6.3 Breach and Remedies

6.3 Breach and Remedies

REG Blueprint II.B.3 asks you to name the breach and pick the remedy. A remedy is a tool, not a buffet: the nonbreaching party is supposed to be made whole, not enriched, and some tools are unavailable on purpose. Whether duties were already discharged by performance, agreement, or operation of law is the prior section, /study-guides/cpa-reg/contracts/performance-discharge.

Material versus minor breach

A minor (partial) breach is a deviation that does not defeat the essential purpose of the contract. The nonbreaching party must still perform and may recover damages for the defect. Substantial performance is the usual companion: the builder who is 95% done with a small defect has not committed a material breach.

A material (total) breach goes to the essence. The nonbreaching party may suspend or treat remaining duties as discharged and sue for the full expectation interest. Factors courts weigh: the extent of deprivation of expected benefit, whether damages can compensate, the likelihood of cure, the breaching party's good faith, and the forfeiture the breaching party would suffer. An uncured failure to meet an express condition is often treated as material because the condition never occurred.

Timing can convert a minor defect into a material breach if time is of the essence — stated in the contract or implied by the nature of the deal (perishable goods, a refinancing deadline).

Anticipatory breach — the remedy overlay

When a party anticipatorily repudiates, the other party may treat the repudiation as a present material breach and sue immediately, without waiting for the performance date. Alternatives: ignore the repudiation and wait (risky, because the waiting party must still be ready to perform and must still mitigate), or demand adequate assurance and suspend. If the repudiation is retracted before a material change of position, the contract is restored. UCC sellers and buyers have the same election, plus the specific Article 2 tools below.

The money remedies

Compensatory (expectation) damages aim at the benefit of the bargain: the amount that puts the injured party in the position performance would have produced. In words: loss in value of the other party's performance, plus other loss (incidental and consequential), minus cost or loss avoided by not having to perform.

Consequential damages are those that result from the injured party's special circumstances — lost resale profits, a factory shutdown for want of a unique part. Under the rule associated with Hadley v. Baxendale, they are recoverable only if they were reasonably foreseeable to the breaching party at formation, either as the ordinary course of things or because the special circumstances were communicated. A carrier who is not told that a mill is idle without a shaft is not on the hook for the mill's lost profits.

Incidental damages are the out-of-pocket costs of dealing with the breach: inspection, storage, resale or cover commissions, extra freight. UCC §§2-710 (seller) and 2-715(1) (buyer) catalog them.

Punitive damages are generally not awarded for breach of contract. A contract claim does not become a punishment vehicle because the breacher was rude. An independent tort (fraud, conversion) can support punitive damages; that is a tort fact, not a contracts default.

Nominal damages recognize a technical breach when no actual loss is proven — typically a token amount, to keep the judgment.

Liquidated damages are a number the parties fix in advance. The clause is enforceable if, at formation, (1) actual damages were difficult to estimate and (2) the amount is a reasonable forecast of just compensation, not a penalty designed to terrorize. An "$10,000 per day, no cap" clause on a two-day software install that actually costs $400 to delay is a penalty and will be struck; the plaintiff then proves actual damages. A clause that reasonably approximates expected delay costs on a stadium project is a liquidated-damages clause and will be enforced, even if hindsight shows the actual loss was a bit different. UCC §2-718 uses the same reasonable-forecast idea for goods.

Duty to mitigate

The injured party must take reasonable steps to reduce the loss. A fired employee must look for comparable work. A buyer of goods must not let perishable rejected goods rot if a reasonable resale is available. A seller should not keep manufacturing after a clear repudiation of a special order that can be stopped. Failure to mitigate reduces recoverable damages by the amount that reasonable effort would have avoided; it is not a complete defense, and the injured party need not take undue risk, humiliation, or a substantially different job.

Specific performance, restitution, and quasi-contract

Specific performance orders the breaching party to do what was promised. It is the standard remedy for real estate (every parcel is unique) and for unique goods (an identified antique, a scarce custom machine, output that cannot be covered). UCC §2-716 extends specific performance to unique goods and "other proper circumstances," including inability to cover. Personal-services contracts are not specifically enforced — courts will not compel a person to work. Money damages or, in a proper case, an injunction against using unique confidential information is the substitute.

Restitution restores a benefit conferred, to prevent unjust enrichment. It is available as an alternative to expectation in some breaches, and it is the measure in quasi-contract (implied-in-law) when there is no enforceable contract — emergency services rendered to an unconscious patient, or a builder who confers value under an oral agreement the statute of frauds blocks, to the extent of the benefit. Quantum meruit is the usual label for the reasonable value of services.

UCC buyer remedies

If the seller fails to deliver, repudiates, or the buyer rightfully rejects or justifiably revokes acceptance:

• Cover (§2-712). The buyer may in good faith and without unreasonable delay buy substitute goods. Damages = cover price − contract price, plus incidental and consequential, minus expenses saved. Cover is not mandatory, but a buyer who does not cover cannot recover consequential losses that cover would have avoided.
• Market damages (§2-713). If the buyer does not cover, damages = market price at the time the buyer learned of the breach − contract price, plus incidental and consequential, minus expenses saved.
• Specific performance (§2-716) when the goods are unique or in other proper circumstances.
• Accepted goods (§2-714). If the buyer keeps nonconforming goods, damages = value as warranted minus value as accepted, plus incidental and consequential.

Consequential damages for a buyer (§2-715(2)) still require foreseeability and that they could not reasonably be prevented by cover.

UCC seller remedies

If the buyer wrongfully rejects, revokes, repudiates, or fails to pay:

• Resale (§2-706). Identify the goods and resell in good faith and in a commercially reasonable manner. Damages = contract price − resale price, plus incidental, minus expenses saved. A lost-volume seller may instead recover lost profit under §2-708(2).
• Market damages (§2-708(1)). Contract price minus market price at the time and place for tender.
• Action for the price (§2-709) — limited. The seller may recover the price of goods accepted, of goods lost or damaged after risk of loss passed to the buyer, and of identified goods if the seller is unable after reasonable effort to resell them at a reasonable price (or circumstances indicate that effort would be unavailing). An action for the price is not the default for ordinary unaccepted widgets sitting in a catalog.

The seller may also withhold delivery, stop goods in transit, and cancel. Security interests that a seller might take in the goods or in the buyer's accounts are Article 9, not this chapter; they belong in /study-guides/cpa-reg/debtor-creditor/ucc-article-9.

Worked scenario: seller fails to deliver widgets; buyer covers

Facts. On January 10, Apex Inc. contracts to sell 10,000 standard widgets to Beacon Co. for $8 each, delivery March 1, FOB Apex's warehouse (shipment contract). Beacon tells Apex, in the negotiations, that Beacon has a fixed-price resale to a hospital group on March 15 at $12 and will lose that resale if widgets are late. On March 1 Apex repudiates and delivers nothing. Widgets are ordinary commercial goods; the market price on March 1 is $9.50. On March 3 Beacon, in good faith, buys 10,000 conforming widgets from another mill for $10.20, the best price reasonably available that week, and incurs $1,500 extra freight. Beacon's hospital resale is saved. Beacon also spent $400 on a useless March 2 inspection trip to Apex. Apex argues that Beacon should have waited, that $10.20 is too high, that punitive damages are in order because Apex "acted in bad faith," and that Beacon's only remedy for ordinary widgets is specific performance.

Analysis.

1. Breach. Apex's March 1 nondelivery is a material breach (and a classic UCC seller failure to deliver). Beacon may cancel and pursue buyer remedies. Because the goods are ordinary widgets, specific performance is not available; cover is.
2. Cover (§2-712). The March 3 purchase at $10.20, made without unreasonable delay and in good faith, is cover. Cover damages on the goods = ($10.20 − $8.00) × 10,000 = $22,000.
3. Incidental. Extra freight $1,500 and the wasted inspection $400 are incidental (§2-715(1)).
4. Consequential. The hospital resale was communicated at formation, so lost-profit consequential damages would have been foreseeable under Hadley / §2-715(2). Beacon covered in time and saved the resale, so those lost profits were mitigated to zero. Beacon does not collect the hypothetical $4 profit on top of cover. If Beacon had been unable to cover and had lost the $40,000 hospital margin, that margin would have been in play as consequential damages.
5. Punitive damages. No. Bad-faith failure to deliver widgets is still a contract breach.
6. Risk of loss does not shift Beacon's remedy here: Apex never made a due tender to the carrier, so this is a nondelivery case, not a goods-destroyed-in-transit case.

Net money: $22,000 + $1,500 + $400 = $23,900, plus any other proven incidental, minus any expenses Beacon saved by not having to receive the Apex shipment.

If Beacon had not covered, market damages under §2-713 would have been ($9.50 − $8.00) × 10,000 = $15,000, plus incidental, plus any unavoidable consequential loss. Cover, when reasonably made, can exceed the market formula; that is allowed. The market formula is the fallback, not a cap on a good-faith cover.

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