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Chapter 17Breach and RemediesIntroductionThis chapter is concerned with the remedies available on a breach of contract to a nonbreaching party. A breach of contract is a failure to perform what a contracting party is under an absolute duty to perform. When a party fails to perform adequately, a wronged party can sue to obtain a remedy. A remedy is the means employed to enforce a right or to redress an injury.The most common remedies available in contract law include damages, rescission and restitution, specific performance, and reformation. An award of damages is a remedy at law. The others are equitable remedies.The basic remedy is damages. The most common type is compensatory damages, which are designed to put an innocent party in the same position he or she would have been in if the contract had been fully performed (if no breach had occurred). An understanding of this concept is essential to an understanding of what a nonbreaching party is normally entitled to on a breach of contract. Your students should realize that there is ordinarily no penalty for breaching a contract over and above restoring a nonbreaching party to the position he or she would have been in if the contract had been fully performed.Additional Background—Breach and RemediesThe Restatement (Second) of Contracts is an authoritative source for many of the principles discussed in this chapter. Specific sections of the Restatement are noted throughout the text. After selected parts of the text in which a section is noted, or is otherwise relevant, the full text of that section is set out. The following is the section that relates to this part of the text—Restatement (Second) of Contracts, Section 235.§ 235. Effect of Performance as Discharge and of Non-Performance as Breach(1) Full performance of a duty under a contract discharges the duty.(2) When performance of a duty under a contract is due any non-performance is a breach.Chapter OutlineI.DamagesDamages are designed to compensate the injured party for the loss of the contract or give the injured party the benefit of the contract—that is, an innocent party is to be placed in the position he or she would have been in if the contract had been fully performed.Additional Background—DamagesThe following is a section of the Restatement (Second) of Contracts that relates to the discussion of the measure of damages in this part of the text—Restatement (Second) of Contracts, Section 347.§ 347. Measure of Damages in GeneralSubject to the limitations stated in §§ 350-53, the 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.A.Types of DamagesThe broad categories are—?Compensatory damages—To cover direct losses and costs.?Consequential damages—To cover indirect and foreseeable losses.?Punitive damages—To punish and deter wrongdoing.?Nominal damages—To recognize wrongdoing without a showing of a monetary loss.pensatory DamagesCompensatory damages compensate the injured party for the loss of the bargain (that is, for injuries proved to have arisen directly from the loss). Incidental damages (expenses that are caused directly by a breach of contract such as those incurred to obtain performance from another source) may also be recovered. The actual measure varies by type of contract.Case Synopsis—Case 17.1: Hallmark Cards, Inc. v. MurleyJanet Murley, vice-president of marketing for Hallmark Cards, Inc., was terminated when her position was eliminated as part of a corporate restructuring. She was paid $735,000 in severance. Later, Hallmark filed a suit in a federal district court against Murley, alleging that she had disclosed confidential information to a subsequent employer. Hallmark was awarded damages that included the $735,000 payment and $125,000 that Murley received from her subsequent employer. Murley appealed.The U.S. Court of Appeals for the Eighth Circuit held that the award of the $125,000 was improper. “In an action for breach of contract, a plaintiff may recover the benefit of his or her bargain” but “the law cannot elevate the non-breaching party to a better position *??*??* had the contract been completed on both sides.”..................................................................................................................................................Notes and QuestionsMurley retained Hallmark-related documents on her private computer for five years after her termination but deleted them forty-eight hours before an inspection of her hard drive. How might Hallmark have discovered these facts? Hallmark might have used the techniques and procedures of discovery to learn what Murley had done and when she had done it. Information stored electronically can be the object of a discovery request. Electronic evidence, or e-evidence, consists of all computer-generated information. E-evidence can reveal significant facts that are not discoverable by other means—such as who created a file and when, and who accessed, modified, or transmitted it. A party usually must hire an expert to retrieve e-evidence.Before the trial in the Hallmark case, during discovery, Hallmark learned that a computer company called LuciData had made a copy of Murley's hard drive. LuciData forwarded that copy to Hallmark's computer expert. At the trial, the expert testified that in the two days leading up to LuciData's review, sixty-seven documents had been deleted from Murley's computer, eight of which plus one folder related to Hallmark.In this case, what was the basis for Hallmark’s suit against Murley? How much did Hallmark seek to recover in the form of damages? Janet Murley was Hallmark Cards, Inc.’s vice-president of marketing until Hallmark eliminated her position. Murley and Hallmark entered into a separation agreement under which she agreed not to work in the greeting card industry for eighteen months, disclose or use any confidential information, or retain any business records relating to Hallmark. In exchange, Hallmark offered Murley a $735,000 severance payment. After the non-compete agreement expired, Murley accepted a consulting assignment with Recycled Paper Greetings (RPG) for $125,000. Murley disclosed to RPG confidential Hallmark information. On learning of the disclosure, Hallmark filed a suit in a federal district court against Murley, alleging breach of contract. Hallmark sought $860,000 in damages, including the $735,000 severance payment and the $125,000 that Murley received from RPG.What were Murley’s arguments against the amount of damages that Hallmark requested? With respect to the $735,000 severance payment, Murley argued that Hallmark was not entitled to a return of its full payment under the parties' separation agreement because Murley fulfilled some of the material terms of that agreement (for example, the non-compete provisions). With respect to the $125,000 that Murley received from RPG, Murley argued that Hallmark could not legitimately claim entitlement to her compensation by RPG for consulting services that were unrelated to Hallmark.Did the court award Hallmark the amount that it sought in damages? A jury awarded Hallmark the amount that it sought in damages, and the trial court issued a judgment that included this amount. On appeal, the U.S. Court of Appeals for the Eighth Circuit affirmed the judgment in Hallmark’s favor but vacated the award of damages. The appellate court remanded the case to the lower court to reduce the award of damages to include only the amount of Hallmark’s severance payment. “Hallmark's terms under the separation agreement clearly indicated its priority in preserving confidentiality. At trial, Hallmark presented ample evidence that Murley not only retained but disclosed Hallmark's confidential materials to a competitor in violation of the terms and primary purpose of that agreement.” But the appellate court concluded that Hallmark could not legitimately claim entitlement to Murley’s compensation from RPG for services that were not related to Hallmark. “In an action for breach of contract, a plaintiff may recover the benefit of his or her bargain as well as damages naturally and proximately caused by the breach and damages that could have been reasonably contemplated by the defendant at the time of the agreement. [But] the law cannot elevate the non-breaching party to a better position than she would have enjoyed had the contract been completed on both sides.”What would be the measure of damages if Murley were liable for negligence? Compensatory damages is the usual measure of damages for an injury in negligence. In fixing damages in actions based on negligence that arise in a situation involving a breach of contract, the amount is whatever puts the plaintiff in as good a position as he or she would have been in if the defendant had not breached the contract. The value that the non-breaching party lost or the amount that the non-breaching party had to pay is an acceptable measure, just as it is acceptable for a breach of contract.Additional Background—The Famous Case of the “Hairy Hand”To illustrate the principle that nonbreaching parties are to put in the position that they would have been in had their contracts been fully performed, professors long introduced students to the famous case of the “hairy hand.” The case concerns an unsuccessful operation on a boy’s scarred hand. Damages assessed against the doctor were based on the difference between the value to the boy of the hand that the doctor had promised and the value of the hand in its condition after the operation.Sometimes forgotten in a dry discussion of the underlying principle is the boy whose hand was operated on. The boy, George Hawkins, suffered an electrical burn when he was 11 years old. The resulting scar was small and did not significantly affect the use of the hand. A doctor persuaded George to undergo surgery, emphasizing the social problems that the scarred hand might create. The operation was performed shortly after George’s eighteenth birthday. The skin graft was taken from George’s chest. There was infection and considerable bleeding. George was hospitalized for three months. The graft covered the thumb and two fingers and soon was matted with hair. Movement of the hand was greatly restricted. The jury awarded George $3,000 (approximately $24,000 in today’s dollars). After the Supreme Court of New Hampshire ordered a new trial, the case was settled for $1,400 ($11,200 in today’s dollars). George’s father took him to specialists in Montreal to see if the appearance of the hand could be improved, but was advised that nothing could be done.George was so embarrassed by his hand that he did not go back to high school. Throughout his life, he was sensitive about his hand. He worked at various semi-skilled occupations, was a chauffeur for some years, married late in life, and had no children. He died of a heart attack at the age of fifty-four.Dr. McGee, the doctor who convinced Hawkins to undergo the surgery that changed his life, had a somewhat different career. After the operation, McGee’s medical practice flourished. He was very popular and served as mayor of Berlin, New Hampshire, the scene of the events in the case. He formed McGee’s Symphony Orchestra as a hobby and performed throughout the area.a_________________________________________________________________________a. Robert, “Hawkins Case: A Hair-Raising Experience,” 66 Harvard Law Review 1 (1978). a.Standard MeasureThe standard measure of compensatory damages is the difference between the value of the breaching party’s promised performance and the value of the actual performance reduced by any loss the injured party avoided.b.Sale of GoodsThe usual measure is the difference between the contract price and the market price. When a buyer breaches and the seller has not yet produced the goods, the measure is lost profits on the sale, not the difference between the contract and market prices.c.Sale of LandWhen the damages remedy applies to the breach of a contract for a sale of land, in most states, the measure is the difference between the contract and market prices of the land.d.Construction ContractsThe measure here depends on which party breaches and when—?Breach by owner—If the owner breaches before construction, normally the contractor may recover only the profit that would have been made on the contract. If the owner breaches during construction, normally the contractor may recover the profit plus costs incurred to that point. If the owner breaches after construction, normally the contractor may recover the contract price plus interest.?Breach by contractor—If the contractor breaches by stopping in mid-project, the owner may recover the cost of completion, including compensation for any delay. If the contractor finishes late, the owner may recover the loss of use.?Breach by both owner and contractor—If the contractor substantially performs, the owner may recover the cost of completion, if completion would involve no economic waste.Additional Cases Addressing this Issue —Consequential DamagesCases involving consequential damages include the following.?Mnemonics, Inc. v. Max Davis Associates, Inc., 808 So.2d 1278 (Fla.App. 5 Dist. 2002) (the damages recoverable under a lease for copier equipment, which included the lessor’s agreement to maintain the copiers, included consequential damages sustained by the lessee when the lessor breached the maintenance provision and the lessee was held liable to its assignee of the equipment and the lease).?Austin Homes, Inc. v. Thibodeaux, 821 So.2d 10 (La.App. 3 Cir. 2002) (the damages recoverable under a contract to build a house included consequential damages that were nonpecuniary, because the nature of the contract was to gratify a nonpecuniary interest and under the circumstances the builder knew, or should have known, that a failure to perform would cause that kind of loss).2.Consequential DamagesConsequential damages are foreseeable damages that flow from the consequences of a breach but that are caused by circumstances beyond the contract. The breaching party must know or have reason to know of the circumstances before the breach. Consequential damages give the innocent party the whole benefit of the bargain.3.Punitive DamagesPunitive damages are designed to punish a wrongdoer and to deter similar, future conduct. They are generally not awarded in a breach of contract action unless a tort is also involved.4.Nominal DamagesNominal damages may be awarded to establish that a breaching party acted wrongfully even though no financial loss resulted from the breach. B.Mitigation of DamagesGenerally, an injured party has a duty to mitigate damages. An award may be reduced by the amount that could have been mitigated.1.Employment ContractsMost states require wrongfully terminated employees to take similar jobs if available.2.Rental AgreementsSome states require a landlord to find a new tenant on a former tenant’s abandonment of the premises.C.Liquidated Damages v. PenaltiesA liquidated damages provision in a contract specifies a certain amount to be paid on a default or a breach.1.EnforceabilityThere are two requirements for an enforceable liquidated damages provision—?When the contract was made, it must have been difficult to estimate the damages that would be incurred on a breach.?The amount set as damages must be reasonable (not excessive).Case Synopsis—Case 17.2: Kent State University v. FordGene Ford signed a contract with Kent State University in Ohio to work as the men's basketball coach for five years. The contract provided that if Ford quit before the end of the term, he would pay to the school liquidated damages in an amount equal to his salary ($300,000), multiplied by the number of years remaining on the contract. Four years before the contract expired, Ford quit Kent State and began to coach for Bradley University at an annual salary of $700,000. Kent State filed a suit in an Ohio state court against Ford, alleging breach of contract. The court enforced the liquidated damages clause, awarding the university $1.2 million. Ford appealed.A state intermediate appellate court affirmed. At the time the contract was entered into “ascertaining the damages resulting from Ford's breach [was] difficult, if not impossible. *??*??* Based on the record, we find that the damages were reasonable.” And the clause was not a penalty—“there was justification for seeking liquidated damages to compensate for Kent State's losses, and, thus, there was a valid compensatory purpose for *??*??* the clause.”..................................................................................................................................................Notes and QuestionsIn deciding whether a clause is a liquidated damages clause or a penalty clause, should the courts ever consider the circumstances that caused the nonperforming party to breach the contract? It is not the function of the court to consider how a liquidated damages clause might affect the breaching party when determining whether the clause is enforceable. There are countless reasons why breaching parties do not perform their contracts. If the courts took these reasons into account when deciding on the enforceability of liquidated damages clauses, it would undermine one of the basic assumptions of contract law—that contracts will be enforced as written. Freedom of contract means that parties may make whatever contractual agreements they wish to make, and, so long as the contracts are not illegal, the parties can anticipate that these agreements will be enforced. Of course, there are exceptions. If a party can convince the court that a contract was objectively impossible to perform, performance may be excused. Also, with respect to liquidated damages clauses, if such a clause is unreasonable or effectively amounts to a penalty, a court will not enforce it.Additional Background—Liquidated Damages and PenaltiesThe following is a section of the Restatement (Second) of Contracts that relates to the discussion of the liquidated damages versus penalties in this part of the text—Restatement (Second) of Contracts, Section 356.§ 356. Liquidated Damages and Penalties(1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.(2) A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence.mon Uses of Liquidated Damages ProvisionsLiquidated damages provisions are often used in construction contracts. It can be difficult to estimate the amount of damages that would be caused by a delay in completing construction work.II.Equitable RemediesA.Rescission and RestitutionRescission is essentially an action to cancel a contract. When fraud, mistake, duress, undue influence, misrepresentation, or lack of capacity to contract is present, a contract may be rescinded unilaterally. A failure to perform entitles the nonbreaching party to rescind. A rescinding party must give prompt notice to the breaching party.1.RestitutionGenerally, to rescind, the parties must make restitution by returning goods, property, or money conveyed. If the actual goods or property can be returned, they must be. If they cannot be returned, restitution must be made in an equivalent amount of money. (Restitution, as the text notes, is also available in other situations.)2.Restitution Is Not Limited to Rescission CasesRestitution is available in various actions—?Breach of contract and tort actions. When money or property is transferred through a mistake or fraud or incapacity, or misconduct within a special relationship.?Criminal cases. Embezzlement, conversion, theft, or copyright infringement.Case Synopsis—Case 17.3: Clara Wonjung Lee, DDS, Ltd. v. RoblesClara Wonjung Lee agreed to buy Rosalina Robles‘s dental practice and lease her dental offices in Chicago, Illinois. After Lee took over the practice, the local media revealed that Gary Kimmel, one of Robles’s dentists, had, among other things, illegally treated underage prostitutes in the practice’s offices after hours. Lee filed a suit in an Illinois state court against Robles, seeking to rescind the contract. Lee alleged that Robles had deliberately withheld the information about the dissolute dentist and that this information “adversely impacted the desirability and economic value of the practice.” The court awarded rescission and damages, which included the price paid to Robles, less Lee’s unpaid rent and a portion of her income during her ownership of the practice. Robles appealed.A state intermediate court affirmed. Lee was entitled to rescission of the contract on the basis of fraud because Robles’s nondisclosure was “designed to prevent Lee from gaining relevant information” that “would have been material to a reasonable dentist's decision to purchase the practice.”..................................................................................................................................................Notes and QuestionsCould Lee have successfully maintained a tort action for fraud against Robles and obtained the same remedy of restitution? Yes, Lee could have successfully maintained a tort action for fraud against Robles and obtained the remedy of restitution. An award of restitution gives back or returns something to its rightful owner and is available in tort actions (and other types of actions). Thus restitution can be obtained when funds or other property are transferred because of fraud.In this case, Robles withheld information that would have materially affected Lee’s decision to go through with their deal for the purchase of Robles’s dental practice. This fraudulent misrepresentation could have supported a tort action for restitution of the benefits that were transferred as a result.Additional Background—RestitutionThe following is an excerpt from a section of the Restatement (Second) of Contracts that focuses on the requirement for restitution, which is covered in this part of the text—Restatement (Second) of Contracts, Section 370.§ 370. Requirement That Benefit Be ConferredA party is entitled to restitution under the rules stated in this Restatement only to the extent that he has conferred a benefit on the other party by way of part performance or reliance. *??*??*??*Illustrations:1. A, who holds a mortgage on B’s house, makes a contract with B under which A promises not to foreclose the mortgage for a year. In reliance on this promise, B invests money that he would have used to pay the mortgage in improving other land that he owns. A repudiates the contract and forecloses. B cannot get restitution based on the improvements since making them conferred no benefit on A. * * * 2. A contracts to sell B a machine for $100,000. After A has spent $40,000 on the manufacture of the machine but before its completion, B repudiates the contract. A cannot get restitution of the $40,000 because no benefit was conferred on B.3. A promises to deposit $100,000 to B’s credit in the X Bank in return for B’s promise to render services. A deposits the $100,000, the X Bank fails, and B refuses to perform. A can get restitution of the $100,000 because a benefit was to that extent conferred on B even though it was lost by B when the X Bank failed. 4. A contracts to work full time for B as a bookkeeper. In breach of this contract, A uses portions of the time that he should spend working for B in keeping books for C, who pays him an additional salary. B sues A for breach of contract. B cannot recover from A the amount of the salary paid by C because it was not a benefit conferred by B.5. A, a social worker, promises B to render personal services to C in return for B’s promise to educate A’s children. B repudiates the contract after A has rendered part of the services. A can get restitution from B for the services, even though they were not rendered to B, because they conferred a benefit on B. Additional Background—Rescission StatutesThe Federal Trade Commission and many states have rules or statutes allowing consumers to unilaterally rescind contracts made at home with door-to-door salespersons. Rescission is allowed within three days for any reason or for no reason at all under such statutes as those beginning with California Civil Code Section 1689.5. Illustrating these statutes, the following is the text of Cal. Civ. Code § 1689.6, with notes and references.CIVIL CODEDIVISION 3. OBLIGATIONSPART 2. CONTRACTTITLE 5. EXTINCTION OF CONTRACTSCHAPTER 2. RESCISSION§ 1689.6. Right to cancel home solicitation contract or offer(a) In addition to any other right to revoke an offer, the buyer has the right to cancel a home solicitation contract or offer until midnight of the third “business day” after the day on which the buyer signs an agreement or offer to purchase which complies with Section 1689.7.(b) Cancellation occurs when the buyer gives written notice of cancellation to the seller at the address specified in the agreement or offer.(c) Notice of cancellation, if given by mail, is effective when deposited in the mail properly addressed with postage prepaid. (d) Notice of cancellation given by the buyer need not take the particular form as provided with the contract or offer to purchase and, however expressed, is effective if it indicates the intention of the buyer not to be bound by the home contract or offer.1985 Main Volume Credit(s)(Added by Stats.1971, c. 375, p. 740, § 2. Amended by Stats.1973, c. 554, p. 1077, § 2.)HISTORICAL NOTESHISTORICAL AND STATUTORY NOTES1985 Main Volume Historical and Statutory NotesThe 1973 amendment substituted “ ‘business day’ “ for “calendar day (excluding Sunday)” in subd. (a); and inserted the words “as provided with the contract or offer to purchase” in subd. (d).REFERENCESWEST’S CALIFORNIA CODE FORMS1985 Main Volume West’s California Code FormsSee West’s California Code Forms, Civil.CROSS REFERENCES1985 Main Volume Cross ReferencesBuyer, see Commercial Code § 2103.Discount buying services, see § 1812.100 et seq.Emergency repairs or services exempt from this section, see § 1689.13.Fixtures exempt from this section after sale or encumbrance of realty, see § 1689.9.Home solicitation contract or offer defined, see § 1689.5.Seller, see Commercial Code § 2103.Tenders required of buyer on cancellation, exceptions under this section, see § 1689.11.Tenders required of seller on cancellation, exceptions under this section, see § 1689.10.Waiver of this section prohibited, see § 1689.12.LAW REVIEW COMMENTARIES1991 Pocket Part Law Review CommentariesSmall Claims Court: How to coach your client to success. Douglas M. Carnahan and Maxine J. Calatrello, 13 L.A.Law. 27 (May 1990).1985 Main Volume Law Review CommentariesConsumer protection; home solicitation contracts or offers. (1974) 5 Pacific L.J. 303.Right to cancel a home solicitation contract. (1972) 3 Pacific L.J. 633.LIBRARY REFERENCES1985 Main Volume Library ReferencesTrade Regulation K862.1.C.J.S. Trade-Marks, Trade-Names, and Unfair Competition § 237.ANNOTATIONSNOTES OF DECISIONSIn general 1Limitation of actions 3Purpose 2Signing of contract 41. In generalMere fact that seller appeared at buyers’ home in response to phone call from buyers was insufficient to remove contract from ambit of § 1689.7 requiring that home solicitation contracts contain notice of buyers’ right to cancel and thus contract for installation of wall insulation system, which was signed at buyers’ home and which did not contain required notification, was buyers’ “home solicitation contract” and retained right to cancel such contract. Weatherall Aluminum Products Co. v. Scott (1977) 139 Cal.Rptr. 329, 71 C.A.3d 245.Definition of “home solicitation” in § 1689.5 which requires that home solicitation contracts contain notice of buyer’s right to cancel focuses not on who initiates contract between buyer an seller but on where contract is made and, similarly, it is immaterial that seller maintains “appropriate trade premises” if contract is not made at those premises. Id.2. PurposeLegislative purpose in enacting § 1689.5 et seq. which requires that home solicitation contracts contain notice of buyer’s right to cancel was to protect consumers against type of pressures that typically arise when salesman appears at buyer’s home which pressures may arise regardless of whether buyer invited seller to call at residence. Weatherall Aluminum Products Co. v. Scott (1977) 139 Cal.Rptr. 329, 71 C.A.3d 245.3. Limitation of actionsOne-year statute of limitations was applicable only to filing of cause of action and, while it might have merit as defense to buyers’ cross complaint, it was not relevant either to buyers’ cancellation of home solicitation contract or to assertion of that cancellation by way of defense in action by seller for balance due under contract. Weatherall Aluminum Products Co. v. Scott (1977) 139 Cal.Rptr. 329, 71 C.A.3d 245.4. Signing of contractUnder home solicitation statute, buyers had right to cancel contract for replacement of main sewer line to vacant house owned by buyers, where contract was signed at that house and not at plumber’s appropriate trade premises. Louis Luskin & Sons, Inc. v. Samovitz (App. 2 Dist.1985) 212 Cal.Rptr. 612, 166 C.A.3d 533.B.Specific PerformanceSpecific performance provides the exact bargain promised in a contract—performance of the promised act. This remedy is not granted unless the legal remedy (damages) is inadequate. Contracts for the sale of goods rarely qualify—the legal remedy is ordinarily adequate because substantially identical goods can be bought or sold in the market. If goods are unique, specific performance will be ordered.Additional Background—Specific PerformanceThe following excerpt from the Restatement (Second) of Contracts—Restatement (Second) of Contracts, Section 359—states principles that apply when the remedy sought is specific performance.§ 359. Effect of Adequacy of Damages(1) Specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party.(2) The adequacy of the damage remedy for failure to render one part of the performance due does not preclude specific performance or injunction as to the contract as a whole.(3) Specific performance or an injunction will not be refused merely because there is a remedy for breach other than damages, but such a remedy may be considered in exercising discretion under the rule stated in § 357.1.Sale of LandBecause each parcel of land is unique, specific performance of a contract to buy land will likely be ordered.2.Contracts for Personal ServicesNormally, specific performance of personal service contracts is refused, because public policy discourages involuntary servitude. Also, courts do not want to monitor a continuing service contract if supervision would be difficult.C.ReformationReformation allows a contract to be rewritten to reflect the parties’ true intentions.1.Fraud or Mutual MistakeThis concept applies most often when fraud or mutual mistake occurs. Reformation is often sought so that some other remedy may be pursued (if a contract for a sale of land mistakenly refers to the wrong property, for example, the contract may be reformed to conform to the parties’ intentions, and specific performance can then be sought).2.Written Contract Incorrectly States the Parties’ Oral AgreementReformation applies when the written draft of an oral contract contains an error.3.Covenants Not to CompeteReformation applies when the terms of a covenant not to compete are unreasonable.Additional Cases Addressing this Issue —ReformationCases in which contracts were reformed include the following.?Grand Acadian, Inc. v. Fluor Corp., __ F.Supp.2d __ (W.D. La. 2009): (a subcontract was reformed to include a general contractor as there was an obvious clerical mistake in listing “Fluor Enterprises, Inc.” as “Flour Contract Management”—the misspelled name was a division of the general contractor and not a separate legal entity, the main contract listed the correct name, and the subcontract referred to the main contract).?Ameriquest Mortgage Co. v. Hanson, __ N.W.2d __ (Minn.App. 2009): (reforming and reinstating a mortgage on the mortgagor's property was proper when two mortgages that the mortgagor had on two different properties contained each other’s legal description, which made both descriptions incorrect, and the mortgagee had not intentionally mixed up the descriptions).?True v. True, 63 A.D.3d 1145, 882 N.Y.S.2d 261 (2 Dept. 2009): (the reformation of a stipulation of settlement, pursuant to a divorce, was required to reflect the correct number of shares of one spouse’s stock available for the division of marital property, when the stipulation had referred to an “in kind” division of the shares but had indicated a wrong amount).?Connor & Murphy, Ltd. v. Applewood Village Homeowners' Association, __ Ohio App.3d __, __ N.E.2d __ (2009): (evidence that the owner of recreational facilities, and a condominium association, intended to enter into an agreement for the use of the facilities for a fee, that the parties agreed to the terms and adhered to them for six years, was sufficient to support reformation of the agreement to correct the agreement’s misidentification of the owner).III.Recovery Based on Quasi ContractA.When Quasi Contract Is UsedQuasi-contractual recovery may be awarded when a party has partially performed under a contract that is unenforceable.B.The Requirements of Quasi ContractTo recover, a party must show that—?He or she conferred a benefit on another.?He or she conferred the benefit with the reasonable expectation of being paid.?He or she did not act as a volunteer in conferring the benefit.?The party receiving the benefit would be unjustly enriched by retaining it without paying.IV.Contract Provisions Limiting RemediesProvisions that affect the availability of certain remedies may be enforced, depending on the type of breach excused by the provision.A.Sales ContractsUnder the UCC, remedies can be limited, but different rules apply (see Chapter 22).B.Enforceability of Limitation-of-Liability ClausesLimitation-of-liability clauses may be—?Unenforceable—Clauses that exclude liability for injuries that are inflicted intentionally, that occur as a result of fraud, or that result from illegal acts.?Enforceable—A clause excluding liability for negligence, if the parties were in roughly equal bargaining positions (large corporations, for instance, would have equal bargaining power).Enhancing Your Lecture—????What Do You Do When You Cannot Perform??????Not every contract can be performed. If you are a contractor, you may take on a job that, for one reason or another, you cannot or do not wish to perform. Simply walking away from the job and hoping for the best normally is not the most effective way to avoid litigation—which can be costly, time-consuming, and emotionally draining. Instead, you should consider different options that may reduce the likelihood of litigation.For example, suppose that you are a building contractor and you sign a contract to build a home for the Andersons. Performance is to begin on June 15. On June?1, Central Enterprises offers you a position that will yield you two and a half times the amount of net income you could earn as an independent builder. To take the job, you have to start on June 15. You cannot be in two places at the same time, so to accept the new position, you must breach the contract with the Andersons.Consider Your OptionsWhat can you do in this situation? One option is to subcontract the work to another builder and oversee the work yourself to make sure it conforms to the contract. Another option is to negotiate with the Andersons for a release. You can offer to find another qualified builder who will build a house of the same quality at the same price. Alternatively, you can offer to pay any additional costs if another builder takes the job and is more expensive. In any event, this additional cost would be the measure of damages that a court would impose on you if the Andersons prevailed in a suit for breach of contract. Thus, by making the offer, you might be able to avoid the expense of litigation—if the Andersons accept your offer.Settlement OffersOften, parties are reluctant to propose compromise settlements because they fear that what they say will be used against them in court if litigation ensues. The general rule, however, is that offers for settlement cannot be used in court to prove that you are liable for a breach of contract.Checklist for the Contractor Who Cannot Perform1.Consider a compromise.2.Subcontract out the work and oversee it.3.Offer to find an alternative contractor to fulfill your obligation.4.Make a cash offer to “buy” a release from your contract. If anything other than an insignificant amount of money is involved, however, work with an attorney in making the offer.Teaching Suggestions1.A breach of contract entitles a nonbreaching party to an amount of money (damages) that will place the party in the position he or she would have been in if the contract had been performed. Of course, losses must be foreseeable and the proximate result of the breach (foreseeable losses may include consequential damages). Another way to phrase this concept is to say that damages are awarded to protect the expectation interest of the injured party.Discuss the use of express conditions in (1) an automobile purchase contract (“subject to the approval of my parents”) and (2) a home purchase contract (subject to financing, inspection, sale of present home). Encourage students to come up with ideas for conditions in each of these contracts that could be used to give them more control over their contract obligations.2.“Equity will not suffer a right to exist without a remedy” (when the remedy at law—damages—is inadequate, a remedy in equity may be granted). This chapter may be a good context in which to review some of the equitable principles mentioned in Chapter 1. For example, to receive equitable relief, a nonbreaching party must “come to the court with clean hands” (must have acted fairly and honestly).3.As an aid to remembering major points in the unit on contract law, students may find it helpful to keep a brief analytical model in mind. For example, the material covered in these chapters can be condensed and divided into the following points to use as a framework for study: (1) if there is an offer and acceptance, (2) supported by consideration, and (3) no defenses to formation, (4) there is an enforceable contract. (5) If the duties are absolute, there is an immediate duty to perform. (6) If the promises are subject to conditions, the conditions, must occur or be excused first. (7) If the duties have not been discharged by agreement or by operation of law, they must be performed. (8) If not, there has been a breach. (9) If so, what remedies are available?Cyberlaw LinkWhat remedies may be obtained for the breach of a contract entered into in cyberspace? Are computations of damages different in disputes involving contracts agreed to over the Internet?Discussion Questions1.For what do compensatory damages compensate? Compensatory damages compensate a nonbreaching party for the loss of a bargain (for injuries proved to have arisen directly from the loss). On an employer’s breach of an employment contract, for instance, the employee would be entitled to the salary that was promised.2.What are consequential damages? Consequential damages are foreseeable damages that flow from the consequences of a breach but that are caused by circumstances beyond the contract (for instance, a loss of profit from a planned, immediate resale of undelivered goods). The breaching party must know, or have reason to know, of the circumstances that will cause the nonbreaching party to suffer an additional loss. Consequential damages give the innocent party the whole benefit of the bargain.3.What are punitive damages? Punitive damages are essentially penalties—designed to punish a wrongdoer and to deter similar conduct in the future. Generally, punitive damages are not awarded in a breach of contract action, because a breach of contract is not unlawful in a criminal sense. If a party’s acts cause both a breach of contract and a tort (for instance, not adhering to a contract’s express standard of care, which could amount to negligence), punitive damages may be assessed for the tort and compensatory and consequential damages for the breach. Some states recognize a breach of the implied covenant of good faith and fair dealing as an actionable tort that may warrant an award of punitive damages.4.Does an injured party have a duty to mitigate damages? Generally, an injured party has a duty to mitigate (reduce) the damages that he or she suffers. The duty owed depends on the nature of the breached contract. On breach of a lease, a landlord may be required to take reasonable steps to find a new tenant and thereby mitigate damages recoverable from the tenant who breached the lease. An award of damages may be reduced by the amount that could have been mitigated. A wrongfully terminated employee who fails unjustifiably to use reasonable means to obtain a similar job may receive an award reduced by the amount of income that he or she might have received.5.What is the difference between a liquidated damages provision and a penalty provision in a contract? Liquidated damages provisions are enforceable; penalty provisions are not. If (1) when a contract was made, it was apparent that damages would be difficult to estimate if a breach occurred and (2) an amount set as damages is reasonable, the provision will be enforced (at common law and under the UCC).6.Discuss rescission and restitution. Rescission is an action to cancel a contract, to return the parties to the positions they were in before the transaction. A contract may be rescinded unilaterally if fraud, mistake, duress, undue influence, misrepresentation, or lack of capacity to contract is present. A failure to perform entitles the nonbreaching party to rescind. A rescinding party must give prompt notice to the breaching party. Generally, to rescind, the parties must make restitution by returning goods, property, or money conveyed. Restitution is a party’s recapture of a benefit conferred on another through which the other has been unjustly enriched. If the goods or property conveyed can be returned, they must be. If they cannot be returned, restitution must be made in an equivalent amount of money.7.Will specific performance be granted on a breach of contract for a sale of land? Specific performance is granted to a buyer on breach of a contract for the sale of land. The legal remedy is inadequate because every piece of land is considered unique. Only when specific performance is unavailable (for example, if the seller has sold the property to someone else) are damages awarded.8.Will specific performance be granted on a breach of contract for personal services? Ordinarily, specific performance of personal service contracts is refused, because public policy strongly discourages involuntary servitude. Also, courts do not want to monitor a continuing service contract if supervision would be difficult, as it would be if a contract required the exercise of personal judgment or talent.9.When may recovery be based on quasi contract? Recovery may be based on quasi contract when a party has partially performed under a contract that is unenforceable. To recover under a quasi contract theory, a party must show that: (1) he or she conferred a benefit on another, (2) he or she conferred the benefit with the reasonable expectation of being paid, (3) he or she did not act as a volunteer in conferring the benefit, and (4) the party receiving the benefit would be unjustly enriched by retaining the benefit without paying for it. For instance, an oral agreement for the sale of land is unenforceable under the Statute of Frauds, but an amount given as a down payment at the seller’s request would be recoverable in quasi contract: (1) a benefit (the down payment) was conferred on the seller, (2) the down payment was made with the reasonable expectation of getting the land, (3) the buyer made the payment at the seller’s request, and (4) allowing the seller to keep the down payment would enrich the seller unjustly.10.In deciding whether a clause is a liquidated damages clause or a penalty clause, should the courts ever consider the circumstances that caused the nonperforming party to breach the contract? It is not the function of the court to consider how a liquidated damages clause might affect the breaching party when determining whether the clause is enforceable. There are countless reasons why breaching parties do not perform their contracts. If the courts took these reasons into account when deciding on the enforceability of liquidated damages clauses, it would undermine one of the basic assumptions of contract law—that contracts will be enforced as written. Freedom of contract means that parties may make whatever contractual agreements they wish to make, and, so long as the contracts are not illegal, the parties can anticipate that these agreements will be enforced. Of course, there are exceptions. If a party can convince the court that a contract was objectively impossible to perform, performance may be excused. Also, with respect to liquidated damages clauses, if such a clause is unreasonable or effectively amounts to a penalty, a court will not enforce it.Activity and Research Assignments1.Ask students to bring in news articles regarding judgments in recent suits involving breaches of contracts. Have the class dissect the judgments. What part of each represents compensatory damages? What part consequential damages? Do the amounts seem fair based on the facts of the case? Were other remedies granted? Does their award seem fair?2.Obtain a complaint form from the local small claims court. Have students work in small groups of four to five to prepare a complaint based on a breach of contract case arising from facts that they invent. They will need to name the parties, state the claims, and request relief. Have each small group share its complaint with the class.Explanations of Selected Footnotes in the TextFootnote 12: In April 2004, Howard Stainbrook agreed to sell to Trent Low forty acres of land in Indiana for $45,000. Under the agreement, Low was to pay for a survey of the property and other costs, including a tax payment due in November. Low gave Stainbrook a check for $1,000 to show his intent to fulfill the contract. Low made financial arrangements to meet his obligations. Three days before the closing, however, Stainbrook died. His son David, the executor of his estate, asked Low to withdraw the offer. Low refused and filed a suit in an Indiana state court against David, seeking to enforce the contract. The court ordered specific performance. David appealed. In Stainbrook v. Low, a state intermediate appellate court affirmed. A contracting party’s substantial performance is sufficient to support an order for specific performance. Low offered to make the tax payment, obtained financing before the closing date, refused to withdraw his offer, and otherwise indicated that he was prepared to go forward with the deal. Low's failure to order the land survey was not enough to “reach[ ] the level of failure to perform under the Agreement.”If the contract in this case had been an installment contract, under which a breach on the part of the buyer would have required that he pay the full amount of the contract, and Low had failed to timely tender an installment payment, would the result have been the same? It is likely that the result would have been the same under these circumstances. Because of the clause requiring payment of the full amount on a breach, however, the court’s order would have been phrased to require “full performance.”Should a party who seeks specific performance of a contract be required to prove that he or she has performed, substantially performed, or offered to perform his or her contract obligations? Why or why not? Yes, to obtain specific performance a party should have performed his or her duties under the contract or have offered to do so. It would not be fair to otherwise order the other party to perform. Of course, as in the Stainbrook case, a party’s substantial performance of his or her contractual duties can be sufficient to support an order for specific performance.Suppose that Stainbrook and Low had been citizens and residents of other countries. Would the location of the land that was the subject of their contract have been sufficient to support the Indiana state court’s jurisdiction and award in this case? Discuss. Yes. Contracting parties can choose the forum in which a dispute under their contract will be resolved, and they may choose the law to apply to that dispute. In fact, when the parties are located in different countries, it is advisable that they stipulate choices on both points. With respect to a designated forum, the selection will likely be honored unless one of the parties is thereby denied an effective remedy or is substantially inconvenienced, or if the selection was the result of fraud or otherwise violates public policy. With respect to the choice of law, the most important requirement is that the law be of a jurisdiction that has a substantial relationship to the parties and the transaction. In an action seeking specific performance of a land sales contract, the court in the jurisdiction in which the land is located would seem to have such a substantial relationship.Footnote 15: Cardiac Study Center is a medical practice group of cardiologists, including Dr. Robert Emerick. Under the physicians’ employment agreement, a physician who left the group promised not to practice competitively for five years. When patients and other medical providers complained about Emerick’s conduct, he was terminated. He filed a suit against Cardiac, seeking to have the covenant not to compete declared unenforceable. From a judgment in Emerick’s favor, Cardiac appealed. In Emerick v. Cardiac Study Center, Inc., a state intermediate appellate court held that the covenant not to compete was reasonable. An employer has a “legitimate interest” in prohibiting an employee from “taking its clients.” Cardiac provided Emerick with a client base and referral sources. He had access to Cardiac’s business model and goodwill. Covenants not to compete are “common among professionals because they allow a new professional to step in to an already established practice while protecting the employer from future competition.”Why is this case important to businesspersons? Many covenants not to compete are considered unenforceable. Nonetheless, if businesspersons create restrictive covenants that are reasonable, do not extend geographically to a very large area, and do not last for decades, then courts often accept their enforceability. Such enforceability encourages hiring employees who will have access to client lists, unique business models, and other trade secrets and confidential information.Should an employer be able to restrict a former employee from engaging in a competing business on a global level? The legitimacy, effect, and reasonableness of a covenant not to compete depend on the nature of the parties’ business. It could be acceptable to limit a former employee’s employment to a wide radius, depending on the individual’s significance to the employer’s trade and the reach of that trade. But it would seem to be too aggressive to extend that restriction beyond the territory in which the employer actually does business. In this case, Cardiac has a limited geographic area from which it draws patients. A globally restrictive covenant not to compete between Cardiac and its physicians would thus likely be unenforceable.Suppose that Emerick had authored a nationally published book, How to Avoid Cardiac Surgery through Diet and Exercise. Could Cardiac have blocked the book’s distribution in Cardiac’s area based on the covenant not to compete? No, Cardiac could probably not have blocked distribution of a book by Emerick titled How to Avoid Cardiac Surgery through Diet and Exercise in Cardiac’s area based on the covenant not to compete. Any connection between the book and a negative effect on Cardiac’s business would likely have been weak. And the book arguably might have had a positive effect on Cardiac’s goodwill. ................
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