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Contracts
Temple University School of Law
Lipson, Jonathan C.

Professor Lipson Contracts Outline Fall 2012

I. Remedies for Breach of Contract

(1) Aids to determine whether an item can be covered under UCC Art. 2

(a) Bonebrake v. Cox

i) The test for inclusion or exclusion is not whether they 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 (e.g. installation of a water heater in a bathroom).

(b) Final Product Test – a court focuses on the end or final product to determine whether it fits the UCC definition of goods.

(c) Predominance – looks at the transaction as a whole to determine whether its predominant purpose was the sale of goods or the provision of a service

(d) Multiple Contracts Approach – division of goods and services into separate contracts

(2) Future goods can only be identified once they exist; prior are not covered under UCC

(a) This means that Article 2 doesn’t apply to building contracts However, selling houses is covered under §2-107(2) [as long as it doesn’t change from a product to components]

2. The Expectation Interest

3. Expectation Damages – Attempt by the law to put aggrieved parties where they expected to be as a result of performance. Not to punish the breaching party or to put the aggrieved party in a better position than would have resulted from performance. These are the main principle when it comes to remedies.

4. Parker v. Twentieth Century-Fox Film Corporation (California, 1970)

a) Facts: π contracted with ∆ to play the female lead in a musical motion picture entitled “Bloomer Girl.” Prior to the start of filming, ∆ informed π that they would not be producing Bloomer Girl, but offered π the lead in “Big Country, Big Man” for the same amount of money – $750,000. π sues.

b) Holding: Recovery by a wrongfully discharged employee is the amount of salary agreed upon for the period of service, minus the amount employee has eared or with reasonable effort might have earned. (Referred to as Contract Market Price Differential)

c) Note: Mitigating damages is a more specific proposition for artists – the determination of substantially similar employment has a fair amount of room for interpretation.

(1) When the question of mitigating damages exists, the burden of pleading and burden of proof is on the employer. If they do not raise the question, the court does not discuss it.

(2) Mitigation must be substantially similar.

d) Related Case

(1) De La Falaise v. Gaumont-British Picture Corp. (California, 1940)

(2) Holding: ∆ was not excused from performing a condition precedent, the giving of notice to the employee regarding the starting date of the second picture. The court held that it was proper to offset against the amount guaranteed under the contract the sum received in radio engagements, because the work was not inferior to the work contracted for.

(3) This was case successfully differentiated as precedent because counsel substituted a reason for the reason that the court gave, and differentiate the cases based on this observation.

5. Neri v. Retail Maine Corporation (New York, 1972)

a) Holding: Determination that if the seller is a lost volume seller, then the measure of damages in the event of a breach by the buyer is the amount of profit the seller would have made from the individual sale.

(1) Lost Volume Seller – a seller who would have made an additional sale if there hadn’t been a breach

(a) This case examines only whether there was the capacity to make a further sale, not whether the seller actually would have made such a sale.

(2) “American Rule” each party pays their own attorney’s fees

(3) Therefore, it is impossible to entirely fulfill expectation damages, because the party who is attempting to recover will be put back where they had anticipated being contingent upon performance minus attorneys fees.

(a) This is a general principle throughout expectation damage cases.

b) Aside on Damages:

(1) In this case damages are profits + incidentals

(a) Direct costs are recoverable profit

i) Direct costs: those for activities or services that benefit specific projects, e.g., salaries for project staff and materials required for a particular project.

(b) Indirect costs are not recoverable profit

i) Indirect costs: taxes, administration, personnel and security costs, and are also known as overhead.

6. In Re Worldcom (Jordan v. Worldcom) (Bankruptcy Court, 2007)

a) Holding: Court holds that π failed to mitigate his damages after ∆ breached the agreement – but an evidentiary hearing was necessary to determine what π could have received had he made reasonable efforts to mitigate.

b) Note: Determining who is a lost volume seller is an Objective/Subjective Test which the ∆ bears the burden of proof upon

(1) Objective: Seller demonstrates a capacity to undertake additional business

(2) Subjective: Seller would have tried and been able to obtain additional business if ∆ had not breached.

(a) Two parts: Did he look? Could he in fact make the sale?

c) Aside on Dilution Issue: For those whose ability to sell rests upon an image, the court gives consideration to dilution of image

(1) Dilution: A decreasing ability to make further sales based upon an increasing number of sales.

B. The Expectation Interest – Performance Rather than Damages

1. Specific Performance – an order of the court which requirnes a party to perform a specific act, usually what is stated in a contract.

2. Copylease Corporation of American v. Memorex Corporation (U.S. District Ct. applying California, 1976)

a) Holding: Courts generally refused to order specific performance of contracts that were not capable of immediate enforcement. Without an exception to the general rule, π would be limited to recovery of damages for the contract breach. Cal. U.C.C. § 2-716(1), which provided for specific performance in an action for breach of contract where the goods were unique, or in other proper circumstances, might provide an exception but hearing would be necessary to determine whether the supplier’s products might be considered unique for purposes of § 2-716(1), making specific performance appropriate.

(1) UCC §2-716. Buyer’s Right to Specific Performance or Replevin: Specific performance may be decreed if the goods are unique or in other proper circumstances.

b) Aside on Types of Contracts:

(1) Requirements Contracts – Contracts where the quantity term is determined by the buyer’s orders or requirements and they are commonplace. Copylease is a requirement contract.

(2) Output Contracts – Contracts where the quantity is determines by the seller’s production

(3) Specific performance is a difficult remedy to enforce for continuing acts or ongoing relationships and is not granted unless the monetary damages are inadequate.

C. The Expectation Interest: Breach Deterrence vs. Liquidated Damages

1. Lake River Corporation v. Carborundum Company

a) Holding: “Liquidated damages” were grossly disproportionate to any probable loss and penalized some breaches much more heavily than others. Fact that damage formula was invalid did not deprive π of remedy – entitled to common law damages; in this case, was unpaid contract price minus costs that plaintiff saved by not having to complete contract. The court held that damages on counterclaim had to be refigured as well, as ∆ made no effort to prove loss in form of reduced profits.

b) Note: Agreed remedies which are too high deter efficient breaches.

(1) Efficient Breach – assumes some promises should be breached when the promisor is better off breaching than they would be fulfilling the contract.

(a) If the promisor is better off, and the promisee is indifferent and no worse off, then society must be better off because there is more wealth in society.

(b) It is important not to overcompensate victims of breach because there are some efficient breaches, and society wants to encourage those efficient breaches

(c) There is question of value to society of paying the agreed remedy if the fulfillment of the contract only results in a highly priced result with low value – referred to as “low utility”

(2) Weaknesses of the argument is that you only have to look at the two parties to the contract – excludes other parties, such as employees.

c) Aside on damages:

(1) If an agreed remedy clause is disproportionally high compared to expected damages, it will be deemed a penalty clause and as such is invalid; the problem arises when trying to explain “why” this is the case.

D. The Expectation Interest: Lost Anticipated Profits and Consequential Damages

1. The Forseeability Test:

a) Hadley v. Baxendale

(1) Holding: ∆ can only be held liable for losses that were generally foreseeable, or if π had mentioned his special circumstances in advance.

(2) Aside on forseeability:

(a) Had π made ∆ aware of the circumstances, it is likely that recovery would have been possible

i) ∆ must be made aware of the circumstances at the time of contracting;

(1) once the contract is created it cannot be modified because the parties must be allowed to make stipulations to account for the circumstances at the creation of the contract

ii) Alternatively, ∆ must be aware of the circumstances because they might not have made the contract in the first place if they had known about the different circumstances

(b) If damages are denied because they are not foreseeable, one can argue that such a decision leaves the non-breaching party in a worse place than if performance had occurred – this is in violation of the expectation principle

2. Proof of Damages with Reasonable Certainty

a) Evergreen Amusement v. Milstead

(1) Facts: π seeks recovery of lost profits for the period of delay in opening a drive-in theater caused by ∆ contractor’s delay clearing and grading of the site.

(2) Holding: π was held liable for the balance due on the written contract, less the cost of completing part of the work and damages for delay in completion which was computed based on the approximated rental value of the theater property during the period of delay and out-of-pocket costs for that time.

(3) Aside on “New Busi

ce were the appropriate remedy.

(2) Aside on Quantum Meruit

(a) In this case, π sought the reasonable value of the services rendered to ∆

i) Quantum Meruit – a Latin phrase meaning “as much as he has deserved”; in the context of contract law, it means something along the lines of “reasonable value of services”

G. Restitution for the Plaintiff in Default

1. De Leon v. Aldrete

a) Holding: ∆ was entitled to retain, as compensation for damages resulting from π’s breach, the difference between the amount received from the second conveyance and the amount contracted for with π. Remaining amount must be returned to π.

b) Aside on Forfeiture Rule:

(1) Forfeiture Rule – Breaching party can also sue in restitution subject to the non-breaching party’s ability to counterclaim for damages.

(a) Note that this is a restitution claim on behalf of the breaching party, not the non-breaching party.

(b) Old majority rule: If the buyer breaches substantially, there is no claim in restitution because only the non-breaching party can sue in restitution.

(c) Policy: Unjust enrichment

H. Measuring Damages for Subjective Loss

1. Peevyhouse v. Garland Coal & Mining Company

a) Holding: Because the diminution in value resulting to the premises because of non-performance of the remedial work amounted to a few hundred dollars, π were not entitled to recover more than a reasonable amount for ∆’s breach – would have been contrary to substantial justice.

(1) Dimunition in Value – The small award in Peevyhouse did not consider subjective value of property

(a) Likely because it is substantially easier to give the diminution in value or specific performance

(b) There is an argument that subjective value should receive heavy consideration in these sorts of situations

(2) Argument for Specific Performance:

(a) This would allow the parties to bargain about what the real (subjective) value of the item in question is – at least from a perspective of each party reaching a suitable number from their perspective.

i) It is substantially easier to give the diminution in value or specific performance

(3) If the π can show that ∆ has no intention of performing at the time of making the contract, there would be a possible claim of fraud – making a promise with the present intention of not performing when it is made.

2. Hawkins v. McGee

a) Holding: π’s case was properly submitted to the jury because ∆’s statement constituted a warranty in that π believed the statement, and the statement induced π to consent to the operation. Court reversed the judgment and ordered a new trial because the jury was improperly instructed that π’s damages included both pain and suffering and the ill effects of the operation – instructed measure of damages was improper because the correct measure of π’s damages was difference between the value of a perfect hand and value of his hand in its post-operation condition; pain resulting from the operation was a legal detriment suffered by π in consideration for the contract.

b) Aside on the difference between Promises and Predictions

(1) There is an argument to be made that there was not sufficient evidence that a promise was made to hold a doctor contractually liable.

(a) This means that there would be no contractual liability with respect to the outcome of the surgery because the statements about the quality of the operation could be either promises or prediction.

(b) Objective Theory of Contract – Focus should be upon what a reasonable person heard, from the position of the listener, and whether they reasonably understood what was said to be promise as opposed to a prediction.

c) Aside on Reliance Damages and Expectation Damages

(1) Because a hand can be valued (Perfect, Pre-Surgery, Post-Surgery) expectation recovery is appropriate

(2) Pain and Suffering damages are not typically contract damages, but there is an exception when the promise relates to a surgical procedure. (Not recovered in this case)

(a) Raises a point that if π obtains recovery of pain and suffering (given its nature as a cost of the surgery), π will be put in a better place