CONTRACTS OREN GROSS FALL 2016
TYPES OF CONTRACTS
EXPRESS – parties expressly agree to certain words and terms
IMPLIED IN FACT – no express agreement, the conduct of the parties implies an agreement from which an obligation in contract can be said to exist (treated the same way as express contracts)
IMPLIED IN LAW – (Quasi contracts) – not a contract at all; recovery is “where justice so requires”, no reference to intentions or expressions of the parties, the duty is based on the concept of unjust enrichment.
BILATERAL CONTRACT – A promise is exchanged for a promise, must be mutuality of obligation; either both parties are bound, or neither party is bound.
UNILATERAL CONTRACT – A promise is exchanged for performance or something else. Only one promise is present. The person performing is not bound to perform the act, but if she begins, the promise becomes enforceable.
REMEDIES
Compensation – what purposes will an award of money damages serve?
Restitution interest – the interest of a party in recovering values conferred on the other party through efforts to perform a contract
Reliance interest – a party’s interest in recovering losses suffered by virtue of reliance on the contract, whether or not there was a corresponding gain to the opposite party
Expectation interest – the interest of a party in realizing the value of expectancy that was created by the other’s promise
Remedies – why start with remedies?
Which promises are enforceable?
Which promises are “legal” promises?
Remedies define rights
What is at stake for the parties?
What do you ask the judge to do at the end of the day?
Remedies are about money; a party wants compensation but what are they asking for?
Restatement §344 – Purposes of Remedies
Judicial remedies under the rules stated in this Restatement serve to protect one or more of the following interests of a promise:
(a) His “expectation interest,” which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed.
(b) His “reliance interest,” which is his interest in being reimbursed for loss caused by his reliance on the contract by being put in as good a position as he would have been in had the contract not been made, or
(c) His “restitution interest,” which is his interest in having restored him any benefit that he has conferred to the other party
UCC §2-706(1) – “good faith” and “commercially reasonable manner” of cover deal in order to be entitled to the difference between the contract and the cover price. (Seller may resell).
EXPECTATION DAMAGES
GOAL: TO PUT THE INJURED PARTY IN THE POSITION THEY WOULD HAVE BEEN IN HAD THE CONTRACT BEEN FULFILLED.
Exceptions
Subjective value / special contract
Profits are too speculative
Unjust enrichment – negative expectation if the contract was performed.
Restatement §347 – Measure of Damages in General
The injured party has a right to damages based on his expectation interest as measured by:
The loss in value to him of the other party’s performance caused by its failure or deficiency, plus
Any other loss, including incidental or consequential loss, caused by the breach minus
Any cost or other loss that he has avoided by not having to perform.
The measurement of damages is generally the difference between the post-action results and the promised results, puts the plaintiff in the position that she would have been in had the contract been performed – this is the standard in contract law!
Establishment of Expectation Damages à Hawkins v. McGee
Defendant promised plaintiff a “100 percent good hand” during an experimental skin graft surgery; plaintiff ended up with a hairy hand.
Rule: expectation damages are measured in the difference between the value of the contract had it been fully performed, and the actual value / current condition. The goal of remedies is compensation not punishment!
Calculation – Cost of Completion à Groves v. Wunder
Defendant agreed to remove sand and gravel from plaintiff’s land and leave it at uniform grade; Defendant deliberately breached and left holes in the land. Plaintiff was awarded $60,000 to fill in the holes, even though the market value of the land was only $12,000.
Rule: damages for a willful breach of a construction contract (even when there has been substantial performance), are the cost of completing the failed performance.
Calculation – Diminution in Value à Peevyhouse v. Garland Coal
Plaintiff leased his family farm to defendant, mining company, and in the contract they agreed that defendant would fill in all the holes at the conclusion. Defendant did not spend the $29,000 required to fill the holes that would have resulted in a $300 increase in the value of the land. The court reduced the trial award of $5,000 to plaintiff down to $300.
Rule: damages are equal to the market value of the land currently minus the market value of the land had the contract been completed; the court denied the cost of completion because it would be an “economic benefit” to plaintiff and “grossly disproportionate”, ruling the condition was “remedial”.
Exception: Special Contract or Subjective Value of a Home à Landis v. William Fannin
Plaintiff hired defendant to build custom home and wanted rustic siding; subcontractor did not order enough – ended up with a striped house due to discoloration; tried to fix it with no avail; Plaintiff and defendant never came to a new agreement over the next 1.5 years. The plaintiff was awarded the cost of completion ($66k) to replace siding minus the balance owed on the construction product to defendant ($3k) to achieve what was contracted for.
Rule: reasonableness test = “the essential inquiry is whether the damages sought are reasonable” … the cost of completion is more expensive, but reasonable because of the subjective value of the home.
When a Breach Benefits the Nonbreaching Party à Acme Mills & Elevator v. Johnson
Defendant contracted to sell wheat to plaintiff, but sold wheat to someone else first for more money; Plaintiff suing for profit defendant made from the sale, claiming it was their wheat.
Outcome: plaintiff was awarded $80 for the sacks furnished and used by defendant for the sale of wheat to the third party.
Rule: if breach works in favor of the nonbreaching party, they cannot recover (contract price minus market value). Expectation: at the time and place of breach.
“Estoppel” = a general and most flexible doctrine of American law. Estoppel can only be invoked when a party, by his conduct, has led another to act to his prejudice.
When Added Value by Defendant à Laurin v. DeCarolis Constr. Co.
P/s bought a tract of land from the defendant. Before the transaction was closed, the defendant took the gravel from the property without permission. Plaintiffs sued for breach of contract and were awarded the market value of the gravel.
Rule: The diminution of value should not include the value added by defendant. The court says it is not sufficient to award damages based on how much less the property is worth. They give as an example chopping down trees from a timber tract. Cutting these trees down might not reduce the value of the property, but the trees themselves may be worth a lot, and the plaintiff is entitled to that value (less the cost of chopping the trees down) because that’s profit the plaintiff should have had the opportunity to make.
When Breach Benefits Breaching Party à Missouri Furnace
Plaintiff made contract with defendant for the sale and daily delivery of Coke. Defendants repudiated the contract part way through and plaintiffs contracted with a third-party to deliver the rest of the coke for the year at a much higher market price. The plaintiff sued for the difference between the market value of the remaining coke for the year and the contract cost. The trial court instead awarded the plaintiff the market price on the day of delivery minus contract price. Verdict for plaintiff but new trial for damages.
Rule: If a buyer repudiates a contract with a lost volume seller, the seller is entitled to the profit the seller would have made from full performance of the buyer, plus reasonable incidental damages associated with the resale (UCC 2-708(2))
Lost Volume Seller – UCC §2-708(2) – a lost volume seller has many identical goods. The buyer breaches. The seller resells for more money than the contract price. §2-708(2): If damages are inadequate to satisfy Golden Rule, then damages equal the gross profit (overhead plus net profit) the seller would have made from the buyer, plus incidental damages, plus reasonable costs reasonably minus credit for payments or proceeds of sale.
Lost Volume Seller à Neri v. Retail Marine Corp
Plaintiff put $4k deposit on a boat sold by defendant. Plaintiff breached the contract and is trying to recover the deposit; defendant sold the boat 4 months later to someone else, but held onto plaintiff’s deposit. The plaintiffs sued to recover the deposit. The defendants countersued, claiming that if the contract were performed, they would have sold two boats instead of one, and therefore plaintiffs were liable for lost profits.
Rule: The UCCs says that if the difference between the market value and the contract price at the time of performance is not sufficient to put the seller in as good a position as performance would have done, then the seller can get the profit he or she would have made from full performance (UCC §2-708(2)).
Upshot: Key here is lost volume seller gets lost profit and incidental damages (have an unlimited/inexhaustible supply of boats, so he sold some boat, not plaintiff’s boat. This would have applied to Missouri Furnace had the UCC existed.
Exception: Unjust Enrichment à Illinois Central RR v. Crail – to calculate the market price of a fungible good, you must use the market price from the market where the injured party typically buys. There are typically two markets: retail and wholesale. Central RR – replacement cost puts a ceiling on something’s value, and the price realizable puts a floor on something’s value. Key here is very basic good that is easily bought and resold – so why use retail price as a replacement when you can use wholesale to make up for it in the next shipment. Here, plaintiff stockpiled coal and was not fiscally damaged (no order to fill per se)
Exception: Unjust Enrichment à Watt v. Nevada – defendants train set fire to plaintiff’s 700 tons of stockpiled hay to feed his cattle in the harsh winters +hay press; market value of $10-12 per ton less than $2 bailing per ton and $6.50 transport per ton. Plaintiff was awarded cost to replace hay press, but only adjusted price of hay. Rule: when calculating expectation damages, make sure plaintiff is not better off than what he would have been had contract not been breached. Upshot: Defendant’s claim for replacement cost denied. In this case, fire “would have been a great source of profit”.
RELIANCE DAMAGES
GOAL: TO PUT THE INJURED PARTY IN THE POSITION THEY WOULD HAVE BEEN IF THERE HAD NEVER BEEN A CONTRACT (POSITION BEFORE THE CONTRACT)
Exceptions: unjust enrichment
Restatement §349 – Damages Based on Reliance Interest
As an alternative to the measure of damages stated in §347, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, minus any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed
Comment: when injured party ignores the element of profit and recover as damages his expenditures, he may choose to do this if he can
claim and was affirmed. It is the general rule that damages cannot be recovered for violation of a contract within the statute of frauds. Plaintiffs merely suffered a loss and defendant got no benefit – had he received a benefit, the law would oblige him to pay.
Rule – for a nonbreaching party to recover on partial performance of a breached contract, the breaching party must have benefitted from partial performance. Here, no benefit.
Upshot – it’s immaterial that plaintiff suffered a loss because he is unable to enforce his contract and thus can’t sue for expectation / reliance. Statute of frauds banned oral agreements in this context – the court found that plaintiff only prepared to perform, didn’t actually perform.
STATUTE OF FRAUDS
Under the statute of frauds, certain types of contracts are unenforceable unless the terms are set forth in writing. Classes of contracts that fall within the statute of frauds: marriage contracts, contracts that can’t be performed in one year, contracts for the sale of goods of $500 or more, land contracts.
One year: a contract falls within the statute of frauds if the parties know that it is impossible for the terms to be fully performed within one year of formation. HOWEVER, if a party renders part performance, the court may provide a limited remedy even without a signed writing. (Restatement §130).
Land: a contract falls within the statute of frauds if an interest in land is transferred, unless a party has reasonably relied on a promise to his or her detriment by rendering part performance that benefits the other party. Contracts involving an interest in land include real property sales contracts, leases for longer than a year, profits from land, etc.
Sale of Goods for $500 or more: a contract for the sale of goods falls within the Statute of Frauds where the price is $500 or more. There are three exceptions to this rule: goods that are specially manufactured, if the party admits there was a contract, and if there has been part performance.
When Breaching Party Incurs Benefit + Negative Expectation à Mobil Oil
Facts: Plaintiff entered into contract with US to drill oil under a lease off NC coast – stipulation that they get permission; Plaintiff applied for approval but it was never received and the US kept the payment of $156 million.
Outcome: Found for plaintiff for $156 million paid for lease that was never actionable
Rule: Nonbreaching party is entitled to restitution when reaching party has incurred a benefit from part performance or reliance
Upshot: US claims plaintiff would have negative expectation – suing in reliance so that doesn’t matter; Restatement §373 = when one party to a contract repudiates that contract, the other party is entitled to restitution for any BENEFIT that he has conferred on the “repudiating party” by way of part performance or reliance.
Quantum Meruit + Negative Expectation à United States v. Algernon Blair
Facts: A subcontractor, Coastal, starting work for primary contract, Blair. Blair refused to make certain payments and Coastal stopped working. The subcontractor brought suit against the primary contractor to recover for the services rendered. 28 percent completion. Plaintiff wanted to recover labor and equipment costs.
Outcome: Plaintiff entitled to labor and equipment costs of partial performance.
Rule: Promisee to recover the reasonable value of services (at time/place of performance) irrespective of whether he would have lost money on the completion of the contract.
Upshot: Important to note that the plaintiff was found the nonbreaching party – defendant was found to have a duty to cover the crane costs; Restatement §347 = recovery for quantum meruit is the reasonable value of the performance and recovery is undiminished by any loss which would have been incurred by complete performance.
Exception: Disgorgement à Watson (Misrepresentation of townhomes cluster-fuck)
Facts: Plaintiff essentially wrongfully represented to defendant, causing defendant to lose on a big deal to sell a townhome; defendant defaulted and had to sell in foreclosure; lo and behold, plaintiff buys the townhomes up on the chopping block and sells for a profit.
Outcome: Remanded to decide between disgorgement / or lost profits for defendant.
Rule: “Expectancy interest” – to put nonbreaching party in the same position he would have been in had the breach not occurred – can include lost profits and future lost profits + disgorgement allows plaintiff to also recover profits earned through bad faith by breaching party.
Upshot: In disgorgement, instead of focusing on harm caused by breaching party, focusing on profits collected by breaching party as a direct result of the breach: MUST SHOW BAD FAITH.
