Damages and limitations on damages Flashcards
Groves & Sons v. John Wunder Co.
Facts:
Groves & Sons leased land to John Wunder Co., granting them the right to remove gravel with the condition that they restore the land to a uniform grade. Wunder Co. deliberately breached the contract by only extracting the best gravel and failing to restore the land, leaving it uneven. The cost to complete the required grading was estimated at $60,000, while the difference in property value due to the breach was only $12,160. The trial court awarded damages based on the diminution in value, not the cost of performance.
Issue:
Should damages for breach of a construction contract be measured by the cost of performance or the diminution in property value?
Rule:
The general rule for construction contracts is that damages should compensate the promisee by awarding the cost to complete performance, unless doing so would result in “economic waste.” Economic waste typically applies when full performance would require tearing down and rebuilding a structure at an unreasonable cost.
Application:
The court rejected the diminution-in-value approach, holding that the correct measure of damages was the cost to complete performance.
There was no economic waste exception because restoring the land would not involve demolishing a structure.
Reducing damages based on the land’s current value would reward the breaching party and undermine the contract’s enforceability.
Conclusion:
The court ruled in favor of Groves, reversing the lower court’s decision and ordering a new trial with damages based on the cost of performance.
Case Brief: Peevyhouse v. Garland Coal & Mining Co.
Facts:
The Peevyhouses leased their land for strip mining under a contract requiring Garland Coal to perform restorative work after mining. Garland failed to complete the promised restoration, which would have cost $29,000. The trial court allowed the jury to consider both the cost of performance and the diminution in property value, leading to a $5,000 award.
Issue:
Should damages be based on the cost of performance or the diminution in property value when the restoration work provides minimal economic benefit?
Rule:
If the cost of performance is grossly disproportionate to the economic benefit gained, damages should be measured by the diminution in value rather than the cost of performance.
Application:
The court found that the restoration work would have increased the farm’s value by only a few hundred dollars, making the $29,000 cost unreasonable.
Unlike Groves, the court emphasized “relative economic benefit” over strict adherence to performance costs.
Oklahoma law limits damages to reasonable amounts to prevent “unconscionable and grossly oppressive” awards.
Conclusion:
The court upheld the $5,000 award, applying the diminution-in-value rule due to the disproportionate cost of performance.
What is the second topic depicted under ‘Damages’ in Diagram 6-1?
‘Limitations’ is the second topic depicted under ‘Damages’ in Diagram 6-1.
How many types of limitations on damages are indicated in Diagram 6-1?
There are three types of limitations on damages.
Name the first type of limitation on damages.
Avoidability (or avoidable consequences), often referred to as ‘mitigation of damage’.
What is the second type of limitation on damages?
Foreseeability (or reasonable contemplation).
What is the third type of limitation on damages?
Certainty.
What should be the first step when analyzing contract damage problems?
Consider the measure of all possible items of damage.
What should be the second step when analyzing contract damage problems?
Consider whether any of the limitations on damages justify reducing a plaintiff’s damage recovery.
Why does the legal system award damages to non-breaching parties?
To encourage promise keeping and contract making.
Fill in the blank: The three types of limitations on damages are ________, foreseeability, and certainty.
avoidability (or avoidable consequences)
True or False: The concept of mitigation of damage is synonymous with avoidability.
True
What policy rationales might be served by limiting damages?
To ensure fairness, prevent excessive recovery, and promote efficient breach of contract.
Rockingham County v. Luten Bridge Co.
35 F.2d 301 (1929)
United States Court of Appeals, Fourth Circuit
Parker v. Twentieth Century-Fox Film Corp.
3 Cal. 3d 176, 474 P.2d 689 (1970)
Supreme Court of California
Case Brief: Parker v. Twentieth Century-Fox Film Corp.
Facts:
Actress Shirley MacLaine Parker had a contract with Twentieth Century-Fox to star in the musical film Bloomer Girl, to be filmed in California. Fox canceled the film and offered her a lead role in Big Country, Big Man, a dramatic Western to be filmed in Australia. The contract terms were largely similar, but key provisions differed, such as director and screenplay approvals. Parker rejected the offer and sued for the guaranteed $750,000 in her original contract. Fox argued that she failed to mitigate damages by refusing the substitute role.
Issue:
Did Parker fail to mitigate damages by rejecting the alternative role in Big Country, Big Man?
Rule:
A wrongfully discharged employee must mitigate damages by seeking comparable employment. However, an employee is not required to accept employment that is different or inferior in kind.
Application:
- Bloomer Girl was a musical, whereas Big Country, Big Man was a dramatic Western, requiring different skills and artistic expression.
- The new offer removed certain contractual protections, such as director and screenplay approvals, making it an inferior position.
- The court ruled that Parker was not obligated to accept a substantially different and inferior role to mitigate damages.
Conclusion:
The court affirmed summary judgment in Parker’s favor, awarding her the full $750,000. Fox’s substitute offer was deemed different and inferior, so Parker had no duty to accept it to mitigate damages.
Hawkins v McGee
Case Brief: Hawkins v. McGee
Facts:
Hawkins underwent a surgical procedure performed by Dr. McGee to repair scar tissue on his hand. McGee allegedly guaranteed a “100% good hand” post-surgery. Instead, the operation resulted in a worsened condition, with excessive hair growth and limited function. Hawkins sued for breach of contract, arguing that McGee’s guarantee constituted an enforceable promise.
Issue:
What is the proper measure of damages for breach of a contract in a medical procedure where a specific result was promised?
Rule:
- Expectation Damages: The proper measure of damages in contract law is to put the plaintiff in the position they would have been in had the contract been fully performed.
- “Benefit of the Bargain” Rule: Damages are calculated as the difference between the promised result and the actual result.
- Limits on Damages: Pain and suffering from the procedure itself are not recoverable if they were expected as part of the performance.
Application:
- The jury was improperly instructed to consider pain and suffering as an element of damages, even though such suffering was anticipated in the surgery.
- The correct measure of damages should have been the difference between a “100% good hand” (as promised) and Hawkins’ actual post-surgical hand condition.
- Incidental damages, such as additional medical costs, may also be recoverable but were not the primary focus of the ruling.
Conclusion:
The court reversed and remanded for a new trial, instructing that damages should be limited to the expectation measure—what Hawkins would have received had the surgery been successful, minus his actual condition. Pain and suffering from the surgery itself were not recoverable under contract damages.
Foreseeability
Hadley v Baxendale
FIRAC Case Brief: Hadley v. Baxendale
Facts:
The plaintiffs, millers in Gloucester, suffered a breakdown of the crank shaft of their steam engine on May 11. To repair it, they needed to send the broken shaft to the manufacturer in Greenwich to serve as a pattern for a new one. The plaintiffs hired the defendants, a carrier company (Pickford & Co.), to transport the shaft. The carrier was informed that the mill was stopped, and delivery was needed urgently. The defendants delayed the delivery of the shaft, and as a result, the plaintiffs’ mill remained shut down for several days, causing a loss of profits.
Issue:
Whether the defendants were liable for the loss of profits due to the delay in delivering the shaft, given that the special circumstances (the urgency of the mill’s operations) were not communicated to the defendants.
Rule:
The rule established by the court is that when one party breaches a contract, the damages awarded should be those that arise naturally from the breach or those that were reasonably contemplated by both parties at the time the contract was made. If special circumstances (such as the urgency of the mill’s operations) were not communicated to the breaching party, then the damages for those special circumstances cannot be considered for compensation.
Application:
The plaintiffs communicated only the general information that the article to be carried was the broken shaft of a mill and that they were millers. However, the defendants were not informed of the specific circumstances, such as the fact that the mill would remain stopped and the plaintiffs would lose profits as a result of the delay. The court concluded that these special circumstances, which would have made the loss of profits foreseeable to the defendants, were not communicated to them. Therefore, the defendants could not have reasonably contemplated the specific loss of profits resulting from their delay.
Conclusion:
The court held that the plaintiffs’ loss of profits was too remote to be considered a foreseeable consequence of the breach. Since the special circumstances were not communicated to the defendants, the plaintiffs were not entitled to damages for the loss of profits. The court ordered a new trial, where the jury would need to be guided by the rule that damages for a breach of contract are limited to what could reasonably have been contemplated by both parties at the time the contract was made.
Certainty
Freund v. Washington Square Press, Inc.
34 N.Y.2d 379, 314 N.E.2d 419 (1974)
Court of Appeals of New York
FIRAC Case Brief: Freund v. Washington Square Press, Inc.
Facts:
In 1965, plaintiff Freund, an author and college teacher, entered into a publishing contract with defendant Washington Square Press, Inc. The contract granted the publisher exclusive rights to publish and sell Freund’s work on modern drama. The defendant agreed to pay Freund a $2,000 nonreturnable advance upon receipt of the manuscript and to publish the work in hardbound edition within 18 months. The contract allowed the defendant to terminate the agreement if the manuscript was deemed unsuitable, but they did not exercise this right. The publisher later merged with another company and stopped publishing hardbound books, failing to publish Freund’s manuscript. Freund sued for breach of contract, seeking specific performance and damages for lost royalties, delay of promotion, and the cost of publication if he had to publish it himself.
Issue:
What damages are recoverable when a publisher breaches a contract by failing to publish a manuscript, especially regarding the loss of royalties and the cost of publication?
Rule:
The law awards damages in contract breaches to compensate for actual loss, which must be foreseeable and measurable with reasonable certainty. Damages should not exceed what the injured party would have gained had the contract been fully performed. Additionally, the loss of anticipated profits must be proved with a reasonable degree of certainty.
Application:
The trial court awarded Freund $10,000 for the cost of publishing the book in hardcover, based on expert testimony. However, the Appellate Division affirmed, and Freund’s claim for royalties was rejected for being too speculative, as there was no reasonable basis to estimate how much he would have earned from book sales. Freund did not provide sufficient evidence to prove the amount of royalties he would have received, and the court determined that the cost of publication was not an appropriate measure of damages. Instead, the proper measure was the benefit Freund would have received from the publication of his work—specifically, royalties—but this could not be determined with certainty. Consequently, the court ruled that Freund was entitled only to nominal damages.
Conclusion:
The Court of Appeals modified the Appellate Division’s order, reducing the damage award from $10,000 to nominal damages (six cents). The court emphasized that damages should reflect the actual loss suffered by the plaintiff, but in this case, the loss (royalties) was too speculative to quantify. Therefore, Freund was entitled to nominal damages, affirming his legal right to compensation, but no substantial monetary award was granted.
MindGames, Inc. v. Western Publishing Co., Inc.
Facts:
- MindGames, Inc., founded in 1988 by Larry Blackwell, created the board game Clever Endeavor and licensed it to Western Publishing Co. in March 1990.
- The contract stipulated that Western would pay MindGames a 15% royalty on all sales. The contract could be extended if Western paid $1.5 million in royalties by January 1993 or by paying an annual renewal fee of $300,000.
- In the first year, Western sold 165,000 copies of the game, paying $600,000 in royalties. After that, sales dropped, and Western did not meet the $1.5 million royalty requirement to extend the contract.
- MindGames sued for the $900,000 in unpaid royalties, plus $40 million in lost royalties due to Western’s failure to promote the game, and $300,000 for the renewal of the contract.
Issue:
- Whether MindGames could recover lost profits, including royalties, for Western’s alleged failure to promote Clever Endeavor, given the “new business” rule in Arkansas law and the speculative nature of the lost profits claim.
Rule:
- Arkansas law, as applied to breach of contract claims, requires that damages for lost profits must be proven with reasonable certainty. A minority of states, including Arkansas, had historically applied a “new business” rule that prevented new businesses from recovering lost profits because such profits were deemed speculative. However, this rule had been largely abandoned in recent years in favor of a flexible standard to evaluate damages.
- Lost profits claims must not be based on speculation and must have a rational basis in the evidence presented.
Application:
- The court reviewed the historical application of the “new business” rule in Arkansas and concluded that it was no longer a relevant standard, as Arkansas had moved toward a more flexible approach to assessing damages.
- In this case, MindGames was considered a new business, but it had sold 30,000 games prior to the contract and had a year of sales history. Despite this, the court found that the lost profits MindGames claimed were too speculative.
- MindGames had not provided sufficient evidence to show how many more units of the game would have been sold if Western had marketed the game properly. The court also noted that the sales of Clever Endeavor had dropped, and there was no clear evidence that the game would have been more successful with additional promotion.
- The court emphasized that damages for lost profits must be proven with reasonable certainty, and MindGames failed to do so, particularly as its projected $40 million in royalties required Western to sell millions of copies of the game, which was not supported by the evidence.
Conclusion:
- The court ruled that MindGames could not recover the $40 million in lost royalties, as its claim was excessively speculative. Although Arkansas no longer strictly applied the “new business” rule, MindGames failed to provide sufficient evidence to prove that the breach directly led to the lost profits claimed. The court highlighted that damages for lost profits must be based on more than mere speculation and that the evidence presented was insufficient to support the claim for lost royalties.
This structure covers the core aspects of the case, highlighting the facts, legal issues, the applicable rule of law, the court’s reasoning in applying the rule, and the final decision.
Steps when dealing with damages…
- What are the actual damages which could be available based on the benefit of the bargain?
- Ibid based on consequential damages and reliance damages.
- Are there any limitations on this damages/rules which would limit them?
- we have to ask about avoidance, ability and/or certainty/
- avoidance/duty to mitigate means the non breaching party has to take action to avoid the damages dont continue to mount.
Are the damages foreseaable?
- Hadley v Baxendale
- The non- breaching party is claiming that the damages would naturally flow from the breach.
- Ability is based upon the ability to guess or understand the likely consequences of the breach.
- If damages are not foreseeable then the damages are not recoverable unless you knew it could happen.
What must the non-breaching party prove regarding damages?
The non-breaching party must have evidence of actual damages and that the amount is provable with reasonable certainty.
What are the three types of damages the professor sought in the Freund case?
- Delay of academic promotion
- Loss of royalties
- Cost of publication
In the Freund case, what was the court’s stance on the cost of completion rule for a publishing contract?
The cost of completion measure of damages does not apply to a publishing contract.
What does the court require for damages to be awarded in terms of certainty?
The amount of damages claimed must be measurable with a reasonable degree of certainty.
What was the professor’s issue in proving lost royalties?
The professor did not provide a stable foundation for a reasonable estimate of royalties he would have earned.
What is the expectancy interest in the context of the Freund case?
The expectancy interest refers to the royalties the professor would have earned from book sales.
What was the main issue in the Mind Games case?
Whether the plaintiff can recover damages for lost profits due to a breach of contract.
What is the new business rule?
A rule barring a new business from obtaining damages for lost profits due to a tort or breach of contract.
In the Mind Games case, how much in royalties did the plaintiff claim to have lost?
$40 million
True or False: The court in Freund awarded damages for lost royalties.
False
Fill in the blank: The measure of damages in a publishing contract is not based on the _______ of books.
cost
What was a key factor that limited the professor’s ability to claim damages?
Lack of proof regarding how many books he would have sold.
What is the significance of the ‘benefit of the bargain’ in contract law?
It refers to securing the injured party the benefits they would have received had the contract been fulfilled.
What was the court’s conclusion regarding the professor’s damages for lost royalties?
The court concluded that the damages were speculative and not proven.
What industry does the Mind Games case pertain to?
Board game publishing and marketing.
What type of contract was involved in the Freund case?
A publishing contract.
What is the new business rule?
A rule that states a new business cannot recover damages for lost profits due to tort or breach of contract.
What does Hadley v. Baxendale establish regarding lost profits?
Lost profits are not recoverable if they are not foreseeable.
What is the reasoning behind the new business rule?
The anticipated profits of a new business are too remote, speculative, and uncertain to support a judgment for their loss.
Why is it hard for new businesses to prove lost profits?
New businesses often lack a track record and cannot demonstrate with certainty the amount of damages.
What is the court’s stance on the new business rule?
The court rejects the new business rule and allows new businesses the opportunity to prove lost profits.
What is the difference between a rule and a standard in legal terms?
A rule is black and white, hard and fast; a standard is discretionary and considers various factors.
What happens if a court applies the new business rule?
The new business would be barred from attempting to prove lost profits.
What is a significant issue with the new business rule?
It can lead to injustice by not allowing a potentially profitable new business to recover damages.
In the absence of the new business rule, what standard applies?
The basic certainty rule that requires proof of damages to a reasonable certainty.
What example does the court provide to illustrate the lack of evidence for lost profits?
Blackwell, the owner of Mind Games, had no track record to demonstrate potential profits.
True or False: The outcome of the case would differ if the new business rule was applied.
False.
Fill in the blank: The anticipated profits of a new business are too _______ to support a judgment for their loss.
remote, speculative, and uncertain.
What benefits do rules provide in legal judgments?
They make judging simpler and less prone to bias and inconsistency.
What are the potential downsides of applying a strict rule like the new business rule?
It may prevent just outcomes in cases where a new business can prove profitability.
What does the court suggest about the opportunity for new businesses?
New businesses should at least have the chance to prove lost profits.
What is the implication of the court’s decision regarding the new business rule?
The court emphasizes the importance of allowing new businesses to demonstrate potential damages.
