Contracts Outline

Contracts – Madison – Fall 2010 Outline
 
I.                    Introduction
a.       Promise – “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.” – Rest. §2
b.       Sources of contract law
                                                   i.      Cases/Common law
1.       Disproportionately determined by state courts applying state law
2.       Summarized in Restatement of Contracts – published by lawyers and judges, sometimes takes sides and innovates, very influential but not precedential.
                                                  ii.      Statutes
1.       Uniform Commercial Code (UCC)
a.       Uniform from state to state
b.       Tries to recognize commercial reality
c.        Not statute, but adopted as statute by states
d.       Governs sales and transactions in goods
2.       Laws restricting freedom of contract
a.       Minimum wage
b.       Consumer protection laws
                                                iii.      Treaty – UN Convention on Contracts for International Sale of Goods (CISG)
c.        No damages for birth of child after sterilization
                                                               i.      Shaheen v. Knight(1987) – P hired D, a physician, to perform a vasectomy and make the former sterile. Less than two years after the operation, P’s wife delivered a child. P is suing for breach of contract.
1.       Doctor orally guaranteed results of surgery
2.       No evidence of negligence or malpractice
3.       Public policy argument
a.       Sterilization is contrary to public policy and public morality, thus contract shouldn’t be enforced
b.       Court: no unanimity on the issue
4.       No warranty of cure
a.       Court: There was an express and explicit special contract (as opposed to an inferred contract).
b.       Rule: A doctor and his patient are at liberty to contract for a particular result, which gives rise to a cause of action for breach of contract if not attained.
5.       No damages
a.       Court: It would be against public policy to award damages for having a child.
b.       Plaintiff could have given child up for adoption
II.               Damages
a.       Types of damages
                                                   i.      Expectation
1.       Benefit of the bargain: putting the promisee in the position he would actually have been in had the contract been performed.
a.       Not subjective damages – what you “think” you’ve lost by the breach – but what you’ve actually, reasonably lost.
2.       Usual or default award in breach of contract cases.
3.       Purpose: to encourage adherence so that people can rely on the agreements they make. Also trying to protect economic efficiency.
4.       Calculation (Rest. §347)
a.       Loss in value due to other party’s failure to perform
b.       Plus any other cost caused by the breach
c.        Less any cost avoided (plus benefits gained)
5.       Use of expectancy damages – pain and suffering not awarded when natural consequence of surgery
a.       Hawkins v. McGee(1929) – P sues for breach of contract, for an unsuccessful operation involving grafting skin from his chest onto his slightly scarred hand. It is alleged that D wanted badly to do the operation, and expressed to P that he “guaranteed a hundred percent perfect hand.” P won at trial, but the court set aside the verdict as excessive.
                                                                                                                                       i.      Rule: The measure of a promisee’s damages in a breach of contract case is the difference between the value of the fulfilled promise, and the actual value received as a result of the breach (expectation)
                                                                                                                                      ii.      Court originally instructed jury to award for pain and suffering and increased injury to hand
6.       Efficient breach
a.       There are times when it makes sense for a seller to breach a contract
b.       If damages are set below the expectation value, the cost of breach would be lower, and people would breach sooner than is efficient. On the other hand if damages are too high, will produce when should breach.
c.        If expectation damages are awarded, the seller will breach if and only if the cost of production is larger than the buyer’s valuation (or if another buyer is willing to pay more) –most efficient
d.       Expectation damages have potential of getting it just right, but all depends on ability of seller to get valuation of cost of breach right predictively
                                                  ii.      Reliance
1.       Putting promisee in the position he would have been in had there been no contract
2.       No negligence, less than expectation damages awarded
a.       Sullivan v. O’Connor- P entered into a contract with D for him to perform plastic surgery on her nose. D botched the surgeries, had to perform an extra one, and disfigured P’s nose beyond repair. P sued for the recovery of out-of-pocket expenses as well as pain and suffering and expectation damages. After getting a verdict, P objected on the ground of not being able to recover for pain and suffering for the first two surgeries, and on the ground of not being able to recover the entire value between the present and promised conditions. D excepted that the plaintiff should be confined to recovering out-of-pocket expenses and not worsening of the condition or pain and suffering from the third operation.
                                                                                                                                       i.      Courts less willing to award expectancy damages in personal settings as opposed to commercial settings
                                                                                                                                      ii.      Reliance: Cost of first 2 operations; pain and suffering for first 2 ops; cost of third op; pain and suffering for third op; original nose-current nose.
                                                                                                                                    iii.      Expectation: Cost of third operation, pain and suffering, third op, original nose – current nose, promised nose – original nose.
                                                                                                                                    iv.      Actual award: Cost of first two operations, cost of third operation, pain and suffering for third operation, original nose – current nose.
                                                                                                                                     v.      Reason not to award expectation damages: Hard to gauge value of successful operation, too harsh on doctors with no negligence.
                                                                                                                                    vi.      Expectation usually more than reliance because one only goes into a contract where the expected outcome is more valuable than cost of getting it (pain and suffering)
                                                iii.      Restitution
1.       Defined from the point of view of the promisor
2.       Meant to put the promisor back in the position he was in before the contract was made.
3.       Rest. §371: Restitution interest measured by the reasonable value to the other party of what he received, or the extent to which that party’s property has been increased in value or other interests advanced.
b.       Limitations on damages
                                                               i.      Three kinds
1.       Foreseeability
2.       Uncertainty
3.       Avoidability
                                                  ii.      Remoteness or unforeseeability of harm
1.       Rest. §351 – Unforeseeability and Related Limitations on Damages
a.       Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made.
b.       Loss may be foreseeable as a probable result of a breach because it follows from the breach
                                                                                                                           i.      In the ordinary course of events, or
                                                                                                                          ii.      As a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.
c.        A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.
                                                            iii.      P can’t recover for lost profits that were unforeseeable at the time of contract formation
1.       Hadley v. Baxendale(Court of Exchequer, 1845) – P runs a mill, which was stopped when the crank shaft broke. P contracted for D to deliver the broken shaft as a model to the crank shaft manufacturers to produce a new one; in the meantime, the mill is to remain out of operation. D promised that if the shaft is delivered by noon, it will arrive at its destination the following day. However, the delivery was delayed, and the plaintiffs received the new shaft several days late, losing considerable profit.
a.       Rule: Damages that immediately arise out of the breach are awardable; damages not arising naturally – consequential damages – are not typically awardable; Damages in special circumstances are allowed if “within the contemplation of both parties.”
b.       UCC: Consequential damages must be specified. (§2-715)
c.        Damages have to be foreseeable, not foreseen.
d.       Foreseeability is assessed at the time the contract is made. When you enter a contract, you’re assenting to the liability that results when you breach it.
e.        Foreseeability rule is default rule – can contract around it (FedEx)
                                                                                                                                       i.      Can’t contract about immutable rules
                                               iv.      Uncertainty of harm
1.       Rest. §349 – Damages based on reliance interest
a.        As an alternative to [expectation damages], the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.
2.       Rest. §352 – Uncertainty as a limitation on damages
a.        “Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.”