Damages in Contract

05-12

A. Monetary remedy

1. Punitive and Nominal Damages

a. Punitive damages – NOT generallyrecoverable for breach of K

b. Nominal damages – may be awarded where the breach is shown but no actualloss is proven

2. Liquidated Damages

a. Definition – K provisionregarding amount of fixed damages

b. Test for validity

(i) Damages are difficult toforecast (at time of K)

(ii) K provision is reasonableforecast (at time of K)

c. If liquidated damages isunreasonable, the provision will be unenforceable as an invalid penaltyprovision

d. Valid liquidated damages clausedoes not preclude an award of specific performance or an injunction if theremedy at law is inadequate.

e. UCC – court can consider the actualdamages incurred in determining whether a liquidated damages clause isvalid;

3. Compensatory Damages

a. Definition T to put the non-breaching party into as good a position as ifthe contract had been performed without breach (i.e., protection of theplaintiff』s expectation interest)

(i) Damages must be reasonablycertain – NOT allow speculative damages

b. Standard measure of damages

(i) Expectation damages – that would permitP to buy a substitute; OR

(ii) Reliance damages – the cost incurred byperforming (when expectation damages are speculative)

c. Formula

(i) What would P had if there wasno breach

(ii) In $ terms, what is P』sposition after breach

(iii) Calculate damages = (i) – (ii)

- E.g., If employee breachesemployment contract, employer entitled to recover the wages the employer mustpay to a replacement employee minus the breaching employees wages.

4. Consequential or Special Damages –awarded in addition to compensatory damages T ifsuch damages were in reasonable contemplation of both partiesat the time of K (e.g. loss ofprofits)

a. Both parties were aware; OR

b. Reasonably foreseeable – if damages are specialto P (P has the burden of proving specialcircumstances were made clear to other party)

(i) Reasonable certainty standard applies toboth established businesses AND new businesses with no operational history, BUTmust provide sufficient evidence of lostprofits using:

(a) comparisons with similarbusinesses;

(b) economic and financial data, OR

5. Incidental Damages – non-breaching party can also recover costs he incurs in dealingwith the breach

a. Incidental damages are always recoverable

- E.g.: a buyer』s incidentaldamages could include expenses reasonable incurred in inspection, receipt,transportation, and care and custody of goods rightfully rejected.

b. Calculated based on cost (expenses) of finding & entering into newK

* Avoidable Damages (Duty to Mitigate Damages bynon-breaching party) – damages will be reduced by avoidable damages that mighthave been avoided by mitigation

a. Sale of Goods K – cover must be reasonable, in good faith, & withoutunreasonable delay

b. Employment K – employee is under a duty to use reasonable diligence to find alike position

- E.g.: D school hires P for 100Kbut breaches – P rejects another teaching job in same city for 80K

(a) P can only recover 20K – therewas comparable job (not saying P is obligated to take new job, only thatdamages are reduced if P rejects a comparable job)

(b) D has burden of pleading &proving avoidable damages

c. Construction &manufacturing K – mitigation requires thebuilder or manufacturer to cease work unless completion would decrease damages(e.g., finishing partly manufactured goods)

- NOTE: duty to mitigate only reducesrecovery, but does not prohibit recovery

B. Compensatory Damages Calculations

1. Damages Rules for UCC Sales of Goods

Buyer keeps goods

(acceptance)

Seller keeps goods

(rejection or not delivery)

Seller breaches

FMV – FMV

(perfect) (as delivered)

Replacement Price – K Price; OR

Market Price at time of discovery – K Price

Buyer breaches

K Price

(market price is irrelevant)

K Price – Market Price at time/place of delivery; OR

K Price – Resell Price; OR

Provable Loss Profits (K Price – costs)

- Lost Volume Seller – consider in Buyer breach & Seller keeps

(i) Seller』s supply of goods is UNLIMITED – provable loss profitsapply (because Seller could have madean additional sale had the buyer not breached – used when other measures are inadequate)

- If S does not have the capacityto perform K that was breached as well as other potential contracts due tounlimited resources or production capacity, no LV damages (e.g. taxi companywith 3 taxis not entitled to LV damages if B breaches but all 3 taxis still rented).

(ii) Seller』s supply is limited – (K Price – Market Price) OR (KPrice – Resell Price)

2. Damages Rules for Common Law Contracts

a. Sale of Land K – difference betweenK price & Fair Market Value

b. Employment K:

(i) Breach by employer – full K price (lesswages actually earned elsewhere after the breach)

(ii) Breach by employee – whatever it coststo replace the employee (modern view allows employee to offset any monies duefrom work done to date)

c. Construction K:

(i) Breach by owner – builder entitled to profitsfrom K, AND any costs expended

- If construction is completed,the measure is the full K price plus interest

(ii) Breach by builder – owner entitled to cost of completion, AND reasonablecompensation for delay

(a) Allow builder to offset/recoverfor work performed to date to avoid unjust enrichment of owner

(b) If breach is only lateperformance, owner entitled to damages incurred from late performance

d. Installment Payments K – there isonly partial breach, & the non-breaching party is limited to recoveringonly the missed payment, not the entire K price (but, K may include an accelerationclause making entire amount due on any late payment, in which casenon-breaching party may recover entire amount)

C. Non-Monetary Remedies

1. Specific Performance / Injunction– court order to make a party fulfill the terms ofthe K (specific perf.) or to start/stop doing a specific act (injunction).

a. ONLY apply equity remedies ifmoney damages are inadequate

- Court may, in addition to orin lieu of an injunction, give (i) a judgment for damages, (ii) a judgmentfor the recovery of possession of land or chattels, or (iii) declaratoryjudgment

b. Sale of Land K – court can compelseller to sell land because there is no substitute

c. Sale of GoodsK– unique goods (e.g. antiques, art, custom-made)

d. Services K – NO specificperformance, only money damages (but possible injunctive relief)

- Courts will not force someoneto work, but can grant negative specific performance (barring D fromworking for P』s competitor)

2. Reclamation (ONLY for Sale of Goods)– right of an unpaid Seller to recover goods from an insolvent Buyer

a. Sale of goods on credit – Seller not paid yet;

b. Buyer must have been insolvent at time of delivery of goods;

c. Seller demands for return of goods within 10 days of Buyer』sreceipt; AND

d. Buyer still has goods

3. Entrustment – rights of good faith purchaser in entrustment

a. Entrusting goods to a merchant who deals in goods of that kindgives him power to transfer all rights of the entruster to a Buyer in the ordinary course of business

b. Entrusting owner has NO rightto recover its goods from a bona fidepurchaser (can only sue entrustee)

D. Rescission & Reformation

1. Rescission – Non-breaching party may rescind(i.e. cancel) K and sue for damages at law or in equity due to mistake ormisrepresentation of a material fact or other grounds such as duress, undueinfluence, illegality, lack of capacity, and failure of consideration.

2. Reformation – changes a writtenagreement to conform with the parties』 original understanding

a. Reformation of a Mistake –to reform K because of mistake, there must be:

(i) an agreement between theparties;

(ii) an agreement to put theagreement in writing, and

(iii) a variance between the original agreement and the writing – mistake must be one as to expression(relates to the contents or effect of the writing).

b. Two Types of Mistakes

(i) Mutual mistake– Reformation will be granted

(ii) Unilateral mistake– Reformation will be denied, UNLESS non-mistaken party actuallyknows about the mistake (regarded as fraud or inequitable conduct)

c. Reformation of a Misrepresentation –to reform K because of misrepresentation:

(i) Misrepresenting the contents ofthe writing (both innocent and intentional misrepresentations) justifiesreformation of the K, BUT NO reformation if it adversely affects rights ofsubsequent BFP

- HYPO: A and B agree that A will buy land from B for $100,000 and willassume an existing mortgage of $50,000. In reducing the agreement to writing, Aintentionally omits the assumption provision and tells B that the writingcorrectly expresses their agreement. B does not notice the omission and signsthe writing. At the request of B, the court will reform the writing to add theprovision for assumption.

d. Defenses to Reformation – Unclean handsand Laches (same as rescission)

E. Restitutionary andReliance Recoveries

1. Restitution – simultaneously seek restitutionto restore parties to positions they were in before K was formed to preventunjust enrichment (applies to enforceable Ks, unenforceable Ks, and when no Kexists).

a. If K is breached andnon-breaching party has not fully performed, he can cancel the K and sue for restitution to prevent D』s unjustenrichment (as restitution damages may be higher than K damages).

b. If non-breaching party hasfully performed, he is limited to his damages under the contract.

c. Breaching party can also seekrestitution but recovery is limited to the contract price less damages incurredas a result of his breach.

2. Reliance – measure of damages generally awarded when the non-breaching partysdamages are not capable of accurate estimation (expectation damages toospeculative), and specific performance is inappropriate.

a. valued by a partys relianceinterest for the foreseeable amount – theyput the injured party in the same money position as if the contract had neverbeen formed (i.e. out of pocket expenses)

b. damages (costs incurred byperforming) must be proven with reasonable certainty

c. In a losing contract, reliancedamages are reduced to avoid putting non-breaching party in a better position thanif the contract had never been performed.

F. Quasi-Contract Relief – if results in unjust enrichment (e.g. doctor provideshis services to unconscious patient)