Contracts

Front 1

Breach--four issues

Back 1

Once it has been determined that a material breach exists, four separate issues must be considered:

1) The nature and extent of the plaintiff's compensable loss
2) If there is more than one means of remedying the loss, we must decide which of the available remedies most efficiently and comprehensively compensate for it.
3) We must take into account any policies or principles that may limit the defendant's liability for the loss.
4) Also, consideration as to whether or not plaintiff discharged duty to mitigate damages must be considered. See Parker v. Twentieth Century Fox.

Front 2

Parker v. Twentieth Century Fox--duty to mitigate

Back 2

No duty to resort to different or inferior employment to mitigate loss. Court held that Parker's alternative contract was different in kind and inferior. Consequently, she did not have a duty to mitigate with that contract.

Front 3

Lost Volume Seller--duty to mitigate

Back 3

If the person is a lost volume seller there is not a duty to mitigate.

Front 4

Neri v. Retail Marine Corporation--duty to mitigate

Back 4

The court claimed, "If the dealer has an inexhaustible supply, the resale to replace the breaching buyer costs the dealer a sale, because, had the breaching buyer performed the dealer would have made two sales instead of one." The court held that Retail Marine Corporation, which regularly sold the product type in question, were a lost volume seller.

Front 5

Jordan v. Worldcom--lost volume seller--two pronged test

Back 5

Two pronged test given in Jordan v. Worldcom called the "objective/subject" test. This two pronged test helps determine whether a person is a lost volume seller.

1) The seller must demonstrate that it had the "capacity" to be a lost volume seller by showing that it was possible to undertake additional business (objective)
2) The seller is required to show that it would have tried and would have been able to obtain additional business if the defendant had not breached (subjective)

Jordan claimed that only an objective measure was important. The court disagreed. It found that Jordan did not meet the subjective prong of the test and as such was not a lost volume seller.

Front 6

Expectation Interest (EI)

Back 6

The purpose of the expectation interest is to place the victim of the breach in the position that s/he would have been in had no breach occurred.

1) not to punish breaching party
2) Not to put injured party in a better position
3) The expectation interest is codified in the UCC in 1.305

Front 7

EI-additional qualifications

Back 7

EI is not determined purely by subjective criteria. Contracts are interpreted objectively and compensation for breach is determined on the basis of objective evidence of loss.

Calculation of damages does not have to be precise, only reasonable. Allows for liberal administration of remedies.

Front 8

EI & Specific Performance

Back 8

The surest way to assure that EI is met is specific performance. However, we do not want to fore parties to work together.

Front 9

EI & approximation

Back 9

The best a court can do in most cases, is try to determine, as closely as possible, what monetary reward will approximate the expectation interest.

Front 10

EI--economic and moral dimensions

Back 10

Contract law does not focus on noneconomic injuries (e.g. emotional distress) except in the most unusual cases.

Front 11

EI & efficient breach

Back 11

The economic justification for confining damages to financial loss is the concept of efficient breach.

1) a breach of contract is said to be efficient if the defendant's cost of performance would have exceeded the benefit that performance would bestow upon both parties.
2) If this is accurate it may be claimed that a rational contracting party with full information will choose to breach where circumstances make the breach efficient.
3) Criticisms: This model does not sufficiently consider noneconomic values such as reliability, fair dealing or faithfulness, nor does it fully account for consequences which cannot be measures in economic terms such as inconvenience, disappointment, or frustrations.

Front 12

EI's failures

Back 12

We systematically fail at protection the EI interest in full

1) P can't recover attorney fees
2) Does not compensate for psychological damage
3) Hadley, we will compensate only so far, even for real damages
4) Mitigation doctrine may make plaintiff loose all or part of her recovery if she refuses to accept a substitute that is not, in her eyes, equal to the promised performance
5) Specific performance is rarely available even when it is the P's preferred interest

Front 13

Calculation of EI

Back 13

Restatement (second) of Contracts, 347:

Damages=P's loss in value caused by D's nonperformance (this is determined by deducting the contractual value of what P received from what she was promised)

Plus, any other losses (this includes consequential and incidental damages)

Less, any cost or loss the P avoided by not having to perform

Front 14

Damages based on substitute transaction--UCC 2.712 and UCC 2.706

Back 14

The aggrieved party has the duty to cover:

UCC 2.712 expresses the buyer's damages, after breach and subsequent cover, as the difference between the cover (i.e. repurchase) price and the contract price.

UCC 2.706 expresses the seller's damages, following a breach by the buyer. It claims that a seller who reasonably resells the goods at a lower price following the buyer's breach is entitled to the difference between the contract price and the lower resale price.

Front 15

Damages based on market value of promised performance

Back 15

Under both common law and the UCC, if the aggrieved party did not cover, s/he is entitled to sue for loss based on a hypothetical substitute, valued at the market price (which would have to be established by testimony; typically of an expert)

UCC 2.713 buyer, (market price at the time that the buyer learned of the breach)
i. UCC 2.712--requiring buyers to cover "in good faith and without unreasonable delay." If buyers do not meet these criteria, they may get the difference between the contract price and the market price.
ii. UCC 2.708(1) seller, (market price at the time and place of tender)
UCC 2.706--requiring the seller to cover in "good faith and in a commercially reasonable manner." A seller who fails to meet these criteria may get the difference between the market price and the contract price.

Front 16

Loss of Income in a Contract for Services

Back 16

If, after breach, employee for services cannot find another job, and the breach results in the loss of the entire expectation, then the only way to compensate for the employee's disappointed expectation is to award damages equivalent to the full consideration due him or her under the contract

Front 17

Offsets for part payment and salvage

Back 17

Any payments that P received under contract, as well as any loss that s/he may be able to salvage, is treated in the same way as costs that s/he saved--these amounts must be offset against the recovery.

Front 18

Direct Damages

Back 18

Direct damages are those which can readily and easily be attributed to the breach and are designed to compensate for the very performance that has been promised.

Front 19

Consequential Damages

Back 19

(also titled consequent on the breach) are damages that result from the breach but are not readily or intimately tied to the breach.

Front 20

Consequential Damages--Hadley v. Baxendale

Back 20

The court in Hadley v. Baxendal held that Consequential damages must be foreseeable. In that case, mill owners sent a servant to deliver a broken crankshaft to defendant/carriers. P contracted for expedited shipping. Due to negligence there was delay. The mill lost profits and sued as a result. The court held that consequential damages (causally related to the breach) must be foreseeable, unless, knowledge of a special circumstance was explicitly communicated to the defending party and that party agreed to those circumstances.

Some believe that Hadley ought to be a default rule, namely "that you do not get consequential damages based on plans and projections that you kept secret from the other party."

Front 21

Incidental Damages

Back 21

ID are administrative costs of coping with the breach.

1) costs of making arrangement for substitute performance
2) costs of transport, storage, and negotiations.
* ID must be incurred reasonably

Front 22

UCC and "goods"

Back 22

"Goods" is defined as "moveable things" which are moveable at the time of their identification to the contract

Front 23

Seller's Remedies

Back 23

UCC 2.703="gateway" shows all potential remedies.

* Remedies are cumulative (you can use as many as it takes to make you whole)

UCC 2.706 and 2.708: Seller can resale (in good faith and in a commercially reasonable manner) and recover "the difference between the resale price and the contract price together with any incidental damages allowed. . . ."

UCC 2.708: Seller can recover damages for non-acceptance

UCC 2.709: Seller can recover the price:
Requirements
i. Buyer has accepted the goods, or
ii. Goods lost or damages, or
iii. Seller can't resell after reasonable effort. (see 709(1)(b)

Front 24

Buyer's Remedies

Back 24

1) 2.711=gateway
i. Restitution of down payment in 2.711 (disgorge, unjust enrichment)

2) Cover 2.712 expectation interest--plust incidental/consequential damages 2.715
i. Good faith
ii. Without unreasonable delay
iii. Can't cover?--> specific performance or market price damages

3) 2.713 market price to be determined according to the price of such good when the aggrieved party learned of the breach.
i. Calculation, difference between market price and contract price, plus any incidental/consequential damages, but less expenses saved in consequence of the seller's breach

4) 2.716 Specific Performance
i. May be required where the goods are unique or in other proper circumstances

Front 25

Specific Performance--Copylease v. Memorex toner

Back 25

a. Idea is that source of goods is unique, so replacement will be hard to find (replacement is markedly inferior)
b. Must make reasonable effort to cover but can't

Front 26

Reliance and Restitution as Alternatives to Expectation

Back 26

Reliance and Restitution have a more limited goal than EI.

1) Reliance aims to refund expenses wasted or equivalent losses by the plaintiff in reliance on the contract, thereby restoring P to status quo ante.
2) Restitution seeks to return to P the value of any benefit conferred on D under the breached contract. if focuses on unjust enrichment of D.

Front 27

Liquidated Damages (LD)

Back 27

A provision term in a contract is present under which the parties agree that in the event of a breach one of the the breacher will pay damages in a specific sum or in accordance with prescribed formula

Front 28

LD--additional qualifications

Back 28

1) The clause must be valid
2) Parties will usually agree upon LD for efficiency
3) P will avoid the problems of establishing foreseeability, mitigation, and certainty, and D has a predetermined liability so that she can better predict the cost of breach
4) Criticism: LD are nothing more than a forecast of probable loss. Exact losses can never be forecast

* Court may find LD clause to function as a penalty clause. If it is found to be a penalty clause, the court will not enforce it.
i. If LD satisfy the test of being a reasonable advance determination of probable harm, it is valid and enforceable.
ii. However, if it fails that test, the court will characterize it as a penalty and will refuse to enforce it.