Contracts Outline – Fall Semester 2005 (Bartlett)
Introduction
I. Introduction
Contract
a. Contract = A legally enforceable promise
i. Restatement (Second) of Contracts
1. §1 – A contract is a promise or set of promises for the breech of which the law gives as a remedy, or the performance of which the law in some way recognizes as a duty
2. §2(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 has been made.”
ii. A promise can be made through spoken or written word or can be inferred
iii. Four Principle Questions
1. When has a contract been formed?
2. What are the duties and obligations of the contracting parties?
3. Have the duties and obligations been discharged?
4. What are the consequences when one/both parties do not perform?
The Nature and History of Contract
b. The Nature and History of Contract
i. Shaheen v. Knight (PA 1957) – Plaintiff alleges that doctor breeched his “special” contract to sterilize the plaintiff b/c he in fact had another child. Court rules that awarding damages would be against public policy. (Court holds that there is no implied warranty of cure with doctors and that a “special” contract must be created)
1. Special Contract
a. “Special Contract” – A contract with peculiar provisions that are not ordinarily found in contracts relating to the same subject matter – also see express contract.
b. “Express Contract” – A contract whose terms the parties have explicitly set out – also termed special contract.
2. Public Policy Rule – “It is only when a given policy is so obviously for or against the public health, safety, morals, or welfare that there is virtual unanimity of opinion in regard to it, that a court may constitute itself the voice of the community in declaring the such a policy void.”
a. Three Types of Public Policy Arguments
i. Incentive-based argument
ii. Autonomy- based argument
iii. Institutional/competence-based argument
3. Prima Facie Case for Breech of Contract:
a. Elements that must be Proven:
i. A contract existed
ii. A contract was breeched
iii. Promisee suffered damage as a result
Freedom of Contract and Public Policy
c. Freedom of Contract and Public Policy
i. In Re Baby “M” (NJ 1988) – surrogate mother tried to maintain physical custody of her child after agreeing to give custody of the child to the child’s father and his wife.
Damages for Breech of Contract
II. Damages For Breech of Contract
The Three Damages Interests
a. The Three Damage Interests: Compensatory Damages (do not include punitive damages)
i. Expectation Interests – These are based on the contract price and have the purpose of putting the victim of the breech in the position he would have been had the promise been preformed – gives the wronged party the benefit of the bargain
1. Incidental Damages – These include expenses such as the seller’s costs of shipping goods to and from the buyer who has breeched or a buyer’s costs of finding substitute goods after a seller breaches. (Incidental damages are normally added to the general damage award)
ii. Reliance Damages – These are based on the non-breeching party’s costs and have the purpose of putting the non-breeching party in the position he would have been in had the promise not been made
iii. Restitutionary Damages – These are based on the reasonable value of the benefit conferred by the promise on the promissor and are available in a variety of circumstances – for example, where:
1. The benefit was incurred under a contract that turned out to not be enforceable
2. The promissory is in material breech
3. No contract was formed but a benefit was conferred in a pre-contractual stage when the parties believed they had concluded or would conclude a contract
Expectation Damages
b. Expectation Damages – put the party in the position he would have been in had the contract not been breeched
i. Hawkins v. McGee – Hawkins sued Dr. McGee for not making his hand perfect, as promised, during operation. The difference between “a perfect hand” as promised and his hand as it was left by the surgery is the true measure of damages in this case. Expectancy damage – put him where he would have been should the surgery had gone as he had expected.
1. “The purpose of the law is to ‘put the plaintiff in as good a position as he would have been in had the defendant kept his contract.’”
2. The measure of recovery ‘is based upon what the defendant should have given the plaintiff, not what the plaintiff has given the defendant or otherwise expended.’”
3. “The only losses that can be said fairly to come within the terms of a contract are such as the parties must have had in mind when the contract was made, or such that they knew or ought to have known would probably result from a failure to comply with its terms.”
ii. Marlowe Method
1. Common sense method
iii. Snyder Method *** (this is the one that he prefers)
1. Reliance + Profit = Expectation Damages
a. Reliance
i. Essential Reliance – reliance that arises from a promisee’s performance of his/her end of the bargain
ii. Incidental Reliance – reliance that follows “naturally” and “forseeably” from the contract, but that was not necessary to perform the promisee’s end of the bargain
1. Limitations (cannot just shift a bad bargain to the party in breech – when the chain of events ceases you stop holding the other person liable)
a. Aviodability
b. Foreseeability
c. Certainty – you must know the extent of your losses and cannot just speculate on incidental damages
2. Hawkins: “the value of his hand in its present condition, including any incidental consequences fairly within the contemplation of the parties when they made their contract ….”
iv. Restatement Formula: §347
1. Damages = [Loss in value] + [other incidental or consequential loss] – [cost avoided] – [loss avoided]
a. Loss = value promised – value received
b. Incidental loss = loss related to performance or from search for a new partner
c. Consequential loss = loss related to performance or from search for a new partner
d. Consequential loss = any extra (“domino”) injury
e. Cost avoided = expenditures saved by not having to finish performance
f. Loss avoided = amount saved by “salvaging”
v. J.O. Hooker & Sons v. Roberts Cabinet Co. (Miss. 1996) – Dispute between contractor and subcontractor of who would dispose of the cabinets. Hooker (contractor) called off the contract and Roberts (subcontractor) sued for everything (lost profits and reliance costs); these included administrative costs and storage costs. Court holds that you cannot collect damages that would put you in a better position than if the contract had been performed and thus they were not able to collect the storage costs since these costs would have been incurred rega
eliver dragline on time and Martinez sues for damages resulting from loss of income from big thing. Court rules that damages are recoverable because loss was foreseeable and didn’t require actual notice. When there is no notice, loss can not be unforeseeable to a reasonable person.
a. Case concerns the meaning of “foreseeable” and when notice of “special” damages is required.
b. Foreseeability is determined at the time of the making of the contract and is unaffected by events subsequent to that time.
c. What about lost profits? Not reasonably foreseeable in and of themselves. Unless Party had given notice. Loss foreseeable to the average person is the standard if no notice is given.
d. Hadely v. Baxendale thus becomes a default rule (can contract around it through notice) – NOTICE IS SUFFICIENT, BUT PARTIES MUST BE GIVEN THE OPPORTUNITY TO RENEGOTIATE
i. Default Rules = rules that parties can contract around
ii. Immutable Rules = rules that the parties cannot contract around
3. Morrow v. First National Bank of Hot Springs (Arkansas 1977) – Morrow requested a safety deposit box and was not given notice that it was available when his rare coins were stolen. Court said notice that he needed the safety deposit box was not enough, but also needed consent of the other party to the expanded liability.
a. “Tacit Assent” Rule
i. Notice is not enough, you must have notice as well as the consent of the recipient of the notice agreeing to the expanded liability
b. This rule is rejected by most jurisdictions and the UCC, only accepted in Arkansas – Hadley v. Baxendale is still the default rule, but can be contracted around
ii. Certainty of Harm
1. Contract damages may be recovered to the extent that they can be proven with reasonable certainty
2. Consequence: Many plaintiffs switch their theory of recovery to recovering reliance-based damages
a. Restatement §349: Party not in breech has the alternative of suing for reliance damages
i. Expenses incurred in performance of contract
ii. And sometimes expenses incurred in preparation of contract
3. Limitation in the event of a losing contract
a. Burden is on the party-in-breech to prove the amount of losses, so breeched party shifts the burden of proof by claiming reliance damages
Chicago Coliseum Club v. Dempsy (1932) – Chicago Coliseum Club arranges to have a match between Dempsey and Willis, Dempsey breeches the contract and they sue for: 1) Lost profits 2) Expenses incurred by the plaintiff prior to the signing 3) Expenses incurred in trying to restrain the defendant 4) Expenses incurred after the signing of the agreement before the breech – directly from the contract. Court holds that profits are not recoverable because they cannot be proven and only reliance damages directly relating to the contract can be recovered
