1 george mason school of law contracts ii remedies ii: expectation interest this file may be...

*George Mason School of Law

Contracts II

Remedies II: Expectation InterestThis file may be downloaded only by registered students in my class, and may not be shared by them

F.H. [email protected]

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 incentivesMitigationAnticipatory RepudiationRemedies

What if the remedy is specified in the contract?

Globe Refining at 94*Oliver Wendell Holmes

1841-1935

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 seek? *

Globe Refining

What damages did the seek? The difference between the contract price and the market price of cotton oil at the time of breach, andThe 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 breachThe cost of sending the tank cars to Texas

Only the formerand why was that?*

Globe Refining

Lets say the plaintiff paid 100 for goods he expected to sell for 150: a profit of 50. But he had to spend 10 to make this profit. So he expected to make (150 100) 10 = 40.

*

Globe Refining

Lets say the plaintiff paid 100 for goods he expected to sell for 150: a profit of 50. But he had to spend 10 to make this profit. So he expected to make (150 100) 10 = 40.Lets say the breach occurred after the expenses were incurredDamages should be 50

*

Globe Refining

Lets say the plaintiff paid 100 for goods he expected to sell for 150: a profit of 50. But he had to spend 10 to make this profit. So he expected to make (150 100) 10 = 40.What damages should not be is 50 plus 10

*

Globe RefiningHad 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 breachGiving Globe both would give it more in breach than on performance

*

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 illsPresumptively 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 performedThe wrong was the breach*

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? Whats the innocent party supposed to do on breach?*

Damages in Freund at 96What was the contract?*

Freund at 96

What damages remedies did Freund seek?*

Freund

What damages remedies did Freund seek?Damages for delay of promotionLost royaltiesPotential cost of vanity publication*

Freund

Fuller and Perdue at 97ExpectationRelianceRestitution*

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 in the same position he would have been in had the contract been performedAnd whats that here?*

B100, 100 I100 IDR 0 50 100 Ebenezer promises to gives 100 but breaches C 100,0 D A50, 50 50 Time 1What do we need to give David to make him as well off as he would have been had the contract been performed?*

B100, 100 I100 IDR 0 50 100 Ebenezer promises to gives 100 but breaches C 100,0 D A50, 50 50 Time 1The Expectation Interest is CB, or $100 *

Freund

What are the three kinds of damages that are considered?The Expectation Interest: Put the in the same position he would have been in had the contract been performedAnd whats that here?Royalties Reputational gains*

Freund

What are the three kinds of damages that are considered?The Expectation Interest: Put the in the same position he would have been in had the contract been performedThe royalties were too speculative to amount to anythingThe reputational loss was not quantified (or quantifiable)*

Freund

What are the three kinds of damages that are considered?The Expectation Interest: Put the in the same position he would have been in had the contract been performedWhat happens when the runs into the Uncertainty Barrier?*

Freund

What are the three kinds of damages that are considered?What happens when the runs into the Uncertainty Barrier?Here nominal (contemptuous) damages*

Uncertainty Limits DamagesDempsey p. 102No recovery for expected ticket revenues (lost profits)*

So would you fight Harry Wills?79-10-4*

Uncertainty Limits DamagesDoes the uncertainty barrier undercompensate ?And give a temptation to breach?*

Uncertainty Limits DamagesDempsey p. 102What recovery was awarded?*

Uncertainty Limits DamagesDempsey p. 102What recovery was awarded?Reliance Damages*

Uncertainty Limits 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 for what he spent in reliance on the contract*

B100, 100 I100 IDR 0 50 100 Ebenezer promises to gives 100 but breaches C 100,0 D A50, 50 50 Time 1What do we need to give David to make him as well off as he would have been had he not relied?*

B100, 100 I100 IDR 0 50 100 Ebenezer promises to gives 100 but breaches C 100,0 D A50, 50 50 Time 1The Reliance Interest is CD, or about $25*

Freund

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

Freund

The Reliance Interest in FreundFor costs actually incurred, not hypothetically incurred as here*

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 plaintiffAppreciation by defendant of the benefitIt 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?*

Could reliance damages be less than the expectation interest?

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


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


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


The hypothetical at p. 100John orders 10,000 bushels of wheat for delivery in two months at $1 per bushelMary breach on the date of delivery, when the price is $2 per bushelWhat 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*

Could reliance or restitution damages ever exceed expectation damages?

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?

Montgomerys Estate at p.101?*

Recall what is needed to support a restitutionary claim*

Benefit conferred on defendant by plaintiffAppreciation by defendant of the benefitIt 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 LouisvilleWhat reliance and expectation damages would you award?

Expectation and Cover in Globe *

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;

Expectation and Cover in Globe *

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

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 TexasWhat reliance damages would you award?

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 TexasReliance damages = 30k [120k less 100k] for coverPlus 10k in consequential damages

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 TexasWhat expectation damages?

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 TexasExpectation = 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

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 *


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?*


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]*


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?*


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?]*


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?*


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*


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*


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 builders expectation interest after he has spent 60 in expenses?*


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?*


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 Hell need the forgone net profits of 10 plus his expenses of 60 less the deposit = 55*


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*

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 $100,000We 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 $100,000We 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 buildIf A breaches, Bs expectation interest is the value of the machine less the $100K purchase price*


A contracts to build a custom made machine for B for $100,000We 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 buildIf B breaches, As expectation interest is $100K less the cost of construction*


A contracts to build a custom made machine for B for $100,000We 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 buildIf B breaches, As expectation interest is $100K less the cost of constructionLets assume that that is $60,000*


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


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


A contracts to build a custom made machine for B for $100,000If B breaches, As expectation interest is $40KSuppose that contract law awards A only $20K in damagesHow might B exploit this?*


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


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


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


A contracts to build a custom made machine for B for $100,000If B breaches, As expectation interest is $40KSuppose that contract law awards A $80K in damagesNow A has an incentive to declare a breach*

*George Mason School of Law

Contracts II

Remedies II: Expectation InterestThis file may be downloaded only by registered students in my class, and may not be shared by them

F.H. [email protected]

Calculating the Expectation Interest

How much do we have to give the injured party to make him as well off as if the contract had been performed?Reimbursing for reliance expenses that otherwise would be wasted

*

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 60The expectation interest gives him the forgone net profits of 10 plus his expenses of 60 less the deposit = 55*

Departures from the Expectation Interest

Departures from the expectation interest invite opportunistic breachesE.g., attempted renegotiation by party in breach after builder has spent 60

*

Departures from the Expectation Interest

Departures from the expectation interest invite opportunistic breaches

But what about non-opportunistic breaches?*

Efficient Breach

Holmes Path of the Law p. 103, n. 71The common law is indifferent between the promisors choice either to perform or breach and pay damages*

Efficient Breach

Holmes Path of the Law p. 103The common law is indifferent between the promisors choice either to perform or breach and pay damagesWhich 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 BreachCf. Casebooks hypothetical at p. 105A agrees to sell widgets to B for $1,000They would cost A $500 to make and so he expects a profit of $500*

Efficient BreachCf. Casebooks hypothetical at p. 105A agrees to sell widgets to B for $1,000They would cost A $500 to make and so he expects a profit of $500They are worth $1,500 to B, who would pay $1,000 for them and lose $500 if he cant get them*

Efficient BreachCf. Casebooks hypothetical at p. 105A agrees to sell widgets to B for $1,000They would cost A $500 to make and so he expects a profit of $500They are worth $1500 to B, who loses $500 if he cant get themC subsequently asks A to sell widgets to him for $2,000A cant sell to both*

Efficient BreachCf. Casebooks hypothetical at p. 105A agrees to sell widgets to B for $1,000They would cost A $500 to make and are worth $1500 to BC subsequently asks A to sell widgets to him for $2,000A cant sell to bothIf he sells to A he makes (1,000 500 =) 500*

Efficient BreachCf. Casebooks hypothetical at p. 105A agrees to sell widgets to B for $1,000They would cost A $500 to make and are worth $1500 to BC subsequently asks A to sell widgets to him for $2,000If he sells to C he makes (2,000 500 =) 1,500, from which he can pay damages to B of 500 and have a profit of 1,000*

Efficient BreachCf. Casebooks hypothetical at p. 105If he sells to C he makes (2,000 500 =) 1,500, from which he can pay damages to B of 500 and have a profit of 1,000So he makes $500 if he performs and $1,000 if he breaches and sells to C*

Efficient BreachCf. Casebooks hypothetical at p. 105So A is net 500 better off if he breachesWhat assumptions are we making?*

Efficient BreachCf. Casebooks hypothetical at p. 105What assumptions are we making?How did we know that Bs damages would only be (1,500 1,000 =) 500? Where did we get the $1,500 figure from?Could it have been $3,000?*

Efficient BreachCf. Casebooks hypothetical at p. 105What assumptions are we making?Can we be sure that C is the most highly valued user?*

Efficient BreachCf. Casebooks hypothetical at p. 105Can we be sure that C is the most highly valued user?Why notwouldnt we expect an auction?*

Efficient BreachCf. Casebooks hypothetical at p. 105What assumptions are we making?Suppose C is the most highly valued user (after all, he paid more for it). Couldnt C buy the widgets from B?*

Efficient BreachCf. Casebooks hypothetical at p. 105Suppose C is the most highly valued user (after all, he paid more for it). Couldnt C buy the widgets from B?We know that C knew of A. Would C know of B?*

Efficient BreachCasebooks hypothetical at p. 105An 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 wont sell to C If he does hell make an extra $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 buyers lost profits?*

Do we have a good faith problem here?

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

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 great in a bare spot in my living room. Before delivery, the gallery decides to sell it to a third party for $20,000Why is this different?

*


The problem of subjective value

*

Peevyhouse 846*

What was the breach?

Would specific performance be ordered?If not what is the measure of damages?*

Just what does it mean to provide compensatory damages in contract?

How do we put the in the same position he would have been in had the contract been performed?*

Just what does it mean to provide compensatory damages in contract?

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

We saw this before

Plante v. Jacobs at 676*

We saw this before

Jacob & Youngs v. KentHow was the cost of repair different from diminution of value, and how did that figure into Cardozos judgment?

*

Peevyhouse 846

Lease of farm for five years for stripminingCost of repair is $29,000Diminution of market value $300*

Peevyhouse

Lease of farm for five years for stripminingCost of repair is $29,000Diminution of value $300Jury 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 stripminingCost of repair is $29,000Diminution of value $300Jury awarded $5,000, which was more than the market value of the land even if the repair work had been doneAnd on appeal?*

Just what does it mean to provide compensatory damages in contract?How do we put the in the same position he would have been in had the contract been performed?Cost of repairs: Give the enough $$$ to permit him to make the repairsDiminution of value: Give the the diminution in the market value of the property had the contract been performedCan you think of a third option?*

Just what does it mean to provide compensatory damages in contract?How do we put the in the same position he would have been in had the contract been performed?Cost of repairs: Give the enough $$$ to permit him to make the repairsDiminution of value: Give the the diminution in the market value of the property had the contract been performedDiminution of subjective value?*

Just what does it mean to provide compensatory damages in contract?How do we put the in the same position he would have been in had the contract been performed?Cost of repairs: Give the enough $$$ to permit him to make the repairsDiminution of value: Give the the diminution in the market value of the property had the contract been performedDiminution 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 didnt it buy the land?*

Peevyhouse

Why do you think Garland agreed to this crazy contract?Why didnt it buy the land?Why didnt it offer a flat amount for the damages to the land?The contract gave the s 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?Do we know that the s wanted more than $3000?*

Peevyhouse

Suppose the facts of the case had been put to the 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 Peeveyhouses got the $29,000. What do you expect they would do with it?*

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 s breach was willful?*

Willful deviations as Conditions

Cf Grun Roofing at 670Contractor must have intended to complyMaterial Movers at 675Can 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*

American Standard


Semble diminution of value was around $3KWe sure about that?*

American Standard


Semble diminution of value was around $3K

So what did the bargain for? Moneys worth or full performance*

American Standard

So what did the bargain for? Moneys worth or full performanceDisparity in economic benefits is not the equivalent of economic waste in Jacob and Youngs v. Kent*

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 didnt) provide that damages were to be paid on a cost of replacement basis. Can one draw an inference from that?*

******

1 george mason school of law contracts ii remedies ii: expectation interest this file may be...

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