Legal Remedies in Contracts: Definition & Acts Video

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  • 0:07 Legal Remedies in Contracts
  • 0:45 Compensatory Damages
  • 3:03 Other Remedies
  • 6:57 Lesson Summary
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Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

When one party breaches the terms of a contractual agreement, the court uses any of several remedies to make the injured party whole. These remedies include compensation, consequences for breach, punishment, nominal fines, liquidation and mitigation.

Legal Remedies in Contracts

A breach of contract occurs when one party does not follow through with the promises made in the contract, and the other party is considered injured, or not whole in some way, generally financially. When this happens, the courts have several ways of making the injured party whole again.

There are several remedies the court may use to settle the score:

  • Compensatory damages
  • Consequential damages
  • Expectation damages
  • Punitive damages
  • Nominal damages
  • Liquidated damages
  • Mitigated damages

Let's explore the important factors that determine the type of remedy used in different situations.

Compensatory Damages

In some cases, compensatory remedies are used. These remedies restore a party back to where they would have been financially had the breach never happened. There are two types of compensatory remedies the courts can apply:

  • Consequential damages
  • Expectation damages

Consequential damages is a remedy that restores the injured party for any loss directly related to the breach and indirectly related but can be foreseen as damages that may occur as a consequence of the breach.

Suppose you contract with a plumber to fix a leaky pipe at your restaurant. Because the leak was located on the main water supply line, you cannot open the restaurant until the leak is fixed. If the plumber neglects to order the parts needed to fix the leak in a reasonable amount of time, he cannot repair the pipe. This means your restaurant cannot open until the parts are ordered and the work is completed. Each day that you are closed, you are losing money.

The court will look at a couple of things:

  • The restaurant cannot be operated without running water
  • Certain parts are needed to make the repairs to the water line
  • The plumber was aware that water is necessary to run a restaurant

A court would look at the restaurant owner's loss of revenue as foreseeable and may require that the plumber not only restores the restaurant to working order, but that he also may have to pay for any revenue that would have been made for a reasonable time between the execution of the contract and the final repair. The reason - the plumber neglected to order the parts quickly enough to repair the leak. Had he placed the order on the day he signed the contract, the parts may have arrived sooner, reducing the lost revenue.

Another remedy the court may use is expectation damages. This remedy qualifies the injured party to the exact loss or market value of loss. In other words, no provisions are made for foreseeable losses.

Suppose you contract with a bakery to make and deliver your wedding cake. On the way to the reception, the delivery truck hits a pothole and the cake shifts from the impact and cracks into a million pieces of crumb. Obviously, the baker cannot serve the cake, but you paid for it. The court will look at this breach as unforeseeable and probably rule in favor of the bakery returning the money you paid for the cake and nothing more.

Other Remedies

Sometimes restoring an injured party is not enough. The court may actually punish the breaching party. This remedy is punitive and is designed to actually settle a breach of contract case with a very high payout - much more than what is expected or even for foreseeable damages.

Here's an example to help explain this. Suppose you purchased a low-mileage car from a small car dealer. After a few months of enjoying your car, you take it in for a tune-up. The mechanic informs you that the car's odometer had actually been tampered with. You thought you purchased a car with low mileage, but what you really purchased was a car that had a phony odometer reading, making the actual mileage much higher than you thought.

In this case, the court would probably impose a punitive remedy on the car dealer because the act of turning back an odometer is illegal and unethical. It is also deceitful and not a very nice thing to do. In this case, you would most likely get your money back for the car, plus a larger amount just to send a strong message to the company to deter them from doing this type of thing to others.

Other times, the court looks to send a subtle message by using a nominal remedy to satisfy the breach. This generally happens when the breach did not injure the breached party in any significant way. It is more about warning the breaching party about their actions.

Let's say you open a taco stand at the beach. You contract with Juan, a local farmer, for a delivery of tomatillos for your secret sauce. Juan forgot to send you tomatillos. You brought him to court because you lost customers during your opening week. The court will take a careful look at the circumstances. Unfortunately, you are a new business. It is difficult to foresee how many customers you lost because you did not have any customers in the past. It is likely that Juan will have to pay a small penalty for the inconvenience but not much more than that.

Liquidated damages is a remedy that actually states an amount of money written into a contract as a clause should a breach occur. This is written into the contract where actual damages would be difficult to determine. A good example of a contract that includes a liquidated damage clause may be one that involves a company who holds a trade secret, like a secret mix of spices for their signature dish.

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