Contracts – Lefstin – Fall 2012
ENFORCING PRIVATE AGREEMENTS
I. Nature and History of Contract Law
• Sources of Contract Law
• Case Law (common law of jurisdiction) – Binding!
• Case law from other jurisdictions is persuasive, not binding
• UCC – Statutes adopted by 49 states, therefore binding on courts and supersedes common law inconsistent with provisions
• Restatement (2nd) of Contracts – “Good Authority” aka safe option for courts, but PERSUASIVE, not binding
• Historical move from STATUS (derived from identities of the parties) to CONTRACT (derived from agreement between parties) – Able to contract freely with one another.
• Not all promises are enforceable (freedom to change one’s mind is essential)
• A mere promise does not give rise to action – Assume promises are generally UNENFORCEABLE and then create exceptions for promises thought desirable to enforce (common law) – Exceptions become general basis for enforcement.
A. Shaheen v. Knight (Damages for Healthy Child?)
• Issue: Can P recover damages for the normal birth of a normal child, when he contracted with D (the doctor) to become sterile (and P was not harmed in the surgery)?
• Rule: P cannot recover damages when P was not DAMAGED by the breach of contract.
• Policy: Ruling says it would be “against public policy” to award damages for a healthy child; We don’t want to make doctors pay for a child when the parents want to keep the child.
• Tort Law vs. Contract Law: P is not alleging that D breached standard of care, but rather that the result contracted for was not obtained (breach of contract)
• Intent: Only time intent (subjective intent in making/fulfilling promise) is looked at in Contract Law is the defense of misrepresentation
• Misrepresentation: P does not want to bring up misrepresentation because it is a DEFENSE to contract fulfillment and could make the contract void/unenforceable (helping D’s side)
B. Restatement § 178, § 179 – PUBLIC POLICY – (see appendix)
II. Public Policy
• Rare to refuse to enforce a contract on grounds of public policy… except:
• Contract to perform an illegal act
• Contracts “in restraint of trade” (i.e. employee competition)
• Contracts considered “immoral” (i.e. gambling)
• Contracts to sell things that are inalienable (i.e. body parts, liberty, etc.)
• Contracts that attempt to interfere with status relationships (i.e. contract agreeing to not sue doctor for malpractice – changes duties inherent in relationship)
III. Remedies for Breach of Contract
A. The Three Damage Interests – Fuller & Perdue
I. Restitution – perform on promise or give back value gained
• Focus: prevention of unjust enrichment of the promisor
II. Reliance – make whole again/undo harm caused by reliance
• Focus: loss of the promisee
III. Expectation – benefit of bargain/give promisee value of expectancy which the promise created
• Focus: future looking: what would have happened had the promisor performed?
• Why does the law protect the expectation interest?
(1) Psychological – “psychic injury” suffered by promisee – hard to measure $$
(2) Will Theory – not relied on in contract law
(3) Economic/Institutional – “credit” society requires that expectations of future values become present values
(4) Juristic (Policy Driven)
i. Opportunity Costs – (approximate by using expectation interest) – Concern to compensate plaintiff for reliance, including loss of opportunity to enter other contracts.
ii. Deterrence & Promote Reliance in Contracts – offer a more effective sanction against contract breach
a) Hawkins v. McGee (hairy hand)
• Issue: May the jury award damages for pain and suffering when P entered into a contract for voluntary surgery, during which some pain is expected?
• Rule: The jury should be given specific instructions to award only expectancy damages, not damages for pain and suffering, which was inherently part of the contract.
• Trial Court measured damages according to the worsening of the hand due to breach + pain and suffering; Supreme Court measured damages according to difference between promised hand and current hand (expectation interest)
• Measuring expectation damages: difference between promised outcome and real outcome
• D = [loss in value of performance] + [other losses b/c of breach] – [any cost/loss avoided] (what was promised but not delivered) (“incidental” damages) (by not having to perform)
b) Restatement § 347 – EXPECTATION DAMAGES- (see appendix)
• Default rule of damages: Expectation Damages
• UCC’s rule re: Buyer Breaches: Damages = Contract Price – Market Price (expectancy damages)
c) Nurse v. Barnes (loss of stock in iron mills – reliance damages much higher than expectation)
• Essential Reliance (cost of your performance) vs. Incidental Reliance (other losses incurred because of breach – subject to limitation of foreseeability)
• When claiming reliance interest, you may ask for both essential and incidental reliance (put yourself back where you started)
• When claiming expectation interest, you don’t get essential reliance (because you would have expended this anyway, had the other party performed), but you can claim incidental reliance (because that loss would not have occurred had they performed)
B. Limitations on Damages
3….Of DAMAGES, not BREACH. Unforeseeability of breach does not allow D to escape liability. Question is if the breach occurs, were the damages foreseeable?
3. * This is a default rule. Can override by (1) contract terms that state otherwise; (2)
3.disclaim liability (i.e. fine print), put caps on damages (parties agree to limitations on damages)
3.2 ways of showing foreseeability:
3.(1) NOTICE of special circumstances
3.(2) Arise NATURALLY from breach (natural consequence) – question for fact finder
a) Hadley v. Baxendale (millers replacing shaft) – NO DAMAGES AWARDED
• Issue: When D’s delay in shipment caused loss of business, but P did not expressly communicate to D these special circumstances, should the jury award lost profits as part of the damages?
• Rule: Damages awarded must be arising naturally from the breach itself, or reasonably foreseeable to both parties (when they made the contract)
• Objective Standard (reasonably foreseeable, not what D actually saw). Subjective standard would be too easy to lie and say you didn’t know, and too difficult to prove actual knowledge.
• Policy: Contracts are voluntary – agreeing to be liable for breach, but only damages that can be foreseen.
• Agency – is notice to the clerk the same as notice to the company?
b) Hector Martinez & Co. v. Southern Pacific Transportation Co. (shipment of dragline in parts – delayed and damaged) – SOME DAMAGES AWARDED
• Clever lawyering: distinguishes Hadley by claiming “use value” of the damaged machine, instead of lost profits (easier to prove)
• The general rule does not require P to show that the actual harm suffered was the MOST foreseeable of all possible harms.
• Policy: We want to compensate the injured P, but also protect D from unforeseeable large losses (which would be paralyzing to commerce)
2.Limitation of Certainty: must be “reasonably certain” – expectation interest is forward-looking (much speculated)
a) Chicago Coliseum Club v. Dempsey (boxer breaching contract)
ARE NOT ENFORCEABLE
c) Kemble v. Farren (Penalty)
• PENALTY because wording of the clause was too extensive (didn’t take into account the severity of the breach) and should only apply to breaches where remedies would be uncertain, otherwise it is up to the jury to award damages.
• Policy: punishment doesn’t fit the crime!
• Arguments in favor of penalties:
•-Makes contract more credible (promote reliance & deter breach)
•-Parties know their own interests best (not courts)
• Arguments against:
•-Prevents “efficient breach” – by breaching you can make the other party whole by paying damages AND end up better off (penalty would impede this)
b) Wassenaar v. Towne Hotel (Liquidated Damages Clause)
• Arguments in favor of liquidated damages:
•-Keeps people out of court (no arguing about damages)
•-Adds certainty to something that might be uncertain
•-Could reduce exposure to liability (knowing what you are getting into), thus making people more likely to enter contracts
c) Restatement § 356(1)
D. Equitable Remedies – flexible approaches when law became too rigid
D.* Equitable relief (injunction, specific performance) is available only when the remedy at law (damages) is inadequate
-Injunction: enjoined to act, or not to act
-Specific Performance: form of injunction that compels D to act to perform contract with P
E.* Land is special, so buyer is entitled to specific performance. [Subjective Value Theory] E.* Seller is not entitled to specific performance, because they would have received $, which is fungible.
a) Loveless v. Diehl (option to purchase land renting, improvements made)
• Issue: Can D receive specific performance on a contract for land, when D intended to resell the property?
• Rule: Yes, D should receive specific performance, regardless of whether the land would be resold.
• D improved the land, so by not granting specific performance, P is unjustly enriched
• Policy: Promote reliance on contracts
•-Inalienability of land
•-Preventing unjust enrichment
F.* Buyer is not automatically entitled to specific performance because goods are fungible, but if they pass the uniqueness test (“unique or in other proper circumstances” – i.e. heirlooms, art, wartime shortages, disruptions in market), specific performance is available.
a) Cumbest (audio equipment) – Specific performance GRANTED
• (1) no adequate remedy at law; (2) not readily available/obtainable due to scarcity; (3) of peculiar, sentimental or unique value.
b) Scholl (action for replevin to recover car) – Specific performance NOT GRANTED
• P didn’t acquire property right just by contracting to buy the car.
• Did not meet standard to prove uniqueness
• Policy: putting a limit on what can be considered “unique” – courts do not want to force people to follow through with contracts when other adequate remedies are available.