Breach of Contract Damages

Whenever you sign a contract, you hope that the other party will fulfill their obligations that they’ve agreed to. Unfortunately, that doesn’t always happen. So, when someone else breaches a contract, what are your rights if you decide to pursue litigation? What will a court award you in damages at the end of a lawsuit?

Today on the Cornerstone Law Firm blog, we discuss what you’re entitled to after a breach of contract in Pennsylvania. But before we begin, we should dispel a common myth. Just because you have a contract with someone doesn’t mean you can actually make them perform it! It is very rare that a court will order “specific performance,” requiring the other party to carry out their obligations under the contract.

Instead, courts prefer to award “economic damages” (that is, money). They’ll give you money corresponding to the value that you “lost out on” under the contract. As simple as that may sound, there are actually several competing ways to calculate damages.

1. Compensatory Damages: What you lost

The primary method of determining damages under a breach of contract is compensatory damages. A court will award damages based on the amount of money that you lost pursuing the contract in order to attempt to make you whole.

breach of contract

So, let’s imagine a scenario when your company spent $400 buying products for a job and sent out workers for two days to start working on the job before the other party breached the contract. When you realized that the other party performed none of their obligations, you stopped work, reassigned your workers to other projects, and moved on with business.

If you prevail, the court will order the breaching party to pay you $400 for materials, and will attempt to calculate the value of the lost labor and time that you invested in the project. In construction contexts, you may also be able to claim some of your overhead under what is known as the Eichleay formula, which measures office overhead and other costs that often go unnoticed in contract disputes. All of this can be included, depending on the circumstances of your case.

2. Expectation Damages: What you should have earned

Another method the courts sometimes use in awarding damages under a contract is known as “expectation damages.” A court will figure out how much you expected to profit under the contract and award that amount to you. So, if you expected that you would spend $600 on a job and that you would earn $1,600 on a job, the court will award you $1,000 in damages.

Expectation damages deal with profit—and that can be hard to calculate. In addition, courts avoid awarding damages for the potential reputation boost a particular job would have been, although it can still be relevant in some instances.

breach of contract

Imagine that a dress designer agrees to design a dress for a movie star’s appearance on the red carpet. The dress designer is excited to earn $1,000 in profits on the job, but is more excited that this job will launch her into a new stratosphere of design jobs when the movie star appears on the red carpet.

If the movie star breaches without excuse, the designer will recover $1,000, but is not likely to succeed in acquiring damages for the loss of expected sales had the movie star worn her dress. Courts seek to provide what is just—and expectation damages may not include every “expectation” you had for the job. Rather, expectation damages seek to provide what you lost out on.

3. Punitive Damages: Punishing the breaching party

In some instances, a court is willing to award punitive damages. Punitive damages punish wrongdoers conduct and are meant to be a warning to others not to do the same.

However, punitive damages are very rare. In American Law, courts do not like the idea of punishing wrongdoers in a civil context. Indeed, the free market system even encourages breach of contract where the breach of contract will be more efficient for the parties involved. Punitive damages are only awarded for wanton or reckless conduct.

“Punitives,” as they are often called, require a showing that the breaching party did something far worse than make a business decision. They must have engaged in fraudulent or abusive conduct, or have acted with malice. Accordingly, punitive damages are rarely awarded. Indeed, even if a contract calls for punitive damages in the event of breach, these provisions will generally not be upheld.

4. Liquidated Damages: We’ve already agreed how much this is worth

In some instances, contracts specifically name the amount of money that the parties expect to lose if the contract is breached. Particularly in situations where there’s a complex construction job, where damages may not easily be measured, the parties will agree to write in the amount of value that each party expects to lose if the other breaches at a various stage of construction.

Courts are wary of these provisions fearing that they may become a back door punitive damages provision. Accordingly, there are a number of factors courts will analyze when looking at a liquidated damages clause in a contract to determine whether it should be upheld and applied in a specific situation.

Liquidated damages can make litigation more efficient, skipping over complex wrangling over which form of damages should be awarded. But, in some instances, they can backfire as they create an unfair incentive for a party to breach a contract at a point where the liquidated damages would actually be less than the value that the party would be losing.

Quantum Meruit: The value of what you produced

Quantum meruit is a Latin term meaning “the value that has been earned.” In other words, even in the absence of a contract, your work has created some sort of value toward the other party.

When it comes to quantum meruit, the court is acting in an equitable capacity in attempting to measure the value of what you created for someone else. Quantum meruit comes into play where a contract is illegal because it contains provisions that are statutorily unenforceable, or where the contract doesn’t help in interpreting the actual situation that has arisen.

At the end of the day, you really don’t usually want to be in a quantum meruit world. It’s usually best if you’re prevailing on pure contract grounds.

Conclusion: Damages are unique to the case

Which sort of damages should you seek in your initial complaint? How can you protect yourself if you’re quoting a job or drafting a contract, in order to make sure that a breach does not end up leaving you in financial peril?

Contact the litigation attorneys at the Cornerstone Law Firm. We’ve helped many clients deal with the difficulties of figuring out the appropriate measure of damages in their cases, and we can help you too. Call us today!

Statute of Limitations

A statute of limitations is the limit on how long after an injury occurs in which the injured victim may bring suit. In other words, the statute of limitations is the amount of time that you have to sue someone after they’ve hurt you. Once the statute of limitations runs out, the victim loses any rights to seek compensation from the wrongdoer.

The statute of limitations can be longer or shorter, depending on the state, and depending on the case that is being brought. In Pennsylvania, for injuries based on negligence, such as car accidents, slip and fall cases, or other cases in which someone’s failure to observe reasonable standards of care led to an injury, the statute of limitations is two years. For breach of contract, the statute of limitations is four years. In some rather unusual cases, such as lesser known common-law causes of action, the statute of limitations is six years. For claims related to privacy and defamation, the statute of limitations is only one year.

There are some exceptions to the statute of limitations bar against a lawsuit. One is called the discovery rule. If the victim did not know or have a reason to know about the injury until after the statute of limitations has run, the statute of limitations may be “tolled” or delayed to allow the victim a longer stretch of time within which to bring suit. The discovery rule is narrow, and fairly limited in Pennsylvania. It will only revive the statute of limitations long enough for the person to bring suit within a reasonable time. In extremely unusual situations where a wrongdoer has intentionally misled someone about their statute of limitations, courts will sometimes invoke the “equitable tolling” doctrine which allows someone to bring suit within a reasonable time after they’ve learned of the statute of limitations. This also is a rare situation, and neither of these exceptions should be relied on by a victim except in the most exceptional of situations.

The bottom line is you typically have a fairly limited amount of time in which to bring a lawsuit if you wish to bring one. Your rights do not remain open forever and you can lose them if you don’t act quickly. Having a litigation lawyer who understands the statutes of limitations in Pennsylvania and the various equitable doctrines built on them can help you determine in which category your case properly falls. For example, depending on the type of car accident you were in, your lawsuit may actually be a breach of contract action against an insurer. Having an attorney who can walk you through these sorts of distinctions may mean the difference between successfully bringing suit or not bringing suit at all. Regardless, you’re encouraged to discuss your rights immediately with an attorney if you believe that you or a loved one have been harmed by someone else’s actions or negligence. A litigation attorney can help you sort through the many complex legal doctrines that will affect your case and help you to understand your rights. Call the attorneys at the Cornerstone Law Firm today and let us help you determine your rights.

Contracts Promote Business

Contracts are the fabric of society. Contracts promote business by clarifying parties’ expectations, and facilitating better working relationships. They hold us together, allowing commerce to go forward quickly and securely, and allow the conscientious businessman a remedy when a business partner goes back on his word. But contracts are often frustrating to the business owner precisely because of their importance. When presented with a contract and all its glorious fine print, most people glaze over (seriously, when was the last time you read your iTunes’ user agreement?).

We have a gentlemen’s agreement

One mistake many people make is assuming that a “gentlemen’s agreement” will suffice for their business. “I was raised to honor my word,” I’ve heard many clients say after they were burned by someone who never put their commitment in writing.

The problem with such oral agreements is two-fold. First, as the old joke goes, oral agreements aren’t worth the paper they’re written on. Just because you were raised to honor your commitments doesn’t mean the other guy was. And second, even where both parties are honest, written contracts force both parties to think about scenarios they might not otherwise consider.

For example, let’s say that you are a famous orange-grower, and I am desirous of buying and re-selling your delicious, name-brand oranges. We agree that you will sell me 1,000 oranges at $1 a piece. We shake hands, and we have a deal, right? Well, yes, we do, but do we really know what our deal is? Am I picking up the oranges, or are you paying to have them delivered? Does it matter if this year’s orange crop came in smaller than last year’s? Do I have to pay on delivery or after I re-sell,  and do you care if I pay with a credit card? Most of all, what if you had a bad year and sell me your neighbor’s oranges? I bargained for your name-brand oranges, not some neighbor’s knock-off citrus!

I think you get the point. Sitting down and writing out an agreement does not eliminate the possibility for misunderstanding, but it helps to bring into focus the various things that can go wrong in a business deal, and allows the parties to allocate the risk of various possibilities.

What should a good contract have in it?

Obviously, a contract should be as unique as the deal it governs. It’s always frustrating to see form contracts copied and pasted from one thing to another, as though a business deal is just a cut and paste job. Nonetheless, certain provisions should probably be in your contract.

  1. Allocation of Risk

What happens if the crop you’re buying—or the product you’re depending on the production of—is unavailable because of famine, war or strike? You can laugh, but this happens all the time. What if the other party dies tragically during the term of the contract? Is his estate responsible for completing the contract?

  1. If there is a conflict between the parties, where can suit be filed, and what state’s laws will apply?

This might seem unnecessary in a deal between two local businesses, especially in a place like Berks County. But what if the other party to your contract moves to Montana, and the deal breaks down at some point. Can you sue him in Reading, Pennsylvania? That depends on a number of factors, believe it or not, but if you’ve written that into the contract, the answer will almost certainly be yes.

  1. What are the parties’ remedies if someone breaches?

If you mess up, what happens? Does the contract dissolve? Is there a stated financial penalty? Does it depend on the damage done to the deal? This part of a contract is governed by a fairly complex thicket of Constitutional law and public policy legislated both through our General Assembly and our courts. Understanding how these remedies will be enforced (or whether a court will refuse to enforce the remedy the parties wrote into the contract) is vital to creating a strong document to govern your transaction.

  1. Terms of Payment and Other Logistics

Sounds obvious, right? But how are you getting paid (or making payment)? Does it matter if it’s in cash, or will you take a line of credit? Will you allow a grace period if a payment doesn’t get in on time? If so, what interest rate are you agreeing to? Who’s delivering? To where? If weather interferes, is delayed delivery excused?

Conclusion

A contract is the lifeblood of a good business deal. It is crucial to have a well-draft document that covers the contingencies that can arise. As the old saying goes, “Measure twice; cut once.” A well-written contract can lead to a much more amiable relationship between the parties when unexpected difficulties arise, and can lead to more and better business in the future. Do you need contracts to cover your business? Contact the Cornerstone Law Firm today, and let us see how we can help you.