1) General Rule – Contract damages should put the ? in as good of a position as if the contract was fulfilled. 2) No action on a contract need be present for damages to be proper. An executory contract will suffice. B) Measuring Expectation Damages (229) 1) Expectation = Expected Value + Costs – Expenses Mitigated 2) Repair Theory – Damages should put things in the state that they were specified in the contract (IE fix the land as per the contract) (a) Argument against repair theory is that given a large quantity of money to repair land, the ? will simply keep the money, ensuring a dramatic windfall.
3) Diminution in Value Theory – Damages should pay the difference between value delivered and value as promised (IE pay the devaluation of the land because it wasn’t fixed after strip mining) (a) Diminution is compared to what the property would be worth if proper, not compared to any appreciated value. 4) Generally, courts favor repair theory damages, unless economic waste will occur through granting of repair damages (IE economic waste occurs if a home constructor is forced to tear down a house and rebuild it in order to use the correct type of water pipes).
(a) Economic waste is found if the repairs cost as much or more than the property is worth. 5) Rule: You have the right to do what you want with your property. (a) IE if you want to devalue your land (by putting neon green siding on your house) and you find that the contractor put grey siding on against your wishes, there has been an actual upturn in the value of your land (as compared to the green siding), but the damages will be for repair, not devaluation. 6) In general, the repair theory is appropriate cases of aesthetics, safety, or usability.
(a) Aesthetics comes from the right to do as you will with your property and the other come from the fact that the breach has rendered your property totally unusable, and as such, the breaching party should fix it. 7) In general, the repair theory is usually granted in breaches that are to the heart of the bargain, while diminished value may be assessed in incidental breaches 8) Useful Life – The court can diminish replacement value of an item by the amount of use (percentage of useful life) the ? had received from the goods. (a).
The court will not allow the ?to pay for part of the life of an item that must (for the sake of efficiency) by replaced when the entire group is replaced (i) IE if you run over a 10 year old power pole that needs be replaced in 5 years. The pole’s owner did get 67% of the life of the pole, but in the sake of efficiency, the pole will be replaced with all of the others. Thus, no windfall will befall the ? by the ? purchasing a new pole. C) The Reliance Interest (247) 1) The reliance interest is intended to bring the non-breaching party back to the status quo (the level prior to the contract).
This should give everyone back what is theirs. (a) The reliance interest is equal to what the non-breaching party spent in preparation or performance of the contract, less any losses the breaching party can prove with reasonable certainty that the non-breaching party would have suffered. (b) Reliance is available in the alternative to the expectancy. 2) Pain & Suffering may be available under reliance if pain and suffering outside the expected scope of the contract is incurred (subject to certainty, foreseeability, etc.) (a).
There must be pain and suffering inherent in the contract for compensation to be found in contract law. (b) Doctor’s breach – only an express guarantee from a doctor is actionable (outside malpractice). Some states include this in their statute of frauds. (c) Pain and suffering may (in theory) be collectable in expectation in a case where the ? “paid” the pain and suffering inherent in the contract, but received nothing in return (IE botched nose job). 3) Do reliance damages include expenses incurred prior to formation?
(a) Usually, a breaching party will only be liable for reliance damages incurred after formation. (b) A breaching party may be held liable for reliance damages incurred prior to formation (but in the same project) if the breach caused the loss of the entire project (or the damages were “within the contemplation of the parties when the contract was signed. ” D) Limitations of the Recovery (257) 1) Certainty (a) 2 Pronged test for certainty (i) Causation – You must prove damages caused by a breach. This is an absolute bar.
(ii) Amount – You must provide at least an estimate of the damages suffered by the breach. (b) Certainty is a problem more predominate for consequential damages. (c) New Business Rule – Generally, a new business will have a problem proving that they were going to make money on a contract, because they have no track record. (i) The new business rule can be overcome with empirical evidence of future profits. 2) Foreseeability (a) The ? is only liable for damages that could be “fairly and reasonably contemplated” by both parties at formation (foreseen or foreseeable).
(b) 2 Types of foreseeable damages (i) General damages – these are damages that arise naturally from a breach. Any reasonable person would have foreseen them. IE the difference between the value of goods as warranted and goods as delivered. Damages for emotional distress can be given if the distress was reasonably foreseeable due to the type of contract. (ii) Consequential (special) damages – these are damages that are remote or unusual. Liability only is present if the ? was aware of the potential damages.
There is no need to form a tacit agreement, if you have informed them of potential losses, then those losses are foreseeable. (iii) 3 Types of consequential damages in a business situation Lost primary profits – Lost profits the ? would have made in the resale of the faulty goods Lost secondary profits – Lost profits associated with goods usually sold alongside the primary goods. Secondary profits should be available if (1) the ? is unable to cover and (2) the nonconforming good was the primary good sold in the establishment.
Loss of prospective profits – Lost profits due to loss of good will towards the store and lost future business. Prospective losses are proven as diminished business after the restoration of conforming goods (as everything up to this would be primary or secondary consequential damages) (c) Caveat: under warranty theory, damages to property or person need not be foreseeable. (d) If allowance for recovery for lost foreseeable profits would create unfairly disproportionate results, the court may, in its discretion, limit recovery to reliance damages. 3) Avoidability (P 281).
(a) A ? is under an obligation to mitigate damages (no actual obligation, just the ? has no liability beyond where the ? could have reasonably mitigated). (i) The ? is also able to recover damages incurred in a reasonable attempt at mitigation. (b) Notice of Intent to Breach – if the ? gave notice of intent to breach, then any damages incurred beyond that point is considered to have been excessive (not mitigated). (c) Mitigation is a duty to reasonable extents. There is no requirement to endure undue burden, tarnish a reputation, or break other contracts to mitigate.
(d) Under the UCC, a seller of goods may be required to complete production of goods assigned to the contract if that will minimize the damages. (i) A UCC buyer may be liable for damages equal to the entire contract if (1) the goods were accepted, (2) the goods were destroyed under the buyer’s custody or (3) the goods have no resale value. (e) Mitigation in employment contracts (i) A wrongfully terminated employee (under contract) is due the full contract value, less mitigation that the employer can prove.
(ii) An employee (wrongfully fired) is responsible to seek and accept employment of similar and comparable nature, but is under no obligation to accept inferior employment (be the refusal reasonable or unreasonable). Just because the breaching party offers different employment, the ? is under no duty to accept (unless similar and comparable (same field)). (iii) A ? ’s liability may not be diminished if the ? could have maintained the job they got after wrongful termination and still worked the original job. Think fired school teacher working as a dinner waitress. The ?
would still have to attempt to find new work. 4) Liquidated Damages (294) (a) Contractual damages can be set within the contract so long as: (i) The damage amount must be a reasonable estimation of the damages at formation (or actual damages) and (ii) The damages at breach must be difficult to calculate. (b) If the estimated damages (at formation) were valid, then the clause will be held valid, so long as the damages do not reach $0. (c) No penalty (in terrorem) clauses – liquidated damage clauses cannot be veiled punitive damages clauses meant to scare the parties.
(d) Situations with a breach and no damages (i) If a breach incurred no damages, then the liquidated damages clause will be held invalid (IE if a bridge is late in construction, but the road was later in completion) (ii) However, if 2 subcontractors (bridge and road builder) are both late in completion, the contractor will be able to collect damages from both, despite the fact that damages weren’t incurred as neither was worth anything until the other completed (exception to save the contractor).
(e) Shotgun Clauses – you cannot create a liquidated damages clause that sets a single amount for X many different types of breach (each worth a different amount). That would obviously be a penalty, not an estimation of damages. (f) Liquidate damages are given in the alternative to contract damages as liquidated damages are meant to replace contractual damages that are difficult to determine. (g) Full contractual provisions (including consequentials) are available if the agreed upon remedy fails (IE if the seller agrees to replace faulty goods and then doesn’t replace them).
(i) However, a separate waiver clause of consequential damages will be held valid despite the failure of the agreed upon remedy. The exception to this rule is that waivers of consequential damages are usually unconscionable (in contracts of adhesion). (ii) Courts will generally interpret contracts to give full effect to all terms. 5) Punitive Damages (311) (a) Generally, punitive damages are not available in contract unless there is also a separate tort cause of action (fraud, malice, gross negligence or oppression mingle in the controversy).
(b) First Blush Rule – if at “first blush” the punitive damages seem outrageous, then they probably are. (i) Multipliers between 100 and 50 times damages have been held valid. (c) Bifurcated trial – some jurisdictions will separate out the punitive award phase from the rest of the trial. E) Damages Under the Uniform Commercial Code (317) 1) UCC Buyer remedies are available once the seller repudiates, fails to deliver, delivers non-conforming goods or delivers goods with latent defects. After seller’s breach, the buyer may cancel the contract and get money already paid. 2) The non-breaching buyer may:
(a) Cover (§2-712) – The buyer may purchase substitute goods (in good faith) and then recover the difference in contract and cover price (plus incidentals/consequentials and less costs saved). (i) The only duty is reasonable cover; if you spend a little more out of necessity, that will be included in damages. (b) Market Value (§2-713) – The buyer may obtain in damages the difference in the market value less the contract price (plus incidentals/consequentials and less costs saved). (i) The market value is determined at the time the aggrieved party learns of repudiation and at the place the delivery was to occur.
(c) Accepted Goods (§2-714) – The buyer may obtain in damages the difference in goods delivered value and goods as warranted value, plus incidentals and consequentials. (d) Specific Performance (§2-716) – A buyer may have a right to specific performance of goods identified to the contract if he is unable to secure reasonable cover. 3) Incidentals / Consequentials (§2-715) (a) Incidental damages – Cost reasonably incurred as a result of the breach including the cost of cover for non-delivered goods and inspection, storage or shipping for rejected goods.
(b) Consequential damages – Damages that the seller knew of at formation and could not be avoided (including lost primary sales, secondary sales, etc. ) and damage to property and person due to breach of warranty (no need to be foreseeable). 4) Sellers’ damages include: (a) Resale (§2-706) – A seller can resale goods in a commercially reasonable means (common to the industry). If the sale is in public, the goods must be sold in a reasonable fashion according to industry standard. If the goods are sold in private, then the breaching buyer must be notified (or the resale is invalid).
(i) Failed resale creates a situation where you just collect damages as if you didn’t resale (damages or profit calculation) (b) Damages (§2-708(1)) – A seller can collect the difference in contract value and the market value of the goods plus incidental, less costs saved. (i) Market value of the goods should be determined at the time of breach plus reasonable time to effect a resale. (ii) This assumes that the market price is less than the contract price, or you wouldn’t have sustained any damages.
(c) Profit (§2-708(2)) – If a seller is unable to collect appropriate damages though damages (§2-708(1)), then he can collect his expected profit under the contract plus incidentals, less costs saved. (i) This is usually reserved for lost volume sellers or when the seller is midway through production. (d) Price (§2-709) – A seller may obtain the full contract price if the goods have been delivered and kept or destroyed by the buyer or the seller is unable to resell the goods. The seller must keep the goods and deliver them to the buyer upon payment of the judgment.
(i) Note: this is a judgment for the price, not an action of specific performance. This just creates a debt by the buyer, not a court order for which non-compliance would get jail time. (e) Seller’s incidental damages (§2-710) include costs reasonably incurred in storage, shipping and resale due to the buyers breach. (f) Lost Volume Seller – a seller with an “infinite” supply of goods. Qualifies if (1) had large enough supply to provide for the original sale and the “cover” sale, (2) could have made both sales if not for the breach and (3) would have profited from both sales.
Lost volume sellers get the expected profit plus incidentals instead of market value damages. F) DTPA (Deceptive Trade Practice Consumer Protection Act) II) Restitution (337) A) Restitution is the recovery of the market value of services rendered to prevent unjust enrichment of one party and unjust impoverishment of another. 1) Market value is determined at the time of performance and is not necessarily reflective of contract price. Some jurisdictions will allow recovery greater than contract value if the value conferred exceeds the contract worth.
2) Restitution recovery doesn’t change if the contract would have lost money (as opposed to reliance or expectation interest recovery). This is because restitution is a theory of recovery outside contract law. 3) Restitution is not available if the contract is completed. B) Restitution in Lawyer’s Cases (special case) 1) A non-breaching lawyer who is fired prior to verdict is able to collect his contract price or restitution for his services (the lesser of the two).
In cases of contingency payment, the lawyer will only collect contingency payments if the client eventually is victorious and then only to the limit of the restitution value of the services rendered (or the contract price, whichever is less). C) Breaching Plaintiff – A breaching ? is due the market value of the services/goods conferred less the cost of replacing the performance due to the breach. 1) Note: if a hiring party gains no benefit from the partial performance, then no payment is due. Restitution is only available for unjust enrichment. 2) Recovery by the breaching ? is capped at the contract value.
3) A breaching ?may be able to recover some of a down payment made. The non-breaching party is able to keep 20% of the contract worth (capped at $500) plus damages. This is only applicable to instances in which a down payment has been made. III) Equitable Remedies (351) A) Equitable Remedies are appropriate in 2 instances: 1) Benefit conferred is specific or unique. (a) A security interest in land is not unique (it isn’t the land, it is just a security interest) (b) IE Loaning of money may be unique if the loan was to buy unique land (c) IE Renting specific property can be unique. 2) Legal relief is not estimatable and thus inappropriate.
(a) Considerations: difficulty in predicting profits, difficulty in obtaining replacement service/cover, ability for parties to work together, hardship on parties, laches, unique personal service, etc) B) Unique Personal Service – One of a kind talent (IE singer, painter, etc) 1) Court’s will never impose a equitable remedy forcing a specific individual to work for another party (difficulties in showing good faith cooperation, etc). However, implied in any breached contract of delivery of a unique personal service was a promise to devote oneself to the contract at hand and not work for other competitors.
Thus the court will issue a prohibitory injunction keeping the ? from working for the ? ’s competitors. C) Sellers and Specific Performance – Sellers never get specific performance; they get judgments for the sum owed them. This judgment is a debt, but the person will not go to jail for failure to acquiesce to a court order if he doesn’t pay it. D) Definiteness – The court must be able to craft equitable relief out of the contract’s provisions. Indefiniteness may make this impossible. 1) It is possible for a contract to from and yet still be too indefinite for equitable relief to be given upon breach.
IV) Parol Evidence Rule A) Parole evidence rule bars the inclusion of terms that are contradictory or within the scope of the contract and were created prior to or contemporaneous with the integrated written document (final expression). 1) No matter what – inconsistent terms will not be allowed in via the parole evidence rule. 2) Contemporaneous written documents – if a second document is created at the same time, the two document are considered a single document for the purpose of the parole evidence rule.
3) Completely Integrated Contract (Complete) – If a written document was intended to include all terms of a contract (to the exclusion of everything else), then additional terms will be kept out. (a) 3 definitions of complete (i) Actually Complete – The written document contains everything agreed to. This can be shown by a merger (integration) clause (IE everything agreed to is in this writing…) (ii) Complete as to the subject of the offered agreement. (iii) The offered agreement is “within its scope. ”
(b) Definitions of Complete will be determined though one of 3 interpretations: (i) 4 Corners – The agreement is complete if it appears to be on its face. Rarely used. (ii) Traditional – Objective test. If this outside term were agreed to, would the reasonable person have included it in this written document? If so, then the contract is inadmissible. Question of intent – “Did both parties intend for this to be a complete description of their agreement” (iii) Modern – Subjective test. Look to the evidence at bar and determine if these parties intended the written document to be complete.
This is a question of the completeness of the document, not inclusion of a term. Question of intent – “Did both parties intend for this to be a complete description of their agreement” (iv) UCC – If the outside term were agreed to, was it one that the parties would have certainly included in the document? Note that the word certainly is going to set the bar higher for if a term would have been included in an agreement; therefore, more outside terms will be let into the contract. (c) Final is a synonym of integrated. 4) Partial Integration – A contract that is partially integrated can be supplemented by consistent terms.
(a) The UCC will allow explanation of terms (course of performance, course of dealing, or usage of trade) in addition to consistent additional terms outside the scope of the contract. (i) The scope of what would be included in a written document is usually expanded with extended negotiations and (sophisticated) legal advice (as they would have thought to include all terms agreed to). (ii) IE If you have already discussed compensation/consideration in a written contract, don’t try to bring in additional consideration terms.
(b) The common law will allow consistent additional terms to be added on. (c) A term can be argued to be contradictory if it is against usual terms of business. (d) Partial integration will occur when parties intend to create a contract including all the terms of a particular area of the agreement. 5) Collateral Source Rule – If there was a separate agreement (secondary nature to the first contract), with separate consideration that is consistent with the terms of the written document and outside the scope of the written document, then it will be held to be valid.
(a) You can simply hold this to be a separate contract. 6) Merger (Integration) Clause – A merger clause attempts to keep out all additional terms with text such as “this agreement is the only agreement controlling this purchase…” (a) This is considered strong evidence against inclusion of outside terms, but is not definitive. (b) An integration clause means less if it is in a boilerplate contract. It means more if it was discussed. 7) Inconsistent Terms – a court will hold a term to be inconsistent with a contract if it is out of “reasonable harmony” with the terms and language.
(a) Conditionless Sale – if a sale is agreed to have no conditions, then addition of conditions (while the conditions may not, themselves, contradict anything) will be considered a contradiction. (b) It has been argued that any term left out of a contract is contradictory. This isn’t usual. 8) Warranty and the Parole Evidence Rule (a) If there is a written warranty and a disclaimer on the same document, there is a warranty (by law). (b) If you have a written warranty with an oral disclaimer, then you will have a warranty and no possibility of outsider terms. (No contradictory terms).
(c) If you have a written disclaimer and an oral warranty, then you will have no warranty. (No contradictory terms) 9) Oral Condition Precedents – if contracting parties agree to an oral condition precedent to the formation of the contract, then that condition will be let in despite the parole evidence rule. The contract never really forms unless that condition is fulfilled and thus the parole evidence rule won’t bar the condition. (a) Oral conditions precedent will not be allowed in if they are directly contradictory (IE this contract is not valid if I don’t receive shipment, but the contract says that you already have possession.)
B) Explanation or interpretation – the parole evidence rule will not keep out evidence of explanation or interpretation of terms in the contract. V) Interpretation (451) A) Two Basic Types of Contractual Interpretation 1) Plain Meaning (4 Corners) – Outside evidence will be introduced only if there are facial ambiguities on the contract that need to be cleared up. (a) Extrinsic evidence can be used for patent ambiguity (IE in the summer – what exactly does that mean? ) and latent ambiguity (IE it will ship on flight 787, but there are 2 flight 787 on that day). (b) Q: Is the written instrument plain and unambiguous on its face?
2) Extrinsic Evidence – Outside evidence can be used to introduce ambiguity into a contract and support an interpretation of which the contract is reasonably susceptible. (a) This is the modern, California or subjective rule. You look to all the evidence offered and the judge decides as a matter of law if the contract is reasonably susceptible to the offered interpretation. (b) Q: Is the contract reasonably susceptible to your proffered interpretation? If so, then the jury can hear evidence and consider it. B) Maxims of Interpretation (6) 1) Constructed against the drafter – Ambiguous terms should be construed
against the person who drafter the document (as they could foresee any problems). 2) Negotiated terms control standard terms – If two parties negotiated a specific term, it will control when contrary term is in the form contract. 3) Reasonable, lawful and effective terms – courts will interpret contracts to give all terms a reasonable, lawful and effective meaning. Look to the contract as a whole and accept the interpretation that makes the entire thing make sense. 4) Primary purpose – If the court can determine the primary purpose of the contract, that purpose will receive great weight.
5) Public Policy – Ambiguous terms will be construed to favor the public. 6) Specific Terms – if one clause is more specific than another, go with the more specific clause. C) Trade Usages, Course of dealings and Course of performance. 1) Non-contradictory (prior history between the contracting parties and usage of the trade) terms are impliedly included in a contract (in the UCC) and can be used in interpretation in common law. (a) Trade usages etc. can be kept out of a contract simply by expressly prohibiting them in a contract. 2) Course of Performance – Accepted manner of prior performance in this particular contract.
(a) Multiple performances need occur prior to establishment of a course of performance. (b) The opposite party must realize that you have been performing in a certain manner (IE late payments) and have had an opportunity to object for a course of performance to be established. 3) Course of dealing – A sequence of performance between the same parties in previous similar contracts. 4) Trade Usage – A practice needs regular observance in an industry such that it would justify an expectation of observance within a contract. (a) Trade usages must be proven by clear and convincing evidence.
(b) Trade usages are only applicable when all parties are within the trade or should have known a usage (including those that regularly deal with member of the trade). 5) Value of terms: (a) Express provisions > course of performance > course of dealing > trade usage D) Ambiguity of terms 1) If both sides took the same meaning at formation, then that meaning controls. 2) If the parties had two different interpretations from a term, but one side knew of both interpretations, rule against the party in the know. (a) If one party should have realized a second meaning, rule against him.
3) If neither party knew of a second existing interpretation, then no contract was formed. E) Texas Law – Ambiguity 1) Plain meaning interpretation – if there is a clear meaning present, as a matter of law, that will be the accepted meaning. If not, the possible meanings will be presented to the finder of fact. VI) Impracticability & Frustration of Purpose A) Supervening impractibility excuses performance (barring an express contractual provision) if: 1) After a contract is made 2) Performance becomes impractible (a) Subjective impractibility – I personally cannot perform, this isn’t excusing.
(b) Objective impractibility – No one could perform, this is excusing. (c) Supervening impractibility – the outside factor occurred after formation. (d) Existing impractibility – the outside factor was present prior to formation, but the knowledge of this fact was not reasonably foreseeable. (i) Existing impractibility isn’t discussed in the UCC and as such common law controls. (ii) Existing impractibility is different from mistake in that mistake voids the contract totally but impractibility will allow for collection on performance given. Mistake may allow a contract to continue and impractibility leaves it impossible to perform.
In mistake, the ambiguity might have been foreseen, but impractibility was not reasonably foreseeable. 3) Without fault of the breaching party (must do everything short of undue burden) (a) No excuse if the breaching party was at fault or failed to exert reasonable energy. 4) By an outside event (not done by a contractual party) 5) The non-occurrence of which was a basic assumption (the occurrence was reasonably unforeseeable) (a) If a party could reasonably foresee the occurrence of an outside action, they are said to have assumed the risk and should have accounted for that risk in the contract.
(b) A guarantee clause is an express assumption of the risk. (c) Assumption of risk can be explicit or implicit. B) Force Majuere Clause – A contractual provision that allocates risk if a unforeseeable events preclude performance. 1) A force majuere clause is valid to the extent that an outside actor caused the problem and that the problem was completely outside the breaching party’s hands. (a) A problem will no be held to be outside a party’s control if they could have foreseen the problem or if they didn’t take all steps (short of undue burden) to ensure performance.
C) Applications of Impractibility 1) Personal Skills – If a contracting party becomes (by no fault of his own) unable to give his unique performance (IE injury), then the his performance is impractible and he is excused. 2) Contractors (special rules) (a) Building a structure – if a structure is destroyed during its building, the builders will be liable to rebuild it. The destruction was reasonably foreseeable and thus, impractibility doesn’t apply.
(b) Renovations – if a complete structure is destroyed while a contractor is renovating the inside, the building owner cannot plea impractibility as he was in a position to assume the (reasonably foreseeable) risk. He must pay the renovators in restitution. D) Identified Goods Under the UCC 1) Destroyed Goods – If identified goods are destroyed prior to delivery (without fault), the contract is avoided. 2) Damaged Goods – If identified goods are damaged prior to delivery (without fault), the buyer may accept the goods (with due allowance for damage) or refuse to accept.
3) Dead Seller – If a seller dies prior to delivery, the contract is valid with the estate. 4) Diminished Capacity – If a seller has multiple contracts for a good but full production becomes validly impractible, he must distribute the right to purchase proportionally among his contracts and regular customers (including himself) and allow them to purchase or refuse. 5) Increase in costs – Increased cost alone won’t create excuse by impractibility, but unforeseen acts such as war, famine, etc causing extreme shortage may excu