Lefstin – Contracts – Spring 2011
I. NATURE AND HISTORY OF CONTRACT
Contract: an exchange of a promise-for-promise or a promise-for-performance. The breach of which the law gives a remedy, or the performance of which the law in some way recognizes a duty
– contract requires at least one promise. Is not immediate, requires some future action
– must have an exchange;
– in breaching a contract or misrepresentation, intent does not matter in court
Assumpsit: an action to recover damages for breach of an express or implied contract or agreement; allowed a cause of action for harms from someone performing a promise poorly or for
Promise: a manifestation of intent to act or refrain from acting in a specified way, so that the promisee understands that a commitment has been made
· Oral, written, or inferred from conduct
Agreement: manifestation of a mutual assent by two or more persons
Bargain: agreement to exchange promises/performance or to exchange a promise for a performance
· Restatement: not binding, persuasive only
· Uniform Commercial Code (UCC): binding; adopted by all states except Louisiana
– supersedes common law
– Only regulates sale of goods
– Makes common law more closely aligned with actual commercial practices in merchant community
i. Shaheen v. Knight (Penn 1957) (failed sterilization case)
· Warranty of cure does not apply to allegation of breach of contract (only to malpractice actions) and awarding damages for care of child would be against public policy
o Did not have to allege negligence in duty of care b/c it’s a case of breach of contract, not malpractice
o People are free to contract but courts will be reluctant to enforce contracts, which violate public policy; ie: illegal acts, price-fixing contracts, restraint in trade, organ trade, etc.
ii. Restatement §178: term is unenforceable on grounds of public policy – when stated by the legislature or when interest in enforcement is outweighed by the circumstances by a public policy against enforcement
iii. Restatement §179: Public policies against enforcement are derived from: legislation, protection of public welfare
· Ie: restraint of trade, impairment of family relations, interference w/ protected interests.
II. REMEDIES FOR BREACH OF CONTRACT
a. The 3 Damage Interests
Ie: pay $20 for professor’s notes; he never gives the notes
1) Restitution interest (backwards looking)– focuses on reversing any unjust enrichment of the breach by the promisor. Does not consider promisee’s lost profit or reliance by the promise that produces no benefit to the promisor.
· Resulting gain by the promisor
· Ie: give back the $20
2) Reliance interest (backwards looking) – Damages awarded are meant to put the plaintiff in as good a position as he was before the promise was made.
· Usually does not take into consideration lost profits
· Reliance may be larger than restitution interest; ie: where promisee experiences loses but promisor does not gain;
· Ie: give back the $20 and must compensate buyer for whatever losses he incucred upon his reliance on the promise; such as notes not taken
3) Expectation interest (forward looking) – Damages awarded are meant to put the plaintiff in as good a position as he would be if the promise were fulfilled. Give the plaintiff the value of the expectancy, which the promise created.
a. why should the law protect expectation interests?
1) Psychology – Breach of a promise arouses a sense of injury and deprivation
2) Will Theory – the law should respect the will of private agreements.
3) Economic approach (credit): credit economy is based on expectations of the future and a promise to pay in the future has value now
o Objection: the only reason why expectations have present values is because the law enforces it. Laws created the credit institutions.
4) Juristic: promote reliance on agreements – encourages people to invest in forward-looking enterprises; ie: mortgages.
o Efficient utilization of resources – want to promote exchanges and utilize resources more effectively;
o Compensate for loss opportunity costs caused by avoidable harms.
– Hard to award for opp. costs b/c hard to determine/approximate
– Reliance might be measured by opp. costs
o Deterrence for breach of contracts and prevent losses, esp. if remedies > reliance
· Purdue assumes that expectancy would be easier to measure than reliance, esp if reliance is in the form of opportunity cost. But this might not be true:
· If expectancy is very high, and creates a lot of value for society, it should be the kind of exchange that should be promoted. However, if the promisee is liable for inability to perform, they may be less likely to enter
· Likely that expectancy and reliance will merge with respect to opportunity costs
· expectation and reliance interest have identical measures of recovery in cases in which:
1. Plaintiff’s reliance of acts essential to the enforcement of the contract by him and defendant breaches contract before complete performance has taken place,
o expectation interest alone; or
o expectation interest and reliance interest
· Gross expectation interest: expectancy which involves 1) reimbursement for what has been done and 2) a profit in addition
2. Where reliance interest is conceived to embrace loss of the opportunity to enter into similar contracts with other persons
3. Breach of contract results in the loss of the promised value but also in some direct harm. Ie: relied on non-diseased cow, but it was diseased and contaminates plaintiff’s entire herd.
Usually expectancy > reliance > restitution; however, in such cases:
Recovery based on reliance should not be allowed to exceed the value of expectancy b/c:
· Most likely, plaintiff entered into a losing contract; plaintiff would be unfairly shifting the cost burden to the defendant
· Essential reliance: loss that is necessary to fulfill the contract; cost to perform. Limiting recovery to just the “contract price” and does not allow plaintiff to shift his own contractual losses to the defendant.
o should be limited to just the expectation interest (full contract price) measured objectively or else it would indicate that the plaintiff entered a losing bargain.
o Ie: $20; pain + suffering
· Incidental reliance: foreseeable loss that follows from the contract. No reason to limit recovery to just objective expectancy and allows plaintiff to shift own contractual losses to the defendant.
o Should still limit recovery to subjective expectation interest. Should not put plaintiff in a better position than he would be if the contract was completed.
o Ie: cost of not doing well because he did not take notes; decrease in utility of hand
i. Nurse v. Barns: though the worth of the iron mills were only 20L per annum and he paid only 10L for 6 months of use, he was awarded 500L for the loss of stock laid in. (Reliance theory or expectation theory)
ii. Hawkins v. McGee (promise of 100% perfect hand – hairy hand)
· Recovery based on expectancy interest with incidental reliance should be based on how much worse off π was after surgery and what his hand would have been if contract were complete. (difference of worse hand and perfect hand)
· Thus, should not include pain and suffering because the patient voluntarily acquiesced to it, it was expected as a cost to the patient.
· Under expectancy theory, should not allow for essential reliance damages, but should allow for incidental. To allow for essential reliance damages would place π in a better position than if the contract had been fully performed.
· If under a reliance theory, could claim essential and incidental reliance damages b/c have to put him back in a the position prior to promise (difference between old hand and worse hand plus pain + suffering)
· Insurance covered doctor negligence (tort) not breach of contract, which was found here b/c father relied on doctor’s promise of 100% perfect hand when agreeing to the surgery.
iii. Restatement §347: Measure of damages in general – right to damages based on expectation interest as measured by
a) loss in value to him of failure to perform or deficiency, and
b) any other loss, including incidental or consequential caused by breach, less
c) cost or loss that would have been avoided by not having to perform.
Damages = loss in value + other loss – cost avoided – loss avoided
o Ie: McGee damages = perfect hand – pain/suffering
Hypo: Bought Restatement FMV = $15 in exchange for $10, and notes FMV = $1, cost to copy =$3; never received the Restatement
Restitution (enrichment to the promisor) = $10+$1 = $11
Reliance (detrimental change in value by the promisee) = $10+$3 = $13
Expectancy = $15
· Photocopied notes and gave them away; did not give $10
o D = loss in value + other loss – cost avoided – loss avoided
D = $15 – $10 = $5
· Photocopied notes but did not give them away
o D = $15 -$10 – $1 (salvage value of notes kept) = $4
· Did not photocopy or give anything away
o D = $15 – $10 – $3 =$2
Hypo: if the Restatement FMV = $9, Prepaid= $10, and gave notes at FMV = $1, cost to photocopy = $3; did not receive Restatement
Restitution = $10 + $1 = $11
Reliance: $10 + $3 = $13
Expectancy = $9
b. Limitations on Damages
Three most common limitations in awarding expectancy interest:
· Remoteness or foreseeability of harm
· Certainty of harm
· Avoidability of harm
When such limitations apply, courts may rely instead on reliance or restitution interests to award damages.
· Expectation reliance should be the ceiling for losing contracts but it should not be the ceiling for incidental reliance.
· Not liable for any and all consequences but only those which are foreseeable in your failure to perform
· Doesn’t matter if breaching party actually foresaw the consequences/liability, just that they should have known – objective standard of foreseeability
1. Hadley v. Baxendale (broken mill shaft, delay in shipping)
· Party is liable if it is the sort of thing that would arise naturally as a consequence of a breach, the damages would be considered foreseeable even if defendant did not have actual notice
· Need foreseeability by either 1) actual notice or 2) should have known – objective standard
· Hadley rule is a default rule but may be contracted around if parties both agree to different set of rules.
à damages not
ssful efforts to avoid loss
4. Neri v. Retail Marine Corp. (buyer of ship backs out, sells to another)
· UCC: “if measure of damages is inadequate to put seller in as good a position as would have done, then damages = profit which seller would have made from full performance + incidental damages, due allowance for costs reasonably incurred.
· When seller has an inexhaustible supply of standard priced goods, the breach is seen as costing the seller a sale, in which he would have sold 2 ships rather than one. Damages should include the dealer’s profit on one sale plus the incidental costs of storing the item.
o Seller mitigated by selling the boat or else Neri would have to pay both the cost of the boat and retailer’s profit.
c. Modifying the Default Damages Rules
Contracting around the default rules of damages
· Most contract rules are default rules – they can be contracted around by inserting an expressed clause to the contrary
· Express clauses may disclaim liability for consequential damages even if it is foreseeable
· Damages may be either limited or expanded by the use of liquidated damage clauses
· Many commercial contracts contain clauses in which one or more parties have the right to have the dispute settled by arbitration – alternative dispute resolution (ADR)
Express limitations on consequential and incidental damages
i. Limitations on Consequential Damages Clauses
· General formula for damages = Contract Price – Market Price
· Warranty clause – limits liability through expressly intended exclusive remedy for breach of contract, thereby excluding damages for other foreseeable losses
· Consequential damages – bad things that happen to you b/c of the breach, other damages which are a consequence of the breach.
· Incidental damages – reasonably associated with or related to actual damages ie: reasonable expenses incurred in stopping delivery or transport/care of goods after breach
· Free to disclaim from liability for consequential damages but limited to doctrine of unconscionability – limits enforcement of contracts that are substantively unfair and have procedural problems
§ Stipulated damages
o Penalty clause – not enforceable if represented damages were meant for penalty reasons
§ if allowed, would deter efficient breaches
o Liquidated damages clause – an attempt to represent the damages ahead of time; enforceable
§ Allow parties to control exposure to risk by setting payment for breach in advance. Decreases need for judicial interpretation
§ Efficient Breach – promisor breached to pursue better, more efficient use of resources
o Ie: Breach = $20K in benefit to promisor – $12K damages = $8K net benefit to promisor
o Promisee is just as well off if contract were completed
ii. Liquidated Damages Clauses
1. Kemble v. Farren (1829) (theatre sues actor for failure to perform for 4 seasons)
Agreement contained a clause that if either of the parties should neglect or refuse to fulfill the agreement/any part thereof, such party should pay to the other the sum of $1000
· Clause was discharged because it was seen as a penalty. The calculated damages for not acting during the second season was certain to be only $750, and increase from that number was a penalty. Liquidation clauses help to address uncertain amounts.
2. Wassenaar v. Towne Hotel (1983) (stipulated damages clause stated that employee wrongfully discharged would receive salary for the unexpired term of the contract)
· Party challenging the stipulated damages clause must show that it is a penalty clause.
· How to judge if stipulated damages clause is reasonable:
i. Did the parties intend to provide for damages or for a penalty? – not given much weight since it is subjective
ii. Is the injury caused by the breach one that is difficult or incapable of accurate estimation at the time of contract?
iii. Are the stipulated damages a reasonable forecast of the harm caused by the breach?
· Once it is found as a reasonable liquidated damages clause (no windfall, unfair bargaining power, etc), mitigation is no longer a factor and the damages should not be reduced at trial.
à defendant’s earnings after the breach did not reduce the damages awarded.