Douglas Baird Winter 2013 Contracts I – Uchicago
A. The expectation damages principle
a. Hawkins vs Mcgee
i. Surgeon does operation to replace skin on hand from chest, said he’d be in hospital for no more than four days and that he could go back to work after that. Doctor messed up and plaintiff brings suit on breach of contract theory.
ii. If we know plaintiff was willing to suffer through 10k in pain and suffering, we know that he valued the perfect hand promised at at least 10k, so this should be the floor on recovery, and we should add this amount to the amount the hand got worse. Add these two together and we know the amount he valued a perfect hand at was greater than this number.
iii. Why shouldn’t the doctor simply have to put plaintiff in the world he’d been in if he’d never made any promise, why should we go with expectation damages instead?
1. Theoretically P altered his behavior as a result of this promise and can’t go back in time and change what he’d do, he’d have made the promise with someone else who’d have done it right in theory
iv. Holding: jury must come up with a monetary number where P would be indifferent as to whether he got the money or the perfect hand
v. takeaway is that we’re not going to penalize the person who broke the promise or force them to perform we’re going to require that person to pay a sum to put the party in the position they’d have been in if the promise was kept
b. fountain hypo: someone promises fountain you want for 5k, they quit after you’ve paid them 2800 and it will cost you 4000 to have it completed. You can sue for damages of 1800 because you originally could have gotten your fountain for 5k, but now it will cost you 6800
Market value vs Cost of performance:
c. Groves v. John Wunder SC of minn 1939
i. Wunder leases land for 105k and agrees to level land before he’s done. He doesn’t do it.
ii. Groves wants Wunder to pay him 60k because this is how much it will cost to have the land leveled as Wunder promised and this would put him in the position he would have been in without the breach he argues
iii. Wunder says he should only have to pay 12k as this is the value of the leveled land
1. Theoretically then, with 12k groves could buy an identical tract of land with that money and be in the position he’d have been in but for the breach
iv. Court goes with Groves’ theory and gives him the 60k, dissent says this is 5 times more than what he needed to be put back in the situation he’d have been in
v. Funny thing about this case per Baird:
1. there are two different ways that we could say that expectation damages have been fulfilled:
a. cost of completion, this gets you what you expected
b. the market value of the land as completed, because in theory this gives you the ability to go buy land just like that which you were promised
2. in this case it turns out these two values are very different, and the court goes with cost of completion
3. cost of completion is much higher here than market value of what you were promised, and Baird argues that perhaps we should go with lowest cost measure here
a. What we should do in expectation damages universe is ask how much it takes to get you to where I promised you would be, and here that is the market value or cost of completion, and market value is lower, so we should go with that he says
4. The tricky thing about this case and peeveyhouse is that there are valuation problems; no one piece of land is alike and thus there may be subjective value greater than the market
(a) We concluded that the expectation damages principle required that we take into account the subjective value of the land in the hands of Groves and Peevyhouse. Subjective value, however, is not a visible benchmark. We know that this amount can never be greater than the cost of leveling the land. This number gives us a ceiling on the recovery under the expectation damages principle. With this money we give Groves or Peevyhouse exactly that for which they bargained. Any greater amount would necessarily be over-compensatory.
(b) The diminution in value gives us a floor. Even if Groves or Peevyhouse did not care if the land were leveled or restored, they could sell it to someone who did and capture the increase in value for which they bargained. Indeed, in the absence of subjective value, the diminution in value is a good way to measure damages. If I run over your iPhone with my steamroller, what matters is not the cost of unsquishing the flux capacitor, but the cost of a new iPhone.
(c) In a case like Groves, it seemed as if there was probably no subjective value. To be sure, every piece of land is unique, but this is a gravel pit. Many other pieces of land should have the same value, serve the same purpose, and promise the same returns if a boom ever comes to this part of town. Hence, the court to the contrary, Groves should have recovered only $12,000 if we accept the expectation damages principle.
1. We might think that groves got the higher value on a restitution theory, if he had paid Wunder a bargain price to take the gravel in exchange for leveling the ground.
d. Peevyhouse
i. Facts basically the same as Wunder.
ii. No restitution issue here, Baird says not sensible way to reconcile cases though.
iii. This is a case where there’s more li
retail price because he is able to enter the wholesale market
i. Missouri Frunace – wrongly decided he says.
i. Supposed to have good delivered in July, in January the price is 1.20, in Feb. it’s 4.00, in July it’s 2 dollars.
ii. Court said P entitled to measure of damages between the contract price and the market value at the time it should have been delivered.
iii. Baird says they should be entitled to the difference between the contract price and the price of the market at the time of the breach, because this is when they entered into a new contract to replace the product they weren’t getting.
1. Should do this because if we live in expectation damages universe, we’re supposed to be able to get back in the position we’d have been in, which would be the peace of mind of knowing you had the contracted for that date
2. it’s also wrong to use the spot price because it is over-compensatory:
a. If we go with the spot price remedy, the person buying is overcompensated because they are guaranteed at MOST a price of what they paid you for the corn (1.20), with no risk of paying more, but WITH ALSO the potential to pay less than that if the price goes down. This gives them too much. They will want a breach.
Indirect Measures:
j. in some cases, the best measures for expectation damages may be indirect. Finding the best proxies turns on the circumstances of each case
k. Freund –
i. court rejected that the cost of publication was a good measure of damages by observing that the cost of performance to the breacher bore no relationship to the benefit the innocent party lost (psychic and professional benefits of having a book published, plus royalties)
1. But what if no one else will publish it and I have to pay someone to publish it?
a. cost of publication may be a proper measure, or give us a ceiling on expectation damages at least.
i. car that is in really bad shape. You promise to buy it for $200. You breach. It turns out no one else will buy it. I have to pay a junk yard $100 to take it off my hands. My damages are $300. The price someone else “pays” for the car is negative.
