Cover Contract: Everything You Need to Know
A cover contract refers to a legal agreement for lessening a buyer's loss or injury when a seller commits a breach of contract. 3 min read
A cover contract refers to a legal agreement for lessening a buyer's loss or injury when a seller commits a breach of contract. It is used as a remedy for the breach of a contract involving the sale of goods. Laws about cover in contracts might vary from state to state, but they all seek to help buyers who are victims of contract breaches receive fair compensation. Besides cover, there are several other remedies wronged parties can use to reduce their losses.
What Is Cover?
Cover is a remedy that allows the buyer in a contract to reduce damages when the seller fails to fulfill his or her contractual obligations. It is typically used in a situation where a seller has promised to sell a certain amount of goods to a buyer but fails to do so. The buyer might have to “cover” by buying substitute goods to offset the losses suffered. He or she must avoid making bad faith or unreasonable attempts to buy substitute goods.
When using cover, the buyer has the right to claim damages equal to the difference between the goods listed in the contract and the substitute goods, as well as incidental and consequential damages. However, he or she must deduct any expenses saved as a result of the contract breach.
Other Remedies for a Contract Breach
Other than cover, a wronged party in a contract can use several methods to reduce losses resulting from a breach, including:
- Award of damages
- Equitable relief
Award of Damages
In a court of limited jurisdiction, the most commonly used remedy for breach of contract is the awarding of damages. Generally, the court can award one of two types of damages when approving a contract breach claim: compensatory or punitive damages.
Also known as actual damages, compensatory damages cover the loss the nondefaulting party suffered because of the contract breach. The court will try to award an amount of damages that is enough to offset the innocent party's loss. Compensatory damages are further divided into two types:
- General damages. These damages cover any loss that directly and necessarily results from the breach of contract.
- Special damages. Also known as consequential damages, special damages cover any loss in a contract breach that is a consequence of special circumstances you would not have been able to predict.
Also referred to as exemplary damages, punitive damages are awarded to make an example of or punish the guilty party for bad behavior and deter other people from committing the same act. They are awarded on top of compensatory damages. Punitive damages are rarely awarded in breach of contract cases. They are more common in tort cases, where they serve as a form of punishment for reckless or deliberate misconduct that causes personal harm.
Equitable relief comes in two main forms:
- Specific performance
Because these remedies are impartial, the court can award or reject them in its equitable discretion. Therefore, a plaintiff might not be granted equitable relief if he or she also engages in bad behavior.
Awarding specific performance is the standard practice for remedying a breach of contract involving the sale of real estate. When a contract for the sale of goods is breached, awarding monetary damages is the standard remedy. Specific performance is an option in the following situations:
- Monetary damages are an inadequate compensation.
- The contract's subject matter has unique or sentimental value.
- Other remedies are not readily available.
In the case of an employee breaching an employment contract, specific performance cannot be used as a remedy. However, if the employee has unique and exceptional ability, skill, or knowledge, it might be possible to use a negative injunction to prevent him or her from working elsewhere.
In certain situations, the court might create a fictional contract to prevent unjust enrichment. When this happens, the innocent party's cause of action is considered restitution instead of breach of contract. Restitution is usually used as a remedy when someone passively received or wrongfully secured a benefit that is considered unconscionable.
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