Primer on Contract Damages and Options for Non-Breaching Party

Henkel Corp. v. Innovative Brands Holdings, LLC, C.A. No. 3663-VCN (Del. Ch. Jan. 31, 2013).

Issue Addressed

The only issue addressed in this decision on cross-motions for summary judgment was the amount of damages based on a stipulation as to liability for breach. In the course of its analysis, however, the court examines the options available to a non-breaching party in the face of repudiation or material breach, as well as the duty to mitigate damages.

Brief Overview

Henkel sued Innovative Brands Holdings (“IBH”) for failure to consummate an agreement for the purchase price of $127.5 million.  After IBH waived its rights to purchase the assets, Henkel sold the business to an alternative buyer for $112 million.  Henkel commenced this action for breach of contract, and IBH filed counterclaims.  IBH later advised that it no longer intended to defend the action.

Henkel sought damages for the difference between the lower sales price, as well as the transactional expenses for the second sales transaction, as well as related legal fees.

Review of Contract Damage Analysis 

This opinion is useful for its discussion of the damages available for breach of contract.  The Court explained that when a contract is breached, the Court determines damages “as if the parties had fully performed the contract” and historically, “damages for breach of contract have been limited to the non-breaching party’s expectation interests.”  See footnotes 51 and 52.  Expectation damages are calculated as the amount of money that would put the non-breaching party in the same position that the party would have been in had the breach never occurred.  See footnote 53.

The Court also recognized the general duty to mitigate damages “if it is feasible to do so, [but] a plaintiff need not take unreasonably speculative steps to meet that duty.”  See footnote 56.

The Court recognized that damages for breach of contract “should not act as a windfall” for the non-breaching party.  See footnote 60.  Actual damages encompasses both direct and consequential damages.  See footnote 63.  However, the contract in this case limited any damages to exclude lost profits and lost opportunity, as well as consequential, special, punitive or exemplary damages.

The Court explained that expectation damages in Delaware are to be measured as of the date of the breach.  See footnote 77.

The Court instructed that there is a difference between the terms “breach” and “repudiation.”  They mean different things and have different consequences.  Under Delaware law, a party to a contract is excused from performance if the other party is in material breach of its obligations.  The non-breaching party has the choice to continue to perform or to cease to perform, and conduct indicating an intention to continue the contract will constitute a conclusive election.  See footnotes 82 and 83.

However, the non-breaching party may not, both preserve or accept the benefits of the contract – - while on the other hand asserting that the contract is void and unenforceable.  See footnote 84.

Repudiation by contrast presents different options.  The party confronted with repudiation may respond by either electing to treat the contract as terminated by breach or by lobbying the repudiating party to perform, or by ignoring the repudiation.  Once the promissee relies on the repudiation by filing suit or by engaging in a substitute transaction or by notifying that it regards the repudiation as final, effective retraction is no longer possible.

In this case, although IBH committed a material breach of the agreement, it did not repudiate the agreement.

This opinion is a useful and practical explanation of what options a party has if another party to the agreement is not complying with the terms and a decision has to be made about whether to perceive that non-compliance as either a material breach or a repudiation.

The Court also discussed the doctrine of quasi-estoppel, which:  “precludes a party from asserting, to another’s disadvantage, a right inconsistent with a position it has previously taken.”  See footnote 99.  The doctrine may “apply when it would be unconscionable to allow a person to maintain the position inconsistent with one to which he acquiesced, or from one which he accepted a benefit.”