CONTRACTS B OUTLINE
Professor Brower – Winter 2016
Damages for Breach of Contract
Assume breach occurred!
REMEDIES: DAMAGES, specific performance, injunctions, reformation (Alcoa – not likely)
The single most important issue in any lawsuit – very important to the parties (what they stand to win or lose)
The point at which everything becomes clear
Drive and shape the entire system – ex: if change measure of damages or the remedy to include death penalty would substantially affect rules of contract law (like greater requirements for formation and interpretation)
Specific performance represents most common remedy in most legal systems and in certain situations in K:
Equitable remedy, when no adequate remedy is available at law
Land Ks: typically land is unique, so damages are not enough to compensate for a particular piece of land à strong presumption get specific performance in land Ks
Personal service Ks: equitable considerations shift away from specific performance
Goods: if absolutely unique (ex: Cumbest’s stereo) à specific performance BUT w/ respect to goods UCC makes them available on a somewhat larger basis (ex: if scarce)
Damages represent the MOST COMMON remedy for breach of K in our legal system
Damage calculations are the MOST IMPORTANT ISSUE in any lawsuit. Very important to the parties – how much they stand to win or lose. Clients either want to know if it’s worth a lawsuit, or if sued, what worst that could happen
Depending on the situation, damages might involve expectation interests, reliance interests, or restitution interests:
Expectation: benefit of the bargain, presumptive remedy, and most desirable remedy b/c can get lost profits would have had if the K had been performed
Reliance: put innocent party in situation had there been no K, typically involves giving back all historical OOP costs
Restitution: put breaching party in same position had K not been entered into, breaching party return to innocent party all value received (tends to be smaller than reliance damages)
While expectation damages are the most common level of damages awarded, and are typically the most generous measure of damages, that is not always the case
Always an approximation, will often under-compensate for non-economic harms (Hawkins)
When expectation damages are available, must measure economic damages by performing all 3 steps of the formula set forth
Three Damage Interests
(p. 59-70)
Expectation
Benefit of the bargain: attempt to put the promisee in the position promisee would have been had the promise been performed (i.e. had there been no breach)
Most generous b/c designed to allow P to recover something (ex: lost profits) they never had; forward-looking
Foreseeable (Hadley), reasonably certain (Dempsey), must mitigate
Not good for things that are not quantifiable – good in commercial situations where sales have value
Always an approximation, difficult to calculate outside of commercial realm, under-compensates for non-economic loss
High degree of speculation b/c in a situation that never existed à result: a number of limitations on these
Expectation damages represent the presumptive measure of damages for breach of K
Other measures of damages are available in other contexts, ex: if impossible to prove expectation damages or if fall outside the limits, can fall back on reliance as a theory, or if have agreement void/voidable and can’t claim the benefit of the bargain or reliance, then maybe just restitution
R §347. Measure of Damages in General
Subject to the limitations stated in §350-353, injured party has a right to damages based on his expectation interest as measured by
(a) the loss in the value to him of the other party's performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not having to perform.
R §347: lost value + incidental/ consequential damages – any costs avoided as a result of non-performance = $ damages
Reliance
Attempts to put the promisee back in the position in which the promisee would have been in had the promise not been made
If the promisee changed its position to its detriment in reliance on the promise (as by incurring expenses in performing or preparing to perform) the court might award a sum of money intended to compensate for this loss
Ordinarily less generous than recovery measured by the promisee's expectation interest b/c such recovery doesn’t take account of the promisee's lost profit – only trying to restore historical, out of pocket expenses that the person has incurred in preparing to perform the K
Backward-looking, look back to put P back into status quo, turning the clock back on what the P has lost
Incurred expenses in performing or preparing to perform
Less generous than recovery based on expectation interest
Restitution
Attempts to put the promisor back in the position in which the promisor would have been had the promise not been made
If the promisee conferred a benefit on the promisor in the course of the transaction (as by delivering something to the promisor or improving the promisor's property) the court might award the promisee a sum of money intended to deprive the promisor of this benefit
Even less generous than recovery measured by the promisee's expectation or reliance interest b/c not looking at the entire universe of out-of-pocket costs P might have incurred, but only the subset of the cost or value the P has parted with and given to D, and forcing D to give it back to P
Backward-looking, turning the clock back on what the D gained
Tries to put D back into status quo: assuming K never formed, forces D to give back to P any benefit D has gained
Amount capped at value of K
Hawkins v. McGee (1929, S.C. of NH):
Facts: Hawkins (P) sued surgeon McGee (D) for not making his hand perfect, as guaranteed, after D operated on it.
Note: 2 theories of recovery: (1) negligence (obvious), (2) breach of K founded on express warranty
Judge rules judgment as a matter of law on obvious negligence count b/c of McGee's popularity – professional medical malpractice at that time would have to rely on expert testimony from doctors in same community à unable to establish prima facie case of medical malpractice
Hawkins falls back on breach of K claim for breach of express warranties:
(1) 3 to 4 days in hospital
(2) Just a few days until go back to work
(3) Perfect hand: “I will guarantee to make the hand a 100% perfect hand”
(1) – (3) alone are not a warranty, just an opinion. BUT b/c guaranteed results à warranty and b/c McGee solicited and hounded Hawkins for the operation so he could experiment – willing to accept that it is a warranty, and follows that the warranty was breached
Issue: appropriate damages for breach of express warranty
T/C: instructs jury to think about pain/suffering and new/additional harm brought to the hand (seems practical, sensible, and fair to George ) à $3,000 damage award. Court says excessive. Accept $500 or new trial. Appeal.
Rule: The true measure of a buyer's damages is the diff. btwn the value of the goods as they would have been if the warranty as to the quality had been true and the actual value at the time of sale, including any incidental consequences w/in the contemplation of the parties when they made their K.
Holding: damages = diff btwn value to him of a perfect hand as promised by D, and value of his hand in its present condition
P's suffering not included in diff b/c it's a legal detriment suffered by him which constituted a part of the consideration given by him for the K
K law usually only compensates economic, commercial loss
Supreme Court: Expectation damages (benefit of bargain)
Value as warranted – value as delivered w/ breach of warranty = $ of damages
Easy to apply to a machine, but not George's hand! (S.C. unwilling to award non-economic damages in K claims, unlike torts)
BOTTOM LINE: Demonstrates that damages, including expectation damages, can be extremely unfair b/c only an approximation – tend to work for most cases, most of the time (make perfect sense w/ ex: a machine that failed) but once move away from goods towards objects w/ no market value whatsoever (ex: hands) à approximation does not work, and functions in an inappropriate way (a product/function of imperfect legal system) – will yield surprising, inappropriate rests in certain cases
McGee v. United States Fidelity & Guaranty Co. (1931, U.S. Court of Appeals):
Dr. McGee (P) notified his malpractice insurer, U.S. Fidelity (D), that he wanted to pay $1,400 to Hawkins to settle the case and that he was going to look to them for payment. D insurance company refused to reimburse him for the damages awarded in the lawsuit, and P sued his malpractice insurer
Court held for D insurance company b/c its policy didn’t cover special contracts to cure, like the one P made with Hawkins
Nurse v. Barns (1664 K.B.): (didn’t talk about)
Facts: Nurse (P) argued that Barns (D), in consideration of 10 pounds, promised P the enjoyment of iron mills for 6 months. The iron mills were worth 20 pounds per annum. At trial for breach, the jury awarded P damages in the sum of 500 pounds for the loss of stock laid in. D appealed.
Rule: Special damages may be awarded for breach of contract.
Holding: The jury was not bound to give only the 10 pounds. The jury may award damages in the sum of 500 pounds for the loss of the stock laid in (incidental + consequential damages)
Analysis: This case appears to allow for expectation damages to be given. R §347 allows an injured party damages based on expectation interests.
Differentiating Damage Interests: A Problem (p. 70)
K: Brower promise to sell student copy of Restatement (market value $15) in exchange for $10 + notes (costs $3 to copy notes, but notes once copied only have market value of $1).
If Brower does not give Restatement, and Student gives Brower $10 + notes. How compensate student for breach of K?
Expectation interest: if Restatement given, $15
Lost value of performance – cost avoided = expectation
$15 (lost entire value of performance b/c no RST) – $0 (didn’t avoid any costs – gave him everything) = $15
Reliance interest: put innocent party back in position if promise not made, $13 ($10 + $3 to copy notes)
If promise had not been made, student would still have $10 and would not have spent $3 to copy the notes
Restitution interest: put breaching party back in position if promise not made, $11 ($10 + $1 market value of notes)
Brower received from student $10 + the notes which are worth $1 to him (value of notes in his hand, not expense in making them) = $11
If Student provided notes, but not $10, and Brower does not give student Restatement. What are expectation damages?
Lost value of performance ($15 b/c no RST) – cost avoided
Formulas are approximations. Difficulties determining what can be included or excluded!
UCC §1-103. Supplementary General Principles of Contract Law Applicable
Unless displaced by the particular provisions of this Act, the principles of law and equity, including
the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.
UCC §2-102. Scope; Certain Security and Other Transactions Excluded From This Article
Unless the context otherwise requires, the Article applies to transactions in goods; it does not apply
to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.
UCC §2-105. Definitions: Transferability; “Goods”. . .
(1) “Goods” means all things (including specially manufactured goods) which are movable at the
time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 9) and things in action. “Goods” also includes the unborn young of animals and growing crops and other identified things attached to realty as described in goods to be severed from realty (Section 2-107)…
UCC §2-106. Definitions: “Contract”; “Agreement”; “Contract for Sale”; “Sale”; “Present Sale”. . .
(1) In this Article unless the context otherwise requires “contract” and “agreement” are limited to
those relating to the present or future sale of goods. “Contract for sale” includes both a present sale of goods and a contract to sell goods at a future time. A “sale” consists in the passing of title from the seller to the buyer for a price (Section 2-401). A “present sale” means a sale which is accomplished by the making of a contract. . .
Tongish v. Thomas (1992, S.C. Kan.):
Tongish (grower) agreed to grow 116.8 acres of sunflower seeds to sell to à Co-op (buyer) à Bambino
$8 or $13 per hundredweight
Cost + 55 cents per hundredweight
Co-op had K to deliver seeds to Bambino, only anticipated profit was handling fee
Co-op gets paid the same no matter what the market price of the seeds is
January 1989: market value spikes b/c supply down due to a short crop – now double that in the Tongish/Co-op K à Tongish told Co-op he would no longer be selling to Coop (regret contingency)
Tongish sold instead to à Thomas for $20/HW, total of $14,714 (which is $5,153 more than the Co-op K price)
Co-op sues Tongish for breach of K
D/C: Tongish breached à awarded Co-op $455.51 in damages (based on buyer’s actual loss of profit – loss of handling charges)
Ct. App.: reversed, based damages on diff btwn market price and K price
Majority Rule: In an action for a breach of K for the sale of goods, the proper measure of damages is diff. btwn the market value of the goods and the K price agreed upon by the parties. (Minority Rule: lost profits view under Allied
Holding: The court of appeals was correct in applying the market price measure of damages. Affirmed.
Follow the majority rule – market damages remedy in UCC 2-713 encourages a more efficient market and discourages the breach of Ks
Damages – UCC 2-713 (formula): Market Price – Contract Price = $5,153
Tongish wants to use UCC 1-106 (principle): Benefit of Bargain = $455
If K had been performed, Coop would not have received the extra $5,153
Benefit of the bargain = the foundation principle, but there are all sorts of things that can systematically result in over-compensation or under-compensation
SO while we have a formula (UCC 2-713) that is clear and easy to apply, and supposed to approximate the benefit of bargain, there are situations where this formula leads to a number that doesn’t resemble the types of figures that would have existed if had performed K as planned
It is clear the formula is out of line w/ the principle. SO fall back on underlying principle b/c formula didn’t work?
Formula has broken down so seems to make sense to go back to principle
BUT Ct. reaches opposite conclusion – stays w/ formula for policy reasons:
Who should be allowed to keep the windfall from Tongish’s K w/ Thomas for higher rate?
