Contracts, Fall 2008

1. Contracts, Fall 2008 Class 30

2. Damages • Expectation • Benefit of bargain • Reliance • detriment to promisee – put relying party in same position as if there’d been no promise (and, up to a point, no dealings with the promisor…) • Restitution • benefit to promisor/other party, or unjust enrichment • Specific Performance/Equitable Remedies • Agreed Remedies: Liquidated Damages

3. Hypothetical • A spends $200 on paint chips to use to figure out which color he wants to paint the house he expects to buy from B. If the $200 is recoverable, is it part of A’s expectation, reliance interest or restitutionary interest? • Reliance. If contract had been fulfilled, A would be out the $200. B doesn’t benefit from the expenditure. But in reliance on B’s promise to sell the house to A, A spent the $200.

4. Hypothetical • A and B enter into a contract for A to buy B’s house. The sales prices they agree on is the same as the market price. B had planned to paint the house before selling it, but never quite got around to it. A, who has more money than sense, decides that she’ll paint the house now, before the closing, so it can be ready by the time she moves in; she clears this with B. She paints the house- it doesn’t take much trouble, but the paint costs $75, and the house could now be sold for $150 more. It would have cost B $100 to hire somebody else to paint the house. After they enter into the contract, B doesn’t turn up at the closing. A decides not to pursue specific performance. What are her expectation damages? Her reliance damages? Her restitutionary damages?

5. Discussion of Hypothetical • Reliance: $75, same reasoning as with paint chip example • Expectation: $150 (leaving a net of $75), because FMV at time of purchase-price in contract=$150 • Restitution: probably $100, the amount B would have paid, or $150, another possible measure of the ‘value to B’

6. Expectation Measure of Damages • Benefit of bargain: nonbreaching party put in as good a position as if full performance • loss plus consequential and incidental damages • Limits • must be foreseeable • can’t recover for speculative losses • duty to mitigate • no punitive damages; • no damages for emotional distress • no atty fees, but this may be eroding

7. Expectation Damages • Loss: measure, as applicable: • Cost to complete/dif between FMV of (result of) actual performance and FMV of contracted performance • Mkt price of goods/real estate-contract price • Mkt price of svces-contract price of services • Other measures as applicable AND • Consequential (“special”) damages (aka “lost profits”) • Incidental damages Note: sometimes, ‘special’ damages are considered generically, with ‘consequential’ and ‘incidental’ damages both included

8. Examples Building contract price =200,000 Cost of construction = 180,000 Owner unjustifiably terminates when work is half done; owner has paid 70,000 and builder has spent 95,000; builder can resell part of materials for 10,000 Employee has 2 year contract for 50,000/yr, payable monthly. Fired after 6 months. Employee can’t find job even though she looks for 3 months. Pays agency $1000 fee. Then gets job 3 months later for $45,000

9. Building contract price =200,000 Cost of construction = 180,000 Owner unjustifiably terminates when work is half done; owner has paid 70,000 and builder has spent 95,000; builder can resell part of materials for 10,000 Builder gets: 200,000(K price)-70,000 (amt received) [= 130,000, “loss in value” where value is what owner is paying] –[85,000 (costs avoided, 180,000-95,000)+10,000 (amt from sale of materials – what he’s able to salvage, given that he didn’t use the materials on the original job)]=35,000 Alternate method: 20,000 (expected net profit) +95,000 (amount he spent) -[70,000 +10,000] (reimbursement less proceeds from sale of materials) $=35,000

10. Employee has 2 year contract for 50,000/yr, payable monthly. Fired after 6 months. Employee can’t find job even though she looks for 3 months. Pays agency $1000 fee. Then gets job 3 months later for $45,000/yr. (the year “left” on the 2 years) 100,000- 25,000 [loss in value- difference between what she was paid and what she was promised] +1,000 [extra loss] - 45000 [amount she gets on substitute job, credited against her recovery – what she’s able to salvage given that she didn’t have to be at the original job..here, get a new job]=31,000

11. Building contract price =200,000Cost of construction = 250,000Owner unjustifiably terminates when work is half done; owner has paid 70,000 and builder has spent 95,000; builder can resell part of materials for 10,000

12. Building contract price =200,000Cost of construction = 250,000Owner unjustifiably terminates when work is half done; owner has paid 70,000 and builder has spent 95,000; builder can resell part of materials for 10,000Builder gets: 200,000(K price)-70,000 (amt received) [or, 130,000, “loss in value” where value is what owner is paying] –155,000 (costs avoided, 250,000-95,000)-10,000 (amt from sale of materials – what he’s able to salvage, given that he didn’t use the materials on the original job)=-35,000 THAT IS, MONEY LOSING PROPOSITION HERE

13. Alternate method:-50,000(expected net loss) +95,000-70,000-10,000 (expenses less reimbursement less proceeds from sale of materials bought with expense $=-35,000what does the $70 difference reflect? Precisely the difference between the expected profit in the first deal (20) and the expected loss in this one (50)