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 fbuckley@gmu.edu

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 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 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” • Is that what happened in Peevyhouse?

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 • Let’s say the plaintiff paid 100 for goods he expected to sell for 150: a gross profit of 50. But he had to spend 10 in marketing expenses to make this profit. So he expected to make net profits of (150 – 100) – 10 = 40.

Globe Refining • Let’s say the plaintiff paid 100 for goods he expected to sell for 150: a gross profit of 50. But he had to spend 10 in marketing expenses to make this profit. So he expected to make net profits of (150 – 100) – 10 = 40. • Suppose the breach occurs before he spends the 100 and before he spends the 10. What should his damages be?

Globe Refining • Let’s say the plaintiff paid 100 for goods he expected to sell for 150: a gross profit of 50. But he had to spend 10 I marketing expenses to make this profit. So he expected to make net profits of (150 – 100) – 10 = 40. • Suppose the breach occurs before he spends the 100 and before he spends the 10. What should his damages be? • 40—not 50

Globe Refining • Let’s say the plaintiff paid 100 for goods he expected to sell for 150: a gross profit of 50. But he had to spend 10 I marketing expenses to make this profit. So he expected to make net profits of (150 – 100) – 10 = 40. • Suppose the breach occurs after he spends the 100 and after he spends the 10. What should his damages be?

Globe Refining • Let’s say the plaintiff paid 100 for goods he expected to sell for 150: a gross profit of 50. But he had to spend 10 I marketing expenses to make this profit. So he expected to make net profits of (150 – 100) – 10 = 40. • Suppose the breach occurs after he spends the 100 and after he spends the 10. What should his damages be? • 150

Globe Refining • Let’s say the plaintiff paid 100 for goods he expected to sell for 150: a gross profit of 50. But he had to spend 10 I marketing expenses to make this profit. So he expected to make net profits of (150 – 100) – 10 = 40. • Suppose the breach occurs after he spends the 100 and after he spends the 10. What should his damages be? • What it shouldn’t be is 150 plus 10—which is what Globe wanted

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

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

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?

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 the contract been performed? C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 0 50 100

Ebenezer promises to gives 100 but breaches Time 1 The Expectation Interest is CB, or $100 C 100,0 D B 100, 100 A 50, 50 50 I 100 I DR 0 50 100

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? • Royalties • Reputational gains

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 • The royalties were too speculative to amount to anything • The reputational loss wasnot quantified (or quantifiable)

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 • What happens when the Π runs into the Uncertainty Barrier?

Freund • What are the three kinds of damages that are considered? • 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? • 79-10-4

Uncertainty Limits Damages • Does the uncertainty barrier undercompensate Π? • And give Δ a temptation to breach?

Uncertainty Limits Damages • Dempsey p. 102 • What recovery was awarded?

Uncertainty Limits Damages • Dempsey p. 102 • What 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 Π for what he spent in reliance on the contract

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 0 50 100

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