When a contract is breached, the non-breaching party can sue.
Most standard contracts in Oregon will send you to mediation or arbitration, but the core questions of law would be looking to these remedies to determine the outcome at arbitration.
What the Law Says
Lawsuits over contract breach have two primary pathways and branching remedies from each pathway, but for this week, we’ll just take the first of the two pathways:
Pathway 1. Contract Affirmed Remedy (contract continues to be in effect).
- Damages. When a party breaches a contract, and the non-breaching party can prove they were not also in breach, the non-breaching party can sue for “damages” to cover their “expectation interest” and “reliance interest” in the contract. Damages must be reasonably provable and linked to the breach and foreseeable. Damages will typically be reduced by any amount of cost saving or loss prevention, and there is a duty to attempt to mitigate damages when you’re aware of it.
- Expectation interest – the non-breaching party’s benefit, had the bargain been fully performed. E.g., Seller says “I promise I’ll sell you the house with the shed,” then the shed gets removed. Buyer can say “I still want the property, but also expected there to be a $____ shed, and it’ll cost me $____ to get a comparable shed.” Expectation damages are only going to be the natural and proximate result of a breach, but the Buyer in the above example may be able to tack on the costs that are incidental to the breach (known as “incidental damages”) such as costs for repairing yard equipment that was left unsheltered before he could get a replacement shed of the cost of purchasing a tarp to cover the yard equipment, but only if there was no other place to put it. E.g., if there was a garage, it would be difficult for Buyer to claim “my lawnmower rusted out because I didn’t have a shed,” if Buyer had a perfectly reasonable other space to house the lawnmower (the “duty to mitigate” would be at play here).
- Reliance Interest – the costs that the non-breaching party suffered in reliance on the contract. Generally, this is to put them in the same position they would have been in had the contract not been made. E.g., Seller makes representations that the property will be vacant at closing, but the termination was sent late, and the Buyer’s cross-country move ends with Buyer spending 3 days in a hotel waiting for the vacancy. Buyer can sue for the cost of the hotel stay that they incurred due to their reliance on the representation that the space would be vacant at closing.
- Specific Performance. Specific performance is a form of “injunctive relief” where the court forces a party to take a certain action. When the court deems specific performance appropriate, it compels the breaching party to perform on the contract as originally intended. The claiming party must show, by clear and convincing evidence, that:
- Damages would be inadequate. This is why specific performance is so rare in the business world, but so common in real estate. Every parcel of land, with rare exception, is considered legally unique, therefore the seller denying the buyer that particular property would be causing an injury that no money could fill. By contrast, when the Buyer breaches the contract, the Seller can just sell to the next person who comes along. For Buyer breaches, seller will always be made whole with cash, whereas Seller breaches result in non-monetary loss.
- The Subject matter of the lawsuit is unique. Property is nearly always unique; the rare exception to this is a new construction in a subdivision where the Buyer has made no issue over the specific location, and if the builder has another comparable or near identical house on a nearby parcel, the court may say “Buyer just buy the other comparable house rather than doing specific performance.”
- Nonpreaching party is “ready, willing, and able to perform.” This means the Buyer must be presently, at the moment they are seeking specific performance, be able to make the purchase happen. No further loan application approvals, no contingent funds that need to show up, no discretionary reviews by a third party that could torpedo the deal. When Buyer asks for specific performance, they must be able to show that they are fully funded and prepared to close before they even ask the courts for specific performance.
- Terms of the contract were certain or definite in all material respects. If there is anything left over to negotiate or anything the parties kicked down the road to figure out later, specific performance may not be available.
- The non-breaching party was not in breach. If the party asking for specific performance is in some way also in breach, such as through misrepresentations or fraud, specific performance will not be available to them.
- Reformation. Reformation is only available if there is a mistake in the contract. E.g. If you accidentally put an extra zero on the $500,000 purchase price, but based on the LOI, the parties were expecting the purchase price to be $500,000 rather than $5 million, courts can be asked to “rewrite” the contract to match the intentions of the parties. Reformation is available when there is a mutual mistake, or when there is a unilateral mistake on the part of the reforming party and inequitable conduct on the part of the other party [see earlier example, it would be considered inequitable to expect the person to pay 10x the expected purchase price, even though the seller would likely love to sell the house for that price]. Generally, reformation requires some sort of proof that the parties made a mistake, which tends to require some sort of antecedent or prior agreement that lays out the essential terms completely.
