Distinguishing Contractual from Other Obligations

CONTRACTS

Distinguishing Contractual from Other Obligations
(1) What does it mean to say that a promise is legally enforceable?
A legally enforceable promise = the coercive hand of the state to take someone’s property by force if necessary - the threat of force. What do you get then? This is what Hawkins v. McGee takes about.
Writ of Attachment: prevailing party is entitled to a writ that will allow the sheriff or law enforcement agent to seize property of defaulting party. May also get a wage garnishment from someone who owes the defaulting party money.
(2) What promises are legally enforceable and what promises are not – how to distinguish between the two?
The basic rule at common law is that a promise is not legally enforceable. It derives from the Greek system: you can have an injury w/o having incurred a wrong. You must show how this particular promise fits within a particular writ. If no writ, then no remedy.
Hawkins v. McGee: P brings an action for a breach of warranty of the success of an operation (negligence claim is declared a nonsuit). P made an agreement w/ D to remove scar tissue from his hand by grafting of skin taken from his chest. Before the operation, P claims D stated, “I will guarantee to make the hand a hundred per cent perfect hand or a hundred per cent good hand.” The trial court rendered a verdict for P for $3,000 but D’s motion to set aside the verdict was granted. P appeals and court grants a new trial.
The theories/writs that may give P cause of action: (**Theories pursued in this case)
Misrepresentation: D said hospital stay would be 3-4 days and turned out to be 1 month (P never would have taken such a risk if he knew what was involved – different from fraud, i.e. D lied as opposed to not giving full disclosure)
Court says this is an opinion – not a promise!
**Injury (negligence /malpractice - TORT): The writ would be trespass on the case
This is declared a nonsuit!
**Promise (contract): The writ would be assumpsit (“he promised”, “he assumed”)
P prevails on this theory. But was D’s guarantee really a legally enforceable promise?
Obligation of doctor due to his status (fiduciary duty)
Goal of Contract Damages: Damages in contracts = “intended compensation for a breach, measured in terms of the contract.” The purpose of the law is to put P in as good a position as he would have been in had D kept his contract. The measure of recovery “is based on what D should have given P, not what P has given D or otherwise expended.”Compare to Torts:Restituitionary damages only (making you whole v. giving you what you expected)!
In Hawkins, the judge concludes that if you are the beneficiary of a promise and someone breaks it, the damages you should receive should be more then restitutionary – you should get the value of your bargain! It was incorrect that the trial judge instructed the jury to measure the value of the hand before v. the hand after. Thus the value of the perfect hand promised him v. the hand in its present condition should be the measure of damages!
Pain and Suffering: P&S is NOT factored in BUT serves as a proxy in calculating what the damage award should be. Ex: If I undergo an operation which makes me suffer 10K worth of pain, this tell us that the value of the finished product is at least worth $10k.
The Consequences of Making a Contract Legally Enforceable: The Expectation Damages Principle
I want to have my house painted and find out it will cost me $100 on the market. Baird offers to paint it for $70. We make a contract but 2 minutes after, he realizes he has tickets to the game and can’t paint. No money exchanges hands. I sue him, what damages do I get or am I entitled to?
Three Theories of Contract Damages:
Reliance Damages:So people are not made worse off then they were before. Are you made any worse off by Baird entering my life? If no, then no damages. Just preventing people from injuring other people – this is the purpose of contract law under this theory. So under this theory, I would get NO damages from Baird b/c I was not worse off then before.
Expectation Damages: Value of the promise itself. Saying when you enter a promise with me, the law will regard it as if I got something presently that I would receive in the future. Basically, you gave me a $30 benefit (or savings) already – the minute you make the promise! The value of the promise in and of itself is worthy of protection. This is a universe where Baird can perform or not perform – he always has a choice! It forces Baird to fill all the costs that I suffer from the lost bargain and if it turns out the value of breaching is GREATER then that loss to me, then Baird will breach. The law doesn’t give Baird an incentive to perform. Under this example, I would get the $30.
Expectation Damages takes subjective value into account! (if MV=$100, price of painting = $70 but my subjective value of a painted house = $80 – my recovery is $10 NOT $30!). Think: How much better off am I if Baird actually performed…only $10 better off, not $30.
Components: (1) the value lost by reason of the other party’s default (benefit of bargain)(2) the expenditures made in carrying out his own obligations under the contract (reliance).
Expectation Plus: It induces Baird to perform and gives him and incentive to perform over and above everything else. This theory says that (2) doesn’t go FAR ENOUGH! It doesn’t induce Baird to perform! I would get $30 + extra for Baird’s breach!
It is not necessarily in society’s interest to have every promise be performed!! It doesn’t always make sense for someone to complete a promise!
Groves v. John Wunder Co: P entered a 7-year contract where P would be the lessor and D agreed to remove sand and gravel from P’s property and leave it at a “uniform grade” by stripping the overburden. D breached the contract deliberately and surrendered the premises not at the uniform grade. P sues for cost of contract completion. Crt. reverses for P b/c damages should equal = not the difference in land’s value before and after for a willful breach of contract. The proper measure is the peak of accomplishment which would have been reached had the work been done as demanded by the contract.
Unlike the Hawkins case, there is no question that the promise is legally enforceable. The problem here is the measure of damages. Which of the three theories is appropriate?
D’s argument is that P’s land, if restored, would only be worth 10K. He received 10K in damages from the jury so what is the problem? P wants the value of the promise! D is saying he didn’t deliver the promise b/c if he did the value of the result would have been less then the value of the promise thus D has done P a favor by NOT performing.
The Role of Subjective Value: In an expectation damages universe, even when subjective value is taken into account, the market is going to put a ceiling on my damages.
What is the subjective value that Groves attaches to the land?
Market Value of Land: $12,000
If we consider the fact that this is a gravel pit, on the outskirts of MN, the subjective value of the land = $12,000 …the market value!
Everything about this case suggest that Groves attaches NO particular subjective value to this land thus his subjective value is just equal to the MV of the land. So if Groves were offered $13,000 or pretty much $12,000 +X…Groves would take it!
In a universe when there appears to be no different subjective value to the land, the Groves case is just like the house-painting example! Ex: Land is worth $0, once leveled the land is worth $12,000, it costs $65,000 to level:
If I entered into a promise with Baird and he promised to level the land, I value his performance at $12K.
If it costs $65,000 to level the land, Baird will not perform b/c he is not crazy! Thus, my recovery would be the difference between the MV and subjective value – so in an expectation universe, I would only get $12,000 (I’m only getting back subjective value).
Since we know that Baird/Groves didn’t level the land after the case, we KNOW he didn’t value the land at $65,000! So why would we pay him $65,000?
The Role of Restitution: Is it fair for him to keep ill-gotten gains? Restitution puts a floor on expectation damages! If you want to put the parties back to where they were first, return all monies, etc. If you believe this, you’ve accepted some departure of expectations universe. An undercurrent in Groves may be this idea in restitution. Wunder was already paid and he doesn’t want to perform (like the repairing ipod case).
Here, under a restitution theory, Groves should get 65000 back because that’s the money Wunder kept, so, it’s expectations damages w/restitution trump.
Specific Performance: In Groves, a rule of SP would not be over compensatory and would put Groves in the same position then he would have been in otherwise – but it DOES induced economic waste. [We would spend $65000 to produce something that he only values at $1200] This is what happens with an over compensatory regime. Another way to think about it is that the advantage of expectation damages is that Wunder will NEVER have the incentive to perform when it doesn’t make economic sense!
Peevyhouse v. Garland Coal & Mining Co: P leased 60 acres of a 120 acre farm to D for 5 years under the agreement that D would extract coal from the leased premises by strip mining and at the conclusion of the stripping, D would fill in all the pits and smooth the ground surface. D’s expert witnesses contend that the moving of this dirt to fill the pits would cost them approx. $29,000 while it would only increase the value of the land by $300 so they didn’t do it. P sues for damages and trial court grants him $5,000. The OK SC modified the judgment to $300 stating (based off an OK statute) $5,000 was more then the value of the land and the remedial work promised by D was incidental to the contract – not its main objective.
The right result in Expectations Damages would be that D should have to pay and the amount of money = to the subjective value P attached to the land.
Unlike the Groves case, P actually lived on the land and thus attached a subjective value to it! Also specifically negotiated to have the land restored.
MV to restore land = $3000. P’s subjective value is over this thus the $3000 MV is a floor to their subjective value. Cost to restore land = $30,000. Thus P’s subjective value falls w/n the $3k and $30K range. Since it is such a large range, will $$ damages over/ under compensate P?
What about Specific Performance? There will be economic waste b/c D will be forced to level the land for $30,000. P will NEVER be under compensated by SP but can be over compensated. BUT realistically, these parties would have reached a deal if SP was the background rule in contract breach cases! By virtue of having specific performance as a background rule, it induces these negotiations ahead of time!! The background rule you have ahead of time will change the negotiation process – they may bargain in different ways not possible before. Ex: If value of land is $20K and cost of restoration is $30K:
ED: D would only pay MV for the land (perhaps subjective value if > MV).
SP: If there were a large economic waste (i.e. $10K), both P and D would not want this. D would never enter such a contract and P would never find a vendor to perform if no provision is made before hand to protect D against liability (i.e only up to the value of the land = $20k). This would NOT happen in an ED universe!
Thus, SP is an ideal rule when a party has a particular need that should be negotiated in advance of the contract. ED seems okay but better off with a background rule that gets people negotiating and talking before contractis made, so a better rule (SP) would put a penalty on one of the parties for breach.
Measuring Expectation Damages
Acme Mills & Elevator Co. v. Johnson: P entered a contract with D to buy 2000 bushels of wheat at $1.03 per bushel to be paid on delivery. D failed to deliver the wheat at the time agreed and P brings an action to recover $240 and the $80 for sacks. D agrees that he broke the agreement but claims P was not damaged from his breach; P suspended business and had no money to pay for the wheat at the time for delivery. P denied this and offered an amended reply which stated that D sold wheat to Liberty Mills at $1.16 a bushel on July 13th and thus was estopped from claiming he did not thresh the wheat until Juy 25th. Court holds that P is not entitled to the difference btwn the contract price (1.03) and what D received from Liberty(1.16). Rather, as is the rule in contract law, P is entitled to the contract price (1.03) minus the value of the wheat at the time of delivery (.97) (Same rule in Missouri Furnace).
The time set for delivery states “delivered from thresher 1909”. No specific date is listed!
When wheat is ready to harvest, it most be done immediately. The contract doesn’t state a date but the court is interpreting the language to mean- the contract was delivery for wheat on July 25-29.
Johnson states that there is really no harm done to Acme b/c the price of wheat had fallen so Acme can buy it for cheaper now thus no damage done. If it turns out the market price of wheat is below the price the seller agrees to pay, then the contract should be breach?
Acme made the contract to protect against his feeling that the price of wheat would go up – he contracted for a cheaper price…but if the priceof wheat went down, then the protection he contracted for is unnecessary?
Restitution Argument: P argues that he is entitled to the ill gotten gains of D on July 13th where he made .13 on the wheat b/c the price on the 13th was 1.16 and the contract price was 1.03.
But if D would receive .13 in profit and have to pay .13 in damages to P – where is his incentive to breach his contract with P? Did he in fact breach his contract with P? In addition, there is no guarantee to D that the price of wheat on 13th would stay steady – it could go up too!
In a true expectation damages universe then there is NO INCENTIVE to breach on July 13th! There are equal risks that I would profit or loose!! So Johnson is NOT locking in some ill-gotten gains at Acme’s expense.
Fungible Goods: Acme has not right to the wheat Johnson is growing – the contract is for # 2 grade wheat….Johnson could have bought wheat from another source and sold it to Acme. Wheat is fungible.
UCC: Suppose Johnson can’t live up to his promise b/c the wheat, by some act of God, was destroyed – Under the UCC, there are commercial laws involving the sale of goods, which govern the rules for contracts. Thus the rule in all US Jurisdictions – if goods have been identified before the contract is completed are destroyed, then Johnson/seller bears the loss for the destruction – contract is void. Risk of loss follows through from possession, not transfer of title.
Laurin v. DeCarolis Construction Co: P purchased from D a wooded lot on which a dwelling was being constructed. Prior to the construction completion, D removed gravel from the property w/o P’s permission. The court held that P is entitled to more then the diminution of the value of the premises. P is entitled to the lost profit which he would or could received for the MV of the gravel removed. This is not a punitive damage to P but instead strips D of the wrongfully taken profit and awards P with the potential profit he would have received from the gravel.
This case is different from Peevy and Groves b/c the only thing we’re worried about is HOW to measure expectation damages – what is the injury suffered here?
The amount they sold the gravel = the amount lost in the value of the land.
The problem is not whether we have expectation damages or not, the problem is what is the amount or the best proxy for determining the value of the expectation damages.
Oliver Wendell Holmes – The Path of the Law(10 Harv. L. Rev. 457) pg. 37:
There is NO difference between promising to do XYZ and breaching the promise of XYZ and paying monetary damages for the breach. The law treats them as the same!
Bad Man Theory: This is a fundamental idea in understanding that sometimes it is better to breach then perform. Holmes’ not saying that it is okay to make this choice to breach contract – just that under contract, the law treats the two situations the same.
Louise Caroline Nursing Home, Inc. v. Dix Construction Corp: P entered a contract with D for the building of a nursing home. P fulfilled its contract obligations, D breached but P suffered no compensable damages as a result of the breach. P takes exception by stating the wrong measure of damages was used. Crt. finds that P relies on cases in which a contractor performs defectively, not cases in which the contractor fails to perform. The damage rule P requests does not apply to their situation – only to instances where the contractor messes up. It is a well settled rule that the measure of damages for contract breach = difference between value of the building as left by the contractor and its value had it been finished.
Two Competing Damage Theories:
(1) Contract Price (-) What had already been paid on the contract
Home now: $5k, Complete Home: $10K, Cost to complete: $2k
Under expectation damages – they would be entitled to what would make them whole.