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St. Johns University School of Law
Kniffin, Margaret N.

Contracts – Kniffin Fall 2006 PM

Common Law governs contract law (mutual assent and consideration = valid contract)
UCC Article 2 governs the sale of goods not real property or service contracts – is NOT limited to merchants but some sections are!

Remedies (Damages)

A. Money Damages [Substitutional Relief] (3 types)

1)      Expectation Damages (looking forward in time)
-Puts the Plaintiff in the position he would have been as if the contract had been performed
-give the aggrieved party what they expected to receive from the contract
-most courts give this remedy for breach of contract
-courts will give expectation damages OR reliance damages but NOT BOTH
-Sullivan v. O’Connor –Nose Job Case: If she had gotten expectation damages, she could only recover for the cost and pain and suffering of the 3rd unexpected surgery (can’t get anything for the first 2 surgeries – she expected to be in pain)

a.      Cover (Laredo Hides)
i.      Cover: buying substitute goods from another seller
ii.      Rule: When a buyer of goods suffers a breach of contract for the sale of goods and covers, the buyer receives as damages the (difference between the contract price and the larger cover price) plus (any incidental and consequential damages)
iii.      UCC §2-712 Requirements for Cover:
1.      Made in good faith (an honest attempt to substitute the goods as similarly as possible to those in the contract)
2.      Without reasonable delay (market price changes; 5 years is unreasonable)
3.      And with a reasonable purchase (same quality of goods)
iv.      Cover Formula (Damages) = Larger cover price for substitute goods – Contract price + Incidental & Consequential damages
v.      Puts the buyer back to his expected contract price
vi.      Buyer is not required to cover, and if the buyer does not cover then he may receive damages under the Market Price Formula  (UCC §2-713) OR the court uses the Market Price Formula for a buyer who DOES NOT meet the requirements to cover, and treat the person as though they had covered and met all the requirements
vii.      Market Price Formula (Damages) = (Market price at the time when the buyer learned of the breach) – (the lower contract price) + (incidental and consequential damages)

b.      Incidental Damages (UCC §2-715)
i.      Expenses reasonably incurred in inspection, transportation, receipt, and care and custody of goods rightfully rejected
ii.      Expenses reasonably incurred in effecting cover
1.      EX: You own a supermarket in NJ, and you contracted to buy tomatoes but the seller sells them to someone else. You cover to get the tomatoes and you have to travel to Oregon to get tomatoes ( cost of travel is an example of incidental damages)

c.       Consequential Damages
i.      Remote chain reaction damages (injury to P’s person or property)
ii.      Requirements:
1.      Foreseeability at formation of the contract: the person who breached the contract could foresee or had reason to know of the consequential damages
a.      If the damages occur in the natural course of events
b.      The seller was informed (written or orally) before the contract was made
2.      Buyer could not reasonably prevent the damage by cover (took all other reasonable opportunities)

2)      Reliance Damages (looking back in time)
-puts the P back in the position he occupied just before the parties entered into the contract
-to compensate him for the detriments he suffered in reliance upon the agreement
-Compensation for “out of pocket expenses”/”worsening”/”pain and suffering” – giving back all expenses incurred
-Sullivan v. O’Connor –Nose Job Case: In reliance damages she would get damages for doctor’s fees, and pain and suffering of all 3 surgeries

3)      Restitution/Unjust Enrichment (looking back in time)
-The promisee may have restitution damages if he has relied on the promise AND also paid a benefit to the promisor
-overlaps with reliance damages, but restitution focuses on restoring to the buyer some benefit that the buyer had given the seller
a.      4 Requirements for restitution:
i.      A benefit was received by the D
ii.      A benefit was at the P’s expense
iii.      It would be unjust to allow the d to retain the benefit w/o returning it to the P
iv.      That the benefit was expected to be given in exchange for compensation it was not a gift

B. Specific Performance (Equitable Damage – Non-monetary Injunction)
-courts prefer awarding money damages over specific performance
-forcing the parties to perform the terms of the contract
-Courts will award specific performance when:
a) Money damages are not adequate to give expectation
1) goods are unique (land, Van Gogh Painting)
2) Aggrieved party cannot cover
b) Performance itself is does not require too much supervision by the court
c) The terms of the contract must be clear enough so that the court can write a clear decree
d) Court will not force a situation where antagonistic individuals must work together.

C. Nominal Damages
-the Plaintiff who proves a breach of contract but fails to prove damages is traditionally awarded nominal damages ($1)
-such an award may serve as a declaration of the P’s rights, and may also carry an award of court costs

D. Punitive Damages
-punitive or exemplary damages are not granted for breach of contract
-the courts do not want to deter people from making contracts

E. Arbitration of Disputes
-process by which parties voluntarily refer their disputes to a special tribunal (1-3 arbitrators), and can only validly take place if the parties have agreed to use arbitration for the settlement of disputes
-no one is forced to arbitrate
-parties get into arbitration by:
1) Stating in the terms of the contract that if there is a disagreement the parties will go to arbitration
2) or the parties can decide that they rather go into arbitration rather than go to court
-speed, results are received quicker than in courts
-you can get very technically knowledgeable arbitrators, where as in court you will receive may receive a judge who may not have as much technical knowledge
-arbitrators do not use the normal rules of law (ie: rules of evidence)
-arbitrators are not subject to precedent the way courts are
-an arbitrator’s decisions cannot normally be appealed unless the arbitrator was bribed/ did something illegal and you can not start again in the judicial system

other in law gave her land as a gift – no bargained for exchange)
3.      Moral Obligation: Not Consideration – it would not be practical, otherwise every promise would have to be performed
4.      Conditional Gratuitous Promises: Not Consideration
a.      Ex: Kirksey v. Kirksey – brother in law did not benefit by his sister in law moving to his property, he was not seeking something for himself – no bargained for exchange
b.      Hypo: You see a homeless person and you want to give them a gift of clothing and you tell him to meet you at Macy’s to get their size and the homeless person goes all the way to Macy’s and waits, but you can’t make it so the homeless person sues; this is a gift based on a condition – there is no bargained for exchange, you receive nothing back
5.      Illusory Promises: a statement that reserves full discretion in the promisor whether to perform the promise or not, lack of mutuality of obligation
a.      -there is no consideration for this b/c there is really no promise
b.      Performance can not be illusory – only promises can be illusory
i.      Ex: I will buy your house for $500,000, if I feel like it.  
–buyer has all of the discretion
Ex: I promise to buy your house for $500,000 if I win the NY lottery. – there is a limitation of discretion b/c the buyer cannot control the lottery – NO ILLUSORY PROMISE
ii.      Ex: Strong v. Sheffield – woman who promised to pay her husband’s debt and the creditor (her uncle) said that he would refrain from collecting until he wants to be paid back -this an illusory promise b/c it gives all the discretion to the uncle. If she had asked for performance then there would be no issue b/c you can’t have an illusory performance.
c.       The moment discretion is limited in any way, the promise is no longer illusory.

Four Contracts that appear illusory, however

1)      Satisfaction Clauses: These DO NOT make contracts illusory.
a.      Mattei v. Hopper (The purchaser would go through with the contract subject to the real estate company obtaining leases satisfactory to the purchaser.)
b.      Satisfaction clauses are not illusory and they fall into 2 categories which have standards that provide limitations on discretion.
c.       2 categories of satisfaction clauses:
i.      Commercial Subject Matter: reasonable person standard (objective standard)
1.      The dissatisfaction has to be a reasonable dissatisfaction. (this is the discretionary limit)
ii.      Artistic Subject Matter/Personal taste: good faith standard (subjective standard)
1.      Honestly satisfied or dissatisfied – much harder to prove
2)      Requirements/Outputs: