CONTRACTS
SCHLEGEL
FALL 2012
UNIT ONE: REMEDIES
A. EXPECTATION INTEREST (EXPECTANCY)
Hawkins and McGee: The Hairy Hand Case (Text page 3)
Facts: McGee performed hand surgery on Hawkins’ hand and promised that it would be 100% perfect after the operation and healed in 3-4 days. Actually, his hand grew hair, was deformd that resulted in extreme amount of pain.
Procedure: Before jury hears any evidence, suit for negligence is dismissed; all that remains is asumpsit- breach of contract.
Issue:
1. Is there a contract? (Branch looks to two possible bases for K)
· 3-4 day prediction (Branch holds that as a matter of law, a doctor’s opinion is not a contract; commonplace practice is for doctors to give opinions, it is not the nature of medicine to make binding guarantees)
· 100% perfect guarantee- (Branch doesn’t want to decide on these words alone, but looks the context in which this statement was made)
o Words + Inducement suggest that Dr. McGee was soliciting for self- interested purposes; this turns McGee’s behavior away from a paternalistic Dr/Patient relationship and more like a Market Transaction. Therefore, we can treat like a contract made in a self- interesting market exchange.
2. How do we award damages?
· Once deciding the 100% guarantee is a contract, the only thing that governs damages are principle and analogy
· Underlying principle of Contract law- Williston position: Put the plaintiff in as good as a position as they would have been if the contract had been performed (as opposed to tort damages to restore the person to status quo ante; here, the condition of Hawkins’ hand prior to the surgery is irrelevant)
o Look to the value promised as opposed to the value delivered
· Analogy: (because we don’t have many contracts in medical setting) “A hand is like a machine”
o If this were a machine, the damage for failure to provide the machine as promised would be the difference in value between a 100% perfect machine (value promised) and the value of the machine that is delivered (value delivered)
· Pain and suffering drops out of damages calculation because this was implicit in the contract; Pain and suffering was exchanged for a 100% hand. The pain and suffering were detriments that constitutes consideration. Bargained for exchange.
Expectation Interest: The interest of a party in realizing the value of expectancy that was created by the other’s promise. The goal of the contract system is to make sure that the non-breaching party is in as good a position as he would have been if the contract was performed
RULE: Judge Branch uses value promised [value of 100% perfect hand] – value delivered [value of hand after operation] to come up with damages award
Groves v. Wunder (Text pg 12)
Facts: Wunder entered into contract with Groves where Wunder promised to leave the land leveled. He took all the best gravel, and left the land rugged and in terrible shape. Land with the correct contract would have been worth 15,000. The work to get it there cost 60,000.
Groves is giving Wunder a seven year lease in exchange for no competition and allows him to take whatever sand and gravel he wants in exchange for $105,000 and an agreement to level the soil in the land. Instead it is left rugged and uneven and only the best gravel has been removed. This is clearly a breach, as the contract specified that land was to be regraded.
Procedural History: Trial court used VP/VD and awarded plaintiff $15,000. [If land had been regraded, its value would have been $15,000- the value of the un-graded land ($0)] Groves is disappointed by this, because he argues that he should have received full Cost of Performance, as regrading the land would cost $60,000.
Issue: Which of the two measures (VP/VS or CoP) is appropriate?
Holding: We should apply the Cost of Performance measurement of damages.
Rule: When a construction contract is defectively performed, then the measure of damages is the cost of remedying the defect, with the exception of economic waste.
· Restatement §346 – [absent waste from wrecking a nearly completed physical structure], “the cost of remedying the defect is the amount awarded as compensation for failure to render the promised performance. (pg 15)
Reasoning: Stone reasons that this was a deliberate, bad faith breach. Because this is a matter of individual choice, it becomes a matter of individual rights. It is the right of the contracting parties to lay out the rights of the contract. Further, this is a free market matter; we enjoy a market economy because individuals have the right to operate in the market however they choose. The regrading clause was put in the K for a reason, as a matter of free market/investment.
· Doctrine of Economic Waste: In some instances, where Cost of Performance may require tearing down a building, etc, we should use VP/VD CP >> (VP – VD).
· Stone confines this doctrine to only those situations when buildings are being torn down; argues that this case does not involve economic waste because there is no building material being put to waste
· Olsen dissent: Economic waste is apparent whenever VP/VD and CoP are vastly different. Moreover, this doctrine should come into consideration whenever CoP makes no economic sense. Furthermore, he highlights the fact that the re-grading clause was “incidental” to the REAL contract, which involved the removal of coal, 7 year lease, etc.
· Olsen concedes that there are certain situations where you may get the full CoP;
· 1. where there has been specific and separate consideration for the incidental term
· 2. Also, Ugly Fountain example- if there had been great subjective value to property, than CoP could be awarded
· However, if the defect in material or construction is one that cannot be remedied without an expenditure for reconstruction disproportionate to the end to be attained, or without endangering unduly other parts of the building, then the damages will be measured, not by the cost of remedying the defect, but by the difference between the value of the building as it is and what it would have been worth if it had been built in conformity with the contract
· Risk allocation considerations- [this is during the depression, when the value of land has plummeted]. The OWNER, not the LESSEE, usually assumes the risk that the land will go from high value to low value; Therefore, to award Groves $60K would be to reward him/punish Wunder for the fact that Groves underestimated the land depreciation.
o Consider: what would trigger the recognition that the re-grading clause was not incidental and included risk allocation?
§ “if not regarded, you will pay cost of regrading the land….”
· Note- Olsen’s minority opinion in Groves becomes the majority opinion in Peevyhouse
· Stone is taking a very Willistonian approach, traditionalist.
· Olson is concerned about allocation of risk. Who bears the risk of the market price fluctuation in a contract?
Peevyhouse v. Garland Coal and Mining Company (Supp. 5)
Facts: Plaintiffs leased part of farm to defendant for 5 years and he was supposed to extract coal and then fill in the pits which he did not do. It would have cost $29,000 to do but only increase the value of the farm by $300
· Trial court awarded plaintiff $5000 but Oklahoma Supreme Court reduced to $300 because the previous amount was more than the value of the farm had the work been done
· Oklahoma statute: no person can recover a greater amount in damages for breach of an obligation than he would have gained by the full performance thereof on both sides
· Cost of Performance proper when does not involve economic waste; diminution in value proper when if construction and completion in accordance with contract would involve unreasonable economic waste (here, diminution of value of really only $300 vs. economic waste of CoP is $29,000)
Holding: The measure of damages in an action by a lessor against a lessee for damages on breach of contract is ordinarily the reasonable cost of performance of the work, however, where the contract provision breached was merely incidental to the main purpose in view, and where economic benefit which would result to the lessor by full performance of the work is grossly disproportionate to the cost of performance, the damages are limited to the diminution in value resulting to the premises because of the non-performance
· Under CP plaintiffs might recover an amount about nine times the total value of their farm and that would be “unconscionable and grossly oppressive damages, contrary to substantial justice”
· Owner is risk bearer of what happens to land in depression (Groves)
o Peevyhouse’s lawyer should have more strongly argued that the coalminers assume the risk of finding the coal, and the Peevyhouses shouldn’t have bore that risk; makes no sense to shift this risk allocation [had this been argued, it would have been harder to align with Groves dissent]
· Olsen’s Groves dissent becomes majority rule; Limits of Economic Waste doctrine applied when there is a large difference between VP/VD and CoP
Acme Mills & Elevator Co. v. Johnson (text 23)
Facts: Parties made an agreement to be executed on July 15th. Johnson (seller) contracted to sell 2,000 bushels of wheat to Acme (buyer) for $1.03 per bushel and Acme supplied Johnson with 1,000 sacks to deliver the wheat. When price of wheat before July 15th went up, Johnson sold his wheat to another mill (Liberty) for $1.16 per bushel using Acme’s sacks. By July 15th, the market price for the wheat dropped to .97 per bushel. Acme contends that because Johnson does something with “their wheat” they are owed the profit for it.
Holding: The measure of damages for a purchaser in a sales contract is the difference between the contract price (KP) and the market price (MP) at the time and place of delivery.
· This turns into risk allocation regarding the market price
o All Acme is getting is a chance to get wheat at a least 1.03
o Only the opportunity for a particular price that one is contracting for
· Doesn’t look like Acme suffered any damage- At time of delivery, if you can go out and get wheat for .97, what is the problem? On the date of delivery the price of wheat had dropped to below the price which Acme had agreed to pay so Acme actually benefited $.06 per bushel
Rule:
§ The new measure for damages becomes the difference between the market price and the contract price at the time and place of tender, MP/KP (market price – contract price @ TPT)
§ Court rejects Acme’s contention that they deserve profit that Johnson got from selling his wheat to the other mill because a contract right is not equivalent to a property right
o It was never his wheat, he did not own it
o The nature of a contract when dealing with fungible goods is bet against the market price
Consider Hypothetical: If the seller breaches when the wheat is $.97, the buyer gets nothing, but if the buyer breaches the seller gets $.06 /bushel. If the wheat had gone up to $1.20 on the 29th and the seller breaches the buyer would get $.17/bushel and if the buyer breached the seller would get nothing.
· Risk allocation- primary risk allocated by contract exchange is a risk in respect to a risking/falling market price
§ This is a pre-UCC case and represents the majority view that once measure of damages for beach of sales contract is the difference between the contract price and market price at the time and place of tender
§ The UCC has adopted this measure of damages via §2-713 but recommends an alternative, that the purchaser acquiring “cover” via §2-713 so as to make unquestionably certain the amount of damages involved
o Cover: purchase of an alternative supply of goods by a buyer, after a seller has breached a contract for sale, for which the buyer may recover the difference between the cost of the substitute goods and the price of the original goods pursuant to the contract, so long as the buyer purchases the alternate goods in good faith and without unreasonable delay (mitigate damages between KP/MP)
Uniform Commercial Code §2- Sales
Practice Problems:
· Owner buys a hillside for $8000. Is this within the UCC?
o No. Real estate or anything permanently attached is not covered by the UCC, only “movable goods”
o Houses, other buildings are not covered
o Movable goods- timber are covered
o Labor and Services are also EXCLUDED
· Owner agrees to buy components for a sound system which he’ll install himself. Is this transaction within the UCC?
o Parts are covered by the UCC, but labor contracts to do services are not, seller installing the system would not be covered
· A Grocer sells his business, including the lot and goods. Is this sale covered by UCC?
o Severance – goods are covered but business and lots are not
· Businesswomen leases car for a day. Is this covered by UCC?
o UCC treats as sales and not leasing
· Owner makes contract with Mechanic to construct a specially designed car where the Mechanic supplies the design, labor and parts.
o Hiring someone to do service is not covered but may be when service done and is movable goods
· CONTEXTUAL APPLICATION-, WAS THIS COMMERCIALLY REASONABLE AND IN GOOD FAITH??
· Seller contracts to sell buyer 1000 bushels of tomatoes at $5 per bushel. Buyer refuses them. Market price at TPT is $4.
o CP ($5) – MP ($4) = $1 per bushel
o If MP were $5.50 per bushel there would be no damages because there is no loss ($5 – $5.50 = -.50)
o If the MP were $4 and the seller resold the tomatoes for $3.50 then UCC changes traditional law here based on good faith and reasonableness
o Substitute tomatoes for $6.00- do you get full cover price/market price
§ You get full cover price/Market price unless the delay was for some reason commercially unreasonable- that is not ok
· Is thing you ask in a contract case: Is the contract covered by the UCC? Service contracts and real estate are not
· UCC looks at circumstances of parties and whether commercially reasonable
· Note mechanical rule- market price/K price
o Rationale is that contract is usually a bet against the market price/dimension (technical)
o BUT sometimes extenuating circumstances rule- should you be unprotected? No (contextual)
The UCC and Market Price/Contract Price.
· The UCC deals with breaching parties in a commercial-order context. §2-708[1][1] deals with the seller’s duty to mitigate damages and then recover loss and incidental damages. UCC §2-713[2][2] deals with a buyer’s right to the difference between market price at the time he learned of the breach and the contract price, along with incidental damages.
Hypothetical:
Owner promised to pay builder $700,000 for a house up to specification. Clause 39A of K says Superpipe should be installed; $2000 specifically set aside for difference. Sub Contractor slips up, installs regular pipe.
o Cost to tear down, etc $150,000 (CP = $150 K > VP/VD)
o Value of house (VD) $680,000 v. (VP) $700,000 (VP/VD is $20,000)
o Assuming breach of contract, given the great disparity between CP and VP/VD- we thus are presented with the problem of Economic Waste
o Owner is going to want CP
o If unique, special use, subjective value then you may be entitled to full CP
§ Value/Importance becomes more than just MP
§ (Stone- free market integrity of rights argument) Future costs- maybe this is just a $20,000 now, but this may be an investment
o Builder is going to want VP/VD
o Arguments: anything more over 20K is unjust enrichment
o Majority in Groves- When you actually are wasting materials/ tearing down structures is really what economic waste is about!
o This K was for building of a house; not a K for installation of Superpipe
§ Olsen calls this incidental; clause 39A- this is NOT the main purpose of the contract? Risk that got allocated? NO
o Breach was totally inadvertent omission- not done in bad faith
Additionally, consider:
o The builder assumed the risk that the price of Superpipe may change
o Specific amount of money set aside for Superpipe
§ This distinguishes from Groves; not incidental
§ But only $2,000 set aside- does this justify an expenditure of $150,000?
Rockingham County v. Luten Bridge- Anticipatory Repudiation
Facts: The contractor built the bridge after the county gave notice that it was breaching the contract. The municipal government was in chaos. If the builder stops to observe the chaos, he can be in breach. If he proceeds, he may be piling up damages.
A: County repudiated the contract, anticipatory to performance. It argues once repudiated, the company must desist. This is a waste of resources. Measure of damages for anticipatory repudiation equals labors and costs up to repudiation plus profit that would have been realized (expectancy). The latter is the position that the party would be in if the contract would be fulfilled. Limited by duty to mitigate damages.
Holding: When an aggrieved party receives notice of a major breach by the opposing contracting party then the aggrieved party acquires an immediate duty to reasonably mitigate damages; cannot pile up damages.
· Court decides that Pruitt had resigned and the repudiation had taken places
Rule: In case of anticipatory Repudiation, court will grant expectancy in and will grant the amount of profits they expected to make in addition to costs up until time of repudiation.
o Measure of Damages = profit that would have been made + any costs up until point of repudiation
o Repudiation and the Doctrine of Mitigation- After a K has been repudiated, the damaged party has a duty to mitigate loss or else such costs would be subtracted from profit (entire damages).
o 5 Corbin on Contracts 241-246 (1964)
particular time is to that one can enter into other contracts under the assumption that the crank will be ready and able to mill grain
· Baxendale’s argument: We ship cranks all of the time, and had no way of knowing that it was the only crank; thought it was just a model.
· Consider: Industrial Revolution; increasing reliance on developing transportation- although Hadley is claiming need for security in contracts, if there is going to be unpredictable liability for entering into contracts, investments will be stifled; court needs to recognize needs of developing market/transportation system. Liability for failure to deliver could be detrimental to further development.
Holding: Lost profits not awarded because Baxendale did not know his breach would cause the damage; this risk had not been allocated.
Rule: You are liable for any damages that arise naturally from the breach and are foreseeable, and needs of both parties must explicitly be communicated at time of contract formation.
· Two pronged rule of Foreseeability:
o Reasonable or naturally occurring damages or
o If not reasonable/naturally occurring, need to be Specially communicated
Lamkins v. International Harvester Co.
Facts: At time of sale, buyer told seller that he wanted lighting equipment so that he could use the tractor at night. Tractor was delivered May 1, 1942, but did not get lighting equipment until nearly year later. Buyer alleges that because he did not have $20 lights, he couldn’t work at night, couldn’t plant crops, and thus is owed several hundred dollars for lost crops.
Holding/Rule: If the liability is totally disproportionate to the consideration, then we are talking about a risk that was never really allocated.
o “where the damages arise from special circumstances and are so large as to be out of proportion to the consideration agreed to be paid for the services to be rendered under the contract, it raises a doubt at once as to whether the party would have assented to such a liability [didn’t allocate risk of lost crops with only $20 consideration]
o “Nothing in the testimony showing that circumstances surrounding and connected with the transaction which were calculated to bring home to the dealer knowledge that appellant expected him to assume liability for a crop loss that might amount to several hundred dollars”
o SEE RESTATEMENT §351
Victoria Laundry v. Newman Indus. Ltd.
Facts: Parties arranged for delivery of boiler on June 5, but on June 1, boiler fell and was damaged so as not to be accepted by Laundromat; defendant was unable to complete repairs until Nov 8. Victoria Laundry wanted to recover lost profits (including particularly lucrative contracts about which defendant had not been told).
Holding: Plaintiffs could recover for loss of profits during this period, but could not recover for “particularly lucrative” dyeing contracts to which defendant, at time of K, had not been told.
· Lost profits foreseeable because it was common knowledge that the Laundromat’s boiler was used for laundry; however, lost profits for special contracts not recoverable because it was not specially communicated
Prutch v. Ford Motor Co. (Consequential Damages Case)
Facts: Claim by farmers against Ford for crop damages found to have been caused by defective equipment. First, Ford claims that farmers damages were not foreseen. Ford confuses “foreseen” with “foreseeability”; Second, claims that farmer’s actions had increase losses, and that had not mitigated
· Statutory “reason to know” standard triggers Ford’s liability for consequences that may not have been actually foreseen but which were foreseeable. A manufacturer knowing that its products will be used for crop production reasonably can be expected to foresee that defects in those products may cause crop losses
· Defendant correctly states rule that consequential damages created by a buyer’s use of the product after discovery of the defect may not be recovered… But unlike the facts in the case the defendant has cited, Ford’s failure to provide the Prutches with properly functioning equipment left them a narrow range of alternatives.
· Plaintiffs, in deciding to continue farming with the knowledge that their Ford equipment might continue to malfunction, actually mitigated their losses as their decision to try to produce at least part of the normal crop, rather than no crop at all was required by their “duty to lessen, rather than increase” their damages
· SEE UCC 2-715; reduces Hadley to one rule- Reason to Know; included in that is obligation to mitigate
UCC §2-715- Buyer's Incidental and Consequential Damages. (1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach. (2) Consequential damages resulting from the seller's breach include: (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty
[1][1] § 2-706. Seller's Resale Including Contract for Resale. (1) Under the conditions stated in Section 2-703 on seller's remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this Article (Section 2-710), but less expenses saved in consequence of the buyer's breach. (2) Except as otherwise provided in subsection (3) or unless otherwise agreed resale may be at public or private sale including sale by way of one or more contracts to sell or of identification to an existing contract of the seller. Sale may be as a unit or in parcels and at any time and place and on any terms but every aspect of the sale including the method, manner, time, place and terms must be commercially reasonable. The resale must be reasonably identified as referring to the broken contract, but it is not necessary that the goods be in existence or that any or all of them have been identified to the contract before the breach.
[2][2] § 2-713. Buyer's Damages for Non-delivery or Repudiation. (1) Subject to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the seller's breach. (2) Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.
