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CHAPTER 19
BREACH OF CONTRACT AND REMEDIES
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
DIGITAL UPDATE—CRITICAL THINKING
Within Instagram’s current terms of service there is a statement “We may not always
identify paid services, sponsored content, or commercial communications as such.” Is it
1. In this case, what was the basis for the students’ suit? In the Baird case, the basis for
the plaintiffs’ suit was an alleged breach of contract with purported resulting damages.
Owens Community College in Ohio maintains a registered nursing program approved by
the Ohio Board of Nursing, which permits graduates to take the National Council Licensure
Examination for their nursing license. Owens lost its accreditation from the National League for
Nursing Accreditation Commission (NLNAC) in July 2009, but did not tell its students until after
classes for the fall semester had begun in September. Sixty-two students, including Carianne
Baird, filed a suit in an Ohio state court against Owens, alleging breach of contract.
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3. In whose favor did the court rule? Why? What remains to be determined? In the Baird
case, at the trial level, the court issued a summary judgment in favor of the college. The trial
court reasoned that the students suffered no damages because the loss of accreditation did not
affect their ability to take the state licensing examination.
A state intermediate appellate court reversed the trial court’s judgment. “When a student
enrolls in a college or university, pays his or her tuition and fees, and attends such school, the
resulting relationship may reasonably be construed as being contractual in nature.” According to
CHAPTER 19: BREACH OF CONTRACT AND REMEDIES 3
CASE 19.2—CRITICAL THINKING
CULTURAL
How does a college basketball team’s record of wins and losses, and its ranking in its
CASE 19.3—CRITICAL THINKING
LEGAL ENVIRONMENT
When rescission is awarded, what is the measure of recovery? What did the recovery
include in this case? The rescission of a contract voids the contract as if the parties had never
entered into it. On rescission, both parties make restitution to each other by returning the
benefits—goods, property, or funds—transferred as part of the deal. The measure of a party’s
recovery on an award of rescission is the restitution of the consideration and other benefits
received under the contract—the remedy that will return the party to his or her precontractual
status.
This rule of recovery applies even when the party against whom rescission is sought
committed fraud. In this case, which of course involved fraud on the part of the defendant, the
recovery included the price that the plaintiff paid to the defendant for the dental practice, which
included a significant amount for the practice’s good will, less the unpaid rent that the plaintiff
owed to the defendant and a portion of the plaintiff’s income during her ownership of the
practice. The appellate court found that the trial court “did not err in calculating the damages,”
which was based on evidence of “the purchase price of the practice, the amount of expense and
professional effort the plaintiffs committed to improving the dental practice, the income
generated from the practice during Dr. Lee's ownership of it, and the rent owed to defendants.”
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Specific performance
The contract between Bruno and X Entertainment is a personal-service contract, and courts are
normally reluctant to grant specific performance of contracts for personal services. To order a
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party to perform personal services against his or her will amounts to a type of involuntary
servitude, which is contrary to the public policy (expressed in the Thirteenth Amendment). Also,
the courts do not want to monitor such contracts.
2A. Limitation-of-liability clause
In light of Bruno’s status in the stunt industry, the clause would likely be enforced. When an
exculpatory clause for negligence is contained in a contract made between parties who have
roughly equal bargaining positions, the clause usually will be enforced. Besides, his presumed
experience and knowledge suggest that he likely carries his own insurance.
3A. Liquidated damages or penalty
To determine whether a provision is for liquidated damages or for a penalty, a court asks (1) at
the time the contract was formed, was it apparent that damages would be difficult to estimate in
the event of a breach, and (2) was the amount set as damages a reasonable estimate of the
potential damages and not excessive. If the answer to both questions is yes, the provision
normally will be enforced. If either answer is no, the provision will normally not be enforced.
4A. Consequential damages
When consequential damages are awarded, compensation is given only for those injuries that a
defendant could reasonably have foreseen as a probable result of the usual course of events
following a breach. If the injury complained of is outside the usual and foreseeable course of
events, the plaintiff must show specifically that the defendant had reason to know the facts and
foresee the injury. In other words, to recover consequential damages, a breaching party must
know (or have reason to know) in advance of the breach that special circumstances will cause
the nonbreaching party to suffer an additional loss. Thus, if X Entertainment breached the
contract with Bruno with the knowledge that it would delay the release of the film and result in
lost summer profits, Bruno may collect consequential damages.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
Courts should always uphold limitation-of-liability clauses, no matter what are the
respective bargaining powers of the two parties to the contract. One of the reasons that
imitation-of-liability clauses are included in contracts is to allow sellers to predict the extent of
their liabilities should something go wrong. Without such clauses, sellers would have a difficult
time obtaining liability insurance and when such insurance could be obtained, it would be at
higher prices. All consumers would suffer as a result. Moreover, certainly buyers and sellers
with equal bargaining powers should be obligated to accept all clauses written into
contracts. Nevertheless, even if one of the parties has less bargaining power than the other, the
courts should still uphold limitation-of-liability clauses because there is enough competition in
the marketplace so that contracts between buyers and sellers are the result of the interactions of
supply and demand and are therefore efficient.
CHAPTER 19: BREACH OF CONTRACT AND REMEDIES 5
How can a judge or jury uphold all limitation-of-liability clauses when in so doing they
often would be perpetuating gross injustices? After all, such clauses are usually contained in
long contracts when printed out or presented on a Web site in small type. Most of the time,
consumers do not read contracts because they are so long and so complicated. To enforce a
limitation-of-liability clause when the consumer was not even aware of its existence would be
unfair. Even if a consumer understands such a clause, that does not mean the consumer really
has a choice. Most contracts are presented in an all-or-nothing manner. Take it or leave it, with
nothing in the middle. Consumers with little or no bargaining power must sign or not obtain the
good or service they need.
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Greg contracts to build a storage shed for Haney, who pays Greg in advance, but
Greg completes only half the work. Haney pays Ipswich $500 to finish the shed. If Haney
sues Greg, what would be the measure of recovery? A nonbreaching party is entitled to his
or her benefit of the bargain under the contract. Here, the innocent party is entitled to be put in
the position she would have been in if the contract had been fully performed. The measure of
the benefit is the cost to complete the work ($500). These are compensatory damages.
2A. Lyle contracts to sell his ranch to Marley, who is to take possession on June 1.
Lyle delays the transfer until August 1. Marley incurs expenses in providing for livestock
that he bought for the ranch. When they made the contract, Lyle had no reason to know
of the livestock. Is Lyle liable for Marley’s expenses in providing for the cattle? Why or
19-1A. Liquidated damages
The entire issue rests on whether the provision is an enforceable liquidated damages clause or
a penalty. Generally, the courts will enforce liquidated damages clauses under the principle of
freedom of contract if damages resulting from breach would have been difficult to estimate at
the time the contract was entered into and, more importantly, if the amount set is a reasonable
estimate of what such damages would be. If the amount is excessive, the court will declare the
clause to be a penalty and unenforceable, and only the amount of actual damages proved will
be allowed. If, however, the amount in the clause is a reasonable estimate, the court will
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enforce the clause, even if the actual damages proved to be less. A good discussion of this
case would go into the hindsight effect of the court in comparing actual damages proved to
result from breach against those estimated at the time the contract was entered into. Should
this influence the court’s decision? (Here, Cohen actually suffered no damage and instead
profited from the breach.) If one believes that $10,000 (10 percent) is excessive, what about
19-2A. Specific performance
Generally, the equitable remedy of specific performance will be granted only if two criteria are
met: monetary damages (under the situation) must be inadequate as a remedy, and the subject
matter of the contract must be unique.
(a) In the sale of land, the buyer’s contract is for a specific piece of real property. The
land under contract is unique, because no two pieces of real property have the same legal
description. In addition, money damages would not compensate a buyer adequately, as the
same land cannot be purchased elsewhere. Specific performance is an appropriate remedy.
(b) The basic criteria for specific performance do not apply well to personal-service
contracts. If the identical service contracted for is readily available from others, the service is
not unique, and monetary damages for nonperformance are adequate. If, however, the services
19–3A. Liquidated damages and penalties
The prepayment penalty is not improper. The word “penalty” is used in many contracts when in
fact liquidated damages are being assessed. “Where there is a breach of a contract, liquidated
damages provisions must be ‘reasonable in the light of the anticipated or actual loss caused by
the breach and the difficulties of proof of loss.’ A liquidated damages provision must not be
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19–4A . Measure of damages
The Testas may recover compensatory damages and consequential damages for the breach of
their contract with GSI. Damages that compensate a nonbreaching party for the loss of the
bargain are compensatory damages. These damages compensate the injured party for the
damages actually sustained and proved to have arisen directly from the loss of the bargain
caused by the breach. The standard measure of compensatory damages is the difference
between the value of the breaching party’s performance under the contract and the value of his
or her actual performance. A measure of the compensatory damages in this case could be the
19–5A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Consequential damages
Simard is liable only for the losses and expenses related to the first resale. Simard could
reasonably have anticipated that his breach would require another sale and that the sales price
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19–6A. Liquidated damages
Yes, Cuesport has to pay Critical Developments $126 for each of the 260 days that elapsed
between the contract deadline and the date of the completion of the wall. A liquidated damages
provision in a contract specifies a certain dollar amount to be paid in the event of a future default
or breach of contract. A penalty provision also specifies a certain amount to be paid in the event
of a default or breach of contract but is designed to penalize the breaching party. Liquidated
damages provisions are usually enforceable. A provision that calls for a penalty, however, will
not be enforced—recovery will be limited to actual damages. To determine if a provision is for
liquidated damages or a penalty, a court asks when the contract was agreed to (1) was it
apparent that damages would be difficult to estimate in the event of a breach and (2) was the
19–7A. Limitation-of-liability clauses
Yes, the limitation-of-liability agreement that Eriksson signed is likely to be enforced in her
parents’ suit against Nunnink, their daughter’s riding coach. And this would likely result in a
judgment against them unless they can establish Nunnink's “direct, willful and wanton
negligence.” A limitation-of-liability clause affects the availability of certain remedies. Under
basic contract principles, to be enforceable, these clauses must be clear and unambiguous.
In this problem, Eriksson, a young equestrian event competitor, signed an agreement that
released Nunnink from all liability except for damages caused by Nunnink's “direct, willful and
CHAPTER 19: BREACH OF CONTRACT AND REMEDIES 9
19–8A. Damages
If Morris succeeds in the action against his former employer for fraudulently inducement, he is
most likely to be awarded compensatory damages. Plaintiffs are awarded compensatory
damages to compensate for actual losses. The goal is to make the plaintiffs whole and place
them in the same positions that they would have been in if the damage had not occurred.
In this problem, Morris was working for his father’s insurance agency when he contacted
Farmers Insurance Exchange about becoming its agent. Farmers trained Morris and gave him
an appointment as an agent. But three years later, Farmers terminated the appointment for “a
19–9A. A QUESTION OF ETHICS—Remedies
(a) Both parties filed motions for summary judgment. The court granted Cohen’s
motion and issued a judgment of liability against the Seinfelds for breach of contract. The court
denied the Seinfelds’ motion, in which they had contended that Cohen was not a licensed
broker—she was. The court reasoned, “[T]he evidence clearly indicates that [Cohen] served as
the Seinfelds' real estate broker. Indeed, she located several townhouses at Galistino's request,
showed the premises in question to Galistino and Jessica Seinfeld on [Friday} February 11,
2005, and made arrangements to have the Seinfelds see the premises the following week.”
The court emphasized, ”[T]he contract clearly provided that the sellers would pay
Sanchez's brokers fees and the buyers (the Seinfelds) would pay the buyers' broker's fees.
These facts . . . establish that there was a co-brokerage agreement whereby plaintiff would
receive one half of the broker's fee. The only real issue here, as far as the Court is concerned, is
whether the broker's fee was five or six percent.” Thus “[t]he matter will proceed to trial on the
issue of whether the broker's fee was five or six percent.” In other words, the court determined
that Cohen was entitled to the full amount of her fee and that the Seinfelds were liable to pay it.
The court did not comment on Cohen’s unavailability on Friday evenings and Saturdays.
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19–10A. LEGAL REASONING GROUP ACTIVITY—Breach and remedies
(a) The court should rule in Bucklin’s favor—Morelli was to convey the house with
whatever title she had. In this problem, a valid agreement existed and Bucklin was ready to pay
the price and obtain the property with its less than marketable title. Morelli’s effort to return