978-1285427003 Chapter 17 Lecture Note Part 1

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Suggested Additional Assignments

Research: Professional Sports and Contract Law

Students should find news articles dealing with contract disputes between professional athletes and their

teams. What are the facts of the dispute? What legal issues do the disputes raise? What remedies do the

parties seek? Are they consistent or at odds with the remedies described in this chapter? Students should

answer these questions in a one-page summary for presentation during class.

Research: Consequential Damages

Ask students to locate a few of the contracts or terms of use to which they are a party, such as for their

cell phone, iPod, computer, or Blackberry. Students should find and read the clause limiting consequential

damages. What does it cover? What does it exclude? Students should report their findings to the class,

particularly if any student has a standard-form contract that does not limit consequential damages. If the

teacher wants to provide an incentive, provide a reward for anyone who finds such an agreement that does

not limit consequential damages. This incentive emphasizes the ubiquity of these clauses.

Drafting Exercise: Injunctions

Students are law clerks for a judge who has just received a complaint from the town resident described in

the text, complaining that his neighbor’s pig farm violates town zoning laws that prohibit raising

livestock. Smells emanating from the farm are strong and unpleasant and the neighbor, Francis Bacon, has

refused to remove the pigs. Bacon, in fact, plans to add goats and chickens to his menagerie. Assume the

plaintiff is right on the law. Draft an injunction addressing this problem for the judge to sign.

Chapter Overview

Chapter Theme

The flexible powers of a court should enable it to craft a just remedy for almost any breach of contract.

Breaching a Contract

Someone breaches a contract when he fails to perform a duty without a valid excuse. A remedy is the

method a court uses to compensate an injured party.

Identifying the “Interest” to Be Protected

In choosing a remedy for a breach of contract, the court must decide what interest (legal right in

something) it is trying to protect. There are four principal contract interests:

• Expectation Interest. This refers to what the injured party reasonably thought she would get from

the contract. The goal is to put her in the position she would have been in if both parties had fully

performed their obligations.

• Reliance Interest. The injured party may be unable to demonstrate expectation damages, perhaps

because it is unclear he would have profited. But he may still prove that he spent money in reliance

on the agreement and that in fairness he should receive compensation.

• Restitution Interest. The injured party may be unable to show an expectation interest or reliance.

But perhaps she has conferred a benefit on the other party. Here, the objective is to restore to the

injured party the benefit she has provided.

• Equitable Interest. In some cases, money damages will not suffice to help the injured party.

Something more is needed, such as an order to transfer property to the injured party (specific

performance) or an order forcing one party to stop doing something (an injunction).

Expectation Interest

The expectation interest is designed to put the injured party in the position she would have been in had

both sides fully performed their obligations. A court tries to give the injured party the money she would

have made from the contract, less any expenses and losses she would have incurred. To win expectation

damages, the injured party must prove the breach of contract caused damages that can be quantified with

reasonable certainty.

Courts typically divide the expectation damages into three parts: (1) direct (or “compensatory”) damages,

which represent harm that flowed directly from the contract’s breach; (2) consequential (or “special”)

damages, which represent harm caused by the injured party’s unique situation; and (3) incidental

damages, which are minor costs such as storing or returning defective goods, advertising for alternative

goods, and so forth.

The goal of contract remedies is to give successful plaintiffs “the benefit of the bargain” and not to punish

defendants. While punitive damages are occasionally awarded in lawsuits that involve both a contract and

either an intentional tort (such as fraud) or a breach of fiduciary duty, punitive damages are not available

in “simple” cases involving only a breach of contract.

Direct Damages

Direct damages are those that flow directly from the contract. They are the most common monetary award

for the expectation interest.

Landmark Case: Hawkins v. McGee1

Facts: Hawkins suffered a severe electrical burn on the palm of his right hand. After years of living with

disfiguring scars, he went to visit Dr. McGee, who was well-known for his early attempts at skin grafting

surgery. The doctor told Hawkins “I will guarantee to make the hand a hundred per cent perfect.”

Hawkins hired him to perform the operation.

McGee cut a patch of healthy skin from Hawkins’ chest and grafted it over the scar tissue on Hawkins’

palm. Unfortunately, the chest hair on the skin graft was very thick, and it continued to grow after the

surgery. The operation resulted in a hairy palm for Hawkins. Feeling rather embarrassed, Hawkins sued

Dr. McGee.

The trial court judge instructed the jury to calculate damages in this way: “If you find the plaintiff

entitled to anything, he is entitled to recover for what pain and suffering he has been made to endure and

what injury he has sustained over and above the injury that he had before.”

The jury awarded Hawkins $3000, but the court reduced the award to $500. Dissatisfied, Hawkins

appealed.

Issue: Did the jury calculate Hawkins’s damages correctly?

Decision: No. The court’s instructions were wrong on both counts.

Reasoning: The jury found that the doctor’s promise of “a hundred percent perfect hand” created an

enforceable contract. Contract damages are intended to put the plaintiff in the position he would have

been in had the defendant kept his part of the bargain. What would Hawkins’s hand have looked like if Dr.

McGee had kept his promise? It certainly would not have had chest hair on it. As such, the court

concluded that the correct calculation of contract damages was the difference in value between the

promised perfect hand and the resulting hairy paw. The pain and suffering Hawkins experienced in the

1 84 N.H. 114; 146 A. 641 Supreme Court of New Hampshire, 1929.

operation had nothing to do with this calculation because it was part of the price he was willing to pay for

the promise of a good hand.

The case was remanded for a new trial.

Question: Why did the appellate court conclude that pain and suffering were irrelevant in calculating

damages?

Answer: Hawkins was willing to endure pain and suffering in order to make his hand better had the

Question: Would Hawkins have won had Dr. McGee not made a promise of “a hundred percent

perfect hand”?

Answer: Possibly, though the calculation of damages may have been different. The court ruled that

expectation damages were appropriate here based on Dr. McGee’s promise to Hawkins. The court

Consequential Damages

Consequential damages reimburse for harm that results from the particular circumstances of the plaintiff.

These damages are only available if they are a foreseeable consequence of the breach at the time the

contract is formed. Also known as “special damages.”

Landmark Case: Hadley v. Baxendale2

Facts: The Hadleys operated a flour mill in Gloucester. The mill’s crankshaft broke, causing the mill to

grind to a halt. The Hadleys employed Baxendale to cart the damaged part to a foundry in Greenwich,

where a new one could be manufactured. Baxendale promised to make the delivery in one day, but he was

late transporting the shaft, and as a result the Hadleys’ mill was shut for five extra days. They sued, and

the jury awarded damages based in part on their lost profits. Baxendale appealed.

Issue: Was the defendant liable for profits lost because of his delay in delivering the shaft?

Decision: No. The defendant was not liable for lost profits.

Reasoning: When one side breaches a contract, the other party’s damages should be those that arise

inevitably from the breach or those that both parties reasonably anticipated when they made the

agreement. If the contract involves special circumstances and the plaintiff tells the defendant about them

when they make the deal, then the defendant is liable for all injuries. On the other hand, if the plaintiff

never informed the defendant about the unique situation, then the defendant should be liable only for

harm that might occur in the normal course of events.

The Hadleys told Baxendale only that the article to be carried was a broken shaft from their mill. How

could Baxendale have realized that a delay in delivery would prevent the mill from operating? He might

have assumed, very reasonably, that the Hadleys owned a second shaft and were sending this one for

repairs while the mill ground on. It would be unfair to presume that Baxendale realized that delay would

halt the mill. The case should be retried, and the jury may not consider the Hadleys’ lost profits.

Question: Baxendale was obviously late in transporting the shaft. What is the dispute about?

Question: Why does Baxendale argue it would it be unfair to hold him liable for lost profits?

2 9 Ex. 341, 156 Eng. Rep. 145 Court of Exchequer, 1854.

Question: Isn’t it obvious that the mill would have to close?

Question: Judge Alderson establishes a standard for analyzing such cases. What is it?

Answer: The judge states that a court should apply one of two rules, depending on the facts. An

Question: What labels does the law put on the two types of damages that Judge Alderson described?

Answer: The damages occurring “naturally” are generally called compensatory (or direct) damages.

Question: According to the judge’s standard, what should Hadley have done when he entered this

contract with Baxendale?

Answer: Hadley should have told Baxendale that this was his only shaft, and that if it was delivered

Question: If Hadley had done that, would he have recovered his lost profits?

Question: Wouldn’t that be unfair to Baxendale?

Question: Where would that leave the parties?

Answer: It would put the issue of Hadley’s consequential damages on the table for the parties to

You Be the Judge: Bi-Economy Market, Inc. v. Harleysville Ins. Co.

of New York.3

Facts: Bi-Economy Market (“Market”), a family-owned meat market, was insured by Harleysville

Insurance. The “Deluxe Business Owner’s” policy provided replacement cost for damage to buildings and

inventory. Coverage also included “business interruption insurance” for one year, meaning the loss of

pre-tax profits plus normal operating expenses, including payroll.

A fire destroyed the Market’s building and its inventory. The Market immediately filed a claim with

Harleysville, but the insurer responded slowly. Harleysville eventually offered a settlement of $163,000,

and a year later an arbitrator awarded the Market $407,000. During that year, Harleysville paid for 7

months of lost income, but refused to pay more. The Market never recovered or re-opened.

Bi-Economy sued claiming that Harleysville’s slow, inadequate payments destroyed the company and

also sought consequential damages for the permanent destruction of its business. Harleysville claimed that

it was only responsible for damages specified in the contract: the building, inventory, and payroll. The

trial court gave summary judgment for Harleysville. The appellate court affirmed holding that when they

entered into the contract, the parties did not contemplate damages for termination of the business.

Bi-Economy appealed.

You Be the Judge: Is Bi-Economy entitled to consequential damages for the destruction of its business?

Holding: Yes, judgment for Harleysville reversed.

3 2008 WL 423451, New York Court of Appeals, 2008.

To determine whether consequential damages were reasonably contemplated by the parties, courts must

look at the nature and purpose of the contract between the parties, and what liability the parties reasonable

expected Harleysville to take on in the event of a loss. Here, according to the court, the purpose of

business interruption coverage was to ensure that Bi-Economy had the financial support necessary to

sustain its business in the event disaster occurred. Thus, the very purpose of business interruption

coverage would have made Harleysville aware that if it breached its obligations under the contract to

investigate in good faith and pay covered claims it would have to pay damages to Bi-Economy for the

loss of its business as a result of the breach.

Implicit in the insurance contract was an obligation on Harleysville to honestly and promptly

evaluate the claim. Harleysville knew that failure to do this would defeat the very purpose of the

insurance contract, and would cause more damage to Bi-Economy. When an insured, like Bi-Economy,

suffers additional damages as a result of an insurer’s excessive delay or improper denial, the insurance

company should be liable for these damages. This is not to punish the insurer, but to give the insured its

bargained-for-benefit.

Harleysville argued that consequential damages were only appropriate where an insured suffered a

loss that was not in the contract. However, according to the court, consequential damages are not “losses”

bargained for by the parties. Consequential damages are in addition to the losses caused by a calamitous

event, and include those additional damages caused by an insurance company’s failure to timely

investigate, adjust and pay the claim. Therefore, the court found that Bi-Economy’s claim for

consequential damages including the demise of its business was reasonably foreseeable and contemplated

by the parties, and thus cannot be dismissed.

Question: What were the unique circumstances of Bi-Economy?

Question: Wasn’t the unique circumstance that it went out of business?

Answer: No, and that was what Harleysville tried to tell the court: Bi-Economy went out of business,

Question: What point was the court trying make by explaining the difference between a loss and

damages?

Answer: What the court was saying was a loss was something contemplated by the parties when they

Question: Why is Harleysville liable for Bi-Economy going out of business?

Answer: Because, according to the court, it was reasonably foreseeable to Harleysville that if there

was a delay in the investigation or if they did not fairly pay Bi-Economy’s claim, Bi-Economy would

Incidental Damages

Incidental damages are the relatively minor costs that the injured party suffers when responding to the

breach.

The UCC and Damages

Under the Uniform Commercial Code (UCC), remedies for breach of contract in the sale of goods are

similar to the rules discussed throughout this chapter. UCC §§2-703 through 2-715 govern the

remedies available to buyers and sellers.

Seller’s Remedies

If a buyer breaches a sale of goods contract, the seller may, in good faith, (1) resell the goods elsewhere

and be awarded the difference between the original contract price and the price she was able to obtain in

the open market, or (2) keep the goods and be awarded the difference between the contract price and the

market value of the goods. Under the UCC, most courts hold that the seller is not entitled to consequential

damages, provided that the seller could reasonably have foreseen them.

Buyer’s Remedies

If a seller breaches a sale of goods contract, the buyer may, in good faith, (1) purchase substitute goods

(“cover”) and obtain the difference between the original contract price and his cover price, or (2) obtain

the difference between the contract price and the market value of the goods. Under the UCC, the buyer is

entitled to consequential damages, provided that the seller could reasonably have foreseen them.

Reliance Interest

The reliance interest is to put an injured party in the position he would have been in had the parties never

entered into a contract. This remedy focuses on the time and money the injured party spent performing his

part of the agreement.

Injured parties sometimes seek reliance damages because it is difficult or impossible to quantify or prove

expectation damages with reasonable certainty.

Promissory Estoppel

Courts generally award reliance damages in promissory estoppel cases.

Case: Toscano v Greene Music4

Facts: Joseph Toscano was the general manager of Fields Pianos (Fields) in Santa Ana, California. He

was unhappy with his job and decided to seek other employment. In July, Greene offered Toscano a sales

management job, starting September 1. Toscano relied on Greene’s offer and quit his job at Fields on

August 1. Greene withdrew the job offer in mid-August. Toscano sued Greene for breach of contract and

promissory estoppel. Greene argued that Toscano was not entitled to any expectation damages, because

his employment with Greene would have been at-will, meaning he could lose the job at any time and

could, at most, recover one month’s lost wage. The trial court ruled that Toscano was entitled to reliance

damages at Fields starting August 1 through his anticipated retirement in 2017 and awarded him damages

of $536,833. Green appealed.

Issue: Was Toscano entitled to reliance damages?

Decision: Yes, Toscano was entitled to reliance damages, but only as recalculated after a new trial.

Reasoning: Toscano gave up his job with Fields, relying on Greene’s promise of employment, but was

then denied his new position. Toscano made a claim of promissory estoppel. Because this is an equitable

doctrine, a court applying it must make a particular effort to do what is right and just.

A plaintiff such as Toscano, lured away by a job promise that goes unfulfilled, should be allowed to

recover the wages he lost at his former employment. That is basic fairness. Further, Toscano should not be

denied compensation merely because he was an at-will employee at his former job. Any other holding

would contradict the basic equitable principles mentioned. However, when the lower court awarded

Toscano lost future earnings from the time of trial to his retirement, it went too far.

4 124 Ca.App.4th 685, 21 Ca.Rptr.3d 732 Court of Appeal of California, 2004.

Toscano’s expert on damages was Roberta Spoon. In calculating Toscano’s lost future wages, she assumed

that without the job offer from Greene, he would have remained with Fields until he retired. She made

this assumption based on the fact that, in the past, Toscano had never changed jobs for any reason except

an increase in pay. Her assumption, however, missed the basic point of at-will employment. Whether

Toscano intended to remain with Fields until retirement was irrelevant. What counts was whether the

Fields company itself wanted Toscano to remain. Because he was an at-will employee, Fields could have

terminated him any time it wanted, for virtually any reason.

For an expert witness to assume that Toscano would remain at the same job for nearly a decade and a half

was sheer speculation. Toscano should have presented testimony from Jerry Goldman, Toscano’s boss at

Fields, or some other evidence indicating that he would have been permitted to remain at the company

until he retired.

The lower court award of past losses, until the time of trial, was affirmed. The award of lost future

earnings was vacated, and the case was remanded for a new trial on those damages only. The judgment

was otherwise affirmed.

Question: On what claim did the trial court award damages to Toscano?

Question: On what promise did Toscano rely?

Question: What harm did Toscano suffer in reliance on Green’s promise?

Answer: He quit his job with Fields on August 1. Then, Greene withdrew its offer and left Toscano

Question: Why wasn’t Toscano successful on his breach of contract claim?

Answer: The appellate court decision doesn’t explain why; the only issue before it was the trial

Question: Toscano relied on Green’s promise and sued Greene. Why does the damages discussion

focus on what Toscano would have earned at Fields?

Answer: Toscano’s harm is that he quit his job at Fields in reliance on Greene’s promise of

employment, soon revoked. Had the court recognized Toscano’s breach of contract claim it would

Question: Why does the court rule that the damage award is too speculative?

Answer: Because the trial court relied on expert testimony that assumed Toscano would have stayed

Public Policy

Question: Is it fair to permit Greene to escape all liability? What is the purpose of the remand? What

might Toscano demonstrate on remand? What practical difficulties will he encounter?

Answer: Although it seems unfair to permit Greene potentially to avoid all liability, the court’s

holding merely demonstrates the precarious position of all employees-at-will. Neither at Field’s nor at

Greene’s did Toscano have job security. However, the court is giving Toscano the chance, on remand,

to prove that his employment at Fields was in fact secure, and that he could have—and would have—

stayed there either to retirement or until something more lucrative turned up. The best evidence for

Toscano would be the testimony of Fields’s owner, but that may be difficult to obtain, given the fact

that Toscano quit.

Restitution Interest

The restitution interest is designed to return to the injured party a benefit that he has conferred on the

other party. Restitution is awarded in two types of cases: (1) when the parties have reached a contract and

one of them breaches, and (2) in quasi-contract cases.

Restitution in Cases of a Voidable Contract

Restitution is a common remedy in contracts involving fraud, misrepresentation, mistake, and duress. In

these cases, restitution often goes hand-in-hand with rescission, which means to “undo” a contract and put

the parties where they were before they made the agreement.

Case: Putnam Construction & Realty Co. v. Byrd5

Facts: Putnam Construction owned the University Square Business Center (USBC), an office complex

with several major tenants. William Byrd and some partners (the “buyers”) agreed to pay slightly over

$17 million for USBC. They financed the purchase with a $16.2 million loan from Northwestern Mutual

Life, which was secured with a mortgage on the property. Shortly after the sale closed, Byrd learned that

several of the major tenants were leaving. The buyers sued Putnam. The trial court rescinded the contract

and ordered the sellers to assume liability for the mortgage. The trial court did not, however, order

restitution of the buyers’ expenses, such as the closing costs. The sellers appealed.

Issue: Were the buyers entitled to rescission or restitution, or both?

Decision: Yes. The buyers were entitled to both rescission and restitution.

Reasoning: The sellers knew that the Corps of Engineers planned to build its own facility and vacate the

USBC, yet they told the buyers that the Corps would be staying. They also knew that McDonnell-Douglas

was leaving but failed to inform the buyers. The sellers clearly committed fraud.

Money damages would be speculative and would leave the buyers saddled with a property that operates at

a steadily increasing loss. The fairest way to compensate them was by rescinding the contract, and the

trial court’s ruling on that issue was affirmed. However, the buyers also incurred substantial out-of-pocket

expenses because of the sellers’ fraud. To compensate them for these losses, they were entitled to receive

restitution damages of $483,006.75 in closing costs, $121,000 in mortgage interest payments, and

$500,000 in nonrefundable fees paid to Northwestern to obtain the loan. The case was remanded for the

trial court to impose all of these remedies.

Question: What is the difference between rescission and restitution?

Answer: Rescission means “undoing” a contract–that is, discharging the parties’ obligations and

Question: Were the plaintiffs in this case entitled to rescission, restitution, or neither?

Answer: The plaintiffs obtained both remedies. They were entitled to rescind the contract, meaning

Question: What’s the best way to characterize Putnam’s failure to tell Byrd that major tenants were

leaving the property?

Question: How does that relate to the court’s decision to award restitution to Byrd?

5 632 So. 2d 961, 1992 Ala. LEXIS 1289 Supreme Court of Alabama, 1992.

Question: Byrd didn’t pay these closing costs to Putnam, so how were they a benefit to Putnam?

Answer: They were not paid to Putnam, but Byrd incurred them as a result of Putnam’s fraud. This is

Question: Let’s assume that the officer from Putnam in charge of negotiating the sale of USBC was

required by her boss to tell Byrd that all tenants would be staying. Isn’t it a matter of ethics whether

she disobeys her boss or plays along with the ruse?

Answer: Unlike most of the ethical questions in the book, this one does not seem to have two

answers. It is unethical to lie to the buyers about the tenants’ intentions; it also happens to be fraud