Contracts McClanahan Fall 2014
1. Meaning of “Contract”
a) Definition: A “contract” is an agreement that the law will enforce. Rest. §1 (Written both oral)
b) Sources of Contract law: Common law / UCC
– UCC: Sales of Goods (movable) / Sometimes “Merchants” (professional dealer of the kind of goods)
Distinguish btw a suit brought on the contract, and a suit brought off the contract (e.g. in quasi-contract)
a) Suit on the contract: Where the parties have formed a legally enforceable contract, and the defendant has breached the contract (but not the P), the P will normally sue “on the contract”.
b) Quasi-contract: In here, the P is not really asking for enforcement of the contract; instead, she is usually asking for damsges based on the actual value of his performance.
Where is (1) the K is unenforceably vague, (2) the K is illegal, (3) the parties are discharged b/c of impossibility of frustration of purpose, and (4) the P has herself materially breached the K.
2. Equitable remedies
a) Two Types
1) Specific performance: A decree for specific performance orders the promisor to render the promised performance.
2) Injunction: An injunction directs a party to refrain from doing a particular act.
1) Inadequacy of damages: Equitable relief for breach of K will not be granted unless damages are not adequate to protect the injured party. The reasons are (1) b/c the injury cannot be estimated with sufficient certainty; or (2) b/c money cannot purchase a substitute for the contracted-for performance. (e.g. land)
2) Definiteness: The K’s terms are definite enough to enable the court to frame an adequate order.
3) Difficulty of enforcement: The court will not grant equitable relief where there are likely to be significant difficulties in enforcing and supervising the order. (e.g. personal service)
c) Rules for particular kinds of contracts:
(a) Real property (land): presumptively unique even if they look the same.
§ Loveless v. Diehl
· Facts: L promised to lease land to D and let him buy land if he pays 21K. Then D makes deal with Hart for 22K – so 1K profit. L didn’t sell land to D – lost profit
· Holding: To refuse specific relief on account of proposed resale would establish an unsound precedent. The Diehls were entitled to $1,000 in damages for the difference between their hypothetical selling price and their hypothetical purchase price.
(b) Personal services
· What a personal services K is?
①Calls for specific duty by specific person
②When it’s a person making the promise, and not the company
–If it’s a company, then SP is possible if money damages aren’t adequate
③When it’s the person agreeing to personally be of service and not an organizer of services
· Specific performance is not awarded in a personal services contract. Presumption that remedy at law is enough.
· Difference between specific performance and negative injunction–Employee may have to honor non-compete if reasonable in duration, geography, and scope. (Legal remedy still must be inadequate).
§ The case of Mary Clark, A Woman of colour
· Covenants of servitude cannot be enforced or coerced by specific performance because doing so would produce a state of degrading and demoralizing servitude, as a state of absolute slavery.
(c) Personal property
· common law (narrow): Unique is necessary prerequisite
· UCC§2-716 (broader): specific performance for buyer if goods are unique or “in other proper circumstances”.
3. Expectation damages
a) Defined: The court tries to put the P in the position he would have been in had the contract been performed by the defendant.
b) Formula: P’s expectation damages are equal to the value of D’s promised performance (generally the contract price), minus whatever benefits P has received from not having to complete his own performance. Rest. §347
1) Overhead: The P’s cost of completion (the amount he has saved by not having to finish) does not include any part of his overhead (indirect) cost.
2) Cost of completion or decrease in value: Where D has defectively performed, P normally can recover the cost of remedying D’s defective performance. But if the cost of remedying defects is clearly disproportionate to the loss in market value from the defective performance, P will only recover the loss in market value.
· Hawkins v. McGee: McGee guaranteed Hawkins a perfect hand from the surgery and the hand was worse off after the surgery. Hawkins sought damages on pain and suffering.
Rule: The measure of expectancy damages based on the difference between the value of the promised performance (perfect hand) and actual performance (post-operation hand) + other kinds of harm caused by breach (incidental or foreseeable) as long as they’re foreseeable. P’s suffering doesn’t affect difference in value unless it’s beyond what was foreseeable.
Reasoning: The purpose of damage awards is to restore the P to the position he would have occupied had the contract been fulfilled
· Hooker v. Roberts: H – contractor. R – subcontractor. R promised to install cabinets, tear out olds ones, ceiling materials etc. R said he wasn’t supposed to dispose of old cabinets so H said that K was void. R wants damages.
Rule: A party is entitled to lost profits on claim for breach of contract. We know we are talking about expectancy when lost profits involved. Robert got profits + costs actually incurred – resale value of cabinets.
o Storage costs were not recoverable b/c it would have incurred anyway.
Administrative costs can be recovered b/c Robert suffered an economic loss by paying employee salary for a contract which would eventually be canceled. This kinds of losses are compensable if there’s plausible reason to believe that the expenses would have been put to productive use but for the breach.
· Sullivan v. O’Connor (1973): O’Connor promised plastic surgery for Sullivan’s nose, but the nose got worsen. Rule: P was entitled to get out-of-pocket expenditures + worsening of her condition + pain and suffering and mental distress involved in the third operation.
c) Reasonable Certainty: The P may only recover for losses which he establishes with “reasonable certainty.” This means the P should show not only that there would have been profits for the K, but also the likely amount of those profits. Rest. §352.
1) Profits form a new business: Courts are especially reluctant to award lost profits from a new business. A business which at the time of breach was not yet in actual operation.
2) Cost of completion unknown: Also, the “reasonable certainty” requirement may fail to be met where the P cannot show accurately enough what his cost of completion would have been.
§ Chicago Coliseum club v. Dempsey
· Facts: Plaintiff made agreement with Wills that Wills would fight Dempsey. Then P made contract with Weisberg. Then P made contact with Dempsey to fight Wills – Dempsey breached.
· Anticipated profits cannot be recovered if it cannot be proven with reasonable certainty. The profit from a boxing contest of this character, open to the public, is dependent upon so many different circumstances that they are not susceptible of definite legal determination.
· Not allowed to recover for pre-K(contract) expenditures generally.
· àException: Can recover only if the expenses were such as would reasonably be in the contemplation of the parties as likely to be wasted if the K was broken
· Post-breach expenditures not going to be recoverable if done at party’s own risk; each party has to pay for their own attorney fees – a fundamental part of American law
§ Anglia Television LTD. V. Reed
· Facts: P and D contracted for making a TV program. But the program totally canceled b/c D breached the K. P argued they could get all the expenditure including the money paid before the K. -> Affirmed
· Rule: P Can recover only if the expenses were such as would reasonably be in the contemplation of the parties as likely to be wasted if the K was broken.
§ Mistletoe Express Service v. Locke
· Facts: Locke entered contract with Mistletoe where Locke would do pickup /delivery for Mistletoe. Locke made certain expenditures for it and M stopped before contract was over.
Holding: The victim of a contract can choose to get reliance damage since it would be bigger than expectancy. It is true that the injured party may not recover in reliance more than they would have gotten if the contract had not been breached. But if breaching party cannot prove with reasonable certainty that the injured party would have suffered loss, then they can get reliance remedy even if bigger than expectancy.
4. Reliance damage
a) Defined: Reliance damages are the damages needed to put the P in the position he would have been in the position he would have been in had the contract never been made. Rest. §371. Therefore, these damages usually equal the amount the P has spent in performing or in preparing to perform.
b) The main situations where reliance damages are awarded are:
1) Profit too speculative or uncertain
2) Vendee in land contract
3) Promissory estoppel
c) Limits on amount of reliance recovery: The P’s reliance damages are sometimes limited to a sum smaller than the actual expenditures.
1) Contract price as limit: B/c D’s only obligation under the K is to pay a sum of money
2) Recovery limited to profits: Most courts do not allow reliance damages to exceed expectation damages.
3) Expenditures prior to signing: The P will not normally be permitted to recover as reliance damages expenditures made before the K was signed, since these expenditures were not made “in reliance on” the K.
a) Defined: The value to the defendant of the P’s performance. Restitution’s goal is to prevent unjust enrichment.
1) When used: (1) A non-breaching P who has partly performed before the other party breached may bring suit on the contract, and not be limited by the contract price; (2) a breaching P who has not substantially performed may bring a quasi-contract suit and recover the value that
erence btw resale price and contract price), or not reselling them (and recovering the difference btw market price and unpaid contract price); seller may also be able to recover lost profits.
3) Summary: So in UCC cases, it is really only the buyer who has a practical duty to mitigate.
c) Losses incurred in avoiding damages: If the aggrieved party tries to mitigate his damages, and incurs losses or expenses in doing so, he may recover damages for these losses or expenses. As long as P acted reasonably in trying to mitigate, it does not matter whether his attempt successful.
8. Liquidated Damages
a) General Rule: Courts will enforce liquidated damages provisions, but only if the court is satisfied that the provision is not a “penalty”.
1. Reasonable forecast: The amount fixed must be reasonable relative to the anticipated or actual loss for breach; and
2. Difficult calculation: In some courts, the harm caused by the breach must be uncertain or very difficult to calculate accurately, even after the fact.
§ Kemble v. Farren
· Facts: P(theater) and D(comedian) contracted 4 seasons’ action with a provision assessing damage £1,000. But jury assessed actual damage £750.
· Rule: “Penalty” is unenforceable, and “liquidated damage” is enforceable.
· Held: Found that because the £1,000 stipulation was for any minute breach that it was a penalty and unenforceable. Stuck with £750 award.
§ Wassenaar v. Towne Hotel:
· Fact: W was employed by T. The contract provided for a 3 year period of employment and included a stipulated damages clause in case T terminated W before the expiration of the Contract. T discharged W 21 months before the expiration. W obtained another job 10 weeks later.
o Whether the clause is a valid and enforceable liquidated damages provision or is an unenforceable penalty: Yes, enforceable!
o Whether a liquidated damages clause in an employment contract may serve to eliminate the employee’s duty to mitigate damages: Yes!
o (1) Test for determining whether the stipulated damage clause is valid: whether the clause is reasonable under the totality of circumstances. (This strikes a balance between the two competing sets of policies: respects the parties’ bargain but prevents abuse.)
§ Did the parties intend to provide for damages or for penalty?
Recent discussion generally discarded the subjective intent of the parties b/c subjective intent has little related to reasonableness -> intention, how hard about breaching, reasonable forecast
§ “Difficulty of ascertainment” test: Is the injury difficult or incapable of accurate estimation at the time of contract?
§ Are the stipulated damages a reasonable forecast of the harm caused by breach?
o (2) Where the stipulated damages clause is a valid provision for liquidated damages, the doctrine of mitigation of damage(proof of the employee’s actual loss) is not applicable to determine the damages awarded the non-breaching party.
· Held: The stipulated damages were not a penalty but a liquidated damage.
o The stipulated damage provision was a valid liquidated provision and the doctrine of mitigation did not apply.
o The employer (P) failed to prove that the stipulated amount of damages was grossly disproportionate to the actual harm and thus unreasonable.
o The reasonableness can be reviewed that the stipulated damage was a reasonable forecast and the harm was difficult to estimate.
Rationale: Skeptical to keep parties on the unwilling K / court’s ruling power -> but nowadays, the effectiveness of private agreement have grown up
b) UCC rules: The UCC basically follows the common-law rule on when a liquidated damages clause should be awarded. The UCC follows the modern view, by which the party seeking enforcement of the clause will succeed if the sum is reasonable viewed either (1) as of the time the contract is made or viewed (2) in light of the actual breach and actual damages. UCC §2-718(1) (clause enforceable if “reasonable in the light of the anticipated or actual harm caused by the breach…”)