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Contracts
Wayne State University Law School
Lund, Christopher C.

Lund Contracts B Winter 2014

Chapter II: Damages for Breach of Contract Pages 59-70, 75-95, 102-172

Remedies

Note: Ask Sale of Goods or Performance?

Two Types of Remedies: (1) Substitutionary Relief and (2) Specific Relief

· (1) Substitutionary Relief

o (1) Expectation Interest: The amount of money necessary to put the party (victim) back in the position they would been had the promise been performed (i.e: had there been no breach). Also called “Benefit of the bargain” – because this would have been the profit that they would have gained. You should always go with expectation interest first because you get the most money from there

o (2) Reliance Interest an attempt to put the promisee back in the position in which the promisee would have been in had the promise not been made. This is less generous than expectation interest because it does not take into account the promisee lost profit. From Notes: the amount of money necessity to put the non breaching party before they would have been. The goal is to put them in the position they would have been before the contract. This is a lot less then the expectation interest.

o (3) Restitution Interest (Take away profits from breaching party) an attempt to put the promisor back in the position in which the promisor would had been had the promise not been made. Such recovery does not take account of either the promisee’s lost profit or reliance by the promise that produces no benefit to the promisor it is ordinarily less generous than recovery measured by the promisee’s expectation or reliance interest. Notes: the amount of money necessary to make sure that the losing party does not profit from the contract, they aim to make sure that the breaching party does not PROFIT from their breached party. Thus, they have to give back the profit they would have made.

Hawkins v. McGee: The hairy hand case. This is not a torts or malpractice case, this is actually a suit about a promise. Doctor promises that “I will make the hand perfect again”. Court says that the amount of damages was inconsistent and excessive. Court offers to lower the damages and offers remitter and new trial. There are two issues in this case.

· First, was there a promise that the law would enforce? (a contract?)

o The D did make a promise here. D argues that I never made a promise, but the court says that as long as juror says yes there was a promise then court says that there is a promise.

· If there is a promise, what are the damages?

o The hand was now worse then it was before. How much should Hawkins should get? Page 62 last paragraph second sentence. This gives Hawkins the difference between a good hand and a worst hand (see slides best, good worst).

§ (1) Perfect Hand (best)

§ (2) Hand Before Operation (good)

§ (3) Hand After Operation (worst)

· The district court awards the difference between two and three (good to worst hand). The lower court held that this was a reliance interest here b/c this is the difference that would have put promisee back in the place had the contract not been made.

· However, the court says that this was wrong b/c the damages should have been the difference between perfect hand (best) and hand after operation (worst). (Thus an expectation interest).

o (EXAMPLE) Damages in Hawkins v. McGee: Perfect Hand = $2000, Hand Before Operation = $1000, Hand After Operation = $500

o Thus, $2000-$500 is 1,500. (B/c he was hoping (expecting) for a perfect hand. The hand after operation was $500 and thus you get what you would have expected (2000).

o NOTE: Example of Restitution interest: restitution interest would be what ever fee that the D charged.

· Page 63 there is a discussion about pain and suffering, the court says that this would not be included b/c this is not apart of the expectation damages. The key is that even if the surgery would have went well, he still would have went through pain and suffering anyway b/c of the operation

McGee v. US fidelity and guaranty Co: USF&G noted that its insurance policy with McGee did not cover cases where the physician makes a contract to guarantee the result of treatment provided. They want to discourage doctors making such contracts or promises b/c it brings up all these issues and even increased insurance rates. Jury found there was a special contract made and doctor failed to perform. Expenses sought to be recovered resulted from findings of jury that special contract existed and not b/c of “malpractice, error or mistake” in treatment.

How to calculate Damages: Examples

Example #1: What are the values of the three interests? Jane and Jack enter into a contract. Jane will give Jack a copy of the Restatement of Contracts. And, in return, Jack will give Jane $10 plus a copy of his Torts notes. Everyone agrees on the following values: Restatement of Contracts = $15; The Cost to Copy the Torts Notes = $3; The Market Value of the Torts Notes = $1. Later on, Jack gives Jane the $10 plus a copy of his Torts notes. But Jane decides she does not want to part with the Restatement. She breaches the contract. Jack sues.

· Answers:

o Expectation: $15- The market value of the book is $15 (putting them back to what they would have been).

o Reliance $13 – Jack gave Jane $10 and it costs him $3 to make the copies. Thus this makes him go back to what he would have been without the contract.

o Restitution $11 – Jane kept the book and she kept the notes (thus the possible profits she made here is $11 (the cost of copies is not important here because it is about taking away the profits of the breaching party)

Example #2: Jane and Jack enter into a contract. Jane will give Jack a copy of the Restatement of Contracts. And, in return, Jack will give Jane $10 plus a copy of his Torts notes. Everyone agrees on the following values: (same as above R$15, CT$3, MN$1). Later on, Jack gives Jane a copy of his Torts notes, but has not given her the $10. At this point, Jane decides she does not want to part with the Restatement. She breaches the contract. Jack sues. Answers:

· Expectation interest would $5: $15 (for the Restatement) – $10 (he was suppose to give her)

· Reliance interest would have been $3 because the only expense he has made

· Restitution interest here is $1 because she did profit from the notes.

Example #3: Jane and Jack enter into a contract. Jane will give Jack a copy of the Restatement of Contracts. And, in return, Jack will give Jane $10 plus a copy of his Torts notes. Everyone agrees on the following values: (see above). This time, no one has given anybody anything when Jane decides she does not want to part with the Restatement. She breaches the contract. Jack sues. Answers:

· Expectation would be $2 (Cost to copy the notes $3-$1???)

· reliance is 0 because jack has not gained anything.

· Restitution is 0 because Jane has not profited

R §347 (Expectation)

· § 347. Measure Of Damages In General “Subject to the limitations stated in sec. 350-353 the injured party has a right to damages based on his expectation interest as measured by:

o (a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus

o (b) any other loss, including incidental or consequential loss, caused by the breach, less

o (c) any cost or other loss that he has avoided by not having to perform.

· THUS (LOSS in VALUE) + (ANY OTHER LOSS) – (LESS ANY COST AVOIDED) = Expectation damages.

Example # 4: B contracts to build a house for C for $200,000. At the time the house is nearly finished, C breaches the contract. At the time of the breach, C has paid B only $100,000. Because of the breach, B has some leftover materials that he would not have had otherwise. B has to pay $5,000 to store them until he can find a buyer for them. But B ultimately sells them for $25,000. Answer:

· $100K (loss in value) (347a) + $5K (any other loss) (347b) – $25K (less any cost avoided) (347c) = $80K

· $80K (we want to put B the position he would have been in had there been no breach) this is b/c C would owe him 105k but B sold the items for 25k so minus 105k-25k the answer would be $80k.

· With the formula you could use it to help you, but you don’t need to use formula because the basic idea of expectation interest is about what you would have been without the formula.

Example 5: In January 1, 2004, Mary begins a 5-year contract as a professor at Bellbrook, a local college. Under the contract, Mary makes $50,000 per year. After 2 years, the college breaches the contract by firing Mary without cause. Mary tries diligently, but cannot find work for 1 year. Many reasonably decides to pay a headhunter $5,000 to help her find a job that pays her $40,000 a year. Mary works there for the 2 more years until her contract with Bellbrook would have expired. If Mary now sues the college, how much would her damages be? Answer: $75 k Here is why:

· Year 1-2: (she works there) so she gets her paycheck of $50k. Year 3: $50k (Does not work so no income). Year 4 & 5: $10k each year (New job pays $40k so $50k-$40= $10k is her loses for that year). What She Had to Pay Extra: $5,000 (Headhunter Costs) Mary’s Damages: $50K (year 3) + $10K (year 4) + $10K (year 5) + $5K (headhunter) = $75K

· OR You can calculate like this: Total of What She Should Have Gotten 5 x $50,000 = $250,000 (Belbrook). Total of What She Actually Got 2 x $50,000 = $100,000 (Belbrook) 2 x $40,000 = $80,000 (Other Employer) What She Had to Pay Extra: $5,000 (Headhunter Costs) Mary’s Damages: $250K – $180K + $5K = $75K

Example 6: Professor Lund contracts to build a sculpture for Professor A, for the sum of $125K. The sculpture will cost Lund $100K to build, and so Lund expects to make $25,000 in profit. Lund spends $40,000 on the project, and has $60,000 left to spend. At this point though, A breaches. A has not yet paid Lund anything. How much should a court award Lund as damages? Answer: $125K (What Lund Would Have Gotten) – $60K (What Lund Would Have Had to Pay) = $65K. OR $25K (Lund’s Lost Net Profit) + $40K (Lund’s Reliance Interest) = $65K

Note that Expectation damages may not always be this easy to figure out:

J.O. Hooker & Sons v. Roberts Cabinet Co: Hooker (D) entered into a contract with the Bessemer Public Housing Authority for the renovation of several residences. The renovation involved removing cabinetry. D entered into a subcontract with Roberts (P) to remove the old cabinets and supply and install the new cabinets and other related items. The parties disputed who was required to dispose of the old cabinets. The parties could not reach an agreement and sent a fax to P stating that he considered the contract null and void. P filed suit, claiming that D had breached the subcontract after performance had begun. The trial court granted summary judgment and denied D’s motions for a new trial and remittitur. D appealed. Issue: 1. Does Article 2 of the UCC apply to mixed transactions that include both goods and services? 2. Is Roberts able to get damages for storage of cabinets (2) and administrative costs and lost profits (3)?

· Holding: NO UCC here b/c this is not a sale of goods, the quality of the cabinets not at issue here. The storage of the cabinets not recoverable because Roberts did not pay extra because of the breach. (Keep in mind the expectation damages rule). No Roberts did not pay extra b/c storing them did not really cost them anything. Roberts made the argument that the cabinets took up 20% of my space, and Hooker should pay the 20% of my space and time. Court says that that doesn’t matter, because he did not pay extra for the space in the storage place.

o The worker Kevin Roberts’s time is recoverable because he wasted his time on the project where he could have been doing something else. However Court says that he must show that Kevin Roberts could have been doing something else.

o The court uses expediency costs lost profits is to put the injured party (Roberts) in as good a position as he would have been in but for the breach; jury was correct in using expectation dam

all seeds and the crop to be delivered in increments of 1/3 on different dates in Dec, March and in May. Coop had contract to deliver seeds to Bambino Bean & Seed, Inc., with their only anticipated profit was the handling fee. There was a Dispute in Jan. 1989 over amount of dockage fees charged against Tongish’s seeds; resolved by Coop issuing additional check to Tongish reflecting a lower dockage charge. Due to short crop, bad weather, and other factors, market price of sunflower seeds in Jan. 1989 was double that set forth in Tongish/Coop contract Jan. 1989, Tongish notifies Coop he would not deliver any more seeds. Tongish goes on to sell seeds to Danny Thomas and they receive $5,153.13 more than the Coop contract price. Thomas paid for 1/2 the seeds, Tongish files suit to collect balance, Thomas pays and is dismissed from action. Coop intervenes in action, seeking damages for Tongish’s breach of contract. Damages awarded to Coop $455.51, the computed loss of handling charge / Coop appeals. Ct of Appeals reversed district ct and remanded case to district ct to determine and award damages pursuant to K.S.A. 84-2-713

· Tongish (P) à sells them to Coop (I) à sells them to Bambino

à Thomas (D)

· Issues: The case presents narrow issue of whether damages arising from the non-delivery of contracted for sunflower seeds should be computed on the basis of whether the buyer is entitled to the actual loss of profit (KSA 84-1-106) or the difference between the market price and the contract price (KSA 84-2-713). This is not about calculating damages under UCC, or how the UCC should be interpreted. This is about what UCC section should apply. Why do we give the expectation interest? Why not more?

· Holding: Should use 84-2-713 when computing damages. Rule: When there are two conflicting statutes, one dealing generally and one specifically with a subject, the specific statute controls unless it appears the legislature intended to make the general act controlling. Kansas Supreme Ct said to read both and try to “harmonize” the two.

o Here Coop is the middle man, the way Coop has structured the deal is that there is no risk to him about the market value of sunflower seeds.

o The question of this case is the measure of the damages. There are two ways of doing this. Either 2-713 and 1-106.

§ Here Coop wants the 2-713, the difference between market price and contract price. This would be to over $5k.

§ Tongish wants 1-106 because this is the expectation interest and so he would owe 455.51.

§ The courts here go in different directions. Trial courts goes with the small sum, appeals goes with the larger sum. Supreme court agrees. They use the option of the court of appeals.

o Here they used four reasons

§ (1) Statutory Construction KA adopted both the provision from the UCC, and the SC asks what would the KA legislature would have wanted us to do? The problem is that the KA leg did not think about this type of problem because there are conflicting statutes here. The court here points to page 86 and says that 1-106 is more general while 2- 713 is more specific. 2-713 provides a more specific formula.

§ (2) Previous Caselaw: Court turns to other cases that interprets 2-713 There was a case with the raisins and the case with the alfalfa. Court says that the breach in ally case (raisins) was a different case because there was nothing that the person could do because the corps were damaged (it is different factually from this case), they were not being opportunistic (As in this case were Tongish went to a different seller.). Here, the Coop attorney successfully argues that this case is very different from the ally case.

§ (3) Discourages Breach Court looks at the text, looks at law review articles to determine the best solution here.

§ (4) Avoids a Windfall Tongish has breached this contract and made a substantial amount of money. The general principal in contract law is that it does not matter why someone breaches. Is discouraging a breach always a good thing? Maybe sometimes discouraging a breach would be a good thing. In this situation the seeds were set to go to Coop for a hundred weight, may be that was a good thing, maybe Thomas really wanted those seeds for more expensive a price…he would used the seeds more effectively then the Coop. What is wrong with that?

· May not reflect actual loss to a buyer, it encourages a more efficient market and discourages the breach of contracts. Damages computed under K.S.A. encourage the honoring of contracts and market stability

· General and specific statues should be read together and harmonized whenever possible, but to the extent a conflict between them exists, the special statute will prevail unless it appears the legislature intended to make the general statute controlling. The court decides to award the difference in market value and contract price for the seeds rather than lost profits.