Contracts are important. We deal with contracts in virtually all aspects of our life. For “big” deals, most people rely on a written contract. A handshake or oral agreement is often used in other matters. Sadly, there are many times when the parties claim that one or the other did not do what was supposed to be done. That is known as a breach of contract.
If a lawsuit is filed to enforce a contract, case law and even some statutes confirm that the non–breaching party is entitled to the benefit of his or her bargain. That means a lawsuit is to put the non–breaching party in position that party would have held if the contract was performed. It tends to limit the damages recoverable or relief that might be awarded by a court.
In contract lawsuits, damages are not usually available for emotional distress or to punish the breaching party other than by awarding the innocent party damages that would put them where they should be absent from the breach. Attorney’s fees are not generally awarded unless the contract or a specific statute provides for attorney’s fees to the prevailing party.
What might an innocent party get from the other in a breach of contract lawsuit? In most cases, the innocent party gets money calculated as what is needed to place the innocent party in the position he or she would have been absent the breach. If one has a contract to purchase a car and the seller defaults, the buyer will generally have a claim for whatever extra money the buyer had to pay for a comparable car above purchase price for the original. If the buyer defaulted, the seller could generally recover the difference between a lower price to another buyer and the contract price with the defaulting buyer.
What about building or renovating a home? If the contractor defaults, the property owner has a claim for any additional expense to complete construction. If the homeowner defaults, the contractor is entitled to sue for the amount due under the contract if the contractor finished all work under contract. If the work was not completed and the homeowner defaulted, the contractor will generally be entitled to the value of work completed and lost profit on the remainder.
The cases make it clear that the innocent party is entitled to money needed to reimburse the cost of substitute performance or otherwise be where they would be without the default. However, there are some cases when no amount of money could really make one whole. When an item is unique and the seller defaults, money cannot replace it. Take a car for example. If the car was an antique or vintage rarity, it could not be replaced no matter how much money was awarded. In those cases, the court can award specific performance mandating the seller comply with the contract as long as compliance is still feasible.
Real estate is considered unique, as no two parcels are identical. Specific performance is usually available in real estate contract cases.
Homeowners do not always get the cost of completing construction when a contractor defaults. If the contractor does not build according to plans, cost of correcting could substantially exceed the reasonable benefit. If the house was built with the garage on the wrong side, it is unlikely a court would order the builder to tear down the house and rebuild it. In cases where the market value of the home is minimally affected by the contractor failure to comply with the contract, the owner might also be limited to the difference in market value as a more reasonable calculation of actual harm. If the construction is not timely completed, the homeowner can also be entitled to loss of use–value or lost rent.
Many homeowners find that although beauty is in the eye of the beholder, the judge disagrees that the contractor must tear down and start over because of the doctrine known as economic waste. That means, if the cost of fixing it substantially exceeds reasonableness, cost will not be awarded. That can apply to other contracts too.
Consequential damages are those which everyone would agree are harm that would be expected from the particular breach of contract. In some cases, however, getting to where an innocent party would have been absent breach of contract involves more than the difference between contract cost and replacement. In those cases, additional money can be awarded to pay what is known as special damages.
Special damages reimburse the non–breaching party for additional losses that are peculiar to that particular situation as long as it was known that breach would cause the additional harm. Lost profits on products that could not be manufactured, or lost contracts would be special damages that might result from failure to deliver manufacturing equipment to the buyer in a timely manner.
The parties can agree in advance upon the amount of damages in the event of breach through a provision in a contract known as liquidated damages. A liquidated damages clause is a clause that provides in event of breach by one party or the other, the non–breaching party is entitled to a set amount of money. Those clauses are enforceable when they are not considered a penalty, which means in Florida they generally should not exceed one–third of the contract price. Many real estate contracts include a liquidated damages provision under which the seller is entitled to forfeiture of the deposit if the buyer defaults.
Damages are not automatic. The non–breaching party must prove some harm to get a judgment in court. There are cases where a breach of contract does not result in any financial or other harm to the non–breaching party. However, because there is a technical default and a contract that provides attorney fees awarded to the prevailing party, litigation ensues. When the plaintiff cannot prove damages, the contract provision for award of attorney’s fees to the prevailing party is in favor of the defendant.
Breach of contract cases generally require that the plaintiff establish the plaintiff was not in default and that the plaintiff was ready, willing and able to complete performance. Some demand for performance is usually required to prove default was not acceptable. That means a party to a contract cannot simply sit back and decide if he or she wants to sue when the other party fails to perform. Waiver, agreement and even acceptance of benefit are often good defenses.
Breach of contract cases can be complicated. Good lawyering can be essential to succeed at trial, but cases are more often won or lost by what is done prior to filing suit. For that reason, contracting parties should retain attorneys sooner rather than later.
William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.