WOODWARD CONTRACTS OUTLINE FALL 2010
INTRODUCTION TO CONTRACTS
I. CONTRACTS THEORIES
A. Classical Approach: Classical legal education requires one to learn the law and its application to particular situations; Law professor would expect students to discover these “elements” through reading a number of cases that address some or all of the tort enumerations; Law professors will change the relevant facts to create hypotheticals, “stretching” the narrow applications of the given case, or see if it can be “stretched” given the language of the opinion; Classic law professor would push to several sources of answers; Appeal to Authority- Cases, statutes, Administrative Regulations, other sources of law and Reason by Analogy to layer an argument with Binding v. Persuasive Authority.
B. Legal Realism: Judges make the law by normative choices; make decisions based on their feelings and sometimes just try to work w/in the doctrine they have to support their overall feelings on the issue; law is based not on formal rules or principles but instead on judicial decisions that should derive from social interests and public policy; stressed the dynamics of the legal process, challenged the preeminence of rules, and advocated a looser, more flexible approach to legal analysis
C. Law and Economics: Examine the law from the perspective of economic principles, and to be concerned with the economic efficiency of legal rules; urge that laws should be primarily concerned with the facilitation of exchanges on the free market, and should not seek to regulate conduct as a means of social engineering
D. Contract law: Is state law; UCC has been adopted in many places to make the law similar in different places relative to the sale of goods; where the UCC conflicts with common law the UCC wins; where the UCC is silent the common law prevails
II. UNIFORM COMMERCIAL CODE (UCC)
A. Goal: Harmonizing state law because of the prevalence of commercial transactions that extend beyond one state.
B. UCC has been enacted in all of the 50 states, as well as in the District of Columbia, Commonwealth of Puerto Rico, Guam and the US Virgin Islands. Louisiana has enacted most of the provisions with the exception of Article 2
C. Scope of UCC: Article 2 (Sale of Goods)
1.Goods or Services? Does UCC apply?
a. Bonebrake v. Cox (Bonebrake test)
“ The test for inclusion or exclusion [in Article 2 of the UCC] is not whether they [goods and services] are mixed but granting that they are mixed, whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved (E.g. contract with artist for painting) or is a transaction of sale with labor incidentally involved (installation of a water heater in a bathroom).
b. Gravamen of the Action
Question: What is the core of the action? What is in dispute?
(1) If it’s about goods- then apply UCC
(2) If it’s not about goods – then use some other law
The substantial point or essence of a claim
A. How do we correct a breach of contract?
1. Usually With Monetary Remedies (Called Damages)
a. Money will be used to remedy contract damages (e.g. this is the default method for remedying a breach of contract (The Method of Law).
i. Valuation – the items of a contract (most always goods) are converted into monetary amounts and damages are based on these conversions.
2. Three ways of awarding monetary damages:
a. Expectation Damages : Measuring damages according to what promised
®put where would have been if K completed
b. Reliance Damages: Idea that party has given something up in reliance upon K.
®Return to status before K (status quo ante)
c. Restitution Damages: Restoring those things turned over by one party.
®return of goods and/or money (i.e. down payment)
II. THE EXPECTATION INTEREST
Goal: To put the aggrieved party in as good a position as if the contract had been fully performed
Expectation Damages: Reliance plus Pure Economic Gain
A. The Expectation Interest – default way for assessing contract damages.
1. UCC § 1-305: The remedies provided by the UCC 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 onsequential or special damages no penal damages may be had except as specifically provided in USS or by other rule of law.
a. Always ask the question: Where would the aggrieved party have been; where is he now? We want to put him where he would have been.
(1) Common Formula: Gains prevented + losses incurred
i. Remember, with a losing contract there will be no gain for the losing party.
b. Expressed in UCC § 1-305 (in goods cases; “as if the party had fully performed”) – principle that shapes the whole course
c. Expectation interest never overcompensates
d. Usually contract price + incidentals – costs saved on the breach
2. Expectation Interest v. Expectation Damages
a. Expectation Interest: Pure economic gain i.e. pure profit
b. Expectation Damages: plus Reliance Interest
(1) R 347– how to measure a loss caused by breaching party’s failure plus incidental or consequential loss minus any cost or loss avoided by the breach.
3. When possible we expect the aggrieved party to attempt to mitigate damages:
a. Mitigation Rule: Mitigation is a doctrinal tool to limit the recovery of damages. The principle of mitigation is that a plaintiff cannot recover for losses that it could reasonably have avoided. Courts and lawyers often refer to the “duty to mitigate” which suggests that a plaintiff has a “duty” to take “reasonable steps” after a breach of contract to minimize damages. While the phrase “duty to mitigate” is commonly used, technically it is inaccurate because the plaintiff is not “liable” for not mitigating (there is no legally enforceable duty to mitigate), rather the principle is that the plaintiff cannot recover for losses that could reasonably have been avoided.
b. EXCEPTION – in employment law an employee is not obligated to enter into a mitigating contract if the employment of the new contract is “different” and “inferior,” even if the value is the same. But an employee is usually obligated and expected to attempt to enter into a mitigating contract
(1) CASE: Parker v. 20th C. Fox:
Parker contracted to star in a musical (Bloomer Girl) for 20th Century for $750,000, who later canceled the movie and offered her a starring part in a Western for the same amount of money which she refused. She relied on initial contract, and did not look for other employment. Parker did not fail to mitigate damages by refusing to accept the part in Big Country, as the role was not comparable to that of Bloomer Girl. The employer must show that the other employment was comparable or substantially similar to that of which the employee has been deprived.
In this case, the court decided that a female lead in a Western drama filmed in Australia was not comparable to a female lead in a song and dance production filmed in LA. In other words, the contracts were not substantially similar because they were different and inferior to one another [“Big Country” different: western v. musical; inferior: limited director / approval rights].
Woodward says the lack of autonomy is the real standout issue in this case. He doesn’t like that Parker is being strong-armed by the studio, and that it undermines her freedom
(2) CASE: De la
for the deposit paid less an offset to D on acct of lost profit & incidental damages ($4,250 minus $3,250).
BUT, even when the buyer breaches and there is an “Agreed remedy clause” – “A term fixing unreasonably large liquidated damages is void as a penalty.”
i. UCC §2-718: Allows for restitution even when buyer has breached; limited to whatever his payment exceeds 20% of value of total performance or $500 whichever is smaller)
(4)In certain cases, the seller may even bring an action for the price of the contract:
ii. Possible when:
iii. 2-709(1) (a) The buyer has accepted the goodsand hasn’t paid “within a commercially reasonable time.”
iv. 2-709(1) (b) The seller has identified the goods to the contract and he is then “unable to resell them after a reasonable effort at a reasonable price or the circumstances reveal that such effort will be unavailing.”
· Would occur when there is no market left for the goods, or when the goods in question are custom-made , etc.
v. DAMAGES FORMULA: (Contract Price) + (Incidentals) – (Expenses Saved)
4. Buyer’s Options Under the UCC
a. UCC Provisions: § 2-711, §2-712, §2-713, §2-714
b. When a seller “fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any of the goods involved, and with respect to the whole if the breach goes to the whole contract”, § 2-711 gives a buyer the following options:
(1) Enter into a Mitigating Contract (e.g. “cover”)
i. UCC §2-712 = when a seller breaches “the 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.”
ii. DAMAGES FORMULA: (Price of Cover Contract) – (Original Contract Price) + (Any Incidental and Consequential Damages) – (Costs Saved)
(2) Recover Damages for Non-Delivery (e.g. not cover)
i. UCC § 2-713
ii. DAMAGES FORMULA: (Market Price at Time of Seller’s Breach) – (Original Contract Price )+ (incidental or Consequential Damages) – (Costs Saved)
(3) Acceptance of Goods that do not Conform
i. UCC §2-714
ii. DAMAGES FORMULA: (Value of Goods Promised) – (Value of Nonconforming Goods) + (Incidental and Consequential Damages)
E. What are general and specific damages?
1. Categories come from Hadley v. Baxendale:
1)A party may only collect damages that arise naturally (“general damages”)
2) As may have reasonably been in the contemplation of both parties upon entering the contract (“special” damages)
2. General damages:
a. The transactional costs of a contract. They are the damages that naturally arise from any contract.
b. Not specific to a certain case.
1) Example: goods contract: market price – contract price
2) Hawkins v. McGee : the general damages are the difference between the perfect hand and the deformed hand
3. Special damages:
a. The non-transactional costs of a contract.
b. Unique to a certain case.