Contracts

what are the three damage interests?

expectation, reliance, and restitution

what are expectation interests?

the “benefit of the bargain” - the court attempts to put the promisee in the position in which the promise would have veen had the promise been performed

what are reliance interests?

put the promisee back in the position in which the promisee would have been had the promise not been made

restatement § 349

what are restitution damages?

put the promisor back in the position in which the promisor would have been had the promise not been made

Hawkins v. McGee

doctor told the plaintiff he would do a skin graft of a scar on his hand and the boy would be in the hospital for three or four days, and then could go back to work with a perfect hand

expectation damages are the presumptive remedy

Sullivan v. O’Connor

plaintiff - a professional entertainer agreed to two procedures to improve the appearance of her nose; the defendant ended up requiring three procedure, and the appearance of the nose worsened

rule: in some instances, expectation damages may not serve the client well

easier not to have to prove lost wages from promised condition

Hooker & Sons v. Roberts Cabinet

• Hooker & Sons subcontracted to have cabinets removed, Roberts did not perform properly

  • Hooker claims on appeal that the trial court failed to use the UCC

• tests for whether the UCC applies to mixed goods and services contracts

  • Center of gravity test

  • Nature of the contract test

  • Designation of the parties

• the court uses the dispute center test and determines that this is a service so the UCC does not apply

center of gravity test

nature of the contract test

designation of the parties

KGM Harvesting v. Fresh Network

• KGM Harvesting contracts to sell fresh lettuce to the fresh network at a fixed price, but the cost of lettuce increases, and KGM says they require a higher payment. Fresh Network refuses to pay and has to ind lettuce elsewhere, which they then sell to Castellini on a cost-plus profit contract. KGM sues Fresh Network and Fresh Network countersues

• UCC argument

• holding: KGM will be responsible for prejudgment interest

default rules

rules parties could displace with express provisions

immutable rules

rules that are either impossible or costly to displace through contracts

Groves v. John Wunder Co.

• the Groves made a contract with the defendant to remove sand and gravel from their property and leave it “at a uniform grade, substantially the same as the grade now existing on the roadway.”

• the defendant breached the contract deliberately by failing to honor the restoration clause

• Groves won cost of completion - the law seeks to award the disappointed party what they were promised

• Dissent: The award is grossly disproportionate to the value of the land

Peevyhouse v. Garland Coal Mining Co.

Peevyhouse owned a farm containing coal deposits. In November 1954, they leased the premises to the defendant for five years for coal mining purposes, and the defendant agreed to perform certain restorative and remedial work at the end of the lease period - defendant failed to perform

Acknowledge Groves rule but say deviation is appropriate where (1) the provision was “merely incidental” to the main purpose of the contract, and (2) the economic benefit of the full performance of the contract is grossly proportionate to the cost of completion

Hadley v. Baxendale

mill-shaft case

Baxendale’s carried on extensive business as millers, and when the crankshaft broke, they sent it off as a pattern for the new one. The clerk told the shipper they needed the shaft the next day (special entry to hasten the delivery)

rule: Damages for the aggrieved plaintiff were limited to those that

• arose naturaly in the usual course of things; or

• were within the contemplation of both parties at the time of contracting

Hector Martinez and Co. v. Southern Pacific Transportation Co.

big machine case

rule: damages from loss of use are a reasonably foreseeable result of delayed transportation

Morrow v. First National Bank

safe deposit case

tacit agreement - one agrees to all terms of a contract that can reasonably be assumed to be part of the agreement but cannot be liable for special circumstances of which one did not have actual notice

Economic Waste Doctrine

if a breach results in defective or unfinished construction and the loss in value to the injured party is not proven with sufficient certainty, the injured party can claim damages either

• the diminution in market value, OR

• the reasonable cost of completion, so long as this cost is not clearly disproportionate to the probable loss of value

foreseeability doctrine

a court will limit recoverable damages to those that are

1. considered as arising naturally in the course of things, or

2. were in the contemplation of both parties, at the time they made the contract, as the probable consequence of a breach (R2d § 351; Hadley v. Baxendale)

foreseeability is judged at the time of contract formation

foreseeability doctrine - capital goods sub-rule

capital goods such as machinery can have a use value, and it is foreseeable that deprivation of the machine’s use will cause a loss of value (Martinez v. Southern Pacific R.R.)

one way to measure the use value of a capital good is by looking at its obvious value

What is the minority rule on the foreseability doctrine?

plaintiff must show a tacit agreement, which includes not only defendant’s mere knowledge that a breach of contract will lead to special damages, but also that defendant tacitly agreed to assume responsibility (Morrow v. First National Bank)

Certainty Doctrine

in order to recover for a loss, P must be able to establish that loss “with reasonable certainty” (R2d § 352, CCC v. Dempsey)

(most often comes up when P claims losses due to lost profits)

consequences: the reliance measure is the “fallback” in cases where P cannot overcome the certainty doctrine

Chcicago Coliseum Club v. Dempsey

boxer case

a party can only recover damages that flow naturally from the breach

Anglia Television v. Reed

british TV case

bad law - a non-breaching party may recover expenditures in lieu of lost profits before and after the agreement was made (reliance damages can happen before and after a contract)

avoidability doctrine

plaintiff cannot recover damages that could have been avoided with reasonable efforts and without undue costs (“risk, burden, or humiliation”) to himself (Rockingham v. Luten Bridge; R2d § 350)

rockingham county v. luten bridge co.

the bridge case

don’t pile up damages after a breach

Parker v. 20th Century Film Corp.

bloomer girl case

wrongful termination damages = promised salary - wages earned or with reasonable effort may have earned from substantially similar employment

What is the narrow employment rule for the avoidability doctrine?

In order to show an employee has failed to avoid or mitigate extra costs, the employer must establish that alternative employment was available and that it was neither different nor inferior to the original position

(Parkver v. 20th Century Fox)

if employee actually finds and accepts alternative work, the resulting salary will be deducted from potential damages

If employer can show that such comparable employment was available, the employee must then show that she made reasonable efforts to obtain comparable work

punitive damages

punitive damages are not recoverable for a breach of contract unless the action constituting the breach is also a tort for which punitive damages are recoverable (Restatement 2d § 355)

liquidated damages

damages for breach by either party may be liquidated in the agreement but only at the amount that is reasonable in light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on ground of public policy as a penalty (Restatement 2d § 356)

stipulated damages

all penalties and liquidated damages clauses are a form of stipulated damages

if a court decides not to enforce a stipiulated damages clause what is it classified as?

a penalty clause

if a court decides to enforce a stipulated damages clause, what is it classified as?

a liquidated damages clause

Wassenaar v. Towne Hotel

Wassenaar signed a 3 year term agreement with a stipulated damages clause saying if the contract was terminated by the hotel, they were responsible for the entire 3 years of compensation

rule: a stipulated damage clause will be upheld if the harm caused by breach is difficult to estimate at the time of contracting and damages are not unreasonably disproportionate to the harm

Lake River v. Carborundum

domestic steel overpay case

rule: a contract provision that contains a single, unmodifiable sum to be paid as damages for all breaches is an unenforceable penalty clause

lost volume seller exception

applies when there is a large supply and a limited demand

common law overlaying and modifying statute - not found in the UCC

Neri v. Retail Marine Corp.

Plaintiff contracted to purchase a new boat (for $12,587.40) from defendant on which they made a deposit ($4,250). Six days after the date of the contract, plaintiff's lawyer sent to defendant a letter rescinding the sales contract because of health problems (in anticipation of expenses).

Even though Retail Marine was able to sell the boat, the court awarded them what they would have gotten had the contract been performed and incidental damages (because since he had multiple boats, he could have sold 2 had the contract been performed)

UCC § 2-718(2) & (3) - Liquidation of Damages; Deposits

Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds

(a) the amount to which the seller is entitled by virtue of terms liquidating the seller's

Bush v. Canfield

• the buyers were entitled to their entire deposit because restitution damages are not limited by the contract price

• If the entire sum had been paid ($14,000), then the plaintiffs would have been entitled to recover the value of it at New Orleans

  • Market-based damages "as if" he had covered

• If they had paid nothing, he could recover only nominal damages (because he can't say that he lost money)

• The Swift opinion is still considered good law in most jurisdictions - courts frequently allow restitution theories of recovery to exceed expectation damages

  • Reason - courts think of restitution as distinct from the other two theories of relief

  • Less of a remedy for relief

  • If expectation and reliance are unlikely to make a client happy, there is a chance that restitution could make them happy

Restatement 2d § 373

• On a breach by nonperformance that gives rise to a claim for damages for total breach or on a repudiation, the injured party is entitled to restitution for any benefit that he has conferred on the other party by way of part performance

• The injured party has no right to restitution if he has performed all of his duties under the contract and no performance

Britton v. Turner

Rule: in a special contract calling for performance and payment at the end, none of the payment has to be recovered if the work is not done; but there is an exception where a substantial part of the work is done (benefits given and accepted)

• Quantum meruit - how much it was worth

  • Britton claims the work he did in those 9 1/2 months has value and he deserves something for that

• The trial court sides with Britton and Turner appeals

• The appellate court affirms the jury and awards $95 to Turner

Cotnam v. Wisdom

implied contract - “a contract implied by the law rests upon no evidence, it has no actual existence, it is simply a mythical creation of the law”

quasi-contract

how is the penalty doctrine for stipulated damages asymmetrical?

it only cares about unjustifiably high damages, the doctrine does not kick out unreasonably low damages

Loveless v. Diehl

Option to buy case

specific performance is the presumptive remedy for land, even if damages can be calculated

for land, uniqueness is presumed

Scholl v. Hartzell

non-unique corvette case (too many of them)

good are not presumed to be unique

there is not an exclusive or immediate right to property if the only payment made was a deposit

Sedmak v. Charlie’s Chevrolet

unique corvette case

specific performance for a unique good is an adequate remedy

In re Mary Clark

indentured servitude case

preclusive rule against affirmative injunctions - a court will almost never force action

Lumley v. Wagner

Opera Singer case

the skills of a person must be unique to force a negative injunction/covenant

negative covenants cannot be to broad in scope

Dallas Cowboys Football Club v. Harris

all-star running back case

unique does not mean one of one

the standard is if the same service is not easily obtained, it is not impossibility to obtain the service

specific performance

is available, but only in cases where the withheld performance is:

• unique, rendering the remedy at law inadequate,

• and if performance is possible

what is the presumption for contracts dealing with land?

uniqueness

what is the presumption for contracts dealing with goods

in favor of damages

when is specific performance available to sellers?

in an action for the price (U.C.C. § 2-709)

a seller must show they cannot resell the goods after reasonable efforts

a seller must hold the goods for the buyer to collect

when is specific performance available to buyers?

U.C.C. § 2-716

The buyer must show that goods are unique

The buyer has a right of replevinfor goods identified to the contract if after reasonable efforts, he is unable to effect cover

affirmative covenants

are very rarely enforced - never against an employee, almost never against an employer

negative covenants

may be enforced if uniqueness is proven, but the covenant must be reasonable in scope

an example is a noncompete clause

What are the sources of contract law?

• the UCC (unifrom commercial code)

• case law

• restatements of law

What four policy commitments does contract law purse?

retributive justice

corrective justice

distributive justice

economic efficiency

UCC § 2-105

definition of goods

“means all things which are movable at the time of identification to the contract for sale other than the money in hich the price is to be paid”

also includes the unborn young animals and growing crops and other identified things attached to realty as described…

UCC § 2-711 through 718

relevant sections for buyers

UCC § 2-711

buyers option to cover

(1) where the seller breaches, the buyer may either…

(a) “cover” and have damages (§ 2-712) as to all the goods affected…or

(b) recover damages fo nondelivery

UCC § 2-712

buyer’s procurement of substitute goods

(1) after the seller’s breach, the buyer may “cover” by making in good faith and without unreasonable delay:

any reasonable purchase of or contract to purchase goods in substitution for thouse due from the seller

(2) buyer’s recovery from seller: cost of cover - contract price + incidental/consequential damages - costs/losses avoided

(3) failure of B to effect cover…does not bar him from any other remedy

UCC § 2-702 to 710

UCC § 1-106

expectation damages

(1) The remedies provided for by this act shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed…

Restatement 2d § 347

the injured party has a right to damages based on his expectation interest measured by

(a) the loss in the value to him caused by the other party’s performance

plus…

(b) any other loss, including incidental or consequential loss caused by the breach

less…

(c) any cost or other loss that he has avoided by not having to perform

Restatement § 348

if breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, the injured party can claim damages either

(a) the diminution in market price of property; OR

(b) the reasonable cost of completion or remedying breach, SO LONG as this cost is not clearly disproportionate to the probable loss of value to him

Restatement § 351 - foreseeability doctrine

(1) damages are not recoverable for losses that breaching party did not have reason to foresee as a probable result of breach at time of contracting

(2) foreseeable loss = loss following from breach

(a) in ordinary course of events; OR

(b) as a result of special circumstances that breaching party had reason to know

(3) court may limit damages for foreseeable loss by excluding lost profits, limiting plaintiff to her reliance interest, or otherwise…to avoid “disproportionate compensation.”

Restatement § 352

certainty doctrine

renders unrecoverable any portion of the plaintiff’s damages that evidence cannot establish with reasonable certainty

Restatement 2d § 349

Reliance Damages

“as an alternative to the measure of damages stated in 6 347, the injured party has a right to damages based on his/her reliance interest, including

• expenditures made in preparation for performance or in performance…

• …less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed (expectation “cap”)

Restatement § 346

Right to nominal damages

(1) the injured party has a right to damages for any breach by a party against whom the contract is enforceable unless the claim for damages has been suspended or discharged

(2) if the breach caused no loss or if the amount of the loss is not proved under the rules stated in this chapter, a small sum fixed without regard to amount of loss will be awarded as nominal damages

Restatement § 350

avoidability doctrine

(1) except as stated in subsection (2), damages are not recoverable for loss that the injuredparty could have avoided without undue risk, burden, or humiliation

(2) the injured party is not precluded from recovery by the rule stated in subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss

UCC § 2-711

UCC § 2-712

UCC § 2-706

UCC § 2-708

Seller’s damages for non-acceptance or repudiation

(1) the damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages…but less expenses saved in consequence of buyer’s breach

(2) if the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done when the measure of damages is the profit together with any incidental damages, due allowance for costs reasonably incurred and due credit for payments or proceeds of resale

UCC § 2-713

UCC § 2-704

UCC § 2-718 - Liquidation or Limitation of Damages; Deposits

(1) damages for breach by either party may be liquidated but only at an amount which is reasonable in light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy

(2) where the seller justifiably withholds delivery of goods because of the buyer’s breachm the buyer is entitled to restitution of any amount by which the sum of his payment exceeds

(a) the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance with subsection (1), or

(b) in the absence of such terms, twenty per cent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller

(3) the buyer’s right to restitution under subsection (2) is subject to offset to the extent that the seller establishes

(a) a right to recover damages under the provisions of this article other than subsection (1)

(b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract

UCC § 2-715

UCC § 2-716

buyer’s right to specific performance

(1) specific performance may be ordered where the goods are unique or in other proper circumstances

(2) the..decree..for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just

(3) the buyer has a right of replevin for goods identified to the contract after a reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing

UCC § 2-709

Restatement 2d § 373

(1) Subject to the rule stated in subsection (2), on a breach by nonperformance that gives rise to a claim for damages for total breach or on a repudiation, the injured party is entitled to restitution for any benefit that he has conferred on the other party by way of part performance or reliance

(2) the injured party has no right to restitution if he has performed all of his duties under the contract and no performance by the other party remains due other than payment of a definite sum of money for that performance

Note: breach must be material

UCC § 2-719

contractual modification/limitation of remedy

(1) subject to the provisions of subsection (2) and (3) of this section and of the preceding section on liquidation and limitation damages,

(a) the agreemnt may provide for remedies in addition to or in substitution for those provided for in this article…

(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy

(2) where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this act

(3) consequential damages may be limited or excluded unless the limitation is unconscionable

Restatement § 356

liquidated damages and penalties

(1) damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.

A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty

Restatement § 35

offeree’s power of acceptance

(1) an offer gives to the offeree a continuing power to complete the manifestation of mutual assent by acceptance of the offer

(2) a contract cannot be created by acceptance of an offer after the power of acceptance has been terminated in one of the ways listed in § 36

Restatement § 36(1)

an offeree’s power of acceptance may be terminated by

(a) a rejection or counter-offer by the offeree, or

(b) lapse of time, or

(c) revocation by the offeror, or

(d) death/incapacity of the offeror or offeree

Restatement § 42

revocation by communication

An offeree’s power of acceptance is terminated when the offeree receives from the offeror a manifestation of an intention not to enter into the proposed contract

Restatement § 43

indirect revocation

offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect

UCC § 2-205

Firm offers

an offer by a merchant to buy or sell goods in a signed writing which by its terms give assurances that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may sych period of irrevocability exceed 3 months

CISG Article 16

(1) until a contract is concluded an offer may be revoked if the revocaton reaches the offeree before he has dispatched an acceptance

(2) however, an offer cannot be revoked:

(a) if it indicates, whether by stating a fixed time for acceptance or otherwise, that it is irrevocable; or

(b) if it was reasonable for the offeree to rely on the offer as being irrevocable and the offeree has acted in reliance on the offer

restatement 2d § 40

rejection or counter-offer by mail or telegram does not terminate the power of acceptance until received by the offeror, but limits the power so that a letter or telegram of acceptance started after the sending of an otherwise effective rejection or counter-offer is only a counter-offer unless the acceptance is received by the offeror before he receives the rejection or counter-offer

restatement 2d § 64

acceptance by telephone or other medium of substantially instantaneous two-way communication is governed by the principles applicable to acceptance where the parties are in the presence of each other

CISG Article 18(2)

“an acceptance of an offer becomes effective the moment the indication of assent reaches the offeror”

CISG Article 16(1)

“an offer may be revoked if the revocation reaches the offeree before he has dispatched an acceptance”

Restatement 2d § 26

preliminary negotiations

a manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent

Restatement 2d § 29

to whom an offer is addressed

(1) The manifested intention of the offeror determines the person or persons in whom is created a power of acceptance

(2) an offer may create a power of acceptance in a specified person or in one or more of a specified group or class of persons, acting separately or together, or in anyone or everyone who makes a specified promise or renders a specified performance

Restatement 2d § 33 - Certainty

(1) even though a manifestation of intention is intended to be understood as an offer, it cannot be accepted so as to form a contract unless the terms of the contract are reasonably certain

(2) the terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy

(3) the fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is not intended to be understood as an offer or as an acceptance

restatement 2d § 27 - existence of contract where written memorial is contemplated

manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof…

…but circumstances may show that the agreements are preliminary negotiations

UCC § 2-207

additional terms in acceptance or confirmation

(1) a definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made (question: is there a valid contract?)

(2) (question: what terms does the contract contain?) the additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

• (a) the offer expressly limits acceptance to the terms of the offer;

• they materially alter it; or

• notifiaction of objection to them has already been given or is given within a reasonable time after notice of them is received

(3) conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this act (question: is there a valid contract?)