Titolo – Contracts – Fall 2010
Chapter 1. Essential Element of Contracts- Restatements Sec 1 and 2 (pp 14)
A. Offer + Acceptance + Consideration
B. A contract is a legally enforceable promise between parties to exchange.
C. Shaheen v. Knight – Man sues doctor for financial costs associated with birth of a child after a failed vasectomy. Court ruled that individuals may make a separate contract with doctors to reach a desired outcome. However, in order to sue for breach of contract, there must be damages. In this case (the birth of a child), there were no damages.
Chapter 2. Damages for Breach of Contract
A. Expectation Damages- the “benefit of the bargain”. Puts promisee in the position he would have been in had the promise been performed
a. This is what a reasonable person in promisee’s position would have expected as the benefit of the bargain. This is never subjective.
b. Gross expectancy- expectancy before subtracting costs
c. Net expectancy- expectancy after subtracting costs
*** Courts never award Gross expectancy***
d. Restatement Second Sec. 347- Damages consist of losses less the gains
e. Plaintiff received difference b/n value of perfect hand and value of hand after surgery Hawkins. (pp. 63)
B. Reliance Damages- refunds for expenses wasted in reliance on K. Puts promisee back in the position he would have been in had the promise never been made. Restatement 349 (pp 125)
a. Essential reliance damages- expenses required in preparation for the K
b. Incidental reliance damages- expenses ancillary to the contract. Must be reasonably foreseeable to the defendant to be reimbursed.
c. Reliance = Gross expectancy + other costs – costs avoided.
d. Negative expectation- plaintiff would have made a loss if K had been performed
i. Defendant must prove negative expectation. Then plaintiff’s reliance damages will be reduced accordingly with Pro Rata Formula.
a. Pro Rata Formula:
b. Damage = Spent Reliance Cost – (Loss of Contract * (cost paid out/total cost))
e. Sullivan v. O’Connor (pp. 72) – Actress sued Doctor for breach of contract after three nose jobs that left the actress disfigured. The Court ruled that expectation damage would have been too high and difficult to foresee, and restitution damage would be too low, so Court used reliance as a “middle road.” Also included in this decision was a ruling on Warranty of Cure
i. Warranty of Cure – A separate contract between a patient and a doctor which guarantees a cure
C. Restitution Damages- returns money to the plaintiff that was unjustly given to defendant. Puts promisor back in position he would have been in had the promise never been made
a. Pertains to situations where one has unjustly been conferred a benefit from another. returns money to the plaintiff that was unjustly given to defendant. Puts promisor back in position he would have been in had the promise never been made. Restatement Sec 371
b. Usually awarded to the non-breacher. Plaintiff paid $5K in advance for delivery of flour. Defendant never delivered flour. Court ordered $5K in restitution for plaintiff despite evidence that contract would have lost Bush v. Canfield (pp 250)
c. Sometimes awarded to the breacher for partial performance. Laborer worked 10 months of a 12 month K then breached. Court ordered his payment for 10 months labor minus the Employers damages for the remainder of the K period. Prevent unjust enrichment. Restatement Sec 373.
Damages = benefit conferred – damages caused by breach. Britton v. Turner (pp 256)
Chapter 2. Limitations on Damages-
A. Foreseeability- Damages will be limited if they are inconsistent with what was reasonably contemplated by both parties at time contract was made. Restatement 351
a. *** Unless the other party has some reason to know that his breach will have an impact beyond simple deprivation of immediate K performance, it is not fair to hold him accountable for consequential losses ***
b. Hadley v. Baxendal (pp 93) – An agent of Hadley (a miller) contracted with agent of Baxendale (shipper) to ship a crank shaft from the mill to the producer. Mill was inoperable while being shipped. Baxendale promised to ship shaft within 24 hours. However, negligently shipped it several days later. Hadley sued for lost profits. Court ruled that Baxendale could not be liable for lost profits
c. Hadley rule: damages are recoverable only if: 1) loss is fairly/reasonably considered to arise in the normal course of things OR 2) loss is reasonably supposed to have been contemplated by both parties
d. Foreseeability does not require plaintiff to see actual damages, only that some damage may occur (Martinez v. So. Pacific)
e. Tacit Agreement Test
a. Rejected under modern theory; however, still used in Arkansas.
b. Tacit agreement test – defendant only responsible for damages which were tacitly agreed upon by both parties at the time of contract
c. Applicable where damages arise from special circumstances & are disproportionately large raises doubt as whether the parties would have reasonably agreed had they known
d. Morrow v. First National Bank of Hot Springs
B. Uncertain Harm- Damages will be limited if plaintiff is unable to show the fact and extent of his loss. Damages need to be certain in order to be paid. Restatement 352 (pp 125)
a. Evidence must be sufficient to persuade factfinder that the loss is more likely to have occurred than not, AND give the factfinder enough basis to calculate award
b. Conjectural/speculative damages will generally not be awarded.
c. If amount of loss is insuperable, court will try to approximate some damages with reference to the evidence available.
d. Defendant owed no damages because Plaintiff could not prove projected losses from cancelled title bout Dempsey (pp. 112)
C. Failure to Mitigate- A rational party will naturally take whatever action is necessary to avoid/minimize loss. Damages will be limited if a plaintiff does not reasonably respond to breach/attempt to mitigate. Restatement 350 (pp 153)
a. If a plaintiff has through bad faith or unreasonable action aggravated his damages, defendant is not liable for the increase in loss.
b. Plaintiff is still entitled to damages that he could not avoid by good faith or reasonable conduct.
c. Reasonableness Test- Burden is on defendant to show 1) Reasonable means existed for plaintiff to curtail his loss AND 2) If plaintiff had taken such course, a reduction in loss would have occurred.
d. Substitute Transactions- if a reasonable substitute becomes available to the plaintiff after breach, plaintiff must take it to mitigate damages.
a. Plaintiff is allowed reasonable discretion in declining to pursue alternatives that are different, inferior, or may subject him to risk, burden, prejudice, or humiliation.
b. Plaintiff will not be denied recovery if he turns down inferior substitute
e. Plaintiff actress was awarded damages for breach after turning down inferior substitute movie offer Parker (MacLaine) (pp. 142)
f. Lost Volume situation- for commercial transactions. If seller can establish a lost volume situation, the second sale is NOT a substitute. Seller will be able to recover full profit expected under the breach. Rodriquez v. Learjet (E&E 659)
a. To show lost volume, seller must show:
i. He could have sold more items
ii.Additional sale would be profitable
iii. Additional sale would have been made regardless of breach
Chapter 2. Liquidated Damages
A. Parties agree, in advance, that in the event of a breach, breacher will pay a specific sum or a sum in accordance with a prescribed formula. Restatement 356 (pp 172)
a. Enforcement is controversial. Countervailing theories of freedom of contract v. economic compensation.
b. Restatement Second Sec. 356- Liquidated damages will be void unless the amount it fixes as damages is reasonable in light of anticipated or actual harm
c. Reasonableness Test- 1) was LQ
to enter a bargain, but person doesn’t know that the other wishes to conclude it. –Restatement Second
b. Offers v. Negotiations
i. Offers are specific and definite – Often will include quantity of goods, price, time, and place of delivery, etc.
ii. Negotiations are ambiguous – If one or more terms are left open, it will be a negotiation, not an offer.
iii. Advertisements are usually not contracts, they are invitations to negotiate; however, they can be contracts if they are exact.
1. Lefkowitz – Advertisement was a contract because it was specific as to place and time, price, and quantity of stock. A reasonable person would think the Ad was serious, the offeree thought it was serious, and it was specific enough to be an offer. Ad stated first 3 customers at 9AM would receive a fur coat valued at $100. Man showed up, wanted a coat. Store said sorry, females only. Man sued and won.
a. For an acceptance to be effective, it must effectively “mirror” all the terms of the offer.
b. An acceptance MUST be definite and unequivacol.
c. Any substantial deviation from the offer rejects the original offer and substitutes a counter-offer.
d. If the offeree will not agree to the terms without changing them, then that is a substantial deviation.
i. Ex: Ardente v. Horan. Plaintiff made bid for house, Defendant accepted. Plaintiff then asked if furniture was included and said he did not want to buy it without. Therefore, substantial deviation.
e. Mailbox Rule
i. Determines when the acceptance actually takes place.
ii. Acceptance occurs when the acceptance is put out of the offeree’s possession.
iii. If the offeror designated a proper time for acceptance to arrive, then acceptance will not occur until offeror receives the acceptance
f. Acceptance by silence – Silence can constitute acceptance only if:
i. The acceptor takes the benefit of the offered services while knowing that if he did it would constitute acceptance
ii. The offer expressly stated that silence may constitute acceptance
iii. Previous dealings show that it is customary
g. E-commerce – same rules apply as in any other contract formation
i. Some factors to help determine if contract is binding:
1. Opportunity to review terms
2. Display of the terms
3. Choice between accepting and rejecting terms
4. Clear method of assent or rejection offered