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Contracts Outline 4 - Professor Dawson, Study notes of Contract Law

University of Florida (UF)Contract Law

Contracts course outline for University of Florida Levin College of Law class in Contracts.

Typology: Study notes

2011/2012

Uploaded on 03/02/2012

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Remedies
(pp. 194 – 271)
- Most remedies in K cases is money, exceptions are specific performance and
injunctions
- Damages have to be reasonably certain and foreseeable – lots of limitations to
damages
- Contracts damages are inherently conservative, Π shouldn’t be overcompensated
- §344 outlines basic structure of remedies
R § 344 Purpose of Remedies
Judicial remedies under the rules state in this Restatement serve to protect one or more of
the following interests of a promisee:
(a) expectation interest – having benefit of bargain by being put in as good a
position as he would have been in had the contract been performed
(b) reliance interest – being reimbursed for loss caused by reliance on the
contract by being put is as good a position as he would have been in had the contract not
been made
(c) restitution interest – restoring any benefit that he has conferred on the other
party
R § 347 Measure of Damages in General (Expectation Damages)
Expectation interest damages measured by:
(a) loss in the value to him of the other party’s performance caused by its failure
or deficiency, 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.
Expectation damages = Loss in value (contract price) + incidental/consequential loss -
avoided loss
Expectation Damages:
• Usually includes lost profits
• Formula: contract price – benefits
§ Benefits = the costs/expenditures the Π saves by not having to
complete contract
o Allocation of overhead is usually not included in “benefits” b/c a fixed
amount and is not really saved by not having to perform contract
o Cost of completion vs decrease in value:
§ has to be proportionate (Peevyhouse)
§ no economic waste (when have to destroy what has already been
done to repair minor breach, Jacobs & Young)
• deprives owner of right to get what he bargained for
§ If breach is willful (in bad faith), courts are more likely to award
cost-of-completion over diminution-in-value
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Remedies (pp. 194 – 271)

  • Most remedies in K cases is money, exceptions are specific performance and injunctions
  • Damages have to be reasonably certain and foreseeable – lots of limitations to damages
  • Contracts damages are inherently conservative, Π shouldn’t be over compensated
  • §344 outlines basic structure of remedies R § 344 Purpose of Remedies Judicial remedies under the rules state in this Restatement serve to protect one or more of the following interests of a promisee: (a) expectation interest – having benefit of bargain by being put in as good a position as he would have been in had the contract been performed (b) reliance interest – being reimbursed for loss caused by reliance on the contract by being put is as good a position as he would have been in had the contract not been made (c) restitution interest – restoring any benefit that he has conferred on the other party R § 347 Measure of Damages in General (Expectation Damages) Expectation interest damages measured by: (a) loss in the value to him of the other party’s performance caused by its failure or deficiency, 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. Expectation damages = Loss in value (contract price) + incidental/consequential loss - avoided loss Expectation Damages:
    • Usually includes lost profits
    • Formula: contract price – benefits § Benefits = the costs/expenditures the Π saves by not having to complete contract o Allocation of overhead is usually not included in “benefits” b/c a fixed amount and is not really saved by not having to perform contract o Cost of completion vs decrease in value: § has to be proportionate (Peevyhouse) § no economic waste (when have to destroy what has already been done to repair minor breach, Jacobs & Young)
  • deprives owner of right to get what he bargained for § If breach is willful (in bad faith), courts are more likely to award cost-of-completion over diminution-in-value

§ Cost-of-completion awards makes most sense in construction contracts

  • Π has to prove expectation damages with reasonable certainty o Profits from new business o When profits would be based on public whim (entertainment and sporting events) o Cost of completion unknown o Non-competition agreements, difficult to prove lost profits o UCC is more liberal on certainty requirement – doesn’t require mathematical precision Reliance Damages:
  • Used when: Cannot show expectation damages (lost profits) with reasonable certainty, or No legally enforceable contract (promissory estoppel)
  • A built-in part of expectation damages (cost of work already performed)
  • Compensation for expenses made preparing to perform or actually rendering part performance
  • Limited by: o The contract price (prevent windfall for when reliance damages are greater than expectation damages would have been) o Recovery limited to profits – courts usually do not allow reliance damages (expenditures) to exceed expectation (lost profits) damages. Burden of proof is on Δ to show what Πs loss would have been. If Δ can prove that Π would have suffered a net loss on the contract, the Πs recovery is limited to what his expectation damages would have been o Incidental Reliance Damages: not related directly to performing the contract, but made in anticipation that contract would be performed. Courts usually deny recovery of these. o Expenditures prior to signing of contract – not recovered if before contract (not technically in reliance of the contract)
  • UCC: Doesn’t name reliance damages directly, but allows for: o Incidental damages – includes expenses reasonably incurred in inspection, receipt, transportation, care & custody of goods, reasonable charges/expenses o Consequential damages – if seller has reason to know of the particular loss Restitution Damages:
  • It is the value rendered to the Δ by the Πs performance, regardless of how much it cost the Π.
  • If performance has no value to the Δ, there are no restitution damages
  • Goal is prevention of unjust enrichment
  • A remedy for breach when one party commits a material breach, the aggrieved party has right to rescind the contract and recovery restitution damages

o Loss in value caused by the breach is the general rule , no double recovery allowed PEEVYHOUSE v GARLAND COAL & MINING CO (1962) [proportionate] Unusual circumstances for strip-mining contract. Land owners contracted with Co for them to do lots of work to restore the land ($29K worth of work), but would have increased value of the land only $300.

  • Jury awarded $5000 (no one knows where that # came from, more like a tort award, K awards are usually closely tied to actual damages – either the $29,000 or the loss in value of $300 – not some # in between) à general damages – an English term, not permissible in US
  • Issue of bad faith – doesn’t make a difference in terms of law if Δ breached in bad faith b/c parties are allowed to breach. But makes court more willing to award damages to Π if breach was made in bad faith (and juries too); Very subjective.
  • Court emphasizes that this part of the contract (restoring the land) was merely incidental to purpose of contract. Real purpose was to mine the land. Issue of damages has to be the focus of the contract, not incidental.
  • Damages also have to be proportionate to loss in value [R § 348(2)(b)] – here, the $29K it would take to repair the damage was clearly disproportionate to the value of the land ($3K) à economic waste – would have to be the focus of the contract if courts were going to enforce R § 348 Alternatives to Loss in Value of Performance (2) If breach results in defective or unfinished construction and loss of value to injured party is not proved with sufficient certainty, he may recover damages based on: (a) diminution in market price , OR (b) reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him JACOBS v YOUNG (case we’re covering later) Judge Cardozo
  • Involves economic waste of tearing down new house to replace the brand of pipe used.
  • Cardozo refused to force damages when it was an unreasonable waste and disproportionate to loss in value AIELLO v NATIONWIDE TRACTOR TRAILER Owner breaches by not paying contractor for services completed.
  • Have to figure out who breached first, b/c then other party didn’t. If Π stopped work because Δ stopped paying, they would not be in breach.
  • BUT, also have to figure out if not paying was a material breach. If so, then deal is off, Π can stop performance and can sue and recover damages. If not, then Π is in breach for stopping work and Δ can sue.
  • Trial and appellate courts used different formulas, but had same outcome (often the case). Trial formula: (costs + profit) – amt already paid = damages awarded Appellate formula: contract price – cost of completion [cost + amt paid] = damages
  • The 2 nd formula is easier to calculate, don’t need to bring in extra #s to calculate profit, but doesn’t really make a difference. UCC 1-305 Remedies to be Liberally Administered (a) Remedies provided … must 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 but neither-consequential or special damages nor penal damages may be had except as specifically provided in the UCC or other law. [expectation measure] UCC 2-703 Seller’s Remedies in General [index section] If buyer breaches, seller may: (a) withhold delivery of goods; (b) stop delivery [2-705]; … (d) resell and recover damages [2-706] (parallel to cover damages) (e) recover damages for non-acceptance [2-708] (f) cancel
  • 2 - 706: seller can re-sell item in market and recover damages of difference in costs. This assumes that buyers don’t breach unless market price goes down, but not always true. When it is true, seller may be forced to sell item at lower price than had contracted for, in that case they get to recover the lost amount. UCC 2-711 Buyer’s Remedies in General [index section] (1)If seller refuses to deliver, buyer may cancel and whether or not he has done so may recover: (a) cover expenses and have damages re all goods affected whether or not they are identified in the contract [2-712] (b) recover damages for non-delivery [2-713] … UCC General types of damages: market price, cover, incidental, & consequential
  • 2 - 708, 2-713 are parallel provisions: with both, you do not have to actually move the goods (seller still has the goods), whereas with cover or resale damages you do.
  • Prior to UCC, courts generally used market price to determine damages
  • 2 - 711 doesn’t list incidental or consequential damages, but doesn’t mean buyer can’t recover – they stand alone in 2- 715 BURGESS v CURLY OLNEY’S INC. (1977, Nebraska) [cover damages]
  • Issue: determining damages from contract price or market price
  • Location of transaction is important to determine market price

§ Cannot usually apply to cars b/c not standard price (certainty problem)

  1. goods have to be “ of unlimited quantity ” or readily available. UCC 2-712 “Cover”; Buyer’s Procurement of Substitute Goods (1) After breach by seller, buyer may “cover” by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller. (2) Buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages (2- 715), but less expenses saved in consequence of seller’s breach. (3) Failure of buyer to effect cover does not bar him from any other remedy. KGM HARVESTING v FRESH NETWORK (1995, Cal) (p.258) [cover] Contract for purchase of lettuce (44,000 lbs @.09).
  • This is a cover case, Π doesn’t ask for consequential (lost profit) damages.
  • No dispute over the cover issues: good faith, w/o unreasonable delay, reasonable purchase, substitute goods (in many cases, it is not this simple and have lots of dispute over these issues)
  • Dispute is over whether damages are recoverable since the loss was made up from other sources
  • What remedy would put Π in position would have been in had Δ not breached (market price vs cover amount)? Cover, b/c to cover Π had to actually purchase the goods from someone else (their real loss); more precise than market value.
  • All court looks at is THIS contract. It doesn’t matter that Π had contract with someone else, that is not at issue for this case. That the forward contract protected the buyer doesn’t matter in eyes of the court.
  • Also, profit the Δ made by breaching doesn’t matter – people are allowed to breach as long as they pay the difference to the party they breached. However, the decision is designed to inhibit breaches. If they didn’t award cover costs, there is no incentive for Δ to not breach again (a judgmental aspect to this case).

Mitigation, Foreseeability, Certainty, Liquidated Damages, Specific Performance (pp. 271-339) ROCKINGHAM COUNTY v LUTEN BRIDGE CO. (1929) [mitigation] County Board (Δ) grants contract to Luten Bridge Co (Π) to build a bridge, connecting 2 roads. Lots of political stuff goes on (force guy to resign, others don’t show up again) and County rescinds contract. Δ builds it anyway (!!) and then sues for payment.

  • County breached by rescinding contract after it was finalized. B/c County breached first, Luten wouldn’t be in breach if he stopped work.
  • And Π should have stopped construction on the bridge then, and could have recovered his expenses ($1900 at that point + lost profits). But he didn’t, he kept working – constructed a useless bridge in middle of forest that has no connecting roads b/c they were never built.
  • Court won’t allow him to recover because he acted in way to increase amount of damages, when you are supposed to mitigate them as much as possible. Once one party breaches, other party has responsibility to not make damages worse.
  • Could have pled for restitution damages, but can’t force County to pay if they never wanted the bridge (bridge has no value, in middle of no where) R § 350 Avoidability as a Limitation on Damages (1) Except as stated in (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation. (2) The injured party is not precluded from recovery by the rule stated in (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss. [a search requirement] HYPO: assume Luten was a small company, they did stop work, but were later offered job by another county but they refused. Could they recover lost profits?
  • NO, b/c they could have mitigated expenses by taking the other job.
  • If they were a larger company and could have expanded to take both jobs, then they could recover lost profits.
  • Courts assume companies can expand and do 2 jobs at same time, whereas individuals cannot (Shirley Maclaine) UCC cases provide format that protect buyer when not sure if seller has breached or not (and don’t want to be the one to breach first, b/c then you are liable): Write letter to seller inquiring about their intent to fulfill contract and asking S to do something to ensure their performance or will consider them to be breaching. Then have clear breach from S. SHIRLEY MACCLAINE PARKER v 20TH^ CENTURY FOX (1970) [mitigation] Contract to do a musical for $750,000, film co changes mind and wants her to do western instead, she refuses and sues for her full salary. Trial court provides SJ for Π. Issue: is her refusal to do the western movie a failure to mitigate damages?

(1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made. (2) Loss may be foreseeable as probable result b/c it follows from breach (a) in ordinary course of events, OR (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know. (3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation. UCC Article 2: broken down differently: 2 - 715(1) : list of damages that are recoverable 2 - 715(2) : any loss resulting from general or particular requirement or needs which seller at time of contract had reason to know and could not have been reasonably prevented by cover

  • If Πs can’t recover lost profits b/c of foreseeability, what can they recover? o Reliance is a possibility, here no evidence of reliance expenses o Restitution interest: benefit conferred to other party – reimburse for cost of shipment? Not so simple, because he did deliver the item and it was returned. It just didn’t happen as quickly as was promised. Even if Π can recover the cost of delivery, it is so small in comparison to their loss it doesn’t really matter o Consistent with notion that don’t want to over-compensate injured parties, but foreseeability rule may serve to under-compensate injured parties o What do we do? Make sure other party is aware of any special circumstances o EX – take pottery to post office, it is broken, what happens? Cannot recover unless warn them that item is fragile; have to buy insurance to protect the item. If it is then broken, can collect the insurance (Hadley v. Baxendale) – declare that there is something special about item and what loss would be if in fact it is broken (charge insurance premium), loss still doesn’t fall on them. Courts wouldn’t apply foreseeability rule on the government. § Why use insurance? Not in business of determining risks. Won’t be broken or delayed everytime. Prob of harm is less than 100%, the purpose of insurance is to cover that risk. Who bears the risk and thus who insures? § Shipper takes the risk, up to us to (1) make carrier aware of the risk, and (2) bear the cost of the insurance KENFORD CO. v ERIE COUNTY [certainty of damages] Contract re building a dome in Buffalo, NY. Kenford to build dome and then “agreed to agree” that Kenford would manage the dome for 20 years.
    • Agreements to agree are not usually enforced b/c of uncertainty
  • Why is this one enforceable? Not simply an agreement to agree: o It provided terms if they do not agree, it becomes a 20-yr contract instead of a 40-yr contract (not uncertain terms!) o Breach isn’t about failure to reach 40-yr lease; breach is that 20-yr lease provided for management of dome that was never built
  • What is issue in the case? o Whether damages can be determined with certainty o If parties contemplated the damages at time of making the contract
  • Holding? (D: “I don’t really know”)
  • Foreseeability argument of court “is a bunch of nonsense” – makes holding look more solid, but doesn’t really hold water (of course they could foresee the damages at time of contract)
  • Court says there is too much speculation about what lost profits would have been (depends on lots of unknown variables). Does this make all lost profits claim uncertain?
  • R 352 – leaves question of reasonable certainty entirely up to the court: R § 352 Uncertainty as a Limitation on Damages Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.
  • Why would past hx make it more certain? Provides best predictor of actual loss (but not a foregone conclusion, economic forecasts are wrong all the time, but still best we have)
  • Π winds up getting no damages at all.
  • NEW BUSINESS RULE – fact that it is a new business makes a difference. Makes it harder to persuade the court as to what their profits would have been. Only have projections – which are less certain than actual facts of previous profits. Loss profits are provable by a new business & potentially recoverable, but burden of proving is very high.
  • Cannot use figures from comparable business b/c have to prove YOUR loss as result of other parties breach. It is not okay to say that would take amount of what loss would have been to someone else. Have to show personal loss!! R § 33 Certainty (1) Even if have manifestation of intent, terms of contract have to be reasonably certain. (2) The terms of a contract are reasonably certain if they provide a basis for determining breach and for giving appropriate remedy.
  • Distinguish b/w uncertainty at point of formation and time of breach (is remedy too uncertain or were terms of contract uncertain?). Uncertainty principle can operate on at least 2 levels WASSERMAN’S v MIDDLETON (1994) [liquidate damages]

§ Another reason: to dissuade leasor from breaching; an inappropriate reason – will not be enforced (penalty).

  • Difficulty of proof: either have a hard time showing loss or not. Not a factor in this case (easy to show what loss of profits would have been, have 18 years of history).
  • Unreasonably large: court looks at numbers, don’t show much profit at all, but by using gross receipts, would get lots of money – a windfall, unreasonably large
  • Fact of the matter is the clause in this case is a penalty – meant to deter the other party from breaching.
  • What about in construction cases, where builder gives up $200 (2% of profits) a day for every day they go beyond deadline. These clauses are routine, why? To prevent breach. Being late = breach. Is it a penalty? (probably not unreasonably large)
  • § 356: permissible if reasonable in light of anticipated (at time of contract) or actual loss (at time of breach) … and difficulties of proof of loss.
  • In hypo, would be impossible to calculate loss if road contractors delay completion of construction on Archer Rd.
  • How know when it is reasonable? A very difficult formula to work with. o Or actual loss – reasonable at time of breach. Kenford, may not have been able to anticipate damages if breach after 10 years, but at time of breach after 10 years, can reasonably calculate losses. o Reasonableness can be calculated at either point of time: at time of contracting or time of breach.