978-1285860381 Chapter 19 Solution Manual Part 1

Unlock access to all the studying documents.

View Full Document

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. (If they do not have a copy of the contract—which is likely—

they should be able to find a copy of the company’s current contract or terms of use online.) 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.

Quote of the Day

“Everyone complains of his memory, none of his judgment.” –Francois, duc de la Rochefoucauld

(1613-1680), French writer, Sentences et Maximes Morales.

Identifying the “Interest” to be Protected

Someone breaches a contract when he fails to perform a duty without a valid excuse. The first step that a

court takes in choosing a remedy is to decide what interest it is trying to protect. An interest is a legal

right in something.

There are four principal contract interests that a court may seek to protect:

• Expectation interest. This interest is 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. Even if the injured party has not shown an expectation interest, he can still

recover damages if he proves 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

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.

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: How should Hawkins’ damages be calculated?

Excerpts from Justice Branch’s Decision:

The jury was permitted to consider two elements of damage, (1) pain and suffering due to the

operation, and (2) positive ill effects of the operation upon the plaintiff’s hand. [T]he foregoing

instruction was erroneous.

By damages as that term is used in the law of contracts, is intended compensation to put the plaintiff

in as good a position as he would have been in had the defendant kept his contract. The measure of

recovery is what the defendant should have given the plaintiff, not what the plaintiff has given the

defendant or otherwise expended.

We conclude that the true measure of the plaintiff’s damage in the present case is the difference

between the value to him of a perfect hand and the value of his hand in its present condition,

including any incidental consequences fairly within the contemplation of the parties when they made

their contract.

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

The extent of the plaintiff’s suffering does not measure this difference in value. The pain necessarily

incident to a serious surgical operation was a part of the contribution which the plaintiff was willing

to make to his joint undertaking with the defendant to produce a good hand. It furnished no test of

the difference between the value of the hand which the defendant promised and the one which

resulted from the operation.

Holding: the New Hampshire Supreme Court held that the lower court’s instructions regarding

damages were incorrect, and found that the evidence presented would have justified a verdict for an

amount sufficient to cover the cost of a new operation to correct the injury to the hand. Overturned

and sent down for retrial.

Question: What does the holding by the New Hampshire Supreme Court mean?

Answer: The New Hampshire Supreme Court restated the rule for damages in a contract breach

Side Note: this case is also known for its reference in the book and movie The Paper Chase. Due to

the basic case facts, it is commonly called to as the “hairy hand” case.

Direct Damages

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

award for the expectation interest.

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.

Students who performed the consequential damages research could discuss their findings here.

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: Should the defendant be liable for profits lost because of his delay in delivering the shaft?

Holding: Judgment for Hadley reversed. The defendant is not liable for lost profits. In one of the most

influential sentences ever written about a contract, Judge Alderson wrote:

Where two parties have made a contract which one of them has broken, the damages which the other party

ought to receive in respect of such breach of contract should be such as may fairly and reasonably be

considered either arising naturally, i.e. according to the usual course of things, from such breach of

contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at

the time they made the contract, as the probable result of the breach of it.

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

Here, there was no evidence that the plaintiffs informed the defendant that the mill would have to close if

the shaft was delivered late, and that they would consequently lose profits.

It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence

of the breach of contract as could have been fairly and reasonably contemplated by both the parties

when they made this contract.

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?

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

Answer: Not necessarily. Contract law presumes each party is looking out for its own interest and

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, 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.

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

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.

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 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 are consequential damages?

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

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

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 general rules discussed throughout this chapter. UCC §§2-703 through 2-715 govern

the remedies available to buyers and sellers.

Reliance Interest

The reliance interest is designed 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.

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?

Holding: Judgment for Toscano’s entitlement to reliance damages affirmed, but damage award vacated

and remanded for new trial on amount of damages. Promissory estoppel permits Toscano, who

relinquished his job in reliance on an unfulfilled promise of employment, to prove he is entitled to recover

the lost wages he would have expected to earn from his former employer but for the defendant’s promise.

The at-will nature of Toscano’s former employment with Fields is not a strict impediment to recovery of

future wages that Toscano would have earned at Fields had he not relied on Greene’s promise. The

evidence, however, was too speculative to support the trial court’s award of Toscano’s future lost earnings

from September 1 until his retirement. Toscano’s damages-expert’s testimony does not establish Toscano

had a definite expectation of continued employment with Fields for any particular period of time.

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?

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

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

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

Restitution Interest

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

other party, which it would be unjust to leave with that person. Restitution is awarded in three types of

cases: (1) when a contract is breached or discharged (2) when the injured party to a voidable contract

rescinds the agreement (see Chapter 11) and (3) in a quasi-contract. Restitution is a common remedy in

contracts involving fraud, misrepresentation, mistake, and duress.

TAYLOR v. KJAER

Addie and Taylor v. Kjaer</CST>

737 F.3d 854

United States Court of Appeals for the Third Circuit, 2013

Facts: Christian Kjaer and his relatives (Sellers) owned a small island off the coast of St.

Thomas, U.S. Virgin Islands. Some investors, led by Miami Dolphins football player Jason

Taylor agreed to buy it for $21 million

Under the contract, Taylor paid a $1 million deposit and promised to close within 60

days. The contract allowed him to extend the closing date by paying an additional $500,000

nonrefundable deposit, which he did. The buyers’ only other duty was to pay the remaining

purchase price at closing. The Sellers committed to delivering clear title to the property, along

with all of the island’s permits.

According to the contract, if Taylor breached the contract, he would forfeit the deposits;

if the Sellers breached, they would return the deposits. The contract did not say what would

happen to the deposit it both parties breached.

On the closing date, the sale was not consummated; the Sellers delivered expired permits

and did not convey clear title. Taylor and his partners did not pay. But the Sellers refused to

return Taylor’s deposit.

Taylor sued for restitution. The Sellers asserted they were entitled to the $1.5 million

because Taylor breached the contract. Taylor argued that the Buyer’s failure to deliver valid title

discharged his obligation to close—and that allowing the Sellers to keep the money would

unjustly enrich them. The district court found that since Taylor breached the valid contract, he

could not recoup the deposit. Taylor challenged the lower court’s call. </TX2>

Issue: Was Taylor entitled to restitution?</CSTX1>

Excerpts from Judge Roth’s Decision:</CSH1>

Agreements concerning an exchange of promises require performance to be exchanged

simultaneously whenever possible, unless the agreement indicates otherwise. This simultaneous

exchange of performances creates concurrent conditions, under which performance by one party

creates a condition precedent for performance by the other party.

Here, the Sellers were required to convey Clear and Marketable title and assignments of

all permits, leases, and licenses necessary. Because the Contract of Sale did not indicate

otherwise, the performance of each obligation was to occur simultaneously. Therefore,

fulfillment of each obligation was a concurrent condition to the other.

With regard to awarding restitution in cases involving valid contracts, we look to the

Restatement (Second) of Contracts:

<EXT>A party whose duty of performance does not arise or is discharged as a result of

nonoccurrence of a condition is entitled to restitution for any benefit that he has conferred

on the other party by way of part performance or reliance.

For example, the Restatement illustrates: “A contracts to sell a tract of land to B for

$100,000. After B has made a part payment of $20,000, A wrongfully refuses to transfer title. B

can recover the $20,000 in restitution.”

In applying the Restatement (Second) of Contracts, it is clear that restitution is in order.

Taylor provided a deposit of $1.5 million to the Sellers with the intent to purchase the property.

However, all of the parties failed to perform within the timeframe specified in the contracts, and

their respective duties were discharged. Thus, as the Restatement instructs, Taylor is entitled to

restitution for the benefit of the deposit that he conferred to the Sellers.

For the foregoing reasons, we will reverse the District Court and order the return of the

deposit to Taylor.

Question: Generally, when does an agreement concerning an exchange of promises require

performance to be exchanged?

Question: On what authority did the court rely in determining whether to award restitution in

this case?

Question: What is a restitution interest designed to do?