This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article discusses the concept of breach of contract under the contract law of the United States.
It has been published by Rachit Garg.
Contract law is a branch of the ‘common law’ heritage in the United States. Colonial America acquired the common law, a system of judge-made laws, from Great Britain. Court evaluation and enforcement of agreements between parties are governed by contract law. When one party alleges that the other violated the contract, or did not follow its terms, the aggrieved party may seek to enforce the contract or seek compensation. Although the majority of contract law is uniform across the United States, generally they are based on state-reliant common law. As a result, each state may have its own interpretation and enforcement of contracts. The Restatement (Second) of the Law of Contracts, a legal treatise, contains the basic principles of contract law. However, you should refer to the Uniform Commercial Code (UCC) for regulations governing contracts relating to sales and other commercial agreements, as the same has also superseded the Restatement (Second) of the Law of Contracts. Different aspects of breach of contract under the contract law of the United States have been discussed in this article.
What is a breach of contract
A breach of contract occurs when a promise that is a component of a contract is not kept without valid reasoning. This includes failing to perform in a way that complies with industry standards or any express or implicit warranty requirements, such as the implied warranty of merchantability. When one of the parties to a contract doesn’t fulfill their end of the bargain, that party is said to have violated the terms of the agreement. As the occurrence of a breach of contract is frequent, a substantial body of law has developed to settle the resulting disagreements. The main objective of contract law is to restore the injured party to the same financial position that they would have been in if there had been no breach of such contracts. Therefore, monetary damages are the only accessible default remedy for a breach of contract.
In most circumstances, these damages are constrained to what is specified in the contract, and courts rarely grant punitive damages for contract violations, unlike when damages are awarded in tort proceedings. For instance, the court will award the painters $40,000 in damages if a party agrees to pay $50,000 to have their house painted but only wants to give over $10,000 once the painting is completed. The efficient breach argument, which contends that breaking contracts and paying damages can occasionally be economically advantageous for society as a whole, is the cause of this reluctance to grant punitive damages.
However, under the law of reliance damages, a party may legally collect more money than was first agreed upon in certain situations. This doctrine allows for the payment of damages for reasonable costs spent as a result of a party’s reasonable reliance on a contract that was later breached. For instance, if a party buys lifeguard gear in anticipation of a pool building contract being fulfilled, that party may be able to get their money back in the event of a breach. The concept of promissory estoppel serves as the foundation for reliance damages, which are granted at the judge’s discretion.
A court may alternatively order particular performance in cases where damages are insufficient. The party aggrieved by the breach is required to make reasonable efforts to comply with the requirements of the contract as part of the specific performance remedy. Remedy for breach can only be asked for by a party only when the party has fulfilled the promises he had made while entering in the contract. The only time-specific performance is, however, typically given out is when dealing with unique assets like real estate.
Breach of contract in the United States
In the United States, contract law governs the commitments made by agreements expressed or implied between private parties. Contract law differs from state to state. Nevertheless, there are some instances where federal contract law is applicable nationwide, such as when contracts are made in accordance with the Federal Reclamation Law.
Due to the broad adoption of the Uniform Commercial Code, the legislation governing transactions involving the sale of commodities has become relatively standardized across the country. Depending on how much a state has codified its common law of contracts or accepted elements of the Restatement (Second) of Contracts, there remains a significant amount of variation in how various types of contracts are interpreted.
The Uniform Commercial Code
Different restrictions than for other types of contracts may be in effect when parties enter into a contract for the purchase and sale of products. To attempt to harmonise state rules on particular sorts of transactions, the Uniform Commercial Code was created. Some, but not necessarily all, of the UCC provisions have been adopted by the majority of states. Contracts for the sale of moveable items, such as shipments of goods between businesses and between businesses and customers, are subject to the UCC. Contracts covered by the UCC must comply with its standards in order to be upheld. The UCC also outlines particular remedies for breaches.
A breach under the UCC rules operates differently than it would under a customary contract. The conventional definition of a breach is the failure to perform a specific contractual obligation or to satisfy a condition. Because of this, a claim for a contract breach is typically one of the few options to obtain compensation for a breach. As a result, the term ‘breach’ in the traditional sense has a limited definition. However, the term ‘breach’ is not defined strictly under UCC guidelines, instead having been provided with a divergent connotation under the UCC. For instance, late delivery of goods may be a violation. Furthermore, although the late delivery of the items does not always violate the contractual agreement, it does according to the UCC and the general standards.
Breach of contract by the seller
The buyer may bring a claim for breach of contract when the seller renounces the agreement and/or fails to deliver the goods. In accordance with the UCC, the buyer is entitled to damages for the breach in an amount equal to the discrepancy between the contract price and the market price at the time the buyer learned about the breach, as well as any incidental and consequential damages that the UCC permits. The seller must have known about or reasonably anticipated the buyer’s particular demands or wants at the time of the transaction in order to be entitled to consequential damages. The damages must be reduced by any costs that were avoided as a result of the seller’s violation. In circumstances of rejection after arrival or revocation of acceptance, the market price is established as of the location for tender, or as of the site of arrival. General illustrations of a breach of contract by a seller would include the delivery of disputed goods to the buyer, which is a common sight in online shopping.
One needs to be aware that a buyer may also bring a claim for damages under a contract that is not subject to the UCC. These damages are calculated in ways that are somewhat comparable to the UCC but not quite so. In essence, making the buyer whole, or giving the buyer enough money to receive what they were promised in the contract, is the basis for damages under ‘common contract law’. Restitution is another provision of common contract law that enables the buyer to recover any payments made to the seller and places them in the same position as if the promise had never been made.
Seller’s remedies for breach of contract under the Uniform Commercial Code
- There are times when the best choice for your company necessitates breaking a contract. Breaching a contract could mean the difference between shutting down your business and continuing to fight. The consequences of a violation are controlled by the Uniform Commercial Code if the contract involves the sale of goods and both parties are ‘merchants’ in this regard. According to the UCC, contractual remedies must be “given for the purpose that the aggrieved party may be placed in as good a position as if the other party had completely complied.” The person who was wronged does not have a right to financial gain. If a buyer breaches a contract by failing to take goods when required or in another way, the seller may:
- Refuse to deliver the products.
- Halt in-transit deliveries.
- Resale the products and collect losses.
- Get compensation for the difference between the contract price and the market price of the products; or
- Terminate the agreement.
- If the seller decides to resell the products, the resale must be done in a fair and reasonable manner from a commercial standpoint. As a result of such a sale, the seller may be entitled to the difference between the sale price and the contract price as well as any incidental damages, but less any costs that were avoided due to the buyer’s violation. The buyer must be given sufficient notice of the intended sale if the seller decides to resell the products through a private transaction.
- The seller may not be able to receive compensation under this remedy if reasonable notice was not provided. The contract allows the seller to keep the difference between the purchase price and the market price if it does not resell the products. If the seller is not sufficiently compensated by the contract price/market price difference, the seller may choose to recover any lost gains. This could happen if the items are sold at a predetermined price and the seller loses out on a sale it could have made to another buyer as a result of the default of the first customer. Finally, the seller is entitled to the entire contract amount if the products cannot be sold for a fair price.
Breach of contract by the buyer
A seller may file a breach lawsuit when a customer declines to accept or pay for items from the vendor. In this situation, the UCC stipulates that the buyer will be held liable for damages equal to ‘the difference between the market price at the time and place of tender and the unpaid contract price,’ as well as any incidental damages allowed by the UCC, but with less money saved as a result of the buyer’s breach. Any commercially reasonable costs paid throughout the process of stopping delivery, whether linked to shipment, care, or other expenses related to the control of the products, may be included as incidental damages in connection with a buyer’s breach. A buyer rejecting goods that were initially ordered by him from the seller or a buyer refusing to pay the amount of the goods that have been delivered to him are common examples of breach of contract by the buyer with that of the seller.
In addition, if these damages are insufficient to fully compensate the seller, the seller may also receive as damages the profit (along with reasonable overhead) that the seller would have made from the buyer’s full performance, as well as any incidental damages, but with proper allowance for costs that were reasonably incurred and proper credit for payments or proceeds from the resale. The UCC enables the seller to pursue additional actions with regard to the immediately impacted items or, in the event that the entire contract was broken, with regard to the entire balance that has still to be delivered. Reselling the items, cancelling the contract, and delaying or preventing the delivery of the goods are some of these remedies.
According to contract law under the common law of the US, the seller may also be entitled to special damages, which cover any loss that was brought on by unique circumstances or conditions that the breaching party knew about at the time the contract was made, in addition to compensatory damages, which cover any loss that is directly related to the breach of the contract. The seller must aim to minimize losses, so in order to make up for their loss, they should try to sell their items elsewhere. The seller may demand restitution or the return of any money or property the buyer acquired from the seller, similar to the buyer’s remedies.
Buyer’s remedies for breach of contract under the Uniform Commercial Code
The buyer is entitled to damages if the seller doesn’t deliver the products or if the delivered goods are flawed. However, a buyer is only entitled to compensation for its actual loss if a seller violated the terms of the agreement. A buyer who never received the goods, rightfully rejected non-conforming goods or justifiably revoked acceptance of the goods, may:
In addition to any commercially reasonable charges, expenses, or commissions associated with purchasing replacement goods, incidental damages also include any other reasonable expenses incident to the delay or other breach. These expenses include those reasonably incurred in inspection, receipt, transportation, and care and custody of goods that were rightfully rejected.
- Cancel the agreement. Whether the buyer cancels or not, they may be able to get their money back.
- Purchase replacement items (‘cover’), then recoup the price difference between the contract price and the price of the replacement items. Any incidental and consequential damages are also recoverable by the buyer. Any savings made by the buyer as a result of the seller’s violation will be deducted from the buyer’s damages.
- Included in consequential damages are any earnings the buyer may have generated from reselling the products if they had been received in excellent condition. However, these losses must be demonstrated to have been fairly foreseeable at the time of the contract and must be proven with a reasonable degree of confidence.
- The customer is still entitled to damages even if they improperly cancel their acceptance of the defective goods. In those circumstances, the buyer is required to promptly notify the vendor of the fault. The customer is then entitled to compensation for any implied or stated warranties that were broken. These damages, which may also include incidental and consequential damages, are the difference between the value of the products as warranted and their value as received.
- If the purchaser decides not to ‘cover,’ it may recover the difference between the contract price and the market price in effect at the time the violation was discovered. Expenses that the buyer avoided as a result of the seller’s violation may be deducted from this sum before any incidental and consequential damages are applied. A court judgment forcing the seller to produce and deliver the agreed-upon products may be available to the buyer if the commodities are thought to be ‘unique.’
It’s also crucial to remember that the vendor must refund the whole purchase price if the consumer properly rejects the items. Any products that are in the buyer’s control at the time of the seller’s breach are subject to a security interest that the buyer may sell in order to enforce if the seller refuses to do so.
Rule of mitigation under the Uniform Commercial Code
Under the UCC, sellers and buyers are obligated to reduce losses. A buyer has an obligation to ‘cover’ a breach if they do not receive the products as specified in the contract. The buyer will now search for comparable goods to replace the undeliverable ones. The difference between the undelivered and the mitigated items will be a loss in this case. Similarly, if a customer rejects a contract and refuses to purchase, the seller is required to sell the products to another buyer in order to reduce losses.
Uniform Commercial Code gap fillers
When there is a breach of an agreement or nonperformance but the contract itself is silent on the matter, UCC gap fillers come into play. For instance, UCC gap fillers allow the delivery to be completed at the seller’s place of business or residence when there is no agreement regarding the place or site of delivery. Therefore, if the site of delivery is not specified in the contract and the items are delivered to the seller’s location, it would not be considered a breach.
Actions that can be taken upon breach of contract
If the other party to your contract has broken the terms of the agreement, it is crucial to keep records of your communications and the events leading up to the breach. You should also follow any contractual requirements relating to giving the other party a written notice and a chance to cure the breach. Include a description of any actions you take to limit your damages.
Remedies for breach of contract in the United States
The various remedies and the related limitations for breach of contract claims govern decisions over whether to pursue claims or settle, whether in litigation or arbitration. The law in the US offers both monetary (damages) and non-monetary remedies (i.e., an injunction) for contract breaches. Potential restrictions on remedies also need to be taken into account. Of course, the actual principles in question in any given dispute may differ based on a number of factors, such as the form of the contract, the applicable state law (such as New York, California, or another), and the venue where the dispute will be resolved. When a contract is broken, money damages are frequently sought as compensation. Expectation damages, reliance damages, and restitution can all be requested as sorts of monetary damages.
Direct damages, also known as actual or compensatory damages, are meant to make up for effects that were reasonably foreseeable. Incidental damages, a general term for reasonable costs related to direct damages, are a similar idea. A buyer can be entitled to reimbursement in the form of incidental damages for shipping or storing items until the seller collects them, for instance, if the things they acquire do not meet the terms of the contract.
Expectation damages compensate the non-breaching party for its ‘expectation interest’ in the performance of the other party. In other words, the non-breaching party is placed in the same position it would have been in if the breaching party had complied through a monetary award. For instance, if a buyer contracts for services with a minimum number of hours and a certain rate per hour, but never utilizes the services, the service provider has a claim for the contractual minimum, less any costs that the provider would have incurred in completing the performance. Giving a party “the benefit of its contract” is another phrase that is frequently used to describe this.
Reliance damages take a different approach to the problem and try to pay the non-breaching party for losses incurred as a result of the breaching party’s negligence. For instance, if one party makes a financial investment in anticipation of a contract that the other party signs but do not uphold, the non-breaching party may be entitled to compensation for that investment, known as its ‘reliance interest.’ In other words, reliance damages make up losses that have been incurred by a non-breaching party as a result of relying too much on its counterparty’s performance promise. When a non-breaching party is compensated for its reliance interest, it is put in the same situation as if the contract had never been made.
Restitution entails the harmed party receiving any advantage it granted to the party in breach due to reliance or partial performance. For instance, the buyer has the right to receive a refund if the seller fails to deliver the products after receiving payment in advance.
There are consequential losses in addition to direct damages. Although not a direct result of the breach, these damages are still conceivably predictable. A claim for lost profits is an example of losses that could be considered ‘consequential’ damages. The non-breaching party may file a claim for lost profits under the principle of direct expectation damages if a party breaches a contract and it is predictable that its counterparty would, as a result, lose out on connected earnings.
The possibility for lost profits may still be recoverable as consequential damages if they were reasonably foreseeable even if they were caused by a situation other than the breach. The correct answer to this question frequently depends on the particular wording of the contract, the relationship between the parties, and the type of breach. Lost profit damages (and consequential damages in general) are frequently passionately contested in disputes. If the claim for consequential damages is too remote or speculative, that is, if it cannot be reliably determined how much will be lost or if there is only a weak link between the alleged damages and the alleged breach of contract, the claim may be denied.
Unless the parties agree to a different rate of interest, interest for monetary damages remedies typically accrues at a rate determined by statute law. Depending on the state statute specific to the one that regulates the dispute, the rate of interest may change (compare the New York rate of interest, which is 9 percent, with the Delaware rate of interest, which is 5 percent over the Federal Reserve discount rate).
For claims of contract violation, some forms of damages are typically not attainable. For instance, punitive damages are typically not available for contract breaches. Punitive damages, as the term suggests, are monetary penalties imposed on a party with the intent to punish it rather than making it whole. When it comes to contract law, compensation is prioritized over punishment, even though punitive damages may be offered in circumstances involving torts or rights violations.
In a similar vein, losses that ought to have been reduced might not be compensable. In general, a party bringing a claim for breach of contract must attempt to limit its losses as much as is practical. As an illustration of reliance damages, a court may decide that a party is not entitled to any compensation for money spent in reliance on a contract when it becomes obvious that the counterparty will not fulfil its duties under the contract.
Additionally, unless the contract specifically states that the party that prevails in a dispute is entitled to its fees, attorneys’ fees are typically not recoverable by the successful party. This default concept, commonly referred to as the ‘American Rule,’ mandates that each party pay its own fees regardless of the outcome, in contrast to the default fee-shifting approach in the UK, which is known as the ‘English Rule.’
Another sort of remedy for contractual violations is what is referred to as an ‘equitable remedy.’ For instance, if one party to a non-disclosure agreement threatens to make the other party’s private information public, a monetary settlement might not be sufficient to undo the harm that will be done. In this situation, the party who has been harmed may ask a court for an injunction to prevent the person who violated the agreement from sharing the secret information further. An injunction is a type of court order that often instructs a party to refrain from doing a particular action or compels particular conduct on the part of a party.
The buyer may be entitled to more than just damages if the seller violates a contract for the sale of a particular piece of real estate or a special object. When necessary, courts may issue a specific performance order, which directs the party in breach to fulfill its responsibilities under the contract by giving the buyer title to the special object or real estate.
To resolve contracts that were entered into based on incorrect facts or facts that were misrepresented, further equitable remedies are available (whether intentionally or unintentionally). In some situations, the parties may have agreed to contractual clauses that, after the facts have been established, are no longer comprehensible. Courts have the authority to repudiate a contract, which means they can declare it void and undo any performance or partial performance by the parties to return them to their original positions or to reform a contract, which means they can rewrite it to reflect the parties’ genuine intentions.
Although the aforementioned guidelines are frequently used in American contract law, they are not always applicable. Instead, they serve as ‘default’ guidelines that apply when there is no other agreement. Contracting parties have considerable latitude in determining the conditions for handling a breach because, in general, contracts are voluntary obligations.
For instance, parties may agree to contractual wording that prohibits claims for consequential damages (and frequently do). By settling on liquidated damages, a set sum of money owed for breach, parties can make damage claims even more foreseeable. Settling liquidated damages can be challenging, and they won’t always be appropriate. In cases when it would be challenging to estimate real damages, liquidated damages are typically set. There are more categories of damages limitations, such as restrictions on damages to a specific sum, such as the total sum paid under a contract within a year. The remedies available to a harmed counterparty may be further constrained by this form of restriction.
It is advantageous to be aware of the default norms before signing a contract, since contract parties have the freedom to alter existing ‘default’ principles of contract law. After the parties have a live dispute, it is crucial to know what damages might be sought and what potential restrictions may have already been settled.
Damages for breach of contract by the government
Governments’ roles as contractors and sovereigns are often in conflict when they enter into agreements. Courts have struggled to find a solution to this conflict as government contracting has become more prevalent in recent years. What should the courts do, specifically, when the government violates a contract? Ordinary contract enforcement with expectation damages restricts the government’s ability to respond to political change and, furthermore, locks in policies of previous administrations, at least to the extent that the cost of expectation damages substantially raises the cost of the policy to taxpayers. A government breach is frequently the result of a change in policy brought about by democratic processes.
When sovereign immunity is lifted and the state enters the realm of contracts, it takes on the legal persona of a private person, but in reality, it never loses its status as a sovereign and its omnipotent authority. This means that even though courts frequently state that when the state “enters into contractual relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals,” they also frequently state in the same breath that governments as contractors retain their sovereign powers, including the power to override contractual obligations.
In Bowen v. Public Agencies Opposed to Social Security Entrapment (1986), for instance, the United States Supreme Court ruled unanimously that Congressional amendments to the Social Security Act that forbade state withdrawal could override agreements between the Federal and state governments for State participation in the social security system that, by their terms, permitted State withdrawal with two years’ notice.
On the other hand, when government contracts are not enforced, the expense of policy changes is shifted onto specific contractors to the degree of their dependency losses (including opportunity costs). The ‘government as contractor’ metaphor misled the Supreme Court in U.S. v. Winstar (1996), treating public contracts as equal to private ones and dominating the “government as sovereign” side of the debate.
American doctrine and the case of United States v. Winstar (1996)
Government contracts and sovereignty are handled more complicatedly in America. This appears to be largely due to the more intricate constitutional concepts at play, which have led to a greater willingness to acknowledge the presence of contractual duty as a limitation on a legislature’s decisions. As a result, American law has had to deal more directly with the issue of remedy, though not to the point where it has to consider whether the number of damages for a breach by the government should be the same as for a breach by a private party.
The fundamental tenet of American law is legislative supremacy. In the US, sovereign immunity also grants legislators the right to revoke their permission for a contract lawsuit, even if one is already in progress. However, there are constitutional clauses and doctrines that have been interpreted to allow one legislature to impose its will on a later legislature side by side with these principles. Government contracts are not specifically mentioned in the Contracts Clause, but some members of the U.S. Supreme Court have vehemently argued that the history of the Clause shows that it was intended to address a “narrow social evil,” namely the “rampant state legislation” that absolved debtors of their obligations during the prior economic depressions.
The seven-judge bench of the Supreme Court ruled in the most significant case of the modern era, United States Trust Corp. of New York v. New Jersey (1977), that the New Jersey legislature could not repeal legislation enacting a 1962 covenant with Port Authority bondholders restricting the Port Authority’s ability to invest in mass transit systems under the Contracts Clause. Although the Clause “does not require a State to adhere to a contract that surrenders an essential attribute of its sovereignty,” the Court concluded that it “limits legitimate state legislative authority, and the existence of an important public interest is not always sufficient to overcome that limitation.”
United States v. Winstar (1996)
In the case of United States v. Winstar Corp (1996) which is the Supreme Court’s most recent ruling on the contractual responsibilities of the federal government, trust became clear. In this case, the Court addressed Congress’ duty to refrain from passing legislation that conflicts with a contract that a federal agency has engaged in. As a result, the matter was two steps removed from the U.S. Trust:
- The federal government, which is exempt from the Contracts Clause, was the government in question.
- The disputed contract was a decision made by the government, not the legislative.
However, the Court determined that the contract had the authority to limit Congress’ ability to pass legislation to address the savings and loan crisis, holding the U.S. government accountable for damages if Congress disregarded the restriction. The absence of injunctive remedies was the single concession to sovereignty in the absence of the Contracts Clause.
The Financial Institutions Reform, Recovery, and Enforcement Act, 1989 (FIRREA), which increased the capital requirements for thrifts and was at the centre of the Winstar case, was enacted by Congress in response to its conclusion that “to a considerable extent, the size of the thrift crisis resulted from the utilization of capital gimmicks that masked the inadequate capitalization of thrifts.” The Federal Bank Board and strong thrift institutions, like Winstar Corporation, had agreed to save failing thrifts as part of an earlier response to the savings and loan crisis and had agreements that allowed the use of certain accounting techniques. This had the immediate effect of eliminating those agreements.
On its understanding and application of the pertinent theories as well as its interpretation of the disputed contractual duty, the Court experienced a significant disagreement. Justice Souter started out with the opinion that the contract in question was not a promise on the part of the federal government not to enact legislation like FIRREA but rather a promise to assume the risk that such legislation would be enacted, writing for a plurality of himself and Justices Stevens, O’Connor, and Breyer.
The doctrines of unmistakable (surrenders of sovereign authority must be made in unmistakable terms), reserved powers (the state may not contract away essential attributes of sovereignty), and sovereign acts as so interpreted, Justice Souter saw no scope for applying special contract rules for government contracts (government-as-contractor cannot be held liable for breach of contract for public and general acts of government-as-sovereign). Instead, the contract was subject to standard private law contract enforcement principles. As a result, when Congress passed FIRREA, it became responsible for damages (although the “appropriate measure and amount of damages” was remanded to the Court of Federal Claims).
The majority and concurring opinions “made profound changes in the law dealing with government contracts,” according to Chief Justice Rehnquist and Justice Ginsburg in their dissent. Both the plurality and the concurrence, according to the Chief Justice, “could not achieve their intended result without transforming the Government into just another private party under the law of contracts.” He made it plain that “the sovereign does not surrender its sovereign rights just because it contracts,” while accepting the government’s ability to bind itself in the contract.
In general, Chief Justice Rehnquist’s assertion that the majority of the Court had failed to understand the differences between government and private parties in contract seems to be accurate. Instead, the majority had succumbed to the idea of contractual duty, which, as we saw in the U.S. Trust, had the capacity to subjugate the government to even more onerous contractual duties than apply to private parties. For Justices Breyer and Scalia, the approach merely applied the well-known common law doctrine of contract construction to the specific facts of the government and its “purpose.” The majority opinion, which claimed that the unmistakable doctrine was irrelevant because the conflict between contract and sovereignty could be avoided entirely by interpreting the contract to require the government to only assume the risk of regulatory change, surprisingly shows a greater understanding of the nature of the conflict. This was not to imply that the opinion adequately addresses the issue.
However, since Winstar Corp. was not asking for an injunctive remedy and Justice Souter believed that the contract could be read (and on the principle of avoiding constitutional issues, should be read) not to constrain sovereignty at all but only to require damages in the event that sovereignty was exercised in a manner that is contrary to its terms, the plurality avoids having to determine what it admits is the “obscure” source of the power of federal agencies through contract. According to the majority, sovereignty was only at issue when an injunctive remedy or its equivalent was requested. By holding as it does, the government was reduced to the position of a private party in a contract, with the exception of the strictest of remedial measures.
After accomplishing this, it was clear to the Winstar plurality that the concepts of reserved powers and sovereign actions, likewise, do not exclude holding the government accountable for a breach that occurred when Congress passed FIRREA. With regard to reserved powers, the result was especially simple; the administration had not given up any crucial aspects of sovereignty; it had just pledged to accept the risk of Congressional actions. The answer was more complicated when it comes to sovereign actions, but it followed immediately from the plurality’s premise that the government should be treated similarly to other contractors when using its contracting authority.
The Court could not go so far as to grant government contracts an injunctive power that private contracts did not have in a federal environment without the Contracts Clause. Winstar, on the other hand, took the premise that the government enters into contracts as if it were a private entity literally and grants it immense power, including the authority to annihilate the crucial democratic interests in legislative supremacy and sovereign immunity. This was not to imply that governments ought to be free to break contracts whenever the political process dictates that they should.
The point was to emphasize the necessity for further investigation into the potential nature of governmental contractual responsibility as a distinctive mode of obligation that integrates rather than eliminates the unique position of governments as sovereign. The issue of remedy was crucial to understanding the nature of obligation here. The problem of proper compensation for government breaches was crucial because citizens were ethically upset when governments broke their agreements because they oppose opportunistic political activities that place the burden of policy changes on contracting partners.
The Fifth and Fourteenth Amendments, as well as the demand for just recompense for a taking, provided both the U.S. Trust and Winstar some of their legal authority. People in Canada who read protection against uncompensated takings into the Canadian Constitution also saw a duty on the government not to take away the expectation of remedy for breach of the Pearson Airport contract.
The remedy for a government breach of contract is, in a significant way, tied to the political process because the sovereign cannot be sued without its agreement. According to the doctrine of sovereign immunity, the government is free to prohibit or restrict access to the courts as a means of redress, to condition access to the courts on procedures that may differ from those that are otherwise required, to withdraw consent to suit even while a suit is still pending, and to demand administrative, as opposed to judicial, resolution. The democratic process, not the law, is what places restrictions on the use of this right. Even in the face of the Contracts Clause and the Fifth and Fourteenth Amendments, the freedom to refuse a remedy for a contract breach is applicable in the United States.
As we come to the end of this article, it is ideal to state that breach of contract under the contract law of the United States is a substantial topic of discussion. Although the main concept underlying breach of contract, meaning violation of contractual terms and conditions by either of the parties to it, remains intact in this respect also, what is different is its often complex nature. Such a complex nature has been time and again provided with a simplified interpretation by courts of the United States. It is the UCC that continues to be the mother statute in contract law in the United States and it is under this statute that remedies for finding a solution to a breach of contract can be located, as has been discussed in this article as well.
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