Contracts Lecture Notes

Restitution Interest as an Alternative Measure of Damages

• Restitution damages are considered when reliance or expectation damages are difficult or impossible to calculate.
• Restitution aims to restore the non-breaching party to their original position, as if the contract never existed.
• This measure is most appropriate when one party has performed, and the other has not, but proving damages is challenging.
• Damages are measured by the benefit conferred by the non-breaching party on the other party (Restatement Section 344(c)).
• The breaching party must give back the benefit received under the contract.
• A party cannot recover both expectation and restitution damages, or reliance and restitution damages; only one type of damage can be recovered.
• Electing restitution excludes other compensatory remedies.

United States v. Algernon Blair

• Case from the Fourth Circuit, 1973.
• Involves a contract for the construction of a navy hospital in Charleston, South Carolina.
• Algernon Blair (general contractor) contracted with Coastal Steel (subcontractor) for steel erection and equipment supply.
• Coastal Steel began work, initially providing its own cranes but claimed Blair was obligated to supply them per the contract.
• Blair refused to pay for crane rental, breaching the contract.
• Coastal Steel sued under the Miller Act after completing about 28-30% of the work.
• Evidence indicated that Coastal Steel would have lost money if the contract had been fully performed.
• Coastal Steel sought restitution for the value of the benefits conferred rather than suing for breach of contract.

The Miller Act

• The Miller Act (40 USC Section 3131-3134) requires general contractors on federal projects over 100,000 to obtain performance and payment bonds.
• Performance bonds ensure project completion; payment bonds ensure subcontractors are paid.
• Subcontractors cannot place liens on federal property; the bonds provide a remedy for non-payment.
• Claims under the Miller Act are brought against the United States, which holds the payment bond.

Trial Court Findings

• The trial court found Algernon Blair had a duty to pay for crane use and materially breached the contract by not doing so.
• The trial court found that Coastal Steel would have been paid 37,000 upon full completion, but would have incurred costs exceeding that amount, resulting in a loss.
• The trial court awarded no damages due to Coastal's projected loss.

Issue on Appeal

• Can a subcontractor who justifiably stops work due to the prime contractor's breach recover in quantum meruit (the value of labor and equipment furnished), irrespective of whether it would have been entitled to recover that amount in a suit on the contract?
• Can the plaintiff recover under a theory of quantum meruit even though it would have lost money under the contract?

Court's Reasoning

• The court disagreed with the trial court, stating that while the normal contract damages rule is that there are no expectation damages if the party would have lost money, this does not foreclose recovery under quantum meruit.
• Quantum meruit is an equitable remedy that provides restitution when one party is unjustly enriched by the other's performance.
• Quantum meruit differs from unjust enrichment/quasi-contract because it usually involves some contractual relationship or promises made.
• A claim in quantum meruit allows recovery of the reasonable value of services, even if the complaining party would have lost money under the contract.
• Court Rule: It is an accepted principle of contract law, often applied in construction contracts, that the promisee upon breach has the option to forego any suit on the contract and claim only the reasonable value of his performance.

Quantum Meruit

• Quantum meruit allows a promisee to recover the value of services given to the defendant, irrespective of whether they would have lost money on the contract.
• Coastal Steel argued they conferred a benefit on Algernon Blair, seeking to recover the value of the work done in equity.
• The measure of recovery for quantum meruit is the reasonable value of the performance (Restatement Section 347).
• Recovery is undiminished by any loss that would have been incurred by complete performance.
• The contract price may be evidence of the reasonable value of the services but does not measure the value of performance or limit the recovery.
• The standard for measuring the reasonable value of services rendered is the amount for which such services could have been purchased from one in the plaintiff's position at the time and place the services were rendered.
• Coastal provided labor and equipment at its own expense, and Blair retained those benefits without fully paying for them; thus, Coastal is entitled to restitution in quantum meruit.
• It does not matter if you would have lost money based on a contract claim.
• Quantum merit is not concerned about the contract; it's concerned about the value of the services that you provided, allowing you to recover the value of those services.

Disposition

• The case was remanded to the trial court to determine the reasonable value of the labor and equipment furnished by Coastal to Blair.
• The value of that service is presumably less than 37,000, as they didn't complete all the work.
• Coastal is entitled to recover the value of that service, even though it would have lost money on the contract.