Ch. 18 Breach of Contract and Remedies

What are the 4 broad categories of 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).

What two questions does the Court ask to determine enforceability:

1. When contract was entered into, was it apparent 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 are 2 yes, provisions are enforced. if either is no, unenforceable.

To recover under the theory of quasi contract, the party seeking recovery must show the following:

1. they conferred benefit on other party. 2. had reasonable expectation of being paid. 3. did not act as a volunteer in conferring the benefit. 4. receiving party would be unjustly enriched if allowed to retain benefit without paying for it.

What are liquidated damages?

A contract provides a specific amount to be paid as damages in the event of future default or breach of contract

What are some the most common remedies:

Damages. Rescission and Restitution. Specific Performance. Reformation. Recovery Based on Quasi Contract.

Eaton v. Waldrop-fraud

Eaton sued Waldrop for the deed of his mothers property which he claimed Waldrop obtained fraudulently. He consented to transfer of the property only because he was told that waldrop married his mother. this was not true. Misrepresentations of a material fact made willfully to deceive, or recklessly without knowledge, and acted on by the opposite party, or if made by mistake and innocently and acted on by the opposite party, constitute legal fraud."

Case 18.1 Hadley v. Baxendale (1854). What factors did the court consider in deciding the events were reasonably foreseeable? What is the amount of damages to which an injured party is entitled for breach of contract?

Facts A shaft in Hadley's (P) mill broke rendering the mill inoperable. Hadley hired Baxendale (D) to transport the broken mill shaft to an engineer in Greenwich so that he could make a duplicate. Hadley told Baxendale that the shaft must be sent immediately and Baxendale promised to deliver it the next day. Baxendale did not know that the mill would be inoperable until the new shaft arrived. Baxendale was negligent and did not transport the shaft as promised, causing the mill to remain shut down for an additional five days. Hadley had paid 2 pounds four shillings to ship the shaft and sued for 300 pounds in damages due to lost profits and wages. The jury awarded Hadley 25 pounds beyond the amount already paid to the court and Baxendale appealed. Issue What is the amount of damages to which an injured party is entitled for breach of contract? Holding and Rule An injured party may recover those damages reasonably considered to arise naturally from a breach of contract, or those damages within the reasonable contemplation of the parties at the time of contracting. The court held that the usual rule was that the claimant is entitled to the amount he or she would have received if the breaching party had performed; i.e. the plaintiff is placed in the same position she would have been in had the breaching party performed. Under this rule, Hadley would have been entitled to recover lost profits from the five extra days the mill was inoperable. The court held that if there were special circumstances (consequential) under which the contract had been made, and these circumstances were known to both parties at the time they made the contract, then any breach of the contract would result in damages that would naturally flow from those special circumstances. Consequential damages are assessed against a party only when they were reasonably within the contemplation of both parties as a probable consequence of a breach. The court held that in this case Baxendale did not know that the mill was shut down and would remain closed until the new shaft arrived. Loss of profits could not fairly or reasonably have been contemplated by both parties in case of a breach of this contract without Hadley having communicated the special circumstances to Baxendale. The court ruled that the jury should not have taken the loss of profits into consideration. Disposition Vacated and remanded for new trial.

Drake v. Hance- mutual mistake and parol evidence

Facts: A deed was incorrectly drafted in the sale of 2 properties and a lawsuit was filed against Hance because he refuse to amend the deed. He appealed Issue: Was there a mutual mistake? Is parol evidence admissible? Decision: Court ruled in favor of Drake because when a mutual mistake is found on a deed, parol evidence will be heard to clarify the mistake

CASE 18.2 B-Sharp Musical Productions, Inc. v. Haber (2010). Why was this liquidated damages, and not a penalty?

Facts: Haber booked B-Sharp for a gig. Contract included a cancellation clause which was full payment if canceled under 90 days before the event and 50% payment if canceled prior to 90 days. Haber canceled the contract under 90 days and B-sharp sued for damages and refusal of payment. Issue: is contract enforceable or are the damages unreasonable? Decision: The court ruled in favor of the band because the clause seeks to recover damages that are fair. It becomes increasingly hard to rebook a date the closer to the date you are.

Hoffman v Red Owlstore-recovery for quasi contracts

Facts: Hoffman (P) owned and operated a bakery and sought to obtain a supermarket franchise with Red Owl Stores (D). Red Owl Stores assured Hoffman that his $18,000 was sufficient and advised him to acquire and operate a small store to gain experience. Three months later Red Owl Stores advised him to sell that store with the assurance that he would be given a larger store. Hoffman was reluctant to miss the summer tourist season but sold the store on Red Owl's assurances. A few months later Red Owl told Hoffman "everything is ready to go. Get your money together and we are set." D told P to raise the rest of his financial contribution by selling his bakery. P sold the bakery for $10,000 and took a job on the night shift at a local bakery. Red Owl informed Hoffman that he would have to contribute a greater amount of money. Red Owl agreed to permit Hoffman's father in law to contribute $13,000 and become a partner in the store. Hoffman was then told that he would have to sign an agreement that the $13,000 was either a gift or a loan subordinate to all general creditors. Negotiations terminated and Hoffman sued Red Owl for reliance damages, lost profits, and expenses. Red Owl's defense was that the parties had never reached agreement on essential factors necessary to create a valid contract. The jury awarded Hoffman $16,735 for the sale of the store, $2000 for the sale of the bakery, and $1250 for other expenses. The trial court ordered a new trial regarding the $16,735 for the sale of the store. Red Owl appealed. Issues: 1) Does promissory estoppel require that, aside from the lack of consideration, the promise sued upon must be able to sustain a cause of action under a breach of contract? 2) Once promissory estoppel is applied, to what remedy is the plaintiff entitled? Holding and Rule: 1) No. Promissory estoppel does not require that the promise sued upon, aside from the lack of consideration, must be able to sustain a cause of action under a breach of contract. 2) Once promissory estoppel is applied damages should be those designed to prevent injustice, not to enforce the promises made. The court then considered the significance of the parties' never having reached agreement on essential factors necessary to establish a binding contract. The court held that the doctrine of promissory estoppel was invoked as a substitute for consideration rendering a gratuitous promise enforceable. Restatement Section 90 does not impose the requirement that the promise must be so comprehensive in scope as to meet the requirements of an offer that would create a binding contract if accepted by the promisee. Rule for Promissory Estoppel: For a finding of promissory estoppel, the requirements are: a promise which the promissor should reasonably expect to induce action or forbearance of a definite and substantial character, that the promise did induce such action or forbearance, and whether injustice can be avoided only by enforcement of the promise. The court held that under these facts, injustice would result if P were not allowed relief because P relied to his detriment on promises which D failed to keep. The court held that all damages as awarded were sustained except that the damages regarding the sale of the grocery store should be limited to the difference between the sale price received and the fair market value of the assets sold, giving consideration to any goodwill. When damages are awarded in promissory estoppel, they should be only such as are necessary to prevent injustice. Justice does not require that the damages awarded should exceed any actual loss sustained.

Salim v. Solaiman-lack of definiteness of terms

Facts: The purchase agreement between the two parties was found invalid because in the sale of property, the property description did not clearly define the property for sale. It only contained an address.

Rosenzweig v. Givens-fraud

Givens and Rosenzweig where romantically involved. In 2002, Givens moved into apartment on which Rosenzweig made down payment and acted as lender for two mortgages. His attorney had her sign mortgage documents, but Rosenzweig made house payments and paid household expenses. In 2004, Givens and Rosenzweig married. A year later, he forged her signature to get a bank loan. She soon learned of forgery and his other family. Marriage was annulled. Rosenzweig then filed a suit against Givens to collect on the mortgages. The court issued a summary judgment in Rosenzweig's favor. Givens appealed, claiming that the apartment had been a gift. Issue: This is an issue of fraud, she was tricked into signing the mortgage because of the nature of her relationship with Rosenzweig. Thus, defendant has detailed circumstances that raise an issue of fact about whether a fiduciary relationship existed between the parties, including their romantic involvement that resulted in a marriage, their age difference and that plaintiff was a lawyer. Court ruled in Givens favor.

Hawkins v. McGee 1929. How are damages determined for breach of contract?

Hawkins (P) underwent surgery to repair scar tissue on his hand resulting from burns he sustained from contact with an electrical wire. Dr. McGee (D) gave Hawkins a 100% guarantee that he would be able to repair the scar tissue by grafting skin from his chest to his hand. The surgery was unsuccessful and Hawkins was left with a hairy hand. At trial, Hawkins sought damages for breach of contract due to McGee's failure to perform including pain and suffering. The jury entered judgment for Hawkins but the judge ordered remittitur. Hawkins refused and brought this appeal. Issue How are damages determined for breach of contract? Holding and Rule The plaintiff was entitled to expectancy damages plus incidental losses resulting from the breach. Expectancy damages are damages sufficient to put the plaintiff in the position he would have been if the contract had been performed. In this case, Hawkins was not entitled to damages for pain and suffering because he would still have endured them had the procedure been successful. Hawkins was entitled to the difference between what he sought - a perfect hand, and what he received - a hairy hand. The plaintiff was also entitled to incidental losses resulting from the breach. Disposition Judgment reversed.

What is the difference between liquidated damages and penalties?

Penalties: designed to penalize, generally unenforceable, recovery limited to actual damages liquidated damages: usually enforceable

Explain why many businesses include liquidated damages in their commercial contracts and construction contracts

Provide certainty, Avoid lawsuits, and Provide an incentive to enter into contracts

Explain unconscionability.

Substantive unconscionability: terms that are too harsh, unconscionable in and of themselves Procedural unconscionability: unfairness in the bargaining process, unconscionable because of circumstances Sometimes terms are so outrageous that it's impossible to believe a party would have read/understood them and still signed the contract

True/False There is ordinarily no penalty for breaching a contract over and above restoring a nonbreaching party to the position he would have been in if the contract had been fully performed

True

True/False UCC's rejects doctrine of election of remedies

True

What is a breach of contract?

a failure to perform what a contracting party is under an absolute duty to perform.

What is recovery based on quasi contract?

arises when no contract actually exists. remedy created to obtain justice and prevent unjust enrichment. party granting benefit can recover in quantum meruit ("as much as she deserves").

What are some reasons for waiving a breach? Give an example.

businesspersons want to get whatever benefit is still possible out of the contract. for example, seller contracts with buyer to deliver to buyer 10,000 tons of coal by Nov 1. contract calls for buyer to pay by November 10 for coal delivered. due to coal miners' strike, coal is hard to find. seller breaches the contract by not delivering until Nov 5. buyer will likely waive the seller's breach, accept delivery of the coal, and pay as contracted.

When do courts use specific performance?

cases involving unique goods (sale of land, paintings, sculpture, etc.) not available remedy in contracts for personal services.

What are compensatory damages?

compensates nonbreaching party for loss of the bargain. damages actually sustained (out-of-pocket), directly arising from breach. standard measure: value of Promised Performance less value of Actual Performance.

How do you measure compensatory damages for sales of goods?

difference between contract and market price.

What is reformation?

equitable remedy that allows contract to be reformed, or rewritten to reflect parties' true intentions. available when agreement is imperfectly expressed in writing.

What is specific performance?

equitable remedy that calls for performance promised in contract. only granted if party's monetary damages is inadequate

Give examples of mitigation of damages.

landlord has duty to find a new tenant if a tenant abandons the premises and fails to pay rent. a wrongfully terminated employee has a duty to take a similar job if one is available.

What is a waiver?

nonbreaching party willing to accept defective performance of contract. knowing relinquishment of a legal right (right to require satisfactory and full performance)

What are remedies?

relief provided to innocent party in event of breach of contract means employed to redress an injury or enforce a right

What are examples of equitable remedies?

rescission and restitution specific performance reformation.

What is rescission and restitution?

rescission- contract is canceled and parties are restored to original positions that they occupied prior to the transactions. restitution- both parties must return goods, property, or money previously conveyed.

Measurement of compensatory damages varies by types of contracts. What types of contracts deserve special mention?

sale of goods sale of land construction contracts

What are punitive damages?

serve to punish or deter future conduct. generally not available for mere breach of contract. usually tort (e.g., fraud) is also involved.

How does one recover consequential damages?

show that breaching party is aware or should be aware that special circumstances will cause additional loss to the injured party

Why do nonbreaching parties ask for equitable remedies?

sometimes damages are inadequate remedy.

What are consequential damages?

special damages or foreseeable losses. differ from compensatory damages in that they are caused by special circumstances beyond contract. they flow from indirect consequences/results of a breach.

What are liquidated damages?

specific amount agreed to be paid as damages in the event of future breach. frequently used in construction contracts, sale of goods, contracts with entertainers and professional athletes.

How do you measure compensatory damages for sales of land?

specific performance--buyer awarded parcel of land that he bargained for. if remedy not available, measure of damages is difference between contract and market price

What are penalties?

specify a certain amount to be paid in the event of a default or breach of contract and are designed to penalize the breaching party.

What are incidental damages?

they are compensatory damages. expenses cause directly by breach of contract.

Why do courts refuse to grant specific performance for personal services?

to order a party to perform personal services against his will is like involuntary servitude.

The purpose of the doctrine of election of remedies

to prevent double recovery.

Williams v. Walker-Thomas Furniture Co. (2010)-unconscionability

unconscionability includes absence of meaningful choice on part of one party together with contract terms which are unreasonably favorable to the other party. Meaningfulness of choice may be negated by a gross inequality of bargaining power. security for loan was grossly out of proportion to what they buyer received: she was essentially putting up all of her past purchases as security for one last purchase. court telling seller that if you know the buyer is going to breach, then you lose your remedy.

How do you measure damages for construction contracts?

varies depending on which party breaches and when breach occurs.

What are the consequences of a waiver of breach?

waiving party cannot take any later action on it. in effect, waiver erases past breach; contract continues as if breach had never happened.

What is meant by mitigation of damages?

when breach of contract occurs, innocent injured party is held to a duty to reduce the damages that he suffered. duty owed depends on the nature of the contract.

When do courts grant reformation?

when fraud or mutual mistake is present with oral contracts and noncompete covenants

What are nominal damages?

when no actual damage or financial loss results, and only a technical injury results. defendant is liable but only for a technical injury.