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

Definition of Contract (Restatement 2nd of Contracts): A contract is a promise or a set of promises for the breach of which the law gives a remedy, or performance of which the law in some way recognizes as a duty.

Promise; Promisor; Promisee; Beneficiary:

(1) A promise is 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 was made.

(2) The person manifesting the intention is the promisor.

(3) The person to whom the manifestation is addressed is the promisee.

(4) Where performance will benefit a person other then the promisee, that person is a beneficiary.

Agreement Defined; Bargain Defined

An agreement is a manifestation of mutual assent on the part of two or more persons. A bargain is an agreement to exchange promises or to exchange a promise for a performance or to exchange performances.

I. DAMAGE INTERESTS

a. Expectation Interest
General measure of damages in K law.

Alternate reality: puts the nonbreaching party in the same position he would be in had the K been performed.

UCC § 1.106: Put aggrieved party in as good a position as if the other party had fully performed, but neither consequential or special nor penal damages may be had, except as specifically stated in UCC or another law.

Hawkins v. McGee: Patient had a scarred hand, was guaranteed a perfect hand by doctor. Doctor performed the operation, and hand was worse off than before the operation. Court awarded P his expectation interest:

Value o perfect hand (value promised) – Value o scarred hand (value at time of ‘sale’) + (Scarred hand – useless hand) (incidental consequence of breach) = Value o’ perfect hand – Value o’ useless hand.

Pain and suffering was excluded because it was w/in his contemplation at the time of contracting.

Restatement § 347: Measures of Damages in General

Loss in value + Other Loss – Cost Avoided – Loss Avoided

Loss in value: Value of promise less value actually received
Other loss: Consequential and incidental damages
Cost avoided: Costs not paid that otherwise would have been
Loss avoided: Salvage value of the good

Nurse v. Barnes (King’s Bench, 1664)
D promised to let P use mills for 6 months, at 10 pounds. D breached, P lost 500 pounds of stock he had bought. The court can award special damages (other loss), not only the loss in value (10 pounds).

Alternatively:

D = Lost Profit + Unreimbursed Expenses + Other Loss – Loss Avoided
Hooker v. Roberts (Mississippi, 1996)
D terminated P’s subcontract over disagreement in how to dispose of old cabinets. P sued for breach, in contention were the damages awarded by the court.

Lost profit: based on %, what profit D would’ve made on K
Expenses: those for storing cabinets were not recoverable, b/c they would have been incurred even w/out the breach. Those for managerial time were, b/c manager could have been working productively on other projects. Awarding for his time is not double recovery, b/c cost was already included in the lost profit measure.

Hypothetical situations for expectation damages:

i. Nonbreaching party makes a substitute contract.

· UCC § 2-712: “Cover”. Buyer who makes a good faith effort to purchase substitute goods is entitled to:

(Cost of cover – K price) + incidental/consequential damage

If buyer was in breach and seller resells at a lower price, seller is entitled to the difference per UCC § 2.706.

ii. Nonbreaching party could have made a substitute transaction, but did not do so or did so unreasonably.

· UCC § 2-713: “Buyer’s damages for non-delivery or repudiation”. Buyer who does not “cover” is entitled to:

(MKT – K price) + incidental/consequential damage

MKT is determined as of place for tender, or if after arrival or revocation of acceptance, as of the place of arrival.

If buyer was in breach, UCC § 2-708 provides damages for the seller.

Tongish v. Thomas (Kansas, 1992)
P sued D for nonpayment. Coop intervened, sued P for not delivering final installment of goods. Coop had unique arrangement where it was guaranteed a 55 cent/hw margin on its resale of the sunflower seeds. P claimed that Coop should be entitled to lost profits per UCC 1.106. Court awarded the hypothetical cost of cover per UCC 2.713, to discourage breach and prevent P from using D as a “put option”.
iii. Contract for services, where breach results in lost income that cannot be recouped.

· Damages may be equal to full value of the expected performance, even though this puts the nonbreaching party in a better position than he would’ve been had K been performed.

iv. Nonbreaching party loses income but also saves costs.

v. The UCC in above situations provides for “incidental or consequential damages.” UCC § 2-715 defines these as:

o Incidental:
o Incurred for inspection, receipt, transportation, care and custody of goods rightfully rejected.
o Commercially reasonable costs connected w/ effecting cover.
o Consequential:
o Loss

ES: General, recoverable.

NO: Direct, recoverable.

NO: Special. Notice?

YES: Special, recoverable.

NO: Special, not recoverable.

d. Certainty of Harm
1. Damages that can’t be established w/ reasonable certainty aren’t recoverable. RS § 352.

Chicago Coliseum Club v. Dempsey (Illinois, 1932)
D entered into K w/ P to box. D repudiated the contract, P sued for damages in the following areas:
· Lost profits: NO. Damages must be established w/ reasonable degree of certainty.
· Presigning expenses: NO. D is not liable for costs incurred prior to contract formation.
· Expenses incurred attempting to restrain D from engaging in other K: NO. D made it clear he was going to breach. American Rule: you are responsible for your own legal expenses.
· Post-signing expenses: YES. Recoverable if incurred after date of signing but before date of breach, and necessary in furtherance of the performance. These are RELIANCE damages.

2. In cases where expectation damages cannot be proven, a party may seek RELIANCE damages. Restatement § 349.

Anglia Television LTD v. Reed (England, 1971)
D entered into a contract to play a role in television show for P. D repudiated, P sued not for their expectation (lost profits), but their reliance expenditures that were wasted as a result of Reed’s breach. D argued that he should not be liable for expenses incurred prior to the formation of the contract.
Injured party can claim expenses incurred before the contract if:
o Reasonably w/in contemplation of parties that the expense would be wasted if K broken.