Sharon Zheng CONTRACTS Fall 2011 Andrew Newcombe

Sharon Zheng | CONTRACTS | Fall 2011| Andrew Newcombe

REMEDIES FOR BREACH OF PROMISE

(1) The Interests Protected

Case / Facts / Rules, Issues, Principles
Wertheim v. Chicoutimi Pulp
AC 1911 / Expectation Interest
Payment for the loss of bargain.
Difference between performing K and damages awarded for breach →same. / “In giving damages for breach of contract, the party complaining should, as far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed.” — “It is a just principle.”
Complaining party gets what they expected.
K breacher suffers a loss, but not more than what they’d have lost had K been performed.
Improves commercial functioning by making it not profitable to breach K. Pressure to keep promises so parties can build future plans.
Bollenback v. Continental Casualty
Oregon SC 1965 / P insured by D and faithfully paid premiums. P attempted to file claim (‘63), told policy lapsed (‘59) for non-payment. D’s mistake. P rescinds K because of repudiation by D. / Restitution Interest—From 1959, D was unjustly impoverishing premiums from P, which created unjust gains for D, as they repudiated K (albeit by mistake).
Recission (undo K) an unusual, equitable remedy →insurance K: utmost good faith.
Anglia Television v. Reed
QB 1972 / P expends money for film, aside from lead actor, who K is signed. D back outs. P sues for all expenses. D responsible for such damages, for he know of expenditures at the time of K. / Reliance Interest—“throwaway costs”—
If expectation damages uncertain →possible to claim wasted expenditure.
D ought to have known that if he breached K, all expenditure would be wasted, whether or not it was incurred before or after K formed.
Courts had a reasonable expectation (2/3) that pre-K expenses would have been covered had K been performed: profit/break even/loss
A.I. Ogus / Should P have right to choose between reliance and expectation interest?
Should pre-K expenditures form part of the reliance interest? / Policy Consideration: Puts P in position had the K not been made. Protects P from a bad bargain at the expense of D.
Doubtful, for expenses would have still been incurred, so does not put P in position had K not been made. Pre-K not reliance, but hope.
Hawkins v. McGee
NH 1929 / K for “100% perfect hand.” Doctor insists on a number of occasions.
Faulty Performance. / Would a reasonable person, hearing doctor’s words, believe he was actually promising a 100% hand; or only expressing his opinion?
No damages for pain and suffering. Pain and suffering is what was bargained for a perfect hand. Expectation measure awarded.

(2) Special problems in measurement

Case / Facts / Rules, Issues, Principles
Cost of Substitute Performance, or Economic Value?
Carson v. Willitts
OLR 1930 / K for 3 oil wells. D bored one well then refused to carry on. / Damages for Loss of a Chance
Difficulty in estimating quantum is no reason for refusing to award any damages.
Distinction: (i) an absence of evidence makes it impossible to assess damages; (ii) assessment is difficult because of nature of the damages. (ii) = no ground for refusing substantial dmgs.
Groves v. John Wonder / Lease agreement. P leases land to D. Condition of removing gravel / leveling land exchanged for gravel, lack of competition, use of factory. D willfully took only good gravel and did not level land. / First, D paid $105K and cost of leveling land. Cost of performance = $60K. However, property value, if K performed = $12K. Court reverses initial reward for value of land. Finds expectation measure was proper: (i) breach of K willful; (ii) promise of K trumps econ. waste.
Dissent: If cost of performance grossly more than benefit returned →punishes D. Waste.
Peevyhouse v. Garland / P sues for breach of K to restore a strip-mining site. / SC of Oklahoma refuses to follow Groves.
If vast disparity between cost of performance and benefits conferred upon innocent party →courts may not award (economic waste). However, if P’s interest in performance is more than purely economic →courts may award even if econ. wasteful.
Lost Volume
Sale of Goods Act
1990 / 48(2): “The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events form the buyer’s breach of contract.” / Award: Difference in-K price and market price at the time goods ought to have been delivered, or if there is no such fixed time, then at the time of the refusal to deliver. 49(3)
If Sale of Goods Act does not apply (an unavailable market) →lost volume awarded— the lost profit margin (supplier/dealer).
Thompson v. Robinson
1955 / Insufficient demand to absorb all the cars; so if purchaser defaults →loss of sale. / There is a loss above and beyond the difference between K-price and market price, for there is a lost profit margin.
Charter v. Sullivan / Demand exceeded supply. / No loss of a sale.
Contrary Principle: The dealer (plaintiff) must show there was a loss of a sale (no market avail). So unless the purchaser (defendant) can prove, on the contrary, that the dealer would have sold the car, the courts will find that the dealer lost the profit on the car.
Loss of Chance
Chaplin v. Hicks / P = 1 of 50 persons shortlisted for 12 positions. Deprived by breach of K for interview. / Entitled to proportionate damages for loss of the chance.
Folland v. Reardon
OCA 2005 / “Lost chance is well recognized as a basis for assessing damages in contract.”
“In K, proof of damage is not part of the liability inquiry.” / (1)P must proves on BoP that but-for D’s breach →P had a chance to obtain benefit or avoid loss.
(2)Chance lost was sufficiently real and significant to rise above mere speculation.
(3)Outcome depended on someone or something more than the P himself.
(4)Lost chance had some practical value.

(3) Remoteness

Case / Facts / Rules, Issues, Principles
Reasonable Contemplation of Allocated Risks
Hadley v. Baxendale
EC 1854 / Common carrier did not deliver broken shaft to manufacturer in a reasonable amount of time. Only shaft available and mill ceased operations. P sues for lost profits as a result of excessive delay. / To be recoverable, losses have to be:
(1)normally expected to arise from breach
(2)reasonably contemplated by both parties
(if special circumstances →communicated)
With respect to (1) →would a reasonable person think loss would result from breach?
With respect to (2) →special circumstances must be reasonably contemplated by parties.
Apply: Fails on (1) & (2). Common carrier cannot be expected to bear the risks for loss of profits of a factory; special circumstances not communicated.
Policy Considerations: Parties, when forming K, must have the opportunity to bargain about who will bear the risks and how much it is worth to agree to bear the risk. It is not fair to hold the K-breaker liable if the resulting loss was too remote.
Fuller and Perdue
/ Foreseeability
Circularity
petition principii
“Begging the question” / “Proper test for determining compensation is whether losses should have been foreseen by the promisor at the time of K.”
What losses were foreseeable? That which a reasonable man would foresee. What would a reasonable man foresee? What the court feels that he ought to pay.
Special Knowledge
Horne v. Midland Railway
EC 1873 / Railway supposed to ship shoes for lucrative K supplying French army. Special circum. communicated to station master. Missed deadline for delivery and Horne had to sell for a cheaper price. Sued for lost profits. / BLACKBURN J: Special circumstances must be written into the K that the railway would accept the risk of the special loss.
Theory not generally accepted by later courts.
Facts: Charges for shipping modest; common carrier; not allowed to refuse to carry; station master did not have power to change K in order to manage the additional risk.
Victoria Laundry v. Newman
1949 / Laundry purchases boiler from engineering firm to (1) expand business with (2) a lucrative dying K. Boiler not delivered in a reasonable amount of time. P sues for loss of profits of 1&2. P recovers only lost profits (1). / Applies Hadley: What would a reasonable engineer selling a boiler likely foresee that the laundry company would use it for?
“Liable to result in the ordinary course of things” does not include (2) special dying K.
No special knowledge communicated the lucrative dying K. D could not bargain risk.
Munroe Equipment v. CFP
Man. CA 1961 / K for rental of 2nd hand tractor for clearing woodcut. Tractor broke down in 2 days, worked sporadically, until dying. P sues for loss of profits. / Use of tractor to clear entire woodcut was not reasonably foreseeable →lost profits remote.
Nature of K (“accidental run-in”) leads to inference that tractor was not important.
Had D contemplated liability for these losses, it is unlikely they would allow the particular 2nd hand tractor to bear the risks.
To what extent is this case distinguishable from Victoria Laundry on the facts?
Scyrup v. Economy Tractor
Man. CA 1963 / 2nd hydraulic part of a tractor fails. P attempts to rent new part, but equipment keeps breaking down. P makes known to D that equipment was “needed in a hurry and in good working order.” / Distinguishable from Munroe on facts—the way K was negotiated.
The loss was reasonably foreseeable to result from the breach. Applying test:
(1)D aware that in the ordinary course of business there would be loss of profits sustained.
(2)Knowledge of special circumstances contemplated by D.
DISSENT: Scope of K not contemplated. Information insufficient. High degree of evidence req. for reasonable foreseeability test.
Cases Distinguished on Facts: (1) amount of information communicated; (2) formality of contract formation; (3) lucrative losses
Generally, if loss = foreseeable →compensable regardless of whether the quantum = greater than what D expected it to be.
Contemporary Applications: Is this risk real enough to be reasonably contemplated?
Chartered Party Law: Deviation from route = serious breach. Substantial risks; K accepts risks of route. Deviation = unknown risks.
The Heron II
HL 1969 / Ship deviated from agreed upon and route and sugar delivered 9 days after normal time it should have been delivered. Price of sugar fell. Ship owners sued for breach of K and loss of profit.
Test (qualifying Hadley 1): what flows naturally? What a reasonable person, in position of D, thinks is a sufficiently likely loss. / Losses (difference between sale price at expected date of return and date of actual return) found to be recoverable.
Fluctuation of the market = reasonably foreseeable; not certain to result, but a “real and serious risk” that prices would fall.
Hadley rule modified: Was the information available to the D at the time of K-formation sufficient for D to bear responsibility for the risk of that K being breached?—req. real risk.
Achilleas
HL 2009 / Ship chartered to Ds for a specified period of time. D keeps ship beyond terms of K. Ship owners enter into lucrative K for new charter upon date of return. Price negotiated down because of 9-day delay. P sues for loss of profits.
A modification of Hadley? Extreme market fluctuations may be too great a risk to bear in certain commercial contexts. / No majority. 3v3 split decision. Damages either:
(1)Difference between K-price of chartered party (D) and market price or charters during 9 day period. (~100k)
(2)Price of lucrative K. (~1000k)
Court, reHadley: (1) is reasonably foreseeable and normal for Chartered Party cases.
P, following Heron II, argues fluctuating market is reasonably foreseeable. Ergo (2).
Hoffman awards (1). Looks at K itself: what does K say and mean in its commercial context?
“A party is not going to be liable for losses, even if they are foreseeable, if they are not the type or kind of which they can assume the risk or responsibility.”
Is the loss too remote? (1) What would a reasonable person think would normally arise from a breach? Standard: strong possibility.
(2) Did the parties know something special about the situation that would occur if K was broken? Standard: strong possibility.
Hoffman—Achilleas—modification: What liabilities would be reasonably expected to be assumed and contracted for?
D’s knowledge (expert?); nature of business (common carrier?); nature of product; sophistication of parties; customs of the trade (expectations in the marketplace—Achilleas—ordinary allocation of risk; proportionality; temporal remoteness.

(4) Intangible Injuries (Aggravated Damages) and Punitive Damages

Case / Facts / Rules, Issues, Principles
Addis v. Gramophone
AC 1909 / Upon termination, P sues for breach of employment K. Lower court awards intangible losses for wrongful dismissal. / Courts reject:
(1)Emotional damage plaintiff suffered
(2)Nasty conduct of employer
Punitive/intangible damages have no place in the law of K; not reasonably foreseeably by D.
Does not distinguish two heads of damages.
Public policy reasons motivating:
(1)Stiff-upper lip theory—primary objective of K law is economic.
(2)Even if lawfully terminated, employee still likely to experience emotional distress.
Jarvis v. Swan Tours
QB 1973 / P books tour based on brochure. Holiday consid-erably inferior to what he expected. Judge initially provided difference between what he paid and what he got. P wanted intangible losses: loss of enjoyment. / New head: loss of entertainment and enjoyment.
If K promises entertainment and enjoyment →damages can be awarded for disappointment & distress caused by breach.
“The right measure of damages is to compensate him for the loss of entertainment and enjoyment which he was promised, and which he did not get.”
Vorvis v. ICBC
SCC 1989 / Wrongful dismissal. P out of work for 7 months before finding employment. Considerable emotional distress and psychological treatment. Breach of K because lack of due notice.
If employment-K→due notice(unless cause). / Aggravated damages arerecoverable if D’s conduct could give rise to an independently actionable wrong. If not, courts reluctant.
Punitive damages recoverable only if D’s conduct = independently actionable wrong.
P could not prove termination without reasonable notice caused the distress.
Terminating employment (even wrongfully) is not in itself an independently actionable wrong.Thus, damages not awarded.
Back to Baxendale: No longer necessary that there be an independent actionable wrong before damages for mental distress can be awarded for breach of contract, whether or not it is a ‘peace of mind’ contract…
Fidler v. Sun Life
SCC 2006 / P denied long-term disability benefits by insurance. Implied term in insurance K that insurer acts in good faith.
Test:
(1)(a) Is it reasonably foreseeable that the breach of K would result in emotional damage? — by:
IN THIS CASE:(b) Is an object of K the securing of a psych benefit?
(2)Is the emotional damage sufficient to warrant compensation? / Damages for mental distress in a “peace of mind” K should be seen as an expression of the general principle of compensatory damages of Hadley v. Baxendale.
Damages awarded if object of K confers a particular psychological benefit, and sufficiently compensable mental distress is caused by the breach.
Mental distress must be reasonably contemplated by the parties to attract damages, but needn’t be the dominant aspect or “very essence” of the bargain.
Mental distress requires substantiating evidence (usually medical evidence).
Breach of Employment Contracts: Reasonable Notice and Manner of Dismissal
Wallace v. United Grain Growers
SCC 1997 / Employment K. Action for intangible losses because of breach of K.
Criticism: (1) If your salary is higher, your mental distress is worth more! (2) Needn’t prove actual damages, only bad faith. / Establishes: Duty of Good Faith in terminating an employment contract. Employer must terminate employment in a candid, reasonable, honest, and forthright manner. Duty survives today.
Wallace Damages: allows the court to extend the period of reasonable noticeif duty of good faith breached.Thus, damages flowing from manner of dismissal, as distinct fromthe mere fact of dismissal.
Keays v. Honda
SCC 2008 / 14 year Honda employee, upon medical issues, refuses to meet with doctor and is terminated without due notice. At trial, awarded Wallace and punitive damages. SCC dismisses both.
Current precedent on intangible losses.
Duty of Good Faith and Fair Dealing remains.
“Wallace damages” no longer binding precedent. / “Normal distress and hurt feelings resulting from dismissal are not compensable”; rather, intangible injury damages available only where the conduct of the employer is unfair or in bad faith. Back to Baxendale: Is the mental distress reasonably foreseeable upon termination? →How was K breached?
Punitive: conduct must be outrageous. (Whiten) BUT WINDFALL Punitive damages for wrongful dismissal (and in general) may result in an unfair duplication of damages.
Followed Bardal v. Globe & Mail Ltd. (1960):
“The reasonableness of the notice must be decided with reference to each particular case, having regard to the character of the employment, the length of service of the servant, the age of the servant and the availability of similar employment, having regard to the experience, training and qualifications of the servant.”
Punitive Damages
Whiten v. Pilot Insurance
SCC 2002 / House of Whiten (P) burns down. Insurance claim. Victims in modest circumstances, so D raises arson. No evidence. P must spend money which should / Punitive damages require an independently actionable wrong.
(1) This could be a tort, but needn’t be.
(2) A breach of good faith of an insurance K is independent of the breach of K being awarded.
(3) Thus, breach of good faith is an independently actionable wrong.
Quantum proportionality (Windfall)
(1) Reward should be rationally related to the objectives of punitive damages (retribution/deterrence/denunciation)
(2) Reward should not exceed the bounds of rationality.
Normally, a moderate award that carries a stigma to the community is sufficient.
If reasonably foreseeable and sufficiently serious(standard for employment versus insurance)→intangible losses (aggravated damages)
If independently actionable wrong (tort or independent contractual obligation, e.g., insurers duty of good faith) →punitive damages
Dissent:Courts reluctant to award intangible injuries because (1) stiff-upper lip theory—primary objective of K law is economic;
(2) foreseeability—it may be unreasonable to have parties foresee that a breach in K would cause serious emotional harm;
(3) economic efficiency: courts try to make it a matter of indifference whether a party breaks a K and pays damages. Sometimes, it may be economically advantageous to break a K and pay the damages owing in order to stop losses.

(5) Mitigation

Case / Facts / Rules, Issues, Principles
K breaker can use mitigation as a defence. If P failed to mitigate, damages can be deducted insofar as P failed to mitigate; since:
(1)Contracts are about economic losses, not punishment. So P ought to avoid economic loss by acting reasonably.
(2)In order to show a compensable loss, you have to show it would flow naturally from the breach. If a reasonable person would have the avoided the loss, it would not have flowed naturally from the breach.
Payzu v. Saunders
KBCA 1919 / Cheque meant for supplier of fabric lost in mail; subsequent cheque delayed. Supplier concerned purchaser is financially unstable. Suppliers says will not supply on credit, only on cash. Breach of K.Purchaser claims damages for difference in market price and contract price. / Purchaser (Payzu) did not act reasonably in order to mitigate their losses.
Instead of going in the market place and buying expensive replacement property, P should have instead accepted new terms and paid in cash. Claimable losses would only be loss of credit suffered.
Obiter: Was it unreasonable for D to demand P pays cash? In some cases, this is an unreasonable modification of K obligations to this extent, not so in these circumstances.
White & Carter v. McGregor
AC 1962 / D enters in a K with P for P to make litter bin adverts. K cancelled almost immediately Within the day, K is cancelled before any work is done. P continues to print adverts and sued for the whole K price.
What would mitigation have been in this case? Finding another client; profit from this advertiser would be deducted from the damage award.
OR: UNILATERAL PERFORMANCE? / Does a P have the right, upon complete repudiation of a K, to perform the contract, and sue for the full price of K?Or may P only sue for the ordinary expectation damages resulting form the breach, minus those losses reasonably mitigated?
“If one party to a K repudiates, in the sense of making it clear to the other party he refuses or will refuse, he may accept the repudiation for breach of K whether or not the time of performance has come. Or, he may also disregard the repudiation and the K remains in full effect.” — Anticipatory Breach
P has option of proceeding as if K is still in effect, or suing right away for damages. How reasonable of a rule is this? Is P always entitled to insist on performance?
For this to be possible, P must have an interest in the K being performed above and beyond the expected monetary benefit.
Finelli v. Dee
OCA 1968 / K to pave a driveway. Before performance, customer cancels with sales manager. Company pays driveway anyways. Sues P for price of performance of whole K. / Distinguishes from White & McGregor. In White, K could be performed without any cooperation from D. In this case, P required permission from D to enter driveway and pave it. (Private Prop.) No such permission granted.
P had no justification to perform K.
Contra: previous permission granted in K.
Asamera Oil Ltd. v. Sea Oil
SCC 1979 / D does not return shares to P. Stocks fluctuate. P sues for specific performance of shares. Shares disposed of; so specific performance impossible.
“Courts do not expect people to recreate reality.” / If reasonable grounds for specific performance →needn’t mitigate losses
No specific performance →mitigate losses.
When P realized they could not get specific performance, they ought to have known, as a reasonable person, to mitigate loss—purchase new shares and sue for the difference in value.

(6) Specific Performance