George Mason School of Law

George Mason School of Law
Contracts II Remedies II: Expectation Interest This file may be downloaded only by registered students in my class, and may not be shared by them F.H. Buckley

Efficiency Pre-breach
Prior to breach or performance, the risks and duties to be assigned to the party best able to bear them

Efficiency Post-breach
Subsequent to breach, the parties might still usefully be given cost-reducing incentives

Efficiency Post-breach
Subsequent to breach, the parties still are given cost-reducing incentives Mitigation Anticipatory Repudiation Remedies

What if the remedy is specified in the contract?
Globe Refining at 94 Oliver Wendell Holmes

What if the remedy is specified in the contract?
Globe Refining “The parties themselves, expressly or by implication, may fix the rule by which the damages are to be measured”

What happens when the contract is silent about the remedy, per Holmes?

What happens when the contract is silent about the remedy?
Give them what they “probably would have said if they had spoken about the matter.”

Globe Refining p. 94 What damages did the Π seek?

Globe Refining What damages did the Π seek?
The difference between the contract price and the market price of cotton oil at the time of breach, and… The cost of sending the tank cars from Louisville to Texas

Globe Refining What did Holmes award?

Globe Refining What did Holmes award?
The difference between the contract price and the market price at the time of breach The cost of sending the tank cars to Texas Only the former—and why was that?

Globe Refining Had the contract been performed, Globe would have spend the money to send the tank cars to Louisville to make the profit associated with the difference between the contract price and the market price at the time of breach Giving Globe both would give it more in breach than on performance

Calculating profits on purchase of commodities
Gross profits = Contract price less market price Net profits = Contract price less (market price plus expenses)

Globe Refining Assume that had the contract been performed Globe would have made gross profits of 100 and net profits of 90 (after spending 10 in expenses) What should Globe’s recovery be if breach occurred after the rail cars were shipped to Louisville?

Globe Refining Assume that had the contract been performed Globe would have made gross profits of 100 and net profits of 90 (after spending 10 in expenses) Damages of $100 puts Globe in the same position as had the contract been performed Gross profits of 100 plus expenses of 10 would be overcompensation

Globe Refining Assume that had the contract been performed Globe would have made gross profits of 100 and net profits of 90 (after spending 10 in expenses) What should Globe’s recovery be if breach occurred before the rail cars were shipped to Louisville?

Globe Refining Assume that had the contract been performed Globe would have made gross profits of 100 and net profits of 90 (after spending 10 in expenses) What should Globe’s recovery be if breach occurred before the rail cars were shipped to Louisville? Damages of $90 puts Globe in the same position as had the contract been performed

The purpose of damages in contract law

Damages are compensatory
They are meant to put the innocent party in the position he would have been in had the wrong not been committed.

Compensation as Substitutional Justice
The assumption that money damages can cure all ills Presumptively no specific performance

How does one compensate?
When the wrong is a tort, one puts the injured party in his pre-tort position

How does one compensate?
When the wrong is a breach of contract, one makes the injured party whole by putting in the position he would be in had the contract been performed The wrong was the breach

How does one compensate
In Globe Refining, the Π would have had the oil, but would have had to send the tank cars to Texas in any event Giving him both is double counting

The measure of damages at common law

The measure of damages at common law?
§ 2-713(1) The measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the seller's breach.

Why the price of oil at breach?
Why was the measure of damages the difference between the contract price and (1) the price of oil at breach, rather than (2) the prince of oil at the time stipulated for performance?

Why the price of oil at breach?
§ 2-713(1) The measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the seller's breach.

What is the normal measure of damages at common law?
Why was the measure of damages the difference between the contract price and (1) the price of oil at breach, rather than (2) the prince of oil at the time stipulated for performance? What’s the innocent party supposed to do on breach?

George Mason School of Law
Contracts II Remedies II: Expectation Interest This file may be downloaded only by registered students in my class, and may not be shared by them F.H. Buckley

Damages are compensatory
They are meant to put the innocent party in the position he would have been in had the wrong not been committed.

Damages in Freund at 96 What was the contract?

Freund at 96 What damages remedies did Freund seek?

Freund What damages remedies did Freund seek?
Damages for delay of promotion Lost royalties Potential cost of vanity publication

Freund Fuller and Perdue at 97 Expectation Reliance Restitution

Restatement § 344 Judicial remedies under the rules stated in this Restatement serve to protect one or more of the following interests of a promisee: (a) his "expectation interest," which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed, (b) his "reliance interest," which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made, or (c) his "restitution interest," which is his interest in having restored to him any benefit that he has conferred on the other party.

Freund What are the three kinds of damages that are considered?
The Expectation Interest: Put the Π in the same position he would have been in had the contract been performed And what’s that here?

Ebenezer promises to gives 100 but breaches
Time 1 What do we need to give David to make him as well off as he would have been had he not relied? C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 50 100

Time 1 The Expectation Interest is CB, or $100 C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 50 100 39

The Expectation Interest: Put the Π in the same position he would have been in had the contract been performed And what’s that here? Royalties Reputational gains

The Expectation Interest: Put the Π in the same position he would have been in had the contract been performed The royalties were too speculative to amount to anything The reputational loss was not quantified (or quantifiable)

The Expectation Interest: Put the Π in the same position he would have been in had the contract been performed What happens when the Π runs into the Uncertainty Barrier?

What happens when the Π runs into the Uncertainty Barrier? Here nominal (contemptuous) damages

Uncertainty Limits Damages
Dempsey p. 102 No recovery for expected ticket revenues (lost profits)

So would you fight Harry Wills?

Does the uncertainty barrier undercompensate Π? And give Δ a temptation to breach?

Dempsey p. 102 What recovery was awarded?

Dempsey p. 102 What recovery was awarded? Reliance Damages

When uncertainty bars recovery for the expectation measure, a court might either bar relief (Freund) or award damages to vindicate the reliance interest (Dempsey)

Freund The Reliance Interest in Freund: Reimburse the Π for what he spent in reliance on the contract

Time 1 What do we need to give David to make him as well off as he would have been had the promise been performed? C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 50 100

Time 1 The Reliance Interest is CD, or about $25 C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 50 100 52

Freund The Reliance Interest: A Tortious measure: Put the Π in his pre-contractual position

Freund The Reliance Interest in Freund
For costs actually incurred, not hypothetically incurred as here

Freund Qu. The analogy to construction contracts at p. 97-98
How might they be different? Cf. Grun Roofing at 670

Restitution Interest What is the harm that is corrected by a restitutionary award?

Bailey v. West When is quasi-contractual liability imposed?
Benefit conferred on defendant by plaintiff Appreciation by defendant of the benefit It would be inequitable to permit the defendant to retain the benefit

The interplay of the three measures of damages

Could reliance damages be less than the expectation interest?

What about opportunity costs?

The hypothetical at p. 100 John orders 10,000 bushels of wheat for delivery in two months at $1 per bushel Mary breach on the date of delivery, when the price is $2 per bushel What is the expectation interest?

The hypothetical at p. 100 John orders 10,000 bushels of wheat for delivery in two months at $1 per bushel Mary breach on the date of delivery, when the price is $2 per bushel What is the expectation interest? John has to spend an extra $10,000 for the wheat

The hypothetical at p. 100 John orders 10,000 bushels of wheat for delivery in two months at $1 per bushel Mary breach on the date of delivery, when the price is $2 per bushel What is the reliance interest?

The hypothetical at p. 100 John orders 10,000 bushels of wheat for delivery in two months at $1 per bushel Mary breach on the date of delivery, when the price is $2 per bushel What is the reliance interest? If John had not ordered from Mary he would have ordered from someone else

Expectation ≈ reliance when opportunity costs are considered in competitive markets

Could reliance or restitution damages ever exceed expectation damages?
P. 102, problem 7

A agrees to build a house for B for $100k. A estimates that he will incur expenses of 90k in doing so.

A agrees to build a house for B for $100k. A estimates that he will incur expenses of 90k in doing so. In fact, A unexpectedly and without fault incurs expenses of 120k. Can he recover for 120k?

Reliance damages as an incentive problem if they exceed the expectation interest

Could a restitutionary award ever exceed the expectation interest?
Montgomery’s Estate at p.101?

Recall what is needed to support a restitutionary claim
Benefit conferred on defendant by plaintiff Appreciation by defendant of the benefit It would be inequitable for defendant to retain the benefit

The primacy of the expectation interest
So the expectation interest places a presumptive limit on reliance and restitutionary awards

Expectation and Cover in Globe
Suppose that the purchase price of the cotton oil is 100K, that Globe has spent 10k in reliance expenses on the railway cars, and that on breach Globe covers by buying substitute oil for 120k in Louisville What reliance and expectation damages would you award?

Cover: UCC § 2-711(1)(a) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract (Section 2-612), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid (a) "cover" and have damages under the next section as to all the goods affected whether or not they have been identified to the contract;

Incidental damages: UCC § 2-713(1) Subject to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article

Suppose that the purchase price of the cotton oil is 100K, that Globe has spent 10k in reliance expenses on the railway cars, and that on breach Globe covers by buying substitute oil for 120k in Texas What reliance damages would you award?

Suppose that the purchase price of the cotton oil is 100K, that Globe has spent 10k in reliance expenses on the railway cars, and that on breach Globe covers by buying substitute oil for 120k in Texas Reliance damages = 30k [120k less 100k] for cover Plus 10k in consequential damages

Suppose that the purchase price of the cotton oil is 100K, that Globe has spent 10k in reliance expenses on the railway cars, and that on breach Globe covers by buying substitute oil for 120k in Texas What expectation damages?

Suppose that the purchase price of the cotton oil is 100K, that Globe has spent 10k in reliance expenses on the railway cars, and that on breach Globe covers by buying substitute oil for 120k in Texas Expectation = 30k. Globe had to spend $130k (120k plus 10k) to be as well off as if the contract had been performed and he had paid 100k

Cover Suppose that in Freud the plaintiff had actually spent money on a vanity press? Would that have been a “cover”?

See problem 7 at p. 102 What are the three possible kinds of damages here? Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 What are the reliance damages?

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 Reliance damages = 60 [less deposit]

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 What is the restitution interest?

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 Restitution interest = 40 [less deposit?]

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 What is the expectation interest?

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 Suppose first that owner defaults before builder incurs any expenses

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 Builder expected profits of 10, and simply keeps the deposit of 15

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 What is the builder’s expectation interest after he has spent 60 in expenses?

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 What do we need to give him to make him as well off as if the contract had been performed?

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 He’ll need the forgone net profits of 10 plus his expenses of 60 less the deposit = 55

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 If we give him less than 55 he is worse off than he would have been had the contract been performed

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 Another way of thinking of this: Give him Gross Profits of 100 less remaining expenses of (90 – 60 =) 30 less deposit

See problem 7 at p. 102 Builder to build a house for 100, owner pays deposit of 15, expected costs of 90, repudiation by owner when builder has spent 60 and property has increased in value by 40 Builder has mitigated by not spending 30K and that should be deducted from the 100K: Restatement 344, illus. 2

Why is the expectation interest the contractual measure of damages?
A contracts to build a custom made machine for B for $100,000

A contracts to build a custom made machine for B for $100,000 We are permitted to infer that, ex ante, the machine was worth at least $100K to B and would cost less than $100K for A to build

A contracts to build a custom made machine for B for $100,000 We are permitted to infer that, ex ante, the machine was worth at least $100K to B and would cost less than $100K for A to build If A breaches, B’s expectation interest is the value of the machine less the $100K purchase price

A contracts to build a custom made machine for B for $100,000 We are permitted to infer that, ex ante, the machine was worth at least $100K to B and would cost less than $100K for A to build If B breaches, A’s expectation interest is $100K less the cost of construction

A contracts to build a custom made machine for B for $100,000 We are permitted to infer that, ex ante, the machine was worth at least $100K to B and would cost less than $100K for A to build If B breaches, A’s expectation interest is $100K less the cost of construction Let’s assume that that is $60,000

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is ($100,000 - $60,000 =) $40,000

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $40K Suppose that contract law awards A only $20K in damages

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $40K Suppose that contract law awards A only $20K in damages How might B exploit this?

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $40K Suppose that contract law awards A only $20K in damages “If I breach, you get $20K, so I’ll offer you $90,000 (= cost of construction plus $30k)

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $40K Suppose that contract law awards A only $20K in damages This invites opportunistic renegotiation by B when the machine is half built

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $40K Suppose that contract law awards A $80K in damages

A contracts to build a custom made machine for B for $100,000 If B breaches, A’s expectation interest is $40K Suppose that contract law awards A $80K in damages Now A has an incentive to declare a breach

Departures from the Expectation Interest
Departures from the expectation interest invite opportunistic breaches

Departures from the expectation interest invite opportunistic breaches That’s inconsistent with our ideas about corrective justice and efficiency

Departures from the expectation interest invite opportunistic breaches But what about non-opportunistic breaches?

Efficient Breach Holmes’ Path of the Law p. 103, n. 71
The common law is indifferent between the promisor’s choice either to perform or breach and pay damages

Efficient Breach Holmes’ Path of the Law p. 103
The common law is indifferent between the promisor’s choice either to perform or breach and pay damages Which is a corollary of the principle that damages fully compensate

Efficient Breach The limitation to expectation damages can give one an incentive to breach

Efficient Breach Cf. Casebook’s hypothetical at p. 105
A agrees to sell widgets to B for $1,000 They would cost A $500 to make and are worth $1500 to B C subsequently asks A to sell widgets to him for $2,000 A can’t do both

A agrees to sell widgets to B for $1,000 They would cost A $500 to make and are worth $1500 to B C subsequently asks A to sell widgets to him for $2,000 A can’t do both What will A gain if he sells to C and pays damages to B?

A agrees to sell widgets to B for $1,000 They would cost A $500 to make and are worth $1500 to B C subsequently asks A to sell widgets to him for $2,000 A would make (2,000 – 500 =) 1,500 on the sale to C, pay damages of (1,500 – 1,000 = ) 500 to B and be 1,000 to the good

A agrees to sell widgets to B for $1,000 They would cost A $500 to make and are worth $1500 to B C subsequently asks A to sell widgets to him for $2,000 If A sells to B he’ll make only (1,000 – 500 =) 500, which is 500 less than if he sells to C and pays B damages

So A is net 500 better off if he breaches

So A is net 500 better off if he breaches What assumptions are we making?

What assumptions are we making? How did we know that B’s damages would only be (1,500 – 1,000 =) 500? Where did we get the 1,500 figure from?

What assumptions are we making? Can we be sure that C is the most highly valued user?

Can we be sure that C is the most highly valued user? Why not—wouldn’t we expect an auction?

What assumptions are we making? Suppose C is the most highly valued user (after all, he paid more for it). Couldn’t C buy the widgets from B?

Suppose C is the most highly valued user (after all, he paid more for it). Couldn’t C buy the widgets from B? We know that C knew of A. Would C know of B?

Efficient Breach Casebook’s hypothetical at p. 105
An efficient breach is thought to move the goods to their most highly-valued user without the need for renegotiation between B and C

Efficient Breach Suppose treble damages of $1500 were awarded to B?
Will A sell to C?

Efficient Breach Suppose treble damages of $1500 were awarded to B.
A won’t sell to C If he does he’ll make (2,000 – 500 =) 1,500 on the sale to C but will pay damages of $1500 to B and would not have an incentive to sell to C

Do we have a good faith problem here?
Would good faith norms require damages that exceed buyer’s lost profits? 128

Would good faith norms require damages that exceed buyer’s lost profits? How much higher (since there is always a theoretical incentive for seller to breach?) 129

Would good faith norms require damages that exceed buyer’s lost profits? How much higher (since there is always a theoretical incentive for seller to breach?) Might we have more bad faith (by the innocent party) with good faith? 130

Just what do the parties expect from performance?
The ambiguity in the expectation interest

Just what do the parties expect from performance
Where I bargain for an ounce of gold, my claim is unquestionably fungible with $$$

I buy a Picasso print from a gallery for $15,000, which I think would look nice in a bare spot in my living room. Before delivery, the gallery decides to sell it to a third party for $20,000 What should I be awarded in damages?

The problem of subjective value

Peevyhouse 846

Just what does it mean to provide compensatory damages in contract?
How do we put the Π in the same position he would have been in had the contract been performed? How would you calculate the damages?

How do we put the Π in the same position he would have been in had the contract been performed? Cost of repairs: Give the Π enough $$$ to permit him to make the repairs Diminution of value: Give the Π the diminution of the market value of the property had the contract been performed

We saw this before Plante v. Jacobs at 675

We saw this before Jacob & Youngs v. Kent
How was the cost of repair different from diminution of value, and how did that figure into Cardozo’s judgment?

Peevyhouse 846 Lease of farm for five years for stripmining
Cost of repair is $29,000 Diminution of market value ≈ $300

Peevyhouse Lease of farm for five years for stripmining
Cost of repair is $29,000 Diminution of value ≈ $300 Jury awarded $5,000, which was more than the market value of the land even if the repair work had been done

Peevyhouse Lease of farm for five years for stripmining
Cost of repair is $29,000 Diminution of value ≈ $300 Jury awarded $5,000, which was more than the market value of the land even if the repair work had been done And on appeal?

How do we put the Π in the same position he would have been in had the contract been performed? Cost of repairs: Give the Π enough $$$ to permit him to make the repairs Diminution of value: Give the Π the diminution in the market value of the property had the contract been performed Can you think of a third option?

How do we put the Π in the same position he would have been in had the contract been performed? Cost of repairs: Give the Π enough $$$ to permit him to make the repairs Diminution of value: Give the Π the diminution in the market value of the property had the contract been performed Diminution of subjective value?

How do we put the Π in the same position he would have been in had the contract been performed? Cost of repairs: Give the Π enough $$$ to permit him to make the repairs Diminution of value: Give the Π the diminution in the market value of the property had the contract been performed Diminution of subjective value? Any problems here?

Peevyhouse Why do you think Garland agreed to this crazy contract?

Peevyhouse Why do you think Garland agreed to this crazy contract?
Why didn’t it buy the land?

Peevyhouse Why do you think Garland agreed to this crazy contract?
Why didn’t it buy the land? Why didn’t it offer a flat amount for the damages to the land? The contract gave the Πs the option of $3000 versus repairing the hole

Peevyhouse Is there a principled way to choose which measure of damages to adopt?

What happens when the contract is silent about the penalty?
Give them what they “probably would have said if they had spoken about the matter.”

Peevyhouse Suppose the facts of the case had been put to the parties at the time of contracting. What do you think they would they have bargained for?

Peevyhouse Suppose the facts of the case had been put to the parties at the time of contracting. What do you think they would they have bargained for? We know that the Πs wanted more than $3000.

Peevyhouse Suppose the facts of the case had been put to the Π at the time of contracting. What would he have bargained for? I can see the possibility of undercompensation. But can you see the possibility of overcompensation?

Peevyhouse Suppose the Peeveyhouse’s got the $29,000. What do you expect they would do with it? 156

Peevyhouse The dissent by Irwin:
How would he have decided Jacob & Youngs v. Kent?

Peevyhouse The dissent by Irwin:
Is it helpful to note that Δs breach was willful?

Willful deviations as Conditions
Cf Grun Roofing at 670 “Contractor must have intended to comply” Material Movers at 675 Can you justify this on efficiency grounds?

American Standard 854 Why a different result?

American Standard 852 Tonawanda!!!

American Standard Cost of completion was $110K
Semble diminution of value was around $3K We sure about that?

American Standard Cost of completion was $110.5K
Semble diminution of value was around $3K Suppose the parties knew that the diminution of value was $3,000. How would they have bargained?

American Standard Cost of completion was $110K
Semble diminution of value was around $3K So what did the Π bargain for? Money’s worth or full performance

American Standard So what did the Π bargain for? Money’s worth or full performance Disparity in economic benefits is not the equivalent of economic waste in Jacob and Youngs v. Kent

American Standard So what did the Π bargain for? Money’s worth or full performance Disparity in economic benefits is not the equivalent of economic waste in Jacob and Youngs v. Kent The breach was “incidental” to the main purpose in Peevyhouse (?!?)

American Standard Did the land have idiosyncratic or sentimental value in Peevyhouse? Did subjective value > market value?

American Standard Did the land have idiosyncratic or sentimental value in Peevyhouse? And here? Tonawanda!?!?!

American Standard The parties might have (but didn’t) provide that damages were to be paid on a cost of replacement basis. Can one draw an inference from that?

George Mason School of Law

Similar presentations

Presentation on theme: "George Mason School of Law"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

George Mason School of Law

Similar presentations

Presentation on theme: "George Mason School of Law"— Presentation transcript:

Similar presentations

About project

Feedback