Class 23 Notes: Certainty & Agreed Remedies

Week 12 - Last Online Week

Almost to the end of the semester. Focus needed for the remaining two weeks.

Class 23 - Overview

• Split into three lectures:
  • Lecture 1: Recap of last live class and discussion of Kvasse v Murray case.
  • Lecture 2: Introduction to nonmonetary relief and Oliver v Ball.
  • Lecture 3: Reed Foundation v Franklin d Roosevelt for Freedom Park.

Recap of Last Live Class

Certainty as a Limitation on Damages

• Discussed through the lens of ESPN v Major League Baseball.
• Plaintiff bears the burden of proof to show a proper basis for ascertaining damages.
• Damages must be susceptible to ascertainment, not based on mere conjecture or guesswork.
• Quote from the case:
  • "A plaintiff seeking compensatory damages has the burden of proof and should present to the court a proper basis for ascertaining the damages it seeks to recover. They must be susceptible of ascertainment in some manner other than by mere conjecture or guesswork."
• When the existence of damages is certain, but only the amount is uncertain, the plaintiff can still recover substantial damages but must show a stable foundation for a reasonable estimate.
• Heightened pleading standard for loss of goodwill, business reputation, or future profits.
  • Claimant must prove the fact of loss with certainty and the loss must be reasonably certain in amount.
  • Damages must be directly traceable to the breach, not remote or due to other intervening causes.
• In ESPN v MLB, the court concluded that baseball offered no evidence of its actual damages.
  • Baseball's subjective belief that damages were significant was insufficient without required proof.
  • Baseball claimed reputational damage and loss of future opportunities due to games not airing on Sunday night, but did not quantify these damages.

Agreed Upon Remedies: Dobson Bay v la Sonrisa

• General rule: A liquidated damage provision is enforceable if it compensates the non-breaching party rather than penalizing the breaching party.
• Purpose of liquidated damages: Provides certainty when actual damages are hard to calculate and alleviates potentially expensive litigation.
• Limits: Parties cannot set penalties for breach because contract remedies are compensatory, not punitive.
• A contract term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy because it is a penalty.
• Damages must compensate for the loss suffered due to the breach, not punish the breaching party.
• Reasonableness Test (Restatement 356):
  • The amount is reasonable if it approximates either the loss anticipated at the time of contract creation or the loss that actually resulted.
  • Non-breaching party does not need to prove actual damages to enforce a liquidated damage provision if it is reasonable in relation to anticipated or actual losses.
• Role of Difficulty in Proving Losses:
  • Courts consider the difficulty of proving that a loss occurred or establishing its amount with certainty.
  • The more difficult it is to establish the amount of loss, the more willing a court will be to enforce a liquidated damages provision.

Kvase v Murray Case (Kansas Court of Appeals, 1991)

• Plaintiff (Kvase), an independent insurance adjuster turned baklava businessman, contracted with Great American Foods (run by Murray) to provide 24,000 cases of baklava over one year.
• Liquidated Damages Provision: $5 per case for each case remaining undelivered if the buyer refuses to accept or repudiates delivery of the goods.
• Plaintiff delivered 3,000 cases; Murray refused to purchase more.
• Plaintiff sued for 105,000 (5 per case x 21,000 undelivered cases).
• Plaintiff estimated profits per case at 3.55, or 4.29 including time and labor.
• Trial Court: Concluded liquidated damages could not be recovered because lost profits were too speculative.
  • Court compared plaintiff's previous yearly income as an insurance adjuster (20,000) to the claim (105,000), finding the disparity too great to enforce the clause.
  • This analysis was deemed nonsensical; prior income as an insurance adjuster is irrelevant to the baklava contract.

UCC Governance

• The contract involved the sale of goods (baklava), so the Uniform Commercial Code (UCC) governs the transaction.
• Whether parties are merchants is irrelevant; the key is the sale of goods.
• Under the UCC, like common law, the propriety of liquidated damages is a question of law for the court.

Trial Court's Reasoning

• The trial court concluded that using expected profits to formulate liquidated damages was improper because the business enterprise lacked duration, permanency, and recognition.
• The court was essentially saying that the plaintiff couldn't use projected profits as the basis for liquidated damages because he was new to the business.

Court of Appeals' Analysis

• The Court of Appeals disagreed with the trial court's reasoning for using the plaintiff's prior unrelated income.
• The court references UCC 2-718, which allows for liquidated damages but only at an amount that is reasonable in light of the anticipated or actual harm caused by the breach.
• The statute also mentions the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is void as a penalty.
• This UCC language is very similar to Restatement 356.

Reasonableness Test Criteria

1. Anticipated or actual harm caused by the breach.
2. Difficulty in proving loss.
3. Difficulty in obtaining an adequate remedy.

• The plaintiff's accountant had calculated the baklava production cost before the contract was signed. If each case sold for 19, the plaintiff would earn a net profit of 3.55 per case, or 4.29 per case with labor.
• The court notes that either of these figures (3.55 or 4.29 per case) would put the plaintiff's projected loss at 16 to 41% less than the liquidated damages provision (5 per case).
• The court questions why the liquidated damages were fixed at 5 per case if the plaintiff contemplated profits between 3.55 and 4.29. It might be a windfall for the plaintiff and a penalty for Great American.
• A better measure of the validity of the liquidated damages clause would require comparison of the actual loss profits caused by the breach to the 5 per case amount.
• The court notes the plaintiff made no attempt at trial to show an actual loss of 5. Therefore, based on the contemplated profits at the time of contracting, the 5 seems unreasonable and like a penalty.

Court's Ruling

• The Court reverses the trial court for using an impermissible factor (prior income as an insurance adjuster).
• The case is sent back to the trial court for a factual determination of the reasonableness of liquidated damages in light of the actual profits or cost of production.

Key Takeaway on Liquidated Damages

• Parties can contract for agreed-upon remedies, but the limitation is that they must serve a compensatory role and not a punitive role.

Other Agreed Upon Remedy: Limitation to Repair or Replacement of Goods

• Often, contracts limit a party's remedy to repair or replacement of the good purchased, which is another type of agreed-upon remedy, just nonmonetary.