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Contracts
Temple University School of Law
Smyth, Sophie E.

I.                  Introduction

§2 Promise (oral, written or inferred from conduct): a manifestation of intention to act or refrain from acting in a specified way so made as to justify a promisee in understanding that a commitment has been made.
a.       Agreement: manifestation of mutual assent on part of two or more persons
b.       Bargain: agreement to exchange promises or to exchange a promise for a performance or to exchange performance

overriding themes in Contracts –
economic efficiency
parties’ intentions about the economic allocation of risk
fairness
game theoretic approach to contracts, esp. default rules
whom does policy encourage/dissuade/prefer?
extra-legal sanctions — especially reputational damage
regarding enforcement (of any type), tradeoff between:
judicial discretion in interpreting and enforcing and
individual freedom to contract
asymmetry of information
lopsided bargaining power

Case 1: Shaheen v. Knight – failed vasectomy, unplanned child                                             p.9
I: does a failed vasectomy operation constitute a breach of contract between Physician and         Patient?
R: If patient and doctor contracted for a particular result and result not obtained, patient
has a cause of action for breach of contract – in absence of a special contract in writing, health care provider is never a warrantor or guaranteer of a cure.
H: No damage done to P, so none rewarded


II.   Damages
A.    Expectation, Restitution, Reliance
in general, damages must be determined with certainty
courts don’t commonly make parties adhere to contracts, usually makes one party pay other party for damages caused
punitive damages are not usually given in breach of contract disputes

i. reliance:damages that put promisee in position had he never entered contract at all
used in noncommercial settings, puts P back in the status quo ante position

incorporated when
–          profits are too uncertain to determine but P can show expenses
–          no enforceable contract, but P entitled to something under promissory estoppel
–          failure to perform on land contract and jurisdiction doesn’t allow expectation damages

§349.                       reliance = expenditures made in prep. of performance – expenses saved in breach
p.139
includes essential and incidental reliance .     reliance damages < expectation damages Case 2: Sullivan v. O’Connor, botched nose job on entertainer                                                       HO I: What measure of damages should be used? R: Contracts usually issue expectation damages except here, where the court makes an exception for medical breaches of contracts ii. expectation(compensatory): damages that put promisee in condition that he would have been if transaction occurred, the normal damages offered in contract law. Expectation measures are preferred because it causes people to breach only when it makes at least one party better off and no one worse off, i.e. encourages only efficient breaches §347: measure of damages in general (default) p. 78 expectation = loss in value to him of the other party's performance caused by its failure or deficiency + any other loss, incidental or consequential, caused by the breach - any cost or other loss that he has avoided by not having to perform promised original current b a Case 3: Hawkins v. McGee – hairy hand skin grafting, promise of a 100% perfect hand p. 69 I: Can oral guarantee of 100% success in operation hold a doctor liable when operation fails? i.e. when a special contract is made? R: Yes, utterance of words are done with the intention that they would be taken at face value by patient inducing them to consent to operation. D went beyond offering a medical opinion when offering a “perfect” hand Expectation damages = value of perfect hand (a+b) – value of current hand + incidental cons. iii. restitution: damages that relinquish benefits provided to promisor derived from promise covers any benefits conferred by P on D in the performance. NOT available when P has fully performed §371, p. 287: Measure of Restitution Interest – If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires to be measured by either -          the reasonable value to the other party of what he has received in terms of what it would have cost him to obtain it from a person in the claimant’s position, or -          the extent to which the other party’s property has been increased in value or his other interests advanced. p.97 §1-106: damages = expectation damages, not consequential, special, or penal damages B.     Limitations on damages i.      Remoteness or unforeseeability of harm §351, p. 120: Unforeseeability and other limitations on damages - not foreseeable by party in breach              no damages - foreseeable if: i.      loss follows in ordinary cause of events (consider separation in time and space between breach and consequences, customs of the trade, etc) ii.      party in breach knows of special circumstances -    exceptions to forseeability damages: i.      excluding loss of profits, paying only reliance damages ii.      if giving damages exults in overcompensation -      damages can be curtailed by excluding recovery for lost profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation a test of foreseeability is to determine whether D would have agreed to the contract price had he known of the extent of his liability Case 4: Hadley v. Baxendale, N‘l failed to deliver on time shaft that runs mill                                p 102 I: is D liable for loss of profits? H: no, damages limited to what was contemplated at the time of contract. R: must be foreseeable. For special situations, damages can be awarded only if P informs D of the special situation or if the damages were reasonable foreseeable. Note that this encourages information sharing when deviating from a default rule. Case 5: Hector Martinez v. South. Pac. Trans., delay and damage of dragline transp.      p 116 I: Due to delay and damage of P’s machinery, should D be liable for P’s loss profits without and conveyance of “special circumstances” notice? R: Yes, as long as it’s foreseeable and not remote to a reasonable person ii.      Uncertainty of harm § 352, p.140: Uncertainty of loss – limitation on damage

resale


incidental damages: i.e. commercially reasonable charges, expenses or commissions incurred in stopping delivery, in transportation, care and custody of goods after buyer’s breach, in connection with return, resale of goods

§2-718, p. 169: Liquidation or limitation of damages; Deposits
–                  a term fixing unreasonably large liquidation damages is void
–                  buyer’s entitled to restitution damages, stipulations on p. 170

i.      Liquidated damages and penalty clauses
§ 2-719,p. 147: Contractual modification or Limitation of remedy Default Rules – parties can contract around by inserting expressed clauses to the contrary unless clause is unconscionable

a.       warranty clause: limits liability by providing the exclusive remedy for a breach excluding damages for other foreseeable losses
b.       liquidated damages: can expand or limit damages, expressed explicitly in contract only if they are reasonable and do not exceed the loss foreseeable by a breach, §356, p.159, applies only when actual damages cannot be ascertained and must be proportional to actual damages
Liquidated damages are good because they place a limitation on liability and sometimes offer a basis for when there’s no easy method to calculate damages in a breach however penalty liquidation damages are bad because they hinder efficient breaches.

Reasonableness Test: (look at factors and policies of the time)
1.       Did parties intend to provide for damages for a penalty?
2.       Is injury caused by breach one that is difficult or incapable of accurate estimation @ time of contract?
a.       difficult of producing evidence of damage
b.   difficult in determining what damages will be caused
c.    difficult indetermining damages contemplated
d.   absence of standardized measure
e.    difficulty in forecasting all damages
3.       Are the stipulated damages a reasonable forecast of the harm caused by the breach?
a.       time of contracting
b.       time of breach

Case 10: Kemble v. Farren, actor’s breach in contract for failure to perform                      p. 174
I: Can court grant damages other than what is stipulated in contract?
R: Yes, clause would have been reasonable if actual damages cannot be ascertained, but, in this case, actual damages are easily calculated

Case 11: Wassenaar v. Towne Hotel, liquid damages in termin. of employment contract      p. 176
I: Does P need to mitigate damages other than what is stipulated in contract? No.
R: test of validity: whether clause is reasonable under the totality of circumstances?
H: yes, reasonable to foresee conseq. Damages, employer failed to show that P suffered no damages, if they did, no damages would have been rewarded. D didn’t meet B/P, must show:   actual damage