Chapter 3-1 Breach of Contract
| Jurisdiction | United States |
3-1 Breach of Contract
3-1:1 Introduction
Breach of contract is the failure by one party to a valid agreement (potentially written or oral) to fulfill the obligations of the agreement. The following sections set forth the requirements for and possible defenses against a cause of action to recover for breach of contract.
3-1:1.1 Related Causes of Action
Promissory Estoppel, Quantum Meruit, Breach of Covenant Not to Compete, Breach of Warranty, Fraud, Tortious Interference, Torts arising from contract, DTPA
MUST READ STATUTES AND AUTHORITY
Restatement (Second) of Contracts Section 1-385 (1981)
Texas Business and Commerce Code Chapter 2
3-1:2 Elements1
(1) The existence of a valid contract2
• A binding contract requires: (1) an offer; (2) an acceptance in strict compliance with the terms of the offer;3 (3) a meeting of the minds; (4) each party's consent to the terms; (5) execution and delivery of the contract with the intent that it be mutual and binding;4 and (6) consideration.5
(2) Plaintiff performed, tendered performance of, or was excused from performing
• Plaintiff must establish that it performed, tendered performance or was excused from performing its contractual obligation.6
• Where the plaintiff was prevented from satisfying its obligations under the contract by defendant or where the defendant repudiates the contract before the time for performance, the plaintiff need not establish performance or tender thereof.7
(3) Breach
• Plaintiff must establish that defendant breached the contract.8
• The damages the plaintiff sustains must be a result of that breach.9
3-1:3 Damages and Remedies
3-1:3.1 Actual Damages
In an action for breach of contract, the plaintiff can recover actual damages.10
3-1:3.1a Benefit-of-the-Bargain
"Benefit-of-the-bargain" damages serve to protect the promisee's "expectation interest," which is its interest in having the benefit of the bargain by being put in as good a position as he would have been had the contract or promise been fully performed.11 Benefit-of-the-bargain damages are measured as the difference between the value as represented and the value received. When the harm caused by the breach of contract is difficult to estimate, the court may calculate damages based upon the market value or the price that would be offered by willing buyer to willing seller when neither is under compulsion to buy or sell.12 For example, in a breach of contract for real estate, the measure of damages is the difference between the contract and the property's market value at the time of the breach.13
The UCC offers both buyers and seller various remedies for a breach of contract in the sale of goods. Upon breach of contract by the seller, the buyer may "cover" and have damages awarded as to the goods affected by the breach or recover damages for non-delivery, in addition to recovering the price that the buyer had already paid.14 A buyer may also recover incidental or consequential damages.15 When the buyer breaches the contract, the UCC permits the seller to elect to recover either "the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages," less expenses saved in consequence of the buyer's breach;16 or, if that is inadequate to put the seller in as good a position as performance would have done, the measure of the damages is the profit that the seller would have earned had the buyer fully performed the contract, plus any incidental damages with due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.17 See Chapter 11, Section 11-2 and Chapter 11, Section 11-5 for UCC buyer and seller remedies.18
3-1:3.1b Out-of-Pocket Damages
In a breach of contract action, "out-of-pocket" damages protect a reliance interest by restoring the expenditures made in reliance on the contract to the non-breaching party.19 "Out-of-pocket" damages are calculated based upon the difference between what the plaintiff paid in consideration and what he actually received.20 Where liability is based on breach of contract, the non-breaching party can recover "out-of-pocket" damages as reimbursement for expenditures made to perform the contract, regardless of whether those expenditures were made before the contract was signed or during the course of performance.21 See Chapter 11, Section 11-3.22
3-1:3.1c Restitution and Rescission Damages
Restitution is an appropriate measure of damages when one party to a contract advances the other party money and, upon repudiation of the contract, the latter has been unjustly enriched.23 Principles of restitution normally require the party who has been unjustly enriched to refund that money.24 Restitution damages are measured by the positive value to the defendant.25 See Chapter 11, Sections 11-4 and 11-11:3.
3-1:3.2 Quantum Meruit
Quantum meruit is an equitable remedy that a plaintiff may recover when the plaintiff has partially performed but, due to defendant's breach, plaintiff is prevented from completing performance of the contract.26 To recover under quantum meruit, a claimant must prove:
(1) valuable services or materials were rendered or furnished to the defendant;
(2) the defendant accepted, used, or enjoyed the services or materials; and
(3) the defendant had reasonable notice that the plaintiff expected to be paid for performing the services or furnishing the materials.27
A party may recover quantum meruit, or the reasonable value of services rendered or material supplied, when there is no express contract covering the services or material furnished.28 See Chapter 11, Section 11-11:4.
3-1:3.3 Unjust Enrichment
Unjust enrichment is an equitable remedy under an implied-contract theory providing that a party should make restitution if it would be unjust to retain received benefits.29 Unjust enrichment requires that the beneficial services rendered were knowingly accepted with an expectation of payment.30 When a valid contract already addresses the matter, recovery under the equitable theory of unjust enrichment would be inconsistent with the express agreement because the party seeking recovery has a legal remedy under the contract.31 See Chapter 11, Section 11-11:2 and Chapter 3, Section 3-17.
3-1:3.4 Liquidated Damages
A contract may include a liquidated damages clause defining the damages calculation that, if found enforceable, provides the specific amount of damages that a claimant may recover in a breach of contract action. The court must make two indispensable findings to enforce contractual damages provisions: (1) "the harm caused by the breach is incapable or difficult of estimation," and (2) "the amount of liquidated damages called for is a reasonable forecast of just compensation"; these findings are made by the court from the perspective of the parties at the time of contracting.32 The enforceability of a liquidated damages clause is ultimately a question of law for the court to decide.33 Sometimes a provision not designed to be a penalty can nevertheless operate as one. Courts must now include a third step in the enforceability analysis, whether at the time of the breach an unbridgeable discrepancy exists between actual and liquidated damages.34"When the liquidated damages provisions operate with no rational relationship to actual damages, thus rendering the provision unreasonable in light of actual damages, they are unenforceable."35 See Chapter 11, Section 11-5:5.
3-1:3.5 Nominal Damages
The plaintiff can recover at least nominal damages for a breach of contract regardless of whether the plaintiff proves actual damages.36
3-1:3.6 Specific Performance
Specific performance is an equitable remedy in the form of injunctive relief that may be used as a substitute for monetary damages when such damages would not be adequate.37 A plaintiff seeking specific performance to show: (1) that he was ready, willing, and able to perform at the relevant time; and (2) that he tendered that performance.38 See Chapter 11, Section 11-5:8.
3-1:3.7 Rescission
Rescission is the common name for the composite remedy of rescission and restitution.39 Rescission is not an independent cause of action but rather an equitable remedy available in a breach of contract action that requires each party to restore property received from the other, or mutual restitution to return the parties to their status quo.40 See Chapter 11, Section 11-5:8 and Chapter 3, Section 3-2.
3-1:3.8 Reformation
The remedy of reformation is available to correct a contract if, owing to mutual mistake, the language used therein did not fully or accurately express the agreement and intention of the parties.41 See Chapter 11, Section 11-5:8.
3-1:3.9 Declaratory Judgment
A declaratory judgment action provides a procedural device allowing judicial determination of the rights, status, and other legal relations of the parties involved in a breach of contract action without regard to whether or not relief is or could be prayed for by the parties.42 The declaration, whether affirmative or negative in nature, has the force and effect of a final judgment or decree.43 See Chapter 8, Section 13.
3-1:3.10 Interest
Prejudgment interest is compensation allowed by law for the lost use of the money due as damages during the time between the accrual of the claim and the judgment date.44 In a contract claim, a money judgment that provides for interest or time price differential within its terms earns post-judgment interest at a rate equal to the lesser of the rate specified in the contract, which may be variable and 18% a year.45 Prejudgment interest accrues at the same rate at the post-judgment interest rate and is computed as simple interest, while post-judgment interest is compounded annually.46 Prejudgment interest accrues on the earlier date of the 180th day after the defendant receives written notice of a claim and the date that the suit is filed.47 Post-judgment interest accrues on the date that judgment is rendered...
To continue reading
Request your trial