Expectation Damages : Contract Law

1. Expectation Damages
   1. General rule: put the plaintiff in the same position as if the contract had been performed
      1. You should always ask first, “How much would performance of the contract increase (or decrease) the plaintiff’s wealth?” If the answer to that question is not consistent with the formula, you probably have the wrong formula.
   2. Note: Expectation Damages and Efficient Breach of Contract
      1. Theory of Efficient Breach – not actually a legal doctrine or a part of law, but a theory of Judge Posner’s. Looks to maximizing efficiency and gain when it would be more profitable for  a party to breach than to perform on a contract, even after compensating the injured party. This is “Pareto superior” b/c at least one person is better off and no one is worse off.
      2. Some things to keep in mind:
         1. Potential breacher must be able to calculate with considerable accuracy the profit that will stem from the breach (otherwise it won’t necessarily be efficient)
         2. Theory assumes that an injured party can be fully compensated (however, transaction costs like attorney’s fees can hamstring this)
         3. Between the breaching party and the injured party, the breaching party gets to keep the entire gain from the more efficient allocation of resources (b/c then there will be an incentive to breach efficiently)
   3. UCC Provisions
      1. UCC §2-712– “cover” damages, damages for replacement goods
      2. UCC §2-713– damages for goods not delivered
      3. UCC §2-714– damages for goods delivered not to spec
      4. UCC §2-715 – damages incidental to main
      5. UCC §2-715(2) – damages consequential to main (as a result of bad goods, extra damages occurred) (Hadley v. Baxendale rule)
      6. UCC §2-717- the buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.
   4. Freund v. Washington Square Press, Inc.
      1. Facts: Freund, plaintiff, entered into a contract with Washington Square Press, defendant to publish P’s manuscript. Contract provisions provided that upon delivery of manuscript, P was paid a $2,000 advance, and if it was subsequently determined that it was not “suitable for publication”, then D had 60 days to terminate by written notice, otherwise, hardcopy and paperback copies would be published. P finished manuscript, 60 days passed, and subsequently D sold itself to another publishing company that didn’t publish hardcopy and then refused to publish the manuscript in any form. P initially sued for specific performance (denied, natch), but then at trial P sought to prove:
         1. Delay of his academic promotion (no);
         2. Loss of royalties which would have been earned (no);
         3. Cost of publication if P made his own arrangements to publish (yes – $10k)
      2. Issue: What damages should be allowed for P?
      3. Analysis: Court holds with Appellate Division’s dissent – cost of publication is not appropriate measure of damages and P may only recover nominal damages
         1. So far as possible, the law attempts to secure the injured party the benefit of his bargain, subject to the limitations that the injury – whether it be losses suffered or gains prevented – was foreseeable, and that the amount of damages claimed be measurable with a reasonable degree of certainty, and of course, adequately proven
         2. It is equally fundamental that the injured party should not recover more from the breach than he would have gained had the contract been fully performed
      4. P should get his manuscript back so that his restitution interest is protected
      5. P’s expectation interest was basically the advance and the royalties
         1. The amount speculated from royalties is speculative, and the claim falls b/c of uncertainty
      6. The courts below erred in finding damages from the cost of performance to the defendant; what they should have done is measure damages by the natural and probable consequences of the breach to the plaintiff
      7. Damage award of $10k reduced to $.06, but with costs and disbursements to P
      8. Notes: An efficient breach?
         1. This case illustrates one of the standard rules of contract damages – that they are not measured by the gain that the breacher enjoyed. If this were the case, the law would foreclose on efficient breaches
      9. Our system is predicated on the assumption that money can heal all when we’re talking damages from breach of contract. Is this true? 
      10. Should the court take into account whether or not the money received for the injury is used toward the ends provided by the contract, or it all gets blown in Vegas?
      11. Freund would’ve gotten the $2000 “advance” as well as all of the royalties from publishing himself; he would’ve been better off than if the contract been performed
   5. Peevyhouse v. Garland Coal Mining Co.
      1. Facts: D agreed to perform restorative and remedial work at the end of the lease period with P; the work would involve moving a substantial amount of dirt, to the tune of about $29,000; D’s didn’t do the dirt work; P’s sued; Court found the diminution in value resulting to P’s premises b/c of D’s non-performance of the remedial work was AT MOST $300, and ordered verdict for that amount to P’s 
      2. Issue: The real issue, says Prof., is how damages often times do NOT adequately compensate, from the aggrieved party’s perspective. Which is why specific performance is exactly what most aggrieved parties ask for. 
      3. Analysis: Ultimately, Prof. asks, does the $300 award put the Peevy’s in the position they would have been in had the contract been performed? 
         1. Prof. asks, what’s wrong with the court’s economic waste argument? First of all, economic waste is a technical legal concept: refers to the “destruction of a substantially completed building or other structure,” not to an individual decision to do something the world deems foolish.
         2. Prof. asks if G’s breach is efficient? This depends on whether $300 actually compensates the P’s for their loss. But remember this: When the cost of performance exceeds its value, the breach is efficient. BUT, “economic efficiency is concerned with the production of wealth, not the transfer of it.” 
            1. In the instant case, does D’s breach produce wealth for society, or does it just transfer wealth from P’s to D? Probably not an efficient breach.
      4. Held: Court holds that the “relative economic benefit” test (the “value” rule) is the proper measure in the instant case
         1. Where the contract provision breached was incidental to the main purpose in view, and where the economic benefit which would result to P by full performance is grossly disproportionate to the cost of performance, the damages which P may recover are limited to the diminution in value resulting to the premises b/c of the non-performance.
      5. Dissent: D’s breach was willful and not in good faith
         1. D had knowledge that the cost of performance might be disproportionate to the value or benefits received by Ps for the performance
         2. D has received its benefits under the contract and now urges, in substance, that the P’s measure of damages for its failure to perform should be the economic value of performance to Ps and not the cost of performance
         3. Therefore, if the value of the performance of a contract should be considered in determining the measure of damages for breach of a contract, the value of the benefits received under the contract by a party who breaches a contract should also be considered.
      6. Notes: Two ways to measure damages
         1. Difference in the value of land –> $300
            1. The value rule
         2. Cost of completion –> $29k
      7. The court notes that the regrading was not the purpose of the contract; it was just incidental to the mining 
         1. The fact that they specifically contracted for the clean-up suggests it wasn’t incidental
   6. Krasfur v. UOP (In re El Paso Refinery, L.P.)
      1. Facts: Refinery (R) went bankrupt and RHC took over their processes and assets. UOP alerts RHC that they are operating without a license, and RHC and UOP negotiated a new license.
      2. Issue: did UOP mitigate R’s damages in the sale of licenses to RHC? UOP argues that R’s damages were not mitigated because RHC was a new potential customer, and UOP is a lost volume seller.
      3. Analysis: Court holds that UOP fails as a lost-volume seller under UCC test
         1. Lost volume seller: a seller who sells to a buyer (B) after a previous buyer (A) has breached a K for sale, but which seller would have been able to make a 2^nd sale to buyer B even if buyer A had not breached the 1^st sale.
         2. Test for determining whether party is lost-volume seller:
            1. UCC 2-708(2): two step analysis of “capacity” and “wholly independent sales event”
               1. First, court has to consider the capacity of the seller to show that it had excess manufacturing capacity such that the seller could have made a “second sale.”
               2. Second, the court looks to see if the original sale and the resale after the breach were wholly independent events, as opposed to the second sale being a replacement for the first. Three variables should be considered:
                  1. The court has to determine that the breach of the original sale did not provide the opportunity to make the resale (in other words, the resale was not just a “replacement sale”)
                  2. Court examines resale buyer’s particular needs to determine whether the resale buyer would have purchased from the seller even if original buyer hadn’t breached
                  3. Trier of fact should look at the characteristics of the particular goods involved: the more specialized the particular item, the more likely it is that its subsequent sale is merely a replacement sale.
      4. Held: UOP is not a lost volume seller, because absent R’s breach, UOP would not have been able to sell to RHC which used the same refinery. Thus, R’s damages were mitigated. 
      5. Note: To be a lost volume seller, these criteria must be met
         1. Capacity to make an additional sale
         2. Profitable to make an additional sale
         3. Probably would have made an additional sale absent the buyer’s breach
      6. Lost Volume sellers do not have to mitigate their loss on a license sale because the new sale would have been one they could have made absent the breach.
   7. KGM Harvesting Company v. Fresh Network
      1. Facts: S contracted to sell lettuce to B which would pass the lettuce to another buyer at cost plus. During a period of skyrocketing lettuce prices, S refuses to supply B with lettuce, forcing B to find another, more expensive supplier. 
      2. Issue: Why should B recover damages when they suffer no consequences of the breach?
      3. Analysis: Where a B covers by making in good faith and without unreasonable delay any reasonable purchase of goods in substitution for those due from the seller, that B may recover from the S as damages the difference b/w the cost of cover and the contract price (2-712). This gives B the benefit of its bargain.
         1. What the B chooses to do with that bargain is not relevant to the determination of damages under 2-712.
         2. Under 2-712, UCC requires cover to be in good faith, without unreasonable delay, and the substitute goods must be a reasonable substitute for the nonconforming goods.
         3. 2-713 (different measure for damages under the UCC) provides that if B cannot cover or chooses not to cover, the measure of damages is the difference b/w the market price and the contract price
         4. Basic Rules of Contract Law: to effectuate the expectations of the parties to the agreement, to give them the benefit of the bargain they struck when they entered into the agreement; that the party injured by the breach should receive as close as possible the benefits of performance.
         5. S tried to rely on Allied Canners, a 2-713 case, but court would NOT extend rationale of Allied Canners to the instant case; that case was a 2-713 case, the instant case is a 2-712 case, and NO 2-712 case has EVER held that cover damages must be limited by 1-106. (Prof. notes) In Allied Canners, court held 1-106 was limiting: In order for this limitation under 1-106 to apply, THREE conditions must be met:
            1. the S knew that the B had a resale contract,
            2. the B has not been able to show that it will be liable in damages to the B on its forward contract, and
            3. there has been no finding of bad faith on the part of the S.
         6. Allied Canners is like Peevyhouse in that there was no cover in Peevyhouse, and it is more of a 2-713 case
         7. 2-712 discourages breach because sellers will know that they will have to pay the cost of cover
         8. Under Allied Canners, seller has an incentive to breach because all they have to pay in damages is lost profits
         9. One of the issues with efficient breach, is are you going to be able to calculate your profits
      4. Held: B should get the benefit of the bargain in all situations. 
   8. Fertico Belgium v. Phosphate Chemicals Export Ass’n, Inc.
      1. Facts: B contracts with S to deliver fertilizer to Belgium which will then go to Iraq in two shipments paid by letter of credit. The first shipment will arrive late, so the second shipment is canceled. The first shipment is covered for $700k more. B then sells the first shipment when it arrives for $450k profit. 
      2. Under 2-712, damages are equal to the diff b/w the higher cost of cover and the contract price, plus incidental or consequential damages, less expenses saved. 
         1. Cover must be in good faith, without unreasonable delay, and buyer must utilize a reasonable substitute for the nonconforming goods from seller.
         2. Consequential damages: F’s additional costs for having to transport inland would usually be consequential damages b/c they resulted from P’s breach and P knew F would incur damages under its separate contract with Alta
            1. The losses were a proximate result of the breach, and were reasonably foreseeable by the breaching party at the time of the contract.
            2. The purpose of awarding consequential damages is to put the nonbreaching party in as good a position it would have been in had the other party not breached
            3. BUT, since Atla compensated F for the additional delivery costs, F was insulated from any loss in that respect as a result of P’s breach, which eliminates that category of damages.
         3. Expense saved: This additional compensation is NOT an expense saved as a consequence of P’s breach for which P is entitled to any credit.
            1. Saved expense must be costs or expenditures which would be anticipated had there been NO breach.
            2. The increased compensation from A was not an expenditure that would have been anticipated in absence of a breach; no credit to P’s favor
         4. Profit made from sale to Jansens: Court says appellate division erred in holding that the independent sale to J from F stemmed from and was dependent upon P’s breach
            1. UCC 1-106 says the nonbreaching party should be put in as good a position if the other party performed: “Had P fully performed, F would have had the benefit of the Alta transaction, and, as a trade of fertilizer, the profits from the J sale as well.” STRETCH
            2. So, basically court is saying F is a lost-volume seller: “Gains made by the injured party on other transactions after the breach are never to be deducted form the damages that are otherwise recoverable, unless such gains could not have been made, had there been no breach.”
         5. Dissent says, “look, cover is available when you don’t get the goods you contracted for and you needed them; in this case, they got the goods.”
            1. Also, are you kidding, we’re talking about a buyer not a seller here; buyer has to go onto the open market
      3. Result: B has to subtract the profit on the resale because he never would have had that profit were it not for the breach.
   9. Hadley v. Baxendale
      1. Facts: Π operated a mill that suffered a broken shaft. Manufacturer asked Π to send them the shaft. Δ delayed in sending the shaft and as a result the mill was inoperable for longer than it had to be.
      2. Issue: is Δ liable for the lost profits Π suffered from their delay in shipment?
      3. Analysis: 
         1. Rule: When a party breaches a contract, the other party should receive damages from this breach as would fairly and reasonably be considered either arising naturally (according to the usual course of things) from the breach of contract itself, OR such damages as would reasonably be supposed to have been contemplated by both parties, as the probable result of breach, at the time they made the contract. (Prof. notes the rule and the importance of foreseeability). 
         2. If D’s knew of special circumstances, they could be said to have known the potential loss of profit for P’s; or, perhaps the parties would have specially contracted with regard to potential damages (Prof. notes the exception made for “special circumstances,” and also that P’s argued D’s were aware of the special circumstances)
            1. But, court concludes D didn’t know of special circumstances.
      4. Result: Δ owed no damages by the famous rule noted above that is now represented in UCC §2-715(2)
      5. Bottom Line: 
         1. A plaintiff can only recover consequential damages when
            1. They arise naturally from the breach itself
            2. They arise from the special circumstances under which the contract was actually made if the special circumstances were communicated by Π to Δ. 
   10. Simeone v. First Bank National Ass’n
       1. Facts: The classic automobiles case; jury found for S and awarded 2,405,000 dollars: 585 thou for compensatory damages; 225 thou for incidental damages; $1,595,000 in consequential damages; and $1 on the court-dismissed fraud complaint (Prof. notes the jury award in this case); on appeal, incidental damages reversed; everything else affirmed)
       2. Issue: What damages is P entitled?
       3. Analysis:
          1. Subcategories of expectation damages:
             1. Consequential damages, direct damages, and incidental damages
                1. Consequential damages: damages incurred as a consequence of the breach 
                2. Direct (or compensatory) damages: damages that are a direct result of the breach
                3. Incidental damages: expenses for rejecting non-conforming goods or covering for non-conforming goods; UCC 2-710 (for seller) and UCC 2-715 (for buyer).
          2. Compensatory (or “direct”) damages: damages recovered in payment for actual injury or economic loss, which does not include punitive damages. The value at the time of breach (market price) minus the contract price is the formula used here. Of course, the parties were in dispute here over which market was the most appropriate measure–repo market v. collectors’ market. 
             1. Rule: (2-713(1)): Measure of damages for a seller’s breach of contract is “the difference between the market price at the time buyer learned of the breach and the contract price” (along with any incidental/consequential damages
          3. Consequential damages: recoverable consequential damages include any loss resulting from general or particular requirements and needs of which the seller at the time of contract had reason to know AND could not reasonably be prevented by cover or otherwise (2-715(2)(a))
             1. The focus is on foreseeability and what the seller had reason to know
             2. Jury awarded 1,595,000 in consequential, based on expert testimony that the autos and parts were worth that much in ‘87, 2 years after the breach of contract, minus the market price of the property at the time of the breach (Prof. points out expert testimony–notes that it is an odd move on the court’s part to look at the market price at the time of trial in 1987, since most contract doctrine says look at the market price at the time of the breach). Prof. asks, how does appreciation enter into contract damages? The granting of lost profits with this appreciation idea is an exception under the UCC. One situation is a lost-volume seller. Market price at the time of breach is the general rule. This case is “wacky,” per Prof. How far into the future should the court be delving? What if the expert in the case had put the value at $500 for the 1987 price? Would the court have used the 2-year rule then? There is a huge issue here with regard to the foreseeability and certainty issues. Prof. urges us to think about this
          4. Incidental damages: expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection w/ effecting cover and any other reasonable expense incident to the delay or breach.
             1. Jury awarded 225 thou in incidental; S believes this amount represents the cost of cover in purchasing one of the cars from SMB
             2. Court holds, though, that the difference b/w the contract price and the cost of cover is not incidental damages; incidental damages are the charges incurred in effecting the cover
             3. Court holds jury’s award of incidental damages in this case represents a double recovery b/c S was already compensated for the difference b/w purchase price and contract price thru the compensatory and consequential damages awards 
2. Mitigation