Contracts
White
Fall 2012
Introduction
The purpose of contract law is that people make promises, and the law realizes that you have an obligation to keep those promises. If you break your promise, the other party is deserving of a remedy. The purpose of contract law is to encourage commerce, so it focuses on goods and services, not personal interactions.
Unlike other forms of law, there are no punitive damages presumed in contract law; contract law focuses only on the obligation from the promise (contract), not societal duties.
The court will not grant a legal remedy where other options exist. A parent who underwent a vasectomy cannot recover the costs of caring for his child because the vasectomy fails, if he wants to keep the child, because there was no damage done. There are already remedies in existence: plaintiff could give the child up for adoption, and the operation could be redone for free or refunded. Shaheen v. Knight, 11 Pa. D. & C.2d 41 (Court of Common Pleas of Lycoming County 1957).
Definitions
· Contract – a promise(s) that creates a legal duty of performance between the parties; the law will give a remedy for the breach of such a promise. It can be an oral or written promise or be inferred from the parties’ actions. RSC §1.
· Promisor – the person who makes and breaks the promise. RSC §2.
· Promisee – the person to whom the promise was made. RSC §2.
· Beneficiary – a person other than the promisee who will benefit from the promise. RSC §2.
· Agreement – a manifestation of mutual assent. RSC §3.
· A promise can be oral, written, or inferred by conduct. RSC §4.
o A term in a promise may be unenforceable due to public policy. RSC §178; RSC §179.
Damage Interests
· Expectation Interest (“Benefit of the Bargain”) – the court attempts to put the promisee in the position it would have been in if the promise had been fulfilled. This is the default measure of recovery, and it can be referred to as “contract damages”.
· Reliance Interest (“Detrimental Reliance”) – the court attempts to put the promisee in the position it was in before the promise was made.
· Restitution Interest (“Unjust Enrichment”) – the court attempts to put the promisor in the position it was in before the promise was made. This is done to discourage egregious behavior.
The true measure of damages in a medical case is the difference between what was promised and the state of plaintiff after surgery; pain and suffering cannot be considered damages. Hawkins v. McGee, 84 N.H. 114, 146 A. 641 (1929) – the “Hairy Hand” case. If a doctor enters into a “special contract” with a patient, his insurance company will not have to cover those costs if it is not malpractice or an error or mistake. McGee v. United States Fidelity & Guaranty Co., 53 F.2d 953 (1st Cir. 1931).
General Measure of Damages (GM) = Loss in Value + Other Loss – Costs Avoided – Loss (RSC §347)
· Loss in Value – value of promisor’s promised performance
· Other Loss – incidental or foreseeable consequential damages
· Costs Avoided – expenditures promisee would have made but did not have to because of promisor’s breach
· Loss Avoided – losses promisee would have had but did not have because of promisor’s breach
There are two types of reliance damages
· Essential reliance – what you spend to perform the contract
· Incidental reliance – not necessary to perform the contract, but happened as a result of attempting to perform it (the damages have to be foreseeable and you have to mitigate the damages)
o Incidental reliance + consequential damages = other loss
Damages for Breach of Contract
Ex facto jus oritur – “out of facts, springs the law” – the factual distinctions between cases will impact differences in their outcomes, and sometimes facts actually lead to changes in the law. Analysis of law is analysis of facts.
Res tantum valet quantum vendi posttest – a thing is worth only what someone else will pay for it.
For a period of time, a part of the law called “contort” was developing (although it has since died out), where courts would let the remedy drive the analysis. A doctor had to pay damages for pain and suffering and the worsening of the patient’s condition. Here, the court awarded contract damages in what was really a tort that didn’t quite amount to malpractice because the court thought the doctor should not have made a promise to make a 100% body part. Sullivan v. O’Connor, 363 Mass. 579, 296 N.E.2d 183 (1973).
Uniform Commercial Code
The UCC applies to transactions of goods. UCC §1-103 discusses general principles of contract law. UCC §2-102. UCC §2-105 defines “goods”, and UCC §2-206 defines “contract”, “contract for sale”, and “sale”.
Expectation Damages
The minority rule is that a nonbreaching party would be entitled to the difference between the market and contract price, rather than the lost profit. Tongish v. Thomas, 51 Kan. 728, 840 P.2d 471 (1992). Contract law is focused on awarding judgment only where a party is actually damaged, and since the plaintiff in this case wasn’t actually damaged, they should not receive a windfall judgment. The purpose of contract law is not to impose penalties; it rewards parties who take risks in the market. “Efficient breach” is favored under the majority rule in America.
“Cover” – A party has a duty to minimize losses by buying the product from someone else (or selling it to someone else), and this is called “cover”.
“Efficient theft” is the opposite of this rule, thinking that a plaintiff is entitled to the market price, because it could have breached and then sold its product at a higher market price, making more money, thus it would be entitled to more than just lost profit. This is what the court awarded in Tongish v. Thomas, but it is the minority rule.
UCC
Remedies will be liberally administered. UCC §1-106. A party has a duty to cover. UCC §2-712. The damages awarded will be the difference between the contract price and the market price. UCC §2-713. Plaintiff can also recover incidental and consequential damages. UCC §2-715.
Limitations on Damages
Remoteness/Foreseeability of Harm
Unforeseeable consequential damages are not recoverable. Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854); RSC §351. This will be an objective test, since we cannot prove what was actually foreseen. Foreseeability is required because contract obligations are assumed, not imposed; you are free to either contract or not contract. Parties cam limit liability (such as in a FedEx disclaimer). On the flip side, parties are free to expand liability. When parties are silent, courts are reluctant to imply liability beyond foreseeable consequences.
Tacit Agreement Test (Minority Rule)
A promisee must prove that t
sed to him; promisee cannot pile up damages by continuing to perform his portion of the contract. Rockingham County v. Luten Bridge Co., 35 F.2d 301 (4th Cir. 1929).
Time
Profit ($2,000)
Expenses ($18,000)
Repudiated
Promisee can recover all expenses from before repudiation, as well as all profits (the gray area). Damages cannot be recovered for an avoidable loss where there was no “undue risk, burden or humiliation.” RSC §350.
Personal service (employment) contracts are different from construction projects because the opportunity costs are higher—you can’t have two fulltime jobs, s if an employer breaches, you won’t have a job for some period of time, and from an employer’s standpoint, employees are unique, so it is harder to cover. A wrongfully discharged employee can recover damages for what he would have made minus the amount the employer proves he could have earned with a reasonable effort to find other employment; however, refusing an inferior and different position does not constitute a violation of a “reasonable effort”, and any money that could be made in such a position will not be deducted from the damages awarded. Shirley MacLaine Parker v. Twentieth Century-Fox Film Corp., 3 Cal. 3d 176, 89 Cal. Rptr. 737, 474 P.2d 689 (1970). Whether substitute work is inferior and different is something that should be determined at trial, which is contrary to Parker, but that is what the dissent said, and I agree.
Lost Volume Doctrine
A seller of volume retail goods may recover lost profits when a buyer breaches a sales contract if market damages are inadequate to put the seller in as good a position as he would have been had the contract been performed. When a seller of volume goods tries to sell products, and the buyer breaches, the seller does not need to cover the sale of the boat (where there is only one boat), but rather, there would have been two sales, because he has an “unlimited” supply of boats. Neri v. Retail Marine Corp., 334 N.Y.S.2d 165, 30 N.Y.2d 393, 285 N.E.2d 311 (N.Y. App. 1972).
A seller is assumed to have supply that exceeds demand, and when supply exceeds demand, a supplier can claim it has lost volume because of the breach. The profit from two sales, rather than one, is what he would have if the contract had been performed. UCC §2-706, UCC §2-708, UCC §2-710, UCC §2-718.
Contracting Around the Default Rules of Damages
Liability can be expanded or contracted from the default rules by inserting a clause that is different from the default rules.
Limitations on Consequential and Incidental Damages
Parties can limit liability by including warranty clauses lay out the exclusive remedy for a breach of contract (like the FedEx disclaimer). UCC §2-719.
