Comparative Law and
Economics of Contracts
Cases slides Topic 5: Damages
Fernando Gomez
Universitat Pompeu Fabra, Barcelona
NYU School of Law
NYU School of Law, Fall term
Hawkins v. McGee
•
Facts
– The Plainfiff, Hawkins had a bad scar resulting from burns
he sustained from contact with an electrical wire 9 years
before
– Defendant solicits Plaintiff’s father for the opportunity to
perform plastic surgery on the scarred hand
– Defendant says to Plaintiff and father
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
Boy will be in the hospital 3 or 4 days
I will guarantee to make the hand a 100% perfect hand
– Plaintiff undergoes surgery, consisting of removal of scar
tissue from palm of hand and grafting skin from his chest
to his hand
– Surgery was entirely unsuccessful and Hawkins is left with
a hairy hand, that requires additional surgery to restore
– Plaintiff seeks damages for breach of contract
Hawkins v. McGee
•
Issues
– Existence of warranties for performance in medical
services
– Measure of damages in breach of contract
•
Outcome:
– Jury found for plaintiff, but defendant excepted that
damages award was against the evidence and excessive
– Judge asked plaintiff to remit everything beyond $500
– Plaintiff refuses and Judge sets aside verdict
– Plaintiff appeals and Court accepts and orders new trial
Hawkins v. McGee
•
Grounds:
– The promise by the doctor was a true warranty of an
outcome under the contract
– Breach should result in damages
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Measured as the difference between the value of hand as
promised, and the present condition, plus
Incidental damages
No damages for suffering since they would have been incurred
anyway
No separate consideration of change of condition in hand
Hawkins v. McGee
•
Analysis:
– Obligations de moyens vs. obligations de resultat: Is it a
general distinction that makes sense?
– Can this be made consistent with the complete contract
framework?
– Expectation damages as the general measure of damages:
correspondence with positives Vertragsinteresse. Is it the
same as the sum of damnum emergens and lucrum cessans
in the tradition of the Latin Civil Codes?
– Determination of expectation damages
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
Buyer: ED= Vb-Price
Seller: ED= Price-MgCost
– What are the conditions for such determination to be
reasonably easy to be made accurately by courts?
Hawkins v. McGee
•
Analysis:
– Are there ways to approximate such determination?

Substitute transaction approach:
– When goods or services admit substitute or cover
transactions to avoid the negative consequences of the
other party’s breach of contract, the price of these
transactions is relevant, and proof of damages is eased:
• If the seller breaches the contract and the buyer has bought
a good, generally fungible or generic, but not necessarily, to
a substitutive contracting party: Expectation damages =
Psub – Pc
• If the buyer breaches the contract and the seller celebrates a
cover sale: Expectation damages = Pc – Psub
Hawkins v. McGee
•
Analysis:
– Are there ways to approximate such determination?

Market damages approach or current price rule:
– For fungible, generic goods with a market price,
abstract comparison of market price and contract
price:
• buyer will receive expectation damages
consisting of the difference between the market
price when the breach of contract took place
(Pm) and the contract price (Pc)→ ED = Pm-Pc
• seller will receive the opposite difference → ED
= Pc-Pm
Hawkins v. McGee
•
Analysis:
– Reliance losses: what elements should be included in their
calculation?
– Are there conditions under which ED=RD
– When are reliance losses to be chosen as measure of
damages for contract breach?
– The problems resulting from monetary nature of the
damages remedy: insolvency of defendant
Hawkins v. McGee
•
•
Analysis: Most legal systems refer to ED as general
measures of damages
Article 160 CESL: General measure of damages
– The general measure of damages for loss caused by nonperformance of an obligation is such sum as will put the creditor
into the position in which the creditor would have been if the
obligation had been duly performed, or, where that is not possible,
as nearly as possible into that position. Such damages cover loss
which the creditor has suffered and gain of which the creditor has
been deprived
•
Article 74 CISG
– Damages for breach of contract by one party consist of a sum
equal to the loss, including loss of profit, suffered by the other
party as a consequence of the breach
•
•
Hawkins v. McGee
Analysis: Most legal systems refer to ED as general
measures of damages
§ 347 Restatement: Measure of Damages in General
– Subject to the limitations stated in §§ 350-53, the injured party has a right
to damages based on his expectation interest as measured by
 (a) the loss in the value to him of the other party's performance caused
by its failure or deficiency, plus
 (b) any other loss, including incidental or consequential loss, caused
by the breach, less
 (c) any cost or other loss that he has avoided by not having to perform
•
§ 249 BGB: Nature and extent of damages
– (1)A person who is liable in damages must restore the position that would
exist if the circumstance obliging him to pay damages had not occurred.
•
§ 252 BGB : Lost profits
– The damage to be compensated for also comprises the lost profits. Those
profits are considered lost that in the normal course of events or in the
special circumstances, particularly due to the measures and precautions
taken, could probably be expected
Hawkins v. McGee
•
•
Analysis: substitute transaction and market damages
are also generally foreseen
Article 164 CESL: Substitute transaction
– A creditor who has terminated a contract in whole or in part and has made
a substitute transaction within a reasonable time and in a reasonable
manner may, in so far as it is entitled to damages, recover the difference
between the value of what would have been payable under the terminated
contract and the value of what is payable under the substitute transaction,
as well as damages for any further loss.
•
Article 165 CESL: Current price
– Where the creditor has terminated the contract and has not made a
substitute transaction but there is a current price for the performance, the
creditor may, in so far as entitled to damages, recover the difference
between the contract price and the price current at the time of termination
as well as damages for any further loss.
Hawkins v. McGee
•
Analysis:
Hawkins v. McGee
•
Analysis:
Hawkins v. McGee
•
Analysis:
Hawkins v. McGee
•
Analysis:
Counterfeit bills and emotional distress case
•
Facts
– Plaintiff buys US dollars (600, in $100 bills) at a branch of
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Banco de Santander
Plaintiff travels to US to meet his girlfriend in Cincinnatti
(Ohio) and deposited dollars in a local bank
Some of the deposited bills are counterfeit, and Plaintiff is
arrested, booked and interrogated by agents of the US
Treasury Department
Apparently this causes a breakup with his American
girlfriend
Plaintiff sues the banks for € 900,000 in damages for pain
and suffering
Counterfeit bills and emotional distress case
•
Issues:
– Damages for pain and suffering or non-economic harm in
contract
– What elements of non-economic losses
compensable
– How to determine the amount of damages
•
should
be
Outcome:
– First instance Court awards € 30,000
– Appeals Court reduces award to € 3,900
– Supreme Court grants plaintiff’s appeal and includes full
damages for pain and suffering in the amount of €
360,000 €
Counterfeit bills and emotional distress case
•
Grounds:
– There was clear negligent non-performance on the part of
the bank in providing false bills
– Damages for pain and suffering should and are
compensable in contract
– Excluding all harm, except that of “trouble” incurred by
plaintiff unduly restricts the scope of liability in contract
– Many fundamental rights and interests of the plaintiff had
been negatively affected by bank’s breach
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Personal freedom
Dignity
Legal security
Free development of personality
– Damages for pain and suffering have to be determined
discretionally by courts
Counterfeit bills and emotional distress case
•
Analysis
– Are emotional losses true social losses?
– What is their distinctive character with respect to losses in
goods that can be traded for money?
– Is money able to compensate such losses?
– Is there a conflict between compensating emotional and
other non-economic losses in contract and the
foreseeability rule?
– Is there a way to reconcile compensation and efficiency in
this matter? Should one or the other goal be given priority?
Counterfeit bills and emotional distress case
•
Analysis
Counterfeit bills and emotional distress case
•
Analysis
Counterfeit bills and emotional distress case
•
Analysis
Simone Leitner v. TUI
•
Facts:
– The Plaintiff (Simone Leitner) goes on holiday with her
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parents to a resort in Turkey where a package holiday had
been bought from TUI, the Defendant, for 2 weeks
In the resort, after a week, Plaintiff suffers salmonella
poisoning
For the rest of the holiday she was sick with high fever and
had to be taken care of by her parents
Plaintiff’s parents send a letter of complaint to defendant,
with no response
Plaintiff sues for damages in the amount of €2,000
First instance Court awards €1,000 for the physical pain
and suffering, but reject any compensation for loss of
enjoyment of the holiday
Appeals Court refers the case to ECJ for preliminary ruling
Simone Leitner v. TUI
•
•
•
Issues:
– Compensation for loss of enjoyment as non-economic loss
– Common notion of compensable loss through European
Directives as a condition of non-distorted competition
Outcome
– ECJ finds that art. 5 of Directive 90/314 includes
compensation for non-economic loss resulting from breach
of contract in a package holiday contract
Grounds
– National differences in compensation concepts concerning
non-economic losses in package holidays distort
competition, given that such losses occur frequently in this
setting
– Protection against such losses is important for consumers
– Wording of Directive 90/314 does not exclude noneconomic losses
Simone Leitner v. TUI
•
Analysis
– Should loss of enjoyment be compensable harm in
contract?
– Should it make a difference if such losses are likely or
unlikely to arise in a certain sector or type of contract?
– Should there be a possibility of contract clauses waiving or
limiting these kinds of damages?
– Do consumers desire to be protected against such losses?
Are there alternative ways to provide protection other than
through contract damages?
Hadley v. Baxendale
•
Facts
– A shaft in Plaintiff’s (Hadley’ mill broke down, which made the mill
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incapable of operating, and thus brought production to a halt
A plaintiff’s agent hired the Defendant (Baxendale) to ship the
broken mill shaft to an engineer in Greenwich for producing a
duplicate
Plaintiff’s agent instructed defendant that mill was stopped and
immediate shipment was required, and inquired about time of
transportation
Defendant informed that if brought before noon, it would be
delivered by next day
Price was agreed and shaft placed in hands of defendant
The shipment was negligently stopped in Greenwich for several
days
Mill’s operations were closed until the duplicate returned
Plaintiff sues for lost profits and obtains £25 from the jury
Defendant appeals
Hadley v. Baxendale
•
Issues:
– Scope of liability in damages and foreseeability rule
– Damages determination as corresponding to what was in
the contemplation of the parties at the time of contracting
•
•
Outcome:
– Court of Exchequer finds for defendant and orders a new
trial excluding the loss of profits
Grounds
– Damages should be restricted to the consequences of
breach that naturally derive from it, or that may
reasonably be supposed to have been in the contemplation
of the parties
– Defendants, although knew of what was shipped, and the
purpose of shipment (making a new shaft) did not know,
and were not informed about the fact that delay in
delivering the model would stop the mill and cause loss of
profit
Hadley v. Baxendale
•
Analysis:
– What is the purpose of limiting damages to those that were
foreseeable at the time of contracting, or that were
foreseen at that time?
– Should
there
circumstances”
be
exceptions
based
on
“special
– Should
communication of “abnormal consequences”
arising from breach suffice? Or should there be
“contemplation by both parties”?
– What should the relevant timing of communication be?
– Should we take the rule that most contracting parties tend
to use in practice, or the one that produces the revelation
of information in the more cost-effective way?
Hadley v. Baxendale
•
Analysis:
– Should the cost of revealing the information about
unforeseeable loss be considered a factor?
– Should the relative frequency of a loss be used to
determine whether it is foreseeable?
– Should the statu quo bias as a behavioral bias be
considered?
– Should the Hadley rule be applied to Tort cases as well?
– Should we extend the Hadley rule to all indirect,
consequential damages?
– Should the nature of breach (negligent vs. wilful) play a
role?
Hadley v. Baxendale
•
Analysis: Foreseeability rule is widespread
– Article 161 CELS: Foreseeability of loss

The debtor is liable only for loss which the debtor foresaw or could be
expected to have foreseen at the time when the contract was concluded
as a result of the non-performance
– Article 74 CISG

Damages for breach of contract by one party consist of a sum equal to
the loss, including loss of profit, suffered by the other party as a
consequence of the breach. Such damages may not exceed the loss
which the party in breach foresaw or ought to have foreseen at the time
of the conclusion of the contract, in the light of the facts and matters
of which he then knew or ought to have known, as a possible
consequence of the breach of contract
Hadley v. Baxendale
•
Analysis: Foreseeability rule is widespread
– § 351 Restatement (Second) on Contracts. Unforeseeability
and Related Limitations on Damages
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(1) 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.
(2) Loss may be foreseeable as a probable result of a breach because it
follows from the breach
– (a) in the ordinary course of events, or
– b) as a result of special circumstances, beyond the ordinary
course of events, that the party in breach had reason to know.
(3) 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.
Hadley v. Baxendale
•
Analysis: Foreseeability rule is widespread
•
Art. 1150 French Civil Code
– A debtor is liable only for damages which were foreseen or which could have
been foreseen at the time of the contract, where it is not through his own
intentional breach that the obligation is not fulfilled
•
Art. 1107 Spanish Civil Code
– The damages for which the debtor in good faith shall be liable are those
which are foreseen or which could have been foreseen at the time of
contracting the obligation and which are a necessary consequence of his
failure to perform.
– In the event of wilful misconduct the debtor shall be liable for all damages
which are known to have arisen from the failure to perform the obligation.
Hadley v. Baxendale
•
•
Analysis: Notable exception is Germany, where
foreseeability rule is replaced by a duty to provide notice
–which may be discharged post-contract- of increased
harm
Section 254 BGB: Contributory negligence
–
(1)Where fault on the part of the injured person contributes to the occurrence of the
damage, liability in damages as well as the extent of compensation to be paid depend on
the circumstances, in particular to what extent the damage is caused mainly by one or
the other party.
–
(2)This also applies if the fault of the injured person is limited to failing to draw the
attention of the obligor to the danger of unusually extensive damage, where the obligor
neither was nor ought to have been aware of the danger, or to failing to avert or reduce
the damage. The provision of section 278 applies with the necessary modifications.
German plastic windows case
•
Facts:
– Defendant hires Plaintiff to manufacture and install plastic
windows in his house, for a total value of € 10,500
– In the plaintiff’s standard terms, it is foreseen that buyers
would be under the obligation to pay 50% of contract price
if they cancel the contract before seller manufactures the
goods, as compensation for loss of profits and costs
– Defendant untimely cancels the contract, apparently after
some wrangling about delivery dates, and on which seller
was not very precise
– Plaintiff sues for € 1,500
•
Issues:
– Distinction between pre-agreed estimate of damages
(liquidated damages) and a private sanction for breach in
the form of aggravated damages (contractual penalty)
– Contractual penalties in standard terms
– Factors to reduce the amount of a contractual penalty
German plastic windows case
•
Outcome
– First Instance Court finds for plaintiff and orders payment
of € 1,500
– Appeals Court reduces amount to € 1,000
•
Grounds:
– The clause in standard terms was a contractual penalty
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
As anticipated estimate of harm from breach it was
unreasonably high, since a profit of 50% cannot be expected
in normal circumstances
There was no effort in anticipating the true value of harm
– Contractual penalties are allowed, but may be reduced, in
this case due to the behavior of the plaintiff regarding
delivery dates
German plastic windows case
•
Analysis
– What may be the purposes of providing for a damages
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measure in the contract?
Should the Law distinguish between the desire to
determine damages ex ante and to introduce a sanction for
non-performance?
What reasons may be for scrutiny of reasonableness of
amount in agreed damages clause?
Should clauses in standard terms be subject to increased
scrutiny?
What is the benchmark to assess if amount of clause is
proportionate or disproportionate? Should we adopt an ex
ante or an ex post perspective?
If a clause is found to be disproportionately high, what
factors may be taken into account to determine the proper
amount?
Should the clause be increased if found disproportionately
low?
Should contractual waivers of seeking reduction of
liquidated damages clauses be enforceable?
German plastic windows case
•
Analysis
– Section 339 BGB: Payability of contractual penalty

Where the obligor promises the obligee, in the event that he
fails to perform his obligation or fails to do so properly,
payment of an amount of money as a penalty, the penalty is
payable if he is in default. If the performance owed consists in
forbearance, the penalty is payable on breach.
– Section 340 BGB: Promise to pay a penalty for
nonperformance


(1)If the obligor has promised the penalty in the event that he
fails to perform his obligation, the obligee may demand the
penalty that is payable in lieu of fulfilment. If the obligee
declares to the obligor that he is demanding the penalty, the
claim to performance is excluded.
(2)If the obligee is entitled to a claim to damages for
nonperformance, he may demand the penalty payable as the
minimum amount of the damage. Assertion of additional
damage is not excluded
German plastic windows case
•
Analysis
– Section 343 BGB: Reduction of the penalty

(1)If a payable penalty is disproportionately high, it may on the
application of the obligor be reduced to a reasonable amount by
judicial decision. In judging the appropriateness, every legitimate
interest of the obligee, not merely his financial interest, must be taken
into account. Once the penalty is paid, reduction is excluded.
– Section 309 BGB: Prohibited clauses without the possibility
of evaluation

5. (Lump-sum claims for damages) the agreement of a lump-sum
claim by the user for damages or for compensation of a decrease in
value if
– a) the lump sum, in the cases covered, exceeds the damage
expected under normal circumstances or the customarily
occurring decrease in value, or
– b) the other party to the contract is not expressly permitted to
show that damage or decrease in value has either not occurred or
is substantially less than the lump sum
Judge Richard Posner
•
Lake River Corporation v. Carborundum
Company
Facts
– Defendant, Carborundum, manufactures Ferro
Carbo, an abrasive powder used in steel production
– Defendant contracts with Plaintiff, Lake River, the
latter agreeing to provide distribution services
through its warehouses in Illinois
– Plaintiff would receive goods in bulk from defendant,
and ship it to defendant’s customers
– Defendant insists that plaintiff installs a new
bagging system to handle goods, at a cost of $89,000
– Plaintiff then requests a minimum guarantee clause
coupled with a damages provision:

If the 22,500 guaranteed tons are not met, plaintiff
would invoice defendant for the difference between
actual amount and guaranteed amount, at the then
prevailing rates
– Defendant only shipped 12,000 of the 22,500
guaranteed tons of the Ferro Carbo when the
contract expired
•
Lake River Corporation v. Carborundum
Company
Facts:
– According to the disputed clause, defendant owed
$241,000 to plaintiff
– Lake retained 500 tons of bagged
product, with
market value of $269,000, and offered defendant to
sell and leave in escrow
– Defendant refused, and in order to serve its
customers had to incur extra costs of $31,000
– Plaintiff sues for $241,000 as liquidated damages
– Defendant countersues for $269,000 + $31,000
– Both claims are granted, and both parties appeal
Lake River Corporation v. Carborundum
Company
•
Issues:
– Valid liquidated damages clause v. unlawful penalty
– How to determine whether the amount of the stipulated
amount is a reasonable estimate of ensuing harm from
breach
– Liens as self-help remedy against breach
•
Outcome:
– The damages clause is considered a penalty clause and
thus unenforceable
– Case is remanded for determination of damages to plaintiff
without taking into account the clause, and for
recalculating the damages to defendant
•
Lake River Corporation v. Carborundum
Company
Grounds:
– There was no valid lien on the bagged goods kept by
plaintiff, since all services rendered by plaintiff had been
paid up
– Although the penalty doctrine under Common Law may be
undesirable, it remains good Law
– The clause in the contract was a penalty clause and not a
reasonable estimate of damages:
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Clause ensures plaintiff in all possible scenarios of breach by
defendant more than actual loss
Clause specifies a single amount for all possible cases of
breach, of different gravity and impact
Does not take into account savings in variable costs to
plaintiff due to defendant’s breach
The windfall for plaintiff was very large: range of 400% in best
scenario for plaintiff, and 130% in a worse one
Mitigation of damages was irrelevant here
– Damages to defendant had been overstated by counting
the extra cost to defendant of shipping goods from East to
serve the customers that could have been served with the
goods in possession of plaintiff
Lake River Corporation v. Carborundum
Company
•
Analysis
– Possible objections not to have a penalty doctrine and to
allow damage clauses in excess of estimated damages from
breach:
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Signalling function of penalties
Discourages efficient breach
Parties are better placed than Courts to assess benefits and
costs of determining a given amount
Systematic underestimation of damages by Courts
Paternalism towards contract parties, especially sophisticated
ones
•
Lake River Corporation v. Carborundum
Company
Analysis
– Economic arguments that may lead to reduce liquidated
damages clauses:

Incorrect prediction about future outcomes→ leads to analysis
in terms of relevant mistake
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Liquidated damages as barriers to entry:
– An excessive amount is beneficial for the parties to the detriment
of a third party who may bid for the services of breaching party
– Excessive damages clauses reduce efficient entry and excessively
protect incumbents
– Evidence concerning rescission clauses in professional soccer
– The goal is not to protect the breaching party, but the thirdparties

Excessive signalling through large liquidated damages
provisions: a pooling equilibrium may be more desirable than
a separating one when the distortion caused by the penalty on
the “good type” is large enough
•
Lake River Corporation v. Carborundum
Company
Analysis
– Is the difficulty of ex-post determination of harm a factor
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in deciding whether a given amount is a liquidated
damages clause or a penalty?
Should the failure of distinguishing different scenarios of
breach of different gravity be a factor weighing in favor of
non-enforceability?
Is it easy to determine what may be considered a fixed and
what may be thought a variable cost in many settings?
Penalty clauses v. admissible Take-Pay clauses
Should one consider lost volume sales in assessing
damages clauses?
What level of divergence between agreed amount and
average estimate should be tolerable?
Which party should bear burden of proof?
•
Lake River Corporation v. Carborundum
Company
Analysis
– CESL and CISG do not have a rule on prohibiting or
reducing excessive damages clauses in contracts, the first
only in the setting of unfair terms

Art. 85 (e): require a consumer who fails to perform
obligations under the contract to pay a disproportionately
high amount by way of damages or a stipulated payment for
nonperformance is presumed to be unfair
– Other European Contract Law documents do contain such
rules:
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Article 9:509 PECL : Agreed Payment for Non-performance
(1) Where the contract provides that a party who fails to
perform is to pay a specified sum to the aggrieved party for
such non-performance, the aggrieved party shall be awarded
that sum irrespective of its actual loss.
(2) However, despite any agreement to the contrary the
specified sum may be reduced to a reasonable amount where
it is grossly excessive in relation to the loss resulting from the
non-performance and the other circumstances.
Lake River Corporation v. Carborundum
Company
• Analysis
– Other European Contract Law documents do contain such
rules:

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III. – 3:712 DCFR: Stipulated payment for non-performance
(1) Where the terms regulating an obligation provide that a
debtor who fails to perform the obligation is to pay a specified
sum to the creditor for such non-performance, the creditor is
entitled to that sum irrespective of the actual loss.
(2) However, despite any provision to the contrary, the sum so
specified in a contract or other juridical act may be reduced to
a reasonable amount where it is grossly excessive in relation
to the loss resulting from the non-performance and the other
circumstances.
– Common Law view is even more negative:
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
§ 356 Restatement: Liquidated Damages and Penalties
(1) Damages for breach by either party may be liquidated in
the agreement but only at an amount that is reasonable in the
light of the anticipated or actual loss caused by the breach
and the difficulties of proof of loss. A term fixing unreasonably
large liquidated damages is unenforceable on grounds of
public policy as a penalty.
Lake River Corporation v. Carborundum
Company
•
Analysis
– Some legal systems explicitly allow Courts, on their own
motion, to reduce or to increase damages clauses if
disproportionately high or disproportionately low
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
Art. 1152 French Civil Code
Where an agreement provides that he who fails to perform it
will pay a certain sum as damages, the other party may not be
awarded a greater or lesser sum. Nevertheless, the judge may
even of his own motion moderate or increase the agreed
penalty, where it is obviously excessive or ridiculously low.
Any stipulation to the contrary shall be deemed unwritten.
Wasserman’s v. Township of Middleton
•
Facts:
– Plaintiff, Wasserman’s, was leasing a property owned by
Defendant, the town of Middletown
– After lease expires, defendant solicits bids to lease the
property again, and current lessee is solo bidder
– After negotiations, the agree on a lease contract containing
a protective clause against early cancellation of lease
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Lessee would get pro-rate compensation for improvements on
the property
Lessee would get damages of 25% of the lessee’s average gross
receipts in one year
– Further sub-leases and transfers of business
– Defendant cancels lease 31 December 1988, and then sells
the property at auction for $610,000, 13 times the value of
property when lease started
– Plaintiff and co-plaintiffs sue under contract clause
Wasserman’s v. Township of Middleton
•
Facts:
– Trial Court grants damages under the clause of $346,058,
of which, $55,748 corresponds to improvements, and
$290,310 corresponds to gross receipts compensation
– Appeals Court affirms
•
Issues:
– Distinction between liquidated damages and penalties, and
especially
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Moment (contracting or breach) at which damages should
appear to be reasonably approximated by the amount of the
clause
Whether gross-receipt clauses are generally reasonable
Outcome:
– NJ Supreme Court remands to the trial Court to
reconsider damages in light of different factors
Wasserman’s v. Township of Middleton
•
Grounds
– Both times (contracting and breach) should be used to
assess reasonableness
– Gross receipts are generally not a good estimate of losses
due to early cancellation of breach
– Several factors should be used to determine
reasonableness:
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Timing of cancellation
Alternative time dimensions for gross receipts
Mitigation of damages
Market rent of replacement space
Wasserman’s v. Township of Middleton
•
Analysis
– Should a prospective or a retrospective approach be used
to compare clause with harm


Forecasted
Actual
– Is there a bias for underestimation if high penalty clauses
are struck down, but low ones are used to replace actual
harm?
– Should the use of easy to apply proxies as to loss be
discouraged by the Law?
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
Gross receipts or gross profit
Portions of contract price