Introduction
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I. What is a contract?
a. All state law
Her definition: conduct that creates binding commitment enforceable by the
legal system
Expectation Damages:
• net expectation (value of performance promised – cost of performance promised by
plaintiff)
• total breach – four elements for this claim
a. loss in value (value in what was promised – what was actually
received)
b. other loss – incidental/consequential damages
• reasonable attempts to avoid loss
• general principle is that all loss is recoverable
c. cost avoided
d. loss avoided
• if risks cannot be priced, they are not considered (foreseeibility)
• partial breach- general principle applies (as does the first two calculations (a+b) for total
breach)
• pre/post judgement interest might be available (p. 820 n5)
• doctrines that normally apply to mitigate these damages: foreseeability, causation,
certainty, mitigation
• restitution damages are as close to punitive damages as we get.
FORMULA:
Loss in value + other loss – cost avoided – loss avoided
Turner v. Benson (SC of TENN., 1984) (p. 913)
Issue: whether proper measure of damages was applied to a vendee’s breach of a real estate
contract?
• Uses the general rule: proper measure of damages available to a vendor against a
breaching vendee is difference between K price and the fair market value at the
time of the breach (p. 814)
• Facts: real estate contract that was breached by buyer (child care)
• Holding: affirm liablely and remand with damages to be determined acc. To
principles
• Damages are not easy to calculate – shows calculation of expectation damages
Limitations on Damages:
Hadley v. Baxendale (Court of Exchequer 1854) (p. 831)
Issue: whether jury was properly instructed about the liability for
expectations damages (arising from lost profit) in original case?
Facts: mill owner’s crank shaft broke. Sent it to Greenwich for new one
via pickford & co. told clerk to hasten the production/delivery but it was
delayed – mill did not resume for several days. Appeal for misdirection by
judge to jury (jury awarded 25l)
Holding: new trial. Loss of profits cannot be considered – not foreseeibile
in new trial.
Rule: damages are recoverable only if they were reasonably foreseeable
at the time of the contract; in certain kinds of recurring disputes, there might
be a best cost avoider -- economics says make that person liable bc they can
prevent
consequential damages are limited to what is forseeabile
• Hadley is still with us. Reasons:
1.Disincentive to enter into contracts if liable for stuff that we cannot foresee
(incentive to gain knowledge -- avoid risk)
2.reduce litigation costs
3.unfair to change
• No attorneys fees even if breacher loses
Rockingham Country v. Luten Bridge Co. (US Court of Appeals – 4th
Circuit) (p. 848)
Issue: Whether a non-breaching party has an obligation to mitigate damages
upon notice of breach?
Facts: contract made by county with construction company to build a bridge.
Notice of cancellation of contract was given to Luten before bridge
construction began.
Holding: Obligation for nonbreaching party to mitigate damages exists.
Plaintiff awarded profit + expense up until the contract was cancelled.
Rule: Non-breaching party has a duty to mitigate damages. (otherwise
construed as a limitation on plaintiff’s recovery of damages
Restitution Damages:
• Restatement provides for restitution in a variety of circumstances (see
Restate § 349, 373-377), but no restitution is if the only breach is that the
person did not pay.
K situations for restitution:
a. Partial performance
b. It turns out no K (incapacity, person is a minor, crazy, fraud,
duress) -- box 1 isssues
c. Rescission
• Rationale is to prevent combination of unjust impoverishment with
unjust gain—interest strongest for judicial intervention
• Quantum meruit allos a promise to recover the value of services he gave
to the D regardless of whether he would have lost money on the K and been
unable to recover in a suit on the K
• Liability for benefits received disgorge unjust enrichment of a defendant
at plaintiff's expense
• Measurement of restitution damages = “as justice requires”
o This can mean either market value, the increase, or other value
Pro (of market value rule) Con
• Prevents unjust gain by • Makes Ks less efficient
breacher • Doesn’t make non-breacher
come out ahead
United States ex. Rel Coastal Steel Erectors, Inc v. Algernon Blair (p.
943)
Issue: Whether a subcontractor who ceases work because of contractor’s
breach recover in quantum meruit the value of labor + equipment already
furnished?
Facts: Blair contracted to provide steel erection for Coastal. Coastal refused to
provide money for crane as per contract. That was material breach.
Holding: The court found that the sub is entitlted to recover.
Rule: You can recover the value of the service that you have provided so that
you can be saved from loss if the other party breaches.
Pros Cons
• Sometimes not ineff • Broken relationship – doesn’t
• Provides remedy when damages work so well
just wont do (land, etc) • Sometimes Ineff
• Hard to supervise/enforce
• Coercion/slavery
• Free compensation in labor
market (w/employ situations)
Two reasons to grant (when asked for):
1. Expectation remedy is undercompensatory
Frustration and anger
2. The plaintiff is in best position to choose the lesser of 2 evils
▬ courts consider: hardship to def or others, hostility to the merits of the P’s
case, values (freedom of speech, freedom from compulsory service)
• Law and equity relationship is important (p. 314)
o In personam relief = injunction or spec performance (awarded
trad by equity courts)
o To achieve these, it is necess to show that damages (default)
are inadequate
o Discretionary remedy that the court can choose to use
-EISENBERG- on consideration…
• administrative problems with donative promises
(radin disagrees)
• donative promises are more likely to be less deliberative
• fades out if you have ingratitude or improvidence
V. Formalities
Functions that legal formalities serve (acc to Fuller, p. 52):
1. evidentiary – providing evidence of the existence and purport of the K in
case of controversy
2. cautionary – acting as a check against inconsiderate action
3. channeling – mark or signal the enforceable promise – simple, external test
of enforcibility
- despite the end of the seal, consideration sometimes serves these functions
• statute of frauds isn’t enough to make promise enforceable –
also need consideration! (opposite is also true – if consideration but doesn’t
meet SoF, then no K)
• courts have become lenient on the SoF
Statute of Frauds – see Restatement beginning p. 305
If you are going to apply it, ask these questions:
1. is the K one of the types to which the SoFs applies?
2. Is the SoFs satisfied? (written statement, signed by the D, etc)
(3. if no to 2, are there other factors (such as performance or reliance by the P
that might invoke an exception to the statutory bar?)
Crabtree v. Elizabeth Arden Sales Corp (p. 298)
Issue: Whether parol evidence is sufficient to establish an enforceable
employment contract under the statute of frauds?
Fact: Crabtree negotiated an agreement with E. Arden for position as sales
manager. Evidence of this negotiation and agreement consisted of a memo
recorded on a telephone order, welcome telegram, and a payroll change
request signed. D said no increase in pay at appropriate time. P sued for
breach. D claim statute of frauds prevents enforcement.
Holding: Court held that the contract exists and is enforceable against the D.
Rule: Parol evidence may be used in combination with oral testimony to
establish the existence of a K.
Two threshold requirements established:
1. signed writing must itself establish a contractual relationship between the
parties
2. unsigned writing must on its face refer to the same transaction as the
signed writing
Section 5: Alternative Basis for Legal Enforcement
I. Promissory estoppel
• Not traditional – unbargained-for reliance substituted for consideration
• Reliance as a means of proving contract exists
• Relying on a promise that cant become a contract
• Very controversial because it really tears apart
• This is out of place, but Section 90 - comment D thinks that a promise
is a contract (any contract remedy would be fine) – remember that
doctrines of mitigation apply to damages!
• Also, dealings between family members usually don’t have to
conform to bargain theory – legal obligations based on relationship of
parties (promissory estoppel and restitution have been used)
• Equitable estoppel – applies where one party has made misstatement of
fact, not promise – courts seem to believe that estoppel of either variety
can be based on conduct as well as express promise
Four things..
1. Promise
2. Promisor should reasonably expect induces reliance
Of definite and substantial character (Removed from require, but still
considered)
3. Does induce reliance on part of promisee or a third party
4. Must enforce to avoid injustice (detrimental reliance)
A. Pre-acceptance reliance
“offeror is the master of the K”
• Courts don’t like to interpret this
• If no option K, classical theory will not protect an offeree who relied on
an offer she had not yet accepted
Two ways to win under classical theory:
1. Earlier acceptance
2. Option contract – separate covenant not to revoke for specified period of
time – when offeree/vendee gives the offeror some consideration to hold
open the offer open for a stated period of time (irrevocable under
classical theory)
o Both parties have to know
o Has to be clear
Bad Bargains – something is wrong with the bargain itself, one side is taking
advantage of the other
[There are other ways, claim there was no offer, no acceptance, it violates the
statute of frauds… but these are all additional concepts to end the contract.]
These can be used defensively or offensively – if the other party tries to
bring suit against you, then defensively you can bring these issues up, or you
can let them ride. Offensively you can sue someone else about the duress of a
contract and try to get restitution or damages for fraud.
Freedom of Contract is about the freedom of will:
a. anything that doesn’t come from freedom of the will has to
be part of the system too, you have to disallow things that
overcome a person’s freedom of the will by using coercion.
a. You cannot allow unfree transfers from coercion if you
want freedom of will
b. Clear cases of Unfreedom that fall out of the will theory in
the classical system
a. Duress
i. Torture
ii. Threats of death or GBH
b. Incapacity
i. Infancy
ii. Mental disability
iii. Delusion
c. Fraud
i. Lies
ii. Trickery
iii. Deliberate misinformation and manipulation
Less Clear cases for the Classical System (do not clearly fall into one category)
a. Grossly unfair terms
a. Traditional theory is that you are not supposed to
inquire into the subsistence of the agreement (peppercorn
theory)
b. Subject matter that is off-limits (Public Policy)
a. Might be paternalistic and economically inefficient
c. Mistake or changed circumstances
a. Classical theory could think that the mistake is a clear
case where there is no meeting of the minds (Peerless), but
it is more difficult when it looks like one person is at fault, or
one person could have more easily found out if there was a
mistake
b. Changed circumstances could be easy, but it is more
difficult when it looks like one party did not plan ahead
enough for the circumstances to occur, what kind of risks
you should have taken into account, risk management
Expansion of Duress:
“Economic Duress”
“Undue Influence” – I was so in love that I had to do this because I was
crazily in love, this was his influence
Questionable:
Exculpation of tort liability
Transfer of child custody
Donahue v. Federal Express (p. 466)
Issue:
Facts: Donahue was employee. Appellant employee called defendant
employer's attention to various improprieties. Thereafter defendant
supervisor, appellant's immediate supervisor, accused appellant of gross
misconduct. Appellant after failing to have his termination overturned by
defendant employer's Guaranteed Fair Treatment Procedure (GFTP), sued.
Holding: appellant could not sue for breach of the implied duty of good faith
and fair dealing, where the underlying claim was for termination of an at-will
employment relationship; defendant employer's grievance procedure imposed
no separate contractual duties on it; superior work performance could not
overcome at-will employment presumption.
Rule:
- some jurisdictions recognize public policy exception to at will doctrine
Remedy if K is against public policy
Let losses lie
Restitution – Restatement 2d 197, 198, 199
BABYSELLING
Posner says..
1. people should market what they like (why should state be
moralistic)
2. practical (blackmarket)
VI. Mistake
Unilateral mistake
1. mistaken about the nature of the thing (one party only) –
other parties non-disclosure might be another doctrine --- 1-54 © -
determines who bears the risk of the mistake
2. One party makes mistake (not fault of other) – IL doctrine is
that the mistake has to be material, notwithstanding the exercise
of reasonable care, so bad enforcement would be unconscionable,
have to get them back to where they were
• 153 Rest 2d
• Contract was rescinded even though there was a
unilateral mistake (rare)- think reasonable care (relied on
specs)
• Balancing test
Will-Fred’s v. Metropolitan Sanitary District (p. 643)
Issue: Whether mistake renders K voidable?
Facts: Will-Fred’s submitted bid for rehab of water reclamation plant w/
deposit. Wil-Fred’s attempted to withdraw after bids opened – w/draw was
rejected – told they would be awarded the K.
Holding: Wil-Fred’s was granted recission + return of security deposit.
Rule: Restatement § 153 – requires that (a) enforce would be unconscionable
or (b) other party had reason to know of the mistake
So three separate doctrines – but all about the same thing in a sense
• If we viewed all of this from risk allocation, we would ask two questions:
1. Who assumed risk?
2. Who should bear risk?
• If we knew who assumed the risk, then we can assume that the risk was
included in the price…
• If no one took on the risk, move to the normative question - who should
o Economic analysis - person who can best protect the risk -- want to
give incentives for future assumption of risk
o Best cost avoider example -- want to price the risks into the K -
systemic rule(util)
o From non-economic view, a little more difficult to figure out
o If person dies, probably should be not be held? Although you can
insure anything…
Karl Wendt v. Int Harvester (p. 655)
Issue:
Facts: Wendt + IH signed agreement where Wendt was IH dealer. Economic
downturn drove IH out of farm equip business. Defendant corporations sold
their farm equipment division but did not terminate plaintiff dealer's contract
under the contract's terms. The court reversed the judgment for defendants
and remanded for a new trial on the issue of plaintiff's damages because the
district court erred when it instructed the jury on the defense of
impracticability of performance
Holding: Remanded.
Issue:
VIII. Modification of existing K
- Court has become lenient on this – see Restatement § 89 – promise
modifying is binding if:
a. mod is fair + equitable in view of changed circumstances
b. extent provided by statute
c. extent to which justice requires in view of material change in position