Contract Damages

Contract Damages Expectancy Restitution Reliance LDCs 1 Contract Damages Expectancy Restitution Reliance 2 Expectancy (334) • Goal of Contract Damages: Give nonbreaching party its expectancy interest… i.e., put nonbreaching party in as good a position as it would have been in with performance. – Burden on plaintiff to prove • _______ (causation of some) by preponderance • ________ w/reasonable certainty. – If plaintiff fails, other remedies may be available. – If contract performance would have netted loss to plaintiff, other remedies may be available. – If award of expectancy is economically wasteful… 3 What if… • Defendant agreed to build house that faced due north; instead, it is a mirror image and faces south. • Rebuilding the house is cost prohibitive and the house‟s value to another person is fine. • Should plaintiff get cost to perform to expectation, or not? – What if plaintiff isn‟t going to re-build? 4 Cost Rule • Plaintiff should be awarded amount to repair/complete the work as promised. – Preferred rule because gives the nonbreaching party benefit of bargain – But, if cost greatly disproportionate to benefit conferred, then “waste” issues arise. Value Rule • Plaintiff should be awarded difference in value between what was promised and what was delivered – Plaintiff often won‟t want because it allows breaching party to deliver less than promised. • If minor problems, works well, but if what is delivered is substantially different? 5 Reliance • Goal: make breaching party pay out-of-pocket costs of nonbreaching party. – Measure plaintiff‟s out-of-pockets, not its expected profits. • General rule: the nonbreaching party may recover expenses made in essential reliance on breaching party. – Exception…. 6 Reliance - Gruber (341) • Plaintiff sued when defendant failed to perform contract for sale of xmas cards. • Plaintiff could not prove expectancy with reasonable certainty due to NBR. So instead sought reliance damages. • Defendant alleged that its breach saved the plaintiff from losing money. • Exception: – Defendant must prove _________________. – If so, then ____________________ ____________________ ____________________ 7 Restitution • Goal: Put the breaching party in the position it would have been in had it performed. – Take away unearned benefits. • General rule: where plaintiff confers benefit on defendant, and it is unjust for defendant to retain benefit, it can be disgorged. • How measured?... 8 Restitution - Campbell (344) • TVA agent without authority • So, is it how much it “agrees” to pay $30k to would cost to acquire Campbell for microfilming goods on the market TVA‟s journals. TVA sends (Plaintiff‟s theory) or film back after 2 months. how much benefit was Campbell destroys original received by having journals. When TVA refuses them? to pay, Campbell sues in QM. • On appeal, TVA says it is • Court uses plaintiff‟s “obligated not to pay for the measure because (1) no film itself, but only for the way to prove benefit „benefit‟ or unjust and (2) no market value enrichment, if any, which it of unique goods. received” by having the film 9 in the library for 2 months. Liquidated Damages Clauses Am I from Your Planet? 10 What is an LDC? • What makes a clause that mentions or limits damages an LDC? • What‟s an LDC typically say? 11 Are any of these an LDC? • “If buyer breaches this agreement, he shall not be responsible for any consequential damages.” • “If buyer breaches this agreement, he shall pay $500 as liquidated damages.” • “If buyer breaches this agreement, he shall pay no more than $500 as liquidated damages.” • “If buyer breaches this agreement, he shall forfeit his deposit as partial liquidated damages.” 12 Southeastern Land Fund (417) • Facts? • Why does the clause allowing for spec perf • If buyer defaults “seller create no problem? shall be entitled to retain $5k, to collect on • Why do the other two the $45k note, and to clauses cause a pursue any and all other problem? remedies including • What should the drafter specific performance” have done to have written a good LDC? 13 Every breach does not trigger award to nonbreaching party of LD. Instead, it must be a ______ breach. 14 What‟s so funny about Freedom of Contract? • So long as there‟s no fraud, why should the law care about bad bargains? Isn‟t that all an “invalid” LDC is? – Is it any different than B agreeing to pay $20k for a car that has a FMV of $5k? 15 Efficient Breach: Reason to Limit LDCs? • Bob had promised to do work for Susie. Bob‟s breach will cost Susie $12k, but would allow Bob to earn $20k. Social efficiency is served if we allow Bob to breach, pay Susie the $12k. So, and LDC set at $25k is socially inefficient: Bob is “forced” to perform, costing society $8k. • But Posner in Lake River questions whether this purpose is outweighed by the credibility LDCs lend to performance. See 411-12. 16 When can an LDC be Invalid at Common Law? Whether, at the time ______________________ (1) damages resulting from a breach would be ________________________________, and (2) the stipulated amount had a _________________ to the ____________________________ if a breach occurred. If the plaintiff incurs no actual damages: If the amount specified is disproportionate to actual damages: If it is invalid, it’s “unenforceable as a penalty.” 17 (1) Difficult to Determine • “The greater the difficulty either of proving that loss has occurred or of establishing its amount with the requisite certainty, the easier it is to show that the amount fixed is reasonable.” – So, the harder it is to prove that a loss happened or how much, the more likely it is that the number the parties wrote down is right? Huh? • If it‟s difficult to determine damages, why on earth do courts enforce contracts written by fools for a specific amount by holding that the amount they picked is reasonable? 18 How do Courts Determine Whether it‟s Difficult to Determine Damages? • Is it – Viewed objectively or – Subjectively? • Examples of what‟s not “difficult:” – Semico (408) – Checkers (408) • What‟s got to be “difficult” about it? – Breach could cause all sorts of harm? – Proving causation is hard? 19 (2) “Reasonable Estimate” At common law, must it be “reasonable” compared to… (A) (B) (C) (D) (E) Expected harm (ex ante)? Actual harm (ex post)? Either (cualquiere)? Both (los dos)? None of the above (nada)? Objectively or subjectively reasonable? 20 Boyle v. Petrie (400) • Wrongful discharge case by Boyle, who wants LDC amount. – Where was Boyle before Petrie? • How was the LDC negotiated? – Who‟s Petrie Co‟s Daddy? • How did he show that to Boyle? • What did the LDC in Boyle‟s employment contract say Boyle should get? • Facts court relies on in upholding it: – – – – – 21 Other evidence relevant to validity? • Under the majority rule, is the parties‟ subjective intent controlling? Relevant? – Minority (Georgia) rule: – Why could that difference matter at trial? • Under the majority rule, if contract says: “This amount is reasonable estimate of possible damages, and not penalty” does/does not that the control the inquiry? – Is the language entitled to any weight? 22 Score sheet Valid • • • • Boyle DiNardo Truck Rent-A-Center In re Lion • • • • Invalid Semico Checkers Southpace Lake River 23 In November • Does the party challenging the clause have to show it‟s invalid; or does the party relying on it have to show it‟s valid? • Who decides if LDC is valid? – Florida, S.C. Georgia: apparently a question of fact. – Most other states: a question of law for the court. 24 What if the LDC is invalid? • Does the nonbreaching party get nothing? 25 What if the LDC is valid? • What is the impact on other remedies? – General rule? – Exceptions? • What if the nonbreaching party loses $100 as a result of the breach and the LDC is $100. Does she get $200? 26 Mitigation and LDCs: Boyle (400) & Musman (404) • As a general principle, is there a “duty” to mitigate damages? – Why is “duty” in quotes? • Do monies earned in mitigation affect the amount owed under an LDC? – Why does that make sense? • Can a plaintiff ever get a portion of the LDC, as such? – E.g.., if it‟s the court holds that it‟s a penalty, can the court award the “reasonable” part, or is the plaintiff relegated to proving 27 up damages? Exclusivity: LDC and SpecPerf? • S breaches, refusing to sell land to B. Contract contains an LDC of $10,000 to B. Can B seek specific performance? – General rule: – Exception: 28 In November…. • When you are drafting a contract for a client, why would you include an LDC? – What are you trying to accomplish for your client? – When would you not want to include one? 29 In November… • Client comes to you with a breach of contract case that includes an LDC. – What‟s your investigation and discovery going to include? – Suppose the LDC amount must be reasonable at the time of contracting. • If the evidence shows the actuals were much different, how would you get that evidence in? • What if actuals were similar to the LDC amount? 30 In November… • Truck Rent-A-Center (405) – Facts? – What‟s the lesson from the court‟s discussion of the option clause? – What “should” the breaching party have done? – Why was the clause upheld? 31