Remedies and the sale of goods

When a contract is broken, the innocent party wants to know what it can get. The law's main answer is money: damages designed to put the innocent party in the position it would have been in if the contract had been performed. In some cases courts order a party to perform or to stop doing something. This lesson explains how damages are measured and limited, when equitable remedies are available and how the law protects someone who has conferred a benefit without a valid contract. It then turns to the special rules for contracts for the sale of goods, which govern a huge share of business transactions.

The purpose of contract damages

Contract damages compensate; they do not punish. The usual measure is expectation damages, which give the innocent party the benefit of its bargain: the value it would have received from performance, minus any costs it saved by not having to perform. When expected profits are too speculative to prove, for example for a new venture, a court may award reliance damages, which reimburse expenses the innocent party incurred in reliance on the contract, putting it back where it was before the contract. Restitution returns to the innocent party the value of any benefit it conferred on the party in breach, preventing unjust enrichment.

Limits on damages: remoteness, mitigation and certainty

Not every loss that follows a breach is recoverable. Under the rule in Hadley v. Baxendale (1854), damages are limited to losses that arise naturally, in the usual course of things, from the breach, or that were in the reasonable contemplation of both parties when they made the contract as a probable result of breach. In Hadley, a mill's crankshaft broke and a carrier delayed delivering it for repair. The mill sued for profits lost while it stood idle. The court held the carrier was not liable, because it did not know that the mill had no spare shaft, and stopping a mill was not the natural consequence of a delayed parcel. The practical lesson is that a business that faces unusual losses if a supplier fails should tell the supplier when contracting, so those losses are in contemplation, and the supplier can price the risk or refuse it.

The innocent party must also mitigate: take reasonable steps to reduce its loss. It cannot recover losses it could reasonably have avoided, but it can recover reasonable costs of mitigating, even if the attempt fails. A landlord whose tenant abandons commercial premises, a seller whose buyer refuses goods and an employee who is wrongfully dismissed are all expected to seek substitute arrangements, and their damages are reduced by what they earned or should have earned. Finally, damages must be proved with reasonable certainty; courts do their best with difficult evidence, but they will not award damages based on pure speculation.

American courts generally do not award damages for emotional distress in contract cases, except where the breach also causes bodily harm or the contract is one where serious emotional disturbance was a particularly likely result, such as a contract to handle a funeral. Punitive damages are not available for breach of contract alone; they require an independent tort, such as fraud, or, in some states, an insurer's bad-faith refusal to pay a claim. The Supreme Court has also held that very large ratios of punitive to compensatory damages, generally above single digits, may violate due process (State Farm v. Campbell, 2003).

Liquidated damages and penalties

Parties often agree in advance on the damages payable for a breach, such as a fixed amount per day of construction delay. Courts enforce a liquidated damages clause if the amount is reasonable in light of the anticipated or actual harm and the difficulty of proving loss; UCC section 2-718 applies the same test to sales of goods. A clause that sets an unreasonably large amount operates as a penalty and is void, and the innocent party is left to prove actual damages. Courts look at substance rather than labels, so calling a payment liquidated damages does not save it if it is really designed to punish.

Equitable remedies and restitution

When damages are inadequate, courts may grant equitable remedies, which are discretionary. Specific performance orders a party to carry out the contract. It is available mainly when the subject matter is unique, so money cannot buy a substitute, such as a rare work of art, a specific business or, often, land. Courts will not order specific performance of personal service contracts, because forcing people to work together is impractical and close to servitude, nor of contracts requiring constant supervision. An injunction orders a party to do or, more commonly, not to do something, such as not to disclose confidential information or not to work for a competitor in breach of a valid covenant. Interlocutory injunctions can be granted urgently before trial when the applicant shows a serious issue to be tried (or a strong case, for some orders), irreparable harm and that the balance of convenience favors the order. Rectification corrects a written document that fails to record what the parties actually agreed.

American courts traditionally treat every parcel of land as unique, so a buyer of real estate can usually obtain specific performance. For goods, UCC section 2-716 allows specific performance where the goods are unique or in other proper circumstances, and gives a buyer a right of replevin to recover identified goods it cannot obtain elsewhere.

Where one party has conferred a benefit on another without an enforceable contract, the law of restitution may require payment to prevent unjust enrichment. Courts describe this as an implied-in-law or quasi-contract: the claimant conferred a benefit, the defendant knew of and accepted it, and it would be unjust for the defendant to keep it without paying. A common business application is quantum meruit, a reasonable payment for work done at the defendant's request where the price was never agreed or the contract proved unenforceable, for example because of the statute of frauds.

UCC Article 2: sales of goods

Article 2 of the UCC governs contracts for the sale of goods: movable, tangible things identified to the contract. It applies to all sellers, but several rules, such as firm offers and the battle of the forms, treat merchants (those who deal in goods of the kind or hold themselves out as having special knowledge) differently. Article 2 supplies gap-filling terms where the parties are silent: a reasonable price, delivery at the seller's place of business, payment on delivery and a reasonable time for performance. Contracts for services, real estate and, in most courts, software licenses delivered electronically fall outside Article 2, although courts apply it by analogy or under the predominant purpose test for mixed contracts. International sales between businesses in different contracting countries are governed by the CISG, to which the United States is a party, unless the parties exclude it.

Sellers may disclaim implied warranties in business sales if they follow UCC section 2-316, and many sellers sell "as is". In consumer sales, the federal Magnuson-Moss Warranty Act provides that a seller that gives a written warranty on a consumer product cannot disclaim implied warranties, although it may limit their duration to that of a limited written warranty, and several states, such as Massachusetts, Maryland and West Virginia, prohibit disclaimers of implied warranties on consumer goods altogether. Magnuson-Moss also requires written warranties to be labeled full or limited and to be clearly disclosed.

Transfer of ownership and risk

UCC section 2-509 allocates risk of loss when the contract is silent. In a shipment contract, such as one marked FOB seller's city, risk passes to the buyer when the seller duly delivers the goods to the carrier. In a destination contract, such as FOB buyer's city, risk passes when the goods are tendered at the destination. If no carrier is involved, risk passes on the buyer's receipt of the goods if the seller is a merchant, or on tender of delivery if not. Under section 2-510, a seller that ships nonconforming goods bears the risk until it cures or the buyer accepts. Title can pass separately from risk. International traders often use Incoterms, published by the International Chamber of Commerce, such as FCA, CIF and DDP, which differ from the UCC's FOB shorthand, so contracts should state which system applies.

Remedies in sales of goods

UCC Article 2 gives detailed remedies. A buyer facing non-delivery or rightfully rejecting goods may cover by buying substitute goods in good faith and recover the difference between the cover price and the contract price (section 2-712), or recover the difference between the market price and the contract price (section 2-713), plus incidental and consequential damages in either case. A buyer that accepts goods and then discovers a defect may revoke acceptance if the defect substantially impairs their value and was hard to discover, or keep the goods and recover the difference in value. A seller may withhold delivery, stop goods in transit, resell the goods and recover the difference from the contract price (section 2-706), recover the market-price difference (section 2-708(1)), recover lost profits if it is a lost-volume seller with unlimited supply (section 2-708(2)) or sue for the price if the buyer accepted the goods (section 2-709).