(5) Remedies and Damages Flashcards
Remedies Overview:
• R2K § 344: purpose of remedies
o Expectation: to put the injured party in the position as if the contract were performed
o Reliance: to put the injured party in the position as if the contract were never formed
o Restitution: to restore to the injured party any benefit he conferred on the breaching party
• UCC § 1-305: remedies to be liberally construed
o The remedies provided in the UCC are to be “liberally administered” to put the injured party “in as good a position as if the other party had fully performed” (expectation interest), but consequential, special, or penal damages may not be awarded “except as specifically provided in the [UCC] or by other rule of law.”
Expectation Damages Formulas:
• Professor Zinnecker’s plug number formula:
o (1) Where would the injured party would be if the contract were performed (benefit/profit(-)costs)?
o (2) Where is the injured party now (benefit/profits(-)costs)?
o What is the plug number to get you from (1) to (2)?
• Textbook formula (p.792):
o Direct loss (difference in value of promise v. received) plus extra loss (additional costs because of the
breach and by mitigating; i.e., incidental and consequentials)
o Minus costs avoided (expenses would have paid but did not have to pay because of the breach) and losses avoided (expenses did not have to pay because of mitigation or other circumstances)
• See also R2K § 347.
Damages in the UCC:
• Seller’s remedies when buyer breaches (list of seller’s options)
o §2-706-Mitigation by reselling the goods (substitute transaction) in good faith that’s commercially reasonable (i.e., the difference in price must be commercially reasonable). Seller can recover the difference between the resale price and the K price, together with any incidental damages, but minus expenses saved in consequence of the buyer’s breach.
o §2-708-Hypo (market price) at time and place of tender. You can get here voluntarily or the court can force it if you didn’t sell in good faith under §2-706. This deals with non-acceptance or repudiation by the buyer.
o §2-709-Specific performance
o §2-710-Incidental damages—seller can get them.
o §2-704(2)-Unfinished goods
NOTE: The seller CANNOT recover consequential damages under the UCC
• Buyer’s Remedies when Seller Breaches
o §2-711 (1)-Buyers remedies in general. In addition to recovering the price that has already been paid, the buyer can “cover” (712) or recover under a hypo market price (713).
o §2-712-“Cover” sale. Must be in good faith and without unreasonable delay and must be a reasonable purchase to substitute the OG K.
o §2-713-Hypo (market price) at time when the buyer learned of the breach. Can get here by choice or forced if “cover” in 712 was not done in good faith. Majority of courts take the market value after a commercially reasonable time after the buyer learned of the repudiation minus the K price (assuming the market price went up). These are the direct damages. Then, the buyer can also recover indirect damages, which include incidental and consequential damages.
o §2-716-Specific performance
o §2-715-Defining the buyer’s incidental and consequential damages.
UCC § 2-713:
• Buyer’s remedy for Seller’s nondelivery or repudiation
o If the Seller simply does not deliver, the market price is determined at the time and place of scheduled performance (because the time when Buyer learned of the breach was the same moment when the breach occurred).
• If the Seller repudiates before the time of breach, there are several interpretations of when Buyer “learned” of the breach:
o (1) When Buyer learned of the repudiation,
o (2) A commercially reasonable time after Buyer learned of the breach (majority), or
o (3) When performance was due.
Diminution in Value v. Cost of Completion:
• R2K § 348(2)
o If you don’t have substantial performance (material breach), court should award cost to complete. If there IS substantial performance, then you can consider the diminution.
Rule from Jacob & YoungsàWhere substantial performance has been rendered, the remedy is the cost of completion or correction, unless that cost is “grossly unfairly out of proportion to the good to be attained.” When that is true, the measure is the difference in value (diminution–value if properly done minus value as is).
• This is the general rule (§ 348) but it’s flexible. Π can argue that even though it’s not proportional, we should get the cost to complete b/c it was very special to us.
Lost Profits and Lost Volume:
• UCC § 2-708(2), Seller’s remedy:
o If the remedy under § 2-708 (1) (market price difference) is inadequate to put the Seller in as good a position as if the contract were performed, then damages are measured by the profit (including reasonable overhead, like worker’s bonus for making) Seller would have made from full performance, with incidental damages (§ 2-710).
o See Nerion pp.815-16; Prof. Zinnecker’s bicycle hypo in class.
• Generally courts ignore/exclude fixed (overhead) expenses in calculating lost profit. Lost profits-generally consequentials.
Incidental Damages:
• “Extra costs incurred by the aggrieved party in dealing with the breach or in mitigating losses
from the breach ….” See p. 907.
o Examples: handling defective delivery, spending time or money arranging for purchase of substitute goods or negotiating a replacement contract, spending money to mitigate your direct damages
• See UCC § 2-710 (seller’s incidental damages)
o “Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach.”
• See UCC § 2-715(1) (buyer’s incidental damages)
o “Incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.”
Consequential Damages:
• “’Downstream’ losses caused to the non-breaching party by the breach ….” See p. 907.
o Examples: lost profits, lost customers, lost business volume
• See UCC § 2-715(2) (buyer’s consequential damages)
o “Consequential damages resulting from the seller’s breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty.”
• Note: In the UCC, sellers do not receive consequential damages.
Doctrines Necessary to Receive Damages:
- Causation
- Certainty
- Foreseeability
- Mitigation
Certainty:
• R2K § 352
o “Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.” (emphasis added)àA plaintiff must prove his damages claim with reasonable certainty by providing sufficient facts and circumstances to allow the fact finder to make an intelligent and probable estimate of the damages sustained
o Note: Mathematical certainty is not required.
• UCC § 1-305 cmt. 1 (not included in the softback book)
o Mathematical certainty is not required but damages are recoverable as proven by the facts.
Foreseeability:
• R2K § 351:
o The damages need to be foreseeable by the breaching party at the time of contract formation.
o The damages are foreseeable as a “probable result of a breach” because they follow:
“in the ordinary course of events” (natural consequence), or
“as a result of special circumstances beyond the ordinary course of events, that the breaching party had reason to know” (special circumstances).
o See Hadley v. Baxendale (p. 821)àMust arise naturally from the breach OR a special circumstance that was communicated at the time the K was made.
• UCC § 2-715(2)(a):
o “Consequential damages resulting from the seller’s breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise ….”
• Note: The breach itself does not have to be foreseeable—just the damages.
Mitigation:
• R2K § 350
o “[D]amages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.
o “The injured party is not precluded from recovery … to the extent that he has made reasonable but unsuccessful efforts to avoid loss.”
• UCC § 2-704(2) [Completion or Salvage Value calculations!]
o Applies in the scenario when the goods are unfinished and buyer breaches.
o “[A]n aggrieved seller may in the exercise of reasonable commercial judgment and for the purpose of avoiding loss and of effective realization either complete the manufacture and wholly identify the goods to the contract or cease manufacture and resell for scrap value or proceed in any other reasonable manner.”
• Note: Although the injured party has a duty to mitigate his damages, he cannot pile on the damages by taking action that accrues loss rather than attempts to avoid it. See Rockingham case, p. 833 (the bridge to nowhere).
Mitigation and Employment Contracts:
- See Parker v. Twentieth Century Fox (p. 837)
- An employee whose employment contract has been prematurely terminated must use reasonable efforts to find comparable replacement work.
- If the injured party finds new work, whether comparable or not, any amounts earned from the new employment are deducted from the injured party’s damages.
Reliance Damages:
• “The amount needed to put the non-breaching party in the position it would have been in had the contract not been made.” See p. 907 and R2K § 344 (b) (purpose of remedies).
• R2K § 349
o “As an alternative to the measure of [expectation] damages …, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.”
Reliance Damages and the Losing Contract Hypothetical:
• Fact pattern tip-off: A nonbreaching party to a losing contract has partially performed and seeks reliance damages, and the breaching party seeks to have the loss that would have been incurred if the contract were fully performed deducted from that amount. (See R2K § 349)
• Formula:
o Literal version-Take reliance damages minus what you would have lost if K was fully performed.
o Pro rata version-Take reliance damages(what they’ve spent so far in performing the K), over the total cost of expenses to perform the K. Then take that % and multiply it by the loss (the loss if the K was totally performed). Then take that number and subtract it from the reliance damages (What they spent so far in performing)
