CONTRACTS OUTLINE



ANALYSIS of CONTRACTS – THEORIES OF OBLIGATION

Definition of a contract = an agreement that is legally enforceable

Major Stages of Contract Analysis:

1. Formation

2. Interpretation

3. Performance – parties do the things they promised to do

4. Remedies – reached when a party failed to perform

Five theories of obligation:

1. Agreement with consideration

2. Promissory estoppel

3. Unjust enrichment

4. Moral obligation

5. Warranty

|Remedies Available for Breach Depend on the Theory of Obligation | |

| |Definition |

|Agreement w/ Consideration |Expectancy |Places Promisee in position as if the agreement honored |

| | |( Forward-looking compensation, pay for the difference btw previous |

| | |state and promised state |

|Promissory Estoppel |(Detrimental) Reliance |Places Promisee in position as if promise was never made |

| | |( Backward-looking compensation, pay for the difference btw the previous|

| | |state and current state |

|Unjust Enrichment |Restitution |Return value of benefit give to Promisor |

1. Agreement with Consideration

Consists of:

(1) Competent and knowing parties entering into a

(2) Bargained for Exchange

(3) of Consideration

Competent parties are free to fix the adequacy of the consideration relative to the scope of their agreement. Hardesty v. Smith (1851) (sale of rights to worthless invention)

a. Consideration – what is adequate? Restatement (First) of Contracts § 75 (1932):

i. An act other than a promise

ii. Forbearance – Forbearance of a legal right is adequate consideration for AwC. Hamer v. Sidway (1891) (nephew gets money for good behavior)

1. Forbearance of valid legal claim in good faith = adequate consideration, regardless of claim’s eventual validity. Dyer v. National By-Products, Inc. (1986)

1) Exceptions

a. Forbearance of a legal claim is not adequate consideration if it is not bargained for. Baehr v. Penn-O-Tex. (1960) (oil company says their refraining from suing for breach of contract = consideration)

b. Mere forbearance to sue on a claim w/o any promise either in express terms or by implication does not form sufficient consideration. Neuhoff v. Marvin Lumber and Cedar Co. (oral contract to provide replacement windows for free)

c. Good faith forbearance of a legal claim is not adequate consideration, if the claim is invalid. Springstead v. Nees (1908) (siblings fighting over inherited property belonging only to two)

iii. Creation, modification or destruction of a legal relation

iv. A return promise

b. Definition of “Bargained for” from Restatement (2nd) of Contracts § 81

1) Fact that what is bargained for does not of itself induce making of a promise does not prevent it from being consideration for the promise

2) Fact that a promise does not of itself induce a performance or return promise does not prevent the performance or return promise from being consideration for the promise

“bargain” – negotiation resulting in voluntary assumption of an obligation by one party upon the condition of an actor or forbearance of the other

c. Defenses to AwC

i. Gifts: unbargained for benefit – seen as gratuitous

1. A benefit that has not been bargained for is not sufficient to constitute an AwC. Dougherty v. Salt (1919) (woman leaves $ to nephew because he is a “good boy”)

1) Counter Defense – Conditional Gift: An unbargained for conditional gift is enforceable if the promisor is benefited by the conditions of the gift. Maughs v. Porter (1931) (lottery of car for making appearance at auction)

ii. Unbargained for Forbearance

1. Good faith forbearance of a legal claim is not adequate consideration if it is not bargained for. Baehr v. Penn-O-Tex. (1960) (s.a.)

iii. Forbearance of a claim that was never valid

1. Forbearance of a legal claim is not adequate consideration, if the claim was never valid. Springstead v. Nees (1908) (s.a.)

iv. Illusory Contract:

An agreement lacking mutuality of obligation is an illusory contract and is not enforceable. De Los Santos v. Great Western Sugar Company (1984) (per unit contract)

1. A per unit contract:

1) w/o specified quantity, or

2) exclusivity

3) is not enforceable even where there is:

a. Prior performance under the contract or

b. Specification of contract duration

2. Definition of mutuality of obligation: When consideration consists of the exchange of mutual promises, the undertakings on both sides must be real and meaningful. If the promise of one party has qualifications or limitations so strong that they negate it, it is really no commitment at all.

3. Definition of an illusory promise: An illusory promise is one that does not constitute consideration because the promisor has an unrestricted right to renege.

4. Counter Defense – Where a contract appears to be illusory, it is enforceable if there is…

1) Exclusivity – An exclusive agreement with implied obligation is enforceable. Wood v. Lucy, Lady Duff-Gordon (1917) (P was exclusive promoter of D’s fashions, good faith agreement)

a. U.C.C. § 1-306(2) Exclusivity – A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes, unless otherwise agreed, an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

2) Discretionary Constraint – An agreement where one party’s discretion is constrained is enforceable. Weiner v. McGraw-Hill, Inc. (1982) (employment agreement, P forbore taking another job on promise he would not be unfairly fired w/o good cause)

3) Satisfaction Clause – An objective satisfaction clause does not necessarily negate consideration, and the contract may be enforceable. Mattei v. Hopper (1958)

a. Mutuality of obligation is required ( for a contract to be binding, both parties have to assume some legal duty)

b. Exception: A subjective satisfaction clause that is contingent on taste and fancy and may vitiate consideration, making the contract unenforceable.

v. Unconscionability: an absence of meaningful choice on buyer’s part and presence of contract terms “unreasonably favorable” to the seller.

1. Restatement of Contracts § 208 (Unconscionable Contract or Term) – If a contract or term thereof is unconscionable at the time the contract is made, a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.

vi. Bad faith: Malicious misrepresentation

vii. Pre-existing duty: a pre-existing legal duty is not valid consideration because it was a part of a prior bargain for exchange.

1. Counter Defense:

1) Prior duty agreed upon under duress

viii. Lack of Mutuality of Assent: when both parties have the same understanding of the information of each and every element of the contract. An understanding/fundamental agreement required for the enforceability of a contract. If there is no understanding between the parties, then the court cannot access consideration. Anderco v. Buildex

ix. STATUTE OF FRAUDS

1. Applicability:

1) No action shall be brought and maintained in any of the following cases:

a. To charge a personal representative upon any special promise, to answer damages out of his own estate;

b. To charge any person upon any special promise to answer for the debt, default or misdoings of another person;

1. Surety: person who agrees to answer for the debt, default, or misdoings of another. Schoor

c. To charge any person upon any agreement made in consideration of marriage;

d. Upon any contract for the sales of lands, tenements, or heriditaments, or of any interest in or concerning them

1. Includes leases of land

e. Upon any agreement that is not to be performed within the space of one year from the making thereof;

1. If employment agreement was made more than one day before the P began performance, the unwritten agreement is not enforceable because it falls within SoF. McIntosh v. Murphy (1970) (man left job for promise of another job)

a. Exception: Even if the agreement was made more than one day before, Sunday is a non-work day and only a fraction of Saturday left, therefore not within the SoF. McIntosh v. Murphy (s.a.)

f. To charge any person upon any agreement authorizing or employing an agent or broker to purchase or sell real estate for compensation or commission;

g. To charge the estate of any deceased person upon any agreement which by its terms is not to be performed during the lifetime of the promisor

2. Unless – Written document: Type of writing sufficient to satisfy SoF: Restatement of Contracts (2nd) §131: Unless additional requirements are prescribed by the particular statute, a contract within the SoF is enforceable if it is evidence by any writing, signed by or on behalf of the party to be charged, which

1) Reasonably identifies the subject matter of the contract

2) Is sufficient to indicate that a contract with respect thereto has been made between the parties or offered by the signer to the other party, and

3) States with reasonable certainty the essential terms of the unperformed promises in the contract

3. Unclear terms of contract: If an alleged contract does not state the condition and terms of the sale and the time of payment, the alleged contract is barred by SoF. Jonesboro Investment Corp. v. Cherry (1965) (Ds made vague oral offer to sell P land, P accepted. D failed to turn land over to P. Agreement ruled unenforceable.)

4. Goods for the price of $500 or more: UCC §2-201

1) Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient (or authenticated record, ex: online sales) to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in writing.

2) Between merchants if w/in a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within 10 days after it is received.

3) A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable

a. If the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement; or

b. If the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or

c. With respect to goods for which payment has been made and accepted or which have been received and accepted.

5. Counter Defense to SoF:

1) Leading object rule: Where consideration for a promise that all or part of a previously existing duty of a third person to the promisee shall be satisfied is in fact or apparently desired by promisor mainly for his own pecuniary or business advantage, rather than in order to benefit third person, promise is not w/in SoF. Restatement of Contracts §184 (1932)

a. If a promise to guarantee another's debt is made primarily for Promisor's own benefit, then SoF does not apply and promise does not have to be in writing

1. When it is abundantly clear that an unwritten promise (oral promise) furthers Promisor’s substantial pecuniary and business interest, the leading object rule applies and the promise is not within the SoF (does not have to be in writing). Howard M. Schoor Associates, Inc. v. Holmdel Heights Construction Co.

b. “Original-Collateral Promise” Test:

1. Where the leading object or Promisor’s main purpose is to become surety for another’s debt, the promise is a collateral one and w/in the SoF.

2. Where the principle purpose is to subserve or promote Promisor’s personal interest, then the promise will be deemed an original one and not controlled by SoF.

c. Oral agreement for a party to act as surety (AwC) may be defeated by SOF (Defense) which may in turn be defeated by Leading Object Rule (Exception)

2) Enforcement by virtue of action in reliance. Restatement (2nd) of Contracts §139 (1), McIntosh v. Murphy

(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires.

(2) In determining whether injustice can be avoided only by enforcement of the promise, the following circumstances are significant:

(a) Availability and adequacy of other remedies, particularly cancellation and restitution;

(b) Definite and substantial character of the action or forbearance in relation to the remedy sought;

(c) Extent to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence;

(d) Reasonableness of the action or forbearance;

(e) Extent to which the action or forbearance was foreseeable by the promisor.

3) Partial Performance: An equitable doctrine justifying the enforcement of an oral agreement for the conveyance of an interest in land where there has been substantial reliance by the party seeking to enforce the contract. McIntosh v. Murphy; Seavey v. Drake (s.b.)

a. However, generally, part performance of an oral land sale contract does not remove the bar of the SOF in an action for damages.

b. An employee’s part performance of an employment contract with a duration of more than one year generally does not take the contract out of the SoF

Pre-promissory estoppel: Courts attempted to fit the following cases within the AwC Theory:

d. Promise of house and tillable land is gratuitous; Antillico’s selling of her house and moving is not deemed consideration (or reliance). Kirksey v. Kirksey (1845) (woman’s move not sufficient for her to recover reliance damages, unfair—but due to lack of PE theory)

e. Promise of money for church is not gratuitous; Town’s fund raising and construction = consideration. Ryerss v. Trustees (1859) (guy promises to give church money if the build, then reneges because he does not like the sect)

f. Dad’s promise gratuitous but one upon which son detrimentally relied via placement of permanent improvements on property which becomes consideration for promises. Seavey v. Drake (1882)

g. Bailee promise to secure insurance for Promisee’s goods, prompting Promisee’s reliance and bailee taking possession of Promisee’s property turns Promisee’s reliance into consideration. Siegel v. Spear & Co. (1923)

h. Equitable Estoppel: Where a party makes a false representation to or knowingly conceals a material fact from another party with the intention that the innocent party act upon the false representation or concealment. (NOT THE SAME AS PROMISSORY ESTOPPEL)

i. Illusory promise – cannot justifiably rely on something that may or may not happen, reliance is unreasonable

1. Promissory Estoppel –

a. Restatement (1st) Contracts §90 (1932):

i. (1) A promise

1. Which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee, and

2. Which does induce such action or forbearance

3. Is binding if injustice can be avoided only by enforcement of the promise.

ii. (2) Charitable subscription or a marriage settlement is binding under above rule without proof that the promise induced action or forbearance.

iii. Elements: (1) Promise which reasonably induces action or forbearance, (2) Actual reliance to promisor’s detriment, (3) Enforcement of the promise will avoid injustice

b. Restatement (2nd) of Contracts §90 (1981):

i. A promise

1. Which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person, and

2. Which does induce such action or forbearance

3. Is binding if injustice can be avoided only by enforcement of the promise.

4. The remedy granted for breach may be limited as justice requires. (allows for partial enforcement, more equitable than previous restatement)

c. Elements of PE:

i. Promise

ii. Promisor’s reasonable expectations / reasonable reliance:

1. Insufficient contract: If all elements of promissory estoppel are present in an insufficient contract, promissory estoppel is enforceable. Wheeler v. White 1965

2. During negotiations of contract: If no actual terms of the agreement had been agreed upon and all elements of promissory estoppel are present during negotiations of contract, promissory estoppel is enforceable. Hoffman v. Red Owl Stores 1965

iii. Actual reliance to a detriment / inducement of action or forbearance

iv. Injustice

1. Enforcement of the promise is necessary to avoid this result

d. Restatement 1st vs, Restatement 2nd

i. Commonalities between Restatement 1st and 2nd

1. Promise

2. Foreseeable reliance

3. Actual reliance to detriment

4. Enforcement of reliance to avoid injustice

ii. Differences: According to the Restatement 2nd §90, economic loss is not a requirement for enforcement of promissory estoppel. One must suffer to his/her detriment.

1. Third parties have ability to recover

2. Partial enforcement is permitted

3. “The remedy granted for breach may be limited as justice requires”

e. Defenses/Limits on PE:

i. Conditional or Indefinite Promise: When the promise is conditional based on an unclear definition of a requirement, the promise is not enforceable under promissory estoppel. Local 1330 (promise made by those who were not authorized to keep it)

ii. Unreasonable reliance

1. Illusory promise – cannot justifiably rely on something that may or may not happen

iii. Un-communicated expectations of Remuneration/Gift

1. Counter Defense: Change in relationship

iv. Termination date on promise: promise only for a limited time

v. Prompt Revocation of promise with notice

2. Unjust Enrichment: a person who has been unjustly enriched at the expense of another is required to make restitution to the other. Restatement of Restitution §1 (1937), Bloomgarden (1973) (P was consultant, gave free advice to D in attempt to foster business connections, establishes UE elements)

a. Elements of Quasi-Contract / “Contract implied in law”

i. A duty thrust under certain conditions upon one party to requite another in order to avoid the former’s unjust enrichment

ii. Not an enforceable contract

1. ≠ implied-in fact contract

1) True contract, but not committed to writing or orally stated expressly

2) Services are not gratuitous but for compensation

3) Implication must arise when service is rendered (Bloomgarden’s case fails b/c did not entertain thoughts of compensation when first consulted w/ D)

iii. Recovery requires P to show Promisor unjustly enriched at Promisee’s expense

1. Services directly benefit recipient

2. Would be unjust to allow Promisor to retain benefit w/o compensating Promisee

iv. Appreciated or had knowledge by Promisor of a direct benefit that for the Promisor

1. Voluntary abandonment of benefit: When D imposes a liability that the benefit will only directly benefit D and D willfully abandons it, then P should receive restitution. Kearns v. Andree (1928) (D agreed to purchase P’s home if certain modifications made, P complied, D refused to honor purchase agreement, not PE b/c no benefit actually retained by promisor)

2. When there is lack of mutual assent (an understanding/fundamental agreement required for the enforceability of a contract), then there is no understanding between the parties, therefore, the court cannot access consideration and determine whether one party was unjustly enriched. Anderco v. Buildex (1982) (parties each acted on what they thought the terms of the verbal agreement were, no enforceable contract actually exists)

v. Notice of compensation for benefit (not gratuitous)

1. A change of relationship from personal to commercial notifies D that reasonable expectation of compensation for the benefit (what was once a gift is now a benefit for consideration – moving an arm’s length). Sparks v. Gustafson (1988) (P used own $ to maintain/improve friend’s building, court ruled not gratuitous service)

vi. Acceptance or retention of the benefit by D under circumstance making it inequitable for D to retain benefit.

1. If promisor repudiates contract, promisee can recover quantum meruit for market value of service he performed. Posner v. Seder (1903) (P wants payment for OT ( quantum meruit, contract specified $17/week including OT and less time)

1) Quantum meruit = [market value of services] – [benefit]

2) Note: Quantum meruit applies to both AwC and Unjust Enrichment.

2. Substantial performance: where a contractor has deviated slightly from the terms of the contract, not willfully, but in good faith, and there has been a substantial performance of the contract of which the other party received a benefit. Kelley v. Hance (1928) (P promises to build D’s sidewalk, P breaches w/o explanation, sues for $ of work done, not awarded b/c not justified abandonment, retention of work ≠ acceptance or promise to pay b/c D cannot give land back)

3. Day-to-day performance: If promisee breached contract without just cause, promisee can recover quantum meruit for market value of service performed if the service performed is one that is looked at as a day-to-day performance (such as farming). Britton v. Turner (1834) (P hired for one year contract of $120, breaches after 9.5 mo, seeks recovery for work performed, recovers)

b. Situations in which used:

i. Contract never formed ( NBP gets restitution

ii. Contract unenforceable ( NBP gets restitution

iii. Contract breached ( NBP gets either expectancy (AwC) or restitution

c. Defenses to UE:

i. Relationships

1. Familial relationship: Services rendered between siblings are gratuitous because these services are usually performed out of a sense of family responsibility. Brown v. Brown.

1) Counter Defense: Change of relationship

Creation, modification or destruction of legal relationship is seen as adequate consideration. Restatement (1st) of Contracts §75(1)(c) (1932)

a. If a party has an unenforceable agreement, the agreement can be used as evidence of a sale that the promisee expected compensation for benefit. Gay v. Mooney (1901) (P sought recompense for room & board furnished to deceased for return promise to build house for P’s children, AwC fails due to SoF – not done w/in one year of contract’s making)

b. Termination/deterioration of relationship: Co-habitation: unmarried cohabitants may raise claims based upon UE following termination (or deterioration) of their relationships where one party attempts to retain unreasonable amount of property acquired through efforts of both. Watts v. Watts (1987)

ii. Lack of notice of compensation / no contemplation of fee / no communication of expectation of remuneration / attempt at a business advantage / beneficiary has total discretion to pay or not pay

1. Bloomgarden

iii. Choice Principle: Unreturnable benefit / unable to reject benefit

1. One who confers benefit upon another w/o affording the opportunity to reject benefit has no equitable claim for relief against the recipient of benefit in absence of some special policy that would outweigh the right of free choice to benefited

2. “intermeddler” – party who conferred the unwanted, unsolicited benefit

3. When partial work has been done to land of D, retaining that land cannot be construed as acceptance (since it is forced), raising an implied promise to pay. Kelley v. Hance (1928) (s.a.)

iv. Gift Principle: one who has conferred benefit upon another w/ intention to make a gift has no equitable claim for relief against recipient of the benefit in absence of fraud, mistake, duress, or undue influence

1. recipient of gift is enriched, but not unjustly

2. “volunteer” – used to refer to gift principle

v. No benefit to the promisor

1. Counter Defense: voluntary abandonment of a benefit

3. Moral Obligation: Restatement (2nd) of Contracts §86 – Promise for Benefit Received. Promise made in recognition of a benefit previously received by the Promisor from the Promisee is binding to the extent necessary to prevent injustice.

a. Exceptions: Promise is not binding if

i. Promisee conveyed benefit as a gift;

ii. Promisor is not unjustly enriched;

iii. The value of compensation promised is disproportionate to the benefit.

(Note: Opposite of AwC because there is no bargain for exchange between knowing parties)

b. Elements of MO: Webb v. McGowin (1935) establishes elements of moral obligation

i. Material benefit or past performance: benefit that was thrust upon another

1. Promise must be made by recipient of benefit to be enforceable. Mills v. Wyman (1825) (P is stranger who helps D’s son, D promises to pay, not enforceable b/c D did not incur benefit, consideration only exists between son and P, D’s promise to pay was not sufficient consideration. No b for e, no contract, no breach.)

ii. Promise of performance for the material benefit/past performance

iii. Promise is necessarily enforced to prevent injustice

c. Applicability:

i. Reliance on promise or the probability of such reliance.

1. Not necessary for moral obligation, but the court can use reliance to weigh whether moral obligation is enforceable. Webb v. McGowin (1935) (P saved D’s life to the detriment of his own well-being, D promised to take care of P until his death, D died, D’s estate refuses to compensate P forthwith, court ruled D’s estate still morally bound to pay P, promise enforceable)

ii. Duty of care:

1. Employment relationship: Webb v. McGowin (s.a.)

2. Landlord-tenant relationship: Edson v. Poppe (1910) (P was D’s tenant, dug a well upon D’s property w/o D’s request, D promised to pay value of benefit conferred, court ruled unenforceable promise b/c subsequent promise to pay after services already rendered is not sufficient consideration)

1) General rule: Unasked for services are insufficient consideration for a subsequent promise to pay once services fully rendered

2) Exception: Moral Obligation – unless provided for services are beneficial, not intended to be gratuitous

d. Difference between PE and MO:

i. PE: Promise made before benefit conferred

ii. MO: Promise made after benefit received

e. Defenses to MO:

i. Performance did not directly benefit promisor: Material benefit did not directly benefit the promisor, therefore moral obligation is unenforceable. Mills v. Wyman (s.a.)

ii. Lack of preexisting obligation: A legal obligation does not exist between two adults. Mill v. Wyman (s.a.)

iii. Promisor did not set the scope of the benefit: The person who receives the benefit sets the scope of the promise. If promisor does not set the scope of the promise, then the moral obligation is unenforceable. Both parties do not have consideration. Harrington v. Taylor (1945) (D assaulted wife, wife took refuge in P’s home, D’s wife about to hurt D when P came between the two and was injured instead, D promised to pay P for intervening but did not)

4. Torts

a. Definitions

i. Action ex contractu – action for breach of promise (contract)

ii. Action ex delicto – action arising out of breach of duty (tort)

1. Nonfeasance: failure to act when a duty to act existed

2. Misfeasance: a lawful act performed in a wrongful manner

b. Remedies

i. Tort remedy is more advantageous b/c it will permit recovery of greater damages: punitive and mental anguish

ii. Contract remedy is only quantum meruit or expectation damages.

1. Only addresses economic loss

2. Contract claim does not require proof of negligence

c. Tort recovery is possible when:

i. Breached Duty – extra-contractual duty

1. If a contract imposes a legal duty upon a party, where the duty exists apart from the specific obligation of the contract, the neglect of that duty is a tort founded upon a contract. Mauldin v. Sheffer (1966) (Engineer D contracted with P, D had professional duty to provide safe designs for school buildings, failed)

2. Examples of separate legal duty apart from contract: Doctor/Patient, Principal/Agent, Bailor/Bailee, Attorney/Client, Carrier & Passenger or Shipper.

ii. Fraudulent misrepresentation/ Intentional fraud

1. When fraudulent misrepresentations have been made, D is subject to liability in tort, regardless of whether or not there is an action in breach of contract. Hargrave v. Oki Nursery (1980) (Misrepresentation of quality of grapes = fraud)

iii. Breached Implied covenant of good faith and fair dealing

1. Breached insurance contracts: tort remedy for bad faith breach

1) Defense: Breached employment contracts: no tort remedy. Foley v. Interactive Data Corp. (1988)

|Benefits of Contract Over Tort Action |Benefits of Tort Over Contract Action |

|May lead to strict liability for failure to perform, tort action requires proof |Damages recoverable for breach limited to those w/in contemplation of D at time |

|of negligence |of contracting |

|Shorter statute of limitations may bar tort action |Tort action might avoid the limitations of K |

|Some immunities may prevent recovery in tort, but not in contract |Only tort action allows recovery of damages for punitive measures and mental |

|Damages recoverable on contract may be greater, to extent that they give P |suffering |

|benefit of the bargain made, rather than compensation for the loss |Only limitations are those of “proximate cause” |

|Contract claim may be assignable where a tort claim is not |May permit recovery for wrongful death, which contract will not normally allow |

|P may by his own conduct have accepted and affirmed the contract as to be bound |Available when K fails for lack of proof or want of consideration |

|by it, to the exclusion of tort remedies he might otherwise have had |May sometimes avoid some defenses |

| |May avoid necessity of joining several Ds or permit successive actions for |

| |multiple breeches of a single contract |

5. Warranty

a. Express Warranties: UCC §2-313: Created by: (A) Any affirmation of fact or promise made by the seller which relates to the goods and becomes part of the basis of the bargain. (B) Any description of goods which is made part of the basis of the bargain. (C) Any sample or model which is made part of the basis of the bargain.

i. Elements to Express Warranties from Keith v. Buchanan (1985) (P purchased boat based on advertised description of sea-worthiness, no chance to test until boat in water)

1. Affirmation (not an opinion)

2. Presumed to be part of the basis of the bargain

1) Seller refutes presumption by proving

a. buyer had knowledge or

b. waived the right to inspect

2) Buyer wins if defect isn’t discoverable

3. A purchaser’s reliance does not need to be established in order to prove an express warranty existed

ii. Defenses to Express Warranties

1. Presumption refuted: Seller refutes the presumption by proving.

1) Buyer had knowledge or

2) Waived the right to inspect

3) Counter Defense:

a. Defect was not discoverable (boat had to be tested in water)

2. Lack of specificity

3. Merely seller’s opinion (v. affirmation)

iii. Application:

1. Analyze whether the seller’s statement is an “affirmation of fact or promise” or “merely the seller’s opinion or commendation of the goods”

1) Use the reasonable person test in analyzing the seller’s statements

2. Statements must be “basis of the bargain”

1) Examine whether statements were one factor that induced purchase

2) Examine whether a reasonable buyer would be induced and whether the buyer actually was induced.

3) Burden on seller to demonstrate buyer had actual knowledge of the true condition of the goods prior to making the purchase of the contract.

b. Implied Warranty of Fitness (Purpose) – UCC §2-315: Where a seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified… an implied warranty that the goods shall be fit for such purpose.

i. Elements to Implied Warranty of Fitness:

1. Buyer intends to use item for particular purpose

2. Seller has reason to know of the buyer’s particular purpose

3. Buyer relies on Seller’s skill or judgment to select or furnish goods suitable for the particular purpose

4. Seller at time of contracting has reason to know Buyer is relying on his S & J

ii. Defenses to Implied Warranty of Fitness:

1. Reliance unknown: Seller did not know of buyer’s reliance, his conduct in providing the goods cannot fairly be deemed suitable for a particular purpose. Keith v. Buchanan.

2. Buyer did not rely of Seller’s expertise: P’s used expert-friend for advice to buy

3. Expert buyer: Buyer does not rely on seller’s skill because the buyer is an expert or has experience with the goods.

c. Implied Warranty of Merchantability UCC §2-314 Merchantability: (1) A warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale. (2) Goods to be merchantable must at least be such as are fit for the ordinary purposes for which such goods are used. (3) Buyer, before entering into contract, examined the goods or has the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances have revealed to him.

i. Basically: Implied warranty that goods sold are generally acceptable quality in such trade

ii. Elements to Implied Warranty of Merchantability:

1. Seller is a merchant with respect to goods of that kind

1) § 2-104 Definitions: “Merchant” – means a person who deals in goods of the kind or, by his occupation, represents himself as having knowledge peculiar to practices or goods involved in the transaction

2. Goods are fit for the ordinary purposes for which such goods are used

3. No warranty if defect is discoverable via exam prior to sale

iii. Defense to Implied Warranty of Merchantability:

1. Does not make the good unfit/Reasonably foreseeable/anticipated risk

1) If it is known through time-old traditions that there will be certain occurrences, such as a fish bone in clam chowder or presence of a piece of oyster shell when eating oysters, then the effect of the UCC is not upon the tradition, therefore there is no breach of implied warranty. Webster v. Blue Ship Tea Room (1964) (P sues D because of bone in her fish chowder, court rules it is normal and acceptable)

d. Exclusion or Modification of Warranties UCC §2-316:

(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending to negate or limit warranty shall be construed wherever reasonable as consistent with each other; but subject to the provisions of this Article on parol or extrinsic evidence (§ 2–202) negation or limitation is inoperative to the extent that such construction is unreasonable.

(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that "There are no warranties which extend beyond the description on the face hereof."

(3) Notwithstanding subsection (2)

(a) unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like "as is", "with all faults" or other language which in common understanding calls the buyer's attention to the exclusion of warranties and makes plain that there is no implied warranty; and

(b) when the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and

(c) an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade.

REMEDIES:

1. Expectancy Damages: Awarded to put the Promisee in the position he would have been in had the Promisor performed as the contract had required

a. D = LoV + OL – [LA + CA]

i. LoV = loss of value; deprives party of value of performance

1. Cost of Performance + Profit

ii. OL = other losses = ID + CD

1. ID = incidental damages

2. CD = consequential damages (includes incidental reliance)

iii. LA = loss avoided, resources reallocatable after breach

iv. CA = cost avoided, expenditures precluded by breach

b. Cost of Completion vs. Loss of Value

i. Great disparity btw value of full performance and cost of performance (4 views)

1. Cost of completion: P is entitled to reasonable cost to him of doing the work called for by contract which D left undone. (CoP vs. value of land had the K performed). Groves v. John Wunder Co. (1939) (D contractor breached, failed to level grade of land, took best material for self)

a. P can recover for cost of completion even if failure of completion does not diminish market value of the P’s land. Radford v. De Froberville (P wants D to build a fence on P’s property, D breaches)

2. Loss of value: Where the economic benefit of full performance of work on land ($300) is grossly disproportionate to cost of performance ($29K), damages are limited to the diminution in value resulting to the premises because of the non-performance ($300). Peevyhouse v. Garland Coal & Mining Co. (1963)

a. Exception: When a property owner contracts for improvements that reduce the value of his property, the measure for damages for breach would ordinarily be the cost of performance. Peevyhouse

b. Statute changes it to cost of completion: The statute of Oklahoma declares that the operator of a strip mine has a duty to reclaim land and that state may contract for work to be done if the operator defaults. Rock Island Improvement Company v. Helmerich & Payne, Inc.(1983) (Note: Peevyhouse rule no longer applies)

3. Specific Performance (applies only to land): Instead of measuring damages, court could have granted a decree of specific performance. If P really wants completion, court will enforce a decree. If P does not, court will make a settlement that divides the windfall at some level between amount at which he subjectively values the performance and the contractor’s cost of completion.

4. Intermediate figure: Suppose that value the P assigns to delta between existing and promised states of the subject matter, although less than the cost of completion, is higher than the market-value differential. In principle, P’s recovery should be measured by this intermediary figure. (Jury in Peevyhouse may have done just that).

ii. Restatement (Second) of Contracts §347, Comment B: The first element that must be estimated in attempting to fix a sum that will fairly represent the expectation interest is the loss in the value to the injured party of the other party’s performance that is caused by the failure of, or deficiency in, that performance. In principle, this requires a determination of the value of that performance to the injured party himself and not the value to some hypothetical reasonable person or on some market. The value of performance therefore depends on his own particular circumstances or those of his enterprise.

iii. Limitations

1. Subsequent contracts: When D breaches a contract and P enters into a subsequent contract, P may recover for the difference in contract price if the second contract did not call for additional work not contemplated by nor included in the first one. Thorne v. White (1954) (P wants D to build roof, D breaches. P hires another to complete work and do additional work, cannot ask D to pay difference between work they owe and new contractor’s work including added)

2. Profits need to be defined: To account for damages based on profit, profit must be defined or have instructions given as to how these profits are to be estimated.

a. Damages are not measured, however, by what the defaulting party saved by the breach, but by the natural and probable consequences of the breach to the P. Freund v. Washington Square Press (1974) (D breached contract to publish P’s book for which P would be paid royalties based on sales. Court rules P can only recover nominal damages)

b. Profits cannot be determined when total CoP cannot be determined:

LoV = CoP + Profit. If profit cannot be determined, the party can seek either restitution or reliance damages, since expectancy damages cannot be calculated. Warner v. McLay (1918) (P claims entitled to 10% profit he would have reasonably made had K been honored by D)

3. Proper mitigation – additional costs: If the party properly mitigated its damages by hiring the least expensive, qualified replacement available, then the party is entitle to have the benefit of the bargain restored, therefore, entitling the party to recover from the additional cost of hiring a replacement. Handicapped Children’s Education Bd. of Sheboygan County v. Lukaszewski (1983) (D teacher breached K w/ P forcing them to hire more expensive replacement, P must pay Δ)

c. Market Based Damages

i. Buyer’s Damage: The measure of damage to be recovered on an executory K is Δ between K price and actual or market value of property at time and place of the breach. If market value is the same as K price when K is breached, then only nominal damages can be recovered. Cooper v. Clute (1917) (D breached promise to sell to P at set price, P still able to purchase at same price from another, no actual damages suffered or proved)

1. Executory contract: A K composed of promises yet to be perform (executed)

( bilateral contract.

ii. Seller’s Damage – Loss Volume Seller Exception: If seller has the opportunity to sell more than one item (has inventory), and buyer breaches, but the seller eventually sells item to another buyer, then seller can recover lost profit and incidental damages. Neri v. Retail Marine Corp. (1972)

1. Limitation: If seller were a private party and only had one item to sell, and buyer breached, but seller eventually sold the item to another buyer, then seller cannot recover lost profits because he only had one item to sell.

iii. UCC:

1. Definitions:

a. Sale:

i. The UCC. defines a “sale” as the “passing of title from the seller to the buyer for a price." UCC 2-106(1)

b. Goods:

i. The UCC defines goods as “all things…which are movable at the time of identification to the contract for sale.” UCC 2-105(1)

ii. “The definition of goods is based on the concept of moveability. It is not intended to deal with things which are not fairly identifiable as moveables before the contract is performed.” UCC 2-105

c. Mixed Goods and Services: Where a sale of goods additionally requires the seller to perform services, contract may be classified as “mixed” and the law requires courts to apply a “predominant purpose” test to determine whether the UCC governs the contract. 

i. The central query test – whether the purpose of the agreement is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater)

1. If the primary purpose is the sale of goods ( UCC applies

ii. Example: Mold-Tech’s refinishing of NIM Plastic’s “roll”

1. Not moveable (surface finish of roll)

2. Not a sale (no title passed)

3. Predominant purpose was service (like sanding someone’s table or painting someone’s chair)

2. Calculating damages under the U.C.C .

a. UCC §1-106. Remedies to be Liberally Administered

(1) The remedies provided by this Act shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed.

b. UCC § 2-713. Buyers Damages for Non-Delivery or Repudiation

(1) The measure of damages for non-delivery or repudiation by the seller is the difference between market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (§ 2-715), but less expenses saved in consequence of the seller’s breach.

(2) Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of place of arrival.

c. UCC §2-712. “Cover”; Buyer’s Procurement of Substitute Goods

(1) After a breach within the preceding section the buyer may “cover” by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

(2) 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 as hereinafter defined (§ 2-715), but less expenses saved in consequence of the seller’s breach.

d. UCC §2-708. Seller’s Damages for Non Acceptance or Repudiation

(1) Subject to subsection (2), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (§ 2-710), but less expenses saved in consequence of the buyer’s breach.

(2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article (§ 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

e. UCC §2-706. Seller’s Resale Including Contract for Resale

(1) Under the conditions state in Section 2-703 on seller’s remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this Article (§ 2-710), but less expenses saved in consequence of the buyer’s breach.

f. UCC §2-714. Buyer’s Damages for Breach in Regard to Accepted Goods

(1) Where the buyer has accepted goods and given notification (subsection (3) of § 2-607) he may recover as damages for any non-conformity of tender and loss resulting in the ordinary course of events from the seller’s breach as determined in any manner which is reasonable.

(2) The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.

(3) In a proper case any incidental and consequential damages under the next section may also be recovered.

i. What the courts have said about §2-714:

1. 2-714: Establishes a remedy for Buyer after the goods have been accepted and revocation of acceptance is not possible. In such a case, the seller is given credit for the value to the buyer of the accepted goods, and normally the measure of damages should be the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had conformed to the contract.

2. The value of goods "as warranted" has been interpreted to encompass two different standards:

a. The primary standard is the fair market value of the goods at the time of acceptance. In using the fair market value, the courts ensure that the buyer is only recovering his actual damages and does not gain a windfall from a fluctuating market.

3. When the fair market value cannot be easily determined, or the parties do not raise it as a measure of " value", courts have generally relied on the contract's purchase price as strong evidence of the value of the nonconforming goods as warranted.

d. Consequential Damages: Damages are not recoverable for loss that was not reasonably foreseeable by the party in breach at the time of contracting. Damages are recoverable if they arise naturally.

i. 3 views:

1. Foreseeable: When D does not know of P’s special circumstance a breach of K such as delivery delay will not make D liable for loss profits which were not reasonably foreseeable. Hadley v. Baxendale (1854) (P = mill, sues D for failing to deliver replacement shaft in timely manner, causing P’s lost productivity)

a. UCC §2-715: Consequential damages resulting from seller’s breach include any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise.

i. Official Comment:

1. Rejects tacit agreement test

2. Particular needs (seller needs to know) vs. General needs (seller not required to know)

b. Restatement (2nd) of Contracts §351(3): A court may limit damages foreseeable loss by excluding recover for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.

c. Convention on Contracts for the International Sale of Goods, Article 74: Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.

2. Tacit Agreement (Note: not really followed anymore): When D is in business of certain trade and P enters into K with D related to this trade, K contains implied undertaking (tacit agreement) to perform work in a reasonably skillful & workmanlike manner. Armstrong v. Bangor Mill Supply Group (1929) (like Hadley but no middleman, P ( D so D had reason to know of urgency of repair)

a. Note: Court does not always follow Hadley decision. Courts generally disregard tacit agreement test when breaching party receives relatively insignificant consideration even if injured party communicated special circumstances to breaching party.

3. Insignificant consideration to the breaching party: If the breaching party receives relatively insignificant consideration (such as $20 for a lighting accessory when the consequential damages are $450), the court will not find that the breaching party is liable for consequential damages. Lamkins v. International Harvester Co. (P purchases tractor & light to see while planting at night, D delivers w/o light, P claims cannot plant & suffers damages, but not foreseeable)

e. Mitigation of Damages (LA + CA): Damages for breach of K by one party consist of sum equal to the loss, including LoP, suffered by other party as a consequence of the breach. These damages may not exceed loss which the breaching party foresaw or ought to have foreseen at time of the conclusion of K, in light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract. Convention on Contracts for the International Sale of Goods. Article 74.

i. Performance after a breach – service contract: If one party breaches K, then other party has a duty to mitigate damages. The performing party cannot recover for performance done after the other party has breached (requested work to stop). Clark v. Marsiglia (1845) (P continued restoration of D’s paintings after D breached)

ii. Reasonable mitigation: The duty to mitigate must reasonable, not vague and not conditional. Schiavi Mobile Homes, Inc. v. Gironda (1983) (D’s father’s offer to buy was rejected by P, P not required to accept b/c offer was conditional and vague)

iii. Employment Contracts: General rule – measure of recovery by wrongfully discharged employee is amount of salary agreed upon for set period of service, less amount which the employer affirmatively proves employee has earned or with reasonable effort might have earned from other employment. Parker v. Twentieth Century-Fox Film Corp. (1970) (Court agrees w/ P that D’s other film not equivalent, not required to take for mitigation)

iv. Qualifications:

1. Comparable, substantially similar: The employer must show that the other employment was comparable, or substantially similar. Parker

2. Breaching party cannot receive profit from the non-breacher’s subsequent K: A party injured by breach of a personal services contract prior to contract completion must deduct whatever value the party can receive for his/her services during the unexpired term of K. Olds v. Mapes – Reeves Construction Co.

f. New Business Rule (NBR)

i. Established Business: Loss of profit is a definite element of damages in an action for breach of K or in an action for harming an established business which has existed for a sufficient length of time to afford a basis of estimation with a degree of certainty as to probable loss of profits. Evergreen Amusement Corp v. Milstead (1955) (P still planning)

1. Defense: New Business Rule: Loss of profits from a business which has not gone into operation may not be recovered because they are speculative in nature & incapable of being ascertained with requisite degree of certainty. Evergreen

a. Note: NBR is in decline b/c some courts find it unfair to deny recovery of lost profits where the fact that P owns a new business prevents him from establishing amount of lost profits due to D’s actions; seems to encourage parties contracting with such new business to breach, may only require P to prove a reasonably certain fact-based computation of probable loss.

ii. Rental Value: Damages are recoverable for profits prevented by breach of K only to the extent that the evidence affords a sufficient basis for estimating their amount in money with reasonable certainty, and that where the evidence does not afford a sufficient basis, damages may be measured by the rental value of the property. Restatement of Contracts §331

iii. Modern view – jury decides amount of profits: If mind of the court is certain that profits would have been made if there had been no breach by D, there will be a greater degree of liberality in allowing the jury to bring in a verdict for P, even though the amount of profits prevented is scarcely subject to proof at all. Lakota Girl Scout Council, Inc. v. Havey Fund-Raising Management, Inc. (1975)

1. Test from Lakota Girl Scout Council, Inc.

a. Proof that some loss occurred

b. Loss flows directly and is foreseeable

c. Proof of rationale basis for calculating profits

|Evergreen – New Business beginning operation |Lakota – New Fundraising Campaign |

|Unrelated Expert testifies to loss |Expert/D confirms loss |

|No lost profits, general damages for lost rental value |No lost profits but restitution and reimbursement expenses incurred |

|Late contractor (very often) |Mismanaged campaign (not often) |

|Business |Girl Scouts, non-profit group |

g. Efficient Breach: occurs when gain to breaching party exceeds loss to the party suffering the breach, allowing movement of resources to their more optimal use ( encouraged by courts

h. Mental distress: Where K breached is a personal agreement involving matters of mental concern and solitude, damages for emotional suffering are recoverable. (Rule of Stewart) Damages for mental distress are allowed where the injury suffered is to the person.

i. Among other damages P could recover, one aspect was for pain and suffering and mental distress to the extent that these exceeded what would have been involved in successful performance by D (i.e., at least the pain and suffering and mental distress involved in the third operation, attempted solely for restorative purposes). The court declines to determine whether the pain and suffering would have been involved even in a successful operation may be recovered under the reliance theory (though such recovery is arguably required, since the suffering has been “wasted.”) Sullivan v. O’Connor (failed nose job)

ii. Defenses to mental distress:

1. Commercial contract: If action is for breach of a commercial contract, damages for mental distress are not recoverable. Chrum v. Charles Heating and Cooling, Inc. (improperly installed water heater causes fire, family lose home in winter)

a. Exceptions:

i. Where P alleges tortious conduct, independent of any breach of commercial K, P can recover mental damages.

2. Intangible Claims: No recovery for damages for mental distress in breach of K cases involving intangible claims such as failure to pay insurance claims and breach of employment contracts.

3. Property loss: Where property loss is involved, the courts have generally not allowed recovery for mental distress in breach of contract actions. Chrum

i. Reliance Damages: When D breaches, P can recover K price (loss of value) & reliance loss. Nurse v. Barns (1664) (Court awarded special damages in addition to expectancy damages)

i. Expenditures incurred before K is made:

1. Two views:

a. Recoverable if likely to have waste: P can recover expenditures incurred before K made official, provided such expenditures were reasonably foreseen as required for completion of K terms. Anglia Television LTD v. Reed. (1971) (P hired staff in preparation of working on project w/ D)

i. Limit: Allowing recovery for foreseeable expenses before the K depends on jurisdiction, time and type of business. Look at Chicago Coliseum Club below.

b. Not recoverable: Items recoverable are such items of expense as were incurred btw date of signing agreement and breach of agreement by D and such as were incurred as a necessary expense in furtherance of the performance. Chicago Coliseum Club v. Dempsey. 1932) (boxing match)

ii. Essential Reliance (Cost of Performance; but not total CoP):

1. Certain acts in reliance are the “price” of the K’s benefits: Performance of agreed exchange, preparations to perform, losses involved in entering into K, i.e. opportunity costs of foregoing other profitable Ks

2. Argue K price serves a ceiling on such costs

3. Argue otherwise would shift burden of loss to D

a. Unknown profits: Normally a Promisee’s damages for breach of K are the value of the promised performance, less his outlay, which includes, not only what he must pay to Promisor but any expenses necessary to prepare for performance. When profits are not known, burden shifts to Promisor to prove that Promisee would not have profited from its business venture. The Promisee may recover his outlay in preparation for the performance, subject to the privilege of the promisor to reduce it by as much as he can show that the Promisee would have lost, if the contract had been performed. L. Albert & Son v. Armstrong Rubber Co.

i. D = (net earnings of refiners + refiner scrap value) – [(cost of refiners) + (preparation for performance)]

4. Limit: essential reliance cannot be greater than expectancy

iii. Incidental Reliance: (Consequential Damages) (Nurse v. Barns)

1. Reliance (laying in stock of goods) followed naturally and foreseeably from K

2. Distinguish from “price” of performance, not preparation to perform

3. Such damages not limited by K price, but other doctrines such as foreseeability + mitigation apply

a. Incidental reliance that are too remote (such as a wedding presents, wines, other clothes) are not recoverable when seller breached in delivering two wedding gowns ($10) by the specified time. Coppola v. Kraushaar

4. Any limits to recovery beyond the K price for incidental reliance? Limit incidental reliance damages with reference to profit or loss reasonably anticipated from K; Incidental Reliance can be greater than expectancy

iv. Limits:

1. Speculative profits / new business: When a breach occurs, items recoverable are such items of expense as were incurred between the date of signing the agreement and the breach of the agreement by the D and such as were incurred as a necessary expense in furtherance of the performance. Chicago Coliseum Club Fixed costs: the same whether or not the firm does anything. Ex: the fee that a state charges for a corporate charter.

a. Exception: If business can show it had forgone other profitable business, business can recover overhead costs for paying engineers who were already employed and spent a certain amount of time on the joint venture project the other party breached. Autotrol Corp. v. Continental Water Systems Corp. (1990) (P & D joint venture design, both breach)

i. Variable Costs: costs that fluctuate because of expectedbusiness activity

j. Liquidated Damages: An agreement, made in advance of breach, fixing the damages therefore, is not enforceable as a K and does not affect damages recoverable for breach, unless (a) amount so fixed is a reasonable forecast of just compensation for harm that is caused by breach, and (b) harm that is caused by breach is one that is incapable or very difficult of accurate estimation. Restatement, Contracts §339

i. Rationale: Such a provision has its basis in principle of just compensation for loss

ii. Elements: A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probably loss and the amount of actual loss is incapable or difficult of precise estimation. Truck Rent-a-Center, Inc. v. Puritan Farms 2nd, Inc.(1977) (P sold trucks to D, D later wants to give back and claims damages equivalent to cost of new trucks)

1. At the time of contracting (not at the time of breach)

2. Reasonable proportion

a. Some courts will find that when the actual loss is incapable or difficult of precise estimation and the liquidated damages are not reasonably proportionate to the damages incurred, the liquidated damage clause is still enforceable. Better Food Markets v. American Dist. Telegraph Co.(1953)

b. Determining the validity of reasonable proportion: Better Food Markets (same as Rinaldi and Sons case, not insurers)

i. Court should:

1. Place itself in position of parties at the time K was made

2. Consider nature of the breaches that might occur, and

3. Any consequences that were reasonably foreseeable

c. Distinguished from limitation of damages: A limitation of damages must be distinguished from a liquidated damages clause. Rinaldi and Sons, Inc. v. Wells Fargo Alarm Service (Ps sue for lost money when contract explicitly states Ds are not insuring the Ps, only providing a service)

3. Actual loss is incapable or difficult of precise estimation.

iii. Tort claims: A liquidation clause cannot be avoided by a tort claim if the duty owed to the P is fixed under the contract. Better Food Markets

iv. UCC §2-718 (1): Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

1. Revised UCC §2-718(a); Discussion Draft, April 2000: Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach and, in a consumer contract, in addition the difficulties of proof of loss and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. (deleted last sentence)

v. Suggestions for drafting liquidated damages clause: Dunbar, Drafting the Liquidated Damage Clause – When And How

1. Amount falls within the upper and lower limits of potential actual damages foreseeable at the time of contract.

2. Recitals to show that the parties actually, seriously negotiated on the question of the amount of measure of the liquidated damages.

3. Particular performance Provide suitable machinery for reasonable extensions to adjust for delays which may result from actions or derelictions of the other party or of third parties.

4. Vary the amount of damages with the extent of the breach, such as duration of the delay or period of default.

5. Incorporate a suitable recital indicating that it was the intention of the parties to provide for liquidated damages; at least, characterize by using the words “liquidated damages.” Before some courts, it may help.

6. Recite the facts which caused the parties to incorporate the provision in the contract, such as that, for stated reasons, the amount of damages upon the breach will be very difficult to ascertain with precision.

vi. Limitations:

1. Penalty:

a. When a liquidated damages clause does not have a reasonable forecast of just compensation and where harm is not difficult to estimate (such as market price), liquidated damages clause is a penalty, hence, unenforceable. H.J. McGrath Co. v. Wisner (1947) (tomato contract)

2. No actual damage:

a. Some courts allow liquidated damages to be recovered when there are no actual damages because contractual parties took a calculated risk and are bound by reasonable contractual provisions pertaining to liquidated damages. Furthermore, if damages exceed agreed upon amount for liquidated damages, then the party cannot recover more than the liquidated damage amount.

b. Not all courts award liquidated damages in absence of actual damages. It may be that actual damage is the qualifier for the recovery of liquidated damages.

3. Against public policy

4. Disproportional

5. Unconscionability

k. Limits and Qualifications on Lost Expectancy Recovery:

i. Punitive damages: Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable. Restatement (Second) of Contracts §355 (1979)

ii. Medical context: Doctors seldom in good faith promise specific results because of the variations in the physical and psychological conditions of their patients. Sullivan

iii. Loss of reputation or goodwill

1. Goodwill: the reputation that businesses have built over the course of time that is reflected by the return of customers to purchase goods and the attendant profits that accompanies such sales

2. Some courts will deny this recovery.

3. For courts that allow this type of recovery, the party claiming damages for loss of goodwill must provide the trier of fact with a reasonable basis from which to calculate damages.

iv. Lost expectancy to attorneys

1. Some courts allow wrongfully discharged lawyers only the reasonable value of their services up to the date of discharge.

v. Attorneys’ fees and interest: General rule is that a victorious party cannot recover attorneys’ fees from the losing party.

1. Exceptions:

a. a specific contract clause providing for recovery of attorneys’ fees to the extent the fees are reasonable.

b. Reliance damages if the P wasted the fees due to the D’s breach.

c. Some state legislatures authorize award of attorneys’ fees to prevailing party.

d. Federal statutes that induce private enforcement of public policies

Damages

|Common Law |Sale of Goods (Seller) |Sale of Goods (Buyer) |

|D = LOV + OL – [CA + LA] |D = [(CP – MP) + (ID)] – (ES) |D = (CP – MP) + (ID + CD) – ES |

|LOV = Loss of Value |CP = Contract Price |CP = Contract Price |

|OL = Other Loss |MP = Market Price |MP = Market Price |

|CA = Cost Avoided |ID = Incidental Damages |ID = Incidental Damages |

|LA = Loss Avoided |ES = Expenses Saved |CD = Consequential Damages |

| | |ES = Expenses Saved |

2. Remedies for Detrimental Reliance

a. Basis is Promissory Estoppel – promise on which Promisee reasonably relies to his detriment

i. See PE section for Restatement

1. Restatement (2nd) recognizes the possibility of partial enforcement in last sentence

b. Preparation costs based on reliance:

ii. A breaching promisor is liable for money which Promisee expended in prepping to do business under promised dealer franchise. Goodman v. Dicker (1948) (radio franchise)

c. Profits based on reliance:

iii. Foregone opportunity to make profits: P can recover for profits when it forgone the opportunity to make the profits based on reliance of a promise to perform by D. D&G Stout, Inc. v. Bacardi Imports, Inc. (1991) (P forgoes selling on D’s promise of business)

iv. Foregone opportunity to invest elsewhere: P can recover anticipated profits when it foregone the opportunity to make the investment elsewhere. Walters v. Marathon Oil Co. (1981) (P had choice to contract w/ D or other gasoline suppliers, D obliged to deliver)

1. Rationale – Equity: Equity court possesses some discretionary power to award damages in order to do complete justice. Furthermore, since it is the historic purpose of equity to secure complete justice, courts are able to adjust remedies so as to grant necessary relief. District court sitting in equity may even devise a remedy which extends or exceeds terms of a prior agreement between the parties, if it is necessary to make the injured party whole.

v. Exception:

1. Profits based on expectancy are not recoverable under promissory estoppel theory. Goodman v. Dicker. (s.a.)

d. Illusory contract for at-will employment: A court can determine that the appropriate theory is promissory estoppel for an at-will employment agreement, which is an illusory contract because of bilateral powers of termination. Grouse v. Group Health Plan. (1981) (P had oral agreement of job offer w/ D company, no references so offer rescinded, P entitled to recover reliance)

vi. Since prospective employment might have been terminated at any time, measure of damages is not so much that P would have earned from D as what he lost in quitting the job he held and in declining at least one other offer of employment elsewhere. Grouse.

Damages Diagrammed

(LoV + OL) – (CA + LA) = Damages

( (

(ER + P) (CD + ID)

( (

CoP IR

(

Reliance Interest + Restitution Interest

ER = CoP = Reliance Interest + Restitution Interest

ER ≤ KP (Contract Price)

CD = IR = Loss for dependent venture

IR ≠ CoP (can never be part of the cost of performance for the primary contract, rather it is damages suffered from loss on dependent venture)

3. Restitution

a. Money Damages (quantum meruit = market value of services)

i. Restatement 2nd § 371: Measurement of Restitution Interest.

1. If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured by either

(a) the reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position, or

(b) the extent to which the other party’s property has been increased in value or his other interests advanced.

ii. Where non-breaching P conferred a benefit and elects a restitutionary recovery:

1. Part performance: The Promisee upon breach has the option to forego any suit on the contract and claim only the reasonable value of his performance. United States for use of Susi Contracting Co. v. Zara Contracting Co. (1944) (P was subcontracted by D to do job, more work than expected K rescinded, P sued D for value of work done, equipment supplied to D, are awarded large amount which D disputes)

a. Since it is D who is in default and P’s performance is part of the very performance for which D bargained, it is to be valued, not by extent to which D’s total wealth has been increased, but by amount for which such services and materials as constituted part performance could have been purchased from one in P’s position at time rendered. Restatement Contracts §347, comment c.

b. Exception: Full performance: The remedy of restitution in money is not available to one who has fully performed his part of a contract, if only part of the agreed exchange for such performance that has not been rendered by D is a sum of money constituting a liquidated debt. Oliver v. Campbell (1954) (P = lawyer who charged D flat $850, trial 29 days, still only allowed flat fee)

2. Rental value: A non-breaching party can recover the rental value when the breaching party uses its equipment, w/o consent of non-breaching party, to continue performance after breach. Susi Contracting Co.

iii. Where NBP conferred a benefit but had a negative expectancy (a “losing” contract)

1. Injured party may recover damages through rest. > expect. Rest. §373. Comment d.

a. Acquiesced beyond specified time: A party, which has acquiesced to other party’s further performance after agreed upon time period, is the breaching party of the K if it has asked other party to stop work. Non-breaching party will recover damages in amount of benefit received by breaching party. City of Philadelphia v. Tripple (1911) (D hired P to do work, but became unhappy w/ P’s slow progress and requested stop, P sued for payment of work done)

i. Indebitatus assumpsit: Analogous to quantum meruit, however is claim for specific value, whereas in quantum meruit, claim is for reasonable value. City of Philadelphia.

b. Good faith. If NBP expended money in good faith and in course of attempted performance, then this is sufficient to give non-breaching party an equitable claim for reimbursement. City of Philadelphia (compare with Kelley v. Hance)

c. Note: Courts and commentators are divided over question of whether restitution should be limited by contract as the ceiling on restitution. Although in this case, P performed 90% of the work. Johnson v. Bovee (1978) (opposite holding from Philly – P only allowed recovery based on KP, Court: unfair to allow P recovery = full cost of services when, if house completed, would be limited to KP + agreed upon extras)

d. Explanations for restitution damages > contract price

i. Allocation of the market and other relevant risks in a business transaction: Beaching parties’ own allocation of market or other risks should be upset because the contract excites expectation and causes reliance, for both of which the law should justly give protection.

ii. Punitive remedy: Some commentators proposed that court’s allowance of recovery under restitution that is greater than expectancy serves as punitive damages because it strips D of benefits secured by K he has failed to perform (poetic justice).

iv. Where NBP conferred a benefit but cannot prove lost expectancy

1. Prepaid royalty: When a non-breaching party has had an exclusive right to a product for a lesser amount of time as agreed upon in the contract, the non-breaching party is not entitled to the entire prepaid royalty it paid to the breaching party. The amount recoverable is the value that the non-breaching party enjoyed of exclusive rights to a product until the breach. Bausch & Lomb, Inc. v. Bressler (1992)

a. Calculation in the absence of readily available market price: Value that parties ascribed to a benefit in K may be best value measure available to court. (K price is important evidence of value of performance to D). Bausch & Lomb

2. Partial performance in a service contract: The non-breaching party is entitled to the difference of the contract price and the reasonable value of services provided by the breaching party. Osteen v. Johnson (1970) (public promotion of country singer)

v. Where P has materially broken contract after conferring a benefit

1. Day-to-day performance: If Promisee breached K w/o just cause, Promisee can recover quantum meruit for market value of service performed if service performed is one that is looked at as a day-to-day performance (such as farming). Britton v. Turner

2. Buyer and seller: If the buyer has materially broken the contract and the seller was able to mitigate damages by selling to another buyer at a lower price, the P buyer can recover partial costs paid for the item subtracted by the difference of the contract price and the subsequent price the item sold for. De Leon v. Aldrete.

b. Specific Performance

vi. Application

1. K relating to land – Vendee entitled to s.p absent a defense. Kitchen v. Herring (1851)

2. When there are no other adequate remedies at law

vii. Defense: Remedy at law adequate to defeat grant of specific performance must be as certain, prompt, complete & efficient to attain same ends of justice as decree of specific performance

viii. Limitations

1. Unfairness – based on sharp practice, unfair advantage taking, non-disclosure, post-contractual conscionability, inadequacy of consideration, mistake, misrepresentation, duress, undue influence

2. Lack of mutuality of performance – court will not grant specific performance to P unless D can be reasonably assured of receiving return performance in his K

3. Indefiniteness of agreement – will not enforce specific performance if the court cannot draft with precision a decree ordering performance of the contract

4. Impracticability of performance or difficulty in enforcement or supervision

5. Contract to provide personal services

a. In employer-employee context, personal services limitation generally operates to preclude granting specific performance to either party

6. Property

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