Shah Contracts Outline W15 PDF

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Outline for Contracts, Winter 2015....

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The Legally Enforceable Promise COMPENSATION PRINCIPLES I. UCC- Law is only for sale of goods but is generally binding a. 1-103  common law will continue as a gap filler II. Restatement 2d – applies to all Ks but not binding III. Common Law- Must be in writing is a. Sale of land b. Sale of goods worth more than $500 c. Contracts that cannot be performed within one year of the acceptance IV. What is at stake in Contract Law? a. Contract Law is Strict Liability  one cannot escape liability upon showing of good faith. b. Possible Measures of Damages: i. EXPECTANCY- Position absent breach  The goal is to put P in as good of a position as he would have been in had the contract been performed.  This measure is the measure that we want to use in a perfect world.  This is the goal of Contract Law.  Expectancy typically covers for restitution and reliance damages.  In order to get expectancy, must deduct wasted expenses, since had the performance occurred, the plaintiff would have accepted the expenses and retained the profit. o We do not want the defendant to have to pay twice. ii. RELIANCE- position absent contract  Measured by the change of position due to reliance on the K.  The goal is to put P in as good of a position as he would have occupied before the K had ever taken place.  i.e. “I lost offer on another car because I relied on K to buy your car, you breached.” iii. RESTITUTION- Recovery (What did I give that was of value)  The interest of a party in recovering that which he expended in an effort to perform a K.  This prevents unjust enrichment by the opposing party. c. Hawkins v. McGee (1929)- Put P in best position BUT FOR breach (Expectancy) i. P went in for hand surgery, D (doctor) guaranteed that hand would be functional after surgery. D solicited from doubtful P chance to perform surgery and used a guarantee to induce P’s consent. ii. The measure of damages is the value of a functioning hand to P, minus the value of the hand in the condition before the surgery. iii. RULE: Here, we use expectation damages. The goal of remedy is to put P in as good of a position as he would have occupied absent a breach. iv. Hypothetical  Facts: o Baseline (bad hand) = 0 o Perfect hand = 10 o Actual (after the botched surgery) = -10 o Pain naturally accompanying surgery = -5 o Fee for surgery = -2  Expectancy o difference between perfect hand (expected) and actual post-surgery hand o 10 - (-10) = 10 + 10 = 20 o If the K were successfully completed, he’d be at 10. Since he’s actually at -10, his expectancy losses are 20.  Reliance o difference between baseline and actual post-surgery hand o 0 - (-10) - (-5) - (-2) = 0 + 10 + 5 + 2 = 17 o Since he started out at 0 and ended up at -17 after changing his position in reliance on the K, his reliance losses were 17.  Restitution o What did I confer of values o fee = 2 d. UCC 2-703. Seller’s Remedies in General. Seller can withhold, stop delivery, resell/recover dmgs (UCC 2-706), recover dmgs for non-acceptance/lost profit (S 2-708), or cancel. Incidental dmgs under S 2-710.

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e. UCC 2-711. Buyer’s Damages for Non-Delivery or Repudiation. Market differential value. Incidental and consequential dmgs under S 2-715. Specific performance under S 2-716 for unique goods. Expectancy- Subjective or Objective- difference between market differential and cost of completion, court wrestles with what is best a. Groves v. John Wunder Co. (1939)- Defective performance  cost of remedying defect i. P leased land to D, and when D was done with it, he was supposed to level it. D did not do this.  The cost to repair the land would be $60,000, and if done, the land would be worth $12,000. ii. Remedies may have subjective and/or objective measures of value, depending on the nature of the controversy.  The correct damages should be the cost of remedying the defect, as P should be able to do whatever he wants with his property, regardless of how much he fiscally gains from doing so. iii. DISSENT  The property in question only had investment value, where there was nothing unique or sentimental about it.The extent of recovery exceeds that of the actual loss.  The correct measure of damages should be the difference between the market price at the time of breach and the market price had the K been performed. iv. Notes- Willful breach destroys good faith expectations of K  Allocative Efficiency- should make sure scarce resources are put to proper use in society  Jacobs v. Young- built a house for $77,000, and sued to recover the balance due of $3,483.46. Defendant specified that all pipe in the house must be Reading pipe, but inadvertently, Plaintiff installed pipe that was not Reading pipe. When Defendant discovered this defect, he demanded that the work be redone, which would have required the demolition and reconstruction of substantial parts of the house, but Plaintiff refused. o The measure of damages for a trivial and innocent omission is not the cost of replacement but the difference in value. b. Peeveyhouse v. Garland Coal and Mining (1962) i. P leased his family farmland to D who would extract coal for 5 years, then fill in all pits and smooth the surface. He did not repair the land.  The cost to do so would be $29,000, but would only increase the value of the land $300. ii. The court held that cost of repair was disproportionate to the actual value that would result.  P can only recover the fair market value of the land. c. Both Groves and Peeveyhouse were INCORRECTLY decided- subjective attachment should matter i. Some might argue that we should remain objective, but this does not take into account the subjective attachment one might have to his land. ii. In Groves, there was no real attachment to the land, as the land was just going to be sold anyways. Don’t want to put P in a better position than he would have been absent the breach. iii. Peeveyhouse was different, in that there was a subjective attachment to the family farm. The subjective value might trump the fair market value. Jury must decide if there was real attachment to the land, and in such case, award the cost of repair. d. Landis v. William Fannin (OH 2011)- Difference between market differential and cost of correction turns on reasonable position of P i. P asked for custom home with specific green stain, promised stain would be fixed when it was odd. Second stain made house look striped. D suggested solid stain but P did not want that because had contracted for a rustic look.  Received 66k in damages to replace siding, D wanted damages for 8.5k, diminution in market value of house instead. ii. Purpose of damages is to make P whole, only way is to meet aesthetic expectations iii. RULE: Market based damages allows for subjectivity e. Restatement §346(1)(a): defective or unfinished construction, the aggrieved party can recover either: i. The reasonable cost of completion if possible and does not require economic waste; or ii. The difference between the market value and the value of the performance f. Restatement §348(2): Diminution of market price of property, OR cost of completion if not unreasonable.

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Market Differential Rule

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a. If K concerns standard goods and services, the measure of damages is usually the difference between the K price and the market price of the property/good at the time of the breach. b. Acme Mills v. Johnson (1911)- Expectancy is based on harm to P, not gain to D on breach. i. D did not deliver wheat on time (as soon as it was threshed) in accordance with the K.  The K price was $1.03 per bushel. D sold the wheat for $1.16 elsewhere. At the time D sold the wheat elsewhere, the market value of wheat dropped to $0.97. ii. The vendee is entitled to damages against the vendor for a failure to comply with the K, and the measure of damages is the difference between K price and the market price at time of breach.  Here, P was not hurt by the breach, and actually benefitted (would have paid 6 cents more per bushel than the wheat was worth at the time). c. RULE: Expectancy damages are measured by LOSS TO PROMISEE, not the gain to promisor. i. If market price is higher than the K price at time of breach, P can recover difference. ii. If market price is lower than K price at time of breach, this is called a dog, or an unsuccessful K. If K was performed, P could expect to lose money. Since P is not hurt by the breach, he cannot recover. (In such a case, P should sue in restitution.) d. Laurin v. DeCarolis Construction (1977) i. P bought land from D and before the transaction closed, D took gravel from land without permission. ii. D liable for fair market share of gravel removed. Even if value of land has not decreased, the gravel itself is worth something and P is entitled to value because P should’ve had opportunity tot make that profit. e. Missouri Furnace Co. v. Cochran (1881)- With anticipatory repudiation, mechanical application of market differential does not serve goals of expectancy damages i. D rescinded a K for 36,000 tons of coal after delivering 3,700 tons for $1.20 per ton. P entered in another K with H for $4 per ton for 30,000 tons (market rate spiked briefly due to problems within the coal industry). Soon after, the market price fell, but P wanted D to pay the damages between their original K price and the new K price. ii. The measure of damages for a failed deliver of goods in installments is the difference between the contract price and the market price of each delivery on the day it should have been made.  If seller repudiates before performance date, calculate damages by market price in recovering with commercial reasonableness- diff between K price and market price at the time and place of delivery.  Mechanical application of the market differential rule can violate expectancy. o Anticipatory repudiation- declaration that party will not live up to K o Forward K- contract to buy/sell at specified future time at a price o Spot K- payment and delivery on spot date (two days usually) f.

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UCC §§ 2-712 and 2-713 i. The consensus view is that when the seller repudiates, the buyer’s damages should be calculated by use of the market price at the time of repudiation OR within a commercially reasonable time after the buyer learns of repudiation.  The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages, but less expenses saved in consequence of the seller’s breach. ii. “Commercially reasonable” depends on the facts of the case  In Missouri Furnace, the cover was not reasonable. The market price spiked due to rare circumstances, whereby P committed to a long term K. Had P needed coal, he could have committed to a short term K, and this would be used. THEREFORE, the court decided to use the market value at each day rather than cover price as a better assessment of damages.  P covered in an irresponsible and unreasonable way, and therefore damages limited.

Punitive Damages (Restatement § 355) a. The purpose of punitive damages is to discourage bad behavior. b. As it is at times advantageous to both parties to breach a K, punitive damages are not used. Anticipatory Breach a. A renunciation of the K by defendant before performance is due.

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b. Damages can be brought immediately, although P can wait to sue for any time within SOL. c. Once anticipatory repudiation is given, the promisor has no duties, and can enter into Ks with others. Lost Profits a. Neri v. Retail Marine Corp. (1972)- UCC, Lost profits may be included in expectancy, depends if volume seller and if market differential does not put seller in expectancy position i. P put a deposit down to buy a boat, and then repudiated. P wants deposit back, claiming D was not damaged, as D sold boat to another. D claims that he lost profits, as but for the breach, D would have made two sales. ii. UCC § 2-718(2): When the seller withholds an item because of buyer’s breach, the buyer is entitled to restitution by which the sum of his payments exceeds 20% of the value of performance, or $500, whichever is smaller.  In other words, seller keeps the smaller amount of 20% of total price or $500  This is a CAP on damages. P’s restitution of the deposit can be decreased by actual damages incurred by D, that D can prove (see 2-708). iii. UCC § 2-708: If the measure of damages is inadequate to put the seller in as good of a position as performance would have done, then the measure of damages is the profit that the seller would have made from full performance by buyer, along with incidental damages.  Incidental damages are the costs of unwinding the breached K, storing the product, having to re-advertise, etc.  P has restitution of his deposit, minus the lost profit and incidental damages D incurred. iv. UCC § 2-711: Buyer remedies upon breach v. UCC § 2-712, 713: Considers breach but not repudiation b. High volume vs. low volume seller i. A high volume seller has a better case for recovering lost profits, as he has many items of merchandise that he can sell. If buyer defaults, he loses the profit of that sale.  Crane says they will get profit + incidental damages ii. A low volume seller has a worse case for recovering lost profits. If seller has one item, and buyer defaults, if seller can sell to another, he really does not have any damages. This was the only sale he was going to make. Measuring Expectancy when BLL Does Not Suffice a. Illinois Central RR v. Crail (1930)i. P purchased a massive amount of coal that was short by only 5000 tons. This shortage did not interfere with his work, and he lost no sales. P wanted the sum required to replace the exact amount of the shortage at the time and place of deliver (i.e. price for specific performance) ii. Compensation for injury suffered must be based on actual loss iii. Court ruled that this was inefficient, and the wholesale price would have afforded full compensation. P has shipped over 60,000 tons of coal since. b. RULE: The principle behind expectancy trumps subsidiary rules to carry out expectancy principles. i. Most of the time, the difference in K price and market price works, but in the end, we need to assess damages based on the circumstances of the case. c. Watt v. Nevada Central (1896) i. Ds locomotive set fire to Ps hay stack/press. P sues for market value of destroyed hay even though P only planned to use hay for cattle feed if severe winter. d. RULE: P should not be placed in a better position than if negligence had just not occured. i. Since the hay had only potential future use, no way to calculate damages for the hay. P also did not avail himself of opportunity to by other hay if needed (no cover). Reliance Damages a. Sometimes no reasonable way to measure expectancy. Instead, reliance is based on preK expenses and the expenses of performance. b. Chicago Coliseum Club v. Dempsey (1932) i. P (promoter) made K with world heavyweight champion Dempsey (D) to fight Wills. P first made K with Wills, before he made K with Dempsey. P made K with Weisberg to do logistical work, and Weisberg was to be paid from the revenue of the fight.  In July, D violated the K, stating that he was training for another fight and that there was not K for the fight with Wills.  P tried to enjoin D’s other fight, and was successful, but since the injunction was granted in a different state than the fight, the fight happened anyways. ii. The court ruled that P could not get expectation damages since they were too unpredictable, dependent on too many variable (i.e. weather, reputation of contestants, accessibility of location, ability to promote fight, etc.) must be reasonable certainty

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Sued for 4 types of damages o Lost profits (too speculative) o Expenses incurred prior to contracts (no, there was no contract, took that upon self) o Litigation expenses (took upon self) o Expenses incurred between K signing and breach (promoter) iii. RULE: Pre-K damages are generally not recoverable as reliance damages. iv. The court also refused expenses incurred before fight (reliance damages) since the Wills K was made before, and P had already assumed the risk of not being able to get D to fight. v. Finally, the court disallowed fixed prices (i.e. salaries of full time employees), but allowed variable prices (i.e. costs in hiring secretaries) 

c. Security Stove v. American Ry. (1932) i. P sued for D’s failure to deliver oil/gas burner to convention. P sued for all expenses of the wasted trip and the price for additional shipments. There were no expectancy damages, as the burner was not to be sold but to spark interest. THEREFORE, we seek reliance damages.  D knew of the circumstances of the shipment (Baxendale standard) ii. The whole damage was suffered in contemplation of D’s performing the K. d. Justification for Dempsey, Security Stove i. P in Dempsey was not able to recover pre-contract expenses ii. For Dempsey, what should have actually happened was that the jury would determine the expectancy damages based on the reasonable person standard. But we didn't get expectancy, so we then turn to reliance damages.  In order to get pre-contract expenses, the reliance requirement would have to be that you stopped looking for a substitute once the K was formed. o In the case of Dempsey, there is no substitute for the heavyweight champion of the world, so there are no reliance damages. P took a risk in making K with Wills before he made K with Dempsey.  In the cases of Security Stove, there were potential substitutes. Here, D should have known that expenditure would be wasted in event of a breach. iii. RULE: In order to enforce pre-contract expenses as reliance damages, reliance on the K must have made you stop looking for a substitute, and the breach occurs whereby you cannot find a replacement; however, a reasonable substitute must be available. XII.

Capping Reliance a. Second Restatement of Contracts § 349: Damages Based on Reliance Interest i. P can seek reliance damages as an alternative to expectation damages. ii. This includes expenditures made in preparation for performance, minus any loss that the party in breach can prove with reasonable certainty that the injured party would have if the K had been performed. iii. RULE: reliance damages are capped at expectancy b. L. Albert & Son v. Armstrong Rubber (1949) i. During WWII, where refurbished rubber was a hot commodity, P bought 4 refiners, 2 of which were not delivered. P refused to accept them as a result of the delay.  Machines cost $8000, the foundation that P put in (in reliance of K) cost $3000, and materials/labor cost $4000. In total, P spends $15,000 for K.  Assuming that performance on the K had occurred, P would have earned $14,000. Therefore, as a result of the K, the expectation damages would be -$1000. ii. P wants to recover $3000 for the foundations, but because he would have lost $1000 as a result of the K, he can only recover $2000 (3000-1000). This puts P in as good of a position he would have occupied absent the K iii. RULE: Buyer gets reliance damages, subject to seller’s privilege to deduct from that amount the sum that it can prove would have been the buyer’s loss if performance occurred. c. Why cap reliance damages? i. We are trying to get P back to a position he would have been in absent the breach. Having P recover expenses he normally would have recovered makes D the insurer for his goods, and we don't want D to have to pay twice. ii. P needs to be responsible for the Ks he enters, even those that are dogs.

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LIMITATIONS ON THE COMPENSATION PRINCIPLE I. Main Point: Law pushes back on expectancy in three ways: mitigation, foreseeability, and reasonable certainty. II. Mitigation a. Rockingham County v. Luten Bridge Co. (1929)- notice of breach means duty to mitigate damages i. P had K to construct bridge, but after a county vote, this K was rescinded. At this point, P had incurred $1900 gathering materials and labor. Regardless of the fact that the K was rescinded, D constructed the bridge regardless, and then sued for the contract price of $18,300. ii. Upon learning of D’s...