Contracts II
Brower
Winter 2014
Chapter 2: Damages for Breach of Contract
· Three Damage Interests
o Expectation (§ 347)
§ Puts claimant / promisee in the same position as if contract was performed
· Forward-looking remedy
o P ==> K
§ Used most of the time on promises that are enforceable because they are supported by consideration.
§ Most generous
· Gives plaintiff something they never had
§ Despite name, we do not look at the P’s subjective expectation, rather we determine objective expectations.
§ Loss in value + incidental damages – cost/losses avoided = Damages
§ See also: Special Damages
· § 348 (Nurse v. Barnes)
o Reliance (§ 349)
§ Promisee changed its position to its detriment in reliance on the promise.
§ Taking the plaintiff and restoring them to the status quo that would have been in play had the parties never entered the contract.
· Turns back clock on what P has lost
· Backwards-looking remedy
o status quo Because such recovery does not take into account the promisee’s lost profit, it is ordinarily less generous than recovery measured by expectation interest.
§ See supra “Uncertainty”
o Restitution
§ If promisee has conferred a benefit to promisor during the course of the transaction, the court may award the promisee a sum of money intended to deprive the promisor of this benefit.
§ Put the promisor back to what its position would be had the promise never been made.
§ Turns the clock back on what P gained
· Backwards-looking remedy
o status quo Least generous because it doesn’t take into account lost profit or reliance.
· Expectancy
o “The benefit of the bargain”
o While contract law generally dictates that a party who is the victim of a breach is simply to be made whole and the breaching party is not to be penalized, in the case of a bad faith breach, UCC § 2-713 dictates that damages are equal to market price minus contract price.
§ E.g., someone breaches contract so they can sell their goods to someone else at a higher market price.
o See pp. 89-90
· Limitations on Damages
o Foreseeability
§ Expectation Damages must be foreseeable. If a party breaches, knowing that breach will cause further damages, breaching party is responsible for those damages.
§ See Hadley v. Baxendale
§ 2 Rules (§ 351)
· 1. General damages that flow as a natural course of breach.
· 2. Those damages that are foreseeable based on special knowledge / circumstances that the D is made aware of.
o May not be foreseeable, but nonetheless the D is aware of for some reason.
o Not entitled to unforeseeable losses so Hadley is unable to recover their actual losses.
o Damages must lie within the range of foreseeability when the 2 sides made the contract. (consent)
§ No eggshell skull rule for contracts
§ Tacit Agreement Test
· Adapted by Morrow v. First Nat’l Bank of Hot Springs
· Not followed by UCC §2-715 or Restatement § 351
· The plaintiff must prove the defendant’s knowledge that a breach of contract will entail special damages to the plaintiff, and it must appear that the defendant at least tacitly agreed to assume responsibility.
o Uncertainty (Reliance Damages)
§ If amount of actual damages is uncertain (e.g. lost profits) expectation damages are inappropriate; P is entitled to reliance damages.
§ Uncertainty has a limitation on recoverable damages
· One time off sporting events and similar are uncertain, so cannot estimate / recover for lost profits
ee pp. 156-157
· Liquidated Damages
o Enforceability: liquidated damages are enforceable if, at the time of contracting:
§ The liquidated amount is a reasonable estimate; and
§ Parties reasonably expect that calculation of actual damages will be difficult.
o UCC § 2-718;
§ (1) Damages for breach by either party may be liquidated . . . but only in the amount which is reasonable in the light of
· anticipated or actual harm caused by the breach,
· the difficulties of proof of loss,
· and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.
o § 356
§ => Unlike UCC, does NOT include the inconvenience / nonfeasibility of otherwise obtaining an adequate remedy.
o When enforceable, liquidated damages preclude mitigation, as the parties have already “interpreted” what should happen in the case of breach.
§ Once a stipulated damages clause is found reasonable, the liquidated damages should not be reduced at trial by an amount the employee did earn or could have earned. (Wassenaar v. Towne Hotel)
o Express penalty damages are unenforceable. Why?
§ Paternalism argument
· Penalty clauses are unconscionable; it must mean that one party is taking advantage of the other.
§ Economic efficiency argument
· Penalty express damages may cause one party to perform on the contract when it would have been more economically efficient for him to breach.
