ECON 3800 Prelim 2 Cases & Terms

Contracts

General Rules for Contract Interpretation

Core Rule: Courts apply the objective standard: a term’s meaning is determined by what a reasonable person would understand, not one party’s subjective intent.

When interpreting a contract, courts will generally prefer:

• to give lawful, reasonable, and effective meaning to all terms;

• to give greater weight to specific terms than to general terms;

• to give greater weight to negotiated or added terms than to standard terms

• to interpret terms against the drafter when choosing among reasonable meanings

Implied Warrant of Habitability

Residential leases contain an implied warranty of habitability, where tenant's rent obligation is dependent on landlord's performance. Housing code violations can be raised as a defense to eviction for nonpayment, and breach can justify reducing or withholding rent.

Javins v. First National Realty

Rule: Residential leases contain an implied warranty of habitability, where tenant's rent obligation is dependent on landlord's performance. Housing code violations can be raised as a defense to eviction for nonpayment, and breach can justify reducing or withholding rent.

• Topic: Implied Warrant of Habitability

• Facts: Tenants withheld April rent, citing numerous housing code violations in their D.C.apartment building. The landlord sued for possession. The trial court excluded evidence of the violations and ruled for the landlord.

• Issue: Can housing code violations be raised as a defense to eviction for nonpayment of rent?

• Holding: Yes, residential leases contain an implied warrant of habitability.

• Reasoning: Modern urban tenants rent for shelter and depend entirely on landlords for maintenance. Housing codes reflect public policy requiring habitable. Because residential leases function like consumer contracts, the law implies a warranty that the premises will remain habitable. A tenant's rent obligation is therefore dependent on the landlord's performance — breach of the warranty can justify reducing or withholding rent, and tenants must be allowed to raise violations as a defense in eviction proceedings.

• Must Consider:

  • Whether the alleged violations existed during the period for which past due rent is claimed?

  • What portion, if any or all, of the tenant’s obligation to pay rent was suspended by the landlord’s breach?

Chicago Board of Realtors v. City of Chicago

Rule: A municipality may enact regulations governing landlord-tenant relationships as long as they serve a legitimate public interest and are not arbitrary or unreasonable.

• Topic: Implied Warrant of Habitability

• Facts: Chicago passed a tenant-protective ordinance — capping late fees, requiring habitable units, mandating interest on security deposits, and allowing rent withholding and repair-and-deduct (essentially codified implied warrant of habitability into law). Landlords sued claiming unconstitutionality and sought a preliminary injunction. The district court denied it.

• Issue: Did the ordinance likely violate the Contracts Clause or substantive due process?

• Holding: No; preliminary injunction denied, affirmed.

• Reasoning: Because landlord-tenant relationships are already heavily regulated, any contractual impairment received deferential review (to lower courts or to existing legislation). The ordinance served a legitimate public purpose—protecting health and improving housing conditions—and courts defer to legislative judgments on economic regulation. Landlords were unlikely to succeed on the merits.

• Notable Concurrence/Economic Issues (Posner): Argues against the economic benefits of the pro-tenant regulations → often harm the tenants they seek to help by decreasing housing supply and raising rents (TANSTAAFL); artificially raising the cost to landlords or depressing rent prices will reduce supply and hurt poorer tenants.

  • A city may constitutionally codify the implied warranty of habitability and impose additional responsibilities on landlords, but doing so is unreasonable and unwise.

Shell Oil v. Marinello

Rule: A franchisor cannot enforce a unilateral right to terminate a franchise relationship, including an associated lease and dealer agreement, without good cause grounded in substantial noncompliance. Additionally, if there is grossly disproportionate bargaining power between parties to a contract, a court may void grossly unfair provisions in the contract as against public policy if those provisions clearly tend to injure the public.

• Topic: Good Cause

• Facts: Shell Oil leased a service station to Marinello and entered into a dealer agreement for the sale of Shell products. The agreements allowed Shell to terminate on short notice. Shell later sought to terminate the relationship, and Marinello sued, arguing termination required good cause. The trial court ruled for Marinello.

• Issue: Should Shell could terminate the franchise relationship at will under the contract terms?

• Holding: No. The court held that Shell could terminate the relationship only for good cause.

• Reasoning: The lease and dealer agreement formed a single franchise relationship in which Shell had significantly greater bargaining power. Allowing termination at will would permit Shell to appropriate the dealer’s goodwill. Public policy therefore requires good cause for termination, and because Marinello had substantially performed his obligations, Shell lacked such cause.

Berry v. Barbour

Rule: When a party confers a necessary benefit on another without an express contract, a court may impose a quasi-contract (unjust enrichment) requiring payment if the benefit was reasonably necessary, knowingly retained, and it would be unjust not to compensate the provider.

• Topic: Quasi-Contract and Unjust Enrichment

• Facts: Contractors installing a steel beam in defendant's theater were present when a fire broke out, damaging the roof. The owner was in Germany with no agent authorized to act. Plaintiffs made emergency repairs without an express contract to prevent further damage, then sought payment and a mechanic's lien. Defendant refused to pay, blaming the fire on plaintiffs' negligence.

• Issue: Can a contractor recover for emergency repairs under quasi-contract when no express agreement existed?

• Holding: Yes, judgment for plaintiffs affirmed.

• Reasoning: A quasi-contract is not based on the parties' agreement but imposed by law to prevent unjust enrichment — "the duty defines the contract." The owner was abroad, the building was exposed, and immediate repairs were necessary. Defendant retained the benefit of those repairs; equity required him to pay their reasonable value. The mechanic's lien was enforceable accordingly.

  • Repairs were an emergency (plausible belief that if either parties had talked about it, the plaintiffs would have been chosen to do the work anyway)

Defenses in Contract Law

Formation Defense → Contract was never valid (at the time of contract creation, something prevented the contract from being valid)

1. Mistake

   1. When both parties mutually were mistaken about a basic assumption upon which the agreement was made.

2. Fraud

3. Duress

→ Unconscionability falls under this

Performance Defense → Contract may have been previously valid, but is no longer valid due to certain, subsequent events or actions since the time of contract creation

1. Impossibility of Performance/Impracticality/Frustration of Purpose

Mutual Mistake (vs. Mutual Misunderstanding)

• Mutual Mistake: A contract may be rescinded or reformed where both parties share a mistaken assumption about a material fact that goes to the very substance (essence) of the contract—not merely its quality or value.

  • Substance vs. Quality:

    • Substance: Mistake as to the essential nature of what is contracted → rescission

    • Quality: Mistake only as to quality or value → no relief

• Who bears the risk of the mistake under the contract? Dependent on:

  • Express allocation—contract explicitly assigns risk to that party

  • Conscious ignorance—the party knew they had limited information but contracted anyway

  • Court allocation—it is reasonable under the circumstances for the court to assign risk to that party

Mutual mistake means the parties agreed on the same thing, but both were wrong about a fact in the world

• Mutual misunderstanding means the parties used the same words but never had a shared meaning in the first place. That distinction matters because mutual mistake can make a contract voidable, while mutual misunderstanding can mean there was no contract at all.

Sherwood v. Walker

Rule: If a contract is made based on a mutual mistake of the parties that relates to a material fact such as the subject matter of the sale, the price, or some other fact that materially affects the agreement, the parties may rescind the contract once they learn of the mistake.

• Or, a contract may be rescinded where both parties share a mistaken belief about a material fact that goes to the essential nature of the subject matter, not merely its value.

• Topic: Mutual Mistake

• Facts: Walker sold Sherwood a cow believed by both parties to be barren, for ~$80. Before delivery, Walker discovered she was pregnant and worth ~$750. Walker refused to deliver; Sherwood sued to recover/replevin.

• Issue: Can a contract be rescinded for mutual mistake about a material fact?

• Holding: Yes, seller could rescind. Reversed and remanded.

• Reasoning: Both parties contracted under the shared assumption the cow was barren. A barren cow and a breeding cow are fundamentally different things, not merely different in quality, i.e. a barren cow (beef) and a fertile cow (breeder) was not merely a difference in value, but a difference in the essential character of the property. The mistake went to the very substance of the contract, so no binding agreement existed.

→ Mistake about the nature of the thing being discussed (Relief allowed)

Simkin v. Blank

Rule: For an agreement to be subject to rescission or reformation based on mutual mistake, the mistake must have existed at the time the agreement was executed. / A contract may be reformed or rescinded where both parties were mistaken about the existence of a fundamental asset or fact underlying the agreement at the time of contracting.

• Topic: Mutual Mistake

• Facts: Divorcing spouses divided assets including a Madoff account that did not exist (Ponzi scheme). Simkin argued both parties believed the account had real value and sought. Reformation or rescission of the agreement based on mutual mistake.

• Issue: Can a divorce settlement agreement be reformed or rescinded based on mutual mistake where both parties believed an asset existed and had value, but it was actually worthless?

• Holding: Yes, claim can proceed.

• Reasoning: At the motion-to-dismiss stage, courts must assume the plaintiff’s allegations are true. Simkin plausibly alleged that both parties shared a mistaken belief about the existence/value of the Madoff account. A mistake about the existence or fundamental nature of an asset can qualify as a material mutual mistake, not just a mistake about value. Therefore, reformation or rescission may be appropriate if proven.

→ Mistake about the existence of the thing itself (Maybe relief / harder case to determine than substance like Sherman); versus mistake about the value (no relief)

Frigaliment v. B.N.S. Int’l Sales

Rule: When a contract term is ambiguous, courts interpret it according to the objective meaning a reasonable person would assign, and the party asserting a narrow or specialized meaning bears the burden of proof.

• If the parties to a contract subjectively, but in good faith, construe an ambiguous term differently, courts may look to external factors to determine the proper interpretation of the term.

• Topic: Ambiguity / Mutual Mistake

• Facts: Plaintiff, a Swiss buyer, agreed to purchase “chicken” from the defendant, a U.S. seller. The plaintiff understood the term “chicken” to mean young broilers suitable for frying, while the defendant delivered older stewing chickens. The plaintiff rejected the shipment and sued for breach of contract, arguing that the defendant failed to deliver the type of chicken contemplated by the agreement.

• Issue: Does the term “chicken” in the contract mean only younger chicken?

• Holding: No.

• Reasoning: The word “chicken” was genuinely ambiguous. Plaintiff could not prove it meant only young broilers—USDA regulations, trade usage, and pricing all supported the broader meaning. Court ruled for defendant.

  • When a term is ambiguous, the burden of proof falls on the party claiming the narrower meaning/interpretation (in this case, the plaintiff/buyer).

Ambiguity (Objective vs. Subjective)

Rule: Courts apply the objective standard: a term’s meaning is determined by what a reasonable person would understand, not one party’s subjective intent.

Two kinds of ambiguity:

1. Objective (Mutual Misunderstanding) → Parties disagree on the core meaning of the term.

2. Subjective → Parties agree on the core meaning, but not the extent.

On Exams:

1. Is the term ambiguous?

2. If yes, what is the purposive interpretation—what is the parties’ purpose in signing the contract?

3. Course of performance, course of dealing, usage of trade (in descending order of importance/weighting)

Course of Performance

Repeated occasions of performance by either party during the current contract. There must be (1) repeated occasions of performance; (2) the other party had actual knowledge of these performances; (3) the other party had reasonable opportunity to object; and (4) did not object.

Course of Dealing

Sequence of previous dealings/contracts between the parties; occurred prior to the current contract.

Usage of Trade

Only requires it to be regularly observed over a reasonable period by the great majority of decent dealers. Bounds a party even though they are not a member of the trade because they should reasonably expect the trade meaning to apply. May trump dictionary definition.

Unconscionability (& Test for Unconscionability)

Rule: A court may refuse to enforce a contract (or clause) that is unconscionable—combining a lack of meaningful choice (procedural) with unreasonably one-sided terms (substantive).

• Two-Prong Test:

1. Procedural unconscionability → Problems with the bargaining process

   1. Unequal bargaining power, absence of meaningful choice, hidden terms, fine print, deception

2. Substantive unconscionability → Unfair, one-sided/oppressive contract terms

   1. Severe forfeiture/harsh penalties, cross-collateralization, one-sided obligations/no consideration)

→ Sliding scale (usually need both, but doesn’t have to be equal amounts—a strong showing of one can compensate for less of the other)

Williams v. Walker-Thomas Furniture

Rule:

• Topic: Unconscionability

• Facts: Low-income buyers signed 'lease' contracts with cross-collateralization clauses tying all purchases together — no ownership of any item until all debt paid. Appellant defaulted on payments after paying $1,400 of $1,800 total payments.. Defendant sought ownership of all previous purchases (example of claw-back contract).

• Issue: Is the contract unconscionable, and therefore, unenforceable?

• Holding: Yes.

• Reasoning: Appellant had no meaningful choice (welfare recipients and low-income, so no alternative) + unreasonably favorable terms to seller (claw-back/cross-collateralization)

Consideration

The mutual exchange of promises or obligations between the parties to a contract. It is a necessary element to the creation of a valid contract. In other words, for a contract to be enforceable, both parties must assume some obligation that binds them, rather than make a promise that is gratuitous, meaning it leaves them free to perform or not at their own discretion.

Fiege v. Boehm

Rule: Forbearance [decision not to] from bringing a legal claim can be valid consideration if the claim was made in good faith and was reasonably believed to be valid at the time of the agreement, even if it later proves to be false.

• Topic: Consideration and forbearance

• Facts: Plaintiff (the mother) claimed that the defendant was the father of her child and agreed not to bring a bastardy (paternity) suit in exchange for the defendant’s promise to pay child support. The defendant later stopped paying after blood tests proved he was not the father.

• Issue: Did the mother’s promise to refrain from suing—based on a claim that turned out to be false—still count as valid consideration?

• Holding: Yes, court upheld the contract.

• Reasoning: The mother had a good-faith and reasonable belief in the validity of her claim at the time of the agreement. Because her forbearance from bringing suit was made honestly and was not frivolous, it constituted valid consideration, making the defendant’s promise enforceable despite the later discovery that he was not actually the father.

Additional note on forbearance as consideration: An act or forbearance is not consideration if the party already has a legal obligation to perform the act or forbearance (pre-existing legal obligation created by law or by agreement).

Efficient Breach Theory (Posner)

Breach is economically optimal when promisor’s gain > promisee’s expectation damages

• I.e., if you gain more from breaching than the other person loses, breach is “efficient”

  • Expectation damages + breach = net efficiency gain if surplus goes to higher-value user.

• When breaching party finds it cheaper to breach the contract and pay damages than to uphold their side of the contract

→ Default (but, not always) logic behind rationale behind assigning damages (specifically, expectation damages)

Friedmann Critique of Efficient Breach

Summary: Efficient breach theory is both normatively wrong and descriptively inaccurate. Contracts create property-like entitlements; breach without consent is akin to appropriation. Modern doctrines also go against efficient breach/make it so you can’t breach freely. Additionally, allowing breach generates additional transaction costs, holdout risks, and systemic uncertainty — the “efficiency” gains are often illusory.

Arguments:

1. Ignores moral and institutional role of contracts + treats contracts as a purchasable option / “property-like”

2. Creates holdouts/ripple effects with future contracts → no breach should be implied

3. Logic of efficient breach applies perfectly to “efficient theft”

   1. Ex: you can steal someone’s property and sell it to the highest bidder as long as you pay the person back the original value

4. Breach creates additional transaction costs that may cancel out/outweigh perceived efficiency gains.

   1. Concept of efficient breach assumes low transaction costs and perfect compensation (but doesn’t hold up in reality)

Policy Implications: Strong remedies (specific performance, restitution of gains) better deter opportunistic breach and reduce transaction costs than expectation damages alone.

StubHub Problem

Platform contractual frameworks effectively cap remedies by limiting buyers to refund and credit, rather than full expectation damages. As illustrated by StubHub’s handling of high-demand ticket cancellations, this creates an “efficiency gap” where buyers are undercompensated relative to market losses, enabling opportunistic breach and raising concerns about fairness and deterrence.

• Topic: Efficient Breach

• Facts: Original buyer of the ticket enters into contract with Stubhub, then Stubhub sells that ticket at a premium ⇒ Original buyer reneges because the value of the ticket has skyrocketed after Kobe Bryant’s retirement announcement + he wants to go to Bryant’s last game, so Stubhub no longer has the ticket to sell and the ticket sale/transaction is voided.

  • StubHub provided a full refund of the original ticket + store credit, but didn’t mandate/force delivery

• No court decision → Resolved within platform policy

  • Economically speaking, 20% seller penalty not enough to compensate the buyer for the ticket loss (implications for opportunistic breach)

Commercial Impracticability/Impossibility

Rule: Impracticability excuses performance only when:

1. An unexpected contingency occurs.

2. The risk was not allocated by the contract.

3. Performance becomes genuinely commercially impracticable — not merely more expensive.

   1. High Bar: Added cost alone, even substantial, does not meet the threshold. Courts look for objective impossibility or near-impossibility, not inconvenience or reduced profit.

3-Step Transatlantic Test:

1. Unexpected contingency? Yes — but foreseeability matters

2. Risk allocated? If contract is silent and custom suggests an alternative route/method, risk stays with promisor

3. Commercially impracticable? Must be extreme — threshold is high; court applies stricter scrutiny when event was foreseeable

Transatlantic Financing v. US

Rule: A legal impossibility, which renders a contract voidable, is defined as a thing that is not practicable or in other words, only done at an excessive and unreasonable cost.

• Topic: Impossibility of Performance/Impracticability

• Facts: A voyage charter from the Transatlantic Financing Corporation (plaintiff) sued the United States for the additional costs incurred from the ship’s diversion from its usual route, due to the shutdown of the Suez Canal. Plaintiff argued the contract became “impossible to perform”, and therefore, by delivering the goods through an alternative, US-mandated route, it should be conferred a benefit/paid for the additional costs.

• Issue: Did the contract become “impossible to perform” on the side of the plaintiff, thereby voiding the contract?

• Holding: No; upheld lower court decisions.

• Reasoning: Route was not specified in the contract, closure was arguably foreseeable (Egypt nationalized canal months before), and the added cost (~14% of 3 freight) fell far short of 'excessive/unreasonable.' Cargo, ship, and crew were unharmed.

Shirley MacLaine v. 20th Century Fox

Rule: A plaintiff cannot recover for losses that could have been avoided by reasonable mitigation. However, there is no duty to accept substitute performance that is different in kind or inferior to the contracted-for performance.

• Or, the measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon, less the amount the employee has earned or with reasonable effort might have earned from substantially similar employment

• Topic: Mitigation of Damages (Remedies)

• Facts: Shirley MacLaine was hired for a musical film (Bloomer Girl) by 20th Century Fox. The studio then canceled, constituting a breach of contract, and offered her a different movie, Big Country (western, filmed in Australia, fewer rights). She said no and sued for full pay.

• Issue: Should Plaintiff’s recovery be limited by her failure to accept substitute work in mitigation of damages?

• Holding: No, plaintiff recovered the full $750k.

• Reasoning: A wrongfully discharged employee’s recovery of her full salary must be reduced by the amount the breaching employer can prove she earned or with reasonable effort might have earned. Importantly, the employer must show that the other employment was comparable or substantially similar to that employment of which the employee was deprived. The employee’s rejection of or failure to seek a different or inferior kind of employment may not be considered.

• Dissent: Factual similarity of the two employments required a trial.

Hadley v. Baxendale

Rule: A breaching party is liable only for damages that arise naturally from the breach or that were reasonably foreseeable to both parties at the time of contracting, including any special circumstances that were communicated.

• Only if the special circumstances are clearly communicated to other party at the time of contracting—not at the time of the breach—are you entitled to lost profits.

• Topic: Expectation Damages (Remedies)

• Facts: Plaintiffs operated a mill, and a component of their steam engine broke causing them to shut down the mill. Plaintiffs then contracted with Defendants to have a new part created. When delivery was delayed due to Defendants’ neglect, causing Plaintiffs’ mill to remain closed longer than expected, Plaintiffs sued to recover damages.

• Issue: Are Defendants liable to Plaintiffs for damages suffered by Plaintiffs due to lost profits?

• Holding: No, defendants are not liable for lost profits from mill shutdown.

• Reasoning: Lost profits during closure were NOT recoverable—carrier only knew it was transporting a shaft, not that the entire mill would remain idle. Special circumstances were never communicated. Key: “the defendant could have had a spare shaft” → carrier’s lack of knowledge was the deciding factor.

Two-Limb Rule for Recoverable Damages:

1. General Damages → Losses arising naturally from the breach

2. Consequential Damages → Losses in reasonable contemplation by both parties at the time of contract formation given communicated special circumstances

Hawkins v. McGee

Rule: Contract damages = value of what was promised − value of what was received (not pain and suffering).

• Topic: Expectation Damages (Remedies)

• Facts: Defendant doctor promised the plaintiff that a skin graft operation would result in a “100% perfect hand.” The surgery instead left the plaintiff with a worse condition (the famous “hairy hand”). The plaintiff sued for breach of contract.

• Issue: Damages should be based on expectation damages, meaning the difference between the value of the hand as promised (a perfect hand) and the value of the hand as received, rather than compensation for pain and suffering. The goal of damages is to put the plaintiff in the position they would have been in had the promise been fulfilled, not simply to compensate for injury or punish the defendant.

[Not an actual assigned case though, so probably don’t use this on the exam? Not sure why it was in the review slides]

Cost of Performance vs. Diminution in Value

Where completion cost is grossly disproportionate to the resulting value, damages are capped at the diminution in market value. However, where breach is willful and the promised performance is central to the contract, cost of performance may be awarded.

Breakdown / Decision Framework:

• Cost of Performance → Cost to fully fix the issue/complete the promised work

  • When breach is willful and promised performance is central to the contract

  • Higher damages

  • Focused on fairness and enforcement of the contract

  • Ex: Groves v. John Wunder

• Diminution of Value → Loss in market value

  • When breach is inadvertent and breached clause is incidental to the contract

  • Lower damages

  • Focused on economic efficiency (No point in awarding damages that are significantly disproportionate to value-added)

  • Ex: Peevyhouse vs. Garland Coal

Peevyhouse v. Garland Coal

Rule: Regardless of any agreement of the parties, damages awarded for breach of an agreement to perform remedial work on property should normally be measured by the reasonable cost of performance of the work, but if the contract provision breached is merely incidental to the main purpose in view and if the economic benefit that would result to the owner from full performance is grossly disproportionate to the cost of performance, damages should instead be limited to the diminution in value resulting to the premises because of the nonperformance.

• Topic: Cost of Performance vs. Diminution in Value

• Facts: Defendant, a mining company, leased farm land from plaintiff to perform strip mining and promised to restore the land after leasing. However, defendant did not perform the remedial work. The cost to restore was $29k, while the increase in value from the restoration was $300.

• Issue: Is defendant required to perform the remedial work/land restoration?

• Holding: No, damages capped at $300.

• Reasoning: Clause was 'merely incidental' to main purpose, not central to the contract. Additionally, cost of restoration wildly disproportionate to the economic benefit/value created from the restoration.

• Dissent: Restoration was a deal-breaker for plaintiff and Garland accepted it knowingly. Therefore, the cost of performance should apply.

Groves v. John Wunder

Rule: Damages for willful breach of a construction contract, even if there has been substantial performance, are awarded as the cost of completing the failed performance. For a willful breach of a construction or improvement contract, the injured party is entitled to cost of completion damages, even if that cost is disproportionate to the increase in market value of the property.

• Topic: Cost of Performance vs. Diminution in Value

• Facts: Groves owned and leased out industrial land to John Wunder Co and allowed defendant to remove sand and gravel, so long as he left the land in “uniform grade” condition. However, defendant willfully breached and only took the richest and best gravel—leaving the land broken, rugged, and uneven. Cost of completing the promised grading was $60k, while the increase in value was $12k.

• Issue: Is Plaintiff entitled to damages equal to the reasonable cost of completion?

• Holding: Yes, the proper measure of damages is the reasonable cost of completion of the promised work, not the diminution in the land’s value.

• Reasoning: Because breach was willful (deliberate and in bad faith), cost of performance applies. Owner's right to have the promise performed is not measured by market appreciation → Protection against intentional breach.

Specific Performance and Injunctive Relief

Specific performance/injunctive relief is available when damages are an inadequate remedy — typically because harm is (1) difficult to quantify, (2) involves unique rights, or (3) because future projections are too speculative and costly to litigate.

• Specific performance—court orders a party to do exactly what they promised

• Injunction—court orders a party to stop doing something

→ Issued when calculating damages would be messy, unclear, and expensive

Walgreen v. Sara Creek Property

Rule: Specific performance/injunctive relief is available when damages are an inadequate remedy — typically because harm is difficult to quantify, involves unique rights, or because future projections are too speculative and costly to litigate.

• Topic: Specific Performance and Injunctive Relief

• Facts: Mall landlord tried to install Phar-Mor pharmacy in violation of Walgreen's exclusivity clause. Walgreen’s sought a permanent injunction to stop the installation of the competing pharmacy.

• Issue: Is a permanent injunction enforcing the exclusivity clause proper, or should Walgreen’s should be limited to money damages as an adequate remedy at law?

• Holding: Yes, court upheld the injunction.

• Reasoning: Awarding damages would require years of litigation, expert testimony, and guessing future profits. Projecting 10 years of lost profits, goodwill, and competitive impact would be enormously uncertain. Rather, issuing an injunction (“don’t lease to competitor”) is faster, cleaner, and cheaper.

  • Parties negotiate afterward → creates bilateral monopoly problem + holdout problems, but manageable and better than damages

Liquidated Damages vs. Penalties

• Liquidated damages—pre-agreed amount of money written into a contract that one party will pay if they breach. Usually included in contracts if:

  • It’s hard to calculate damages later

  • They want certainty

  • They want to avoid litigation fights

A liquidated damages clause is enforceable only if:

1. Actual damages were difficult to estimate at contract formation, AND

2. The stipulated amount is a reasonable forecast of probable compensation—not a punishment or deterrent.

Factors for penalty finding:

Grossly disproportionate sum; no attempt to estimate harm; uniform treatment of wildly different breaches; punitive language in contract.

Rye v. Public Service Mutual Insurance

Rule: A liquidated damages clause is enforceable only if it is a reasonable estimate of expected harm at the time of contracting, and actual damages were difficult to calculate. If the clause is meant to punish or deter breach, rather than compensate for harm, it is unenforceable.

• When damages flowing from a breach of contract are difficult to ascertain, a provision in the contract fixing damages in advance will be upheld if the amount is a reasonable measure of the anticipated probable harm.

• Topic: Liquidated Damages vs. Penalties

• Facts: Plaintiff, the City of Rye, hired Defendant, developer, to complete six apartment buildings. Developers had to post $100K bond and pay $200/day for failing to complete the apartments on time. After 100 days, plaintiff sought to recover the full value of the bond.

• Issue: Was the agreement a valid liquidated damages clause or an invalid penalty clause?

• Holding: Affirmed appellant court ruling → agreement was an unenforceable penalty.

• Reasoning: City's actual harm from delay (extra inspector time, tax revenue) was minimal and unquantifiable. $100K bore no relation to any real pecuniary loss. Therefore, damages are unenforceable.

Stormy Daniels / Essential Consultants NDA

Article: "Why Trump Likely Won't Collect the $20 Million He Claims Stormy Daniels Owes Him" (Slate, 2018)

• Topic: Liquidated Damages vs. Penalties

• Facts: The NDA involving Stormy Daniels and Essential Consultants LLC said: If she discloses confidential information of the affair, she must pay $1 million per violation (up to $20M).

• Issue: Is the payment violation clause enforceable?

• Holding: No; unenforceable penalty.

• Reasoning: Liquidated damages must be a reasonable estimate of anticipated harm, not a punishment → (1) No reasonable relationship to actual harm per disclosure (2) Treats a whisper and a magazine interview identically (3) Allows stacking of LD + actual damages + injunction (4) Expressly authorizes punitive damages (prohibited in contract), and (5) Designed to deter/punish, not compensate.

[Not a case, just supplementary example for liquidated damages/penalties]

Haugan v. Haugan

O’Brien v. O’Brien

Irvin v. Smith