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Types of Remedies

Punitive

Compensatory

Substitutional

Specific

Expectation

Reliance

Restitution

Smith WTA = $4

White WTP = $4

Benkowski WTA = $1

Green WTP = $10

$3

Sleepless Nights. Neat Sawyer purchased a pick-up truck with financing by Bank of America. As part of the agreement with the bank, Sawyer was required to have insurance, but he could choose to get it himself or have the bank purchase it for him. Sawyer elected to delegate the responsibility to the bank. Some time later, the truck was badly damaged in a fire. The damage was estimated at $2,000. When Sawyer tried to collect the insurance money, he discovered that the bank had accidentally forgotten to pay the premium and so his coverage had been discontinued. Sawyer then asked the bank to pay the $2,000 for damages due to its breach of the contract. Bank of America refused and offered a $1,000 settlement without providing any rationale for the lower figure. Sawyer rejected the offer, and the stress of the damage to the truck and his inability to pay for the repairs caused him to suffer from insomnia for months. He sued Bank of America for breach of contract and sought $2,000 in compensatory damages plus punitive damages for the unnecessary stress the banks refusal to pay caused him. Should the court award punitive damages?

Sleepless Nights. a) Yes, assuming that the banks refusal to pay the $2000 was in bad faith. b) No, because the bank did not commit a tort.

Sleepless Nights. The California District Court held that punitives were not warranted. Appellant points out that the award of punitive damages was also improper where there was no evidence which could support a finding of liability against appellant on a tort theory. Here, the only supportable theory of liability was for breach of contract. Hence, the award of punitive damages cannot be sustained. Sawyer v. Bank of America, 83 Cal.App.3d 135 (1978).

Dodgy Dodge. Robert Clark purchased a car from Boise Dodge for $2400 that the dealership claimed was new and showed 165 miles on its odometer. In fact, the dealership knew that the car was used and that the odometer had been set back from 6,968 miles to disguise this fact. When Clark learned that the car was used, rather than seek rescission of the agreement, he sued for breach of contract. A jury awarded Clark $350 in compensatory damages the difference between the $2400 value of the car as represented and the $2050 value of the car as it actually was. On the basis of the trial judges instruction that the jury could award punitive damages if it found Boises conduct to have been willful, wanton, gross or outrageous, the jury also returned an award of $12,500 in punitive damages. Boise appealed the punitive damages award. How should the court rule?

Dodgy Dodge. a) The court should uphold the punitive damages award because the dealerships behavior was knowingly dishonest. b) The court should reverse the punitive damages award because Clarks claim was for breach of contract.

Dodgy Dodge. The Dodgy Dodge: The Idaho Supreme Court upheld the jury instruction and the $12,500 punitive damages award. The court held that it was irrelevant whether Clarks claim technically sounded in contract or tort and that the jurys compensatory damages award was based on contract law principles. [I]n certain cases elements of tort, for which punitive damages have always been recoverable upon a showing of malice, may be inextricably mixed with elements of contract, in which punitive damages generally are not recoverable. In such cases, punitive damages are allowed according to the substance of a showing of willful fraud. Boise Dodge, Inc. v. Clark, 453 P.2d 551 (Idaho 1969).

The Unpaid Attorney. Claud Yeldell hired John Goren, an attorney, to assist him in the sale of a piece of real estate. Yeldell promised to pay Gorens fees out of the profits of the sale after closing and, as the project proceeded, Yeldell reiterated this promise several times. Shortly after the sale closed, Goren contacted the title company to inquire after his fee. The title company told him that Yeldell had ordered that Goren not be paid. In fact, Yeldell had specifically instructed the title company: Do not pay John Goren any money. He was not my attorney and has never represented me in any matter, and then withdrew all of the sale proceeds from his title company account. Goren sued for breach of contract, and the trial court awarded him $1,336 in unpaid fees and $2,400 in punitive damages. Yeldell appealed, claiming the punitive damages award was inappropriate and should be reversed. How should the appellate court rule?

The Unpaid Attorney. a) For Goren, because the evidence indicates Yeldell committed promissory fraud. b) For Yeldell, because punitive damages are not allowed for breach of contract and there was no proof that he intended not to perform at the time his promise was made.

The Unpaid Attorney. The Court of Appeals of Texas upheld the punitive damages award. The court stated that a promise made with no intent to perform it is fraud, that breach of the promise alone is not evidence of fraud, but that intent at the time of promising may be inferred from subsequent actions. We conclude this evidence is legally sufficient to show Yeldell promised to pay Goren for his efforts on behalf of the Chathams and in connection with the closing, assured Goren he would be paid at closing, but never intended to pay Goren. Thus, the trial court did not err in concluding Yeldell committed fraud, and exemplary damages were therefore recoverable. Yeldell v. Goren, 80 S.W.3d 634 (Tex.App. 2002).

Walgreen v. Sara Creek Property Value to Walgreen of no competition in the mall: $1 million Value to Sara Creek of renting to Phar-Mor: $2 million

Not a Harrier Jet. Eugene Klein retained a broker to help him locate and purchase a Gulfstream model G-II corporate jet, and entered into a contract to purchase such an aircraft from PepsiCo for $4.6 million. When PepsiCos Chairman of the Board decided he wanted to keep the plane, the company breached, and Klein sought specific performance of the agreement. The trial court found that of 21 other G-IIs available on the market, only three were roughly comparable, and Klein would have had to go to considerable expense to locate a replacement. Klein testified that he did not purchase a replacement plane because prices rose sharply following the breach. Ultimately, he purchased a Gulfstream G-III model. Should the court grant Kleins request for specific performance of the PepsiCo airplane?

Not a Harrier Jet. a) Yes, Klein should be granted specific performance because the amount of money needed to satisfy his expectation is too difficult to calculate. b) No, Klein should be limited to money damages because the G-II was not unique and the breach was susceptible to cover.

Not a Harrier Jet. The U.S. District Court ordered specific performance, finding that the Pepsico G-II was unique and Kleins inability to cover with a similar aircraft was strong evidence of other proper circumstances necessary for specific performance under the Uniform Commercial Code. The U.S. Court of Appeals for the Fourth Circuit reversed, explaining that price increases alone are no reason to order specific performance. The court found the G-II was not unique within the meaning of the U.C.C. and money damages would be adequate. Klein v. Pepsico, 845 F.2d 76 (4th Cir. 1988).

The Pace Car. When Corvette was named the official pace car of the Indianapolis 500,
Chevrolet announced that it would produce 6,000 special-edition models of the car to commemorate the event. Joseph Sedmak, a collector of Corvettes, contacted Charlies Chevrolet to pre-order one. Charlies Chevrolet learned it would be allotted one specialedition car from the manufacturer, and the parties agreed to a sale at the (then unknown) manufacturers suggested retail price. At the request of Sedmak, Charlies Chevrolet ordered its car equipped with a special engine, a four-speed standard transmission, and an AM-FM radio with a cassette tape deck. When the car arrived, Charlies Chevrolet told Sedmak that, given the high demand for the special-edition model, it could not sell its single allotted car for the manufacturers suggested price, and that Sedmak would have to bid for the car in an auction. Charlies received offers to buy the car for $24,000 and $28,000 from prospective purchasers as far away as Florida and Hawaii. Sedmak immediately filed a lawsuit for breach of contract and requested specific performance. After a bench trial, the court found that Charlies was in breach of contract and ordered it to make the car available for delivery to Sedmak. Charlies appealed the grant of specific performance, arguing that, given the existence of 6,000 special-edition Corvettes, money damages were a sufficient remedy. How should the court of appeals rule?

The Pace Car. a) For Charlies, because it is possible to ascertain the amount of money damages necessary for Sedmak to purchase one of the 6000 substantially similar Corvettes. b) For Sedmak, because it is unclear if he could find a car with the exact same options and determining the price of such a car would be difficult.

The Pace Car. The Missouri Court of Appeals affirmed a lower court judgment granting specific performance. Here, the trial court ordered specific performance because it concluded the Sedmaks have no adequate remedy at law for the reason that they cannot go upon the open market and purchase an automobile of this kind with the same mileage, condition, ownership and appearance as the automobile involved in this case, except, if at all, with considerable expense, trouble, loss, great delay and inconvenience. Contrary to defendants complaint, this is a correct expression of the relevant law and it is supported by the evidence. Sedmak v. Charlies Chevrolet, Inc., 622 S.W.2d 694 (Mo.App. E.D. 1981).

Purchased for Resale. Ace Equipment Company entered into a contract with Aqua Chem to purchase a used, 6,000 KVA General Electric Transformera very large piece of industrial equipmentfor $1,800. At the time, Ace already had a deal in place to resell the transformer to Frank Lunney for $7,500. Ace loaded the transformer on to a truck on Aqua Chems premises in order to transport it to Lunney, but Aqua Chem prohibited Ace from removing it and disavowed the contract. Ace filed suit against Aqua Chem for breach of contract and requested specific performance, asking the court to order Aqua Chem to turn over possession of the transformer. Aqua Chem argued that specific performance was improper because damages were an adequate remedy. Assuming that the court finds a breach of contract, should it grant Aces request for specific performance?

Purchased for Resale. a) Yes, because it would be difficult for Ace to locate a similar piece of equipment that it could sell to Lunney. b) No, because $5700 would compensate Ace for the profit it expected to make on the transaction.

Purchased for Resale. The Pennsylvania Court of Common Pleas held that Ace had stated a valid case for specific performance by demonstrating other proper circumstances under UCC 2-716. Here, we are dealing with a huge piece of used equipment. It was purchased at a relatively low price when compared to the resale price plaintiff has contracted to sell it to Lunney. This is unlike the ordinary purchase of goods and merchandise for resale. It is unlikely that there is a substantially identical piece of used equipment which plaintiff could locate in order to perform its contract with a third party. Ace Equipment Co., Inc. v. Aqua Chem, Inc. 16 Leb.C.L.J. 12, 1975 WL 22811 (October 16, 1975).

Coal and Coal Miners. In a problem following Chapter 5.B.3, the Northern Indiana Public Service Company unsuccessfully sought to be excused from its duty to purchase coal form Carbon County Coal Company due to a change in circumstances. Carbon County sought specific performance of the contract, arguing that damages would not help the coal miners who would be laid off if NIPSCO were to stop purchasing coal from Carbon County and the businesses in the surrounding area that catered to coal miners and would suffer indirectly from the layoffs. Should Carbon County be entitled to specific performance or should it be limited to damages?

Coal and Coal Miners. a) Carbon County should be limited to a monetary award based on the difference between the contract price and cost of mining the coal (which would be saved as a result of the breach). b) Carbon County is entitled to specific performance because the cost of breach to the community is impossible to calculate.

Coal and Coal Miners. The U.S. District Court for the Northern District of Indiana denied Carbon Countys claim for specific performance and awarded it $181 million in damages. The U.S. Court of Appeals for the 7th Circuit affirmed. The court held that the proper measure of damages was the difference between the contract price of the coal and the cost to Carbon County of mining that coal, and that $181 million was a reasonable estimate of this amount, making money damages an adequate remedy. The court stated that the losses to coal miners and surrounding businesses were irrelevant to the question of remedies as they were not parties to the contract. It also observed that it was unlikely that coal production would continue even if the court were to order specific performance, because NIPSCO and Carbon County would have both been better off negotiating a dissolution of the order of specific performance. Northern Indiana Public Service Co. v. Carbon County Coal Co., 799 F.2d 265 (1986).

Export Technology. Justina Falk worked as an export agent arranging commercial deals for Chinese producers. She contacted Axiam to order a steel skirt gauge for a client in China. The gauge is a technical piece of industrial equipment. As part of the arrangement, Falk required that representatives from Axiam travel to China to install the gauge, test the gauge, and train her client to correctly use the gauge. Axiam manufactured the gauge and shipped it to the client in China. It did not, however, send personnel to install the gauge or train the clients workers. Falk filed a lawsuit for breach of contract and requested specific performance. Axiam argued that damages were sufficient and that it should not have to send an engineer to China to supervise the installation and training. Should the court grant specific performance?

Export Technology. a) Yes, because performance required very specialized technical know-how that few companies have. b) No, because specific performance would require the provision of a personal service, which is difficult for a court to supervise.

Export Technology. The US District Court in Texas held that specific performance was warranted. In the instant case, the facts show that the gauge purchased by Falk from Axiam for Datong was a specialized device, which required the technical and specialized knowledge of Axiam engineers to install, test, and train Datong personnel in its use. The court further held that the services were not personal services, but rather a corporate obligation. Falk v. Axiam Inc., 944 F.Supp. 542 (S.D.Tex., 1996).

J.O. Hooker v. Roberts Cabinet Co. K Price: $151,000 Cost of services: $121,000 K Profit margin: $30,000 Net cost of materials/labor incurred: $9778 Time spent by Kevin Roberts administrating: $1760 Storage of cabinets (after breach): $1440 Travel expenses (in reselling cabinets): $72 Method #1: K price minus costs saved as a result of breach (plus incidental costs of reselling) Method #2: Lost profits plus reliance expenses (plus incidental costs)

Insubstantial Performance. Paul Goulds contractor, Takis Argentinis, stopped work on Goulds house prior to completing work. At this time, Gould had yet to pay Argentinis $43,000 of the $340,000 contract price. The court appointed a trial referee to find facts. The referee concluded that Argentinis had failed to render substantial performance and that the cost of completing performance would be $73,000. Gould then sought to recover $73,000 in damages. Argentinis argued that Gould was entitled to only $30,000. Who is correct?

Insubstantial Performance. a) Gould b) Argentinis

Insubstantial Performance. The trial court awarded Gould $73,000, and the appellate court affirmed, holding that Argentinis would be entitled to reduce Goulds award by $43,000 only if he had substantially performed the contract. The Connecticut Supreme Court reduced Goulds judgment to $30,000. The court held that, as Argentinis had failed to substantially perform, the constructive condition of Gould paying the outstanding $43,000 was not satisfied, and Argentinis could not sue to recover that $43,000. However, concerning Goulds claim for damages, the court held that [i]t is axiomatic that the sum of damages awarded as compensation in a breach of contract action should place the injured party in the same position as he would have been in had the contract been performed. The injured party, however, is entitled to retain nothing in excess of that sum which compensates him for the loss of his bargain. The damages as measured by the cost to Gould of completing performance must be reduced by the $43,000 savings that he enjoyed as a consequence of the breach. Otherwise, the owner would be placed in a better position than full performance would have put him, thereby doubly compensating him for the injury occasioned by the breach. Argentinis v. Gould, 592 A.2d 378 (Conn. 1991).

Challenger Fallout. NASA contracted to launch a series of commercial satellites


owned by Hughes Communications Galaxy into space from NASAs space shuttles. Following the explosion that destroyed the space shuttle Challenger in January 1986, President Reagan decided that NASA shuttles would no longer be used for commercial satellite launches. At that time, NASA was still contractually obligated to launch five of Hughes HS-393 satellites over a period of several years. Without access to the space shuttles, Hughes turned to expendable launch vehicles (ELVs)essentially, large rocketsto launch its satellites. Launching satellites using ELVs was more expensive than Hughes contracted price with NASA. In addition, the HS-393 satellites were not well-suited for ELV launches, so after launching three HS-393 satellites on ELVs, Hughes developed and launched HS-601 satellites, which were better suited to the ELV technology and, in addition, more powerful satellites. At a trial on the issue of damages, Hughes calculated the difference in the cost of launching an HS-393 satellite using ELVs and the cost it would have paid under the NASA contract and requested five times that amount (for the five launches it had left on its contract with NASA at the time of breach). NASA contended that, because Hughes only launched three HS-393s, it was only entitled to three times the cost differential.

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Challenger Fallout. (continued) The NASA contract with Hughes included a


reflight clause, which would provide Hughes with a free relaunch on a later space shuttle if a satellite was not deployed or its deployment deviated from the proper orbit. Such a term was not available in Hughes contracts with the ELV providers, so Hughes purchased launch insurance, which would have reimbursed the company for the cost of an unsuccessful launch. Hughes sought reimbursement for the cost of the launch insurance, and NASA objected on the ground that such insurance was not included in its contract with Hughes. As a result of NASAs breach of contract and the subsequent increase in costs of launching satellites, Hughes increased the price it charged its customers for satellite space. NASA sought to have these revenues subtracted from the damages it owed to Hughes as losses avoided. Hughes argued that it would be improper to consider price concessions obtained by Hughes subsequent to the breach as part of the damage calculation. How should the court rule on these three issues concerning the calculation of damages?

Challenger Fallout. a) Hughes is only entitled to the difference between contract price and price paid for the three HS-393 launches. b) Hughes is entitled to the difference between contract price and price paid for an HS-393 launch times 5, but not the reflight insurance. c) Hughes is entitled the price difference times 5 plus the flight insurance. d) Hughes is entitled to the price difference plus the flight insurance but must subtract the added revenue it received because the delay of the launches.

Challenger Fallout. The US Court of Appeals held that the Court of Claims had
substantial evidence to conclude that the cover by Hughes was reasonable (which is a question of fact). Hughes Communications Galaxy, Inc. v. U.S., 271 F.3d 1060 (Fed Cir. 2001). Furthermore, while the damages calculation might have been easier if Hughes had kept launching HS-393s on ELVs, ease of proof in potential future litigation is not sufficient justification to require Hughes to continue launching satellites that were ill-suited for ELV launches. As the victim of the breach, Hughes was within its rights to obtain commercially reasonable substitute launch services even if the substitute services were not identical to those covered by the LSA. The Court of Federal Claims thus did not clearly err in holding that Hughes successfully covered by launching HS-601s on ELVs. The Court of Claims held that Hughes contract with NASA did not include launch insurance, and Hughes was not required to purchase such insurance, so Hughes decision to purchase such insurance was an independent business decision and not a direct damage caused by NASAs breach of contract. Thus these costs were not recoverable. The USCA held that this decision was not an abuse of discretion. The Court of Claims also held that any increased revenues enjoyed by Hughes should not be deducted from damages, because it would be far too difficult to determine the source of Hughes ability to raise prices after a breach.

Restricted Stock. According to the contract between TheraTx and holders of certain restricted shares of its stock, the stockholders would be permitted to trade their shares for a two year period if TheraTx undertook a public offering of additional stock. TheraTx did undertake a public offering but it prevented the stockholders from selling their shares for a six month period before lifting the restrictions as required by the contract. During that six month period, TheraTxs share price reached a high of $23 per share. When TheraTx lifted the restriction on the stockholders, the share price had declined to $13. The stockholders sued for breach of contract. How should their damages be calculated?

Restricted Shock. a) The difference between the price on the first day of the 2-year period and the last day of the 2-year period. b) The difference between the price at the beginning of the 2-year period and the time at which the shareholders were actually permitted to sell. c) $10: the difference between the highest price the shares reached during the 6-month period and the price on the day the shareholders were permitted to sell.

Restricted Stock. The Deleware Supreme Court held that damages are measured by calculating the difference between (1) the highest intermediate price of the shares during a reasonable time at the beginning of the restricted period and (2) the average market price of the shares during a reasonable period after the restrictions were lifted, with reasonable time and reasonable period defined as the period of time in which the stockholders could have sold their shares without depressing the market price for those shares. The court said that this is a sensible bright line rule that is fair and achieves more certainty than the alternatives, while assigning the risk of fluxuations in share price after the stockholders were permitted to sell to the stockholders. Duncan v. TheraTx, Inc.775 A.2d 1019 (Del. 2001).

Hardwood Floors. Steven and Ana Marie Bray brought a suit for breach of contract against the builder of their new house, Founders C.D., for improperly installing the hardwood floors in their home. Visible sections of the kitchen floor were incorrectly installed, cracked, and/or faded, and the flooring under the kitchen cabinets were improperly installed as well. At trial, undisputed evidence was presented that replacing the floor, including removing the cabinets, installing flooring underneath, and then reinstalling the cabinets, would cost approximately $25,000. The Brays objected to this measure of damages, however, because it did not take into account the disruption that they would suffer as a result of the repairs. Instead, the Brays sought the diminished value of the home as a consequence of the mistakes in the flooring, which they and their real estate agent estimated to be $60,000. What amount of damages should the court award?

Hardwood Floors. a) The court should award $60,000 in diminished value. b) The court should award the $25,000 needed to complete the performance as promised.

Hardwood Floors. The trial court awarded the $25,000 cost of performance figure, stating that under Connecticut law diminished value should be awarded only if it is substantially less than cost of performance. The court ruled that because the Brays had presented no estimates of the disruption costs it had no basis on which to premise an award for such incidental or consequential damages. Bray v. Founders, 2004 WL 1558071 (Conn. Super.).

Contract Price: Costs incurred prior to breach: Additional Cost to Complete: Value of Completed Product on Market: Scrap value of half-complete product: Damages if Manufacturer Completes: $20 - $15 + $5 lost profit = Damages if Manufacturer Stops: $10 - $1 + $5 lost profit =

$25 $10 $10 $15 $1

$10

$14

Family Help. Frank Gironda, Jr. contracted with Schiavi Mobile Homes to purchase a two-bedroom mobile home for just over $23,000 and paid a $1000 deposit. When personal difficulties caused Gironda to breach the contract, Schiavi contacted Girondas father, Frank Gironda, Sr., to try to learn if Gironda, Jr. was planning to go through with the purchase. Gironda, Sr. said that he didnt know, but that he would be willing to purchase the mobile home if his son could not be found and would otherwise lose his deposit. Two months later, Schiavi sold the mobile home to a third party for less than the amount Gironda, Jr. had contracted to pay and sued Gironda, Jr. for damages. At trial, Gironda, Sr. admitted that he didnt have the cash available to make the purchase at the time of the telephone conversation but testified that he stood ready to mortgage his house to raise the money. May Schiavi keep the $1000 deposit and collect the remaining difference between the contract price and the resale price?

Family Help. a) Yes, because Schiavi took reasonable steps to mitigate its damages. b) No, because Schiavi did not pursue the possibility of selling the mobile home to Gironda, Sr.

Family Help. The trial court ruled for Schiavi and awarded damages, and Supreme Judicial Court of Maine reversed on the ground that Schiavi had not taken reasonable steps to mitigate its damages by seeking to sell the mobile home to Schiavi, Sr. Upon learning of the Defendants breach, the Plaintiff was obligated to take reasonable affirmative measures to keep its losses to a minimum.Regardless of whether the father actually made a valid offer, the retailer had tha duty to pursue this opportunity to minimize the effects of the breach. Instead, the Plaintiff waited another two months and sold the home forless than Frank Gironda, Sr., was willing to pay.

Fair Employment. Patricia Fair worked as a room service server in a Red Lion Inn
hotel. After suffering a non-work-related accident, Fair took a medical leave of absence, (during which she also informed Red Lion that she was pregnant). She was discharged by Red Lion two weeks before her doctor believed she could safely return to work from the accident without restrictions. Fairs lawyer contacted Red Lion, asserted her position that her firing constituted a breach of contract, and threatened a lawsuit. In response, Red Lion offered to reinstate Fair in her prior position with appropriate benefits. Fair responded that she would return if she could work at the hotels front desk, Red Lion would agree to additional restrictions on its ability to terminate her in the future, and she be guaranteed the right to transfer to another Red Lion in the future under the same terms. Red Lion declined and reiterated its offer to reinstate her in her prior position with her prior set of employment rights. Fair rejected the offer and sued Red Lion for breach of contract. At trial, Fair testified that she did not accept Red Lions reinstatement offer because she was concerned about the possibility of retaliatory termination, she was concerned about the physical demands of the job in light of her preganancy, and she was uncertain about whether her reinstated medical benefits would cover the period during which she had been fired. Red Lion argued that Fair failed to mitigate her damages and moved to have damages limited to those suffered prior to the offer of reinstatement. The trial judge denied the motion, and the jury awarded Fair damages that included losses suffered after the offer of reinstatement. Red Lion appealed. How should the court rule?

Fair Employment. a) The appellate court should affirm, because there was sufficient evidence for a jury to find Fairs refusal to accept reinstatement was reasonable under the circumstances. b) The appellate court should affirm, because, as a matter of law, an employee should never be required to accept reinstatement from an employer who had illegally discriminated against her in the past. c) The appellate court should reverse, because there was not sufficient evidence of Red Lions bad faith to excuse Fair from minimizing her damages by accepting reinstatement.

Fair Employment. The appleals court reversed, finding that Fair failed to mitigate her
damages as a matter of law. The Colorado Supreme Court affirmed the appeals court. The court found that a party who suffers a breach of contract, including the breach of an employment contract, has a duty to use reasonable efforts to mitigate damages. Although the reasonableness of mitigation efforts is usually a question of fact for the jury, refusal to accept an offer of reinstatement by the firing employer is not reasonable as a matter of law unless there are special circumstances justifying the rejection, and Fair did not offer any evidence of special circumstances that would create a triable issue of fact. According to the court, fear of retaliation without an evidentiary basis did not constitute a special circumstance, because the victim of any contract breach would naturally have diminished trust in her former contracting partner; Fair failed to offer any evidence of particular physical limitations that might be relevant; and Red Lions reinstatement offer implied a commitment to provide continuous insurance coverage. In dissent, three justices claimed that there was sufficient evidence for a jury to decide that Fairs rejection of the reinstatement offer was reasonable. It pointed specifically to evidence that Fair was concerned about the physical limitations of her pregnancy and that she was concerned that the vague language of appropriate benefits in Red Lions reinstatement offer might indicate she would have suffered a gap in medical coverage. Fair v. Red Lion Inn, 943 P.2d 431 (Colo. 1997) (en banc).

Can the Collection Agency Collect? Sprint Spectrum hired Penncro Associates to
staff a call center with employees, who would try to collect unpaid charges from Sprints cell phone customers. The contract called for Penncro to provide 500 dedicated employees for Sprints business, but it continually had problems retaining enough employees to satisfy this requirement (although Sprint never complained about this because its call volume was never high enough to require the contractually-specified number of employees), and the service quality of its employees was poor enough that Penncro ranked last among Sprints contract collection agents in performance quality measures specified in the contract. Sprint breached the contract, and Penncro sought damages of $53 million dollars due under the contract minus $28 million that it would save in costs avoided, which came out to approximately $25 million in damages sought. Sprint argued that $6.5 million, which Penncro earned from contracts with AT&T and American Water after the end of its work for Sprint, should be subtracted from that amount as losses avoided. Penncro won its contract with AT&T on the basis of its experience working for Sprint and based on the understanding that employees, who had serviced the Sprint contract, would service the AT&T contract. The American Water contract required immediate staffing at the time it was awarded. Penncro conceded that it used employees, who had previously serviced the Sprint account, to service the AT&T and American Water accounts. It argued, however, that it was a lost volume seller because it could have hired additional workers and profitably serviced the AT&T and American Water accounts even if it were still servicing the Sprint account. The trial court ruled for Sprint, and Penncro appealed. How should the appellate court rule?

Can the Collection Agency Collect? a) The appellate court should affirm, because the evidence supported the conclusion that Penncro would not have earned $6.5 million of revenue from the new accounts had Sprint not breached. b) The appellate court should reverse, because it would have been possible for Penncro to service Sprint and the new accounts by hiring and training additional employees.

Can the Collection Agency Collect? The 10th Circuit framed the issue as a factual question of whether Penncro could have taken on the additional work and still performed its initial contract with Sprint. The district court found that it could not in light of its continual staffing problems throughout the life of its contract with Sprint, the fact that it was awarded the AT&T contract expressly on the understanding that the employees who had gained telecommunications experience by working on the Sprint account would service the AT&T account, and the fact that the availability of facility space freed up by the termination of the Sprint contract was necessary for Penncro to perform the American Water contract in on the required timeline. The 10th Circuit found this to be substantial evidence for the district courts determination, notwithstanding that Penncro had presented competing testimony from its employees about its adequate capacity. Penncro Associates, Inc. v. Sprint Spectrum, LP, 499 F.3d 1151 (10th Cir. 2007).

The Rule of Hadley v. Baxendale Damages limited to those items: that would fairly and reasonably be considered to arise naturally, i.e. according to the usual course of things, or that were in full contemplation of both parties at the time they made the contract, as the probable result of the breach of it

A Faulty Soil Assessment. Maine Rubber International identified a parcel of land


where it wished to relocate its main manufacturing plant. Maine Rubber paid Environmental Management Group (EMG) $1,900 to test the site for contaminants. At the time Maine Rubber hired EMG, Maine Rubbers president told an EMG representative about the type of business in which Maine Rubber was involved and that it was considering a purchase of the property in question. Maine Rubbers president did not provide any specific information about its plans to relocate to that site. EMGs assessment determined that the property was clean, and Maine Rubber made extensive preparations for a phased move to the new location that would allow it to slowly shift production from the old site to the new one without suffering declines in productivity. Just before the phased move was about to begin, government regulators discovered significant environmental hazards on the new site. Because the toxins could not be remediated before the closing date, Maine Rubber canceled the purchase and completed an expedited, and much more expensive, move to another site. Maine Rubber sued EMG for breach of contract, and a jury returned a verdict for Maine Rubber. Maine Rubber sought $200,000 in damages as compensation for the costs of preparing for the phased move and $500,000 for lost profits during the period in which its plant had to be shut down in order to effectuate the last-minute move to a new location. How should the court rule on Maine Rubbers damages claim?

A Faulty Soil Assessment. a) Main Rubber should recover the $200,000 preparation costs but not the $500,000 lost profits. b) Main Rubber should recover the $500,000 lost profits but not the $200,000 preparations costs. c) Main Rubber should recover the entire $700,000 d) None of the damages claimed are recoverable.

A Faulty Soil Assessment. A jury awarded Maine $700,000 in damages, and EMG moved for the court to set aside the jurys verdict on damages. The court held that Maine Rubber could recover for moving expenditures but not for lost profits. In rejecting the damages for lost profits the court relied on the low contract price that seemingly contained no risk premium and the fact that EMG was never told anything about expected profits at the new site. In awarding out of pocket expenses made for the move, the court held that EMG should reasonably have foreseen that its clean bill of health would lead to Maine Rubber making expenditures for engineering costs, legal fees, site plan consulting, site studies, public relations, geotechnical investigations and design work, and that those would be valueless if Maine Rubber later had to abort the move because of undiscovered environmental hazards. Maine Rubber Int. v. Environmental Mgmt. Group 324 F.Supp.2d 24 (D. Maine 2004)

The 1031 Exchange. The United States Tax Code (section 1031) enables the seller of an
investment property to defer taxes due on the sale by purchasing a similar property with the proceeds within a short period of time. When a 1031 exchange is accomplished, the tax basis of the original property is shifted to the replacement property, and taxes are not due until the replacement property is eventually sold. To complete a 1031 exchange, the taxpayer must designate a replacement property within 45 days of selling the original property, and the purchase of the replacement property must be completed within 180 days of the original sale. In January 2003, Lillian Logan sold a piece of investment property that had appreciated considerably and sought to take advantage of the section 1031 rules. Her real estate brokers told the owner of a shopping mall, D.W. Sivers Company, that Logan was a motivated 1031 buyer. In March, Logan entered into a letter of intent agreement with Sivers to purchase the mall for $5 million with a closing date of June 30. The letter of intent listed several conditions of the purchase and stated that the parties acknowledge that this Letter of Intent proposal is not a binding agreement and that it is intended solely to establish the principal terms of the purchase and as a basis for the preparation of a binding Purchase and Sale Agreement. It also provided that, in return for Logans good faith efforts to review all the relevant information concerning the shopping mall, Sivers would not sell the property to any other party for 60 days. Logan then designated the mall as her exchange property under section 1031, just in time to meet the 45-day designation requirement. Twenty-one days later, Sivers sold the mall to a third party. At this point, it was too late for Logan to designate another property under section 1031. Consequently, she sued Sivers for the $900,000 of federal taxes that would now be due as a result of her January sale, in addition to out-of-pocket costs associated with conducting due diligence on the shopping mall purchase. Is Logan entitled to collect?

The 1031 Exchange. a) Yes, because the taxes were a foreseeable consequence of Sivers breach. b) No, because the tax liability was not a foreseeable consequence of a breach of a promise to negotiate.

The 1031 Exchange. The jury returned a verdict for the plaintiff for breach of contract and awarded her the $900,000 tax loss. The trial court set aside the jurys verdict and entered a directed verdict for defendant Sivers. The Oregon Court of Appeals reversed the trial court and ordered the reinstatement of the jury verdict, finding that substantial evidence supported the jurys implicit conclusion that Logans tax loss was a foreseeable result of the breach. The Oregon Supreme Court reversed, holding that because defendant never agreed to sell or even to negotiate in good faith toward the sale of the property to plaintiff (and, in fact, explicitly disclaimed any such agreement when it signed the letter of intent), plaintiff cannot, under this contract charge defendant with losses that flowed from her inability to finally purchase it. It allowed Logan to recover any expenses that she incurred (and wasted) in attempting to negotiate a final agreement with the defendant Logan v. D.W. Sivers Co., 343 Or. 339 (2007).

When Shamu Attacks. Jonathan Smith, an animal trainer at Sea World in San Diego,
was attacked by an orca (or killer whale) during a live performance at the park. A member of the audience, who happened to catch the attack on film, gave Smith the tape, and Smith permitted two television networks to air the footage, accompanied by interviews with him, in return for $300 and $500, respectively. A decade later, a Fox television show, The Extraordinary, aired 37 seconds of the footage without Smiths permission. Smith sued for copyright violation, and the case was settled out of court with Fox and the shows producer paying Smith $40,000 and promising not to duplicate, display, distribute, or perform the offending footage again. The producer later breached the settlement agreement by selling the rights to rebroadcast ten episodes of The Extraordinary, including the episode that included the Smith footage, to Universal Television Networks (which then broadcast the episode) for $200,000. Smith testified that, since the settlement agreement, he had not attempted to license the video, and he intended not to do so in order to protect his privacy. Smith sued for breach of contract and sought damages for mental suffering and emotional distress that he claimed he suffered as a result of the unauthorized rebroadcast. Assuming Smith can prove he suffered emotional distress as a result of the breach, should he be entitled to recover an amount necessary to compensate for them as consequential damages?

When Shamu Attacks. a) Yes, because emotional harm was a foreseeable risk of breach in this circumstance given the nature of the film. b) No, because emotional damage is not a foreseeable risk of breaching a promise not to sell a video tape. c) No, because emotional damages are never recoverable in a breach of contract lawsuit.

When Shamu Attacks. The federal district court stated that damages for emotional disturbance as a result of breach of contract are excluded unless the breach also caused bodily harm of the contract or the breach is of such a kind that serious emotional disturbances was a particularly likely result.Cases where recovery for emotional disturbance is permitted generally involve a contract where mental anguish was clearly foreseeable or where the express purpose was the mental and emotional well-being of the one of the contracting parties. In this case, the court refused to allow the claim for emotional damages to go to the jury, because the settlement agreement did not state that it was intended to protect Smiths mental condition and that, given Smith had previously licensed the video and discussed the incident on national television, no reasonable jury could find that the parties contemplated that an unlicensed broadcast would cause Smith mental anguish. Smith v. NBC, 524 F.Supp.2 315 (SDNY 2007).

The Frustrated Professor. Professor Philip Freund entered a contract with Washington Square Press according to which Washington Square would publish Freunds manuscript on modern drama first in a hardbound edition and later in a paperback edition and pay defendant an advance of $2000 and royalties of 10% of retail sales proceeds. After paying Freund the royalty, Washington Square stopped publishing hardbound books and breached the contract. Freund sued. At trial, Freund presented expert testimony that it would have cost Washington Square $10,000 to publish the book. He presented no evidence of any reliance damages incurred in performance of his contractual obligations. What damages should the court award?

The Frustrated Professor. a) Nothing. b) $10,000.

The Frustrated Professor. The trial court awarded Freund $10,000, and the appellate court affirmed, comparing the $10,000 to the cost of completion that would be an appropriate remedy for a builders breach of a construction contract. The New York Court of Appeals reduced the award to six cents, representing nominal damages. The court held that awarding the cost of publishing the book would overcompensate Freund, since his expectation was only to earn a fraction of the sales price of the book in royalties. (The court suggested this remedy would have been appropriate if the contract had called for Washington Square to print and bind the book and deliver the copies to Freund.) Since the value of the lost royalties defied proof to the standard of reasonable certainty, Fraud could not recover the royalties themselves. The court found that Freund could have recovered reliance damages had he proven them and had they been foreseeable. Freund v. Washington Sq. Press, 314 N.E.2d 419 (N.Y.C.A. 1974).

When Shamu Attacks, Revisited. Review the facts of the When Shamu Attacks problem that followed Section E. In additional to emotional damages, Smith sought to recover for lost profits resulting from the breach, calculated by multiplying the percentage of the episode of The Extraordinary containing his footage by the amount the producer received for selling the episode in violation of the contract. Should Smith be entitled to recover this amount?

When Shamu Attacks, Revisited. a) Yes, because it is a reasonable estimate of the amount Smith could have received for the video in the absence of the breach. b) No, because there is no evidence for the assumption that the value of the video is proportional to the percentage of time it took up in one episode of The Extraordinary. c) No, because there is no evidence Smith would have sold the video in the absence of the breach. d) The matter should be left to the jury to determine.

When Shamu Attacks, Revisited. Smith claimed that he was entitled to lost profits in the amount of the $200,000 sales price of the 10 episodes, divided by 10, with the result then divided by the percentage of the episode that contained Smiths footage (37 seconds out of 45 minutes), which would yield approximately $280. The district court held that Smiths argument makes no sense, because his alleged damages has no relationship whatsoever to defendants profits, and that Smith has offered no evidence whatsoever that indicates he has suffered any such economic damages. Citing Smiths testimony that he didnt want the footage to be seen, the court ruled that potential damages are far too speculative to be recoverable and granted partial summary judgment to the defendants on the issue. Smith v. NBC, 524 F.Supp.2 315 (SDNY 2007).

The owner of the Cheshire Lodge in a St. Louis suburb leased its adjoining restaurant, the Cheshire Inn, to L&S Properties Limited for a term of 25 years on the condition that the restaurant provided Lodge guests with room and breakfast service. After 8 years, L&S changed management and the service provided deteriorated. Guests began to complain about slow or nonexistent room service, and there was often no breakfast available. Over the same time period, the Cheshire Lodge began to experience a significant increase in room vacancies. The owner of the Lodge, Apted-Hulling, sued L&S for breach of contract. Without contradiction, the Lodges business manager, Margaret Piot, testified that the Lodge rented 6,263 fewer singleoccupancy rooms in 2003 and 6,543 fewer in 2004 than in 1991, before L&S took over the restaurant. She also testified that, using a conservative estimate of revenue per guest and the Lodges profit margin of 40 percent, the reduction in occupancy resulted in a $244,000 reduction in profit for those two years compared with 1991 levels. Piot testified that the Lodge had received numerous complaints about the restaurants service, and that the reduction in occupancy was due entirely to the actions of L&S. On cross examination, Piot testified that the Lodge had no direct competitors for business travelers within three miles of its location and, when the L&S attorney listed several hotels within that distance, admitted that at least two were competitors. She also testified that she did not know if the number of corporate headquarters had increased or decreased in St. Louis during the time period in question or whether the demolition of a nearby sports venue could have affected occupancy rates. The trial court conducted a bench trial and awarded the $244,000 in lost profits, and L&S Properties appealed. How should the appellate court rule?

Poor Service.

Poor Service. a) The court should uphold the damage award because lost profits need only be proved with reasonable, not absolute, certainty. b) The appellate court should reverse the award because the claim that $244,000 of reduced profits were caused by the breach are too speculative.

Poor Service. The trial court conducted a bench trial and awarded the lost profits to the Lodge. The Missouri Court of Appeals upheld the verdict, noting that while an estimate of anticipated profits must be based on more than mere speculation, uncertainty regarding the amount of profits that would have been made does not prevent a recovery. When evidence demonstrates a substantial loss but the amount defies exact proof, it is reasonable to require a lesser degree of certainty as to the amount, leaving a greater degree of discretion to the jury or judge. The court found the plaintiffs business manager credible and witnesses of the defendant not credible. The cross examination of the business manager might affect the weight given to her testimony but does not make the evidence overly speculative. Apted-Hulling v. L & S Properties Ltd. 234 S.W.3d 486 (Mo. Ct. App. 2007)

Stipulated Damages Provision

Liquidated Damages (Enforceable)

Penalty (Unenforceable)

A Monument Made of Italian Marble. In the 1880s, defendant Margaret Lynch contracted with plaintiff M. Muldoon for Muldoon to improve the San Francisco cemetery plot in which Lynchs husband was interred and to construct on the site a monument built out of Ravaccioni Italian marble. Seven thousand dollars of the $18,887 contract price was to be paid when the preparation work was complete, with the remaining $11,887 due after the completion of the monument. The contract provided that:
All the work, with the exception of monument, to be completed within four months from date of contract, and the balance in twelve months from the date of this contract, under forfeiture of ten dollars per day for each and every day beyond the stated time for completion.

The preparation work proceeded on schedule and the first $7,000 was paid, but the monument was nearly two years late. Lynch claimed she was entitled to $7,820 in liquidated damages, which in turn meant she owed Muldoon only $4,067 of the outstanding $11,887. Muldoon sued for the full amount, testifying that the delay was due to the lack of a suitable ship to carry the marble from its Italian sea port and the $10 per day figure constituted an unenforceable penalty. Is Muldoon entitled to $11,887, or only $4,067?

A Monument Made of Italian Marble. a) $11,887, because the difficulty obtaining a ship temporarily excused his performance. b) $11,887, because the $10 per day charge was an unenforceable penalty clause. c) $4067, because the harm suffered by Lynch are of a type particularly difficult to measure.

A Monument Made of Italian Marble. The California Supreme Court ruled that the stipulated damages provision was unenforceable. It found that there was no evidence that the defendant suffered any actual damage which can be measured or compensated by money. It is true, she had the right to contract to have the monument erected in memory of her deceased husband, and to have it at a certain time; and possibly the agreement might have been so drawn that her disappointment should have received adequate compensation; but, referring to the words used by the parties, we are not prepared to say that either had thought of compensation as such. The world forfeiture is the equivalent of the world penalty; it imports a penalty. The court then conceded it might have been quite difficult for the defendant to show any damage of a pecuniary nature for the non-completion of the monument at the time specified, though its completion might have been of great comfort and consolation to her affectionate remembrance. Muldoon v. Lynch 66 Cal. 536 (1885).

A Double Deposit. Donald Leeber contracted to purchase a condominium from the Deltona Corporation for $150,200, with a 15% ($22,530) downpayment made at the time the agreement was signed. The contracted provided that if Leeber failed to close on the purchase, Deltona would retain the full deposit as liquidated damages. When Leeber failed to close on the appointed date, Deltona notified him that it was retaining the deposit. Four days later, it sold the same condominium unit to another buyer for $167,500 (including a $25,125 deposit). The evidence indicated that that Deltonas incurred costs of $5704 as a result of the breach in the form of commission to the selling real estate agent and administrative costs. Leeber claimed that the liquidated damages term was unenforceable and sued for the return of his $22,530. What result?

A Double Deposit. a) Deltona must return the entire deposit to Leeber. b) Deltona may keep the deposit. c) Deltona must return the entire deposit less $5704.

A Double Deposit. The trial court allowed Deltona to keep $5704 and ordered it to return the remainder to Leeber. The Maine Supreme Court, applying Florida law, concluded that the liquidated damages clause was enforceable if the actual damages in the case of breach were not ascertainable on the date of contracting unless the amount stipulated in the context of the contract was shocking to the conscience. In this case, it found that damages were not ascertainable on the date of contracting, that 15% was not an unreasonable amount of liquidated damages on its face, and that the amount was not converted to ordinary breach of contract damages by the sellers fortuitous resale of the contract real estate subsequent to the buyers breach. Leeber v. Deltona, 546 A.2d 452 (1988).

Public Infrastructure. The City of Coffeeville, Kansas, hired Hutton Contracting Company to construct a power and fiber-optic cable line for the city within a 45day period, with extensions for bad weather, for the price of approximately $1,132,000. The contract included the following stipulated damages clause:
The time of the Completion of Construction of the Project is of the essence of the Contract. Should [Hutton] neglect, refuse or fail to complete the construction within the time herein agreed upon, after giving effect to extensions of time, if any, herein provided, then, in that event and in view of the difficulty of estimating with exactness damages caused by such delay, the [City] shall have the right to deduct from and retain out of such monies which may be then due, or which may become due and payable to [Hutton], the sum of FIVE HUNDRED DOLLARS ($500.00) per day for each and every day that such construction is delayed on its completion beyond the specified time, as liquidated damages and not as a penalty.

Hutton was nearly six months late in completing the project, and the City withheld $85,500 from the final payment as stipulated damages for the delay. Hutton sued. At trial, the City presented evidence that, as a result of the delay, the city spent an additional $76,000 in increased engineering and inspection costs but no evidence that the damages correlated with the number of days the project was delayed. Who should prevail?

Public Infrastructure. a) Hutton should prevail because the clause was clearly intended to penalize any unexcused delay. b) The City should prevail because the contract specifies that the damages are liquidated damages and not a penalty. c) The City should prevail because the stipulated damages amount was reasonably related to the actual damages suffered.

Public Infrastructure. Hutton argued that the City suffered no damages because it lost no revenue as a result of the delay and, therefore, the stipulated damages clause was an unreasonable penalty. The court held that, as the city incurred $76,000 in damages, the clause amounted to a reasonable estimation of damages using the retrospective method. (The court declined to determine whether it was prospectively reasonable because Hutton did not raise that issue at trial). Hutton Contracting Co. v. Coffeyville 487 F.3d 772 (10th Cir. App. 2007).

Full Tuition. In March 1989, John Carney entered into a contract with Lake Ridge Academy to enroll his fourth-grade son, Michael, in the private school for the following academic year, at a cost of $6240 for tuition, books, and supplies. The contract allowed Carney to cancel the agreement in writing prior to August 1, and provided that Carney would be obligated to pay the full charge if enrollment were canceled after that date. On August 7, Carney notified Lake Ridge that Michael would not be enrolling that fall. When Carney refused to pay the tuition, Lake Ridge sued for the tuition, and Carney defended on the ground that the contract provision constituted a penalty clause. At trial, the Lake Ridge headmaster testified that we feel that August 1st is as far as we want to go prior to the start of the school year in order for us to be able to collect our revenue for expenses that are ongoing regarding the operations of the school. The only testimony concerning damages actually suffered by the school was the headmasters testimony that, if the school enjoyed any savings from Michaels withdrawal, they were minuscule. Should Lake Ridge be permitted to recover the full amount of tuition?

Full Tuition. a) No, because the charge is a penalty. b) Yes, because the charge constitutes liquidated damages.

Full Tuition. The Ohio Supreme Court upheld a trial court ruling granting the school the full tuition. The court found that the provision in question was an enforceable liquidated damages clause rather than a penalty because at the time of the contract damages that would result from breach were uncertain as to amount and difficult of proof, and the contract as a whole was not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties. The court held that, in light of the liquidated damages clause, the school had no duty to mitigate, and that, even if it did, it could not reasonably be expected to recruit a new student so close to the beginning of the school year. A dissent claimed that, although actual damages might be uncertain, they were clearly something less than the full annual charge for tuition, books and supplies. Therefore, since the provision did not attempt to take account of this fact, is constituted an unenforceable penalty. Lake Ridge Academy v. Carney, 613 N.E.2d 183 (Ohio 1993).