Ilrg law School Course Outlines Archive

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Internet Legal Resource Guide

ILRG Law School Course Outlines Archive

LawRunner: A Legal Research Tool

Author: Anonymous

School: University of Texas School of Law

Course: Contracts

Year: Fall 1995 and (most of) Spring 1996

Professor: Robert Hamilton

Book: Contracts, 2nd Edition, by Hamilton, Rau, & Weintraub


Professor Bob Hamilton

Book Used: Hamilton, Weintraub & Rau

Coverage: Fall 1995 & Most of Spring 1996

Prescott M. Caballero

Chapter I: Enforcement of Promises

Monetary Recoveries

I. Expectation Damages

A. General Measure: Injured party will be awarded his expectation interest, the benefit of his bargain.

1. Court attempts to put plaintiff in as good a position as if contract had been performed by defendant.

  1. Most often this may be expressed by the difference between the Kp and the costs saved by plaintiff.

  2. Or the profits made if the contract is performed + the costs incurred before the defendant's breach.

  3. Illustration: O contracts P to build house for $100k. P figures his costs to be 80k. O Br/k after P spent 50k. P damages = Kp (100k)-Costs saved(30k)=70k; or = profits(20k) + costs incurred(50k)=70k.

  4. Hawkins v. McGee-Damages = Difference between a good hand and the hand resulting from operation.

2. Efficient Breach: Breach is deterred only if the gain to promissor does not exceed the loss to promissee.

3. Sometimes, the court will award the diminution in value from a Br/K, rather than the cost to complete performance.

a) Peevyhouse v Garland: Cost to do repair work=29k. Without work 's farm is worth $300 less.

If cost to complete calculation were used would get 29k. Held it would constitute economic waste to award the cost of completion. Where benefit to is clearly disproportionate to cost to then diminution in value should be awarded. The cleanup was incidental to the main purpose of K, which was fulfilled. (Note the breached performance must also be incidental to the main purpose of the K.)

b) This theory of economic waste often comes into play in construction contracts where the defect is minor.

Jacob & Youngs v Kent: Constr. K called for Reading Pipe, not used architect refused payment. Builder sued. J/, not a material breach. Thus, builder entitled to damages offset by any damages to architect.

c) Some courts will be influenced by whether the breach was willful, as well as intentional. This may lead courts to award cost of completion rather than diminution in value. Groves v John Wunder Co. [Hamilton says that the willfulness of breach does not usually enter into damage calc. (9/8/93)]

4. Fuller and Purdue said that this measure is most useful when promises are made in a business/commercial context. Its less useful in medical cases and cases in a non-commercial field.(see Sullivan under reliance damages)

B. Limitations on Expectation Damages

1. Generally, if a can avoid a measure of damages by a reasonable effort, without undue risk, expense, or humiliation, he can't recover if he fails to make such an effort. Courts wish to treat a breaching party fairly.

2. Duty to Mitigate. If doesn't avoid his avoidable damages, then he simply loses ability to recover them.

a) Rockingham County v Luten Bridge: Luten was informed of breach & continued work. Kp(10k), costs at time of 's Br/K(1.9k), cost to finish(7k) Thus should get profit on job(1.1k) + cost to date(1.9k)=3k

- may not learn of 's repudiation and pile up damages.

b) This duty leads to tricky situations in cases of personal service Ks. Courts tend to be lenient to s and not enforce a duty to mitigate by accepting substantially different positions.

i) Hussey v. Holloway: Employer Br/K with . was to pay her $18/wk. Court held that would not have to take a job of substantially different character to mitigate damages.

ii)Hamilton's hypos: could have collected 18/wk from and still worked cocktail waitress job, if 2nd job was during a time she would not have worked for . Essentially Hussey sold her asset(9-5 as trimmer) to Holloway. Thus, if she capitalized on the asset she sold to , then her damages should be offset.

-If Steinbrenner fires manager of Yankees, does manager have to take job with Padres to offset. No, moving to a different city would not be a job of the same general character.

iii) Parker v. Twentieth Century-Fox Film Corp- (Shirley McClaine) was offered lead in a huge musical. Br/K, offered role in a Western for same salary. Held: refusal of western was not a failure to use reasonable efforts to mitigate 's damages. J/ for full Kp of musical.

iv) Olds v Mapes-Reeves: Client hires Contr. who hires subcontractor to do marble work for 3k. Contr. Br/k with subcontractor and was liable for expectancy. Subcont then did work for client-profit = $335.23.

Is this mitigation of contractor's damages. Held No. If subcont could do 'both' jobs then he is entitled to his expectancy, and may keep his profit on Ks occurring at the same time.

-Rule for these situations: Pertinent facts are whether there is a plentiful supply of labor available to then no mitigation. If you do all work yourself you cant expand to cover multiple contracts, so you are more like in Hussey.

3. Lost-Volume seller exception: In cases where a buyer breaches, & seller resells for same price, the mitigation formula can be modified to allow seller to get profit from breached K, if seller can establish that he is a lost volume seller.

a) R.E. Davis v Diasonics: Buyer paid 300k down payment on machine, then repudiates. Buyer entitled to 300k less $500[2-718(2)(b)]. Seller resold for same Kp. Under 2-706 Seller would get no damages, no offset. Court Held- no hierarchy between 2-706 & 2-708. Thus, if seller can establish that it could have profitably produced the breached unit, then it would be entitled to its lost profit under 2-708(2), and this award would mitigate buyer's recovery.

b)Nobs v Koppers: Facts- bought 1000 tons at 445/ton=445k total cost. K to sell to for 540k. Profit = 95k Br/K, never procures cumene so no action for price(2-709)or resale(2-706) Court awarded lost profits under 2-708(2) Nobs wanted 2-708(1) to apply since market price had fallen since Br/k. Court held 2-708(2) applies where 2-708(1) does not put seller in as good a position. They cite 1-106 to say that cannot be put in a better position than if K had been performed. Also, seller not entitled to recover consequential damages.

-Hamilton has a problem with not awarding the 75k lost volume discount in this case. For cases like this, the rewrite of UCC 2-710 will allow seller to collect consequential damages from the buyer.

4. Other UCC obligations to mitigate damages:

a) Cover: Dura-Wood v Century Forest Ind: CF Br/K to sell wood ties to DW. DW middleman had K with Smith. DW covered under 2-712. 2-712 entitles buyer to Cost of cover-Kp plus Conseq. & Inc. damages under 2-715. Here DW covered by producing ties internally. Court said it was OK to do this, but here DW could have minimized its total costs by covering ties on open market. Thus DW gets no potential profits from using its own industrial facilities to effect cover. No consequential damages.

-Hamilton's reasons for not allowing internally produced cover. might be better off if cover is affected through a third party. would be able to pile up damages by including all sorts of internal costs in cover.

b) Problems of Hazy wording in UCC-Question: if you cover, can you still collect under 2-713(Kp-Market Price)? White and Summers say buyer should be limited to 2-713 if he does cover, since you don't want to put buyer in a better position than if K was performed.

i) Interior elevator v Limmeroth: Buyer partially covered after sold 5138 bushels short. needed 4337 to fulfill its own K. sought Market price - Kp(2-713) * 5138. Held only partially covered, & thus, may sue under to 2-713 for damages. (see 2-713 note 5)

c)Reason Companies should be careful of what they warrant their products to do

i) Chatlos v. Natl. Cash Register: bought comp. from NCR for 46,020. Tr Judge found value accepted machine = 6k. found value of machine as warranted $207,826. J- $201,826. Applying 2-714(2) Breach with regard to accepted goods. Seller could have limited its liability using 2-719.

d) Overstreet v Norten Labs. supplied with vaccine to prevent equine disease which causes foals to abort. Tr ct found had given an implied & express warrant (2-313 & 2-314) that vaccine would prevent disease. J-P on value of lost foals. Appeal, must establish causal link between his reliance on drug and loss of foals. Link would allow collection of damages under 2-715. Majority probably will only allow nominal dams. Reversed with directions to establish question of proximate cause. Hamilton says if had a K to sell foals it could get lost profits of K under 2-715(2)(a)

i) Notes on p.50 problem:

e) Anticipatory Breach problems, & duty to mitigate.

i) Cargill v Stafford- repudiate K 8/24. Final date of performance 9/30. urged performance, repeated repudiation 9/6. Damages determined in 2-713(1): at time buyer learned of breach.

problem lies in 2-610(a) aggrieved party may await performance for a commercially reasonable time. After this buyer would have to cover to mitigate & fix 's damages (unless buyer had a valid reason for not covering.)

5. Foreseeability: Generally, s will only be liable for those damages which are reasonably foreseeable.

a) Rules derived from Hadley v. Baxendale: Famous British case which is universally accepted in the US.

i) sent a broken mill shaft via a common carrier to get fixed. Shaft was late being delivered, 's mill was shut down for days. sued to recover lost profits from mill as consequential damages. Court applied the following Rule for damages. gets only those damages fairly and reasonably considered to be either:

a) "Arising naturally, i.e., according to the usual course of things, or"

b) "arising from the special circumstances under which K was made, if these circumstances were communicated by the plaintiff to the defendant."

ii) In Hadley, court held that the 's lost profits fell under second branch(which didn't know about) and were thus unrecoverable. Only damages awarded was the cost of the shipping service.

iii) In U.S., first rule considers direct or general damages. Second rule covers special or consequential damages. Hamilton asked whether Hadley was contrary to Hawkins v McGee rule (expectancy)? Answer, partially. Its more of a limitation on the rule. It allows us to exclude grossly disproportionate damages, like in the for want of a nail story. Hamilton, this should be a question of Law for the judge. Judge should have told jury in Hadley that lost profits were not to be considered.

a) Hypos for Hadley application: Cab driver guarantees to get banker to a flight after banker tells him that he'll lose a $10m deal if he misses flight. Lost deal recoverable? Probably yes. Cabbie should have said I can't guarantee it.

b) You get a job in San Antonio, you buy used car with 60-day warranty. it breaks down on way to San Antonio, you lose job. Can you sue car dealer for lost job. No these aren't within contemplation of the parties when K was made.

iv) A liberal version of the Hadley rule is embodied in damage provisions of UCC.

2-706, 2-708, 2-712, 2-713 equals first branch, 2-715(2)consequential damages = second branch.

b) Tacit Agreement Test: Morrow v. First National Bank: Bank did not have safety deposit boxes ready for . 's house robbed of coins, which could have been safe at bank. Held for . No liability for consequential damages, unless had knowledge of 's special requirements, and tacitly agreed to assume responsibility.

This test is rejected in UCC 2-715 comment 2 and by Restatement § 351. Only applies in Arkansas.

c) Application of Hadley rules: Telegraph cases (Kerr S.S. Co. v. Radio Corp. of America)- Shipper lost profits on cargo cause of a screw up in telegram. RCA not liable under second rule of Hadley.

d) Restatement § 351 accepts Hadley rule, but feels its a little too broad. Thus, they added the escape clause 3 to give judges leeway in limiting liability for damages that are too disproportionate.

6. Limitation of expectancy to those damages whose amount can be proven with reasonable Certainty.

a) This requirement mainly comes up with regards to claims for lost profits. Ferrel v. Elrod: Br/K to lease premises to for a new business. Damages awarded included lost profits for 9 month delay. contended that these damages could not be determined with reasonable certainty, court disagreed.

b) The UCC has liberal certainty requirements, § 1-106 rejects notion that damages should be calculated with mathematical precision.

7. Punitive Damages as an Extension of Hadley principles: In some cases (very rarely), where the breach of contract also constitutes a tort. This is most often seen in cases where an insurance company incorrectly repudiates a claim. Ainsworth v. Combined Insurance Co. was awarded $6m punitive damages on 's denial of a $9k claim. Usually these tort damages are issued when can be said to be acting in bad faith. Courts will award these damages to punish companies, and to deter them from operating like this in the future.

a) Breach of a good faith covenant will sometimes bring down punitive dams. on . denies contract even exists. Seamans v Standard Oil.

b) Other Ks where punitive damages awarded: Western Union screws up a funeral notice, undertaker screws up (water seeped into casket), wedding dress late, wrongly ejecting customers from trains or hotels. These are all cases where mental anguish is viewed as appropriate for making exception to rule against these damages. See Restatement § 353.

c) Courts are wary of awarding this since they don't want to deter efficient breaches, make the business community too cautious.

II. Reliance Damages

A. Generally when expectation damages are not suitable to compensate the reliance damages may be more appropriate. This measure attempts to put in the position he would have been had there been no K. Often these damages are awarded when the profits for an expectancy recovery would have failed due to certainty requirement. However, expectancy and reliance are not true alternatives, since in both cases is enforcing the contract.

B. The modern view is that a may recover for both essential & incidental reliance. Restatement § 349 comment a.

1. These concepts are a parallel to the two rules of Hadley. They were developed in the Fuller 7 Purdue article.

a) Essential reliance: Like first rule of Hadley, any expenditures necessary for to fulfill the K itself. Ex. Costs incurred on bride before breach in Luten.

b) Incidental reliance: 2nd Branch of Hadley: Expenditures made by (other Ks, advertising costs, etc) relying that the original K. Like Hadley would have to show that this reliance was reasonable and foreseeable.

2. Reliance where lost profits are too speculative

a) Security Stove & Mfg. Co. v. American Railway Express Co.: sent new stove to a convention in AC, and hired to ship it. did not get all parts there. Ct. awarded reliance expenditures including sum paid to , plus incidental costs(fare of president, rental of booth, hotel room, etc.), because profits from potential sales were too speculative. Under expectancy, would have recovered squat. Reliance allows alternative recovery.

b) Hamilton hypo: You lease a large apartment, and thus ordered a large sofa. Landlord Br/k, can you recover sofa down payment? Yes, if you state that you relied on K, and if L.L. subjectively contemplated that you would order large furniture in reliance on K.

c) Are reliance expenditures made before the K recoverable?

i) Anglia Television v. Reed: Expenditures made by before signed K were recoverable. Hamilton felt this decision was proper.

ii) Dempsey case: Cost of signing other figher before K with Dempsey not recoverable. Hamilton says this case was too stingy. First, he did not feel that the profits were too speculative. Once, was relegated to seeking reliance, Hamilton feels that should have recovered cost of signing other fighter.

3. Reliance awarded in suits on medical contracts. In Sullivan v. O'Connor: contracted to provide a good nose to in 2 operations. Even after 3rd, nose was worse than before. Court ruled restitution would be too meager (fee paid to ) & expectancy too excessive (Hawkins recovery) Thus, ct. awarded fee paid to , difference between present nose & nose before the operation, pain and suffering exceeding what they'd have normally been in this type of operation. Hamilton says in these contexts this is a better measure of damages than the Hawkins rule.

4. Freund v. Washington Square Press: had K with publisher to publish book within 60 days of manuscript delivery. Publisher Br/k after 60 days, returned manuscript. sought royalties, denied. No money for restitution, Hamilton says lawyers fucked up & should have sought reliance for cost of 's labor.

5. Incidental and Essential reliance can be had under UCC 2-715.

C. Limitations on Reliance Damages

1. Reliance damages may not exceed the original K price. Courts don't want to award more than expectancy damages. Most courts will however put the burden of proof in this case on .

2. Also reliance damages are measured usually by the costs to the , not value to .

III. Restitution

A. Generally, the restitution interest is the value to the of the 's performance. The general goal of restitution as it developed at common law was the prevention of unjust enrichment. These suits can be on the contract or suits in quasi-contract. In restitution recoveries, it does not matter how much the was injured by 's breach or how much it cost the to confer that benefit on .

B. Restitution as a remedy for BOK. Usually this is an option when one party is performing his obligation, and the other party commits a material breach. Then the may rescind the K and recover restitutionary damages. (note this is an alternative to expectancy, but the modern view is that restitution does not need to be based on rescission.

1. Bollenback v Continental Cas. Co.: had insurance policy from 1954 until 1963 when he made a claim. mistakenly said policy lapsed in 1959 for non-payment. Held 's mistake repudiated the K in 1959, and under restitution, entitled to all premiums paid since 1959.

2. Restatement 2d § 373(1)says injured party receives rest. for any benefit conferred on by way of performance or reliance. However, if has fully performed, and only owes money, the most courts don't allow restitution, limited to his expectancy.
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