Contracts Outline Spring Final 1. The Compensation Principle A. Introduction i.

The traditional goal of contract remedies- compensation of the promise for the loss resulting from breach. ii. The law of contract holds that a contract is formed when one party has an expectation, reliance or restitution interest arising from a promise and deserving of legal protection. iii. The law prefers to put a party injured by a breach into the position he/she would have been in had the contract been performed, insofar as money can do so. iv. Expectation damages- forward looking. Put the person in the position it would have been in had the contract gone through. (Need to liquidate damages). v. Reliance damages- backward looking- put client back in the status quo ante. Put them back as if they would have been had they not entered into the contract. vi. Restitution- disgorge benefit you received but didnt deserve- unjust enrichment. vii. A Breaching party is responsible for all consequential damages if they are reasonably foreseeable and not speculative. viii. Punitive damages are not allowed in contract actions. Why? Sometimes breach is good and not malicious. ix. Society is best off when all of its members are working at their highest and best use social interest. x. If you cant reasonably calculate the cost of changing your position, then you wont and society will be worse off. B. Compensation or Punishment? i. Breach- partys failure to do what he/she expressly and impliedly promised to do, without justification or excuse. ii. Punitive damages are not recoverable for a breach of contract unless the conduct constituting breach is also a tort for which punitive damages are recoverable (RST 355. iii. White v. Benkowski- Friendly neighbor squabble over well and septic tank. Court held in Wisconsin punitive damages are given on the basis of punishment to the injured party not because he has been injured, which injury has been compensated with compensatory damages, but to punish the wrongdoer for his malice and to deter others from like conduct. iv. Efficient Breach Hypothesis: a. A legal rule or act is efficient when it induces people to behave in ways that makes at least one person better off while nobody else is made worse off. b. One party breaches and is acting rationally, that party must consider itself better off by breaching. v. City of Rye- LDCs cannot be penalties, they must reflect a reasonable estimate of probable monetary harm or damages. vi. Exemplatory damages- Consumer Protection Statutes for bait and switch, misleading advertising. (Over and above economic harm, like treble damages and attorneys fees.) vii. Liquidated Damages Clausesa. They cant be punitive and cannot be in a shotgun clause.

b. Usefulness- they liquidate a loss that is of difficult measurement and in the contract when there is a breach, parties dont have to agree on compensation. c. The more difficult it is to liquidate a damage, the more lenient the court will be in allowing LDCs. d. To not be punitive, LDCs must be reasoned. There must be a reasonable argument behind the number. We use LDCs when it is fuzzy about what a damage would be. e. Ways to make a LDC reasonable: Look at the time value of money (interest that wouldve been earned as well as the lost cost of financing). f. You can also make an LDC seem reasonable. Like say you want the job done by a certain date. Say you will give bonuses for early finishing like a reward. viii. Specific Performance (equitable Remedy) a. Normally, you dont get specific performance (usually liquidated damages). b. Specific performance violates liberty because if a party fails to perform, they are in contempt of court, go to jail, and lose personal liberty. c. Basic Requirements of Specific Performance: i.) Inadequate Remedy at Law (like contracts for interest in land). ii.) Practical under the circumstances iii.) Must no violate public policy. d. You cant get specific performance to make someone fulfill an employment contract because that is an involuntary servitude. Instead, find a comparable employee and look at the difference between that and the contract price. e. To get injunctive relief, you need to show irreparable harm that cant be repaired by a mere award of money damages. C. Calculating Damages 1. Damages= GVK +LCD ES-VR 2. Incidental Damages- incidental to the breach 3. Consequential Damages- usually brought by a third party. 4. 2-715- Buyers Incidental and Consequential Damages a. Concepts: 1. Foreseeability (must be a loss from general or particular requirements and need of which the seller at the time of contracting had reason to know) and which could not reasonably be prevented by cover or otherwise. 2. Mitigationlosses couldnt reasonably be prevented by cover or otherwise. 3. Must be reasonable 5. Kinds of Breaches that Occur Under the UCCa. Seller Breaches i.) Failure to Deliver: Remedies a.) Cover b.) Noncover c.) Combo of the two ii.) Nonconforming Delivery: Remedies a.) Accept the deal without recourse b.) Reject the nonconforming tender and sue for breach (cover or noncover). c.) Accept the good and sue for breach (2-714) b. Buyer Breaches i.) Buyer accepts but doesnt pay- remedy is an action for the price.

Repudiation- buyer orders, calls one week later and cancels the order. Remedy- resale (resale price- contract price) or pretend resale (2-708). (difference of Contract price and Market price at the time of breach). c. To find a lost profits situation: i.) Have to show the court that your client wouldnt be correctly compensated under 2-706 or 2-708(1) ii.) Show that if your client is a dealer in goods, they have excess inventory (more inventory units than customers). If your client is a manufacturer, show that he has excess capacity to fill that order. d. Limitations on Damagesi.) Special or consequential damages compensate for losses peculiar to the nonbreaching party, in addition to any general damages to which it is entitled. ii.) Damages must be reasonably foreseeable and proven with reasonable certainty. D. Raptor Shoes Problem 1. What is included in the calculation of damages? 2. Cover Damages- $4,000; Employees Time: $75.00 3. Argument against Employees time: he would get that money anyways. Its a normal part of his job which would entail finding the cover anyways. 4. Incidental Damages- any cost incurred with cover. Wont get these because it is difficult to get hourly wages in a situation like this. Look at 2-715. Expenses or commissions in connection with effecting the cover. At the end of the month, he would have had this money anyways for effecting cover Might get more if he worked overtime. 5. Flo would respond that he was taken away from other job duties that are presumably profit making 6. Earl would respond that it was speculative. Displacing David from one duty to another. 7. Wouldnt get damage to reputation- it is very speculative, hard to come up with a number to reflect good will. Conjectural. 8. Emotional Distress- If you cant stand the fire, get out of the kitchen. 9. Attorneys feesi.) American rule- parties pay for their own attorneys fees unless they are provided for in the contract or by statute. (Attorneys fees clauses arent uncommon in contracts- yet they are a 2 edged sword, because if you lose, you have to pay the other parties attorneys fees.) In some states, statutes say that you get attorneys fees if the party acted in bad faith, while another allows recovery for attorneys fees for abusive litigation. ii.) British Rule- Default is loser pays. 10. Lost Profitsi.) Speculative? ii.) Forseeablity/Mitigation- Earl would say that she waited until she had a 2 day supply when she had a very fast selling item. This is Poor Inventory planning. Earl would also say that he didnt have reason to know at the time of contracting that you were low on inventory. iii.) 2-715- she could have avoided it by making the order earlier. (But for your poor inventory planning, you wouldnt experience damage.

ii.)

Breach of contract

Off the Contract

Expectation (Benefit of the Bargain

Reliance- available: 1. When measure of damages (expectation) are too Speculative. 2. When you have a losing bargain

Reliance/ Restitution

Quantum Meruit

2. The Autonomy Principle Again A. Identifying Express Contract terms i. Identify the express terms of the contract. These are those portions of the parties agreement which was stated and relates to a distinct element of performance or enforcement. a.) Oral contracts- identify what the parties communicated to each other by way of committing themselves to a future course of conduct towards each other. b.) Written Contracts- complicated by agreed terms being superseded as negotiations evolve into a final written contract. ii. Interpret the express terms. iii. Identify and interpret the implied terms of the contract. iv. Distinguish between certain kinds of terms thus identified- promises, conditions, and promissory conditions. v. RST 216(2)- possible that a contract isnt completely integrated if: a. The agreed to term is agreed to for separate consideration (a side agreement has consideration on both sides and isnt in the contract). b. Such a term as in the circumstances might naturally be omitted from the writing. vi. How Courts Approach Problems a. Courts look at the text first b. Then parol evidence regarding the text c. Then course of performance- how parties acted under THIS contract. d. Then course of dealing- how parties acted in prior contracts e. Then trade usage f. And Finally they look at circumstantial evidence. vii. shamal Problem- Insurance Co- the prohibition against going West of Cape Flattery is a barrier to entering the Pacific Ocean. (this is the ambiguity created, next step is to bring in parol evidence of the brochure and affidavit.) - P- you can go in the Pacific Ocean without going West of Cape Flattery. The point of parol evidence and the plain meaning rule is to give a person direction in what he can do. - Insurance Co- P knew of 2 meanings of west and we only knew of one. RST 201(2)(b).

P- I got my meaning from the plain meaning of the term in the contract. We should only rely on the contract. Even if it is ambiguous, then insurance company must have been aware of 2 meanings as well. P shouldnt have to say that he thought about the brochure, because he had a contract to rely upon. - Insurance Co- both sides could have been aware of both sides interpretation. 2 choices: (1)No contract because it dies due to indefiniteness. (2). Construe it against the drafter, which created the problem to begin with. Rule of Construction at any tine- good with tie when both sides were aware of the others interpretation as well as their own. viii. Bloor v. Falstaff Brewinga.) Express term- when we have an express term, use a strict interpretation. b.) When we have implied terms or conditions, the courts arent as strict and give the interpretations some slack. c.) Courts look at reasons for breaching contracts and try to determine if the breach was done in good faith (i.e. whether it was done to keep the company from going under, whether it was common practice) d.) A contract behavior that is disproportionately unfair to one party and is outside of what is expected is done in bad faith. 3. The Security Principle A. Introduction i. Both parties may have contractual interests that conflict in a case. The more deserving interest is a contract right The interest is strong enough to justify imposing a contract duty on the other party. ii. Expectation interest can be divided between an interest in present performance and an interest in future performance. B. Interests of the parties Implied by a Breach i. The security principle implies that a contract imposes an obligation on each party that the others expectation of receiving due performance will not be impaired Found in the UCC at 2-609(1). Also in RST 251 comment A. ii. A party has an expectation interest in performance as and when promised and also in a continuing sense of reliance and security that the promised performance will be forthcoming when due. iii. When a party has a condition precedent, a covenant is dependent upon the fulfillment of that condition precedent. iv. 3 Kinds of covenants: a.) Mutual and independent- either party may recover damages from the other for injury due to breach. No excuse for the defendant to allege breach by the Plaintiff. b.) Conditions and dependent- performance of one depends on the prior performance of another. Until the prior condition is performed, the other party isnt liable in action. c.) Mutual conditions to be performed at the same time- one that is ready, willing, and able to perform can maintain an action against the one who has neglected or refused to perform. v. Implied promise- where there is a contract to do an act on a future day, there is a relation constituted between the parties in the meantime by the contract, and that they impliedly promise that in the meantime neither will do anything to the prejudice of the other inconsistent with that relation.

The man who wrongfully renounces a contract into which he has deliberately entered cannot justly complain if he is immediately sued for a compensation in damages by the man whom he has injured. the injured party can sue immediately or wait until the act was to be done (It is easier to calculate damages that way). vii. All that is required to close the door to repentence (after there is anticipatory repudiation) is definite action indicating that the anticipating breach has been accepted as final, and this requisite can be supplied either by filling suit or a firm declaration that unless within a fixed time the breach is repudiated, it will be accepted. viii. The most appropriate time to measure a buyers damages where the seller has anticipatorily repudiated a contract and the buyer doesnt cover is, after the seller informs the buyer that it was cancelling. ix. 2-713- Damages = market price at the time when the buyer learned of the breach (contract price + incidental and consequential damages) x. learned of breach means (1) learned of repudiation; (2) learned of repudiation plus a commercially reasonable time; or (3) performance is due under the contract. xi. 2-610- (seller anticipatorily repudiates, the buyer doesnt cover)- the aggrieved party is authorized to await performance for a commercially reasonable amount of time before resorting to remedies of cover or damages. xii. 2-611- Gives the seller an opportunity to retract repudiation. xiii. While cover is the preferred remedy, the UCC clearly provides the option to seek damages UCC 2-712(c) comment 3 and 2-713 comment 1. xiv. A party who has in good faith entered upon the performance of his contract and nearly completed it, and then abandoned the further performance- although the other party had the full benefit of all that has been done, and has perhaps sustained no actual damage- is in fact subjected to a loss of all of which has been performed. xv. If, where a contract is made of such a character (as above), a party actually receives labor or materials (benefit/advantage) over and above the damage which has resulted from the breach of the contract by the other party, the labor actually done and the value received furnish a new consideration, and the law thereupon raises a promise to pay to the extent of the reasonable worth of such excess. C. Cancellation in Response to Breach i. A breach generally entitles its victim to compensatory damages ii. Cancellation brings the contract to an end, discharging all executor duties of both parties. iii. Material breach- the event triggering the power to cancel. iv. Any breach not considered material is partial or immaterial One party may cancel when the other doesnt substantially perform. v. Any case of material breach is a case of insubstantial performance. vi. Any case of substantial performance is a case of immaterial breach. vii. The law will be slow to impute the purpose, in the silence of the parties, where the significance of the default is grievously out of proportion to the oppression of the forfeiture. viii. The measure of allowance is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing (Jacobs and Youngs v. Kent- Reading Pipe case).

vi.

ix.

x. xi. xii. xiii.

xiv. xv.

xvi.

xvii.

The Rule that gives a remedy in cases of substantial performance with compensation for defects of trivial or inappreciable importance has been developed by the courts as an instrument of justice. Substantial performance as applied to construction of a house does not mean that every detail must be in strict compliance with the specifications and the plans. Something less than perfection is the test of substantial performance unless all details are made the essence of the contract. For substantial performance, the plaintiff should recover the contract price less the damages cause by the defendant by the incomplete performance. Diminished value rule- the difference between the value of the item as it stands with faulty and incomplete construction and the value of the house if it had been constructed in strict accordance with the plans and specifications. 275 RST of Contracts- lists factors to determine whether a breach is material The expectation interest of a party to a contract can be divided into 2 distinct interests that may be impaired by the others breach: a.) Interest in present performance- harmed when the one in breach fails to perform properly on time. b.) The interest protected by the cancellation remedy is the interest in future performance, which involves a partys security or confidence that the other party will perform duties not yet due as when agreed. c.) A breach of a contract may harm either the interest in present performance, the interest in future performance, or both. In a case where the subcontractor has asked for assistance in obtaining credit, in order to give rise to a renunciation amounting to a breach of the contract, there must be an absolute and positive statement of an inability to do so. If the part to be performed by one party consists of several and distinct items, and the price to be paid by the other is apportioned to each item to be performed, or is left to be implied by law, such a contract will generally be held to be severablebut if the consideration to be paid is single and entire, the contract must be held entire, although the subject of the contract may consist of several distinct and wholly independent items.