Spring 2011, Eric Chaffee for Contracts I.
Contract Damages are compensatory in nature. Thus, courts are reluctant to enforce damages that are punitive in nature and/or provide a large windfall for one particular party.
I. Restitution – Prevents an unjust enrichment that was conferred on the one of the party's if the contract was not properly formed. A court will restore the value to put the parties back to the position as if the contract had not been formed.
a. Breach Helps the plaintiff: In Acme Mills, the plaintiff contracted for 2,000 bushels of wheat at $1.03. The defendant breached the contract when the market value was at 97.5c. Awarded Restitution for the $80/value of sacks (only benefit that was conferred) that the plaintiff had given the defendant. However the court was reluctant to award any other damages because the plaintiff actually benefitted from the defendant's breach.
II. Reliance – This refers to the expenses incurred by one party in reliance on one of the party's promise (See Restatement 349)
a. Strict: In Dempsey, a boxer breached four months after signing the contract, but did not fight until the following spring. Therefore the court distinguished the coliseum's cost of doing business expenses with their damages based on reliance interest. The court ruled that the only possible damages would be the architecture expense for the particular event. The case stressed the notion that he had already fought, and they had time to find a new fighter.
b. Scienter: In Security Stove & Manufacturing, there was a failure to transport one out of the twenty-one packages for assembly of an oil and gas burner to convention in Atlantic City The court rejected the notion of expectancy damages because the lost profits were speculative (don't know how many will purchase esp. at a convention). Instead, the court used reliance damages as the appropriate measure because the court addressed the shipper's scienter, he knew that all 21 were needed for assembly.
c. Windfall: In Mt. Pleasant Stable Co., there was a contract with furnishing teams of horses for the defendant's company. If there are no expenses than the loss of profits would tend to be reliance damages. The court held for the defendant because the entitlement to recover the loss of profits would create a huge windfall on the side of the plaintiff. Courts are reluctant to enforce windfall awards because of the plaintiff was not losing anything but profits in the contract. Further, contract damages are compensatory in nature. (Harmonizes Expectancy and Reliance).
d. Fixed Overhead: In Leingang, the city breached contract of weed cutting. The plaintiff inflated the raw materials to increase the award. The court ruled that the plaintiff was not allowed to include fixed, constant overhead expenses because they would have been incurred regardless of the breach.
e. Award of Prior Contract Expenses: In Anglia Television Ltd., the court was much more aggressive allowing the plaintiff-company recover expenses prior to and after the formation of the contract. Generally a court will limit the expenses that are incurred after the formation of the contract. (The notion here is how can one rely on something he hasn't done yet). However, in this case because the actor skipped to the United States only four days before filming and rehearsal, the court broadened the scope of the company's reliance interest.
f. Plaintiff Better Position from Breach: In L. Albert & Son, the plaintiff was seeking a breach of contract. The plaintiff sought reliance damages, because expectancy damages would put him in a worse position. This court displays that there is a strong reluctance to not reimburse for losses incurred in reliance on a contract that knowingly put the plaintiff in a better position than if the contract was fully performed.
III. Expectancy – realizing the value of expectancy that was created by the other's promise. Put the promisee in as good as a position as he would have occupied if the defendant performed the promise.
a. Cost of Completion – In Hawkins, the doctor promised 100% good or perfect hand. The court awarded the value of the perfect hand minus the value of his present hand. Cost of completion is only awarded in few cases, this was one of them.
i. CC Continued: In Groves, the cost of completion was also awarded because the defendant acted willfully in the breach. The contract was to remove all gravel, but the defendant took only the best and richest gravel. Defendant was liable for what he promised to do. Not a case of economic waste because that only deals with fixtures. (See Restatement 346 , overturned by 348 ). Most important fact the court hinged on was that the real estate was 24 acres on Minneapolis suburban real estate (otherwise court would have awarded the value $12,000, and not the cost $60,000). Dissent says no – should be diminished value.
1. Plaintiff's entitlement: In Laurin, plaintiff purchased lot and the defendant after purchase removed valuable gravel from the lot. The court awarded the FMV of the gravel removed and not the labor to take it off. (Look at what the plaintiff is entitled to.)
ii. Diminution Value: In Peevyhouse, the defendant was contracted to extract coal as a part of a lease, and was to fill the holes after they were finished. The defendant extracted the coal, and left the holes. Plaintiff sued for the cost to fill the holes. However the court awarded the diminution value of the premises. This was mainly because the farm was valued at $5,000, where the cost to fill the holes was $29,000.
1. Cost versus Value – Look at the underlying purpose of the contract – oil well versus statute.
b. Installments & the UCC: In Missouri Furnace, the plaintiff contracted with the defendant for coke at a low price per ton in installments. The market value went up, and the defendant breached. The defendant was awarded the difference between the market value and the contracted price at every breach/installment. The UCC would disagree and state the proper approach would discount all future breached to the current market value. This is a case that displays that the UCC is not actually the law in all jurisdictions. Under UCC 712(3), the plaintiff is not required to make a cover contract for the remainder of the installments. (this case is an anticipatory breach).
c. Lost Profits: In Neri, the plaintiff sought to recover a deposit from a boat sale. The defendant gets to deduct any reasonable liquidated damages according to the UCC. If the item, like the boat is available to the next seller in large quantities, the defendant can deduct both the lost profits and the incidental damages from losing the sale. (Look to whether the item is unique or readily available – lost profits.) (Also See UCC 718, 708.)
d. Retail v. Wholesale: In Illinois Central R.R. Co., the plaintiff bought the coal at a wholesale price, which upon receiving it would sell it on retail. The defendant delivered a smaller amount than supposed to be delivered. The plaintiff did not use a cover contract, instead electing to sue for damages. The plaintiff argued that they should receive damages in accordance with the retail price to compensate for their lost sales. The defendant argued that the retail price included prices of delivery and additional measures not applicable to their breach. Thcourt awarded the wholesale price because of the defendant's argument and that the defendant had the coal in reserves.
i. Less Value Less Award: In Watt, (Tort case) the defendant's car set fire to the plaintiff's hay. The plaintiff did not buy more hay to replace that hay because it was just storage. After the plaintiff lost $100,000 worth of cattle due to starvation, the plaintiff began to store hay. The court awarded the plaintiff the actual value of the hay (price – the bailing and transportation costs.) Further display of what is compensatory.
e. Windfall: In Mt. Pleasant Stable Co., there was a contract with furnishing teams of horses for the defendant's company. If there are no expenses than the loss of profits would tend to be reliance damages. The court held for the defendant because the entitlement to recover the loss of profits would create a huge windfall on the side of the plaintiff. Courts are reluctant to enforce windfall awards because of the plaintiff was not losing anything but profits in the contract. Further, contract damages are compensatory in nature. (Harmonizes Expectancy and Reliance).
Limiting the Compensatory Principle of Damages
I. Duty To Mitigate
a. (Generally) Duty to Mitigate: In Rockingham Cty., the defendant bridge company was awarded a contract to build a bridge by the County. The County provided the company with notice that the they were breaching. The company decided to push through and finish the bridge. The court held that when one party gives notice of the breach, the other party has a duty to mitigate damages. Therefore the company only awarded the expenses incurred up until the point of breach.
i. Duty to find similar employment: In Parker v. Twentieth Century-Fox Films, the defendant breached on the actress's contract for a musical in the U.S. Offered a country-western movie in Australia, she denied to take it. The general rule is that a non-breaching parties is expected to take reasonable efforts to seek other employment. The court held that the actress did not the similarity close enough, but the dissent did “its still acting.”
1. Collateral Source Rule: In Billetter, the defendant-store employed a lady at $75/week to be a floor designer. They breached and found a lady for $50, but still left an offer of $60 on the table. Lady quit and received unemployment benefits. Suit awarded the full amount, because the company was not allowed to deduct state government benefits and she was not required to do the same work at less pay. Generally employers are not allowed to deduct damages by the credits received from government b
Kearns v. Andree, the defendant to construct a house, but the plaintiff breached. Writing of the contract was fatally indefinite because there was no mortgage at the time only a letter of intent. Defendant made specific altercations to met the plaintiff's needs. The court found it a situation to “imply an agreement to allow reasonable compensation.” The redecoration expenses can be recovered if in good faith and honest belief that the agreement was enforceable. Usually there is a strong argument that since the party did not move in they never benefitted from the décor, but if it was very specific to the person (Lil Wayne -definitely an argument).
iv. Deviate from the Contract Wording: In Oliver v. Campbell, a lawyer was fired right before the court's judgment was signed for the wife. The lawyer's reasonable value of the services was $5,000, but the contract was for $850 for the whole trial. The court gave the lawyer the entire $850 because performance was basically full. Therefore if one party “in effect” performs a contract, a court can award restitution damages. Also it is good to provide the $5,000, to put in a better position for settlement.
v. Condition Precedent (Split in Authority):
1. No Recovery: In State v. Parker, the plaintiff sought damages for the work over the year. The plaintiff breached and the contract explicitly stated that the condition precedent is that but-for the completion of this contract, no money will be awarded. Some courts prevent breaching plaintiff's from recovering from the breach. Don't want to compensate for bad behavior, additionally it is justified by the condition precedent.
2. Entitled to Quantum Meruit: In Britton v. Turner, plaintiff breached a 1-year employment contract 9.5 months in. Court stated that the plaintiff could recover to prevent abuse of employees to make them quit one month before the end of the contract. Look for the benefit conferred on the defendant. However, the plaintiff bears the burden of proof on the “pro-rated” amount, and the defendant can subtract the incidental damages (how much it costs to search for another employee).
vi. Good Faith Deviation: In Pinches v. Swedish Evangelical Lutheran Church, the plaintiff deviated from the contracted architect measurements (windows smaller, pews narrower, ceiling lower,). The contract was in writing, but the plaintiff deviated from it. More importantly the defendant took possession of the church and was still able to use it for the purpose. The court also stressed that the plaintiff did not do so wantonly. Therefore the court awarded the contract price less the diminution value to the plaintiff because it was still a breach and won't get the entire cost of completion. (Notion of Good Faith Deviation).
1. Willful Deviation: In Kelley, plaintiff agreed to excavate and build a curb. The plaintiff dugout 8 by 12 foot hole, and did not return. Defendant canceled the contract, but plaintiff sued for damages under quantum meruit. Look at what is the benefit in this case – a big hole in their yard. Most Courts do not award damages if a person willfully breaches like this case. (Willfully left the hole in their yard.) In dicta, this court states that the even if the performance is not substantial a party can recover on quasi contracts or even an implied promise if there is a voluntary acceptance of benefits.
vii. Liquidated Damages Clause Remedy: In Vines, it was a contract of for a condo. The plaintiff put a $7,880 down payment, but then defaulted and never got the property. The plaintiff sued for the down payment even though there was a liquidated damages clause. Courts are unlikely to enforce the liquidated damages clause if there is a large windfall situation, or it seems highly punitive to do so. In this case the defendant benefitted from the breach because the condo nearly doubled in value. Therefore the court disregarded the clause, and gave the down-payment back.