Contracts are the underlying fabric of Utah’s economy. A contract is a legally enforceable agreement between two or more parties (i.e. persons, companies, legal entities, etc.). By entering a contract, a party agrees to make a payment or perform some other obligation in exchange for some type of benefit—whether it be a service, payment of money, a product, etc. When parties do not keep their contractual promises, the result is a breach of contract, and the non-breaching party usually has a variety of legal remedies it can pursue in an attempt to be made whole. Often, this includes seeking damages in a Utah court. The general purpose of awarding damages in breach of contract cases is to put the non-breaching party in the position that it would have enjoyed had no breach occurred, but other remedies serve a different purpose. This blog post discusses several remedies that may be available in Utah following a breach of contract:
- General damages—or damages that are the expected and natural result of a breach (usually a money award)
- Consequential damages, which are foreseeable damages based on the circumstances of the contract (also usually a money award)
- Rescission of the contract so that the parties are placed in their pre-contract positions
- Reformation of the contract to correct an error to accurately show the parties’ intent
- Specific performance: compelling the breaching party to move forward and fulfill his or her contractual obligations
The most common remedy for a breach of contract claim is recovering what are known as “general damages”—or the damages that flow from the breach of the contract. These damages are sometimes referred to as “direct damages.” Perhaps the most common example is an agreed-upon amount in a contract for goods or services that goes unpaid. For instance, if Harry Homeowner agrees to buy a new furnace from Fred’s Furnaces for $10,000, and Fred installs the furnace but doesn’t get payment from Harry, Harry has caused Fred general damages in the amount of $10,000, the price of the new furnace. Fred can bring a breach of contract claim to recover this amount of money damages.
Other kinds of general damages include refunds, reimbursements, other similar costs associated with the breach of the contract. For example, if Fred had delivered a non-working furnace, Harry could—after making payment—ask for his money back. If Fred forgot to install certain parts of the furnace, Harry could probably seek reimbursement of the cost to purchase and install these parts. If Fred guaranteed (or warrantied) that the furnace would work without problem for at least one year, but it broke down within a few months, Harry might be able to ask Fred to pay the cost to repair or replace the furnace.
Consequential damages (sometimes called special damages) are less direct damages than general damages. They are damages that are reasonably foreseeable when the contract is made but do not necessarily flow naturally from the contract. They extend beyond the terms of the contract, such as payment terms. Consequential damages are difficult to prove. In Utah, a person generally has to specifically show: 1) the damages were caused by the breach of contract, 2) the amount of damages is reasonably certain (not speculative) and 3) the damages are the types that should be allowed, which usually means that the parties to the contract believed that these types of damages could result.
As an example of consequential damages, let’s suppose that Harry Homeowner goes to Fred’s Furnaces and explains that his furnace doesn’t work, and he needs a new one before Christmas because he is going to rent his house out on Airbnb to some out-of-towners who want to ski Snowbird over the holidays (whether Harry can legally rent out the house is a separate issue). Harry and Fred agree to a contract price of $10,000 with the delivery and installation of the furnace scheduled on Christmas Eve, but Fred doesn’t deliver the furnace until early January. It may be that, because Fred was late and Harry couldn’t find anyone else to install a furnace, Harry’s Airbnb fell through, and he lost $3,000 in rental income. Because Fred’s breach of the contract led to this lost rental income, Harry may able to seek $3,000 from Fred to make him whole. This lost rent isn’t part of the contract price or other contractual terms, but based on Fred and Harry’s pre-contract discussion, it is the kind of loss that Harry and Fred likely anticipated might occur if Fred didn’t fulfill his end of the bargain. The loss of $3,000 has occurred, and there is no speculation as to the amount of this loss.
Rescission of the Contract
Rescission of a contract is a remedy that attempts to cancel the contract and put the parties right back where they were before entering the contract. Rescission attempts to restore the pre-contract status quo—sometimes it is possible, and sometimes it is not. Rescission is not proper if the breach is minor and does not significantly affect the contract. The breach must go to the heart of the contract. Also, rescission is not available if the contract cannot practicably be undone or if the non-breaching party has materially altered a product he or she purchased. For example, let’s say Harry orders and pays for a superior furnace from Fred’s Furnaces but receives an inferior model. Annoyed, he goes to a hardware store, buys high-quality furnace components, and installs them on the furnace himself. Now he has what he paid for. Harry may likely be able to seek reimbursement from Fred for the parts and time required to upgrade the furnace, but unless Fred agrees to it, he probably could not rescind the contract (return the furnace and get his money back) since he has materially altered and thus taken ownership over the new furnace. (Moreover, rescinding the contract wouldn’t really make sense for Harry now that the furnace is nicer than it was when delivered.)
Rescission is generally easiest to achieve by mutual agreement. For instance, let’s suppose that Harry Homeowner pays Fred’s Furnaces $10,000 for a furnace and then immediately has buyer’s remorse. He then gets a call from Fred who says the furnace, surprisingly, is out of stock and that it will take two weeks to get one in from the manufacturer. Harry suggests that they just cancel the contract. Fred agrees and refunds him the $10,000. The contract has been rescinded, and neither Harry nor Fred has any further contractual obligations.
Contract reformation is a remedy that generally seeks to fix an incorrectly written contract so that it conforms to the parties’ intended agreement. For instance, perhaps Harry Homeowner and Fred’s Furnaces discuss and agree to a purchase price of $10,000 for a furnace. Fred then puts together and signs a contract, attempting to put their oral agreement into a written document. Unknown to Fred, the price he wrote on the contract was $1,000 rather than the agreed-upon $10,000. Seeing Fred’s mistake, Harry signs the contract, waits until the furnace is installed, and then sends Fred a check for $1,000 and refuses to pay more. This will probably not fly. If Fred brings a breach of contract claim, he can seek to have the contract reformed and the higher price paid.
Reformation can be difficult. In the above example, a $1,000 furnace is probably a steal of a bargain, and there may be other evidence that the agreed-upon price was $10,000, so a court may likely reform the contract price term. However, Utah courts are generally reluctant to change the terms of a contract that two parties freely and knowingly enter, so the evidence of the mistake must be very strong.
Another contract remedy is specific performance, which is a legal way of saying that a party is forced to perform his or her contract obligations. For example, if Fred’s Furnace receives Harry Homeowner’s $10,000 payment for a furnace, but Fred does not deliver and install the furnace, the remedy of specific performance would require Fred to come to Harry’s house and install the furnace. Although this is a potential remedy, Harry probably wouldn’t be able to get this kind of relief. Courts are much more willing to order parties to pay money than they are to force people to perform a specific act, like installing a furnace. Also, the contract must clearly impose the duty on the breaching party that the non-breaching party seeks to enforce. Moreover, specific performance is a more common and appropriate remedy where the act to perform is rather simple or where an award of money damages will not be adequate. It is also appropriate where the subject of the contract is unique. For example, each piece of real property is unique (as opposed to furnaces), so specific performance is the presumed remedy where a party refuses to sign a deed to complete a contract for the sale of real property.
Help with Contract Issues
If you or your company has entered a contract, and the other party is not fulfilling its end of the bargain, it may be proper to enforce your contract rights under Utah law. I am happy to help you understand your rights and potential remedies. I offer a free consultation. Give me a call. My direct dial is 801-365-1021, or you can e-mail me at [email protected].