Contracts – Class 2 Prof. Merges Jan. 11, 2011

Main Topics Finish Express/Implied warranty discussion The simple rationale for contract remedies

Finishing Crow v. Bayliner UCC Statements here; warranty?

Why does the UCC apply here? There is at least one “merchant” This is a transaction involving “goods” -- UCC § 2-104(1), 2-105(2)

UCC § “Express warranties by the seller are created as follows: (a) Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

UCC § “Express warranties by the seller are created as follows: (b) Any description of the goods which is made a part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

“the basis of the bargain” Something that forms an expected part of the K or its performance; Expectations of the promisee, reliance on element of the promisor’s performance

Prior case law Daughtrey v. Ashe Diamond appraisal case –Holding?

Prop matrix statements Were they binding?

Prop matrix statements NO!! They “did not relate to the particular boat bought by Crow”

Brochure statement?

“A statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.”

Was there a contract?

Yes But – it did NOT include a warranty as to the speed of the boat

From enforcement to remedies Enforceability is a feature of a promise Remedies translate this into practical payoff for one of the parties

US Naval Institute v. Charter Communications, Inc. Introduction -

US Naval Institute v. Charter Communications, Inc. Introduction – –United States Court of Appeals for the Second Circuit -- ?

The Naval-Berkeley Contract Clancy US Naval Institute © Charter- Berkley $ 7 billion/yr revenue

Hardcover vs. paperback sales Why hardcover 1 st ?

Hardcover vs. paperback sales Why hardcover 1 st ? –Other examples of this? Airline tickets Theatre tickets New electronic products

Brief digression There is nothing so useful as a good, effective theory...

Price Quantity Demanded (000s) D $5 100 $3 170 Total Revenue Price Discrimination

Price Quantity Demanded (000s) D $5 100 $3 170 Price Discrimination Hardcover Softcover

Total Revenue Without Price Discrimination With Price Discrimination $510$710

History of the USNI case Who originally sued whom; for what?

What remedy or “relief” did Naval seek in its original lawsuit vs. Charter/Berkley?

What happened in the court below?

Why?

Holding Below

What did the agreement in USNI say?

What did the agreement say? Berkley may publish a paperback edition “not sooner than October ”

Facts When did Berkley in fact first publish its paperback edition?

Facts When did Berkley in fact first publish its paperback edition? Beginning on Sept 15, 1985; book reached paperback bestseller list by the end of Sept, 1985

Easy case, right?

Industry custom as a factor in interpreting the K May not mean what it appears to mean to an industry “outsider” UCC “trade usage”

When did this litigation start?

When USNI first learned of Berkley’s plans for early shipment What relief did USNI seek at that time?

Copyright vs. contract

Property right vs. K rights Property is a right “good against the world,” no K, no privity required Presumed to be unique and hard to value; so an injunction is the “default remedy”

What are the legal rights over the traded good? SB Contract

What are the legal rights over the traded good? SB Title to the good

SB Contract IPR: patent, ©,TM

Contract IPR: patent, ©,TM +

A Transactional View of Property Rights, 20 Berkeley Tech. L.J (2005) Robert P. Merges

Contract Damages: Bottom p. 10

Basic principles of K damages According to Judge Kearse, what is the basic purpose of K damages?

Basic principles of K damages According to Judge Kearse, what is the basic purpose of K damages? “[T]o compensate the injured party for the loss caused by the breach”

What is the usual measure of promisee’s loss? “[T]hose damages are generally measured by the plaintiff’s actual loss”

What about defendant/promisor’s GAIN?

“on occasion” might be appropriate As an estimate of plaintiff/promisee’s loss

Why? This would be punitive “[N]ot part of the law of contracts” Well, why not?

My loss/your gain When might they not be the same thing?

What was Berkley’s gain?

Easy to figure: all September sales Total: $724, 300

What was USNI’s loss?

District court: $35, – difference between August and September sales

How did the district court get this figure? Said that USNI would have sold the same number of books in September as it sold in August Why modest? Remember price discrimination – high demanders mostly purchased by now...

District court then added to the $35K figure

Why the addition? Added $7760 Softcover sales made to people who would have purchased a hardcover book This was a very small part of the $720,000

Why was the $7660 improperly awarded? Berkley’s gain, NOT USNI’s loss

Efficient breach Gain to Berkley: $720,000 Loss to Naval: $35,000 Pareto superiority...

Vilfredo Pareto,

Pareto superior Berkley breaches, pays USNI $35,000 Berkley earns $720,000 as a result of the breach After paying USNI, Berkley is still $685,000 to the good!

2d Circuit decision Reviewing fact finding by the district court Court was not wrong to estimate lost sales using August figure “Tie goes to the aggrieved party” – USNI here

Sullivan v. O’Connor Use this as a vehicle to explore K remedies

Facts and findings below

Nose surgery Jury awarded $13,500 for K breach Both parties appeal damages instructions/theory

See note 1, p. 19 Dr. fee: $300; hospital cost per operation, $200 Expected pain and suffering; “cost” of normal amount of pain: $3,000 Increase in future earnings from improved appearance: $20,000 Loss from disfigurement: $10,000

Baseline: financial condition on day K was signed

Baseline Expectation: where you expected to be at completion of K

Baseline: condition on day K was signed Expectation: where you expected to be at completion of K Expectation measure of damages

$ 20,000

Baseline: financial condition on day K was signed Reliance: what you spent relying that K would be completed Reliance measure of damages

Typical reliance expenditures Home purchase: –Expenditures on home inspection; –new satellite dish Commercial deal: –Loading dock equipment –Concrete slab for new machine

To other party to contract To other people – “third parties”

Reliance measure of damages

Example: down payment on a home Restitution Benefits conferred on the other party

To other party to contract To other people – “third parties” Restitution Benefits conferred on another party

Restitution “Unjust enrichment” To restore, to return to a just situation Often employed when a contract is terminated, or no true contract exists –A cause of action in addition to a contractual interest

3 Measures of Damages in Sullivan Expectation Reliance Restitution

Sullivan: expectation interest $20,000: value of improved nose (the economic value of the “nose as expected” $10,000: compensation for loss in value due to disfigured nose $3000 additional pain from additional operation Total: $33,100

Sullivan expectation Does NOT include $300 Dr. fee, $200 hospital costs for 1 st 2 operations, $6000 in pain from 1 st 2 operations All these would have been incurred anyway if the operation had been a success

Sullivan reliance $300: Dr. fee $300 hospital fees for all 3 operations $9000 in pain from all 3 operations $10,000 for worsening of appearance Total: $19,600

Sullivan restitution $300 Dr. fee, paid back to Sullivan This is the only direct benefit conferred by Sullivan on Dr. O’Connor