#10996 - Contract Remedies - Contracts

Contract Remedies

A. The Principles of Remediation: Expectation, Reliance, and Restitution

1. Expectation damages – THE DEFAULT MEASURE

a) Used to put the injured party in the position he would have been in had the contract been performed

(1) Must know what position the promisee currently occupies following the breach

(2) Then must know the position the promisee would have been in had the contract been performed

b) Limited to reasonably foreseeable damages

2. Reliance damages

a) Used to return the injured party to the position he was in before the contract was made, when a promise or agreement causes the injured party to expend resources regardless of expectancy. Includes both out of pocket expenses and all expenses that flow naturally from breach of contract.

b) Reliance Awarded; Expectancy too Uncertain: Sullivan v. O’Connor -- Where plaintiff had a contract with defendant doctor to receive a nose surgery that would entail two surgeries to enhance her beauty, but she ended up requiring three operations and her appearance was irreparably worsened, the court held that reliance damages that would put the plaintiff back in the position she occupied just before entering the agreement were appropriate because of the difficulty in assessing the value of the difference in the promised condition (an improved nose) and the condition before the operation; plaintiff was awarded out of pocket expenditures for the third surgery (she waived her claims for the first two), the pain and suffering for the third surgery (she waived her claims for the first two), and would have been awarded lost wages except that she did not charge any; she waived an difference in value between her present condition and promised condition.

Note: If she had been able to produce concrete evidence that the botched nose job had actually caused her financial detriment (like, for example, it had caused her to lose a movie role), she might have been able to get expectancy damages.

Note: Court worried that expectancy damages had potential to be wildly out of proportion to the cost of the service.

3. Restitution damages

a) Awarded to prevent unjust enrichment, returns promisee to market value of benefit already conferred—in the surgery case, out of pocket expenses.

b) This is looked at from the perspective of the breacher – what did they gain?

4. Injunctive relief (specific performance) is unusual as a contract remedy.

5. Freund v. Washington Square Press -- Where plaintiff granted defendant publisher exclusive rights to publish manuscripts and was given a $2000 advance and the defendant did not exercise his 60 day right to terminate and failed to publish the book the court held that the trial court wrongfully awarded expectancy damages of $10,000 for the cost of publication because damages are NOT measured by what the defaulting party saved by the breach but by the natural and probable consequences of breach to the plaintiff; the court also held that the plaintiff should not recover more for the breach than performance and that here the contract was not for books but for royalties but in this case the royalties were too speculative so nominal damages alone were awarded.

(1) The court also could have considered the prestige and/or loss or delay in promotion but the plaintiff did not place a monetary value on this at trial.

(2) If the plaintiff had sought reliance he probably would have received the cost of publishing the manuscript himself

B. Expectation-Based Recovery as an Exercise in Contract Interpretation

1. Cost of Completion or Diminution in Value

a) Cost of Completing Damages: American Standard v. Schectman -- Where plaintiffs made a contract in which they agreed to give buildings and other structures and most of the equipment to defendant contractor in exchange for defendants’ payment of $275,000 and his promise to remove structures and grade the property 1ft below the surface as specified, the court upheld jury verdict that awarded $90,000 for the cost of completion as opposed to the relatively small difference between the value of P’s property with and without the promised completion. The court stated that the diminution in value measure of damages is only appropriate when the defects are irremediable or may not be repaired without substantial tearing down, or when the breach is only incidental to the main purpose of the contract. In this case, D did not have to tear down existing structure. It just needed to finish the job. And the breach was central to the purpose of the contract. Furthermore, the breach was believed to be intentional, which generally precludes value-based damages.

(1) The court relies on Groves v. Wunder Co. where the cost to complete the grading was 60,000 but the value of the property graded was only 12,160 and the court found that an owner’s right to improve his property is not trampled by its small value.

Counter: It is unlikely that P would have paid D $90,000 for something that would have increased the value of the land by only $3,000.

b) Diminution in Value: Peevyhouse v. Garland Coal & Mining Co. - Garland Coal (D) contracted for the right to strip mine coal on Peevyhouse’s (P) property for five years. The contract provided that D would perform restoration work on the property at the end of the lease period. P sued for $25,000 when D refused to perform the restoration. D and P argued over whether diminution or cost of performance was an appropriate measure of damages. Court ruled in favor of D, holding that if breach pertains to a matter only incidental to the main purpose of the contract, and performance would be disproportionately costly, the proper measure of damages is diminution. However, if performance is a main or principal purpose of the contract, the cost of performance is an appropriate measure.

Note: The court noted the strangeness of this scenario in which P could gain much more from non-performance than from performance.

C. Limitations on the Expectation Remedy

1. Foreseeability

a) A party can only recover damages reasonably foreseeable at the time of breach. However, exactly what reasonably foreseeable means is interpreted very broadly.

Note: Parties are able to contract out of this rule.

b) Not Foreseeable: Hadley v. Baxendale -- Where plaintiff millers contracted with defendant carriers to deliver a broken shaft, without disclosing that the shaft was necessary for the operation of the mill, and the carriers failed to timely deliver the broken shaft, causing plaintiff's mill to be closed for several days, the court held that loss of profits was not a reasonable damage award, as the special circumstances were not known and communicated, and defendant could not have foreseen this consequence of breach at the time of the contract.

Note: This incentivizes openness. Explicitly stating what terms within the contract are very important. (allows for contracting around, i.e., upping the liability on a FedEx delivery)

c) Foreseeable: Spang Industries, Fort Pitt Bridge Division v. Aetna Casualty and Surety Co. (1039) – When parties contracted for steel to build a bridge that included a date of delivery, and where the steel company breached the date of delivery and should have known based on their past business experience that failure to deliver by that date would cause difficulty and increased expenditures due to the oncoming winter, the damages were foreseeable and the court ordered payment.

Note: The parties don’t have to explicitly agree that the breaching party will be responsible for consequential damages if those damages are foreseeable.

d) In certain industries, it is custom that the breaching seller is not responsible for consequential damages. In at least the Seventh Circuit, trade custom with regards to this matter is respected.

e) Emotional damages can be deemed foreseeable, but it depends on the nature of the contract. In Allen v. Jones, the court held that there are certain contracts which so affect the vital concerns of the individual that emotional distress is a foreseeable result of breach. However, it also said that all of the cases in that state (Cali) where awards had been given based on mental distress, there were also physical consequences.

f) Recent court decisions tend to include damages for lost profits among reasonably foreseeable damages, but some, while acknowledging that these profits should be included, refuse to include them because they are too speculative.

2. The Duty to Mitigate

a) Duty Existed: Rockingham County v. Luten Bridge Co. – P contracted with D to build a bridge in a remote part of the county. D rescinded the contract. P was notified of the breach, but continued to work on the bridge. P then sued D for the full amount of the bridge. Court ruled in D’s favor, holding that, though breach was improper, after P was notified of the breach, it had the duty to do nothing to increase the damages resulting from that breach. Work done after the rescission could very likely be useless to the D, and yet he would be forced to pay the full contract price.

b) Duty did not Exist: Parker v. Twentieth Century-Fox Film Corp. – P was offered to play the lead in one movie. D decided not to produce the movie, but offered P a role in another movie set in a different location and of a different genre. The compensation offered was identical, though a few terms of the contract were different. P decided not to take the offer and sued D. D claimed that P was not entitled to damages due to her failure to mitigate. Court ruled in P’s favor, holding that the D needed to show that the...