BLAW Ch. 15 - Breach and Remedies

the terms of a contract must be sufficiently definite...

for a court to determine the amount of damages to award

example of compensatory damages (sale of goods) - bride contracts with seamstress for a gown costing 5,000 to be ready by june - seamstress' profit is 1,500 - seamstress delivers gown but bride runs away and cancels wedding - what are damages for breach of contract?

- 1,500...she only gets profit - because she still has the dress which has 5,000 worth of value (she can still sell it) - if she keeps gown, she will have a windfall - owed profit from labor...wouldn't have made the dress if bride didn't want her to

specific performance

- an equitable remedy in which a court orders the parties to perform as promised in the contract - this remedy normally is granted only when the legal remedy (monetary damages) is inadequate - contracts for sale of goods rarely qualify for specific performance - remedy is available in actions for breach of contract that involve the sale of land - remedy is not available in actions for breach of personal services contracts

reformation

- an equitable remedy where the court rewrites the contract to reflect the parties' true intentions - it is used when the parties have imperfectly expressed their agreement in writing - available where: 1. fraud or mutual mistake is present 2. written contract incorrectly states the parties' oral contract or 3. geographic or temporal terms of a valid covenant not to compete or restrictive covenant is reasonable

liquidated damages provisions are frequently used in what types of contracts - example

- construction, sale of goods, entertainers and professional athletes ex. 15.7 - a tv network settled its contract dispute with tonight show host conan o'brien for 33M - amount of settlement was somewhat less than 40M o'brien could have received under a liquidated damages clause in his contract

measurement of compensatory damages (sale of land) - specific performance 1. what is the remedy 2. what about incidental damages?

- contract for sale of unique home for $200,000 *seller breaches contract; home is still available.... 1. judge could order to go to closing (specific performance) - order from court to make seller give what was promised...*done only for unique items like land, irreplaceable, can't be replaced by another seller* 2. (costs related to breach) costs fair to get from seller from breach; include hotel costs b/c of no house, mortgage paperwork, attorney, etc.

measurement of compensatory damages (sale of land) - money damages 1. what is the remedy 2. what about incidental damages?

- contract for sale of unique home for 200,000. market price at time of breach is 250,000 - seller breaches contract; home has been sold to someone else 1. use money to give benefit of bargain of 50,000 -represents value change of house...could have been using this 2. (all costs related to breach) costs fair to get from seller from breach include hotel costs b/c of no house, mortgage paperwork, attorney, etc. (same as specific performance)

what are compensatory damages? 1. standard measurement 2. what happens if non-breaching party has avoided some losses? 3. if the non-breaching party has no losses, is s/he entitled to compensatory damages?

- damages paying the non-breaching party for the loss of the bargain - these damages compensate the injured party only for damages actually sustained and proved to have arisen directly from the loss of the bargain caused by the breach of contract - they simply replace what was lost because of the wrong or damage 1. difference between value of promised performance and value of actual performance (on day of CF we think value of promised performance is worth this much, but the actual value can be different now) 2. no compensation, but can get nominal; nominal is like symbolic $$$, it's the "principle of it" 3. no monetary damages

incidental damages

- damages that compensate for expenses that are directly incurred because of a breach of contract - such as those incurred to obtain performance from another source

case 15.2 - kent state university v. ford

- ford signed 5 yr contract with kent state in ohio to work as head coach for the men's bball team - contract provided that if ford quit before end of term, he would pay school liquidated damages in amount equal to his salary (300k), multiplied by number of years remaining on contract - kennedy, kent state's athletic director told ford that the contract would be renegotiated within a few years - 4 years before contract expired, ford left kent state and began coaching for bradley university at annual salary of 700k - kent state filed suit in ohio against ford, alleging breach of contract - court enforced liquidated damages clause and awarded university 1.2M - ford appealed, arguing that liquidated damages clause in his employment contract was an unenforceable penalty - liquidated damages clause in ford's contract was enforceable - state appellate court affirmed the lower court's award - clause was not a penalty - "there was justification for seeking liquidated damages to compensate for kent state's losses" on ford's breach - the effect of the breach were difficult to measure because a lot of damages can come from the loss of a university head coach - damages were reasonable considering his salary at bradley

example of compensatory damages (sale of goods) - bride contracts with seamstress for a gown costing 5,000 to be ready by june - seamstress is unable to complete gown and bride has to purchase replacement online - new gown costs 6,000. shipping and expedited alterations cost 1,000 - what are the damages for breach of contract?

- give her extra 2,000 (seamstress gives her this so she has enough money to get benefit of bargain) because bride should only be paying 5,000 because that was the original budget - 2,000 is the difference between her budget of 5,000 and the extra 2,000 direct costs to get new dress - bride hasn't paid seamstress yet though (if she had paid a deposit or any $$ she would've gotten it back) - shipping and alterations are direct costs which make them eligible for compensatory damages

case ex. 15.3 - jamison well drilling, inc. v. pfeifer

- jamison well drilling, inc. contracted to drill a well for ed pfeifer for 4,130 - jamison drilled the well and installed a storage tank...the well didn't comply with state health department requirements, and failed repeated tests for bacteria - health department ordered the well to be abandoned and sealed - pfeifer used the storage tank but paid jamison nothing...jamison filed a suit to recover - court held that jamison was entitied to 970 for the storage tank but was not entitled to full contract price because the well was not usable

rental agreements

- some states require a landlord use reasonable means to find new tenant if a tenant abandons the premises and fails to pay rent - if an acceptable tenant becomes available, landlord is required to lease the premises to this tenant to mitigate the damages recoverable from the former tenant - former tenant is still liable for the difference between the amount of rent under the original lease and the rent received from the new tenant - if landlord has not taken reasonable steps to find new tenant, a court will likely reduce any award by the amount of rent the landlord could have received had he or she done so

- what are contract damages? - what is the most common remedy for breach of contract? - what remedies are used otherwise?

- the *relief* provided to the non-breaching party, - for *losses* suffered by the breaching party - monetary damages, money fixes everything - remedies in equity - specific performance, restitution, rescission (only if monetary remedy not enough)

case 15.3: clara wonjung lee, dds, ltd v. robles

- lee agreed to buy robles' dental practice and to lease her dental offices in chicago - price was $267k with $133,500 allocated to goodwill (mkt value of the bussiness's good reputation) - after lee took over, chicago magazine and other local media revealed that gary kimmel, one of robles' dentists, had illegally treated underage prostitutes in the practice's offices after hours - media reported kimmel was under investigation by federal officials for this and other activities - lee filed suit in illinois state court against Robles to rescind - lee alleged that robles had deliberately withheld the information about kimmel and that this info "adversely impacted the desirability and economic value of the practice" - court ruled in lee's favor and awarded rescission and damages (included purchase price - unpaid rent and portion of income during ownership) - robles appealed - lee was entitled to rescission of her contract on the basis of fraud - appellate court confirmed trial court's judgment - parties agreement for the sale of practice required robles to disclose "any material information" - info about kimmel's activities would have been material to a reasonable dentist's decision to purchase the practice - robles knew about the investigation because the FBI and magazine interviewed her - robles's failure to disclose this was "purposeful and not the result of any mistake or accident" - nondisclosure designed to prevent lee from not proceeding with sale

employment contracts - ex. 15.6 - concha works as a librarian at brigham young university (byu)

- majority of states, person whose employment has been wrongfully terminated has a duty to mitigate damages incurred because of the employer's breach of the employment contract - a wrongfully terminated employee has a duty to take a similar job if on is available - if employee fails to do this, damages received will be equivalent to person's former salary less the income he or she would have received in a similar job obtained by reasonable means - employer has burden of proving such a job existed and that the employee could have been hired - normally, a terminated employee is under no duty to take a job that is not the same type of rank - when she was fired, she claims that she was terminated in retaliation for filing an employment discrimination claim - suppose concha succeeds in her employment discrimination claim but that byu can show that she has failed to take another librarian position when several comparable positions were available - byu can assert that she failed to mitigate damages - in that situation, any compensation she is awarded for wrongful termination will be reduced by the amount she could have obtained from another employment

consequential damages example 15.4

- mason contracts to buy a certain quantity of quench, a special sports drink, from nathan - nathan knows that mason has contracted with ruthie to resell and ship the quench within hours of its receip - beverage will then be sold to fans attending the super bowl - nathan fails to deliver the quench on time...mason can recover the consequential damages - loss of profits from the planned resale to ruth - caused by the nondelivery (if mason purchases quench from another vendor, he can also recover compensatory damages for the difference between the contract price and market price)

case ex. 15.1 - hallmark cards, inc. v. murley

- murley was vp of marketing at hallmark cards, inc., until hallmark eliminated her position as part of a corporate restructuring - as vp, murley had access to hallmark's confidential information, including its business plans, market research, and financial statements - murley and the company entered into a separation agreement (2002) - murley agreed not to work in greeting card or gift industry for a period of 18 months and not to disclose any confidential info or retain any business records or docs relating to hallmark - hallmark paid 735k to murley as part of her severance package - murley accepted a consulting position of rpg for 125k after the expiration of her noncompete agreement but she disclosed confidential info - hallmark filed suit for alleging breach of contract and jury ruled in their favor - awarded hallmark 860k in compensatory damages (735k severance payment and 125 that murley received from rpg) - murley appealed and court ruled that hallmark (non breaching party) could not obtain compensatory damages in an amount that was more than what they lost (735k) - they reduced the award of damages, hallmark was entitled to 735k severance they paid but not the 125 she earned from rpg - a plaintiff may recover the benefit of his or her bargain as well as damages naturally and proximately caused by the breach and damages that could have been reasonably contemplated by the defendant at the time of the agreement - court reasoned that awarding more than the severance would place hallmark at a better position than if there was no breach, making the extra 125k from rpg improper

punitive damages - volkswagen example

- punitive, or exemplary, damages, generally are not awarded in an action for breach of contract - such damages have no legit place in contract law because they are, in essence, penalties, and a breach of contract is not unlawful in a criminal sense - a contract is simply a civil relationship between the parties....the law may compensate one party for the loss of the bargain - no more or no less punish or deter future conduct - generally not available for only a breach of contract - usually a tort (e.g. negligence or fraud) is also involved in breach of contract dispute -- innocent party gets punitive damages for the tort claim; AND -- compensatory and consequential damages for the breach of contract claim - volkswagen class action settlement - created software so car recognizes when it is being tested or on road to think everything was working properly -> cheated to bypass standards - part was punitive because pre-scandal values -deliberate deceit and fraud to make software to make the car act okay throughout testing - verdict, billion in damages

restitution is not limited to rescission cases

- restitution may be required when a contract is rescinded, but the right to restitution is not limited to rescission cases - because an award of restitution basically returns something to its rightful owner, a party can seek restitution of actions for breach of contract, tort actions, and other types of action - for instance, restitution can be obtained when funds or property has been transferred by mistake or because of fraud or incapacity - similarly, restitution might be available when there has been misconduct by a party with a special relationship with other party - even in criminal cases, a court can order restitution of funds or property obtained through embezzlement, conversion, theft, or copyright infringement

nominal damages

- when no actual damage or financial loss results form a breach of contract and only a technical injury is involved, the court may award nominal damages to the innocent party - often small, such as 1 dollar, but they do establish that the defendant acted wrongfully, but no actual damage suffered - matter of principle under the theory that a breach has occurred and some damages must be imposed regardless of actual loss no financial loss - defendant has breached the contract - failed to perform and party did not get expected bargain

4 categories of money damages

1. *compensatory* (to cover direct losses and costs) 2. *consequential* (to cover indirect and foreseeable losses) 3. *punitive* (to punish and deter wrongdoing) 4. *nominal* (to recognize wrongdoing when no monetary loss is shown)

1. liquidated damages - college football example vs. 2. penalties

1. - in event of breach, a fixed dollar amount will be paid to the non-breaching party - the fixed sum is a reasonable estimate of the damages that will occur as a result of a breach - typically show up in employment contracts ex: college football talk - alabama taking former receivers coach mike groh to court -groh left contract too early from alabama to coach for chicago bears - damges were 57k, so wanted $$ for leaving contract early b/c those were damages included in contract 2. - in event of a breach, a certain amount is paid to the non-breaching party - it is designed as a penalty -- made to punish breaching party, not make the non-breaching party whole - is it typically enforced by a court? the amount agreed upon is not enforced

1. rescission 2. restitution - example: house design

1. an equitable remedy whereby a contract is cancelled or undone to restore the parties to the positions they occupied prior to the formation of the contract - remedy available when fraud, mistake, duress, undue influence, lack of capacity or failure of consideration is present 2. an equitable remedy whereby the non-breaching party is - restored to his or her original position before the loss or injury; or - placed in the position s/he would have been in had the breach not occurred - quantum meruit (as much as her or she deserves) - katie contracts with mikhail to design a house for her - katie pays mikhail 9k and agrees to make 2 more payments of 9k (for total of 27k) as design progresses - next day, mikhail calls katie and tells her that he has taken a position with large architectural firm in another state and cannot design the house - katie decides to hire another architect that afternoon - katie can obtain restitution of 9k

compensatory damages: construction contracts - types

1. owner breaches a. breach before construction has begun b. breach during construction c. breach after completion of construction 2. contractor breaches a. breach before construction has begun b. breach before completion of construction - different remedies depending on who breaches and when

measurement of compensatory damages (sale of land) - 2 types

1. specific performance 2. money damages

1. when it is no longer advantageous for a party to fulfill her or his contractual obligations.... 2. remedy

1. that party may breach, or fail to perform the contract; once one party breaches the contract, the other party - the nonbreaching party - can choose one or more of several remedies 2. the relief provided to an innocent party when another party was breached the contract

compensatory damages: construction contracts 1. owner breaches a. breach before construction has begun b. breach during construction c. breach after completion of construction 2. contractor breaches a. breach before construction has begun b. breach before completion of construction 3. breach by both owner and contractor

1a. profits that would have been made on the contract (this would be total contract price less the cost of materials and labor)(because you haven't expended the materials or done any labor)- can't recover for these because haven't been used 1b. profits plus costs incurred in partially constructing the building (all profits and costs for what has already been completed) 1c. the entire contract price plus interest (because labor is complete and profit is owed, which creates the payment of interest- waiting to be paid) 2a. costs in excess of contract price to complete work (get extra from contractor to get what you originally wanted, get difference b/w contractors to fit budget...so owner doesn't go over original budget) 2b. all of owner's costs to complete project (cover the rest of the costs) 3. when performance of both parties - the construction contractor and the owner- falls short of what their contract required, the courts attempt to strike a fair balance in awarding damages

example of compensatory damages: service contract - plumber agrees to fix leaky faucet for $300 plus necessary parts ($100). homeowner pays $400 for the job - plumber does poor job and costs homeowner $150 to fix damages - what are the damages for the breach of contract? A. $400 B. $150 C. $250

B. $150 - promised performance would be 400 - actual performance is 550 because had to pay additional money to another plumber to do a better job - plumber needs to pay the difference to fix (550-400=150)

penalty

a contract clause that specifies a certain amount to be paid in the event of a default or breach of contract but is unenforceable because it is designed to punish the breaching party rather than to provide a reasonable estimate of damages - amount agreed upon previously will no be enforced, and recovery will be limited to actual damages (still penalty, but what you agreed upon)

to avoid the risk of consequential damages

a seller can limit the buyer's remedies via contract

liquidated damages

an amount, stipulated in a contract, that the parties to the contract believe to be a reasonable estimation of the damages that will occur in the event of a breach (future) - liquidated = determined, settled, or fixed

equitable remedies - remedies in equity include: (3)

awarded only when damages are an inadequate remedy for breach of contract (if monetary compensation is not an option) 1. rescission and restitution 2. specific performance 3. reformation

compensatory damages: sale of goods - 2 types of measurement

buyer's standard measurement: - difference between contract price and the market price when goods were to be delivered (usual measure) seller's standard measurement: - seller's lost profits on the sale of goods - paid for raw materials and labor but wants profit - sometimes, buyer breaches when the seller has not yet produced the goods - in that situation, compensatory damages normally equal the seller's lost profits on the sale, not the difference between the contract price and the market price

consequential damages cont.

compensate nonbreaching party for the entire benefit of the bargain (includes appreciated value and lost profit, known as *compensatory* damages) measure of damages are compensatory PLUS lost profit (because it is *foreseeable*)

nominal damages: - apple example - what are the damages in both cases

contract for sale of 100 pounds of apples at $2 per pound - farmer breaches; supermarket buys apples on market at $3 per pound. what are the damages? (compensatory damages -> difference of $1 per pound, $100) - farmer breaches; supermarket buys apples on market at $1 per pound. what are the damages? (no economic losses -> can only get nominal damages)

the most common remedies available to a nonbreaching party under contract law...

damages, rescission and restitution, specific performance, and reformation courts distinguish between remedies at law and remedies in equity today, remedy at law is normally monetary damages

sale of goods - example: medik laboratories

ex. 15.2 - medik laboratories contracts to buy ten models UTS 400 network serves from cal industries for 4k each, but cal industries fail to deliver the servers the market price of the servers at the time medik learns of the breach is 4.5k therefore, medik's measure of damages is 5k (10 x 500), plus any incidental damages (expenses) caused by the breach

nominal damages - Google example

ex. Google trespass lawsuit with boring family for coming onto private property - Google would have had to go on private road to get photo of house online - family wants apology and photo removed -> proof they took photo b/c on google maps - they didn't take it down so sued Google....must respect property rights - no economic loss, but still damages (symbolic)

consequential (special) damages - doll example: - contract for sale of an antique doll for 5,000. seller knows that buyer intends to re-sell doll to a collector for a 10% profit - seller breaches; doll's value at time of breach is 6,000 1. what is the total measure of damages? 2. what happens if seller is not aware of plan to re-sell?

indirect and foreseeable losses - breaching party knows or should know that innocent party will suffer additional loss - innocent party gets the whole benefit of the bargain - foreseeable damages that result from a party's breach of contract but are caused by special circumstances beyond the contract itself 1. compensatory damages and consequential damages (lost profit) - comp: mkt price (value at time of breach) - contract price = $6k - $5k = $1 - consequential: lost profit = 10% * $5k = $500 - no incidental damages known total = $1k + $500 = $1500 (compensate for depreciated value and then for lost profit by not being able to sell to someone else) 2. NOT foreseeable -> only compensation...only get consequential if foreseeable for the nonbreaching party to recover consequential damages, the breaching party must know (or have reason to know) that special circumstances will cause the nonbreaching party to suffer an additional loss

standard measure of compensatory damages

is the difference between the value of the breaching party's promised performance under the contract and the value of her or his actual performance this amount is reduced by any loss that the injured party has avoided ex. 15.1 - randall contracts to perform certain services exclusively for hernandez during the month of march for $4,000 hernandez cancels the contract and is in breach....randall is able to find another job during march but can earn only $3,000 randall can sue hernandez for breach and recover $1,000 as compensatory damages randall can also recover from hernandez the amount that he spent to find the other job

sale of land: specific performance - buyer vs. seller

remedy for a seller's breach of contract for a sale of real estate is specific performance - buyer is awarded the parcel of property for which he or she bargained when buyer is the party in breach, the measure of damages is typically the difference between the contract price and the market price of the land - same measure is used when specific performance is not available (b/c seller has sold property to someone else for instance)

nominal example 15.5 - hernandez contracts to buy potatoes from stanley at 50 cents a pound

stanley breaches the contract and does not deliver the potatoes meanwhile, price of potatoes fall hernandez is able to buy them in the open market at half the price he agreed to pay stanley hernandez clearily is better off because of stanley's breach so if hernandez sues for breach of contract and wins, the court will likely award only nominal damages (because no economic loss)

enforceability

to determine whether a particular provision is for liquidated damages or a penalty, the court must answer two questions 1. at time the contract was formed, was it apparent that damages would be difficult to estimate in the event of a breach? 2. was the amount set as damages a reasonable estimate and not excessive? if answers to both questions are yes, provision normally will be enforced if either answer is no, provision usually will not be enforced

mitigation of damages - ex. foogi vs. fedex

when breach of contract occurs, the non-breaching party is held to a duty to reduce the damages caused by the breaching party (when breach on contract occurs, the injured party is held to a duty to mitigate, or reduce, the damages that he or she suffers) - essentially minimize damages caused by breaching party - an award of damages may be reduced by amount that should have been mitigated - shipping things from japan to austin, texas but they didn't want them so sent back - left texas in good condition through fedex, they were broken and ruined when they got to japan...couldn't mitigate damages (nothing you could do with the chips, couldn't even open the packages to recover parts) - but if you can mitigate you should