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Contracts
University of California, Hastings School of Law
Lefstin, Jeffrey A.

Lefstin – Contracts – Fall 2011

I. Nature and History of Contract

Contract (definition): an exchange of a promise for a promise (bilateral) or a promise for a performance (unilateral)

→ Contract REQUIRES an exchange

Shaheen v. Knight: failed vasectomy by Dr. Knight, unwanted child is born to Shaheen

– Court says Shaheen benefits from the breach (with the blessing of having a child, etc) and therefore suffers no loss

– Courts see a breach as involving a loss, not a gain/benefit (Shaheen suffers no loss, he isn’t “damaged”)

Instances in which courts will NOT enforce a contract:

1. if the contract is illegal

2. Immoral acts: i.e., gambling

3. Inalienable: parting with personal liberty or body part (one cannot sell oneself into slavery)

4. Reducing/altering personal status relationships

– Redefining doctor-patient, attorney-client, or parent-child relationship

II. Remedies for Breach of Contract

– courts don’t commonly make parties adhere to contracts, usually make one party pay other party for damages caused

– punitive damages are not usually given in breach of contract disputes

A. The three damage interests

1. Expectation Interest (aka Standard Measure of Damages)

– ordinarily, this is what is granted by the courts

→ This places the non-breaching party in the position it would have occupied had promise been performed

– this is to provide the non-breaching party w/ sufficient damages to buy a substitute performance

E&E example: A contracts with B for singing lessons for $1500. B breaches. How do we place A in position

she would have been in had contract been performed?

– A will have to mitigate damages by finding another teacher. Say this teacher costs $1800, then B must pay A $300 b/c A expected to pay only $1500. Of course, if A found teacher for same or lower price, then B owes no damages

Hawkins v. McGee (“Hairy Hand” case): “guarantee” of a “perfect hand”

– The measure of damages is the difference b/w current state non-breaching party is in and the value of the performance (of what should have been)

2. Restitution interest (preventing “unjust enrichment”)

→ This seeks to put breaching party in position in which it would have been if promise was never made

– covers any benefits conferred upon D due to P’s performance

3. Reliance interest

→ This seeks to place non-breaching party back in position in which it would have been if promise was never made

– put P back in status quo ante position (“the way things were before”)

reliance = expenditures made in prep. for performance – cost avoided/saved due to breach

– essential reliance: expenditures directly based on the contract and essential to fulfilling party’s commitment

Nurse v. Barnes: D allowed P to use mills, so P spent money on buying supplies for use of mill, but D breached

– courts grant damages for loss incurred due to promisees reliance of the promise

B. Limitations on Damages

1. Foreseeability

– Rest. 2nd §351 only damages which are reasonably foreseeable by both parties at the time of contract formation are

recoverable

– only the loss/damages from breach need to be foreseeable, not the breach itself or the particular way the loss comes about

– foreseeability only relates to the party in breach (objectively: whether it was foreseeable)

– the resulting loss from breach doesn’t have to be the loss most foreseeable, just that the loss was foreseeable in some way

Hadley v. Baxendale: P’s mill was shutdown longer (resulting in loss of profits) as result of delay in delivery of

repaired shaft by D

– D not responsible for loss of profits b/c D could not have reasonably foreseen such loss AND was not given notice of consequences of nondelivery

– Default Rule: parties may specify damages/consequences and modify the default rule (eg FedEx Airbill)

Martinez v. Southern Pacific: D delays and damages drag-line during shipment to P

– P seeks damages for loss in “use value” of the drag line (rental value) due to delay and damage

– This was foreseeable

– one can recover rental value of a good if there is delay in performance, measured by market rental

value (b/w promised time & actual delivery time)

2. Uncertainty

– only damages sustained by P which are certain (or measurable) are awarded

– speculative damages will not be awarded (especially if a business is a start up or an idea is new), but a business or individual with past experience and success could show potential lost profits

– Rest. §352 (comment a): while damages cannot be recovered for loss beyond amt established with reasonable certainty, policy of holding breacher accountable for her wrongful act requires that doubts should generally be resolved against her once it is established injury has occurred

– determination of damages is an estimate, not exercise in mathematical precision

– this limitation applies particularly to lost profits and ‘potential profits’ for sports events and start-ups

Chicago Coliseum Club v. Dempsey: Boxing match contract breach by boxer (D)

– P sought potential lost profits

– court held it very diffic to measure what profits would have been, limited by uncertainty

– but P could recover for expenses in reliance (ie reps traveling to boxer after contract formed)

– Causality: damages are awarded only for those harms resulting from the breach

– one cannot recover for expenses incurred BEFORE contract formation (courting boxer)

3. Avoidability/Mitigation (D is not liable to pay for damages that could have been mitigated by P)

– nonbreaching party cannot recover damages which could have been avoided by them

– but if nonbreaching party tries to mitigate damages or find alternatives in ‘good faith’, all’s good

– Rest. §350: avoidable losses not recoverable if nonbreacher could have avoided without “undue risk, burden or humiliation,” except if P makes “reasonable (even if unsuccessful) efforts to avoid harm”

– burden of showing avoidability is on breaching party

Mistletoe v. Locke: P made 1 yr contract w/ D for delivery job and bought equip to prep for job. P was profitless and D decided to cancel contract, breaching it. P sued for damages

– Mistletoe (D) argued Locke (P) could only recover expectation interest (the gen rule) and as she was not making a profit, this would be nothing

– However, Rest. §349: injured party can choose b/w Expectation & Reliance damages – benefit of being non-breaching party!

– Court says non-breaching party is able to recover reliance interest, and if P was not making a profit then burden is on D to prove this amount of loss which is subtracted from damages

– Locke was able to salvage some costs by reselling, and these are subtracted from damages

Rockingham County v. Luten Bridge Co.: County repudiated bridge contract but co. continued to build

– Bridge co. only recovered expenses prior to breach, any costs incurred after breach NOT recoverable

– nonbreaching party must cease performing after repudiation/breach in order to avoid further damages

Shirley MacLaine v. 20th Century Fox: Studio cancels musical, offers alternative non-musical role to actress

– Actress sued for expectation damages, studio said she could mitigate damages by taking new role

– Court rules that the alternative offer was sufficiently “different and inferior”, NO mitigation by P reqd

C. Modifying the Default Damages Rules

1. Limitations on Consequential and Incidental Damages

– modifying the default rule is allowable for contracting parties; parties are generally free to add

or subtract to contract under the common law

– ex: FedEx Airbill limiting FedEx’s liability

2. Liquidated Damages Clauses (aka “Penalty Clauses”)

– this is a contractually set amount of damages for breach

Policy: this is good at times because it removes need to evaluate amount of damages after breach, and

makes it easier and more efficient to obtain relief if a breach occurs

– overall point: to avoid uncertainty of calculations of damages later

– if two parties agree to provision when entering contract, party seeking to overturn provision

(usually the breacher) should bear burden of proving it is a penalty and unenforceable provision

Vines v. Orchard Hills: P must show why the deposit for condo is penalty and not liq damg

How courts approach question:

Restatement §356(1)/UCC 2-718 (modern approach): look at time of contracting to see if forecast

of damages was reasonable at the time, AND actual damages suffered to see if provision was

reasonable

1. Court asks whether parties made a reasonable forecast of harm at time of contracting

– if it was difficult to measure anticipated damages, less precision required

– if it was easier to measure anticipated damages, more precision required

2. If provision was reasonable effort to forecast but turned out “unreasonably large” then no enforce

Posner says: “if damages would be easy to determine at time of contracting, or if estimate greatly exceeds a reasonable upper estimate of what damages are likely to be, it is a penalty”

Liquidated damages clauses sometimes prevent efficient breaches (Posner)

Kemble v. Farren: P and D (actor) contracted for D’s performance but D breached by not performing 2nd season. Parties stipulated £1000 liquidated damages in case of breach

– the law’s goal is not to deter breach by compelling breacher to perform, but to redress breach by

compensating the non-breacher

– in terrorem effect: causes potential breacher to be compelled to perform

(courts DO NOT want this)

Wassenaar v. Towne Hotel: P was employee of D and contract had liquidated damages clause (employee to be paid by employer in case of termination). P was fired and sued for enforcement of liquidated damages clause, while D argued P mitigated damages since he found new job

– Once it is decided that liquidated damages are enforceab

– courts want to promote Drs to offer services and be awarded under quantum meruit, otherwise

they may not perform such services to save lives

– man who fainted prob would have wanted Dr to save him

– but a mere volunteer “Mr. Fake Dr” cannot try to perform surgery on accident victim; courts

DON’T want to promote this behavior and incentivize it

III. Mutual Assent

A. The Objective Theory

– Objective Theory prevailed → the classical period brought on a strict objectivist standard – they looked

to the outer manifestation (objective) of the parties’ intentions

– party’s “inner thoughts” or subjective intent do not matter

– how would a reasonable person in the position of the party to whom manifestation was made

view the outer manifestation?

– Prof Lefstin: outer manifestation is the only reliable evid we have of a party’s intent

– Modern approach: accepts objective theory but is not as strict

– subjective intent is still acceptable as persuasive evid but only so far has it is in accord with the

lang of the contract; it cannot be at odds with the “plain and reasonable” meaning of the lang

Embry v. Hargadine – employer did not subjectively intend to give contract to Embry, but Embry

understood his statement to mean he was assenting to a contract, and reasonable person in Embry’s

position would have also understood employer’s action to mean he was assenting and giving him the contract

Hawkins v. McGee – court held that it doesn’t matter what the Dr. subjectively intended by saying “I guarantee a 100% perfect hand,” rather what matters is what patient understood those words to mean based on what a reasonable person would think

Lucy v. Zehmer – Even though D contended he was joking, court held that reasonable person in P’s position would have understood D to be serious through his outward manifestation, actions/conduct (writing out contract and signing it, etc)

– doesn’t matter if one is joking. Place reasonable person in position of other party and determine what a

reasonable person would think

B. Offers

1. Completeness

– an offer is that which creates the power of acceptance, and once acceptance is made, then a contract is formed

– A distinction must be made between statements of future intention and promises (statements of present intent)

– Rest. §24 offer defined: An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it

– common law: courts look to “essential terms” such as price, time of delivery, and identity of offeree

– The terms must be complete, cant just have an estimate of quantity (Nebraska Seed Co. v. Harsh)

– modern approach: moved away from notion of “essential terms” (only quantity is necessary)

UCC 2-204 (3) (FOR GOODS ONLY!): Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is reasonably certain basis for giving an appropriate remedy ← rest of the terms can be “filled in” with UCC “gap-fillers”

“Gap-Fillers” under the UCC:

– price: reasonable price at time of delivery

– Delivery: seller’s place of business

– time of delivery: look to custom and industry practice (how long after contract is delivery usually?)

– payment due upon receipt of goods

Pre-Contractual Negotiations:

– negotiations can generate documents like “letter of intent” or “agreement in principle”

– Court will look at whether the parties intended to be bound by such documents/agreements

– courts have not adopted a “contract to bargain”

– they haven’t held parties to terms of negotiation as a binding contract

– if one party seeks enforcement of negotiation terms but left themselves daylight to withdraw

– most likely not going to be enforced by court (Empro v. Ball-Co)