designed to protect the expectations created by the agreement, not to punish the breaching party. For paralegal exam candidates, mastering the menu of remedies and the rules that limit them is essential, because this subject appears frequently in both multiple choice and scenario based questions.

How Do Courts Classify a Breach?

A material breach is a serious failure that defeats the purpose of the contract. It excuses the other party from further performance and allows a claim for total damages. A minor breach is a slight deviation, such as a short delay with no real consequence. The non-breaching party must still perform but may sue for damages caused by the deviation. An anticipatory repudiation occurs when one party clearly states before the performance date that they will not perform, which allows the other party to treat the contract as breached immediately or wait a reasonable time.

What Are Compensatory Damages?

Compensatory damages are the most common remedy. They aim to put the injured party in the position they would have been in had the contract been performed. This is called the expectation interest. The usual measure is the value of the promised performance minus the value actually received, plus incidental and consequential damages, minus any costs avoided.

For example, if a buyer agrees to pay a seller $50,000 for equipment and the seller fails to deliver, the buyer may recover the cost of obtaining substitute equipment above the contract price. Under the Uniform Commercial Code, this is called cover damages.

What Are Consequential and Incidental Damages?

Incidental damages are reasonable expenses incurred in dealing with the breach, such as storage, transportation, or the cost of finding a replacement. Consequential damages are losses that flow indirectly from the breach, such as lost profits from a resale contract. They are recoverable only if they were foreseeable to the breaching party at the time the contract was made, the rule from Hadley v. Baxendale. Parties often limit or exclude consequential damages by contract clause.

What Limits Contract Damages?

Foreseeability: Only losses that were reasonably contemplated at formation are recoverable.
Certainty: The plaintiff must prove damages with reasonable certainty. Speculative profits are not recoverable.
Mitigation: The injured party must make reasonable efforts to avoid or reduce losses. A landlord, for example, may need to attempt to re-let a property after a tenant abandons it in many jurisdictions.

What Are Liquidated Damages?

Liquidated damages are an amount the parties agree in advance will be paid upon breach. Courts enforce them if the amount is a reasonable forecast of harm and actual damages would be difficult to estimate at the time of contracting. If the amount is so large that it operates as a threat to induce performance, it is an unenforceable penalty, and the injured party is left with ordinary damages.

What Are Nominal Damages?

When a breach occurs but causes no provable loss, courts may award nominal damages, often one dollar. They acknowledge that a legal right was violated and may support an award of costs.

What Is Specific Performance?

Specific performance is an equitable remedy in which the court orders the breaching party to perform the contract as promised. It is available only when money damages are inadequate. This most often arises in contracts involving unique goods or land. Because every parcel of real property is considered unique, courts routinely order specific performance of real estate sale contracts. Rare artwork, heirlooms, and custom items are other common examples.

Courts generally refuse specific performance of personal service contracts because forcing someone to work raises concerns about involuntary servitude and supervision. Instead, a court might issue an injunction preventing the person from working for a competitor, if the contract is otherwise enforceable.

What Are the Requirements for Equitable Relief?

The plaintiff must show a valid contract, definite terms, that damages are inadequate, that the plaintiff has performed or is ready to perform, and that enforcement is feasible. Equitable defenses such as laches, unclean hands, and undue hardship may defeat the request.

What Is Rescission?

Rescission cancels the contract and returns the parties to their positions before the agreement. It is available in cases of mutual mistake, misrepresentation, fraud, duress, undue influence, or material breach. The party seeking rescission must usually act promptly and return any benefit received. Rescission is often paired with restitution, which requires each party to give back what they received.

What Is Restitution?

Restitution prevents unjust enrichment. If one party conferred a benefit on the other under a contract that is unenforceable or breached, the court may order the recipient to pay the reasonable value of the benefit. A non-breaching party may elect restitution instead of expectation damages. In certain circumstances, even a breaching party that has partly performed may recover restitution, less the damages caused by the breach.

What Is Reformation?

Reformation is another equitable remedy in which the court rewrites a written contract to reflect the true agreement of the parties when the document contains a mistake, such as a scrivener's error in a legal description or a payment amount.

Remedies at a Glance

Money damages: Default remedy and measured by expectation.
Specific performance: Equitable, used for unique subject matter.
Rescission and restitution: Undo the deal and return benefits.
Reformation: Correct the document.
Injunction: Prevent a party from doing something that violates the contract.

How Paralegals Support Contract Disputes

Paralegals gather the contract and amendments, correspondence, invoices, and performance records. They help calculate damages, prepare demand letters, review the notice and cure provisions, and check dispute resolution clauses for arbitration or mediation requirements. They also calendar the statute of limitations, which for written contracts often ranges from three to ten years depending on the state and, for sales of goods under the UCC, is four years.

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Breach of Contract Remedies: Damages, Specific Performance, and Rescission