Bernstein/Baird Contracts Outline

Spring 2009

Chapter 1:

Remedies for Breach:

A. The Expectations Damages Principle

Ways to calculate the value of the three different types of Damages

-Expectation: Expenditures plus the profit made on the contract

-Reliance: Expenditures

-Restitution: Value rendered to the defendant

Reoccurring Themes:

  • Courts never allow over compensation, but are okay with under compensation
  • Contract damages are usually under compensatory; they usually don’t fully make whole the client
  • This is incentive to make a contract with equally beneficial consideration so that no parties breech.
  • Goal of contract damages is to:
  • Compensate; regulate behavior; and punish/prevent bad behavior

Holmes’s definition of common law duty to keep contract: with a legally binding promise, one can either perform or pay damages

Translate as Expectations Damages Principle: (Typical measure of damages for breach of contract)

-Known as giving the P the benefit of the bargain.

-Enough $ to place breachee in same position as would have been if promise’d been performed – and no more.

-Normally, this means that the P is awarded the profit which she would have made had the contract been performed.

-Rationale: forces party who thinks about breaching take into account other’s possible losses. Also normative claim that breacher “should” bear costs for breach.

-The formula for calculating expectation damages is usually 1) the value of the D’s promised performance (contract price), minus, 2) whatever benefit, if any, the P received from not having to complete his own performance.

  • Usually the benefits in (2) are expenditures which the P would have had to make to complete his performance under the contract

Alternatives:

  • Reliance damages:
  • When the court can’t accurately measure expectations damages, they P may recover Reliance damages
  • Damages that are designed to put the promisee in the same position that she was in before the contract was made.
  • Court usually rewards out-of-pocket costs incurred in the performance he has already rendered.
  • Restitution:
  • When Expectation nor Reliance damages are appropriate the P may recover Restitution damages
  • Here the court will force the D to pay the P an amount equal to the benefit which the D has received from the P’s performance.
  • Damages in amount necessary to ensure that the breaching party does not gain from breach
  • (goal is to prevent unjust enrichment, we don’t want contract breaker to gain from breaking)
  • This leaves the disappointed promisee out to dry because this approach doesn’t address there interest.

Rep case: Surgery (Hairy Hand), expectation, value differential

  • Hawkins v. McGee– Hairy hand case. Doc makes the hand even worse after surgery.
  • Key Question: Was there a contract?
  • “Guarantee” statement (I will make the hand 100% better or good) + acts (inducement, solicitation, pressure, etc.) held to be a contract.
  • Key Question: What type of damages should be awarded
  • Expectation Damages: held to be difference between hand after operation versus what it was promised or contracted to be “perfect hand.” Recuperation, pain & suffering, etc don’t count.
  • Rule: “As a general rule, the measure of the vendee’s damages is the difference between the value of the goods as they would have been if the warranty as to quality had been true, and the actual value at the time of the sale, including gains prevented and losses sustained, and such other damages as could be reasonable anticipated by the parties as likely to be caused by the vendor’s failure to keep his agreement and could not by reasonable care on the part of the vendee be avoided.”
  • Holding: Damages are the difference in value between a good hand, and the value of hand in the present condition

Rep case: Surgery (Dancer Nose job), reliance

  • Sullivan v. O’Conner – Cocktail Dancer case. Three attempts at cosmetic nose surgery, all failed.
  • Key Question: Was there a contract?
  • Yes
  • Key Question: What are the correct damages?
  • Court in this case departs from “Hairy hand standard of Expectation”
  • Reliance Damages awarded; court argue that awarding full compensatory expectation damages, which are usually awarded to commercial contracts, could have a chilling effect on patient-doctor relationship, and so they use the reliance standard which is a middle ground; it gives the patient some money but at the same time they don’t fine the doctors so heavily that it chills there practice.
  • Notes: The reputation of parties matter; a judge and jury will look differently at a stripper vs. a Broadway actress. And a no name Doctor vs. a well known Dr.

Valuation Problems: Even after we decide that expectation damages are in order, and we know the cost of the contract or the cost and value of land, there is still a difficult question of how to decide expectation damages.

Rep case: Nursing Home, failure to complete, Expectation, Cost of completion

  • Louise Caroline v. Dix – Contract to build nursing home was breeched with no justification
  • Partway through construction Dix stopped building without justification. Auditor found that Nursing Home suffered no damages because the cost to complete was less than the contract price minus what had already been paid. P appealed, claiming it was entitled to value of completed building minus value of existing building.
  • The two options are the cost of completion (smaller amount) or the difference in value / decrease in value (larger number)
  • Court denies, because the plaintiff is entitled to what makes them whole, and no more. The larger amount would be vastly overcompensating.
  • Furthermore, in failure-to-complete cases damages are limited to cost of completing and or repairing.
  • Note: Unless the contractor can show with some specificity what it would have cost him to complete the job, he will not be able to recover his expectation damages.

Why not overcompensate: We don’t want this because then you would have people finding any reason to claim breach of contract in hopes that they would be overcompensated.

Ceiling: cost of completion (cost of leveling land in Groves and Peevyhouse) – b/c that’s exactly what they ask for.

Damages cannot be greater.

Floor: Dimunition in value. b/c if they didn’t care whether land were leveled or restored, could sell land to someone who did and get increase in value they bargain for.

Efficient Breach: Courts will sometimes allow an efficient breach if it will benefit the breaching party and compensate the breached against party.

Rep Cases: Gravel pit, Expectation, Cost of Contract (completion)

  • Groves v. John Wunder Co: Case for gravel removal, and part of the contract requires the defendant to leave the land at a level grade. Wunder completes the contract but refuses to level, because it would cost $60,000 to level the land, but the land would only be worth $12,160 leveled.
  • Key Question: What damages? Cost of completion (60,000) or difference in value of land (end product 12,000)
  • Rule: “Defendants here are liable to the plaintiff for the reasonable cost of what defendants promised to do and have willfully declined to do.” SO the D had to pay the 60K
  • DISSENT: Groves is receiving 500% more than the property would be worth. This is distinct from the case in which someone is building a structure. The only thing he would have gotten from leveling the land is its market value, so why pay him more.
  • Notes: The type of business is important; judge and jury will look differently at a dusty old gravel pit vs. a family ran farm (a lot of sentimentality here)
  • Economic waste argument comes up, court doesn’t want to encourage spending 60,000 on something that will be valued at 12,000
  • This eco-waste argument is partially based on an objective valuation of the land, but if it was a subjective valuation then you would take into consideration if the owners felt that it was worth investing the money for maybe sentimental reasons.
  • You also don’t want to shift any duties if you don’t want to; if the P would have just charged 60,000 more then he could have paid someone to do it and there would be no issue.

BUT

Rep case: Coal Mine pit, expectation, Value Differential (Diminution), Economic Waste

Peevyhouse v. Garland: P leased ½ land to defendants for coal mining. Lease provided for D to fill in all pits & smooth surface at completion. D didn’t. Cost of completion = $29k. Diminution in value = $300. S.C. awarded $300. Held that primary purpose of contract was recovery of coal, and remedial work was “incidental.” Statute prohibited recovery in damages greater than would’ve gained for full performance on both sides.

why not other way around since: Groves a businessman so little subjective value to land while Peevyhouses live on farm, also Peevyhouses explicitly rejected offer earlier and insisted on restoration clause.

  • Court frowns upon economic waste, 29K to gain $300 in property value
  • Possibly restitution at work in Groves.
  • Also possibly like specific performance: parties can bargain around gains for breach. Groves in fact did not spend his award on restoring the land.
  • Peevyhouses never in fact restored the land- but maybe they couldn’t afford to, or restoration value > market value but < cost of restoration.
  • In Peevyhouse, advantage of awarding this damage would’ve been: put incentives to bargain well in beginning.

Coal company in best position to know cost of restoration. Information forcing rule, not expectation.

Expectation Damages in Operation:

Contract/Market Differential:

-Under the common law, when a market exists for a good or service, standard measure of damages = difference between contract price & market price (at the time of breach) + incidental expenses (i.e. costs to enter new contract). If the P purchases cover at a rate higher than market rate, then the P suffers the lost.

-This was changed by the UCC, it now says that the P can recover the difference between cost of cover (replacement goods) and the contract price, but it must be reasonably priced cover.

-Acme Mills & Elevator Co. v. Johnson: (Sales contract breach, expectation market differential, efficient breach)

  • Contract for wheat deliver. Market price at time of breach was less than contract price. Breach, but no damages.
  • Notes:
  • When do we want to encourage breach of contract? Posner argues for efficient breach of contracts
  • So if a breach can make one person better off and no person worse off then it is said to be efficient. So if the breaching party pays the expectation cost and comes out better then it is a good breach.
  • Missouri Furnace Co. v. Cochran: ( Sales/forward contract, spot market, wrongly decided)
  • Cochran breaches a forward contract to sell a large amount of coke to Missouri Furnace at $1.20 a ton. They were short about 30,000 tons, and rescinded the contract. Plaintiff made a new forward contract at $4.00, the market rate at the time. P wants to recover the difference between original contract price and the new contract price. After February 27th, the price returns to about $1.30
  • Rule: Plaintiff should get the difference and value between the spot market on the several dates that coal was to be delivered and the original, not the difference between the new contract and the old contract.
  • BUT, reason for entering contract – more certainty. Therefore, shouldn’t correct measure be substitute futures contract price (minus original contract price)? (Prof. Bernstein thinks this case was wrongly decided)
  • Notes:
  • Forward Contract: a contract that calls for performance in the near future; you do this to relieve your mind from having to worry about market conditions.
  • Anticipatory Breaches (repudiation): when D renounces contract before performance is due. Also see UCC §§2-712 & 2-713: if seller repudiates, buyer’s damages should be calculated re: market price at expiration of “commercially reasonable” time after buyer learned of breach. Differs for common law’s focus on time of performance.

Lost Profits

-Wholesale/retail differential: ceiling on seller’s damages; differential represents incidental costs that seller faces in finding another buyer. But, seller may sell less than otherwise b/c consequences of breach are so big.

-Neri v. Retail Marine Corp: (Lost volume seller, recover lost profits)

  • Neri contracts to buy boat from defendant, sends in deposit, but rescinds when needed operation -> can’t afford boat. Boat had already been delivered to D by that time and was sold to another customer for same price. P sues for deposit back. D argues that but for P’s breach, would’ve sold 2 boats and made 2 profits. If you can argue that you would have sold two if the first person would have made good then you can recover for loss of profits. Neri did recover.
  • Damages calculated re: UCC. Damages = lost profit + incidental expenses. Governed by UCC 2-718.
  • Notes: There are a few reasons why you wouldn’t want to pursue loss of profits
  • Because you would have to divulge the amount of profit you make off of every sale, this could cause your buyers to think they are being over charged, your employees to think they are underpaid, or even your supplier to think they are not charging you enough.
  • In this case you would either not want to pursue the suit or you may want to try to just get the other party to settle maybe they will be intimidated by an impending lawsuit

-Illinois Central R.R. Co. v. Crail: (recovery for cover, spot market v. replacement futures contract)

  • This case is not really unique, but good to talk about
  • Crail argues that he can’t buy coal in such small quantities and that he should be able to go out and buy a whole new car load and the RR should pay for the whole carload less the amount cost of what was missing out of the other.
  • Illi. Argues that crail buys coal all the time and he can just get a little more next time he goes. At the wholesale price.
  • If crail wanted the retail differential then he would have to prove that he needed to get the coal immediately for maybe a customer then he would be forced to buy at retial cost.
  • But because he wasn’t going to use it immediately then he should have just waited until he could get it at the wholesale cost.
  • Rule: Common law remedy should only provide recovery for the injury suffered. In these circumstances the market cost was not the measure of the loss, because it was able to be replaced at wholesale.

B. Reliance as Proxy for Expectation Damages

-Sometimes expectations damages difficult to measure (eg, lost profits measurement may be speculative)

-Reliance damages as proxy, usually awards less than expectation measure because you just show what you spent on reliance of the contract.

  • Problems: difficulty of measurement (a promise can induce subtle changes in behavior, etc. all of which can be “reliance”); giving promisee bad incentive to incur too many costs; giving promisor bad incentives -> more broken promises since courts usually underestimate real reliance costs (for instance, reliance usually doesn’t include

-Chicago Coliseum Club v. Dempsey: (Reliance damages, Only recover for cost incurred after contract)

  • Dempsey breached a contract to fight for a fight promoted by CCC.
  • The P first tries to get an injunction to stop Dempsey from fighting, the court grants a negative injunction, which says that he can’t fight in the other arranged fight hoping that it would persuade him to fight in the CCC fight. The court wouldn’t grant a positive injunction because the law looks down upon injunctions to force people to do things, similar to slavery.
  • When you are going to the court to try to get an injunction you have to be able to prove that if this act happens money damages will be the damages sought but assessing the amount will be really hard to figure out. Like in the Dempsey case
  • P sued for lost profits + incurred expenses (expectation) but court did not award lost profits b/c too speculative. Court did not try to get at all reliance costs. Only awarded expenses incurred after the contract was signed and up until they were given notice that Dempsey wasn’t going to take part in the fight. (Didn’t measure opportunity costs or pre-contractual costs).
  • The court also denied recovery for things that were not contingent on the fight and would have been paid for anyway such as the cost of a staff.

-Security Stove & Mfg. Co. v. American Ry. Express Co: (Reliance, R1 recovery)

  • In Security stove the P paid the D to deliver a product on a specific date for a exhibition
  • The D breached contract because they didn’t deliver every piece
  • The court ruled that because they weren’t going to sell the stove but that it was for display you can’t really figure out what the loss profits or sales are
  • For this reason the court decides that reliance damages are in order; so the court says that they can recover all expenses occurred before the point that they realized a part of the stove was not delivered.

-L. Albert & Son v. Armstrong Rubber Co.:(Reliance, R1 recovery)