CONTRACT DISPUTES – EQUITABLE REMEDIES: DRAW THE LAW

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So last week I rounded out the discussion about what you can expect in terms of damages from a lawsuit. Just a brief recap, there will be no punitive damages via a penalty clause in the contract and it is possible other statutory damages may be available based on what the situation is for the breach (was there any fraud or misrepresentation?).

This week I will focus on what are known as equitable remedies.  The prior discussions on damages are legal remedies.
 

What’s the Difference between Equitable and Legal Remedies?

My goal is not to turn you into a legal expert, but you should understand there is a distinction between the two. I will be brief. Generally, legal remedies provide for monetary damages as was discussed in the prior posts.  However, equitable remedies deal with the notion of equity or “fairness”. Equity remedies were created to deal with situations where the rule of law’s answer was too harsh (i.e. monetary damages were not enough). Therefore, equitable remedies care more about a particular person’s knowledge and their state of mind and motive. These things go to whether or not a court will grant an equitable remedy.

Legal remedies are different from equitable remedies, whereas legal is limited to a monetary amount and on the law, equity is focused on fairness and the particular person who caused the unfairness.

 

Why are Equitable Remedies Important for Delaware Corporations?

In general, most states in the US have granted their courts merged powers over equitable and legal remedies (that is you can go to court and ask for both where appropriate). However, of significant note to startups, Delaware’s Court of Chancery remains separate as a court of equity, therefore you would go there to receive equitable remedy. This is significant and why some people suggest that when you intend to go the startup corporation route seeking to do a public offering you incorporate in Delaware due to the significant experience and knowledge that this court of equity provides.

Delaware has a special equity Court of Chancery, which has a lot of experience dealing with corporate law and will provide these remedies. Most jurisdictions, Hawaii included, have merged courts of law and equity, but lack the body of legal history that Delaware has from its Chancery.

 

The Equitable Remedies for Contract Situations

Since we are focusing on a contract matters I am only going to talk about 3 equitable remedies, but know that for the variety of situations that a lawsuit might arise out of there are more.  The 3 are as follows: (1) specific performance; (2) rescission; and (3) rectification.
 

Specific Performance: Make the Wrongdoer do What was Agreed Upon!

Specific performance is as it sounds. The court will order the wrong party to do something. Typically, in contracts this becomes an appropriate remedy when the subject it in question is unique and no other remedy is available.  For example, if the seller fails to deliver a valuable painting by a specific artist.  What you should note is that this almost a goods-specific remedy, as a court will almost never force a person to do what was agreed upon in a personal services contract.  For example, forcing a singer to sing when they ditch out on a concert.

In a specific performance situation, a court will force the wrongdoing party to perform under the contract they broke, such as delivering a specialty good, like artwork.

 

Rescission: Banish this Bad Contract to the Void!

This remedy is basically terminating the contract and putting the parties back in the position they were before the contract was agreed upon.  Basically, it is kind of like those time-travel alternate reality type of movies.  We treat the situation as if it never happened (in legalese this is known as void ab initio).  Common situation is where insurers will rescind an insurance policy due concealment, material misrepresentation, or breach of warranty.  In this scenario, the insurer will send the insured a notice and send a check in the amount for the premium paid back to the relevant policy period.

In a rescission situation the court will “erase” the contract and put the parties in the position where they were before, so the party that received the money must return it and the other party will return the goods.

 

Rectification: Judge, Fix the Contract!

Rectification (more commonly known as Reformation) basically is the court rewriting the contract to reflect what a written document should have said in the first place. Typically, there is a situation which is known as unilateral mistake where one party mistakenly believes a term or provision is in the contract, and the other party is aware of this mistaken belief and the mistake is to the benefit of the second party knowing the error.

In rectification, the judge will basically “edit” the contract to capture the original intent of the parties.

 

Bottom line: Remedies of Last Resort

Understand that equitable remedies are not the court’s first position.  We place significant value on parties of full capacity to bargain out their contracts.  Therefore, to force someone to do something (which goes against the theory of “efficient breach”) or for a judge to tear up the contract or edit it is not taken lightly.  In most contract breaches, your first stop will be damages, and you only get to equitable remedies if that is not enough and unfair.
 
[author] [author_image timthumb=’on’]http://www.alohastartups.com/wp-content/uploads/2011/09/RyanKHew.png[/author_image] [author_info]I am a practicing attorney in Honolulu, HI helping small businesses with their transactional and compliance needs. Contact Me Today: Web| 808.944.8400 @RKHewEsq Ryan K. Hew, Attorney At Law[/author_info] [/author]

*Disclaimer: This post discusses general legal issues, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction. Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.