A. Contract: an agreement between 2 or more parties that has legal effect.
a. Protects society’s expectations that arise from making promise in exchange of future performance.
B. Primary Authority vs. Secondary Authority
a. Primary authority (binding): common law, statutes (UCC), ordinances
i. UCC: Applicable only in sale of goods. Trumps common law.
1. UCC § 1-103: Supplementary General Principles of Law Applicable: UCC trumps common law/equity only when it displaces it; otherwise, it supplements it.
b. Secondary authority (persuasive): Scholarly commentary, Restatements
c. International Commercial Law: CISG (international sale of goods only, and does not apply to consumer transactions)
C. Points to Keep in Mind: Counselor, Negotiator, Drafter, and Advocate
II. THE EXPECTATION AND RELIANCE INTERESTS
A. Expectation Interest: Goal is to put party in position it would have been in had contract been performed as promised
a. Courts generally use expectation interest (default rule)
b. 2 Possible Formulas
i. Difference between present value and promised value (Hawkins)
ii. Cost of completion (if second surgeon can fix it at higher price…?)
c. Hawkins: Doctor promised perfect hand, but surgery resulted in unsightly hand with restricted motion. Proper measure of damages was expectation, not reliance. Expectation measured by difference between hand after surgery and hand that doctor promised (uses value).
i. Damages would not include “out-of-pocket” expenses (doctor’s fee), because these would be expected in honor of contract.
B. Reliance Interest: Goal is to put party back to where it was before contracting occurred (status quo ante).
a. Courts don’t like to speculate about deals that “might have been.”
b. 2 ways to calculate:
i. Cost of restoration
ii. Loss in value
c. Restatement § 349
d. Sullivan: Surgeon promised patient that plastic surgery would make her more attractive, but the third surgery made her look worse. Patient awarded something between expectation and reliance. Reasoning:
i. What’s the value of perfect nose? Too hard to speculate.
ii. Expectation too harsh (surgeon wasn’t negligent).
iii. Expectation would offend public policy (would force doctors into defensive medicine; doctors normally give optimistic assurances).
iv. Restitution too meager.
C. Restitution Interest: Value of benefit bestowed on breaching party by aggrieving party (in Sullivan, this would be the doctor’s fees only).
a. Not the default rule (“opt-out rule”)
D. Specific Performance: Goal is to give injured party promised performance (ex: court orders breaching seller of rare goods to deliver them to buyer).
a. Usually granted for rare/unique objects:
i. works of art
ii. output and requirements
iii. real estate (convey land)
b. Court never has an obligation to grant specific performance.
c. Forces breaching party to perform what it promised (injunctive relief).
d. Exception to general rule (only when money damages are inadequate).
e. Will not be enforced if impossible, unreasonably burdensome, or unlawful
f. Employer will not make employee carry out specific performance
i. aggrieved party gets exactly what it wanted
ii. no worry about putting price tag (less speculative)
iii. bargained for settlements encouraged (see Copylease)
i. Enforcement difficulty (prolonged supervision)…exaggerated?
ii. Sometimes against public policy
iii. Sometimes, aggrieved party prefers money damages
iv. Lawyerly interest (contingency)
h. Copylease: Manufacturer sold uniquely “superior” toner and developer to distributor that had exclusive territory to sell products. Manufacturer breached. Specific performance remedy granted under UCC § 2-716 on condition that distributor proved § 2-716 requirement that it was “unable to cover” (because of lack of/difficulty in finding alternative supplier).
i. UCC § 2-716: Buyer’s Right to Specific Performance or Replevin:
i. SP where “goods are unique or in other proper circumstances.”
ii. SP may include payment of price, damages, or other relief.
iii. Replevin where buyer is unable to “cover” for goods or circumstances show that such effort will not su
Theory of Efficient Breach: if you can get more by breaching, you should breach. Assumes breaching party and third party benefit, and non-breaching party stays neutral.
i. Ex: if value of worker hired at $10,000 salary falls to $8,000, and employer will gain through repudiation when resulting cost to him is less than $2,000 and worker finds another job for $8,000.
ii. But did Holmes really think parties had right to breach contract? Also, what about the reality of transaction costs and, for example, damage to fired employee’s reputation?
iii. Few courts rely on doctrine in deciding cases.
iv. Liquidated Damages and Efficient Breach: Moral Obligation
1. Subjects more willing to breach when damages stipulated (permits efficient breach without repudiation of the mutual understanding). Ex: stipulation of 15 days of sick leave for firefighters rather than unlimited à more sick days used. When penalties are explicitly stated, breach is more likely.
2. Moral obligation > legal obligation
b. Five Theories:
i. Westhaven: Court held lessor’s liquidated damages clause reasonable based on three criteria (“totality of circumstances”):
1. Parties intended to provide for damages or penalty? Rarely helpful. Parties cannot create penalties.
2. Injury caused by breach incapable of accurate estimation at time of contract?
3. Stipulated damages reasonable forecast in light of actual harm caused by breach?
ii. Wassenaar: penalty if “grossly proportionate” at time of contract (difficulty in proof of loss looms large)
iii. Rest. § 356(1)’s two-part test – amount fixed must be reasonable:
1. In light of anticipated or actual loss cause by breach, and
2. In light of difficulties of proof of loss (the more difficult, the better)