FMV vs. Replacement Costs in Tort and Contract Cases

1. Trinity Church v. John Hancock • Market value vs. replacement costs in tort cases • Generally courts will award the lesser of FMV or replacement costs • TC court said replacement (repair)cost measure of damages was appropriate even though it was quite high – church was “special purpose” property with no discernible market value • Even though the rule is clear, it can still raise lots of questions in cases like this: • What is a reasonable replacement? • When is replacement reasonable necessary?

2. Trinity Church wasn’t totally destroyed – it was damaged but still standing • After the damage, Trinity Church was simply closer to “takedown” (i.e., the end of its useful life) than before. • Church used an “angles of distortion” method to calculate how much of the church’s useful life was lost. The unusual increase in the church’s foundational settling was used to calculate damages and the assumption was that the church would have a lesser useful life than if it were not damaged. • Has P really been damaged if it is using the church and isn’t planning to repair the damage until the church is fully at “takedown”?

3. The Concept of “Present Value” • Trinity Church majority rejected argument that P’s damages should be reduced to their present value – What is that? • Present Value = the amount of money which if invested today would produce a future stream of payments sufficient to compensate plaintiff for future pecuniary loss resulting from a present injury. • Why did the Court reject the present value argument?

4. Present Value Problem Assume that Linduh was reasonably severely injured by Buzz in an auto accident. Linduh has had several operations for which Buzz’s insurance has agreed to compensate her. But Linduh’s doctors tell her she will need another operation in 7 years to finally repair the damage. It is estimated that the cost of this operation will be $100,000 in seven years. The insurance company has agreed to give Linduh the present value of that future $100,000 operation. Use the present value table on p. 796-97and assume Linduh invests the money she is awarded so that she receives a 3% return. • How much money will Buzz’s insurance company have to give Linduh now in order for her to have $100,000 in 7 years (or what is the present value of $100,000 using these assumptions)?

5. Present Value Problem – broken down • Linduh must invest sum PV for 7 years at 3 percent interest in order to get $100,000 in seven years. • The present value table tells you how to get sum PV with that information – use the appropriate column & row to get the multiplier to use to find the present value of $100,000. • Here present value (PV) of $100,000 = $81,309.15 • Notice the multiple assumptions that must be made here: • 1) What the appropriate investment return will be (i.e., interest) • 2) What the cost of the operation in the future is likely to be (based on inflation) • 3) What the timing of the operation is likely to be • This is a mathematic calculation but it is still based on some tenuous assumptions that might not get P full recovery or might overcompensate P.

6. Common Damages Measures in Contract Situations • Like tort damages, contract damage measures typically use FMV or replacement cost measures • BUT the rules differ under common law & UCC • Common law: • FMV is preferred tool for measuring damages for breach of contract • UCC : • Can use market value to measure damages – UCC 2-708/2-713 • Can also use measures similar to replacement costs • Cover – UCC 2-712 • Resale – UCC 2-706

7. Neri v. Retail Marine • Neris enter K to buy boat from RM for $12,587.40. Neris gave $4,250 deposit; arranged for immediate delivery. • Neris later backed out; ask for deposit back; RM refuses because boat has already been delivered to it. Boat later sold at same price to new buyer. • Neri’s sued (in restitution) for return of deposit; RM counterclaimed for breach of contract. • What measure of damages did Neri use – market value, resale value or something else? Why?

8. Contract Damages – Giving P Their Expectancy • Expectancy measure of damages – puts P in position as if contract performed • Compare “reliance” measure of damages– put P in position as if K was never made • Expectancy is the favored method of implementing rightful position for contracts • FMV, replacement costs or Neri measure all implement P’s expectancy – i.e., all put P in the position would have been in if K were performed • Why do courts prefer damages measures that implement expectancy rather than reliance measures in contract situations?

9. Clarifying the Various Damages in Neri: • Retail Marine received $2579 in lost profits and $674 in storage and other upkeep costs • Has the court awarded expectancy and reliance damages? • At first glance it seems as if RM is getting both because it is getting expectancy (lost profits) and out-of-pocket losses (which often fall into the “reliance” category). • But here O-O-P losses fall under the heading of “consequential damages” since they don’t overlap with the expectancy award of lost profits.