#12255 - Cancellation And Remedies - Contracts

Part Four: Cancellation and Remedies

Does an injured party have a right to cancel? What are other appropriate remedies?

Remedies Under the Common Law

Impossibility | Mitigation | Foreseeability | Expectation | Reliance | Restitution | Specific Performance | Liquidated | Nominal | Punitive

1. Impossibility

   1. Rule

      1. Impossibility

         1. under the Common Law

            1. makes a contract voidable from either side when

               1. the promise is impossible because the subject matter of the contract unexpectedly perishes (Taylor);

               2. the substance of the contract is frustrated by the nonexistence of a thing which the contract was made for (Krell).

               3. OR

                  1. there was a contingency,

                  2. the risk was not expressly or impliedly allocated by agreement,

                  3. AND performance is commercially impracticable.

            2. allows either party to collect restitution (RSC§272).

            3. does not apply when increased price alone is what makes the contract impracticable,

               1. BUT does apply if a shortage is what makes the contract impracticable (RSC§272).

         2. under the UCC

            1. gives the seller the right to excuse himself from the contract when

               1. a basic assumption of a non-occurring event is part of the contract,

               2. the event happens to make the sale impracticable,

               3. AND the seller notifies the buyer (UCC§2-615), after which

                  1. the buyer may

                     1. terminate the contract,

                     2. modify the contract and take what’s left,

                     3. OR let the contract lapse (UCC§2-616).

            2. gives the buyer the right to void the contract when

               1. the goods are a casualty without the fault of the seller (UCC§2-613),

               2. OR there is no substitute available for an impossible carrier or a manner of pay that becomes unavailable (UCC§2-614).

   2. Analysis

      1. Impossible?

         1. Two methods of analyzing whether contract is impossible:

            1. physicality: is the item still there (Taylor)(Krell)?

            2. risk analysis: which party should bear the burden of risk (N. Ind. Pub. Serv. Co.)(Transatlantic).

         2. If the contract was fulfilled, it probably was not impossible (Transatlantic).

      2. Excuse v. defense

         1. An excuse is not a defense; parties to not argue that no contract exists, but that there was a good reason not to perform.

   3. Cases

      1. Taylor v. Caldwell (Eng. 1863, 551)

         1. Δ leased music hall to Π, which burned down. Since renting the music hall is now impossible, both parties are discharged from the contract.

      2. Krell v. Henry (Eng. 1903, 555)

         1. Δ advertised room to watch coronation, which was cancelled because king got sick. Since the substance of the contract was frustrated by the nonexistence of its essential promise, both parties are discharged.

      3. N. Ind. Pub. Serv. Co. v. Carbon Cnty. Coal. Co. (7th Cir. 1986, 559)(Posner)

         1. Π was told by state that it could not raise prices. Signed a fixed long-term K with Δ promising to buy coal in specific amounts (i.e. not a requirements K). The price rose and Π tried to get out. Since the force majuer clause did not allocate risk to the promisee (Δ), but rather to Π, there is no excuse.

      4. Transatlantic Fin. Corp. v. United States (D.C. Cir. 1966, 563)

         1. Π was hired by Δ to ship wheat to Iran, during Suez Crisis. The crisis escalated while Π was en route, forcing Π to go around Cape of Good Hope instead of Suez Canal. Since Π should have known the crisis would block the canal, the rising price alone is not enough for impossibility.

2. Remedies

   1. Rule

      1. @Remedies: an injured party may

         1. treat contract as alive and remain ready to perform.

         2. cancel, mitigate, and recover

            1. expectation damages (RSC § 347):

               1. incidental damages from breach

               2. MINUS expenses saved,

               3. PLUS foreseeable consequential damages:

                  1. if other party substantially performed:

                     1. the cost of replacement (Hawkins)

                     2. OR the diminished value of the performance (Peevyhouse),

                        1. depending on whether the cost of completion is grossly disproportionate to its value (Plante).

                  2. if other party did not substantially perform

                     1. the value of a fully performed contract (Hawkins).

                     2. OR lost profits (Walters).

            2. reliance damages: the cost of what it would take to return to before K.

            3. OR restitution damages:

               1. if party substantially performed:

                  1. any liquidated debt owed (Oliver).

               2. if other party did not substantially perform:

                  1. the return of anything paid for unacceptable performance (Britton).

         3. OR, in rare cases, recover

            1. specific performance to complete contract (London Bucket Co.).

            2. liquidated damages (City of Rye).

            3. nominal damages (White).

            4. punitive damages (City of Rye).

      2. A breaching party may

         1. treat contract as alive and remain ready to perform.

         2. OR recover restitution damages:

            1. if substantially performed: what is due under the contract (Walker & Co.).

            2. if not substantially performed: in quantum meruit the reasonable value of what was acceptably performed (Britton).

      3. @Substantial performance

         1. is a question of fact that depends on

            1. (Jacob & Youngs):

               1. the purpose of the contract,

               2. the desire to be gratified,

               3. the performer’s excuse for deviation,

                  1. although the parties may explicitly express that a deviation is not okay

                  2. and a willful transgression is never okay.

               4. the cruelty of enforced adherence (Jacob & Youngs).

            2. (Walker & Co.):

               1. the extent to which injured party will obtain anticipated benefit,

               2. the extent to which an injured party will be adequately compensated,

               3. the extent to which the breacher has performed,

               4. the hardship on the breacher,

               5. the willfulness of the breacher,

               6. the certainty that the breacher will finish (Walker & Co.).

   2. Analysis

      1. Perfect tender or substantial performance?

         1. Rakoff: the law for construction contracts is generally substantial performance, and for goods is generally perfect tender, e.g. UCC § 2-503 (seller must tender conforming goods)

   3. Cases

      1. Britton v. Turner (N.H. 1834, 493):

         1. Π partially performed labor contract for a year of work. Even though Π did not perform entire contract, may recover in quantum meruit for the reasonable value of what was performed.

      2. Jacob & Youngs v. Kent (N.Y. 1921, 498):

         1. Π built house but used wrong brand of piping. Since Π’s deviation was trivial and the cost of replacement grossly disproportionate to the value of the right brand of piping, Π owes the diminished value.

      3. Plante v. Jacobs (Wis. 1960, 502):

         1. Π did not build house to specifications. Owes replacement damages for defects that do not create unreasonable economic waste, but diminished value for everything else since Π substantially performed.

      4. Walker & Co. v. Harrison (Mich. 1957, 506):

         1. Δ leased sign from Π, who promised to clean and maintain it. Π did not clean tomato from sign after Δ called. This was not a material breach, so by cancelling, Δ owes liquidated damages.

      5. Walters v. Marathon Oil Co. (7th Cir. 1981, 343):

         1. Δ induced reliance of Π on promise to become gas franchise. The station was near market value, but the expected profits were very high. Δ did not give gas. Π gets expectation damages since no other damages otherwise.

3. Mitigation & Foreseeability

   1. Rule

      1. @Mitigation

         1. requires parties to reasonably avoid loss through mitigation (RSC § 350),

            1. unless alternatives are of a “different or inferior kind” (Parker).

      2. @Foreseeability

         1. limits consequential losses to those that were within the contemplation of both parties at time of K (Locke)(Hadley).

   2. Analysis

      1. Are the damages limited?

         1. All damages are limited by the mitigation or foreseeability rule, because the breaching party should only be responsible for damages she could anticipate and prepare for.

   3. Cases

      1. Parker v. Twentieth Century-Fox Film Corp. (Cal. 1970, 309):

         1. Π agreed to perform in Δ’s musical. Δ changed movie to western. Π refused to accept, and sued for damages. Since the western is “different” and an “inferior kind” of movie for Π, she did not have to mitigate.

         2. (Dissent): the “different or inferior kind” rule should apply to different fields, not different genres of movie.

      2. Hadley v. Baxendale (Eng. 1854, 332):

         1. Δ agreed to transport Π’s crankshaft, but took time doing it. Π lost profits and sued. Since Π did not inform Δ that it needed quick delivery and damages were not in contemplation of parties, lost profits are too remote.

4. Expectation Damages

   1. Rule

      1. @Expectation damages

         1. are determined by:

            1. consequential damages,

            2. PLUS incidental damages resulting from breach,

            3. MINUS savings from not having to perform (RSC § 347).

      2. @Cost of replacement:

         1. the injured party may collect

            1. the cost of obtaining completed contract (Hawkins),

            2. OR the cost of fixing particular defects, unless the defects are too difficult to separate (Plante).

      3. @Diminished value:

         1. if completion would result in unreasonable economic waste grossly disproportionate to the result, the injured party may collect the market value of a completed contract minus the value of what was performed (Peevyhouse).

      4. @Lost profits:

         1. the injured party may also collect any lost profits (Locke) so long as they are foreseeable and can be proven with reasonable certainty (Locke).

            1. Foreseeable lost profits must be capable of proof with reasonable certainty, not speculation (Kenford).

   2. Analysis

      1. Cost of replacement or diminished value?

         1. The general rule is whether there would be unreasonable economic waste. If so: diminished value. If not

   3. Cases

      1. Hawkins v. McGee (N.H. 1929, 3):

         1. Δ solicited injured Π and said he would make hand “100%” within three to four days. The “100%” could reasonably be interpreted as a promise, but given social practice, the timeline was a prediction. Correct damages are not reliance (such as pain & suffering), but expectation: the cost of replacing the performed hand with a good hand.

      2. Peevyhouse v....