Contracts outline, Epstein, Fall 2007 (I got a B+ in the class)


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Epstein, Fall 2007

(I got a B+ in the class)
Prima Facie case of contract:

  1. Bargain between plaintiff and defendant

  2. What the promise was that defendant had undertaken

  3. Defendant has not performed that obligation to your detriment

Once state that, have option to deny: was no bargain, or yes there was a bargain, but I performed. Or yes there was a bargain, but was non performance rather than breach (condition precedent to promise was not performed)
The Legally Enforceable Promise: Basic and Recurring Themes (Chapter 1)

  1. Goals of Contract Law

    1. To avoid conflict and encourage cooperation—want both parties to gain

    2. Deal with private rights--disputes between private individuals, not the state

    3. 3 Measures of Damages:

      1. Restitution-return what was taken from plaintiff. (Return to status quo)

      2. Reliance-return plaintiff to place he would have been in had he never entered into the contract, or give him sufficient $$ that he is indifferent (time 0 - time 1)

      3. Expectation-give what was expecting at completion of contract. (time 2-time 1). (Return to completed state)

        1. Where expectation measures are large relative to cost, they are less likely to be applied.

    4. Differences between torts and contracts
      1. If a presumption/social norm is irreversible, it’s likely to be a tort. If you have a right to flip the norm by agreement, it’s a contract.

      2. Torts are moves you’re not allowed to make; contracts can be altered by voluntary means. Boundaries between the two often blur.

  2. Expectation Damages Principle

    1. Give damages equal to what makes you indifferent to whether or not the contract had been completed. Problems arise out of how do you measure this? Have to ask what was promised and how much it was worth

      1. Diminution in value-give the difference in the market value of the thing of the completed contract and what it’s worth now. Works well if there is no subjective value to what was promised.

      2. Cost to completion-give the cost for the amount of work required to finish the contract. Works well if there is subjective value.

    2. Cases

      1. Hawkins v. McGee-doctor performing operation to remove scar tissue stated to patient “I will guarantee to make the hand a 100% perfect hand or a 100% good hand.” Hand was worse off as a result of the operation.

        1. Holding: There was a contract because doctor offered assurances in order to convince father to let him do the operation; the measure of damages is the difference between the value of a perfect/good hand and the value of the hand in its present condition, including any consequences fairly within the contemplation of the parties when they made their contract (expectation damages). Pain and suffering is not valued in the damages because the plaintiff expected pain and suffering as part of the operation.
      2. Groves v. John Wunder Co.-Groves leased land to Wunder for $105,000 to remove gravel and agreed to leave the land at a uniform grade level with the road. Wunder deliberately did not do so; it would cost $60,000 to grade, which would only improve the value of the property by $12, 000.

        1. Question of Case: What is the proper expectation measure of damages-cost of completion or difference in market value?

        2. Substantial Performance: when contractor willfully and fraudulently varies from terms of the contract, he can’t sue and have the benefit of the equitable doctrine of substantial performance.

        3. Court holds that defendants are liable to plaintiff for reasonable cost of doing what defendants promised to do ($60,000). Theorize that returning land to grade was part of lease price—if didn’t want this, would have negotiated a higher lease price. Don’t know what the negotiations for the $105,000 entailed—have to figure out cost of compliance of each clause.

        4. SUBJECTIVE VALUE issue, which is idiosyncratic to the owner. If the land has high subjective value, owner will use the money awarded to fix land. If not, will just take the money. If the land has no subjective value, then value of performance overcompensates owner.

        5. Problem with this case is it allows for renegotiation after judgment if the land has no subjective value and owner just wants cash. Want to find a way around this—bar ex post bargaining

      3. Peeveyhouse v. Garland-P leased land for coal mine with the express provision that D would fill in pits and smooth land. D performed none of these, which would have cost $29,000, but increase the value of the farm by only $300.

        1. Court held could only recover $300 on theory that no person can recover a greater amount in damages for breach of an obligation than he would have gained by full performance
        2. However, in negotiations for contract, P specifically passed on a $3000 option if gave up right to fix land, suggesting the land had subjective value to them—should have used this as a lower-bound value for restoration of land.

        3. End-state problem—last act of performance in contract with no price is often breached—want to write in a clause to deal with breach beforehand.

  3. Measuring Expectation Damages

    1. Plaintiff’s Election of Remedies: If you take something from me, get my loss or your profit, whichever was better.

    2. Market Value/Contract Price Difference: As a general rule of damages in the event of breach, often get the difference in the contract price and market price at time contract was supposed to be performed.

      1. Contract for Sale of Goods: Standard damage measure for breach on sale of goods: Damages=contract price-market price(price sold to other person)

        1. Have to ask what kind of transaction this is: Sale of Specific goods (your goods) versus sale of goods by description (goods can come from anywhere)

        2. Acme Mills v. Johnson-D agree to deliver 2,000 bushels of wheat in sacks to be furnished by P, to be delivered from the thresher, at $1.03. D admitted breach of contract, but denied P was damaged; pleaded that he threshed his wheat after the time fixed for delivery, and wheat was then worth only 97.5 cents per bushel. Prior to date of delivery, D sold his wheat to Liberty Mills for $1.16 a bushel. P argues because of this, D owes him the difference in price between the wheat sold to Liberty Mills and the contract price.

          1. Holding: NO DAMAGES awarded because the contract price was actually HIGHER than the market price at the date the wheat was to be delivered—the plaintiff actually SAVED money by the defendant’s breach.
          2. Not clear if this is a sale of specific goods or goods by description; if it was a not for specific goods, then it was an individual transaction and D was not legally wrong to sell wheat prior to delivery date to someone else.

      2. Contract for Sale of Land: Same as contract for sale of goods; Standard damage measure= difference in contract price and fair market value. If no actual loss, no damages.

        1. Laurin v. DeCarolis Constr. Co.-P purchased lot from D. Prior to closing of transaction, D removed gravel from property without P’s approval. FMV of gravel=$6,480.

        2. If deliberate or willful breach, damages should =FMV gravel-cost of labor, because in selling gravel, sold both gravel and services required to remove it. Cost of gravel is upper bounds on damages. FMV of gravel rather than diminution of land strips D of wrongfully derived profit.

          1. Should NOT include cost of labor, as this would overly compensate.

        3. Epstein thinks this should be treated as a tort of conversion.

    3. Limitations on Expectation Damage Principle

      1. U.C.C. §2-712: If seller breaches, buyer has an obligation to cover the contract if he can find goods in substitution of those from the seller. If he doesn’t cover, he can’t recover consequential damages

        1. Damages that can be recovered are the cost of cover and the contract price together with any incidental or consequential damages, less expenses saved in consequence of breach.

        2. Consequential damages-those damages above and beyond cost of contract as a result of the breach.
          1. Missouri Furnace Co. v. Cochran-Installment contract for a year for sale of coke. Fixed price at $1.21. Seller rescinded contract, buyer made contract with another seller for remainder of year for $4 ton, which was the market rate for such a forward contract at the time, but was lower than the spot market price.

            1. Court does not allow difference; says can recover the damages from the breach of contract, but not the difference in the new contract because it is a separate, independent contract. Probably wrong decision.

          2. UCC 2-712 would allow to cover today; If seller, want to make sure buyer states very early on whether it is a cover contract or independent action since they have the option, to prevent ex post opportunism.

          3. Cover-can cover in sport market cover or fixed cost cover. 2-712 gives you the option.

      2. UCC §2-610-Anticipatory Breach section; If you breach before a contract is due, this discharges any duties from the other side and they can try to cover. Can sue either on the date of the breach or can wait all the time up to when the contract should have been fulfilled.

        1. Hochster v. De La Tour-guy hired to be a travelling companion starting June 1st is notified on May 11 that D no longer requires his services, breaching the contract before it is due to be performed.

      3. Neri v. Retail Marine Corporation-Buyer contracted to purchase new boat, put down deposit of $4250. Buyer backs out after boat has been ordered, sues to get refund on deposit. Seller later resells boat for profit of $2,579. Incurred incidental expenses of $674 during time boat remained unsold.
        1. Purpose of down payment is to add stability to relationship. Probability of breach is much lower if have security deposit. Seller’s reputation is important, so not likely to breach. Buyer less likely to breach if has down payment.

        2. Result of this case involves UCC provisions:

        3. UCC § 2-718: Liquidated Damages-fixed monetary value of damages. Law treats liquidated damages as upper bound on amount seller can keep from buyer. If the seller withholds delivery of goods because of buyer’s breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds: 20% of total performance, or $500, whichever is lower. This amount can be reduced further by 2-708(2)

        4. UCC § 2-708(2) (Seller’s Damages for Non-Acceptance or Repudiation)- Seller can recover lost profits, the amount he would have made if the transaction had gone forward, in order to put him in as good a position as he would have been had the contract been performed, as well as incidental costs, because were it not for buyer’s breach, he could have sold two boats.

        5. Reading these two provisions together, Damages for Buyer in this case are: Deposit value-lost profit-seller’s incidental expenses: $4250-$2579-$675=$997 (seller get $3,253)

      4. Illinois Central R.R. Co. v. Crail-if you are buying wholesale to resale at retail price, but your supplier breaches, you can only recover the wholesale price, not the retail price, because purpose of contract law is to compensate only for injury actually suffered, and if you can replace loss on wholesale market, that’s what you should be compensated for.

    4. VP - cost saved=rel + LP Formula for how to think about damages in breach of contract. Each side uses different attack to get at expectation measure of damages, so only need to be able to determine one side.

      1. VP=value of performance to innocent party. Typically equal the contract price.
      2. Cost saved in consequence of breach (future expenditures)=unavoidable loses, have duty to mitigate these. If seller has delivered performance and buyer just refuses to pay, this is zero and damages are just VP. (UCC § 2-709)

      3. Rel=reliance costs, all money that you as innocent party have spent prior to the time of the other side’s breach.

      4. LP=Lost profit. Usually assume positive, because don’t enter into agreement without profit expectation.

      5. Things to keep in mind when using this formula:

        1. When dealing with reliance costs, reliance costs made before the contract may be taken into account.

        2. If you can show lost profits to be negative, this can be used to offset reliance costs until the left side is equal to zero.

        3. If the damages are large, have to decide whether or not it is in the interest of the two parties to keep to this form or deviate

        4. Performance of two sides completely independent in this model; not always the case in real life (ie, construction contracts)

      6. Chicago Coliseum Club v. Dempsey-Dempsey entered into contract to appear in fight and to not appear in any other boxing match prior to the fight. Dempsey breached contract, stating he was training for another upcoming match when the Club’s insurers tried to contact him.

        1. Court recognizes four different stages of damages to think about:

          1. Lost profits—Deny this because say too hard to determine-BAD. Should try to estimate, get range from 0 to gross profits. To just say it’s zero because you couldn’t estimate severely undercompensates. Judge only gives reliance costs. Should have used reliance cost as lower bound.

          2. Expenditure that occurred prior to the signing of the agreement before P and Dempsey—prior to signing, these were at P’s risk. But once he signed, the risk paid off, so Dempsey should be responsible for these damages.

          3. Expenditure incurred after signing agreement before the breach-recoverable
          4. Expenditure incurred after the breach-- Not recoverable, shouldn’t mitigated.

      7. Security Stove & Mfg Co. v. American Ry. Express Co.-Guy ships packages for exhibition, one he needs doesn’t arrive in time because of the shipping company and the display is worthless.

        1. Reliance costs-expenditures both before and after entered into contract. No lost profits in this case (greater than zero, but not calculable). No cost saved. Have to figure out value of performance.

      8. Albert & Son v. Armstrong Rubber Co.-Contract for four rubber refiners; two were delivered on time (1943), but the other two were delivered two years later (1945). Buyer refused to accept all and sued for breach. Buyer had built a specific foundation for the refiners

        1. SPECIFIC ASSET-if you can’t sell something in the market after a breach because it is needed for a specific purpose in the contract, can have the cost of this asset in future expenditures.

        2. Don’t know VP; business was not profitable because war ended. Future expenditures—rubber wasn’t altered by the breach, so can’t sue for these damages. Foundation does count as a specific asset. Allow reliance term to survive; If you can show lost profits to be negative, then this can be subtracted from reliance term.

      9. Mt. Pleasant Stable Co v. Steinberg-Performance contract, profit per unit load of $1. P bought Cleist horses (bought for $625, sold for $485) specifically for use in D’s trucking.

        1. Lost profits easy to figure out-number of loads left times the profit per unit; Court does not allow to recover for loss on horses because says if had completed contract, could only recover for contract price. WRONG result because horses are a DEPRECIABLE ASSET
        2. DEPRECIABLE ASSET—If a depreciable asset is used in a contract, have to consider the change in market value and recover for the change in the asset as a result of the contract if the price has decreased more than normal time depreciation as a result.

          1. Recovery for Asset=Amount Realized – Adjusted Basis, where AB is original cost-depreciation and amount realized is the gain or loss from the original basis of the item.

          2. E.g., here, say adjusted basis is $500. Recovery would be $15 ($485 (sell price)- $500)

  4. Mitigation of Damages

    1. In general, have a duty to mitigate to prevent further losses once the contract has been breached.

    2. Rockingham County v. Luten Bridge Co.-Luten bridge contract with county to build bridge; county rescinds contract and notify plaintiff that contract wasn’t valid due to some local politics and construction should be stopped. After receiving notice, Plaintiff continued to finish bridge.

      1. Luten Bridge can only recover for the amount of work done up until notification of breach, including profit or loses up to that point, minus cost saved, but cannot recover for any work done after was told to stop. Can’t add to damages once contract breached.

    3. Performance Contracts

      1. When mitigating in employment circumstances, employment found must be “comparable” to job lost.

      2. Duty to mitigate rare in employment contracts; usual negotiate severance pay.

      3. Parker v. Twentieth Century-Fox Film Corp.-Shirley MacLaine (parker) was offered lead in musical film; However, Twentieth century canceled contact and, for the purpose of “avoid[ing] damage to you,” offered to employ plaintiff as a lead in a western, with the same provisions as the first contract.

        1. Court held she did not have to mitigate by accepting the offered role because it was not “comparable employment.” Probably should have mitigated if she was doing another film at the time.
        2. In performance contracts like this with stars/famous people, have to take into account reputation and that value of performance isn’t just the amount of money in the contract.

      4. Billetter v. Posell-Lady employed for $75 a week; was told she would have to take a job for $55. P left and sued for $75/wk salary.

        1. General rule on paycuts is can always walk out and take the full amount; no one put in position of being told will be paid less and then have to sue for the difference.

        2. With employment contracts, can’t know left side because don’t VP, can’t use right side because don’t know LP, so best to negotiate severance formulas ex ante into contract.

  5. Lost Profits in Damages

    1. Can only recover what is reasonably foreseeable by the parties (Hadley)

    2. Hadley v. Baxendale-Mill stopped working because of broken crank shaft. When P took crank shaft to be shipped to manufacturer as model for replacement, told shipping company the shaft must be sent immediately. Delivery of shaft was delayed, and mill was stopped for several additional days as a result. P sue carriage company for lost profits as a result of the delay.

      1. Carriage company not responsible for lost profits because plaintiff did not inform them of special circumstances. Suggest if had informed them of special circumstances, they would be responsible.

      2. This case doesn’t reflect reality of carrier business today; most carrier companies will make you insure for item, will only pay up to a certain amount.

      3. If you really need something, send through multiple carries at different times.
    3. Globe Refining Co v. Landa Cotton Oil Co.-Contract for sale of oil. P sent tankers from far away, but D breached contract. Knew cancelled contract on Sept 2, but didn’t notify P until Sept 14th. P claims had he known of breach, he could have been supplying himself elsewhere ($2000 damage) and lost use of its tanks for 30 days ($700 damage estimate)

      1. Damages not affected by loss of use of tankers—D could have sent tankers from anywhere; assumed risk of selling tankers from far away.

      2. Assumption of Risk formula—Specifically told this DOESN’T work in the UCC

    4. Heron II case-P ships sugar to Basra; ship stops 3 times on way, and by the time it gets to Barsa, the sugar prices have changed because another sugar ship had arrived and satiated market. P sue for loss of profit because of delay.

      1. Can’t recover for lost profits; If expected value at time of intended delivery was the same as the expected value at actual delivery, you can only recover the value of interest for delayed shipment. Because you are selling in the spot market, you don’t know if the price of sugar is going to go up or down, so can’t claim lost profits when you just as easily could have gained by boat being delayed.

    5. Victoria Laundry v. Newman Indus. Ltd.- P purchased a boiler for laundry business. Boiler delivery was delayed; Defants knew at time of contract that P were launders and dyers and wanted to use boiler in business.

      1. P can recover for loss of “business profits” during the delay period, but can’t recover lost profits for “exceptionally lucrative contract.”

      2. Restatement says give lost profits unless too big.

      3. This is wrong in terms of the foresight formula, because if you know you’re going to have this thing you need, you will have both high contracts and low contracts.

    6. Hector Martinex & Co v. Southern Pacific Tranp. Co.-D carrier was a month late in delivering dragline which shipper intended to use in strip mining.

      1. Foreseeability Doctrine-Full lost profits its awarded because it was known the dragline was going to be used.
    7. MindGames, Inc. v. Western Publishing Co.-P had license contract with Western publishing for game. 15% royalty on all games sold, remain in effect until Jan 1993, for another year if paid at least 1.5 million minus royalties paid before then, and option for subsequent years if paid annual renewal fee of $300,000. First year paid $600,000 in royalties, dropped after that. Did not pay the $900,000 to renew contract, but continued to do business for another year. Feb 1994, parties parted. MIndgames asking for $40 million in lost profits up to the future.

      1. Clearly asking for way too much in lost profits.

      2. Lost profits: only time with lost profits was last two years when game sells dropped. Upper bound will be $600,000, since that’s what collected when sales were good.

      3. Normally would have termination fees so don’t try to speculate if want out of contract.

    8. Freund v. Washington Square Press, Inc.-P granted D exclusive rights to publish book. Agreement called for $2000 advance plus royalties. D agreed to publish hardbound edition if didn’t terminate agreement within sixty days of manuscript. D paid advanced, but merged with another company and ceased publishing hardbacks. Never terminated agreement, and refused to publish book in any form.

      1. Cost of publication NOT appropriate measure of damages because would put P in far better position than he would have been if contract had been performed. Allow P to recover nominal damages

      2. Cost of damages to non-breaching party can’t be measured by amount saved by breaching party! (here, that would be cost of publication)

    9. Fera v. Village Plaza, Inc.-P signed lease to open a “book and bottle” shop in d’s shoppoing center. P’s space was given to another tenant, and D’s offer of alternative spot was refused because it was unsuitable.

      1. If there is some injury, don’t preclude recovery just because lost profits are speculative and hard to prove; DOESN’T mean you just assume them to be 0.

      2. New Business Rule: Hard to predict lost profits, but should find some method of estimation that will be lower than actual damages (which are too hard to prove) and more than 0.
  6. The Restitution Alternative

    1. Goal of restitution is to try to return wronged party to the status quo ante.

    2. Statute of Frauds-In most instances, an oral contract is valid. However, certain arrangements, by statute, must be evidence by a writing signed by the parties sought to be bound to be valid. If arrangement is fully executory under contract covered by statute of frauds, essentially you lose all your profits and have no reliance or restitution costs.

      1. Fully Executory: promises have been made, but nothing has been done on them yet—gap between promise and performance.

      2. Arrangements under the statutes of fraud (almost all have exceptions):

        1. Contracts for the sale of an interest in land

        2. Contracts for sale of goods for a price exceeding a specified amount ($500 or more in UCC, § 2-201)

        3. Promises “to answer for the debt, default, or miscarriage of another” (suretyship or guaranty)

        4. Contracts “not to be performed within one year”

        5. Contracts in consideration of marriage.

      3. Purpose of statute of frauds is to improve security of transactions and prevent fraud.

      4. Exceptions

        1. If the defendant has gained something from the plaintiff, this can be recovered. (Restitution)

        2. If plaintiff has somehow improved property, contract can be enforced because improvements suggest an agreement. (See Seavy v. Drake, Reliance on promise, p. 13)
    3. Quasi-Contractual Relief (restitution): situation in which the plaintiff has conferred a benefit on the defendant for which the defendant is not contractually liable to pay. Designed to avoid injustice by preventing unjust enrichment of D to the detriment of the P. Quasi-contractual relief may be sought in:

      1. An unenforceable contract (such as one under the statute of frauds) if there is unjust enrichment

      2. A material breach of contract—if an enforceable contract is materially breached, restitution damages may be awarded instead of expectation damages; typically more will be recovered in restitution

      3. No contract involved, but the plaintiff has conferred a benefit on the defendant by rendering services, had the reasonable expectation of being compensated for the value of the benefit, D had reason to know of P’s expectation, and the D would be unjustly enriched if he were allowed to retain the benefit without compensation.

    4. Boone v. Coe-D owned farm in TX, made verbal contract with P to rent them the farm, and told them he would have a house ready on the farm for them. P travelled for 55 days from TN, D refused to let them occupy house and form.

      1. This case falls under the statute of frauds because it is an oral contract on which the defendants had not yet received any benefit, so no unjust enrichment, so not an exception to statute of frauds. P can’t recover.

    5. United States v. Algernon Blair, Inc.-Subcontractor brought action against contractor. Contractor refused to pay for crane rental, so subcontractor claimed this was material breach and ceased work after completing 28% of its work. Brought action to recover for labor and equipment furnished. Had sub completed contract, it would have lost more than it made.

      1. Albert rule (if lost profits are negative, then reliance costs are diminished) doesn’t work in this case because the breaching party got the benefit of work done, so the Albert rule would lead the breaching party better off in virtue of the breach.
      2. Quantum Meruit- plaintiff in quasi-contractual situation is entitled to the reasonable value of his services in order to prevent unjust enrichment. Here, this will give more than expectation damages since it was a losing contract.

      3. How to deal with material breach to prevent recovering more than performance price

        1. Write in clause into contract to say in event of material breach, can only recover up to performance price, no matter what expenses you spent

        2. Negotiation-start to list things that constitute material breach at front end.

        3. Arbitration and cure provisions—if material breach, get arbitrator within certain time frame to decide if it really is a breach.

    6. Britton v. Turner-P agreed to work on D’s farm for one year, for $120 a year. P quit after 9 ½ months, claiming in quantum meruit.

Stark v. Parker-action to recover balance due for services rendered on D’s farm. D admitted P performed the service and that he had paid him from time to time, but that P was supposed to work for a year, for a sum of $120, and P voluntarily left service before the year was up, without any fault on part of D.

      1. Whether or not you allow recover depends on whether or not it is a minor breach or a major breach and whether or not contract is entire.

      2. Entire contract: one in which the performance of the worker is a condition precedent to payment he is to receive.

      3. If minor breach in installment contract, gets $10 and has to keep working. If major breach, can get all $120.

      4. If entire, doesn’t get any. Perhaps because bulk of work is harvest time and quit before harvest. Have to look at circumstances. Different from contract for sale of goods because if you don’t like them, reject them, but can’t reject work that’s already been done.
    1. Kearns v. Andrew-P owned land was trying to sell to D. D became dissatisfied with contract, but agreed to go through with it if P made certain alterations. P did this, but D refused to complete the purchase. Alterations had made house less saleable, but P did sell property for slightly less than first contract.

      1. Allowed to recover expenses to make property idiosyncratic to buyer, but not allowed to recover costs to alter back if other party backs out.

    2. Pinches v. Swedish Evangelical Lutheran Church-Building wasn’t built to specifications. Fault of both P and D’s architect. Would be impossible to fix defects without taking building partially down and rebuilding.

      1. Court gives diminution in value to be subtracted from contract price rather than cost to repair since both parties are at fault.

      2. If MULTIPLE parties at fault, try to divide loss by number of parties that are equally responsible.

      3. If the original contract would allow a surplus for the defendant, want to preserve the same scale of surplus when dividing damages.

    3. Schwasnick v. Blandin-Lumberman contracted to cut timber on D’s land left job when D, claiming defective work, refused to pay a salary installment.

      1. Since guy in breach willfully quit, only entitled to be in same position as he was before. In quantum meruit in this case would risk overpayment.

    4. Vines v. Orchard Hills, Inc.-P makes down payment on house, but his employer transfers him and he can’t go forward with the contract. Seeks to recover down payment, though the breach was theirs. Seller was able to resell house for much more than first contract price.

      1. Court: Person in default can recover some of the money they paid if it unjustly enriches defendant, but allows plaintiff a very heavy burden of proof to prove damages were less than down payment and can recover.
      2. Epstein’s view: should follow industry standard, because the property sellers are in the better position to estimate damages and set the standard. In housing industry, usually 10% of sell price is damages.

      3. Don’t deviate from industry standard because looks like penalty damages rather than liquidated damages, which aren’t ok.

      4. The price the item is resold for cannot be taken into account when determining damages—can only take into account the value of the property at the time of the breach.

  1. Contractual Controls on the Damage Remedy

    1. Liquidated Damages-fix damages as a specific money value in the contract before hand. Liquidated damages must be a reasonable sum; if they are too high (a penalty) or too low (disclaimer), the court might not allow it, even though they were agreed to in the contract.

      1. UCC tends to increase validity of liquidated damages clause. Good to figure out damages ex ante because it is easier to calculate and can increase expected utility if there is a dispute because it’s easier to resolve, and parties themselves are valuing what the damages are worth to them. FREEDOM OF CONTRACT

      2. Often better than expectation damages on administrability front because in a world without full information, expectation damages are hard to determine.

      3. Pacheco v. Scoblionko-P is planning on sending his child to camp; contract includes a statement that a $500 deposit won’t be refunded after a certain date. After a later date, no refund of any amount paid to that date wouldn’t be refunded and would constitute liquidated damages for cancellation of the contract. P withdrew his child after the later date and sued to recover the amount paid to date.
        1. Important thing to determine is whether or not it was reasonable for liquidated damages in this case. Want to find out if the camp would be able to cover (ie, had a waitlist), or if it is hard for them to cover because of the late date. Can look at industry standard, but at some point worry about industry standard being set by collusion.

      4. Muldoon v. Lynch-P and D entered contract in which P were to complete a monument at cemetery for dead husband using Italian marble, and would forfeit $10 a day for every day late beyond the stated time for completion. Marble was procured in Italy, but delayed for nearly two years due to transportation problems. P claimed were due to rest of sum owed under contract; D claimed the sum of 10 dollars a day was liquidated damages and had to be deducted, which would reduce the payment left from nearly $12,000 to only $4000.

        1. Court: Liquidated damages clause was invalid because it was wildly high and was a penalty, not damages.

        2. If have a contract with idiosyncratic preferences, want to put risk of delay on person with idiosyncratic preferences. Avoidable risks go to party on ground with best position to avoid it. May want contractor to be able to indemnify whoever he is buying marble from for shipping delay.

        3. If no penalty clause, have a hard time measuring intangible “grieving” damages.

          1. Could use value of interest on money damage as a lower bound for damages since you can’t calculate psychic damages.

          2. Important to put why you need damage clause in contract—here, Mrs. Muldoon won’t last forever, unlike monument, so important to have it finished. Not straight line depreciation on value.

      5. Wilt v. Waterfield-D had contracted to sell P farm for $19,000. D had paid $1900 on purchase price; D breached contract and sold farm to someone else for $26,000 (and paid $1900 to agent). Contract had close that if a party fails or neglected to perform his part of the agreements, pay liquidated damages of 10% sale price.
        1. Epstein view: clause technically doesn’t apply because guy did not fail or neglect contract technically, because still had contract when sold to someone else. Thinks clause ought not to apply unless it’s clear that it creates a specific option for seller saying if seller got better offer, entitled to accept that and refund with interest/penalty all money to other side.

      6. City of Elmira v. Larry Walter, Inc.-Contractor (D) abandoned work on parking garage. P had to get another contractor to finish project. Contract stated that since damages for delay are impossible to determine, was entitled for $1,000/day liquidated damages for delays.

        1. Usual rule for delay is risk is on the builder where he has control. However, this isn’t a delay, but abandonment, and clauses for delay don’t work for abandonment. Want a lump sum payment for abandonment so you can optimize going forward (otherwise, owner can delay in finding replacement to drive up damages)

      7. Yockey v. Horn-Business partners enter settlement agreement for failed relationship. Clause that parties would not voluntarily participate in lawsuit against the other, fixing liquidated damages at $50,000. One party did testify against the other.

        1. Court upheld liquidated damage clause because it was hard to measure damages because no idea to what extent voluntary testimony hurts. Variance in estimates high, but looking at the nature of the business (reputational effects), $50,000 looks reasonable, so court lets stand because can’t do any better.

      8. Massman Constr. Co. v. City Council of Greenville, Miss.-P was constructing bridge across river; clause had liquidated damages for delay. Bridge was delayed, but it did not matter because state on other side was even further delayed on finishing road, so bridge did no good.

        1. No liquidated damages because no harm by delay; Allow to recover under genuine preestimate unless events manifest themselves to show this off the charts because of some unanticipated circumstances. Look at event as way to invalidate in cases where there is no harm.
      9. Samson Sales v. Honeywell, Inc.-P contracted for burglar alarm. Burglar alarm contract had clause stating that the agreement didn’t bind company as insurer of property, and had clause limiting liquidated damages to $50.

        1. Clause not allowed because too low; company trying to get less than what the breach would actually cost them.

  2. Enforcement in Equity

    1. Specific Performance-when you actually get whatever the contract is for. Defendant has to perform obligation, rather than s imply paying damages.

      1. Subject matter of contract should be rare or unique and damages hard to estimate (same for injunction)

      2. These work especially well in contracts for sale of land because land is unique and all you have to do is convey the deed, which the sheriff can do.

        1. Once contract for sale of land, we treat property as if owned by buyer.—“equitable interest in property in vendee.”

        2. Recordation of deed-to give third parties notice of contracts so if they enter into a contract where the land already has a contract, know they are breaching and first purchaser will prevail.

      3. Don’t work well for construction contracts (because if you already have an unreliable contractor, don’t want him finishing) or performance contracts (don’t want to force someone to perform against their will).

      4. Doesn’t work well for ordinary sale of goods because most goods are fungible and there is a constant market flow, making consequential damages easier to measure. Sometimes give sp if nature of good makes it hard to cover (Tomato case)

      5. Usual rule is that you give specific performance to one side, you have to give it to both.

    2. Injunction-prevent defendant from performing something that would interfere with contract (ie, prevent him from selling goods to someone else)
    3. Manchester Dairy System v. Hayward-P entered into contract in which he had to sell to ass’n all dairy products produced on farm. Ass’n pay monthly base price and distribute balance of year’s net earnings among members. Clause stating would be difficult to assess damages, so $5 per cow liquidated damages, and in event of a breach, Ass’n entitled to an injunction to prevent breach or decree for specific performance.

      1. Want specific performance or injunction in this case because of business model of association—if you can’t get injunction/specific performance, worry about others defaulting, which is a huge externality and causes the other association members to bear a higher costtragedy of the commons situation.

      2. In sale of perishable goods, injunction tantamount to specific performance because if can’t sell to anyone else, might as well sell to P because otherwise stuff just rots.

    4. Van Wagner Advertising Corp. v. S & M Enterprises-Michaels leased space on the exterior of her wall in Manhattan to P for a period of three years with an option period of 7 more years. P erected illiuminated sign and leased it to Asch Advertising for 3-year period commencing March 1, 1982. On Jan 22, 1982, Michaels sold building to D, a land developer. Michaels informed P of sale in August, D sent letter to P cancelling lease pursuant to clause in contract stating “Lessor or its successor may terminate and cancel this lease on not less than 60 days prior written notice in the event of a bona fide sale of the building to a third party unrelated to lessor.”

      1. Court: Damages should be awarded through expiration of P’s lease.

      2. Two uses of the land (development and builboard) incompatible. Unclear to whom “lessor or its successor” is referring to in the contract. Bad drafting.

      3. D should have exercised option immediately and renegotiated if P wanted to come back

      4. Specific performance denied, billboard would have to stay up for specific performance—specific performance would be inequitable because would be disproportionate in harm to D and its assistance to P.
    5. Curtice Bros. v. Catts-P, operator of canning plant, sued for specific performance of contract wherein D, a farmer, had agreed to sell his entire tomato crop from specified land. Plant has known capacity, which is used to estimate amount of tomatoes needed, and only for a certain time during the year.

      1. Specific performance is appropriate in this case because the ability to cover in the spot market would be very small, since there wouldn’t be many free tomatoes on the market and their price would be high (most in these forward contract). Damages would be very hard to estimate, and P would have to try to induce others to breach their contracts to cover D’s breach. Market dislocation would be bad.

    6. Fitzpatrick v. Michael-Lady is nurse/companion of old man, who has promised if she remained with him for rest of his life, he would pay her $8 a week, and would leave her his house by will of life estate. After two years, old man tossed her out. P asked for specific performance of contract.

      1. Case is not covered by statute of frauds because it COULD be performed within a year and partial performance has already occurred, and there wasn’t full payment because the life estate was deferred compensation.

      2. Damages would be hard to determine because of the nature of the life estate, which is a function of age.

      3. Specific performance not appropriate because it’s a service contract and don’t want to force someone to accept service of someone they don’t want.

      4. Court should, however, have given partial specific performance to the extent it doesn’t require forced unwanted association by making him uphold his end of the bargain (leaving life estate, set up fund for her wages).

    7. Lumley v. Wagner-D, opera singer, engaged in contract to which an exclusivity clause was added by her agent. D made another engagement for larger sum and abandoned agreement with P.

      1. Can’t force D to sing and damages are hard to estimate, but read contract as exclusive right and enjoin her from singing at second opera house.
      2. Third party who employed her separately in this case is free riding on first guy’s advertising, knew about first contract. Want to prevent free-riding. Period of exclusivity is crucial for this sort of performance.

    8. Covenants Not to Compete

      1. Clause that blocks you from working for someone else in competition/opening your own store in competition after you stop working for person you have covenant not to compete with

      2. In order to be enforceable, time limit can’t be excessive and person must bring something to the other side above and beyond their native talents (like property that could be enjoined—trade secrets)

      3. E.g., Fullerton Lumber Co v. Torborg-manager with covenant not to open own lumber store for ten years quit and opened lumber store; court held clause was unenforceable because the time limit was excessive and it was an unreasonable and illegal restraint of trade.

    9. Specific Performance in Leases

      1. City Stores Co. v. Ammerman-shopping center trying to get zoning approval; D in writing promised P that if it supported their application, P would be given oopportunity to become one of D’s major tenants with rental and terms equal to other major department stores in center. D later refused to lease P site in center; P sue for specific performance.

        1. Specific performance is appropriate; trying to figure out lost profits and reliance costs would be extremely hard.

      2. Grayson-Robinson Stores v. Iris Constr. Corp-Iris aggred in writing with Grayson to rent him a building. Agreement called for arbitration of disputes, empowering arbitrator to award equitable relief including specific performance. Iris informed Grayson couldn’t go forward with project because of difficulty borrowing funds unless Grayson paid more rent. Grayson refused. Arbitrators entered an award ordering Iris to proceed with the improvements in accordance with lease.
        1. Court uphold arbitrator’s award of specific performance. Important for courts to enforce arbitration agreements to make the system go, but in this case, Grayson really couldn’t find the money and had to settle.

The Domain of Legally Enforceable Promises (Chapter 2)

  1. What’s an Enforceable Promise?

    1. Commercial arrangements of straight business nature with consideration are generally considered an enforceable legal arrangement, whereas purely social arrangements aren’t (see chart)—but what happens when you get a situation in the middle?

    2. Probabilities of enforcement increase as go from oral to formalized because there is more evidence and the more effort you put into a contract, the more seriously you will take it (cautionary function)






      least enforceable



      Most enforceable

  2. Gift Promises

    1. Usual rule for conditional gift is the promisor doesn’t get anything—no expectation of return performance because it is driven by “natural love and affection”

    2. Gifts are completed only by delivery—completed gift requires outright delivery and intention that the ownership of the thing be transferred over to someone else.

    3. Nudum Pactum non obligea-a “bare promise” with no consideration is not enforceable. Bare promises not enforceable until completed, and then can only be set aside for duress, incompetence, etc. Need reliance or consideration to move out of bare promise.

    4. Congregation Kadimah Toras-Moshe v. DeLeo-old guy was ill, made oral promise in presence of witnesses to give Congregation $25,000 after his death, which the Congregation planned to use to convert a storage room in the synagogue into a library. Oral promise never reduced to writing.

      1. Promise is unenforceable; No consideration or reliance and would be against public policy to enforce an oral promise against an estate. Unclear if there was undue influence (get third party advisor to protect against this).

  3. Consideration

    1. Two elements necessary to constitute consideration:

      1. A bargained-for exchange

        1. Each side hopes for a gain.

      2. That which is bargained for must be considered of legal value, either a benefit to the promisor or detriment to the promisee.

    2. Doctrine of Mutuality: Consideration must exist on both sides of the contracts (must be mutual obligations) (applies ONLY to bilateral contracts)
    3. 2nd Restatement(p. 206)-§ 71-for consideration to exist, there must be something that was bargained for and given (or promised to be given) in the exchange.

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