CONTRACTS II
1. Breach
 Express Conditions
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Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.
 Parties:
 Oppenheimer & Co. = plaintiff
 Oppenheim, Appel, Dixon & Co. = defendant
2. & Y = owner and builder of the World Financial Center
 Chronology:
 1986 - plaintiff moves into the World Financial Center
 induced by O & Y agreeing to pay rent on their previous space in One New
York Plaza should Oppenheimer & Co. not find a subleasor for that space
 December, 1986 - O & Co. and OAD enter into a conditional letter agreement
to sublease the 33rd floor of One New York Plaza
 OAD was already renting space on the 29th floor of ONYP
 *Letter Agreement:
 Condition #1 (¶ 1(a)) = O & Co. was required to obtain the Prime
Landlord’s written notice of confirmation that OAD & Co. was an
acceptable tenant
 Condition #2 (¶ 4(c)) = O & Co. was required to obtain the Prime
Landlord’s written consent for the creation of a telephone linkage
system between 29 and 33 (tenant work)
 -¶ 4(d) = parties agree not to execute and exchange the Sublease unless
and until the conditions in 4(c) are met
 The parties extend the deadlines for the conditions
3. & Co. timely satisfies the first condition
 Feb. 25, 1987 - the adjusted deadline - O & Co. has not delivered a notice of
confirmation in writing satisfying condition #2.
 attorney for O & Co. called the attorneys for OAD and said that the the
Prime Landlord’s consent was given.
 Feb. 26, 1987 - OAD’s attorneys call O & Co.’s attorneys to tell them that the
letter agreement and sublease were null and void.
 Mar. 20, 1987 - the written confirmation of the Prime Landlord’s consent to
condition #2 arrives at OAD
4. & Co. brings suit against OAD
 alleging breach of contract
 and that OAD was estopped from insisting that O & Co. make the
delivery on time, because it had in bad faith prevented this from
happening
 also alleged substantial performance
 Trial
 court issues order barring any reference to substantial performance
 after trial, court allows jury to consider substantial performance, and
charges the jury on the subject
 jury finds that OAD had properly complied with terms of letter agreement
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jury also found that O & Co. had substantially performed, and awarded
them $1.2 million
 OAD moved for judgment notwithstanding the verdict.
 Court grants the motion
 rules that substantial performance should not be considered because the
language is unambiguous
 Appellate Division reverses the decision and reinstates the jury award.
 rules that O & Co.’s failure to meet the condition was inconsequential
 This court reverses
 Issue: Does the language of the agreement create an express condition, so that
OAD was not required to perform their part of the bargain?
 Holding: Yes, the language is unmistakable language of an express condition.
 Analysis:
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 Judgment: Reversed with costs and the complaint dismissed
Words of Express Conditions
 If
 unless and until
 provided that
 on the condition that
 subject to
 in the event that
Material vs. Technical conditions
 Material Conditions
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It is undisputed that the critical language of paragraph 4(c) of the letter agreement
unambiguously establishes an express condition precedent rather than a promise
There is no justifiable basis for applying the doctrine of substantial performance to the
facts of this case
 "The flexible concept of substantial compliance 'stands in sharp contrast to the
requirement of strict compliance that protects a party that has taken the
precaution of making its duty expressly conditional'"
the plaintiff has not suffered a forfeiture or conferred a benefit upon the defendant
Precedents of this court are consistent with the general principle that substantial
performance is ordinarily not applicable to excuse the nonoccurrence of an express
condition precedent
substantive to bargain
precondition of obligor's ability to perform, or
related to whether obligor will get the bargain they want
Excusing a Non-Occurrence of a Condition Precedent
 Forfeiture
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Occurs when there is ambiguous language of a condition
R 229
 "the denial of compensation that results when the obligee loses its right to
the agreed exchange after it has relied substantially, as by preparation or
performance on the expectation of that exchange"
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need forfeiture by obligee
need non-material condition
 Waiver and Estoppel

R 84. Promise to Perform a Duty in Spite of
Non-Occurrence of a Condition

Except as stated in Subsection (2), a promise to perform
all or part of a conditional duty under an antecedent
contract in spite of the non-occurrence of the condition
is binding, whether the promise is made before or after
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the time for the condition to occur, unless
Can only retract waiver before NOCP
United States Fidelity and Guaranty Co. v. Bimco Iron and Metal Corp.
 Procedure:
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Trial Court ruled for Bimco
 refused to admit testimony relating to waiver on the ground that it related
to facts occurring after a non-waiver agreement had been executed
Court of Appeals
 said that the damage and theft was covered by the policy, but remanded
on the issue of waiver of late filing of proof of loss.
This Court
 affirmed the ruling of the Court of Appeals
Issue: Did the Insurance Co. waive the timely filing of proof of loss?
Holding: Yes.
Analysis:
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Waiver = an intentional relinquishment of a known right or intentional conduct
inconsistent with claiming it
The non-waiver agreement only states that investigation will not constitute
waiver, and what the investigator did was not merely investigation
 After the time for filing proofs:
 Investigator told plaintiff's attorney that the company would not pay for
the theft, but would pay for the damage to the door
 *this is inconsistent with an intention to rely on the failure to timely file
proofs defense
*Court adopts the rule that a waiver may be effective after expiration of the
time for performance of a condition has expired, if the condition which is
asserted to have been waived is not a material part of the agreed equivalent of
the obligor's promise and its non-performance does not materially affect the
value received by the obligor
5. Types of Breach
 Total/ Material Breach
 A breach is total if the breach is sufficiently serious to justify
discharging the nonbreaching party from her obligations to perform
the contract
 Effect:
 A total breach discharges the nonbreaching party from his duties under the
contract = he is justified in refusing to perform his obligations and may even
enter into alternative contracts
 After a total breach, the injured party is entitled to recover not only actual
damages accrued as a result of the breach but also any future damages
that will reasonably flow from the breach
 Sackett v. Spindler
 Procedure:
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Sackett = Plaintiff/Cross-defendant appealed from the judgment of the trial
court:
 ruling that he get nothing for his complaint and awarded
defendant/cross-complainant $34,575.74 plus interest for breach of
contract
Spindler = Defendant/cross complainant
 owner of S & S Newspapers
 publisher, editor and general manager of the Santa Clara Journal
 Chronology:

July 8, 1961: Spindler and Sackett enter into written agreement
 Sackett agreed to purchase 6,316 shares of stock in S & S Newspapers
 Total Price = $85,000 to be paid:
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 obligated Sackett to pay interest at the rate of 6% on any unpaid balance
 shares were to be delivered to Sackett when he made his final payment
Sackett makes the first $6,000 payment
July 21: Sackett pays $19,800 (late)
August 10: Sackett gives Spindler a check for $59,000
 insufficient funds for the check, and the check is never paid
Spindler acquires the stock owned by the minority shareholders, had endorsed
the stock certificates, and had given all but 454 shares to Sackett's attorneys to
hold in escrow
Sept. 1: Spindler reclaims the stock certificates held by Sackett's attorneys
Sept. 12: Telegram from Sackett to Spindler:
 Sackett informs Spindler that he had the money and was willing to pay
Return Telegram:
 Spindler gives Sackett the name of his attorney
Sept. 19: Meeting:
 Sackett says he'll pay the money by Sept. 22
 Spindler serves Sackett with a notice:
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$6,000 on or before July 10
$20,000 on or before July 14
$59,000 on or before August 15
unless Sackett paid the $59,200 remaining plus interest, Spindler would not
consider completing the sale and would assess damages for Sackett's breach
 also discussed the paper's need for working capital
Sept. 22:
 Sackett has failed to pay or to contact Spindler
 Spindler extends the time for payment to Sept. 29
Sept. 29:
 Sackett has failed to pay or to contact Spindler
Oct. 4: Telegram:
 Sackett advises Spindler that Sackett's assets were now free due to an
advantageous ruling in his divorce proceedings
 Sackett says he's ready to pay
 Sackett urges Spindler to contact his attorney
Oct. 5: Letter: REPUDIATION
 Spindler's attorney writes to Sackett's attorney that because Sackett had
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delayed in performing, "there will be no sale and no purchase of the stock"
Oct. 6: Sackett's attorney calls Spindler's attorney and offers to pay th balance
due under the contract over a period of time through a liquidated trust
 Spindler's attorney rejects the offer, but states that Spindler is still willing to
consumate the sale of the stock, provided that Sackett would pay in cash
Sackett does not pay the balance, nor does he contact Spindler
Because of Spindler's need for working capital:
 he mortgaged personal property to obtain a loan for $4,000
 November:
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he has to convert the paper from a daily to a weekly
July, 1962:
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he sells half his stock in the newspaper for $10,000
December:
Spindler repurchases the $10,000 in stock, and sells the full 6,316 shares for
$22,000, which netted him $20,680
Total Payments:
 Sackett had paid $29,744.26 of the money
 Issue: Whether Sackett's duty to consummate the contract or to pay
damages for his failure to perform was in any way discharged by Spindler's
conduct
 Holding: Termination of the contract by Spindler was justified because
Sackett's breach was total and not partial. "the letter which Spindler's
attorney wrote to Sackett's attorney on Oct. 5 did not constitute an unlawful
repudiation, was therefore not a breach of the contract by him, and thus did
not discharge Sackett's duty to perform the contract or, alternatively, to
respond to Spindler in damages."
 Analysis:

R 275 (old Restatement) factors for determining whether a breach was partial
or material = depends on its MATERIALITY
6. the extent to which the injured party will obtain the substantial benefit which he could have
reasonably anticipated
7. the extent to which injured party may be adequately compensated in damages

*Sackett's delay could probably be compensated for in damages
8. the extent to which the party failing to perform has already partly performed
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*Sackett has paid some
9. the greater or less hardship on the party failing to perform in terminating the contract
10. the willful, negligent, or innocent behavior of the party failing to perform
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*Sackett's failure to perform after many requests cannot be seen as innocent
11. the greater or less uncertainty that the party failing to perform will perform the remainder of the
contract
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*Sackett was not justified
Based on these factors, Spindler was justified in terminating the contract on
Oct. 5
Spindler's repudiation on Oct. 5 was anticipatory in nature, and did not
discharge Sackett's performance, and Spindler retracted the repudiation,
thereby reinstating Sackett's duty to perform (even if he was not justified in
terminating on Oct. 5, which he was)
 Judgment: Affirmed
 R 241 Circumstances Significant in Determining Whether a Failure
Is Material
 In determining whether a failure to render or to offer performance is
material, the following circumstances are significant:
 the extent to which the injured party will be deprived of the benefit
which he reasonably expected;
 the extent to which the injured party can be adequately compensated
for the part of that benefit of which he will be deprived;
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cmt. c - "Difficulty (the injured party) may have in proving with sufficient
certainty the amount of that loss will affect the adequacy of compensation."
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if the failure is a breach, the injured party always has a claim for damages
where the failure is not a breach, the question becomes one of the adequacy
of any claim
 the extent to which the party failing to perform or to offer to perform will
suffer forfeiture;
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cmt. d - a failure to perform by the breacher is less likely to be regarded as
material if it occurs late, after substantial preparation or performance
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a failure to perform by the breacher is more likely to be regarded as material if
it occurs early, before such reliance
Illustrations in Materiality

R 241 factors argue against a finding of material failure and in favor of one of
substantial performance where a builder has completed performance under a
construction contract, and because the building is on the owner's land, can
salvage nothing if he is denied recovery of the balance of the price
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even in such a case, however, the potential forfeiture may be
mitigated if the builder has a claim in restitution or if he has already
received progress payments under a provision of the contract
R 241 factors argue for a finding of material failure where a seller tenders
goods and can salvage them by resale to others if they are rejected and he is
denied recovery of the price
 the likelihood that the party failing to perform or to offer to perform will
cure his failure, taking account of all the circumstances including any
reasonable assurances;
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Significant circumstance
The fact that the injured party already has some security for the other
party's performance argues against a determination that the failure is
material
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adequate assurances help
a favorable shift in the market for the failing party help as well
defaults on other contracts (or missed payments on the present contract) by
the failing party hurt
financial instability by the failing party, if demonstrating a lack of ability to
cure also hurts
 the extent to which the behavior of the party failing to perform or to
offer to perform comports with standards of good faith and fair dealing.
 R 242 Circumstances Significant in Determining When Remaining
Duties Are Discharged
 In determining the time after which a party's uncured material failure to
render or to offer performance discharges the other party's remaining duties
to render performance under the rules stated in sections 237 and 238, the
following circumstances are significant:
12. those stated in R 241;
13. the extent to which it reasonably appears to the injured party that delay may prevent or hinder
him in making reasonable substitute arrangements;
14. the extent to which the agreement provides for performance without delay, but a material
failure to perform or to offer to perform on a stated day does not of itself discharge the other
party's remaining duties unless the circumstances, including the language of the agreement,
indicate that performance or an offer to perform by that day is important.
 cmt. b
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R 242 states circumstances which are to be considered in determining whether
there is still time to cure a particular failure, or whether the period of time for
discharge has expired.
where performance is to extend over a period of time, as where delivery of
goods is to be in installments, so that a continuing relationship between the
parties is contemplated, the injured party may be expected to give more
opportunity for cure than in th case of an isolated exchange
Suggests another relevant consideration: "the reasonableness of the injured
party's conduct in communicating his grievances and in seeking satisfaction is
a factor to be considered."
 Time
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is more important, generally in sales of goods because the market is more
likely to fluctuate
For instance if A agrees to sell stock to B for money on Oct. 1, and then A for no
good reason tells B that he will not deliver until Oct. 2, B's duties are
discharged.
stock phrases such as "time is of the essence" do not necessarily have this
effect, although under Subsection (c) they are to be considered along with the
other circumstances in determining the effect of delay - cmt. d
 courts use two-part test focusing on 1) intention of parties and 2) equitable
factors in deciding whether to enforce time-of-essence clauses. Elda
Arnhold and Byzantio, L.L.C. v. Ocean Atlantic Woodland Corp., 284 F.3d
693 (7th Cir. 2002)
 Partial/Non-Material Breach
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A partial breach does not discharge the contract
Partial breach produces a right to damages only for the actual harm that has
resulted to date, not for future harm
If a breach is not material it is partial
Jacob & Youngs, Inc. v. Kent (1921)
 Facts:
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Plaintiff = Jacob & Youngs
Defendant = Kent
J & Y sued Kent to recover $3,483.46 yet unpaid from their building a house for
Kent
Construction concluded in June, 1914 and Kent lived in the house without
complaint until March 1915
Condition of the building contract was that all pipe used in the home was to be
Reading pipe
Kent discovered the pipe was from a different manufacturer and told the
architect who directed J & Y to do the work anew
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the pipe was encased in the walls and would have cost J & Y a substantial
amount of money to fix
J & Y did not complete the fix and asked for a certificate that the final payment
was due
Kent refused and J & Y sued
The Cohoes pipe which was used is different from Reading pipe only in the
name of the manufacturer
Evidence that the pipe was the same was not allowed at trial and Kent won
The Appellate Division reversed
 Issue: What is the correct remedy for this type of breach?
 Holding: The damage award is not the cost of replacement but the
difference in value which would be either nominal or nothing.
 Analysis:
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 Judgment: Affirmed.
Constructive Conditions
 developed over the years by British and American courts in order to achieve
just results in cases where it seemed to the court that one party's failure to
perform should constitute a sufficient justification for the other party's
withholding of its performance in return.
 Judicially created devices used to determine the consequences of breach
when the parties have failed to spell that out in their agreement
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The question is one of degree
In most cases the cost of replacement is the measure. "The owner is entitled
to the money which will permit him to complete, unless the cost of completion is
grossly and unfairly out of proportion to the good to be attained. When that is
true, the measure is the difference in value."
Some argue that the doctrine of constructive conditions simply reflects the
agreements the parties would have entered into, had they actually bargained
for them
Substantial Performance
 Each party's duty of performance is implicitly conditioned on there being no
uncured material failure of performance by the other party
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best understood as one aspect of the doctrine of constructive conditions
 Jacob & Youngs v. Kent is the leading case for this proposition
 Even with substantial performance, the performance may be lacking
thereby warranting damages
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Often measure by the cost of completion or repair
Effect of Willful Breach
 In Jacob & Youngs v. Kent, Cardozo states that the willful breacher will not
be entitled to recover under substantial performance
 However, the Restatement considers it merely one of the factors under R
241(e) = willfulness is not a complete bar on recovery
Order of Performances
 R 234 Order of Performances
 Where all or part of the performances to be exchanged under an
exchange of promises can be rendered simultaneously, they are to
that extent due simultaneously, unless the language or the
circumstances indicate the contrary.
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Applies whenever possible, absent a showing of intent to the contrary
(express or implied (although express is better))
Categories of instances when simultaneous performance is possible:
where the same time is fixed for the performance of each party;
where a time is fixed for the performance of one of the parties and no time is fixed for the other;
where no time is fixed for the performance of either party;
where the same period is fixed within which each party is to perform
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When Simultaneous Performance does not apply:
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Where different periods are fixed within which each party is to perform
 doesn't apply even if simultaneous performance is possible = the parties
have contemplated it demonstrating an intention contrary to subsection (1)
 Except to the extent stated in Subsection (1), where the performance
of only one party under such an exchange requires a period of time, his
performance is due at an earlier time than that of the other party,
unless the language or the circumstances indicate the contrary.
 Rationale behind R 234
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It offers both parties maximum security against disappointment of their
expectations of a subsequent exchange of performances by allowing each party to
defer his own performance until he has been assured that the other will perform.
It avoids placing on either party the burden of financing the other before the latter
has performed
 Anticipatory Repudiation
 R 250 When a Statement or an Act Is a Repudiation
 A repudiation is
 a statement by the obligor to the obligee indicating that the
obligor will commit a breach that would of itself give the
obligee a claim for damages for total breach under R 243, OR
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the party's language must be sufficiently positive
mere expressions of doubt about ability to perform are not enough
language that amounts to a statement of intention not to perform except on
conditions which go beyond the contract constitutes a repudiation
Must be to the obligee - no hearsay
 a voluntary affirmative act which renders the obligor unable or
apparently unable to perform without such a breach
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must indicate that performance would be a practical impossibility
 i.e. X contracts to employ Z, and Z to work for X for a year beginning in
10 days. Z, three days later embarks on a ship for a voyage around
the world = Z's actions are a repudiation
Gravity of the Breach under R 250
 In order for a statement or an act to be a repudiation, the threatened breach
must be of sufficient gravity that, if the breach actually occurred, it would of
itself give the obligee a claim for damages for total breach under Section
243(1)
Truman L. Flatt & Sons Co v. Schupf (1995)
 Players:
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Plaintiff = Truman L. Flatt & Sons
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Defendant = Sara Lee Schupf, Neiswander and American National Bank and
Trust
 Chronology/Facts
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March, 1993: Contract is entered into
 Schupf agreed to sell a parcel of land to Truman for $160,000
 Conditioned on paragraph 14:
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Contingent on Truman to change the zoning designation of the land so that
there could be an asphalt plant on the site within 120 days otherwise the
contract will be voidable at Truman's option
Buyer = obligor
May 21: Letter
 Truman's attorney sends letter discussing the public opposition to the
rezoning effort and state that "our chances were zero to none for success"
and that they had decided to "withdraw the request for rezoning"
 also stated that Truman was still interested and offered to pay $142,500 for
the property
June 9: Letter
 Sara Lee's attorney writes that the new offer is not accepted
June 14: Letter
 Truman's attorney writes stating that they have decided to go ahead with
the original contract
June 23 & July 6: Letters
 Truman's attorney sends letters requesting information
July 8: Letter
 Sara Lee's attorney replies stating that Truman had voided the contract
Sometime after that: Letter
 Truman sends another letter to convince Sara Lee to honor the contract,
but they declined
 Procedure:
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Truman files a complaint for specific performance
Sara Lee files a motion to strike, dismiss, or summary judgment
Truman files interrogatories
 requesting information regarding the current status of the property
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Trial court grants Sara Lee's motion for summary judgment
Truman files post-trial motion to vacate the judgment
Motion denied
Truman appeals, arguing:
 they did not repudiate the contract
 and if they did, they timely retracted the repudiation
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*the property had not been sold or offered for sale to anyone else
 Issue: Did Truman repudiate the contract, and if so, did they retract that
repudiation so as to not allow Sara Lee to fail to perform?
 Holding: Truman did not repudiate the contract, and also would have
retracted the repudiation.
 Analysis:
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May 21 letter did not constitute a clearly implied threat of nonperformance,
required under anticipatory repudiation
 the letter was at most an ambiguous implication whether performance
would occur
June 14 letter from Truman's attorney was a timely retraction of the repudiation
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anyway
 Sara Lee's June 9 letter failed to treat the contract as rescinded, and
absent notice or other manifestation defendants were pursuing one of their
options, Truman was free to retract its repudiation
"Where the aggrieved party has not otherwise undergone a material change in
position, the aggrieved party must indicate to the other party it is electing to
treat the contract as rescinded."
 prior to such indication, the repudiating party is free to retract its repudiation
Retraction
 a party who commits an anticipatory repudiation may change her mind and
retract the repudiation so long as the other party has not relied to his
detriment on the repudiation or notified the repudiating party that he is
treating the repudiation as final.
 Adequate Assurances of Performance
 R 251 When a Failure to Give Assurance May Be Treated as a
Repudiation
 Where reasonable grounds arise to believe that the obligor will
commit a breach by non-performance that would of itself give the
obligee a claim for damages for total breach under section 243, the
obligee may demand adequate assurance of due performance and
may, if reasonable, suspend any performance for which he has not
already received the agreed exchange until he receives such
assurance.
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Reasonable Grounds:
 Significant financial difficulties
Not Reasonable Grounds:
 unreliable rumors
 insignificant risks
 when the demand for assurances has to do with something that happened
prior to the formation of the contract
Can be demanded: (will depend on the circumstances of the case)
 verbal guarantee
 posting of a bond
Cannot be demanded:
 personal financial statement from officer of a corporation
 The obligee may treat as a repudiation the obligor's failure to
provide within a reasonable time such assurance of due
performance as is adequate in the circumstances of the particular
case.
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The failure to give assurances constitutes an anticipatory repudiation
Hornell Brewing Co. v. Spry (1997)
 Players:
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Hornell Brewing
 Plaintiff
 supplier and marketer of beverages
 Don Vultaggio = Hornell's chairman of the Board
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Stephen A. Spry and Arizona Tea Prod. Ltd.
 Defendant
Richard Worthy = Metro Factors, Inc.
 Chronology/Facts
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Jan. 1993: Spry presents Vultaggio with a plan to distribute Arizona beverages
in Canada
Early 1993:
 Hornell grants Spry the exclusive right to purchase Arizona products for
distribution in Canada
 Spry forms a Canadian corporation, Arizona Iced Tea Ltd. for this purpose
 agreement is oral
July 1993: Letter
 Hornell provides letter at Spry's request stating that they had reached an
agreement, but without being specific
1993-May 1994:
 Hornell sells Arizona beverages to Spry on 10-day credit terms
 Spry was failing to remit timely payments for the beverages
 Between Nov. and Dec. 1993, and Feb. 1994:
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March and April 1994: Series of letters and phone calls
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
Hornell writes stating that it will only release more product if they receive a
letter confirming a line of credit and a personal guarantee that is backed up by
a personal financial statement
NO ASSURANCE GIVEN
May 26:



the entire amount owed by Spry is paid
May 10: Request for assurance



Spry sends proposed letter to Hornell, to send to Metro
Vultaggio sends it off although the words "Factors Inc." were missing
stated that if Hornell received $79,316.24 by May 2, they would resume selling
product to Spry
May 2: No payment
Before May 9: Hornell learns that Spry's operation might be a sham
May 9: Wire transfer


Hornell sends letter to Spry discussing certain details of the Apr. 15 meeting,
including that payment would be made by April 19
April 25: Proposed Letter






Spry arranged for Vultaggio to talk to Worthy of Metro Factors, Inc.
April 18: Letter


Spry signs an agreement with Metro Factors, Inc. for a line of credit
March 30, 1994: Agreement between Spry and Metro is fully executed
April 15: Meeting


Hornell wanted Spry to obtain a steady line of credit
Spry sent a letter saying that a $1.5 million line was granted by Vanguard
Financial Group - but it never materialized
March 24, 1994: Agreement



Spry's unpaid invoices grew from $20,000 to over $100,000
also, check for $31,000 was returned for insufficient funds
Vultaggio meets with Spry to discuss the termination of their agreement, and
gave Spry a letter to sign, which he did not
Hornell defacto terminated its relationship with Spry and permanently ceased
selling its products
Hornell brings suit for declaratory judgment
 Issue: Did Hornell have reasonable grounds for seeking assurances, and if
so did Spry breach the contract by failing to make assurances?
 Holding: Hornell had reasonable grounds for seeking assurances and
Spry's failure to respond constituted a repudiation of the distributorship
agreement, which entitled plaintiff to suspend performance and terminate
the agreement.
 Analysis:



Spry's request for an order after he paid what he owed exceeded the agreed
upon amount he could ask for, and considering what he had been doing, and
that Hornell had reason to suspect his operation was a sham, this was asking
for too much
Neither Spry, nor Metro fully informed Hornell what assurance of payment
Metro could provide
Spry had a regrettable lack of credibility
 Judgment: Declaratory judgment granted
15. DAMAGES
 Expectation Damages = the gain the plaintiff would have realized if the
contract between plaintiff and defendant had been fully performed






Formula = LV + OL - CA - LA
Loss in Value (LV)
 the difference between the value to the injured party of the performance that
should have been received and the value to that party of what, if anything,
actually was received
Other Loss (OL)
 Incidental damages = additional costs incurred after the breach in a
reasonable attempt to avoid loss, even if the attempt is unsuccessful
 Consequential damages = injury to person or property caused by the
breach
Cost Avoided (CA)
 the beneficial effect on the non-breacher by saving it the further
expenditures that would otherwise have been incurred
 only applies to total breach
Loss Avoided (LA)
 the beneficial effect on the non-breacher by allowing it to avoid some loss
by salvaging and reallocating some or all of the resources that otherwise it
would have had to devote to performance of the contract
 applies only to total breach
R 347 Measure of Damages in General
 Subject to the limitations stated in Sections 350-53, the injured party has a
right to damages based on his expectation interest as measured by



the loss in the value to him of the other party's performance caused by its
failure or deficiency, plus
any other loss, including incidental or consequential loss, caused by the
breach, less
any cost or other loss that he has avoided by not having to perform
 Breacher as Paying Party

Roesch v. Bray (1988)
 Players:


Plaintiffs/Appellants = John and Janie Roesch
Defendants/Appellees = Harry and Carol Bray
 Harry Bray is Janie Roesch's father
 Chronology/Facts:


Sometime (maybe before contract, maybe after, but before repudiation):
 Roeschs enter into contract to purchase another home in Huron
Aug. 18, 1982: Contract
 The parties enter into a contract for the sale of the Roesch's home on
Lincoln Ave.





5 days later: Repudiation
 Brays inform the Roeschs that they are unable to purchase the home
Later:
 Roesch borrows $65,000 at 16% interest to honor the contract for his new
home
Aug. 1983: Resale
 Roeschs resell Lincoln Ave. home for $63,500
Referee of suit's recommendation of damages:
 $9,163.06 to be paid by the Brays to the Roeschs including:








Price = $65,000
 $45,000 to be paid at closing
 $20,000 to be paid upon sale of the Bray's home (with no interest)
utilities
insurance
real estate taxes
yard maintenance
maintenance
interest on the $45,000 owed to the Roeschs at closing date (16% interest)
(later changed to 10% by the trial judge)
Trial Court did not think the resale price was an indicator of the value of the
home and didn't allow it to be admitted
Appellees argue that they should only pay the difference between the market
value of the home as indicated by the resale price and the contract price $65,000 - $63,500 = $1,500
 Issue: Should the Brays have to pay the $9,163 in damages awarded by the
trial court for costs incurred during the time between breach and resale, or
$1,500 for the difference between the resale price and the contract price?
 Holding: The Brays should pay the $1,500 plus 10% interest from the date
of the breach.
 Analysis:


The housing market was moving slowly and therefore the resale price is the
best indicator of the market value of the home at the time the contract was
entered into
To allow recovery for expenses of the kind which the Referee found could lead
to harsh consequences as these costs could mount indefinitely
 These expenses are incidental to ownership and speculative at the time of
the breach
 Judgment: Reversed - $1,500 to the Roeschs at 10% interest from the date
of the breach

Damages for Real Estate Contracts
 General Rule = damages to be calculated as the difference between the
contract price and the market value of the property at the time of the breach
 If Buyer Breaches (Roesch v. Bray)

Seller must show that at the time of the breach, the property was in fact worth
less (on the market) than the contract price
 If Seller Breaches

Buyer must show that at the time of breach the property had a market value of
more than the contract price
 Limitations on recovery of consequential or incidental damages:
16. Damages must be foreseeable
17. Damages must not be speculative
18. Non-breacher has a duty to mitigate
 Proof of Market Value



Real estate appraisers or other people who are qualified by education, training,
or experience can provide testimony about market value
Courts also usually allow the owner of the property to testify about its market
value even if not qualified as an expert
Many courts have also allowed the resale value to be proof of market value
(Roesch v. Bray), if its resold within a reasonable time
 Prejudgment and Postjudgment Interest


When the plaintiff is successful in recovering any judgment in a court action,
postjudgment interest will under local law usually accrue with respect to the
amount of that judgment at least from its date of entry, perhaps from the date of
verdict
Agreements that call for the payment of a sum of money on or before a fixed
date or on the happening of a specified event commonly provide that this sum
will bear interest at some stated rate if timely payment is not made.
 will be given effect unless it violates a "usury statute"
 Even without contract language, the successful plaintiff may sometimes
recover prejudgment interest

usually only awarded in cases where at the time of the breach the plaintiff's
claim was for a "liquidated" sum.
 a claim becomes liquidated when both the amount due and the date on
which such amount is due are fixed and certain or when the same become
definitely ascertainable by mathematical calculation
 Breacher as Performing Party

Construction Contracts
 Jacob & Youngs v. Kent



In most cases the measure is the cost of replacement or completion
"The owner is entitled to the money which will permit him to complete, unless
the cost of completion is grossly and unfairly out of proportion to the good to be
attained. When that is true, the measure is the difference in value"
 in this case, it was nothing
Performing Party and Other Loss
 American Standard, Inc. v. Schectman

Facts:
 Schectman owned and operated a pig iron manufacturing plant which
included many buildings and a lot of equipment

Schectman decided to close the plant in 1973 and made a contract with
American Standard:



Trial Court:





Schectman would convey the buildings and other structures and most of the
equipment to AS for defendant's payment of $275,000 and his promise to
remove the equipment, demolish the structures and grade the property as
specified
AS failed to grade the land as specified
Schectman awarded $90,000 = the cost of completing the grading
Issue: Should the damage award be the cost of completion or the difference in
value ($3000) of the land at the time of the contract minus the resale value?
Holding: There is no reason to invoke the diminution in value rule used in
Jacob & Youngs in this case, and therefore the cost of completion is the
appropriate measure of damages.
Analysis:
 The grading and removal of the structures were not incidental to plaintiff's
purpose of "achieving a reasonably attractive vacant plot for resale"
 That the fulfillment of defendant's promise would add little or nothing to the
sale value of the property does not excuse the default
 Disparity in relative economic benefits is not the equivalent of "economic
waste" which will invoke the rule in Jacob & Youngs
 Defendant did not render substantial performance, nor was the unfinished
work "of trivial or inappreciable importance"
 Defendant never even tried to remove the underground structures and
therefore cannot contend to be a "transgressor whose default is
unintentional and trivial [and who] may hope for mercy if he will offer
atonement for his wrong."
Judgment: Affirmed
 Rationale for Cost-to-Complete Measure of Damages



It is more in line with the general principle that damages for breach of contract
allows the injured party to recover an amount sufficient to give that party the
benefit of the bargain
The actual injury to the plaintiff may not be adequately reflected by the
market-value comparison
 Where the plaintiff contemplates a personal use for the property, it may be
that the property has "idiosyncratic" value to the plaintiff that is not reflected
in the market value of the property
Groves v. John Wunder Co.
 plaintiff had leased property and conveyed a gravel plant to defendant in
exchange for a sum of money and for defendant's commitment to return the
property to plaintiff at the end of the term at a specified grade
 Defendant didn't perform
 Cost to complete the grading = $60,000
 Total value of the property, graded as specified = $12,160
 Court ruled for the cost-to-complete damage award


"The owner's right to improve his property is not trammeled by its small value"
The builder cannot not perform because because his performance would not
be beneficial to the plaintiff
 Justification for Diminution in Market Value Damages


Efficiency
the award of cost-to-restore damages overcompensates the owner



 R 348 Alternatives to Loss in Value of Performance
If a breach delays the use of property and the loss in value to the injured party is
not proved with reasonable certainty, he may recover damages based on the
rental value of the property or on interest on the value of the property.
If a breach results in defective or unfinished construction and the loss in value to
the injured party is not proved with sufficient certainty, he may recover damages
based on



 often the plaintiff will not use the award to actually restore
Peevyhouse v. Garland Coal & Mining Co.
 Diminution in value is the proper measure where defendant, the lessee of
plaintiff's lands under a coal mining lease, failed to perform costly remedial
and restorative work on the land at the termination of the lease
 The court noted that the breach was of a covenant incidental to the main
purpose of the contract which was the recovery of coal from the premises
to the benefit of both parties
the diminution in the market price of the property caused by the breach, or
the reasonable cost of completing performance or of remedying the defects if
that cost is not clearly disproportionate to the probable loss in value to him.
If a breach is of a promise conditioned on a fortuitous event and it is uncertain
whether the event would have occurred had there been no breach, th injured party
may recover damages based on the value of the conditional right at the time of the
breach
 Employment Contracts: LV and OL

Handicapped Children's Education Board v. Lukaszewski (1983)
 Measure of Damages = The difference between the bargained-for price and
the price of a replacement with reasonable attempt at mitigation
 Players:


Plaintiff = Board (employer)
 Thomas Morelle = Director of Special Education
Defendant = Lukaszewski (employee)
 Chronology/Facts







Jan. 1978: Board hires Lukaszewski to be speech and language therapist
 She is assigned to the Lightfoot school in Sheboygan Falls (45 miles from
her home)
Spring 1978: Board offers Luaszewski contract to continue in her position for
the 1978-79 school year
 annual salary of $10,760
 She accepts
Aug. 1978: She is offered a position at Wee Care Day Care Center
 closer to her home
 annual salary of $13,000
 She decides to accept
She notifies Morelle that she intends to resign from her position at the Lightfoot
School
She tenders her resignation letter to the Board
Aug. 21, 1978: Board discussed the resignation
 they decide not to release her
Aug. 24: Board's attorney sends letter to Lukaszewski telling her to return to









work
 also sends letter to Wee Care asking them not to interfere with her
contractual obligations
Fall, 1978: She returns to Lightfoot School
Sept. 8: She discusses her unhappiness about the deal with Morelle
 BREACH = she never returns to work after this
She visits a doctor after this discussion
 she has high blood pressure
Sept. 11: Letter from doctor
 She has hypertension problem dating back to 1976
 his opinion is that unless the stress causer was removed, her medical
condition would not improve
 he also thought that the long drives would be dangerous in her agitated
state
Sept. 13: Resignation letter from Lukaszewski to Board, citing her medical
condition
Short time later: she gets the job at Wee Care
Board is only able to find one qualified replacement
 replacement would have to be paid more, as she had more experience and
the teacher's union required her to be paid more
 $1,026.64 more per year than Lukaszewski
Dec.: Board sues Lukaszewski for breach of contract
 damages of $1,026.64
 Trial Court rules that there was a breach and awarded the Board the
damage amount plus $222.50 in costs ($1,249.14)
Lukaszewski appealed
 Appellate Court affirmed, but reversed the damage award because the
Board received a better teacher for the position
 Issue: Did the Board suffer recoverable damages from the breach?
 Holding: Yes. The Board suffered damages for the loss of its bargain in the
amount of additional compensation it was required to pay the replacement.
 Analysis:




The Board and Appellate Court improperly looked at the objective value of the
services received, rather than the expectations of the parties which is the
proper indicator
The Board didn't expect or want a more qualified therapist
 their gain was imposed upon them and therefore cannot be considered a
benefit
The Board properly mitigated damages by seeking the cheapest, most
qualified replacement, of which there was only one candidate
Roth v. Speck (1956)
 Measure of Damages = The difference between the bargained for price and
the fair market value of the expected performance (in this case measured
by the employee's salary after finding new employment)
 Players:


Plaintiff = employer
Defendant = employee
 Facts:

Plaintiff owned a beauty salon in MD




 business was seasonal
Apr. 15, 1955: Contract
 Plaintiff agreed to employ defendant as a hairdresser for 1 year
 Salary = $75 per week, or a commission of 50% on the gross receipts from
his work, whichever was greater
Defendant remains in Beauty Salon for 6 and a half months, then leaves
 cites unbearable working conditions
Defendant gets new job at $100 per week
Plaintiff is unable to find an acceptable substitute
 Issue: What damages is plaintiff entitled to under the circumstances?
 Holding: Plaintiff is entitled to the value of replacing defendant's services,
which in this case is measure by the difference between what plaintiff would
have had to have paid a replacement which is determined by the
defendant's new salary ($100 per week) and the $75 plaintiff was paying
defendant (=$25 per week for the remainder of the contract (24 weeks)) =
$600.00
 Analysis:

"The measure of damages for breach of an employment contract by an
employee is the cost of obtaining other services equivalent to that promised
and not performed"
 No need to deal with foreseeability because plaintiff's proof on the point is at
most conjectural and speculative
19. There was evidence of the value of the defendant's services and therefore of the cost of
replacement
 His new salary is the fair value of his services

supported by the fact that plaintiff was unable to obtain a comparable
replacement
20. The complicated method of payment by commission should not deter this damage amount
because Defendant had a duty to prove facts in mitigation of the damage he caused by his
breach and failed to do so

The Disgorgement Principle
 the owner's damages for defective performance are measured by the cost
of completion rather than by the diminution in value occasioned by the
breach
 may be proper in 2 types of cases:


those involving appropriation of some "property" or "quasi-property" interest
rightly belonging to the plaintiff and
those in which "deterrence" is a major factor
 Foreseeability, Certainty, and Causation

Hadley v. Baxendale (1854)
 Facts:





May 11: Miss was stopped due to the breakage of a crank shaft
in order to get a new crank shaft, they had to send the broken shaft as a model
to a company to make a new one
they sent it by common carrier (Pickford & Co.)
the boy sent to the carrier apparently did not tell the clerk for the carrier that
they needed the shaft in order to resume running the mill
there was a delay in the shipment


 the mill lost profits during this time
jury found for the mill
This court reversed
 Rule:


"Where 2 parties have made a contract which one of them has broken, the
damages which the other party ought to receive in respect of such breach of
contract should be such as may fairly and reasonably be considered either
arising naturally . . . or such as may reasonably be supposed to have been in
eh contemplation of both parties, at the time they made the contract, as the
probable result of the breach of it."
special circumstances must be communicated in order to warrant damages
resulting from the unique nature of the circumstances



General/Direct Damages
 damages that arise naturally from the contract
 Special/Consequential Damages
 damages flowing from special circumstances
 in construction contracts, the most important type of consequential
damages is lost profits arising from collateral contracts
 R 351. Unforeseeability and Related Limitations on Damages
Damages are not recoverable for loss that the party in breach did not have reason
to foresee as a probable result of the breach when the contract was made
Loss may be foreseeable as a probable result of a breach because it follows from
the breach



in the ordinary course of events, or
as a result of special circumstances, beyond the ordinary course of events, that
the party in breach had reason to know
A court may limit damages for foreseeable loss by excluding recovery for loss of
profits, by allowing recovery only for loss incurred in reliance, or otherwise if it
concludes that in the circumstances justice so requires in order to avoid
disproportionate compensation
 Notes
 it only matters that the type of damages are foreseeable, not that the
manner in which they accrued was foreseeable
 focus of foreseeability is on the breaching party

the breaching party is liable for losses about which it had reason to know
 Breacher can use foreseeability to challenge LV and OL claimed by the
non-breaching party
 R 351(3):



cmt. f - indicates that the limitation is intended to apply in cases where there is
extreme disproportion between the price charged by the defendant under the
contract in question and the liability sought to be imposed on it
only a few courts have relied on it
Florafax International, Inc. v. GTE Market Resources, Inc. (1997)
 Facts:


Florafax sold flowers through 1-800 number and contracted with GTE for
telemarketing services
GTE failed to staff properly and this resulted in lost sales and other losses for
Florafax, including a contract with Bellerose

GTE upper management knew of the Bellerose agreement and even
considered this to be a positive aspect of their agreement with Florafax
 Issue:

Whether GTE should be responsible for damages from Florafax losing its GTE
deal and whether these damages could be calculated
 Holding #1: Lost Profits from a collateral contract may be recovered where:
21. the loss is within the contemplation of the parties at the time the contract is formed,
22. the loss flows directly or proximately from the breach, and
23. the loss is capable of reasonably accurate measurement or estimate
 Holding #2: The 60-day termination agreement in the contract does not
preclude damages beyond this period


GTE argued that if lost profits were proper, they should not be awarded past 60
days because of a clause in the contract that allowed either party to get out of
the contract with proper notice
however, that clause was in the Florafax/Bellerose contract and therefore,
GTE could not have ended the contract
 Holding #3: Competent evidence exists to support the award of lost profit
damages to a reasonable certainty








Notes:
 Florafax's contract with GTE was not intended to make a profit, so in order
to receive the most amount of damages, had to claim that their lost contract
with Bellerose was foreseeable, certain, and caused by GTE's breach which they did
Speculative Damages:
 plaintiffs must prove their damages with "reasonable certainty"
 courts often draw a distinction between uncertainty about the fact of
damage and uncertainty regarding the amount of damage.


when the plaintiff establishes the fact of damage, the jury is given wide leeway
in awarding compensation
Proof of Lost Profits
 usually involves expert testimony
 In computing expected lost profits, the plaintiff is only entitled to recover net
as opposed to gross profits
 Sometimes, the plaintiff will argue that the breach of contract resulted in a
decline of the value of that party's business


lost profits must be reasonably certain to have occurred
mere uncertainty to the exact amount is not enough to preclude recovery
there was testimony showing that the contract with Bellerose would have
lasted a long time, but for GTE's breach
damage experts also showed estimates based on the current market for
flowers and future projections
*Bellerose actually increased sales after terminating its contract with Florafax
the damages awarded were within the range of the experts
the plaintiff is generally not entitled to recover both the decline in market value
of its business and the present value of the future net income from the
business because these 2 methods are normally alternative ways of
measuring the same injury
The "New Business" Rule
 new businesses or ventures have traditionally encountered great difficulty
in recovering lost profits in a new business venture, or at least a new one for
the plaintiff, with no history of prior profitability
 recent decisions, however have allowed new businesses to recover lost
profits provided that they are proved with reasonable certainty
 Mitigation

Rockingham County v. Luten Bridge Co. (1929)
 Facts:


Luten sued Rockingham county for an amount due for constructing a bridge
County admits that they breached, but claims that they gave notice of the
cancellation before the project was begun, and therefore Luten should only get
damages for losses sustained at the time of the cancellation
 Issue: Should Luten recover damages for performance after the
cancellation?
 Holding: No. After Luten received notice of the breach, it was its duty to do
nothing to increase the damages flowing therefrom.
 Analysis:



the remedy is to sue for damages at the time of repudiation, not to rack up
damage amounts
*The plaintiff must mitigate damages
Havill v. Woodstock Soapstone Company, Inc. (2004)
 Facts:







Plaintiff worked for defendant starting in 1982, was terminated due to lack of
business in 1987, came back to work there in 1990, and became full time in
1994
company had a policy, starting in 1994, for requiring that an employee had to
have 2 written warnings before they could be fired
a new woman came in to streamline the company and there were problems
between the 2
plaintiff was terminated in 1997 without having 2 written warnings (she was 58)
 stated reason was for lack of work
 however, defendant hired new people who all handled responsibilities
similar to what plaintiff had done
court ruled that defendant had breached contract
Mitigation:
 worked at Morgan's Plumbing 30 hrs./week at $9.00/hour from 1997 to
2000 (she's now 61)
 worked for a typing place (Therapeutic) from home - but she did this while
employed with defendant as well and did not increase her hours after being
terminated
 worked for Wilson Associates after being terminated from Morgan's between Wilson and the typing place, she works 40 hours/week without
benefits
Trial Court's Damage award
 calculated from 1998 - 2004


5 years of back pay
2 years of front pay
 Defendant's argument #1:

the damages award is unreasonable because the number of years is twice as
long as plaintiff's tenure there as a full-time employee
 no, she worked there for 15 years in some capacity, so it's reasonable to
think that she might work there another 7
 Defendant's argument #2:

the award is excessive because of the period on which it's based, in light of th
fact that the position was eliminated in Jan. 1999 at the latest
 this argument is not good
 however, remand for consideration on whether or not plaintiff would have
worked past the age of 65
 Defendant's argument #3:

plaintiff did not fully mitigate
 mitigation in employment contracts requires that the employee make a
"good faith effort to find suitable alternative employment"
 the employer must show that they failed to do this = they must show that
suitable work existed and that the employee did not make reasonable
efforts to obtain it
 suitable employment is that which is "substantially equivalent to the
position lost and suitable to a person's background and experience"
 plaintiff did immediately find comparable, replacement employment
 she acted in good faith
 there was no evidence of the job market entered by defendant to show that
she could have found a better position
 Defendant's argument #4:

the trial court erred in not deducting money that plaintiff earned working at
home for Therapeutic from her final damage award
 by excluding this income from the damages picture, the trial court unfairly
placed the burden on defendant to make up for the shortfall in plaintiff's
income that resulted more from her voluntary choice to work fewer hours
than defendant's decision to fire plaintiff
 Defendant's argument #5:

the trial court should not have included additional funds to compensate plaintiff
for paid vacation time
 the trial court's decision to provide plaintiff full credit for all the vacation she
would have been entitled to without any findings on plaintiff's past behavior
as it relates to vacation time was error
 Defendant's argument #6:

the trial court erred by including anticipated bonuses because defendant was
not contractually bound to pay plaintiff bonuses
 it was not too speculative that plaintiff would receive bonuses like she had
in the past
 Plaintiff's argument #1:


the trial court should have accounted for future raises
 the raises were not set for a certain time every year
 the trial court was right to conclude that future raises would be too
speculative
Employer's burden of proof regarding mitigation
 Most courts agree with the Havill decision that the burden of proving
whether the employee made reasonable efforts to mitigate her damages

rests with the employer
Jetz Service Co. v. Salina Properties (1993)
 Facts:




 Issue: If Salina breaches the lease, forcing Jetz to remove profitable
machines from the premises, may Jetz recover lost profits if they placed the
machines profitably in another location?
 Holding: If Jetz would have been able to place machines in the new
locations regardless of the breach, then Jetz is considered a lost volume
lessee and can recover lost profits from the lessor in breach.
Mitigation vs. additional contracts:
 mitigating contract = a contract that the plaintiff was able to perform only
because the defendant's breach freed the plaintiff from the obligation to
perform the original contract
 additional contract = the plaintiff is entitled to the profit from both contracts,
and the defendant will not have the benefit of any deduction from its
damage liability
To establish status as lost volume seller
 plaintiff must prove:




Jetz leased space in an apartment for its coin-operated laundry machines
Salina bought the building and breached the lease
that it possessed the capacity to make an additional sale,
that it would have been profitable for it to make an additional sale, and
that it probably would have made an additional sale absent the buyer's breach
"Equal Opportunity" exception
 some courts have found that when a plaintiff and defendant both have
opportunity to mitigate damages in a certain way, the plaintiff will not be held
accountable for not mitigating - Hightower
 Non-Recoverable Damages

Attorney's Fees
 Zapata Hermanos Sucesores, S.A. v. Hearthside Baking Company, Inc.
(2003)




Facts:
 Zapata, a Mexican corporation that supplied Lenell (a wholesale baker of
cookies) with cookie tins sued Lenell for breach of contract and won
 the district judge ordered Lenell to pay Zapata $550,000 in attorneys' fees
 Lenell appealed the award
Issue: Are attorneys' fees "losses" under the Convention on Contracts for the
International Sale of Goods, of which the U.S. and Mexico are signatories?
Holding: "Loss" does not include attorneys' fees incurred in the litigation of a
suit for beach of contract, though certain prelitigation legal expenditures, for
example expenditures designed to mitigate the plaintiff's damages, would
probably be covered as "incidental" damages.
Analysis:
 the American rule is that one may not recover attorney's fees, and it follows
that the U.S. would not have signed onto the Convention if "loss" were to
include attorneys' fees
 a breach of contract is not considered wrongful activity in the sense that a
tort or a crime is wrongful


breach of contract is a form of strict liability
The inherent authority of federal courts to punish misconduct before them
is not a grant of authority to do good, rectify shortcomings of the common
law, or undermine the American rule on the award of attorneys' fees to the
prevailing party in the absence of statute
 Exceptions:






the parties have agreed in the contract that one party will award attorneys fees
to the other for breach
statutory law
 it has been contended that the UCC provides for or at least permits the
award of attorney fees to a victorious plaintiff, either as incidental or
consequential damages, but such claims have usually been unsuccessful
court rules
 such as Rule 11 in FRCP
collateral litigation
 when the breach causes the plaintiff to engage in other litigation, the
plaintiff may recover as consequential damage for breach of the principal
contract the attorney fees incurred in the collateral litigation
Insurance bad-faith
Emotional Damages
 Erlich v. Menezes (1999)




Facts:
 the Erlichs contracted with Menezes, a general contractor, to build their
"dream home"
 there were numerous serious structural defects
 the Erlichs claimed that they suffered emotional distress from their fear that
the house would collapse
 At trial, each spouse was awarded damages for emotional distress
Issue: Whether a negligent breach of a contract will support an award of
damages for emotional distress - either as tort damages for negligence or as
consequential or special contract damages.
Holding: No.
Analysis: Courts generally enforce the breach of a contractual promise through
contract law, except when the actions that constitute th breach violate a social
policy that merits the imposition of tort remedies
 it's allowed in insurance bad faith because of the special relationship
between the insurer and the insured
 Reasons for denying tort recovery in contract breach cases:







different objectives underlying tort and contract breach
the importance of predictability in assuring commercial stability in contractual
dealings,
the potential for converting every contract breach into a tort, and
the preference for legislative action in affording appropriate remedies
A tortious breach of contract . . . may be found when:
the breach is accompanied by a traditional common law tort,
the means used to breach the contract are tortious, or
 one party intentionally breaches the contract intending or knowing that such a
breach will cause sever, unmitigable harming the form of mental anguish,
personal hardship or substantial consequential damages


no reasonable home builder can expect the perfect house
the lived there for 5 years




Issue: Should damages for emotional distress be included as consequential or
special damages in a contract claim?
Holding: No, the available damages for defective construction are limited to the
cost of repairing the home, including lost use or relocation expenses or the
diminution in value
Analysis:
 to allow them would make the financial risks of construction agreements
difficult to predict
 could increase the cost of homes
 most other jurisdictions have reached the same conclusion
Judgment: Reversed and Remanded
 Contract Cases where Emotional Distress Damages may be recovered:

R 353:
 the breach of contract also causes bodily harm
 emotional distress is particularly likely consequence of breach




contracts of carriers and innkeepers with passengers and guests
carriage or disposition of dead bodies
delivery of messages concerning death
Punitive Damages
 generally not available

if conduct goes beyond bad faith to amount to an independent tort action, there
can be punitive damages on the tort claim
 Justifications for Rule
24. the damage remedies available in contract are only such as will compensate the plaintiff for
harm actually caused and should not put the injured party in a better position than she would
have occupied if the contract had bee performed
25. contract law is a system founded not on "fault" but strict liability
26. Contract remedies (like the law of contract in general) should promote "efficiency," and
therefore should deter only "inefficient" breaches of contract
 Exceptions:


Insurance Bad Faith
Efficient Breach
 Theory that contract should support the idea that breaching a contract when
it would be advantageous is desirable
 not many courts have applied the doctrine
 Reliance Damages

Wartzman v. Hightower Productions, Ltd. (1983)
 Facts:





Plaintiffs came up with plan where "Woody Hightower" would set a Guiness
World Record for the longest time spent on top of a flagpole
Woody was to live in a specially constructed mobile flagpole perch for nine
months, have his own theme song, and be displayed throughout the country at
state fairs and shopping centers
He was to descend the pole on New Year's Eve in Times Square
plaintiffs hired the defendant law firm to incorporate their venture
Defendants structured the corporation improperly and plaintiffs investments
were lost
 Issue: What are the damages when breach of contract prevents a highly
speculative venture from being performed?


 Holding: When expectation interests are not provable or cannot be
ascertained because of the speculative nature of a venture, reliance
damages should be awarded. Reliance damages may include
expenditures made in preparation for performance, less any loss that the
breaching party can prove with reasonable certainty the injured party would
have suffered had the contract been performed.
Losing Contracts:
 defendant can attack plaintiff's claimed reliance damage amount by proving
(although this can be hard) that plaintiff would have lost money on the
contract
Foregone Opportunities
 sometimes, protection of the injury to the plaintiff's reliance extends beyond
out-of-pocket expenses, taking into account the gains the plaintiff would
have made had she not relied on the promises of the defendant


Dialist Co. v. Pulford, 399 A.2d 1374 (Md. Ct. Spec. App. 1979).
 after breach of exclusive territory provision, plaintiff permitted to recover
not only initial franchise fee but also amount of lost salary after quitting his
original job until reemployed; court assert that "giving up one's livelihood in
reliance on, in preparation for and in performance of, a contractual
obligation can be as real a detriment as out-of-pocket expenditures"
Walser v. Toyota Motor Sales, U.S.A., Inc.
 Facts:

Toyota told Walser that it had approved a formal letter of intent to give him a
Lexus dealership, but this wasn't true
 Issue: May a jury be instructed on a promissory estoppel claim to limit the
type of damages it may award?
 Holding: A jury may be instructed to limit its damage award on a promissory
estoppel claim to the promisee's out-of-pocket expenditures made in
reliance on the promise
 Restitution Damages


Either party may be entitled to restitution
United States ex rel. Coastal Steel Erectors, Inc. v. Algernon Blair, Inc. (1973)
 Facts:



After Blair breached by its failure to pay for part of Coastal Steel's operating
costs, Coastal ceased work and sought restitution for the work performed
Coastal would have lost money if the contract had been performed
 Issue: Is a party who justifiably stops work under a contract entitled to
restitution for work done, if it would have lost money had the contract not
been breached?
 Holding: A party can recover in quantum meruit ("what is deserved") for the
value of labor and equipment furnished pursuant to a contract that it
justifiably breached, irrespective of whether it would have lost money
Lancellotti v. Thomas (1985)
 Facts:

Thomas agreed to sell his business to Lancellotti for $25,000 and to lease the
land it occupies with the stipulations that only Lancellotti would own and
operate the business and that he would erect an additional building with an
year. After a dispute arose over the additional building, Lancellotti breached
and sued to recover the $25,000
 Issue: Can a breaching party recover for any loss incurred in th attempt to
perform?
 Holding: R 374 provides that a party in breach is entitled to restitution for
any benefit conferred upon the other party in excess of the loss caused by
the breach.
 Specific Performance


historically, money damages became regarded as the norm, and specific
performance is not a preferred remedy
City Stores Co. v. Ammerman (1968)
 Facts:


Ammerman promised to grant City Stores a leas on equal terms to those of
other tenants in its proposed shopping mall in exchange for City's letter of
commitment to open a store in Ammerman's mall. Ammerman used City's
letter, among others, to secure approval of the project from the county council,
but later refused to give City a lease.
City sued for specific performance
 Issue: May an option to lease a store be specifically enforced?
 Holding: Where monetary damages are inadequate to compensate a
party's loss, and the terms of a contract can be verified or reasonably
implied, a court will enforce despite supervisory problems, because leases,
like land are unique
 Analysis:



It's easy to grant specific performance here, because lease agreements from
other stores are available, and the spaces themselves are so similar, that the
mall would simply have to give one of the spots to City Stores
Effect of indefiniteness on specific performance
 specific relief will not be denied merely because the parties have left some
matters out of their agreement, or left some issues to be agreed on in the
future, particularly when the parties have agreed on all material terms and
other equitable factors are present
Promises to render personal services:
 Will not be enforced . . .
 Reier Broadcasting Company, Inc. v. Kramer (2003)


Facts:
 Montana state statute provided that if a contract may not be specifically
enforced then a court may not issue an injunction to prevent its breach.
 Kramer, football coach for Montana University, contracted to broadcast
only for Reier, which had an exclusive contract to broadcast sports events
for the University.
 Reier's contract with the University ended, but its deal with Kramer
remained in effect
 University sold its rights to Clear Channel, and this contract required
Kramer to be used for its broadcasts in violation with the Reier deal
Issue: If a promisor promises to provide certain services exclusively for a
promisee, may th promisee obtain an injunction to prohibit the promisor's
providing those services to a particular third party?

Holding: Where state statute prohibits issuing an injunction to prevent breach
of a contract that may not be specifically enforced, an injunction enforcing a
negative covenant would have the same effect as specific enforcement of the
promise to provide those services directly. Hence the negative injunction may
not be granted.
27. Justifications for Nonperformance
 Mistake

Lenawee County Board of Health v. Messerly (1982)
 Facts:








Unknown tot he Messerlys, a previous owner of the land had installed an illegal
underground septic tank
the Messerlys then sold the property, which included a 3-unit apartment
building to Pickles.
contract had an "as is" clause, which shifted the risk of unknown defects to
Pickles
6 days after the sale, sewage from the tank oozed up to the surface of the
property, and the county condemned the property until the sewage system
could conform to the sanitation code
 Issue: Is a hidden defect sufficient grounds for rescission of a contract on
the basis of mutual mistake?
 Holding: A rescission on the grounds of mutual mistake may be granted
when the mistake relates to a basic assumption of the parties upon which
the contract is made, and which materially affects the agreed performances
of the parties. However, where both parties are equally innocent and have
agreed to allocate the risk of loss, rescission will not be granted.
 there was an "as is" clause which shifted the risk to the Pickles
Effect of "as is" clauses
 most courts will enforce the clause
 however, some decisions have not treated the clauses so conclusively
Mistake in written Expression
 when the mutual mistake consists of the failure of the written contract to
state accurately the actual agreement of the parties, reformation of the
contract to express the parties' mutual intent it eh normal remedy
Equitable Relief
 the relief available for mutual mistake other than a mistake in the writing is
ordinarily rescission, along with any restitution that may appear appropriate
Wil-Fred's Inc. v. Metropolitan Sanitary District (1978)
 Facts:



Wil-Fred's submitted a closed bid and security deposit for a District project.
Wil-Fred's was the lowest bidder and was awarded the contract
however, a mistake by the subcontractor, Wil-Fred's could not perform the
contract at its bid price and requested rescission of the bid and return of its
deposit
 Issue: Can a contract be rescinded because of a unilateral mistake?
 Holding: Rescission of a contract for a unilateral mistake is granted if clear
and positive evidence shows that th mistake occurred notwithstanding the
exercise of reasonable care; that it is of such grave consequence that

enforcement of the contract would be unconscionable; and that the other
party can be restored to its original position
Effect of Negligence
 many courts have held that a unilateral mistake must be non-negligent
 however, there has been a relaxation of this requirement where the proof of
mistake is strong and the effect of enforcement would be devastating
 R 157 does not requirement negligence
 Impossibility, Impractability, and Frustration

Impossibility
 R 262, 263
 requires literal impossibility - the thing promised simply cannot be
performed at all
 objective impossibility, not subjective "I can't do it" impossibility
 Taylor v. Caldwell (1863)





Facts:
 plaintiff contracted to rent the defendant's concert hall
 defendant was unable to convey the hall because it burned down, through
no fault of his own
 plaintiff claimed that defendant breached and sued to recover damages for
advertising expenses
Issue: Are both parties excused from performance if that which was essential
to their performance ceased to exist?
Holding: In contracts in which performance depends on the continued
existence of a given person or thing, there is an implied condition that
impossibility of performance arising from the destruction of the person or thing
excuses performance
Frustration of Purpose
 the exchange called for by the contract has lost all value to the defendant,
because of a supervening change in extrinsic circumstances
 application of the principle in case law is sparse
Impracticability
 extreme change in circumstances makes the bargain sufficiently different
from what the parties had both contemplated at the time of contracting
 Mineral Park Land Co. v. Howard (1916)



Facts:
 Howard agreed to take all of its gravel requirements for a bridge building
contract from Mineral's land
 Howard removed all of the gravel that was above the water level but
refused to remove any gravel from below water level because to do so
would have been very expensive
Issue: May nonperformance be excused if the cost of performance is extremely
high?
Holding: Performance of a contract premised on the assumption that goods are
available may be excused for impracticability where the cost is so great that the
effect is to make the goods unavailable
 Karl Wendt Farm Equipment Co. v. International Harvester Co.

Facts:
 Int'l Harvester entered into a franchise agreement with Wendt




due to a dramatic downturn in the farm equipment market, International
Harvester sold its farm equipment division, and Wendt lost its franchise
 Wendt claimed breach of the franchise contract
 International Harvester claimed that it could not perform the contract
because of economic hardship
Issue: Do the doctrines of impracticability or frustration of purpose excuse
failure of performance because of economic loss or hardship?
Holding: Economic loss or hardship caused by a dramatic downturn in a
market does not excuse performance under the doctrines of impracticability of
frustration
Comparison of Impracticability and Frustration
 the elements of both are essentially the same
 they both require the disadvantaged party to show:
28. substantial reduction of the value of the contract;
29. because of the occurrence of an event, the nonoccurrence of which was a basic assumption
of the contract;
30. without the party's fault; and
31. the party seeking relief does not bear the risk of that occurrence of the event either under the
language of the contract or the surrounding circumstances




Increased Cost as a basis for relief
 most courts have refused to grant relief under either the impracticability or
frustration of purpose doctrines to a party ho seeks to avoid a contract that
has become more expensive or less profitable due to change in market
conditions
Natural Disaster or war as a basis for relief
 courts have been generally unwilling to grant relief
Death or incapacity of particular person necessary for performance
 there is a somewhat more likelihood of excuse
 If a particular person or thing is necessary for performance, the death or
incapacity of the person, or the destruction of the thing, will excuse
performance
Role of Foreseeability
 some courts have tended to require a showing that the event complained of
was at least unforeseen (perhaps even unforeseeable) at the time the
parties made their contract


any party who can foresee an adverse event has the burden of contracting for
protection against it
 Most courts, however, have held that relief under the doctrines of
impracticability or frustration of purpose should not be denied simply
because the event may have been foreseeable
Mel Frank Tool & Supply, Inc. v. Di-Chem Co. (1998)
 Facts:



Di-Chem leased a storage and distribution facility from Mel Frank Tool to use
for the storage of chemicals.
Di-Chem wanted to store and distribute some hazardous chemicals on the
leased premises but did not inform Mel Frank Tool of this
a new city ordinance prohibited storage of such chemicals within the city's
jurisdiction, which included the leased premises


Di-Chem moved out and Mel Frank sued for breach
 Issue: Is a tenant still bound by a lease if a new government regulation
makes the tenant's intended use of the premises illegal?
 Holding: The tenant's obligation to pay rent under a lease continues even if
a new regulation makes its planned use of the premises illegal, if there is
still some legal use for the premises consistent with the contract of lease.
Government Regulation as a basis for excuse
 although Di-Chem did not succeed, the courts have been much more willing
to grant relief when the event on which the claim of impracticability or
frustration rests is some form of supervening governmental action rather
than cases in which the event is war, natural disaster, or market change
 R 264 recognizes that compliance with foreign or domestic governmental
orders is a basis for excuse under the doctrine of impracticability
 however, courts will impose stringent limits on such relief:


requirement that frustration be quite substantial
courts may also deny relief if the event was foreseeable and the complaining
party did not guard against the occurrence or otherwise assumed the risk
32. Avoiding Enforcement
 Misrepresentation




Traditionally fraud was not recognized as a defense at law
however, courts of equity allowed a party who had been the victim of fraud to
avoid the contract by way of equitable "rescission"
 amounted to a judicial return of the parties to the status quo that existed
before the contract was formed
Under modern law, a victim of misrepresentation may have a choice between 2
significant avenues of redress:
 a tort action for damages, or
 a right to avoid the enforceability of the contract by way of rescission
Syester v. Banta (1965)
 Facts:






Defendants owned a dance studio
Over the course of a year, the defendants sold Syester, a widow in her late
60s, over 3,000 hours of dance lessons at a cost of over $29,000
defendants employed a wide variety of representations to persuade Syester to
purchase the lessons, including promises that the lessons would make her a
"professional dancer"
they also exploited Syester's affection for one of the young dance instructors to
effect the sales
Syester sued the defendants, but defendants employed similar tactics to
persuade Syester to dismiss the suit and sign 2 settlement agreements
Shortly thereafter, Syester sued again, alleging fraud and misrepresentation in
the defendant's sales and settlement negotiations
 Issue: when may a contract be voided for fraud and misrepresentation?
 Holding: A contract may be voided for fraud or misrepresentation when a
party is damaged because she relied on false representations of a material
matter intentionally and knowingly made by the other party. The plaintiff in
this case had fallen victim to a calculated course of intentional

misrepresentations on the part of the defendants
Fraudulent or material misrepresentation
 R 164(1)

a contract is voidable if a party's "manifestation of assent is induced by either a
fraudulent or a material misrepresentation by the other party upon which the
recipient is justified in relying"
 R 162(1)(b) and (c)


defines fraudulent to also include an assertion made as true but without
knowledge or confidence by the maker whether it is true or false, and thus
includes statements that are made recklessly or negligently
Misrepresentation based on false opinion or prediction
 R 168(1)

defines an opinion as the expression of a belief, without certainty, as to the
existence of a fact
 typically, opinions deal with matters such as quality or value of property
 R 169



 a statement of opinion may also be actionable if the one giving the opinion:
stands in a relationship of trust or confidence to the recipient ("fiduciary relationship")
is an expert on matters covered by the opinion, or
render the opinion to one who, because of age or other factors, is peculiarly susceptible to
misrepresentation
 Nondisclosure

Hill v. Jones (1986)
 Facts:


the Hills sued to rescind an agreement to purchase a house from the Joneses,
alleging that the Joneses had made misrepresentations concerning termite
damage to the house and had failed to disclose the existence of the damage
and the history of termite infestation
 Issue: Does a seller of residential property have a duty to disclose defects?
 Holding: Where the seller of a home knows of facts materially affecting the
value of the property, which are not readily observable and are not known to
the buyer, the seller is under a duty to disclose them to the buyer.
 Judgment: Remanded for the determination of whether the termite damage
was material and whether it was readily observable
Historical Perspective
 Laidlaw v. Organ (1817)


Facts:
 Organ was negotiating to buy tobacco from Laidlaw
 Organ heard news of the Treaty of Ghent, which ended the war of 1812 and
the British blockage of New Orleans, and would cause an increase in the
price of tobacco
 When Laidlaw asked Organ if he had heard any news that would raise the
price of the tobacco, Organ said that he did not
 Organ bought the tobacco, but Laidlaw retrieved it after he heard of the
Treaty and the resulting increase in eh price of tobacco
 Organ sued to recover the tobacco, and Laidlaw argued that Organ
committed fraud by not disclosing news of th peace treaty.
Issue: Does a vendee have a duty to disclose information exclusively in his


possession that is relevant to the price of a commodity?
Holding: A vendee has no duty to disclose information exclusively in his
possession that is relevant to the price of a commodity.
Analysis:
 It would be difficult to fashion a rule that compels disclosure when the
methods of obtaining information are equally accessible to both parties
 Modern Approach


R 161
 in some situations a failure to disclose a material fact may justify rescission
of a contract
Factors: (Professor Page Keeton)
 the difference in the degree of intelligence of the parties
 the relation that the parties bear to each other
 the manner in which the information is acquired
 the nature of the fact not disclosed






whether it's discoverable or not
the general class to which the person who is concealing the information
belongs
more likely for a seller to have to disclose than a buyer
the nature of the contract itself
the importance of the fact not disclosed
conduct of the person not disclosing something to prevent discovery
 Real estate disclosure statutes and common law actions


majority of states require a seller's disclosure form
statutes may impose a standard of ordinary care on the seller
 Tort liability for nondisclosure


Restate (Second) of Torts 551
 nondisclosure will give rise to liability if the party is "under a duty to the
other to exercise reasonable care to disclose the matter in question"
Park 100 Investors, Inc. v. Kartes (1995)
 Facts:


business entity leased space from Park 100
Park 100 presented a document to Kartes, owner of the business, which was in
fact a personal guaranty but which was called a "lease agreement", and Kartes
signed
 Issue: May a promisee enforce a contract that is induced by fraud?
 Holding: A creditor cannot enforce a guaranty against the guarantor who
was induced to enter the contract by a fraudulent misrepresentation
 Duress

Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co. (1978)
 Facts:





Totem agreed to transport materials from Texas to Alaska for Alyeska Pipeline
Totem encountered may unforeseen difficulties that delayed delivery and
increased transportation costs
after Alyeska agreed to pay the increased costs, Totem took out short-term
loans to finance its performance
However, Alyeska ordered Totem to dock at Long Beach, CA, off-loaded the
materials, and terminated the contract without explanation
Totem pressed Alyeska to pay for the transport from Texas to California, but


Alyeska resisted
In desperate need of cash to pay off its short-term loans, Totem agreed to
release Alyeska from all claims by Totem in exchange for 1/3 of the amount
due
After receiving the settlement payment and paying its immediate debts, Totem
sued to have the settlement agreement rescinded on grounds of economic
duress
 Issue: When may a party to a contract rescind on grounds of economic
duress?
 Holding: A party may rescind a contract on grounds of economic duress if
the party seeking rescission involuntarily agreed to the transaction due to
the wrongful acts and threats of the other party and circumstances were
such that the party had no reasonable alternative but to agree to the terms
or face serious financial hardship
 Public Policy