Contracts Flashcards
Summary
Damages for breach of contract are typically based on the aggrieved party’s expectation interest —how much worse off the aggrieved party is than if the breaching party had fulfilled its obligation under the contract. In this case, the owner would have had to pay the contractor $100,000 to install the seats but, because the contractor breached its contract, had to pay the substitute contractor $150,000 for that task. Thus, the owner is $50,000 worse off than it would
have been if the contractor had satisfied its obligation. As a result, the owner’s “direct damages” are $50,000.
Whether the owner is also entitled to consequential damages arising from the cancellation of the film festival depends on whether the original contractor had reason to foresee the cancellation as
a probable result of its breach. Here, the original contractor did not know about the scheduled film festival, and there is no indication in the facts that the original contractor had reason to know of it. Thus, it is unlikely that the owner will be able to recover damages arising from the cancellation of the film festival. Even if the original contractor had reason to know of the owner’s plans for the film festival, the owner might not be entitled to recover its $35,000 in lost profits as consequential damages. If the college auditorium was a reasonable substitute location for the film festival, the owner could
have avoided $25,000 of the $35,000 in lost profits and thus would be entitled to recover only the $10,000 that would have been lost had the film festival been held at the college auditorium.
But the college auditorium may not have been a reasonable substitute. An apparent reason for the film festival was to showcase the new theater, and moving the film festival to the college
auditorium would not then have been a reasonable substitute, so the fact that the owner did not move the film festival there would not reduce the recovery for lost profits
Do the damages recoverable by the owner from the original contractor include $50,000 for the additional amount paid to the substitute contractor beyond the $100,000 price to be paid to the original contractor under the contract?
The owner is entitled to recover expectation damages equal to the difference between the original contract price and what was paid to the substitute contractor, which is $50,000.
Rule & Application
Generally, the non-breaching party in a contract has the right to expectation damages. Expectation damages are intended to put the non-breaching party in a position it would have been in had the contract been performed.
Here, the contractor promised to install the seats by August 15th for $100,000, so that was what the non-breaching party expected to have. However, the contractor failed to do so, leaving the owner to find a substitute contractor to install the seats for $150,000 at a later date. This means that the owner had to pay $50,000 more than it originally expected to pay. Therefore, to put the owner in the position it would have been in had the contract been performed, it is entitled to recover the $50,000.
Can the owner recover from the original contractor as consequential damages lost profits from the canceled film festival even though the contractor was unaware of the owner’s plan to hold the film festival?
Conclusion - It is unlikely that the owner is entitled to recover the loss it suffered as a consequence of the cancellation of the film festival, which would be consequential damages.
Rule & Application
The owner may seek consequential damages from the breach, such as lost profits, in addition to expectation damages. However, such damages are only recoverable if the breaching party had reason to foresee the losses as a probable result of the breach when the contract was made. A loss may be foreseeable as a probable result of a breach if it follows from the breach either 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 of.
Here, a film festival would not likely follow in the ordinary course of events from breach of a contract to install seats in a movie theater by a stated date. Although the contractor likely would have known that general ticket sales would be lost because of the delayed opening, there is nothing in the facts to indicate that film festivals or similar events are usually scheduled immediately following the construction of a movie theater. It might be argued, however, that the original contractor would have reason to know that the owner of a new theater would promote its opening with some sort of a special event that could generate significant revenue. However, given the facts do not indicate that the owner mentioned the festival to the contractor, nor was it part of the contract, the court will likely find that the film festival profits were unforeseeable.
The owner will not recover lost profits from the cancelled film festival.
Assuming that the owner can recover consequential damages resulting from the canceled film festival, does the owner’s failure to reduce those damages by relocating the film festival rather than canceling it result in lower consequential damages?
Even if the cancellation of the film festival was reasonably foreseeable, the owner might not be entitled to recover the $35,000 in lost profits resulting from the cancellation if it was able to mitigate damages.
Rule and Application
A party is required to mitigate its damages, or, put another way, a party cannot recover damages for loss that the party could have avoided by reasonable efforts. Therefore, the amount of loss that the non-breaching party could have reasonably avoided by making other arrangements would not be recoverable. The key here is that the steps, or substitution, must be reasonable.
Here, if holding the film festival at the college auditorium was a reasonable substitute for holding it at the new movie theater, that would have been a required mitigation. If, on the other hand, holding the film festival at the college auditorium was not a reasonable substitute because a primary purpose of the film festival was to showcase the new movie theater, the failure of the owner to relocate the film festival will not reduce the owner’s recovery for lost profits.
Thus, the ability to recover the full amount is dependent on whether the substitution of the location was reasonable.
