1. CHAPTERCHAPTER McGraw-Hill/Irwin©2008 The McGraw-Hill Companies, All Rights Reserved Compensatory and Related Damages THIRTEENTHIRTEEN

2. 13-2 Damages The law categorizes the kinds of monetary remedies (money damages) available to plaintiffs based on their source Money Damages can be 1.Compensatory 2.Consequential 3.Incidental 4.Nominal 5.Liquid 6.Limited

3. 13-3 Damages Not Recoverable Under Contract Law There are two kinds of damages that are never recoverable under contract law: 1.Speculative: Harm incurred by the nonbreaching party that is not susceptible to valuation or determination with any reasonable certainty 2. Punitive: An amount of money awarded to a nonbreaching party that is not based on the actual losses incurred by that party, but as a punishment to the breaching party for the commission of an intentional wrong (under tort theory, not contract)

4. 13-4 The most common example of potentially speculative damages is lost profits. –If Farmer Fred breaches his contract to deliver apples to Greg Grocer to sell at the Apple Festival, Greg’s lost profits will be speculative if he has never participated in the Apple Festival before. But the lost profits will not be speculative if Greg has a documented profits from several years of participating in the Apple Festival. Damages Not Recoverable Under Contract Law

5. 13-5 Statutory authority –The legislature of a jurisdiction may codify certain actions as subject to punitive damages if they occur in conjunction with a contractual breach Damages Not Recoverable Under Contract Law

6. 13-6 Punitive damages are awarded only if the defendant’s conduct was malicious, fraudulent, or oppressive conduct by the wrongdoer, or conduct committed recklessly or with wanton disregard of the wronged party's rights. To get an award for punitive damages, there must be at least some actual damages. Damages Not Recoverable Under Contract Law

7. 13-7 Spot the Issue page 219 Contract required Diggers to mine ore and OresRUs to sell the mined ore. Ores terminated the contract after one year. Diggers sued for lost profits and their expert testified that it was $500,000. Ore’s expert testified that it was $10,000. –The pre-existing or historic profits of an established business, together with other facts and circumstances, may be considered in arriving at a just estimate of the profit lost as a result of the breach of contract Speculative Damages?

8. 13-8 Compensatory damages compensate for the loss/harm incurred by the nonbreaching party and attempt to put him in as good a position as he would have been had the contract not been breached There are several kinds of compensatory damages: 1.expectation damages 2.restitution damages 3.reliance damages Calculation of Compensatory Damages

9. 13-9 Expectation damages −Monetary damages which will put the nonbreaching party (plaintiff) in the same position she would’ve been in if the contract had been performed. −Formula: The market value of the promised performance less the consideration promised by the nonbreaching party. Calculation of Compensatory Damages

10. 13-10 A contracts to paint B’s house for $1,000. B breaches before performance even begins. A expected to make $200 from the job. What are A’s damages? Calculation of Compensatory Damages

11. 13-11 Restitution damages –Monetary damages which will put the parties in the same position they had been at the time the contract was formed. The breaching party must return any benefits received under the contract to the nonbreaching party. Calculation of Compensatory Damages

12. 13-12 A contracts to paint B’s house for $1,000. B pays $250 up front. A breaches by never showing up. What are B’s damages? Calculation of Compensatory Damages

13. 13-13 A contracts to paint B’s house for $1,000. B pays $250 up front. A breaches by never showing up. What are B’s damages? $250 restitution Calculation of Compensatory Damages

14. 13-14 A contracts to paint B’s house for $1,000. B pays $250 up front. A breaches by never showing up. B has to pay another contractor $1,200 to do the job. What are B’s damages? Calculation of Compensatory Damages

15. 13-15 A contracts to paint B’s house for $1,000. B pays $250 up front. A breaches by never showing up. B has to pay another contractor $1,200 to do the job. What are B’s damages? $200 expectancy; $250 restitution Calculation of Compensatory Damages

16. 13-16 A contracts to paint B’s house for $1,000. B breaches before performance even begins. A expected to make $200 from the job. What are A’s damages? Calculation of Compensatory Damages

17. 13-17 A contracts to paint B’s house for $1,000. B breaches before performance even begins. A expected to make $200 from the job. What are A’s damages? $200 expectancy Calculation of Compensatory Damages

18. 13-18 A contracts to paint B’s house for $1,000. A expects to make $200 on the job. A starts the job and completes 25% of it before B breaches. A has spent $200 to complete 25% of the job. What are damages? Calculation of Compensatory Damages

19. 13-19 A contracts to paint B’s house for $1,000. A expects to make $200 on the job. A starts the job and completes 25% of it before B breaches. A has spent $200 to complete 25% of the job. What are damages? $200 expectancy; $200 restitution Calculation of Compensatory Damages

20. 13-20 A starts the job, but the price of paint skyrockets so that he has spent $300 to complete 25% of the job. At that rate, his expenses under the contract would’ve been $1,200 and he would’ve lost money if B hadn’t breached. What are the damages? Calculation of Compensatory Damages

21. 13-21 A starts the job, but the price of paint skyrockets so that he has spent $300 to complete 25% of the job. At that rate, his expenses under the contract would’ve been $1,200 and he would’ve lost money if B hadn’t breached. What are the damages? $300 restitution for the fair market value of his service Calculation of Compensatory Damages

22. 13-22 Reliance damages –A monetary amount that “reimburses” the nonbreaching party for expenses incurred while preparing to perform her obligations under the agreement but lost due to the breach. Note: the breaching party has not gained any benefit –Eg., Where a buyer of machinery installed a concrete pad on which the machinery would sit, the buyer can recover the cost of the pad if seller fails to deliver the machinery. – Calculation of Compensatory Damages

23. 13-23 Duty To Mitigate The nonbreaching party has a duty to try to lessen the amount of harm suffered due to the breach, thereby mitigating damages. The burden of proof is on the breaching party – who must prove that the nonbreaching party’s actions were unreasonable.

24. 13-24 Consequential and incidental damages are specific damages that go beyond compensatory damages and are incurred by the nonbreaching party after the breach The timing of the actions giving rise to the damages is what distinguishes consequential and incidental damages from reliance damages Consequential and Incidental Damages

25. 13-25 Consequential damages –Sustained by the nonbreaching party that naturally and foreseeably flow from the breach; they are a direct consequence of the breach Incidental damages –Damages resulting from the breach that are related to the breach but not necessarily directly foreseeable by the breaching party Consequential and Incidental Damages

26. 13-26 Owner contracts with Builder to construct motel for $1,000,000. Builder breaches by failing to perform. Owner gets new bids and winning bid is $1,200,000. The re-bidding process costs Owner $2,500 and delay of six months costs lost profits of $50,000. What are damages? Consequential and Incidental Damages

27. 13-27 Owner contracts with Builder to construct motel for $1,000,000. Builder breaches by failing to perform. Owner gets new bids and winning bid is $1,200,000. The re-bidding process costs Owner $2,500 and delay of six months costs lost profits of $50,000. What are damages? $200,000 + $50,000 expectancy $2,500 consequential Consequential and Incidental Damages

28. 13-28 Spot the Issue page 223 Dr. Smith and Dr. Jones contract for Jones to purchase Smith’s chiropractic center, including client files and equipment. Smith breaches the contract. Jones enters agreement with Med Offices to purchase empty medical office space, buys new equipment and expends substantial amount of advertising money to attract new clients. Let’s assume the sales price was $100,000 and Jones expended $150,000 to start up the new center Consequential and Incidental Damages

29. 13-29 Nominal damages –Where there are no damages, the court may award a small amount of to the nonbreaching party as a token award to acknowledge the fact of the breach Nominal Damages

30. 13-30 V + E + L - M - R = D –V - value of the promise in the contract –E - any foreseeable out-of pocket expenses –L - foreseeable losses due to the breach –M - mitigation –R - value of what nonbreaching party did receive –D - the potential compensatory damages Calculation of Damages

31. 13-31 V + E + L - M - R = D Eg. Page 225 Bob Builder contracts to construct home for $500,000 (V) for Newlyweds. Newlyweds hire roofer to enclose the house immediately for $5,000 (E) Newlyweds put down $50,000 (L) deposit. New Contractor charges $495,000 (M) to finish the job. Bob puts in $25,000 (R) of value before he breaches. Calculation of Damages

32. 13-32 V + E + L - M - R = D The answer should be $35,000 but the authors say it’s -$35,000, but even that isn’t accurate The best way to calculate damages is to compare the result to the non-breaching party if the contract had gone through, to the result after the breach. Contract: Newlyweds out $500,000 but they would’ve had a new house Breach: Newlyweds out $50,000 (deposit); $5,000 (expenses); $495,000 (new contract) = $550,000, and they have a new house Calculation of Damages

33. 13-33 V3 + V2 + E + L – V1 = Damages V3 = The value of a new contract made by plaintiff (non-breaching party) in mitigation V2 = Any increased value in the subject matter of the contract OR the value of lost profits E = Expenses L = Losses (money given by plaintiff to defendant) V1 = Value of the original contract Calculation of Damages

34. 13-34 Plugging the numbers in from the Bob the Builder case we have the following: $495,000(V3) + 0 (V2) + $5,000 (E) + $50,000 (L) - $500,000 = $50,000 Calculation of Damages

35. 13-35 What about an example where Owner contracted with Builder to build a motel for $1,000,000, but then Builder breached. Because of the breach, Owner had to put the project out for bids again, which cost him $2,500. The winning bid was for $1,200,000. And the six month delay caused by the breach cost the Owner $50,000 in lost profits. $1,200,000(V3) + $50,000(V2) + $2,500 (E) + $0 (L) - $1,000,000 (V1) = $252,500 Calculation of Damages

36. 13-36 Liquidated Damages Liquidated damages –An amount of money agreed upon in the original contract as a reasonable estimation of the damages to be recovered by the nonbreaching party – Note: there is no calculation involved – the damages are what the parties agreed to up front.

37. CHAPTERCHAPTER McGraw-Hill/Irwin©2008 The McGraw-Hill Companies, All Rights Reserved Equity and Quasi-Contract FOURTEENFOURTEEN

38. 13-38 “Action” Damages When a party’s monetary damages are inadequate to compensate for the harm incurred, the court has the ability to order alternative equitable remedies in the form of either 1.an injunction or 2.specific performance These are “action” damages because they effectively force the defendant to act in some way to try to remedy the breach

39. 13-39 It bears repeating that the court must find that monetary remedies are insufficient to compensate the plaintiff. Only after showing that the money will not fix or prevent harm can the plaintiff obtain an injunction or specific performance. “Action” Damages

40. 13-40 Injunction –A court order that requires a party to refrain from acting in a certain way to prevent harm to the requesting party “Action” Damages

41. 13-41 TRO (temporary restraining order) –a temporary injunction granted prior to the commencement of litigation which prohibits a party from acting for a limited period of time. Preliminary Injunction After litigation has commenced, an application for a preliminary injunction is appropriate for the maintenance of the status quo until a final determination. “Action” Damages

42. 13-42 Permanent Injunction –A court order that prohibits a party from acting in a certain way for an indefinite and perpetual period of time “Action” Damages

43. 13-43 Covenants that bind companies and products are more commonly enforced than covenants that restrict a person’s right to work. There are important public policy considerations that courts take into account when deciding whether to enforce a contractual provision that restricts trade or employment. Covenants not to Compete

44. 13-44 Specific Performance –A court order that requires a party to perform a certain act in order to prevent harm to the requesting party –To obtain an order for specific performance, the contract must be very clear as to the act to be compelled. The standard of proof for specific performance is greater than that of obtaining damages at law “Action” Damages

45. 13-45 Declaratory Judgment –the court’s determination of the rights and responsibilities of a party with respect to the subject matter of the controversy The court’s decree settles the matter in its entirety “Court-Ordered” Solutions

46. 13-46 It is important to note that declaratory judgment is only appropriate where another legal remedy is not available. A party may not clothe the issue as one for declaratory judgment and then try to collect monetary damages. “Court-Ordered” Solutions

47. 13-47 Under the Uniform Declaratory Judgment Act, attorney’s fees can be collected from the losing party. Eg., a finance company properly brought an action for declaratory relief to determine who had legal title to four vehicles in question; the issue of ownership was the central problem to be resolved “Court-Ordered” Solutions

48. 13-48 Spot the Issue page 240 The law firm of Faith, Hope and Joy (FHJ) contracted with Hire ‘Em Company, a paralegal recruitment firm, in order to staff their expanding office. FHJ also put ads in the local classifieds to speed up the process. FHJ hired Emma Employee, who had previously registered with Hire ‘Em for a different position, but who independently applied for this current position with FHJ. Hire ‘Em filed a declaratory action seeking a determination as to whether a placement commission was due. Is this an appropriate equitable remedy? “Court-Ordered” Solutions

49. 13-49 Rescission and restitution –A decision by the court that renders the contract null and void and requires the parties to return to the wronged party any benefits received under the agreement Eg.,, Newlyweds had contract to buy house and Owners covered water damage with sheetrock and tile, but then Newlyweds discovered damage after they moved in. “Court-Ordered” Solutions

50. 13-50 Reformation –An order of the court that “rewrites” the agreement to reflect the actual performances of the parties where there has been some deviation from the contractual obligations –Eg, Newlyweds bought house on a lake, and after transaction, Developer noted that the Deed inaccurately included an adjacent lot. Developer brought this to Newlyweds attention, but Newlyweds refused to acknowledge the mistake. “Court-Ordered” Solutions

51. 13-51 Quasi-contract / pseudo-contract / implied-in- law contract –Where no technical contract exists, the court can create an obligation in the name of justice to promote fairness and afford a remedy to an innocent party and prevent unearned benefits to be conferred on the other party Quasi-Contracts

52. 13-52 Promissory Estoppel: When there is a promise relied on by another party which the promisor knows the promisee will reasonably rely on, and in which the promisee incurs a substantial detriment, the theory of promissory estoppel will allow for recovery This theory of relief only arises where there is no valid contract! Usually applied in cases where there is no consideration. Quasi-Contracts

53. 13-53 Unjust Enrichment When there is a promise that the promisor intended the promisee to rely on, and there is a benefit conferred on the promisor, the theory of unjust enrichment will allow for recovery. Quasi-Contracts

54. 13-54 Eg, George, general contractor, hires Tony to install tiles in house, but they never discuss price. Tony invoices George at completion of job but George never pays. Under a theory of unjust enrichment, Tony may get either - Quantum meruit: the value of services rendered. Quantum valebant: the value of the benefit received. Quasi-Contracts

55. 13-55 Doctrine of “Unclean Hands” None of these equitable remedies will be available to a party seeking relief if they come to the court with unclean hands. Where the plaintiff is also guilty of some misconduct, the notions of justice under equitable principles will not allow a guilty party to complain of unfairness.