Business Law Chapter 18 Homework Craig Were Undertaken With Actual knowledge That The

Unlock access to all the studying documents.

View Full Document

Chapter 18

CONTRACT REMEDIES

A. Interests Protected by Contract Remedies

B. Monetary Damages

1. Compensatory Damages

a. Loss of Value

b. Cost Avoided

c. Incidental Damages

d. Consequential Damages

2. Nominal Damages

3 Reliance Damages

4. Damages for Misrepresentation

a. Fraud

b. Nonfraudulent Misrepresentation

5. Punitive Damages

6. Liquidated Damages

7. Limitations on Damages

a. Foreseeability of Damages

b. Certainty of Damages

c. Mitigation of Damages

C. Remedies in Equity

1. Specific Performance

2. Injunctions

D. Restitution

1. Party Injured by Breach

2. Party in Default

3. Statute of Frauds

4. Voidable Contracts

E. Limitations on Remedies

1. Election of Remedies

2. Loss of Power of Avoidance

a. Affirmance

b. Delay

c. Rights of Third Parties

Cases in This Chapter

Merritt v. Craig

Arrowhead School District No. 75, Park County

Montana, v. James A. Klyap, Jr.

Real Estate Analytics, LLC v. Vallas

Madison Square Garden Corp, Ill. v. Carnera

Chapter Outcomes

After reading and studying this chapter, the student should be able to:

Explain how compensatory damages and reliance damages are computed.

Define (a) nominal damages, (b) incidental damages, (c) consequential

damages, (d) foreseeability of damages, (e) punitive damages, (f)

liquidated damages, and (g) mitigation of damages.

Define the various types of equitable relief and explain when the courts

will grant such relief.

Explain how restitutionary damages are computed and identify the

situations in which restitution is available as a contractual remedy.

Identify and explain the limitations on contractual remedies

TEACHING NOTES

A. INTERESTS PROTECTED BY CONTRACT REMEDIES

Contract remedies are available to protect one or more of the following interests

of the injured party: (1) the expectation interest; (2) the reliance interest;

or (3) the restitution interest.

B. MONETARY DAMAGES

*** Chapter Outcomes ***

Explain how compensatory damages and reliance damages are computed.

Define (a) nominal damages; (b) incidental damages; (c) consequential damages; (d)

foreseeability of damages; (e) punitive damages; (f) liquidated damages; and (g) mitigation

of damages.

Compensatory Damages

Designed to place the injured party in the position in which he would have been

had the contract breach not occurred (expectation interest). In general

compensatory damages are measured by taking the difference between the

value of the promised performance of the breaching party and the value of the

actual performance rendered by the breaching party. The value of the promised

performance minus the value of the actual performance equals the loss of value.

Incidental and consequential damages are added to the loss of value, while

expenses saved by nonperformance are subtracted.

Nominal Damages

Nominal damages are a small sum of money awarded where the contract has

been breached but the dollar loss is negligible or unproved.

Reliance Damages

The injured party may seek reimbursement for foreseeable loss caused by his

reliance on the contract; intended result is to place the injured party in as good a

position as he would have been in had the contract not been made; may include:

Damages for Misrepresentation

Fraud — Recovery is allowed in a tort action when fraud is used to induce a

party to enter into a contract; most states follow a “benefit of the bargain”

rule, a few states follow the “out of pocket” rule.

Nonfraudulent Misrepresentation — Where the misrepresentation is

Punitive Damages

Punitive damages (also called exemplary damages) are monetary damages in

addition to compensatory damages that are awarded to an injured party in

CASE 18-1

MERRITT v. CRAIG

Court of Special Appeals of Maryland, 2000

130 Md.App. 350, 746 A.2d 923, certiorari denied, 359 Md. 29, 753 A.2d 2

http://scholar.google.com/scholar_case?

q=746+A.2d+923&hl=en&as_sdt=2,34&case=10339288125936808164&scilh=0

Davis, J.

In the fall of 1995, during their search for a new residence, appellants [Benjamin and Julie

Merritt] inspected Craig’s property located at Pergin Farm Road in Garrett County [Maryland].

After viewing the residence, appellants advised Craig that they were interested in purchasing the

property; however, their offer was contingent upon a satisfactory home inspection. On November

5, 1995, appellants, their inspector, and appellee’s husband Mark Craig conducted an inspection

of the basement area of the residence, during which there was an examination of cistern and

water supply pipes. The examination revealed that the cistern had been used to store a water

supply reserve, but was not currently utilized.

The inspector advised appellants that the system he had observed was one which utilized a

submersible pump in the well from which water flowed to a pressure tank in the basement. The

pressure tank distributed water through the internal piping system of the house. There were also

appellants’ house from the second well on Craig’s guest house property. On June 14, 1996,

appellants and Craig had settlement on the property. Later that afternoon, Craig’s husband,

without appellants’ knowledge, excavated the inside wall of appellants’ house and installed a cap

to stop a leaking condition on the water line that he had previously cut.

Subsequently, appellants, while attempting to fill a water bed, noticed that the water supply

in their well had depleted. On July 13, 1996, appellants met with Craig to discuss a solution to

the water failure problem, believing that Craig was responsible for cutting a water line to their

house. Appellants agreed with Craig to conduct a flow test to the existing well and contribute

On February 11, 1997, appellants brought suit against Craig and other appellees in the Circuit

Court for Garrett County, seeking rescission of the deed to the property and contract of sale,

along with compensatory and punitive damages. During the course of the trial, the judge

dismissed appellants’ claim for rescission on the ground that they had effectively waived their

right to rescission. * * * At the close of trial, the jury returned a verdict in favor of appellants and

awarded compensatory damages in the amount of $42,264.76. Appellants were also awarded

punitive damages in the amount of $150,000. Subsequently, appellants filed a motion to alter or

amend the judgment requesting the court to grant rescission of the contract of sale and the deed,

which the circuit court denied on June 17, 1998.

* * *

* * * Under Maryland law, when a party to a contract discovers that he or she has been

defrauded, the party defrauded has either “a right to retain the contract and collect damages for

its breach, or a right to rescind the contract and recover his or her own expenditures,” not both.

[Citations.] “These rights [are] inconsistent and mutually exclusive, and the discovery put[s] the

relieved of all obligations under the contract while simultaneously securing the windfall of

compensatory and punitive damages beyond incidental expenses.

* * *

In sum, although whether appellants promptly repudiated the contract was not squarely

before the court, we are not persuaded by appellees’ assertion that appellants did not seek

rescission in a timely fashion. We hold that, under the facts of this case, appellants must elect the

form of relief, i.e., damages or rescission

* * *

We hold that * * * the appellants are entitled to be awarded punitive damages resulting from

Craig’s actions. A “[p]laintiff seeking to recover punitive damages must allege in detail in the

complaint the facts that indicate the entertainment by defendant of evil motive or intent.”

[Citation.] The Court of Appeals has held that “punitive damages may only be awarded in such

* * *

The jury believed that the representations made by Craig were undertaken with actual

knowledge that the representations were false and with the intention to deceive appellants. * * *

Moreover, the record reflects that the jury could reasonably infer Craig’s intention to defraud

appellants by her representation in the Disclosure Statement that there were no problems with the

water supply, and by subsequently making substantial changes in the water system by cutting off

a water line which supplied water to appellants’ residence immediately after appellants’ inspector

examined the system. Therefore, we hold that the circuit court was not in error in finding facts

from the record sufficient to support an award of punitive damages.

Craig also challenges the punitive damages award on the basis that the amount of the award

was excessive. * * *

Liquidated Damages

A contract may contain a liquidated damages provision by which the parties

agree in advance to the damages to be paid in case of a breach; will be enforced

if it is a reasonable projection of the loss that may, or actually does, result from

the breach.

CASE 18-2

ARROWHEAD SCHOOL DISTRICT NO. 75, PARK COUNTY,

MONTANA, v. KLYAP

Supreme Court of Montana, 2003

318 Mont. 103, 79 P.3d 250

http://scholar.google.com/scholar_case?case=643756738100095281 &q=79+p.3d+250&hl=en&as_sdt=2,34

Nelson, J.

Arrowhead School District No. 75 (District) is located in Park County south of Livingston

[Montana]. The District consists of one school, Arrowhead School (School).

For the 1997-98 school year, the School employed about eleven full-time teachers and

several part-time teachers. During that school year, the School employed Klyap as a new teacher

instructing math, language arts, and physical education for the sixth, seventh, and eighth grades.

In addition, Klyap, through his own initiative, helped start a sports program and coached flag

football, basketball, and volleyball.

* * * the School offered Klyap a contract for the 1998-99 school year on or about June 15,

1998, which he accepted by signing on or about June 30, 1998. This contract provided for a

clause in Klyap’s teaching contract for the stipulated amount of $4,100, 20% of the $20,500

salary. * * *

After Klyap resigned, the School attempted to find another teacher to take Klyap’s place.

Although at the time that Klyap was offered his contract the School had 80 potential applicants,

only two viable applicants remained available. Right before classes started, the School was able

to hire one of those applicants, a less experienced teacher, at a salary of $19,500.

* * * After a bench trial, the District Court determined the clause was enforceable * * *

because the damages suffered by the School [were] impractical and extremely difficult to fix.

Specifically, the court found the School suffered damages because it had to spend additional time

* * *

The fundamental tenet of modern contract law is freedom of contract; parties are free to

mutually agree to terms governing their private conduct as long as those terms do not conflict

with public laws. [Citation.] This tenet presumes that parties are in the best position to make

decisions in their own interest. Normally, in the course of contract interpretation by a court, the

court simply gives effect to the agreement between the parties in order to enforce the private law

of the contract. [Citation.] When one party breaches the contract, judicial enforcement of the

contract ensures the nonbreaching party receives expectancy damages, compensation equal to

what that party would receive if the contract were performed. [Citations.] By only awarding

expectancy damages rather than additional damages intended to punish the breaching party for

failure to perform the contract, court enforcement of private contracts supports the theory of

* * *

* * * Liquidated damages in a personal service contract induce performance by an employee

by predetermining compensation to an employer if the employee leaves. However, the employer

clearly prefers performance by the specific employee because that employee was chosen for hire.

The preference for performance by a specific person is reflected in the rule that personal service

contracts are not assignable. Further, because personal service contracts are not enforceable by

specific performance, [citation], liquidated damages are an appropriate way for employers to

protect their interests. * * *

* * *

After reviewing the facts of this case, we hold that while the 20% liquidated damages clause

is definitely harsher than most, it is still within Klyap’s reasonable expectations and is not unduly

oppressive. First, as the School pointed out during testimony, at such a small school teachers are

chosen in part depending on how their skills complement those of the other teachers. Therefore,

finding someone who would provide services equivalent to Klyap at such a late date would be

virtually impossible. This difficulty was born out when only two applicants remained available

and the School hired a teacher who was less experienced than Klyap. As a teacher, especially one

with experience teaching at that very School, Klyap would have to be aware of the problem

finding equivalent services would pose.

Second, besides the loss of equivalent services, the School lost time for preparation for other

activities in order to attempt to find equivalent services. * * * Further, the new teacher missed all

Therefore, because as a teacher Klyap would know teachers are typically employed for an

entire school year and would know how difficult it is to replace equivalent services at such a

small rural school, it was within Klyap’s reasonable expectations to agree to a contract with a

20% of salary liquidated damages provision for a departure so close to the start of the school

year.

Limitations on Damages

Limitations imposed upon monetary damages are intended to ensure that

damages:

• can be taken into account at the time of contracting

• are compensatory and not speculative (based on a guesswork), and

• do not include loss that could have been avoided by reasonable effort.

Foreseeability of Damages — Damages are recoverable only for loss that the

party in breach could have foreseen as a likely result of a breach when the