Contracts II
Damages
When a breach has occurred, the aggrieved party is entitled to seek remedies. While equitable remedies can be sought, courts usually prefer to award monetary damages if adequate.
There are three methods of calculating damages:
- Expectation damages (to put into the position of if the full performance was made)
- Reliance damages (to put into the position from before the contract was made)
- Restitution damages (to compensate for unpaid-for benefits received)
Seller's Remedies
UCC § 2-703
Seller's Remedies in General.
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Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a payment due on or before delivery or repudiates with respect to a part or the whole, then with respect to any goods directly affected and, if the breach is of the whole contract ([UCC § 2-612]), then also with respect to the whole undelivered balance, the aggrieved seller may
- withhold delivery of such goods;
- stop delivery by any bailee as hereafter provided ([UCC § 2-705]);
- proceed under the next section respecting goods still unidentified to the contract;
- resell and recover damages as hereafter provided ([UCC § 2-706]);
- recover damages for non-acceptance ([UCC § 2-708]) or in a proper case the price ([UCC § 2-709]);
- cancel.
UCC § 2-706
Seller's Resale Including Contract for Resale.
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- Under the conditions stated in[UCC § 2-703] on seller's remedies, the seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages allowed under the provisions of this Article ([UCC § 2-710]), but less expenses saved in consequence of the buyer's breach.
- Except as otherwise provided in subsection (3) or unless otherwise agreed resale may be at public or private sale including sale by way of one or more contracts to sell or of identification to an existing contract of the seller. Sale may be as a unit or in parcels and at any time and place and on any terms but every aspect of the sale including the method, manner, time, place and terms must be commercially reasonable. The resale must be reasonably identified as referring to the broken contract, but it is not necessary that the goods be in existence or that any or all of them have been identified to the contract before the breach.
- Where the resale is at private sale the seller must give the buyer reasonable notification of his intention to resell.
- Where the resale is at public sale
- only identified goods can be sold except where there is a recognized market for a public sale of futures in goods of the kind; and
- it must be made at a usual place or market for public sale if one is reasonably available and except in the case of goods which are perishable or threaten to decline in value speedily the seller must give the buyer reasonable notice of the time and place of the resale; and
- if the goods are not to be within the view of those attending the sale the notification of sale must state the place where the goods are located and provide for their reasonable inspection by prospective bidders; and
- the seller may buy.
- A purchaser who buys in good faith at a resale takes the goods free of any rights of the original buyer even though the seller fails to comply with one or more of the requirements of this section.
- The seller is not accountable to the buyer for any profit made on any resale. A person in the position of a seller ([UCC § 2-707]) or a buyer who has rightfully rejected or justifiably revoked acceptance must account for any excess over the amount of his security interest, as hereinafter defined ([UCC § 2-711(3)]).
UCC § 2-708
Seller's Damages for Non-acceptance or Repudiation.
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- Subject to subsection (2) and to the provisions of this Article with respect to proof of market price ([UCC § 2-723]), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article ([UCC § 2-710]), but less expenses saved in consequence of the buyer's breach.
- If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this Article ([UCC § 2-710]), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.
UCC § 2-709
Action for the Price.
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- When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price
- of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and
- of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.
- Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold.
- After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated ([UCC § 2-610]), a seller who is held not entitled to the price under this section shall nevertheless be awarded damages for non-acceptance under the preceding section.
UCC § 2-710
Seller's Incidental Damages.
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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.
Buyer's Remedies
UCC § 2-711
Buyer's Remedies in General; Buyer's Security Interest in Rejected Goods.
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- Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes acceptance then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract ([UCC § 2-612]), the buyer may cancel and whether or not he has done so may in addition to recovering so much of the price as has been paid
- Where the seller fails to deliver or repudiates the buyer may also
- if the goods have been identified recover them as provided in this Article ([UCC § 2-502]); or
- in a proper case obtain specific performance or replevy the goods as provided in this Article ([UCC § 2-716]).
- On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them in like manner as an aggrieved seller ([UCC § 2-706]).
UCC § 2-712
"Cover"; Buyer's Procurement of Substitute Goods.
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- After a breach within the preceding section the buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.
- The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined ([UCC § 2-715]), but less expenses saved in consequence of the seller's breach.
- Failure of the buyer to effect cover within this section does not bar him from any other remedy.
UCC § 2-713
Buyer's Damages for Non-delivery or Repudiation.
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- Subject to the provisions of this Article with respect to proof of market price ([UCC § 2-723]), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in this Article ([UCC § 2-715]), but less expenses saved in consequence of the seller's breach.
- Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.
UCC § 2-714
Buyer's Damages for Breach in Regard to Accepted Goods.
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- Where the buyer has accepted goods and given notification ([UCC § 2-607(3)]) he may recover as damages for any non-conformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.
- The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.
- In a proper case any incidental and consequential damages under the next section may also be recovered.
UCC § 2-715
Buyer's Incidental and Consequential Damages.
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- 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 resulting from the seller's breach include
UCC § 2-717
Deduction of Damages From the Price.
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The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.
UCC § 2-723
Proof of Market Price: Time and Place.
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- If an action based on anticipatory repudiation comes to trial before the time for performance with respect to some or all of the goods, any damages based on market price ([UCC § 2-708] or [UCC § 2-713]) shall be determined according to the price of such goods prevailing at the time when the aggrieved party learned of the repudiation.
- If evidence of a price prevailing at the times or places described in this Article is not readily available the price prevailing within any reasonable time before or after the time described or at any other place which in commercial judgment or under usage of trade would serve as a reasonable substitute for the one described may be used, making any proper allowance for the cost of transporting the goods to or from such other place.
- Evidence of a relevant price prevailing at a time or place other than the one described in this Article offered by one party is not admissible unless and until he has given the other party such notice as the court finds sufficient to prevent unfair surprise.
UCC § 2-724
Admissibility of Market Quotations.
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Whenever the prevailing price or value of any goods regularly bought and sold in any established commodity market is in issue, reports in official publications or trade journals or in newspapers or periodicals of general circulation published as the reports of such market shall be admissible in evidence. The circumstances of the preparation of such a report may be shown to affect its weight but not its admissibility.
Expectation Damages
Expectation damages attempt to put the aggrieved party into the position it would be in if the full performance was made.
Expectation damages are the preferred form of damages, on the theory that the aggrieved party should be given the "benefit of the bargain."
Expectation damages include both direct and indirect damages.
Direct Damages
Direct damages are equal to the difference in value between the value directly received by full performance and that actually received.
Indirect Damages
Indirect damages are the amounts awarded for secondary losses resulting from a breach.
Indirect damages are classified as either incidental or consequential.
Incidental Damages
Incidental damages are extra costs incurred by an aggrieved party in dealing with a breach, such as return shipping or time spent finding a replacement.
UCC § 2-710
Seller's Incidental Damages.
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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.
UCC § 2-715
Buyer's Incidental and Consequential Damages.
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- 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 resulting from the seller's breach include
Consequential Damages
Consequential damages are any other losses incurred as a result of a breach that are not incidental damages, such as lost profit or causing a breach of another contract.
Expectation damages are calculated as: direct loss + extra loss − cost avoided − loss avoided or mitigated
Restatement Second of Contracts § 347
Restatement Second of Contracts § 347Measure of Damages in General
Subject to the limitations stated in [R2C § 350, R2C § 351, R2C § 352, & R2C § 353], 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.
Restatement Second of Contracts § 348
Restatement Second of Contracts § 348Alternatives 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
- 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, the injured party may recover damages based on the value of the conditional right at the time of breach.
There are three limiting factors to recovery:
- Foreseeability
Restatement Second of Contracts § 351
Restatement Second of Contracts § 351Unforeseeability 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.
Copyright, The American Law Institute- Determined at the time the contract was entered into
- Certainty
Restatement Second of Contracts § 352
Restatement Second of Contracts § 352Uncertainty as a Limitation on Damages
Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.
Copyright, The American Law Institute - Avoidability
Restatement Second of Contracts § 350
Restatement Second of Contracts § 350Avoidability as a Limitation on Damages
- Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.
- The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.
Copyright, The American Law Institute
Examples
9-1
Employer hires employee for two-year contract at $50,000/year, but employer wrongfully terminates him six months in. Employee looks for new job for three months unsuccessfully, then hires an employment agency for $1,000 and finds a new job paying $45,000 per year.
Employee's damages would be $31,000:
- Direct loss: $50,000 × 1½ = $75,000
- Extra loss: $1,000
- Cost avoided: $0
- Loss avoided: ($45,000 × 1) = $45,000
- $75,000 + $1000 - $0 - $45,000 = $31,000
If the employee did not look for work, he could not recover for that time, as there is a duty to mitigate damages.
9-3
Employer hires employee for two-year contract at $50,000/year, but employee wrongfully quits six months in. Employer looks for a replacement for three months unsuccessfully, then hires an employment agency for $2,000 and finds a temp replacement for $30,000 for three months, then hires a permanent replacement for $55,000 per year.
Employer's damages would be $24,500:
- Direct loss: $50,000 × 1½ = $75,000 (value of employee to employer)
- Extra loss: $2,000 + $30,000 + ($55,000 × 1) = $87,000
- Cost avoided: $50,000 × 1¾ = $75,000 (cost of paying employee)
- Loss avoided: $50,000 × 1½ = $62,500 (value of work covered by other workers)
- $75,000 + $87,000 - $75,000 - $62,500 = $24,500
Some damages will not fit this formula exactly though.
Reliance Damages
Reliance damage attempt to put the aggrieved party into the position that it would have been in if the parties had not entered into the contract.
Reliance damages compensate for expenses incurred by the aggrieved party in reliance on the existence of the contract, as well as lost opportunity costs, if provable.
While expectation damages are preferred, reliance damages may be used if there are no identifiable expectation damages or when the promise is enforced based on reliance.
Reliance
Restatement Second of Contracts § 90
Restatement Second of Contracts § 90Promise Reasonably Inducing Action or Forbearance
- A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.
- A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance.
Reliance, also known as promissory estoppel, requires doing something to one's own detriment due to someone else's promise.
Such reliance must be reasonable.
Restatement Second of Contracts § 349
Restatement Second of Contracts § 349Damages Based on Reliance Interest
As an alternative to the measure of damages stated in [R2C § 347], 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.
Restitution Damages
Restitution damages attempt to put the aggrieved parties into position that they were in before the contract was entered into.
Restitution
Restitution is an obligation imposed by law on ground of justice and equity. Its purpose is to prevent unjust enrichment. Unlike express contracts or contracts implied in fact, restitution does not rest upon the assent of the contracting parties.
Restitution is also known as "quantum meruit," "quasi-contract," and "implied in law contract."
Officious Intermeddler Doctrine
The "officious intermeddler doctrine" holds that where a person performs labor for another without the latter's request or implied consent, however beneficial such labor may be, he cannot recover therefor.
An exception is that of emergency aid, where the service is needed to prevent the others' bodily harm and the helper is a doctor and therefor doesn't give the implication of gratuitousness.
Restatement Third of Restitution § 1
Restatement Third of Restitution § 1Restitution and Unjust Enrichment
A person who is unjustly enriched at the expense of another is subject to liability in restitution.
Restatement Third of Restitution § 2
Restatement Third of Restitution § 2Limiting Principles
- The fact that a recipient has obtained a benefit without paying for it does not of itself establish that the recipient has been unjustly enriched.
- A valid contract defines the obligations of the parties as to matters within its scope, displacing to that extent any inquiry into unjust enrichment.
- There is no liability in restitution for an unrequested benefit voluntarily conferred, unless the circumstances of the transaction justify the claimant's intervention in the absence of contract.
- Liability in restitution may not subject an innocent recipient to a forced exchange: in other words, an obligation to pay for a benefit that the recipient should have been free to refuse.
Restatement Second of Contracts § 272
Restatement Second of Contracts § 272Relief Including Restitution
- In any case governed by the rules stated in this Chapter, either party may have a claim for relief including restitution under the rules stated in [R2C § 240] and [R2C § 377].
- In any case governed by the rules stated in this Chapter, if those rules together with the rules stated in Chapter 16 will not avoid injustice, the court may grant relief on such terms as justice requires including protection of the parties' reliance interests.
Restatement Second of Contracts § 374
Restatement Second of Contracts § 374Restitution in Favor of Party in Breach
- Subject to the rule stated in Subsection (2), if a party justifiably refuses to perform on the ground that his remaining duties of performance have been discharged by the other party's breach, the party in breach is entitled to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the loss that he has caused by his own breach.
- To the extent that, under the manifested assent of the parties, a party's performance is to be retained in the case of breach, that party is not entitled to restitution if the value of the performance as liquidated damages is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.
Restatement Second of Contracts § 373
Restatement Second of Contracts § 373Restitution When Other Party Is in Breach
- Subject to the rule stated in Subsection (2), on a breach by non-performance that gives rise to a claim for damages for total breach or on a repudiation, the injured party is entitled to restitution for any benefit that he has conferred on the other party by way of part performance or reliance.
- The injured party has no right to restitution if he has performed all of his duties under the contract and no performance by the other party remains due other than payment of a definite sum of money for that performance.
Restatement Second of Contracts § 371
Restatement Second of Contracts § 371Damages Based on Reliance Interest
If a sum of money is awarded to protect a party's restitution interest, it may as justice requires be measured by either
- the reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant's position, or
- the extent to which the other party's property has been increased in value or his other interests advanced.
Liquidated Damages
UCC § 2-718
Liquidation or Limitation of Damages; Deposits.
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- Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
- Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds
- the amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1), or
- in the absence of such terms, twenty per cent of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.
- The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes
- Where a seller has received payment in goods their reasonable value or the proceeds of their resale shall be treated as payments for the purposes of subsection (2); but if the seller has notice of the buyer's breach before reselling goods received in part performance, his resale is subject to the conditions laid down in this Article on resale by an aggrieved seller ([UCC § 2-706]).
Restatement Second of Contracts § 356
Restatement Second of Contracts § 356Liquidated Damages and Penalties
- 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.
- A term in a bond providing for an amount of money as a penalty for non-occurrence of the condition of the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused by such non-occurrence.
Restatement Second of Contracts § 361
Restatement Second of Contracts § 361Effect of Provision for Liquidated Damages
Specific performance or an injunction may be granted to enforce a duty even though there is a provision for liquidated damages for breach of that duty.
Punitive Damages
Restatement Second of Contracts § 355
Restatement Second of Contracts § 355Punitive Damages
Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.
Restatement Second of Contracts § 353
Restatement Second of Contracts § 353Loss Due to Emotional Disturbance
Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result.