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Expectation Damages

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					                                               Expectation Damages
                                                 (expectoutline.doc)

Expectation damages are the primary/normal measure of damages for breach of contract

Purpose
To restore promisee to the same position, as far as money can do, that they would have been in had contract been
performed as promised.

       Formula: Difference b/n plaintiff’s expected financial position had K been performed as undertaken and P’s
        actual position b/c of D’s breach.

Expectation damages may include both pecuniary and non-pecuniary losses in the forms of
    Entitles P to recover both wasted expenses and lost profit. Note that the P can also recover wasted
       expenses based on reliance or restitution. Where P has not incurred wasted expenses as a result of D’s
       breach, the expectation interest will consist of the net gain that the P would have obtained from the K.

Basis of expectation damages appears to be distributive justice. Goes beyond restoring the status quo ante to
actively create a new situation for the benefit of P based on the expected value of performance

Why should the law protect expectation interests in the absence of reliance? (Consider the materials on the
theoretical basis of expectation damages as background. They would not be covered in class)
For theoretical underpinnings of expectation interests, consider Fuller & Purdue (277); Beale (383); and Vernon
(387)
     Why do Fuller & Purdue regard expectation damages as a queer kind of compensation?
     Which argument(s) do you think justifies expectation damages?
     Consider some advantages of expectation damages.


Meaning of Value
    Quantum of damages ascertained by reference to value of P’s interests in performance. Yet “value” is not a
      neutral concept.
    Market price may provide an indication of P’s interest in performance but this cannot be determinative in all
      cases.
    Meaning of value may be influenced by policy considerations and judges’ prejudices.


Expectation Damages in Particular Situations

Sale of Goods

Breaches of K can arise from:
   1.      Non-performance
   2.      Delayed Performance
   3.      Defective performance

Lost Profit and Other Consequential Losses
   P’s expected gain from a K may exceed difference in market value and K price. In addition, P may incur
   consequential losses in an attempt to procure substitute goods or remedy defective goods. P may also suffer
   loss of profits as a result of D’s breach. Are all these losses recoverable as expectation damages?

Given the P’s duty to mitigate (take reasonable steps to limit losses resulting from D’s breach), under what
circumstances should future profits be recoverable?

Lost profits are speculative and therefore subject to some limitations.

General Principles on Recovery of Lost Profits
       P may recover difference b/n market and K price, cost of replacement or diminution in value due to breach
        plus consequential losses incurred in reasonable mitigation. See McLean v. Canadian Vickers, a case
        involving delivery of a defective printing press. P was entitled to recover the lost value of the machine due
        to the breach of warranty and reasonable expenses incurred in an attempt to repair the machine. See also
        Ticketnet v. Air Canada (Both cases will be discussed in detail under “lost profits and double recovery.”
       Lost profits may include immediate and future losses including loss of opportunities to earn profit in the
        future directly resulting from D’s breach.
       While past profits may be readily ascertained, the assessment of future profits can be problematic. Care
        must be taken not to make D an insurer for P’s benefit. Recovery is limited to lost profit for period during
        which breach is the effective cause of P’s loss - Canlin v. Thiokol
       Onus of Proof: P must establish profits it would have earned in the absence of D’s breach. Though court
        would normally accept circumstantial evidence re lost profit it would not speculate about the P’s loss.
        Recovery may be limited to wasted expenses where P fails to discharge onus.

       Type and extent of loss must be in the reasonable contemplation of the parties at the time of K. Losses that
        are too remote are not recoverable.
             Canlin suggests that remoteness requirement would be readily met in most commercial contracts
                 but it should be noted that such losses would not always be foreseeable
       Recovery is subject to P’s duty to mitigate. Losses already avoided or that could have been avoided
        through mitigation are excluded from recovery


How were these principles applied in Canlin?

Canlin Ltd. v. Thiokol Fibres:
D, in breach of K supplied P with defective materials. D was aware that P needed materials to manufacture a
specific product (swimming pool covers) and was therefore aware of the quality of materials necessary to meet P’s
needs. P was flooded with customer complaints with the result that its reputation was seriously tarnished in the
industry. P stayed out of the market for 4 years and successfully recovered its lost future profits for that period from
D.

       What was the court trying to do in Canlin? Do you think the decision was just as between the parties?
       Was lost profit reasonably foreseeable?
       How did Cory J.A. distinguish Simon v. Pawsons?
       How did court respond to D’s argument that P should have mitigated?
       In light of the Ps’ duty to mitigate, was the court’s decision to award Ps’ lost profits for four years justifiable
        in the circumstances, that is, was the decision fair as b/n the parties?
             o Was it reasonable for the P to have stayed out of the market for that long?
             o How could the D have protected itself against such liability?
             o Was it reasonable for court to have ignored notional interest Ps would have earned on capital?
             o Does the decision reflect an efficient allocation of contractual risk?


Defective Performance (Delivery of Defective Goods)
       P is entitled to the cost of replacement or substitute goods, or the cost of remedying the defect.
       P may also be entitled to lost future profits.

Wasting assets – Should a P be entitled to recover lost profits for what would have been the useful life of the asset
 but for the D’s breach? See Sunnyside Greenhouses Ltd. v. Golden West Seeds Ltd (1972) 27 D.L.R. (3d) 434
                             (Alta. C.A.), aff’d (1973) 33 D.L.R. (3d) 384n (S.C.C.)


This was an action for damages arising out of an alleged breach of warranty. P produced plants in greenhouses. D
supplied roof panels made of a plastic material represented to have a life of from seven to ten years. Panels began
to deteriorate after 3 years and P alleged loss due to the failure of the plants to mature. P sued for damages. The
trial Court allowed damages but only on the capital loss. He made no allowance for loss of profits. P appealed the

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quantum of damages and the defendant counter-appealed against the finding of an implied warranty of
merchantable quality.

HELD: P was successful in part. The cross-appeal was dismissed. P was compensated for replacing defective
panels sooner than it otherwise would have done but for D’s breach. P was also awarded interest on moneys spent
earlier than it normally would have been spent in replacing defective panels. P was also awarded loss of profits for
one season. The plaintiff had an obligation to take steps to mitigate the damages within a reasonable time after the
defects became apparent and was therefore not entitled to lost profits for the useful life of the panels absent D’s
breach of warranty


Can Canlin be justified in light of the principles articulated in Sunnyside?


Issues of Double Recovery in Recovery of Lost Profits

P is not to be placed in a better position than s/he would have occupied had the K been performed as promised.

Calculation of lost profits can be problematic in the context of sale of income generating assets that turn out to be
defective.

Can P claim diminution in capital value of machine due to D’s breach of warranty in addition to lost profits it would
have earned had machine been sound?

Issue: Whether P can claim lost profit (expectation) and wasted expenses (reliance) at the same time

According to McLean v. Canadian VIckers, P must choose between damages for lost profit based on position he
would have been in had K been performed and restoration to his/her original position (reliance). To claim both
would constitute double recovery.

Is this true in all cases?


Important to ascertain what kind of profit P is claiming under lost profit (expectation) – is it net or gross profit? See
Ticketnet Corp. v. Air Canada

        Where P claims Gross Profit s/he is not entitled to claim reliance damages (wasted expenses).
        Where claim is for gross profits a deduction must be made for expenses saved due to D’s breach, that is,
         expenditure that P would have incurred to generate the profit). This may include both capital and operating
         expenses. As well, deductions must be made for residual value of asset in P’s hands, if any. (This was not
         necessary in Ticketnet b/c the software had no residual value)
        P can claim both expectation and reliance where lost profit is limited to net profit. Where claim is for Net
         Profit, P can claim wasted expenses as reliance damages plus net profit as expectation.
        Wasted expenses may include costs incurred before and after D’s breach that can no longer be recouped
         b/c of breach.
        Where asset has residual value after breach


Critique of McLean

In McLean, the Ont. C.A. allegedly followed the British C.A. decision in Cullinane v. British “Rema” Manufacturing
Co, [1954] 1 QB 292 (CA), where it was held that the P must elect b/n compensation for the capital value and loss
of profits and that to claim both would be double compensation. Are the two cases indistingushable?

Do you think the Ontario Court of Appeal decision in McLean is justifiable?

For a critique of the McLean decision, see Baer (CB, p. 304). Are those criticisms justified?

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Did the Ontario Court of Appeal over compensate the plaintiff in Ticketnet v. Air Canada?

Case involved claims for lost profits for non-delivery of a capital asset. The asset had no residual value after the D’s
breach. P (Ticketnet) had incurred capital expenditures that it had no way of recouping b/c of AC’s breach (wasted
expenses). It also incurred expenses in mitigation after the breach.

In an action for breach of K against AC, trial court awarded Ticketnet damages for loss of profits and lost business
opportunity in the software but dismissed Ticketnet’s claim for expenses incurred prior to repudiation. It was only
allowed partial recovery for out of pocket expenses incurred after the breach in an attempt to mitigate its damages
($500,000 for out of pocket expenses truly spent to mitigate damages.)

Questions
What assumption did the trial court make in holding that Ticketnet was not entitled to separately claim wasted
expenses in addition to projected profit.

Laskin J.A. Appeal allowed in part
P was held entitled to recover out of pocket expenses incurred before and after D’s breach that had been wasted
due to D’s breach in addition to projected net profit.

Was the decision fair to the defendant?




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