Understanding Breach of Contract in Spanish Law

In Spanish Contract Law, the concept of breach of contract is defined in a comprehensive manner. It covers any deviation from the contract's specified terms and conditions, including aspects like timing, quality, and substance. Furthermore, a breach can occur when there is no legal justification for the behavior. It should be emphasized that actions prohibited by the government do not qualify as breaches because they are justified by legal grounds.

When determining breach of contract, the parties themselves typically rely on the contract they agreed upon rather than external ideas.

However, external ideas become significant in certain situations such as in the consumer market. In this market, the consumer's expectations serve as the main criteria for evaluating quality and performance since there is no explicit contract. In other markets, external ideas are also important when a third party has a duty or responsibility towards the contract and therefore bears some responsibility for any possible breach.

The breach is not excused by the reason for it, but rather the breach itself is what matters.

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The analysis of the breach is conducted objectively. Subjective factors typically do not justify the breach, although they may affect the remedies. Breach in certain types of contracts, like professional and management contracts, necessitates a violation of duty of care or loyalty. In professional contracts, this violation may stem from a contracted professional's fault, while in management contracts, it could be attributed to the manager's fault.

2) Remedies: In Spanish Contract Law, there are several general remedies for breach of contract.

One remedy is specific performance, which requires the court to compel the breaching party to fulfill their contractual obligations. For instance, if a contract stipulates that the promiser must provide the promisee with a product of quality 2 but instead delivers a product of quality 1, the court can enforce specific performance by mandating the promiser to deliver a product of quality 2.

The court has the power to demand payment from the party who violated a contract as a way of compensating for any harm caused. The court will decide the precise sum that needs to be paid in order to sufficiently cover the damages suffered. Alternatively, there is also the option of having predetermined liquidated damages included in the contract itself, serving as a pre-established form of monetary compensation. This can be observed in agreements made with soccer players or sales contracts, where a fixed amount is stated for each day of delay.

There are various general remedies available in case of a breach of contract, including termination and reduction of prices. If a party suffers a breach, it can choose to terminate the contract by contracting with another party and abandoning its contractual obligation. If the breacher does not agree with this course of action, court intervention may be necessary. Another common remedy is to reduce the price agreed upon in the contract in order to restore balance.

Typically, the party that has been harmed is the one who decides which remedy should be implemented.

Specific performance is a type of remedy for breach where the breaching party is compelled to fulfill the failed performance or required action as stated in the contract. This remedy has various forms, including forced delivery, forced action, injunction to refrain from doing something, repairing faulty performance, and replacing goods that do not meet the agreed-upon specifications. For instance, if a contract prohibits a CEO from working for a competitor, the court can issue an injunction to prevent the breaching party from doing so. Specifically, specific performance also encompasses the repair and replacement of consumer goods.

The main concern with specific performance is evaluating the benefits and costs involved. Specific performance requires the breaching party to fulfill the contract's terms, but there are cases where complying may be more costly than the social welfare benefits. For example, let's consider a situation where a mining company has a contract with a landowner for 10 years of mining and subsequent land cleaning. After the 10-year period, the company breaches the contract and refuses to clean the land. The cost of cleaning is $20 million, while the owner only benefits by $1 million. If a court orders specific performance from the company, society would suffer a loss of $19 million. In this case, it would be more appropriate to impose damages on the company instead. This option would be preferred by the owner as they can negotiate an agreement that maximizes social welfare.

In these cases, the cost of performance may outweigh its value for the promisee, leading to ex post inefficiency. Specific performance as a remedy has both positive and negative characteristics. On the positive side, it requires low informational requirements to apply the remedy, avoiding the cost of estimating damages. Additionally, the party that suffered the breach of contract is usually satisfied in terms of their expectations. However, there are also negative aspects to consider. Specific performance requires a court order and takes time. In the case of complex performances, it necessitates costly and difficult supervision by the court. Furthermore, a party forced to comply with the contract may only make perfunctory efforts at best.

4) Damages: General remedies known as damages can be applied to all types of contracts and breaches of contracts. The concept is broadly defined as the amount of money that compensates for any harm experienced by the injured party due to a breach of contract. There are two types of damages: expectation and reliance damages, leading to a remedy that varies in scope.

Expectation damages refer to the monetary compensation that allows the injured party to experience the same level of satisfaction and benefit as if the contract had been fulfilled without any breach. In essence, the party that breaches the contract is obligated to pay the harmed party an amount of money that not only covers the damage caused but also matches the value of the intended performance.

However, there are certain issues associated with expectation damages as they can be challenging to calculate and may give rise to instances of moral hazard. Claimants are required to present evidence of both the existence and extent of damages, with a few exceptions applicable in cases of harm in re ipsa, such as the illegitimate use or deprivation of a productive good.

In Spanish Law, expectation damages are the standard form of compensation for breach of contract. This measure applies when a breach occurs and serves as the replacement for specific performance. Expectation damages are given in cases of misrepresentation, false advertising, and fraudulent actions that amount to a breach of contract.

When determining expectation damages, we must consider the availability of substitutes or cover transactions in order to avoid negative consequences resulting from a breach of contract by the other party. In cases where the seller breaches the contract and the buyer has purchased a generally interchangeable good, the expectation damages will amount to the discrepancy between the price of the substitute transaction and the price stipulated in the contract: Psub-Pc. Conversely, if it is the buyer who breaches the contract and the seller arranges a cover sale, the expectation damages will be equivalent to the difference between the contract price and the price of the new sale: Pc-Psub. Other methods for calculating expectation damages include:

Market damages: (for fungible good with market price) the buyer will receive expectation damages consisting of the difference between the market price (Pm) when the breach of contract occurred and the contract price (Pc). Conversely, the seller will receive the opposite difference.

The scope and magnitude of expectation damages are limited in several ways. One restriction is the foreseeability rule, which states that the breaching party can only be held responsible for damages that were reasonably anticipated or could have been reasonably anticipated at the time of the agreement. These damages must directly result from their failure to fulfill their obligations. For instance, if breaching the contract would cause harm amounting to 100 units that could be foreseen, but the aggrieved party actually suffers a loss of 1000 units, then damages will be constrained to 100 units according to the foreseeability rule. This rule encourages individuals to provide relevant information during contract negotiations because those who suffer harm must disclose what they expect in terms of performance value. In contrast, tort law does not include a foreseeability rule; instead, compensation is determined based on actual damages incurred. Another limitation is the duty to mitigate damages, which requires the aggrieved party to minimize any harm caused by the breaching party's failure to fulfill their contractual obligations.

Reliance damages aim to restore the injured party to their initial state, as if the contract had never existed. These damages cover expenses related to entering into the contract, investments made based on the other party's obligations, and any missed opportunities. They are usually lower in value compared to expectation damages. Limited assets:

The effectiveness of damages in reducing harm caused by individuals may vary. While some individuals can afford to pay for damages and are motivated to take precautions to prevent harm, not all situations are the same. If the responsible party does not have sufficient assets to fully cover damages, the deterrent effect of damages diminishes. Consequently, individuals may not feel obliged to bear the consequences of their actions and will only take precautionary measures based on their financial capacity rather than what is morally right. This problem is commonly referred to as the judgment proof problem.

According to the traditional stance of the Spanish Supreme Court and Spanish Courts, damages for pain and suffering are accepted for breach of contract and awarded generously. These damages serve multiple functions, including the avoidance of difficulties in calculating and justifying the amount of the award.

• In order to provide compensation for harm to personality rights such as the right to life, liberty, and honor. • In order to provide compensation for non-patrimonial values associated with economic goods and rights, such as discomfort, inconvenience, disappointment, and frustration.

• The purpose of punishing intolerable or egregious behaviors is to address a breach of contract. When an individual experiences harm, their utility decreases (moving from point A to point B), but their utility function for money remains unchanged. If the harm is economic in nature, it can be rectified by compensating with money, which restores the individual to point A. However, non-economic harm has a different impact on utility, and the same amount of money cannot fully restore the initial utility (a significant amount would be necessary). An example of this is pain and suffering resulting from accidents or the death of a relative, which cannot be adequately compensated for with money. This is why purchasing insurance for death is futile as it does not compensate for the harm. The hairy hand example illustrates this point.

The text highlights the distinction between expectation and reliance damage by presenting a hypothetical situation involving an individual who experienced hand injury resulting in a 50% loss of functionality. In order to regain full use, the individual entered into a contract with a doctor who guaranteed complete restoration in exchange for payment. Prior to entering this agreement, the individual had reached a state of indifference where various combinations of hand use and money yielded equal satisfaction. This suggests that the person was willing to trade hand functionality for monetary compensation. Unfortunately, after the contract was executed and the surgery took place, the individual's condition deteriorated further, leaving them with only 25% utilization of their hand. The question then arises: what should be the doctor's compensation? If expectation damages are applied, the doctor would be obliged to pay an amount that, when combined with the individual's current 25% hand use, would provide them with equivalent satisfaction as if their hand had been fully restored according to the contract. Consequently, this would elevate the person to a higher level of indifference denoting increased utility.If reliance damages are enforced, the doctor must pay a sum of money that, when added to the individual's 25% hand use, would bring about an equal level of contentment as if there had been no contract and the individual possessed 50% hand use. Consequently, this would restore the individual to their original state of indifference on the curve.

5) Liquidated damages are agreed upon by the parties involved in a contract before any breach occurs, rather than being determined by a Court or arbitration panel after a breach has happened. Most legal systems acknowledge these damages and typically involve the payment of money, although other alternatives may be possible. These damages act as a replacement for Court-awarded damages and can be imposed as an extra penalty for violating the terms of the contract.

The primary concern revolves around whether Courts are obligated to enforce liquidated damages or if they have the discretion to disregard or lower the liquidated damages amount. The rationale behind Courts allowing liquidated damages can be attributed to several reasons:

• In order to ensure the credibility and sustainability of a contract, a significant liquidated damages clause may be required to incentivize the promisee. • The parties involved are better equipped to evaluate the advantages and disadvantages of determining a specific amount, rather than relying on the courts. • Liquidated damages serve to compensate for the tendency of courts to underestimate damages. • If the liquidated damages exceed the expectation damages, the court will enforce the latter. • However, there are economic arguments that support reducing or controlling the level of liquidated damages clauses: - Clauses that result in excessive damages due to inaccurate predictions about future outcomes. - Unexpected external shocks that lead to unforeseen increases in damages payments. - Genuine uncertainty about future costs for one party. - Behavioral biases that cause parties to underestimate the negative impact of a damages clause. This includes over-optimism about future performance and costs, as seen in the example of a gym, and hyperbolic discounting of future outcomes. • Liquidated damages can be seen as hindrances to market entry. • An excessive amount of liquidated damages benefits the parties involved at the expense of third parties who may bid for the breaching party's services. • The promisor agrees to pay a higher amount than expectation damages in exchange for a higher price.The Promisee employs high liquidated damages to obtain a greater payment from a third party who is interested in the promisor's performance. This larger payment from the third party results in an increase in the surplus for the contract parties, which they share. In addition, the inclusion of excessive damages clauses enables the possibility of excessive payment from the third party. However, these clauses also discourage efficient entry by third parties and hinder their ability to successfully bid for the promisor's performance. Therefore, the objective of reducing "excessive" liquidated damages is not to safeguard the breaching party, but rather to protect third parties.

Excessive LD for signaling can be undesired as it may lead to unexpected contingencies that can breach the contract. In some cases, a pooling equilibrium is preferred over a separating one if the penalty for the "good type" creates significant distortion.

6) Termination: Termination, also known as rescission or cancellation in Common Law jurisdictions, is a remedy for breach of contract that allows the aggrieved party to cancel the contractual relationship with the breaching party. This results in the elimination of any obligations that may have arisen from the terminated contract.

Once the contract is ended, both parties are obliged to return what they received under the contract, unless a third party now possesses the goods legally. However, in such a situation, the value of the goods would substitute for the actual goods. This cancellation of the contract's consequences is retroactive in nature, as if the contract never existed.

In Spanish courts, it has been established that termination does not necessitate a lawsuit. However, if the termination is disputed by the other party or its conditions, legal action would be required for restitution. The courts do not determine termination itself, but rather ascertain whether the termination was properly executed by the party involved. The question of when termination can be considered as a remedy is the most contentious issue. It is evident that not every breach or failure to perform allows the aggrieved party to terminate the contract. Instead, a qualified breach (such as a material or fundamental breach) is necessary. This can be defined as follows: • Relevance: The breach must impact the central obligations or duties outlined in the contract, rather than minor or incidental responsibilities. • Duration: The breach must not be sporadic or temporary, but rather likely to recur or continue. • Importance: The breach must significantly affect the interests of the non-defaulting party. Termination does not stand alone; it does not exclude the payment of damages and is typically accompanied by such compensation.