Chapter 5

Remedies

Chapter Five covers the remedies available to a contracting party who is entitled to recover for breach of contract, promissory estoppel, or unjust enrichment. We “in the know” call the party entitled to recover the “injured” party. First, we discuss several possible remedies for the injured party for breach of contract. The most common remedy, called “expectancy damages,” seeks to give the injured party the money equivalent of what she expected from the contract so that she is in as good a position as if her contracting partner had not breached.¹ Another remedy for breach of contract is “reliance damages,” which seeks to put the injured party in the position she was in before making the contract.² This remedy is different from expectancy damages because the injured party does not recover the value of the broken promise. A third remedy for breach of contract is “liquidated damages,” which is the measure of damages contractually agreed to by the parties in case of breach.³ We also discuss contract law’s treatment of emotional distress damages and punitive damages for breach of contract.

We follow up all of these measures of damages for breach of contract with a discussion of two additional remedies for breach of contract. First, we look at a remedy called “restitution,” which gives the injured party an amount of money measured by the benefit the injured party conferred on the contract breaker.⁴ Second, we study “specific performance,” in which a court orders the breaching party to perform the contract.⁵

We then turn to remedies for an injured party based on the theories of promissory estoppel and unjust enrichment. Remedies for promissory estoppel include damages measured by the value of the injured party’s detrimental reliance or damages measured by the value of the promise.⁶ The remedial goal in unjust enrichment cases is the same as in cases where an injured party elects restitution for breach of contract, namely to give the claimant a money remedy based on the benefit the injured party conferred on the other party.⁷

This little roadmap will not mean very much until you read and study what follows. So what are you waiting for?

A. REMEDIES FOR BREACH OF CONTRACT

1.Expectancy Damages—Introduction

You will find many references in judicial decisions, treatises, and law reviews to the remedial goal in cases of breach of contract (in fact, you already have seen several references to this goal right here in this valuable book⁸): The purpose of awarding damages is to compensate the injured party so that she is in the position she would have been in if the breaching party had performed the contract.⁹ In short the injured party gets the monetary equivalent of what she expected (hence “expectancy damages”) under the contract. She doesn’t get more than her expectancy. For example, she cannot recover punitive damages, because contract law’s goal is to compensate the injured party, not to punish the breaching party.¹⁰ Nor, in theory, does the injured party get any less than her expectancy (although we will see that there are lots of limitations on the expectancy recovery so that injured parties rarely, in fact, receive the full money equivalent of what they expected).¹¹

An example should clarify the idea of expectancy damages. Suppose you make an enforceable contract to sell your piano to your neighbor, Alice, for $1200, when the market value of the piano is $1400. You break your contract before you deliver the piano and before Alice has paid you anything. Alice’s expectancy damages are $200, the difference between the market value of the piano and the contract price. If you had performed your contract, Alice’s net worth would have increased by $200—she would have parted with $1200 to acquire an asset worth $1400. She can use the $1200 she would have paid you, plus the $200 in damages, to purchase an equivalent piano on the market for $1400. Alice is in as good a position as if you had not breached the contract. Expectancy damages measured by the market price-contract price differential are often called general damages.¹² (This example is a sale of goods, so Article 2 of the UCC would apply. We will see that under the UCC the result would be the same.)¹³

You are probably already worrying about several complications. For example, you may be concerned about whether contract law compensates Alice for her time and effort in finding and purchasing another piano. And suppose Alice is a piano teacher and loses income during the time she has no piano due to your breach. Contract law must compensate Alice for all of this harm in order to put her in as good a position as if you had not breached. Recoveries of this nature are the consequential damages component of expectancy damages, and much more about them in due time.¹⁴

Why should injured parties in breach of contract situations receive expectancy damages? Most writers explain the expectancy goal as the best method for encouraging people to make and rely on their contracts, which benefits them and society.¹⁵ For example, parties can rely on their contracts, assured that they will receive either performance or the equivalent in compensation for non-performance.¹⁶ A damages measure any lower than lost expectancy would undermine people’s confidence in their contracts, and a measure larger than expectancy would discourage them from making contracts because they would be wary of the extent of their liability for breach.¹⁷

Lawyers interested in economics offer another rationale for awarding expectancy damages.¹⁸ (Please continue to read even if you hated economics in college.) According to the “theory of efficient breach,” expectancy damages correctly encourage a party to breach when the breach is efficient, in that the breach makes some parties better off without making anyone worse off.¹⁹ On the other hand, expectancy damages dissuade a party from breaching when a breach would cause more losses than gains.²⁰ Suppose, for example, you agree to sell your piano to Alice for $1200. As above, the piano is worth $1400. But, alas, you have more than one neighbor in this example. Another neighbor, Bob, offers to buy the piano from you for $1800. According to the lawyer-economists, expectancy damages allow, even encourage, you to break your contract with Alice, to pay her $200 (her expectancy damages measured by the market price-contract differential), and to deliver the piano to Bob, who outbid Alice for the piano. You gain enough from selling to Bob instead of Alice ($600) so that you can pay Alice her expectancy damages and still come out $400 ahead.²¹ Bob, who bid the highest for the piano is also better off because he valued the piano more than the $1800 he paid (otherwise he would not have made the deal). Alice is no worse off because she recovers her $200 expectancy. Everybody is happy. What a wonderful world.

Lawyer-economists point out that awarding damages greater than an injured party’s lost expectancy would be undesirable because it would discourage breach when breach would be efficient.²² Suppose, for example, that Alice could recover $200 lost expectancy damages and $600 punitive damages. You would not breach because it would not be profitable for you, even though we have just demonstrated that, without the punitive damages liability, breaching would make you and Bob better off and no one worse off (hence a breach would be efficient). Awarding damages any lower than expectancy also would be undesirable because you would have the incentive to breach even when your gain from doing so would be less than Alice’s real loss.²³

Please understand that this introduction to expectancy damages (and efficient breach) requires lots of elaboration (to come). For example, the efficient breach idea is controversial and we will introduce many counter arguments.²⁴ Further, lots of damages rules often limit the recovery of injured parties to well below lost expectancy. For example, contracting parties usually must pay their own lawyers and can rarely recover prejudgment interest.²⁵ These costs of litigation apply across most areas of the law.²⁶ Further, contract law denies injured parties damages that were not reasonably foreseeable or not proven with certainty, even though such damages may be real and large.²⁷ In addition, courts rarely award certain kinds of damages, such as emotional distress damages and sentimental losses.²⁸ Finally, contract law denies recovery for losses that the injured party could have avoided after the other party’s breach.²⁹

Such limitations on expectancy damages make sense. For example, we will see that contract law bars the recovery of unforeseeable consequential damages in part to encourage parties to disclose potential losses at the time of contracting.³⁰ (I can’t resist giving you a brief explanation of this point right here. Before making the piano contract, Alice has the incentive to disclose to you that she is a piano teacher and will lose profits if you fail to deliver the piano because, if she doesn’t disclose, she cannot recover the lost profits if you breach.) In addition, contract law awards only provable damages to encourage parties to enter contracts in the first place.³¹ (Would you want to enter the contract to sell your piano to Alice if you thought your liability would not be limited to damages she could prove with sufficient certainty?) You can see that the study of expectancy damages involves understanding the policies in favor of these damages and the counter-policies that sometimes restrict recoveries to less than expectancy.

2.Methods of Measuring Expectancy Damages

It is easy to say that the goal of contract damages is to put the injured party in as good a position as she would have been in had there been no breach. Actually achieving this goal is another story.

One fundamental question is whether a party’s lost expectancy under a contract should be measured objectively, based on the market value of the promised performance “to some hypothetical reasonable person,”³² or subjectively, based on the value of performance “to the injured party himself” in light of the party’s “particular circumstances.”³³ For example, you promise to sell a piece of your land to a developer. The developer promises to build a wall to divide your remaining land from the development. Although you realize that the wall will actually decrease the market value of your remaining land, you are peculiarly adverse to development and wish not to see it from your land. The developer breaks its promise to build the wall. The cost of getting someone else to build the wall is $3000, but the wall actually will diminish the value of your remaining land by $1000. In other words, you are better off on your balance sheet without the wall. Should you recover $3000, the value of performance to you in light of your circumstances and proclivities or should you get nothing and be thankful that you saved $1000 on your balance sheet?

So as to not keep you in suspense, some courts would award you the $3000.³⁴ Such decisions theorize that contract law should measure lost expectancy based on the injured party’s subjective perspective.³⁵ Notice, however, that I said that “some” courts would do so. The issue is, in fact, controversial and a number of important cases have wrestled with it.

The opinion in Groves v. John Wunder Co.,³⁶ includes forceful majority and dissent discussions of how to measure lost expectancy. Wunder leased a piece of Groves’ land in order to excavate gravel. Wunder promised in the lease to “leave the property ‘at a uniform grade, substantially the same as the grade now existing at the roadway * * *.’ ”³⁷ At the end of the lease, Wunder returned the land without honoring the promise to restore it to a uniform grade. The cost of restoration would have been more than $60,000, but restoration would only have increased the value of land by a little more than $12,000.³⁸ The case presents the issue of whether Groves’ expectancy damages should be measured by the actual cost of restoration or by how much restoration would increase the value of the land.

The majority opinion held that Groves was entitled to the cost of restoration ($60,000), provided that the contract actually required Wunder to remove gravel from the premises in order to restore the grade, which, apparently, constituted a large part of the expense.³⁹ The dissent, however, would have awarded $12,000 damages, on the theory that Groves suffered only a $12,000 loss in the value of the land as the result of the breach.⁴⁰ Who is right?

Both the majority and dissent agreed that Groves was entitled to expectancy damages and that two methods of measuring those damages existed. They strongly disagreed, however, on the correct measurement under the facts of the case. For example, the majority volunteered that Wunder’s breach was “deliberate” and “wilful.”⁴¹ A court positing whether to award a larger or smaller measure of damages naturally would be inclined to require a “nasty” contract breaker to pay the larger amount. But the dissent observed that there was no “finding that the contractor ‘wilfully and fraudulently’ violated the terms of its contract.”⁴²

You have learned that the goal of contract remedies is to make the injured party whole, not to punish contract breakers,⁴³ so different perspectives concerning the motives of Wunder in breaking the contract cannot be all that separated the majority and dissent. In fact, more important was the majority’s and dissent’s different views of the probable intentions of Groves after Wunder returned the land. The majority appears to have opted for cost-of-restoration damages because they believed that Groves would keep the land and that its condition was important to Groves. The majority likened Groves’ position to a property owner who contracted for a foolish monument on his property that will actually diminish the value of his land: “ ‘A man may do what he will with his own, * * * and if he chooses to erect a monument to his caprice or folly on his premises, and employs and pays another to do it, it does not lie with a defendant who has been so employed and paid for building it, to say that his own performance would not be beneficial to the plaintiff.’ ”⁴⁴ The majority’s position was that Groves may be objectively irrational to have contracted for restoration (a $60,000 investment for a $12,000 return), but a landowner ought to have the right to do what it wants with its land.

The dissent argued, however, that the parties contemplated “put[ting] the property in shape for general sale”⁴⁵ and that nothing supported the view that Groves wanted the property for a “unique or personal use.”⁴⁶ Further, the property was not special because of its location or because of a future contemplated use.⁴⁷ In short, according to the dissent, restoration of the land was not important to Groves, and was only an incidental term of the contract. The dissent therefore concluded that, although Groves could have contracted for a foolish monument, and would then have been entitled to the cost of restoration, “that is not what [Groves] contracted for.”⁴⁸ Implicit in the dissent’s opinion is the concern that if Groves were awarded $60,000, Groves would pocket the money and receive a windfall instead of investing the money to restore the land.⁴⁹

Whether the majority or dissent is correct about the appropriate measurement of Groves’ lost expectancy thus depends on who is right on the facts. If Groves wanted the land restored so that it could enjoy its beauty, Groves should get $60,000. If Groves was simply going to sell the land, which would be worth only $12,000 once restored, Groves should recover only $12,000. The majority thought that Groves was more like the former than the latter, whereas the dissent thought the opposite.

One aspect of the case that went unexplored by both the majority and dissent that would have shed light on Groves’ motives, is the nature of the parties’ bargaining over the restoration clause at the time of contracting. Did Groves insist on the clause or was it part of a standard form that the parties ignored? If the former, did Groves reveal why it wanted the clause? Did Groves actually pay for the restoration clause, for example, by discounting the price of renting the land, so that Wunder would agree to restore it?

Let’s illustrate the latter point. Wunder paid $105,000 for the lease.⁵⁰ Suppose the fair rental value of the land was $165,000, but that Groves discounted the price because Wunder promised to restore the land, which the parties calculated to cost $60,000. Under these facts, restoration must have been important to Groves (after all, he gave up $60,000 in rent for it). Groves’ lost expectancy would therefore be $60,000. Neither the majority nor dissent discussed this issue, perhaps suggesting that the parties did not calculate the cost of restoration at the time of contracting.

In Peevyhouse v. Garland Coal & Mining Co.,⁵¹ often a companion case to Groves in the casebooks, the Peevyhouses brought an action against Garland Coal for failing to restore the Peevyhouses’ land after strip mining, as promised by Garland Coal. The cost of restoration was about $29,000, but restoration would increase the value of the land by only about $300. The majority focused on the huge discrepancy between these amounts and denied the Peevyhouses cost-of-restoration damages. The court reversed a jury verdict of $5000 and awarded $300.⁵²

Based on our discussion above in Groves, however, the Peevyhouses may have been shafted (this would be a great pun if strip mining created shafts, but unfortunately it doesn’t). The dissent pointed out that the Peevyhouses “insisted that the * * * [restorative and remedial] provision be included in the contract and that they would not agree to the coal mining lease unless the above provision were included.”⁵³ So the Peevyhouses should have recovered $29,000 because the restoration provision was important to them. At minimum, the majority should have affirmed the jury’s award of $5000 because this measure appeared to constitute a compromise between the cost of restoration and the diminution in value. Alternatively, perhaps the jury thought that the Peevyhouses gave Garland Coal a $5000 discount on the lease because the parties thought that was the cost of restoration. Unanticipated circumstances after the parties signed their contract may have driven up the cost of restoration.⁵⁴

The Peevyhouse case, decided by the Oklahoma Supreme Court, was cast into doubt by Rock Island Improvement Company v. Helmerich & Payne, Inc.,⁵⁵ a federal court case applying Oklahoma law. In still another instance where the cost of land restoration was hugely disproportionate to the increase in land value by restoration, the court applied the cost-of-restoration measure.⁵⁶ The wrinkle was that by the time the court decided the case, the Oklahoma legislature had adopted a statute declaring that land conservation was the policy of the state and requiring the miner to restore the land regardless of the cost.⁵⁷ The Rock Island decision included this telling passage:

When the parties negotiated the contract in question, they expressly included a reclamation clause and required the lessee to bear the cost of reclamation. Given the attention focused by Oklahoma on the importance of reclaiming stripmined lands, it is more logical to assume that the parties meant what they said, calculated their costs and benefits under the contract accordingly, and intended the provision to insure proper reclamation of the land, than it is to assume that they expected the reclamation clause to have no force.⁵⁸

In Oklahoma, the state policy created a strong presumption that the contract right of landowners to reclamation was not merely incidental to the contract, but an important, bargained-for term. Although the cost of the restoration was grossly disproportionate to the increase in value of the land, the landowner was therefore entitled to the cost of restoration.⁵⁹

3.Expectancy Damages—General Damages and Consequential Damages

An injured party’s lost expectancy consists of two basic components. First, certain damages, sometimes called “general damages,” arise “naturally” or “ordinarily”⁶⁰ from a breach, meaning that every injured party under the circumstances suffers these damages. When you contract to sell your piano, worth $800, to Alice for $1000, you will suffer $200 damages if she repudiates the contract before either party performs. You were going to sell an asset worth $800 for $1000, so your balance sheet would improve by $200 if Alice performed the contract. In fact, every seller who has a contract to sell an item worth $800 for $1000 would lose $200 by a breach.⁶¹ Your $200 damages are therefore often denominated general damages.

“Special damages,” also called “consequential damages,” arise because of an injured party’s particular circumstances.⁶² Suppose you fail to deliver the piano to Alice, making you the breaching party in the above example. Alice claims damages of $300 because she made a contract to resell the piano for $1300 (recall that she was buying it from you for $1000). To make Alice whole, contract law must award her the $300. But, of course, not all piano buyers would incur such a loss (many buyers, like me, keep their pianos so that they can learn to play Chopsticks). Contract law therefore calls the $300 special or consequential damages.⁶³

The distinction between general and consequential damages sometimes is blurred and confusing,⁶⁴ but, when clear, the distinction often helps clarify what the injured party must show in order to recover damages. For example, we will see that an injured party claiming consequential damages faces certain proof hurdles, such as showing that the damages were reasonably foreseeable to the breaching party at the time of contracting,⁶⁵ and not too speculative.⁶⁶ Contract law establishes these and other hurdles to the recovery of consequential damages because, by definition, not all injured parties suffer them. In the discussion that follows, we therefore will refer to general and consequential damages where appropriate.

4.Expectancy Damages in Various Contexts

A helpful approach to the study of expectancy damages is to sample the expectancy damages awarded in various contexts. Here we consider construction contracts, employment and other service contracts, and sales of goods and land. Although the principles that emerge are not always unique to a particular context, after becoming familiar with how the principles operate in one context, you will be able to apply them to other types of contracts.

a.Construction Contracts

First, let’s consider construction cases. How much can a builder recover when the owner breaches a construction contract? How much can the owner recover when the builder breaches? Simple answer: Both can recover the money equivalent of their lost expectancies. Let’s delve more deeply.

Injured builders: In order to put an injured builder in as good a position as if there had been no breach by the owner, contract law must give the builder the net profit it would have made on the contract and any amount already expended in furtherance of the project.⁶⁷ Suppose you repudiate a contract in which Ajax Construction Company was going to build a house for you for $150,000 (sorry, these days that won’t get you much). Ajax’s total cost of building would have been $120,000, and you repudiated the contract before Ajax began performance. Ajax should recover $30,000—the amount of Ajax’s net profit had it built the house. If you repudiated the contract after Ajax had already spent $50,000 of the cost of performance, Ajax should recover $30,000, the expected net profit, and $50,000, the amount Ajax expended before your repudiation. The $80,000 award takes Ajax from a minus $50,000 position after your repudiation to a plus $30,000 position, the position that Ajax would have been in had both parties performed the contract. Of course, if you had already made progress payments to Ajax, these would be subtracted from the recovery.⁶⁸

The formula for an injured contractor can also be expressed in another way, namely contract price minus the cost of completion.⁶⁹ Ajax would have been paid $150,000 if there had been no breach. Now it can save $70,000 ($120,000 total cost minus $50,000 cost expended). So Ajax should recover the difference or $80,000 (again minus any progress payments you already made).

It is time to introduce an important limitation on lost expectancy recoveries that applies in all cases, variously called the mitigation principle, the duty to minimize damages, and the avoidable consequences principle.⁷⁰ This limitation is well-illustrated by injured builder situations. Suppose again that you repudiate after Ajax has already performed $50,000 of the work. Ajax ignores your repudiation and finishes the house, which costs an additional $70,000. Ajax then seeks $150,000, the contract price. Contract law doesn’t reward Ajax’s stubbornness, but will only award $80,000, as above.⁷¹ The theory is that Ajax must act reasonably after a breach to minimize its loss. Ajax’s unreasonableness, not your breach, caused the extra $70,000 loss to Ajax after your repudiation.⁷² As one early court put it: “the plaintiff had no right, by obstinately persisting in the work, to make the penalty upon the defendant greater than it would otherwise have been.”⁷³ If Ajax finishes your job, it cannot collect damages for the portion completed after your repudiation.

In a great case illustrating the “mitigation” principle, Rockingham County hired Luten Bridge Company to build, you guessed it, a bridge.⁷⁴ However, the county decided not to build a road to and from the bridge and canceled the contract before Luten Bridge began construction. Luten Bridge built the bridge anyway “in the midst of the forest.”⁷⁵ The court held that Luten Bridge “had no right * * * to pile up damages by proceeding with the erection of a useless bridge.”⁷⁶ (Maybe this was the bridge that inspired Paul Simon to write “Bridge over Troubled Water.”) The county was liable only for the damages Luten Bridge would have suffered had it stopped work at the time of the county’s countermand.⁷⁷

As we have said, the duty to mitigate damages requires an injured party to act reasonably after breach.⁷⁸ Occasions may arise where finishing work after a countermand is the most reasonable strategy for an injured party trying to minimize damages.⁷⁹ For example, a manufacturer of goods may act reasonably by completing the job after a repudiation if there is a rapidly rising market for the completed goods and the manufacturer can resell them for more than the contract price.⁸⁰ The same reasoning could apply to a developer who is selling lots and building upon them. However, it is difficult to see how an injured builder working on your land could avail itself of this principle.

The duty to mitigate damages also requires a builder who honors a repudiation to look for other work in order to minimize the loss.⁸¹ If Ajax reasonably can make a net profit of $20,000 by constructing another building for a third party, a job Ajax can take only because your breach freed up time, contract law deducts the $20,000 from your damages liability. In the example above where you repudiated after Ajax had completed $50,000 of work, Ajax’s recovery should be $60,000, consisting of $30,000 net profit, plus $50,000 costs expended, minus $20,000 made on the substitute job.

Some analysts prefer to examine the mitigation doctrine through an economic lens. For example, Judge Posner argues that “[t]he duty to mitigate damages prevents [a party] from exploiting his temporary, contract-conferred monopoly in order to obtain a more generous settlement of his claim of breach of contract.”⁸² Posner’s principal justification for analyzing the problem in economic terms is clarity of analysis.⁸³ However, it is not self-evident why language such as “exploiting” and “contract-conferred monopoly” is any clearer than traditional language that describes as wrongful promisee conduct that builds up damages, such as failing to take advantage of market substitute opportunities.

Now we introduce another damages principle nicely illustrated in the construction setting, which involves builders who “lose volume” as a result of a breach. Suppose Ajax is a large construction company that can satisfy all of the demand for construction in its area at any given time. (It can hire and lay off workers and rent machinery as needed.) Assume again that Ajax made a net profit of $20,000 on another job after your breach. Does this $20,000 decrease your $80,000 damages liability to Ajax, even when Ajax can do all of the construction jobs that people request? If Ajax has lost volume, because it could have done your job and the second job, the answer is a definitive no!⁸⁴ The second job is not a substitute for your job and, if you had not breached, Ajax would have made a total of $50,000 net profit; $30,000 on your job and $20,000 on the second job. Contract law therefore ignores the $20,000 Ajax made on the second job to put it in as good a position as if you had not breached. Remember to apply this lost-volume idea only when an injured party can take on as many jobs as people request and, therefore, when any new jobs are not substitute jobs.⁸⁵

A large construction company that can satisfy all of the demand for construction at any given time can still mitigate damages in the following situation. (This “wrinkle” drives people crazy, and not just law students, so pay attention.) Suppose you hired Ajax to build a house for you. Ajax retains a subcontractor, Acme Plumbing Company, to install all of the plumbing in the house. Acme is a large company that can perform all of the plumbing jobs it is hired to do at any given time. In short, Acme will lose volume if Ajax breaches. Ajax does breach; in fact, it stops all work on your house and thus breaches the contract with you too. You take over the general contracting yourself and hire Acme to do the same plumbing work it would have done as Ajax’s subcontractor. Acme performs the work and you pay it the same amount Ajax would have paid Acme. Acme then sues Ajax for breach of contract and seeks lost profits as a lost-volume contractor. Can it recover?

In a case with similar facts (only you weren’t involved), Olds v. Mapes-Reeves Construction, Co.,⁸⁶ the court suggested that a subcontractor (Acme in the example) can recover lost profits from a general contractor (Ajax in the example) despite doing the same work for the landowner (you in the example).⁸⁷ The court reasoned in part that the subcontractor could have taken a completely different job, say doing plumbing work at the Watergate complex in D.C.⁸⁸ The profit made on that job would not have diminished the general contractor’s damages liability because the subcontractor lost volume by virtue of the breach (the subcontractor could have done both jobs). So why should the subcontractor’s work for the landowner be treated any differently?

This reasoning in Olds is faulty for at least two reasons. First, unlike the Watergate job, the subcontractor’s job with the landowner is available only because of the general contractor’s breach. The job for the landowner, in short, is a substitute job, whereas the Watergate job is not. As a substitute job, the subcontractor does not lose volume as the result of the breach (even though, in general, the subcontractor can do as many jobs as are available). The second reason the court’s approach was inaccurate is that the subcontractor would never be in a position to take the Watergate job instead of the job with the owner precisely because the subcontractor is a lost-volume contractor. If Watergate offered the subcontractor a job and the landowner offered a job, the subcontractor reasonably should take both. In fact, if the subcontractor failed to take the landowner job, the subcontractor would not be acting reasonably to minimize its damages after the general contractor’s breach.⁸⁹

Injured landowners: Suppose Ajax breaches the contract to build your $150,000 home, instead of you. You hire another builder to do the same job for $160,000. This new contract is called a “cover” contract because it covers or substitutes for what Ajax was supposed to do. If Ajax had performed, you would have had the house for $150,000. Now you will get the same house for $160,000. You can recover $10,000. Of course, your substitute arrangement must be reasonable. You cannot hire a builder to build the same house for $160,000 if other builders reasonably were available who would have done the work for $150,000. Further, you cannot hire a builder to build a better house for $160,000 and still get the $10,000.⁹⁰ That would put you in a better position than if Ajax had performed. One exception to this last point: You might get the $10,000 if you contracted for the better house only because you reasonably could not find a builder willing to build the $150,000 house. In that case, you had no choice but to accept the more valuable house, which, contract law says, was “foisted” on you.⁹¹

Suppose, in the above example, Ajax had completed $10,000 of work before repudiating. You reasonably hire a substitute builder for $160,000. Do you still get the $10,000 difference between your cover and contract prices? Does this penalize the breaching builder who has done $10,000 of work? The answer is that you do get the $10,000 and the award does not penalize the builder. This is because the $160,000 price you paid to the substitute contractor takes into account the work Ajax did. Let’s assume that Ajax’s $10,000 of work reduced the cost of the substitute’s construction by $10,000. Without Ajax’s work, the substitute would have charged roughly $170,000. So Ajax’s damages liability (cover minus contract price) would have been $20,000 without its work. With its work, Ajax owes you only $10,000. It therefore got full benefit for the work it did.⁹²

The “hypos” keep coming. Suppose you hired Ajax to build a bed and breakfast for you. You tell Ajax about your plans. Ajax promises to complete the house by June 1, so that it will be ready during the busy summer months. Ajax delays completing the house until September 1 and you bring an action seeking lost profits for the summer months.

The lost profits you seek are a form of consequential damages, a topic introduced above.⁹³ As such, among other things, you must show both that the damages were reasonably foreseeable and that you can prove them with sufficient certainty.⁹⁴ The first of these hurdles is not a problem here because you told Ajax about your plans to open a bed and breakfast.⁹⁵ The second hurdle is more problematic. You are starting a new business and it will be very difficult for you to prove what your gross receipts and expenses would have been during the time you could not open your business because of Ajax’s delay.⁹⁶ In short, your damages are very speculative and you probably cannot recover them.

Courts sometimes manipulate the “new business rule” (which bars a recovery of lost profits) and, for that matter, the general requirement of proving consequential damages with sufficient certainty. For example, a court that strongly believes that a breaching party actually caused a loss is more likely to relax the certainty requirement.⁹⁷ In addition, courts are more likely to award lost profits when a party willfully or negligently breaches than when the breach is innocent or common (such as a delay in a construction contract).⁹⁸ In fact, as a general matter, the certainty requirement seems on the wane.⁹⁹ For example, an early case that denied lost profits required the injured party to prove damages with “reasonable certainty.”¹⁰⁰ Later cases pronounce arguably more liberal standards, such as a “rational basis” for the computation.¹⁰¹ Moreover, some courts largely reject the new business rule.¹⁰²

All is not lost for you, incidentally, even if the new business rule bars your recovery of lost profits for your bed and breakfast. Most courts would still grant damages for the delay in construction measured by the lost rental value of your property (usually measuring the rental value of the improved property) on the theory that if the builder had not delayed, you could have rented the property as a bed and breakfast from the time the structure was due.¹⁰³

Now suppose you hire Ajax to build an addition on your already existing bed and breakfast. Ajax breaches the contract and your business loses good will. Good will is “the reputation that businesses have built over the course of time that is reflected by the return of customers to purchase goods and the attendant profits that accompanies such sales.”¹⁰⁴ Claims for loss of good will or loss of reputation, for that matter, have not always been successful because of the difficulty of quantifying the loss.¹⁰⁵ Courts allow such a recovery only when there is “a reasonable basis from which to calculate damages.”¹⁰⁶

b.Employment and Other Services Contracts

Now we take up an injured employer’s expectancy damages after an employee breaks an employment contract and an injured employee’s expectancy damages after a breach by the employer. In addition, we look at damages for breach of services contracts, which share many of the attributes of employment contracts.

Injured employers Recall that property owners typically hire a replacement builder after the original builder breaches a construction contract. Injured employers also usually hire a substitute. Not surprisingly, the employer’s expectancy damages are the difference between the salary the employer must pay the new employee and the salary the employer would have paid the breaching employee.¹⁰⁷ The employer must hire a reasonable replacement, of course, meaning that the employer must “attempt to obtain equivalent services at the lowest possible cost.”¹⁰⁸ If the only substitute employee available is more qualified than the breaching employee, contract law usually ignores any extra benefit the employer receives because the employer had no choice but to accept the benefit¹⁰⁹ (the “foisting” principle again¹¹⁰). For example, in Handicapped Children’s Education Bd. of Sheyboygan County v. Lukaszewski,¹¹¹ Lukaszewski broke her teaching contract with the Education Board and the court awarded the Education Board the full difference between the substitute teacher’s salary and Lukaszewski’s, even though the substitute teacher had more teaching experience than Lukaszewski. The court concluded that “[a]ny additional value the Board may have received from the replacement’s greater experience was imposed upon it and thus cannot be characterized as a benefit.”¹¹²

The reasoning of the court in Handicapped Children’s Education Bd. should be familiar to any reader who has studied the material in Chapter 3 on the theory of unjust enrichment. Recall that a party who receives a benefit without the opportunity to reject it is not liable under the theory of unjust enrichment. (Remember the example where Alice is in the swimming pool construction business and she builds a pool in your yard while you are away. You don’t have to pay for the pool.¹¹³) The crux of the problem is that the party receiving the benefit neither consented to nor wanted the benefit. Similarly, the Education Board received the benefit of the better teacher only because of Lukaszewki’s breach and the unavailability of comparable teachers, not because the Education Board sought the benefit.¹¹⁴ Hence, contract law ignores the benefit in determining Lukaszewski’s damages liability.

Injured employees Suppose an employer wrongfully terminates an employee. The employee is entitled to any unpaid salary up to the time of the breach and her salary for the remaining term. But the employee must try to minimize her damages.¹¹⁵ Contract law deducts from her recovery any salary she makes or could have made by accepting reasonable substitute employment.¹¹⁶ If you have a contract to work for one year for Paul’s Piano Tuners for $4000 per month and Paul’s wrongfully terminates you after paying you for one month, you are entitled to $44,000 ($4000 per month for eleven months) minus what you make or could have made in a reasonable substitute job. The mitigation principle creates incentives for you to find substitute work instead of lying around and binging on Netflix.

What constitutes a reasonable substitute job? Obviously, the substitute job must be comparable or similar to the original job.¹¹⁷ But what exactly is a comparable or similar job? The issue of a reasonable substitute arises not only when an injured employee has opportunities with third parties after a breach, but also when the breaching employer reconsiders and seeks to rehire the injured employee. In the latter case, courts especially have amplified the meaning of a “reasonable substitute.”

Consider the decision in the wonderful case of Parker v. Twentieth Century-Fox Film Corp.¹¹⁸ Fox hired Parker, also known as Shirley MacLaine, to act in a movie called “Bloomer Girl,” a musical to be filmed in California. The contract gave Parker approval rights over the director and screenplay. Fox decided not to make “Bloomer Girl” and broke the contract with Parker. However, Fox offered Parker a part in another movie, “Big Country, Big Man,” for the same salary.¹¹⁹ This film was to be a western, shot in Australia. Parker also would lose her approval rights. Parker declined the job offer and sought full payment of her promised salary for “Bloomer Girl.”

The Supreme Court of California affirmed a summary judgment in favor of Parker.¹²⁰ Applying the mitigation-of-damages principle, the court held that Fox’s substitute offer was not “substantially similar” (therefore not a reasonable substitute) but, instead, was both “different” and “inferior.”¹²¹ Further, no factual issues challenged that conclusion.¹²² (The court stated that Parker could ignore Fox’s new offer if it was either “different or inferior,” but the court believed that the facts supported both requirements in the case.)¹²³ Fox’s substitute offer was “different” because “Big Country, Big Man” was a western to be filmed in Australia, not a musical to be shot in California.¹²⁴ Fox’s offer was “inferior” because Parker lost her approval rights.¹²⁵ Parker was therefore reasonable in refusing to accept the substitute offer.¹²⁶

A dissenting judge was chagrined by the majority’s willingness to decide the case without a trial. The dissent thought that the question of whether the substitute offer was “different” should go to a jury because “[i]t has never been the law that the mere existence of differences between two jobs in the same field is sufficient, as a matter of law, to excuse an employee wrongfully discharged from one from accepting the other in order to mitigate damages.”¹²⁷ According to the dissent, the jobs had to be “different in kind,” a factual issue, before Parker could ignore the substitute offer. Further, whether loss of approval rights made “Big Country, Big Man” inferior was also a fact question.¹²⁸

From Parker and similar cases,¹²⁹ we can glean some of the factors that are probative of whether a new offer of employment, whether from the breaching party or a third party, is a reasonable substitute. Is the offer for a job in the same field?¹³⁰ Parker certainly wouldn’t have to take a job cleaning the animal cages used in “Big Country, Big Man.” Does the employee have the same rights as in the original contract?¹³¹ Recall that Parker lost her approval rights.¹³² Does the employee have new duties or responsibilities?¹³³ Is the compensation different? How will the substitute job affect the injured party’s career? Obviously, such factors will not always provide clear guidance to courts in any particular case.

A few policy concerns apply only to new offers made by the breaching party.¹³⁴ Although the court in Parker did not address the issue, courts should consider whether requiring an injured employee to accept a new offer from her breaching employer, even a reasonable one, impinges on freedom of contract. Parker contracted to perform in a musical in California, not a western in Australia. If the mitigation rule applied to Fox’s offer, Parker would have to perform a different contract than she bargained for (or lose the amount she could have made by doing so). In addition, not only would Fox have the power to alter the contract unilaterally, but Parker would have to deal further with a party who had already demonstrated its lack of reliability and untrustworthiness. What would prevent Fox from coming up with still another substitute film offer, say for Parker to play a derelict in a horror film to be shot in Mongolia? Further, Parker may be so disgusted with Fox that she will create difficulties and decline to perform in “Big Country, Big Man” to the best of her abilities.

These policy concerns influence courts so that breaching employers have had an uphill battle arguing that an employee should have accepted a breaching party’s new offer.¹³⁵ On the other hand, if the terms of the offer are similar enough (for example, if Fox simply sought to move the shooting date of “Bloomer Girl” forward by a few weeks), contract law requires the injured employee to take the offer in order to avoid the costs of breakdown.¹³⁶

Before we leave the issue of mitigation of damages in the employment context, one caveat: If an injured employee actually takes a clearly inferior job, the substitute salary made by the injured employee is still likely to reduce the damages liability of the original breaching employer.¹³⁷ Suppose again that Paul’s Piano Tuners hires you for one year for $4000 per month and wrongfully terminates you after one month. You immediately take a job as a janitor at Elliot’s Cleaners for $2000 per month, and remain with Elliot’s for eleven months. You can recover $22,000 from Paul’s ($44,000 expected from Paul’s minus $22,000 made with freed-up time). Contract law does not account for your loss of prestige, but would award any consequential damages you suffer, such as the costs of a longer commute or other concrete inconveniences.¹³⁸

Service contracts Hadley v. Baxendale¹³⁹ may be the most famous contracts case. Perhaps it is one of the most famous cases in any field of Anglo-American jurisprudence. Maybe it is the most important piece of writing in the English language. Well, I may be getting carried away, but please treat the case with appropriate veneration. The case involves what I am calling a “service contract,” because a carrier promised a miller to deliver a broken crank shaft to a repair shop. The carrier was performing a service for the miller as an independent contractor, not as an employee. Nonetheless, as you will see, the Hadley rule applies to all kinds of contracts.

The carrier delayed delivering the crank shaft and the miller lost profits. The court would not award the lost profits to the miller, however, because the lost profits did not “aris[e] naturally” from the breach, nor were they “reasonably * * * in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.”¹⁴⁰ The lost profits did not “aris[e] naturally” because it was “obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred.”¹⁴¹ The lost profits were not reasonably in the parties’ contemplation because the special circumstances—the miller would lose profit without its crank shaft because it did not have a substitute shaft and the mill would have to shut down until the shaft was repaired and returned—were “never communicated” by the miller to the carrier.¹⁴²

Hadley is famous for setting forth the “reasonably foreseeable” hurdle to the recovery of what are, in the typical case, consequential damages.¹⁴³ (The lost profits are consequential damages because not every miller would have lost profits because of the carrier’s delay.¹⁴⁴ For example, some would have a substitute crank shaft to keep the mill running.) According to Hadley, the miller can recover lost profits only if the carrier, at the time of contracting, should have reasonably foreseen that its delay would cause such losses.¹⁴⁵ This objective test (because it depends on what a reasonable party would know) does not always require the injured party to explain the consequences of breach to the breaching party. For example, suppose the carrier previously had transported the miller’s crank shaft and knew that the miller had to shut down the mill while the crank shaft was being repaired. Or suppose it was generally known that millers could legally own only one crank shaft. In either case, the miller could assert persuasively that the carrier reasonably should have known that the miller would lose profits if the carrier delayed delivering the crank shaft. Now suppose the carrier delivered crank shafts and nothing else. In this instance, a carrier reasonably should know more about the milling business and perhaps about the consequences to a customer of delay.¹⁴⁶

In the actual case, the miller did not tell the carrier about the consequences of delay nor would a reasonable carrier have gleaned the ramifications from the circumstances. The lost profits were therefore not reasonably foreseeable and not recoverable.¹⁴⁷ By the way, don’t be confused by the conflict between the rendition of the facts set forth at the beginning of the opinion, written by a court reporter (“the defendants’ clerk * * * was told that the mill was stopped, that the shaft must be delivered immediately, and that a special entry, if necessary, must be made to hasten its delivery * * *.”¹⁴⁸), and the court’s understanding of the facts in the middle of the opinion (“we find that the only circumstances here communicated by the plaintiffs to the defendants at the time the contract was made, were, that the article to be carried was the broken shaft of a mill, and that the plaintiffs were the millers of that mill.”¹⁴⁹). According to later courts, the Hadley court simply rejected the court reporter’s version of the facts.¹⁵⁰

Several policies support the Hadley rule, which awards only reasonably foreseeable damages.¹⁵¹ The court notes the injustice of requiring the carrier to pay for losses it reasonably could not foresee. The court does not elaborate, but it must have thought that the carrier would have charged more, taken extra precautions, or insisted on a disclaimer of liability had it known of the miller’s potential loss from delay.¹⁵²

Another policy supporting the Hadley decision involves reducing the costs of contracting. The contract between the miller and carrier did not allocate the risk of the carrier’s delay, meaning that the contract did not say whether the carrier was liable to the miller for its lost profits caused by delay. So the issue in the case boils down to how the court should fill the gap in the contract. Lawyer-economists argue that courts should fill the gap with the term the parties would have wanted had they dealt with the issue in their contract (assuming that their bargaining would be costless and each party had complete information).¹⁵³ This strategy serves economic efficiency because it reduces “transactions costs” (roughly, the cost in time and effort of reaching an agreement on the issue). Parties do not have to invest resources bargaining over terms, such as whether the carrier is liable for lost profits, because the court will fill the gap with the term the parties would have selected.¹⁵⁴

How do courts find the term the parties would have selected? Lawyer-economists posit that the parties would have allocated the risk of lost profits to the “superior risk bearer,” the party better able to bear the risk, such as by purchasing insurance, or to the “superior risk avoider,” the party better able to prevent the loss from occurring in the first place.¹⁵⁵ In Hadley, for example, the superior risk bearer may be the miller, who can insure most cheaply against the risk of a broken crank shaft.

You may be a little concerned with this analysis. You may be thinking that the carrier is the superior risk avoider in Hadley because it can take precautions to ensure delivery of the crank shaft on time at a lower cost than the miller can insure against the risk of a broken shaft or can ensure that the mill does not stop after a crank shaft breaks.¹⁵⁶ You also may be thinking that this is all very speculative and that a court can easily manipulate the determination of who is the superior risk bearer or avoider. Although you are surely right, the superior risk bearer or avoider approach is a major theory of gap filling, which we pursue further in Chapters 7 and 9.¹⁵⁷

Commentators also treat the Hadley rule as an example of a “penalty default,” which penalizes a party for failing to reveal its superior information.¹⁵⁸ Specifically, Hadley penalizes the miller, who did not disclose its potential losses to the carrier at the time of contracting, by disallowing the miller’s lost profits.¹⁵⁹ The decision therefore encourages future parties to reveal, at the time of contracting, any special losses they will incur if the other party breaches.¹⁶⁰ Further, were it not for the Hadley rule, the miller probably would not disclose these potential losses. Assuming most millers do not suffer lost profits due to a delay in the carriage of their crank shaft, the carrier will raise its price once the miller reveals its special circumstances (because the carrier is taking on a greater risk of liability than when it carries the average miller’s crank shaft).¹⁶¹ So, without the Hadley rule, the miller will not disclose because the result would only be that the miller would pay more for carriage of the crank shaft. With the rule, the miller will disclose so long as the benefit of a potential recovery of lost profits exceeds the higher price of carriage.¹⁶²

The “penalty-default” explanation of Hadley is controversial. For one thing, the miller may not disclose its situation to the carrier under the Hadley rule because the costs of doing so may be even greater than an increase in the price of carriage.¹⁶³ A miller inclined to disclose will have to incur the costs of determining exactly what it will lose by a delay in carriage (which may not always be as obvious as in Hadley).¹⁶⁴ The miller also suffers the risk that the carrier will try to exploit the miller by charging more than a fair price for the carrier’s extra liability.¹⁶⁵ The total costs of revealing information therefore often may outweigh the gains of potential carrier liability.¹⁶⁶ Moreover, even if the miller discloses, the carrier may not take the necessary precautions to avoid delivering late (which, after all, is the one of the main benefits of information disclosure).¹⁶⁷ If the carrier rarely delivers late and delivers oodles of crank shafts, it may be cheaper for the carrier to pay high damages very rarely than to try to process information from millers and make special arrangements as needed for each type of miller.¹⁶⁸

Whatever the reasons for the rule of Hadley v. Baxendale, it has met with wide approval and adoption. For example, the drafters of the UCC codified the Hadley rule in section 2–715(2)(a): “Consequential damages resulting from the seller’s breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise * * *.”¹⁶⁹ An official comment to the section expressly repudiates the “tacit agreement” test for the award of consequential damages.¹⁷⁰ Under that test, a breaching party might escape liability for foreseeable consequential damages. A breaching party would be liable only if she “tacitly consented” to be liable for the foreseeable damages.¹⁷¹ In Hadley, for example, the carrier might not be liable for the miller’s lost profits even if the miller told the carrier of the ramifications of delay. The carrier would be liable only if the circumstances showed that the carrier “tacitly agreed” to take on that potential liability. If you are having trouble thinking of how the miller could show the carrier’s tacit agreement, you are not alone. That is why most courts and section 2–715 repudiated the rule.

c.Sales of Goods

Part seven (the 700 sections) of Article 2 of the UCC governs remedies for breach of a sales contract. In addition, section 1–305 of the UCC sets forth the general expectancy measure as the cardinal remedial principle of the UCC (the rules of Article 1 apply to all of the UCC, including Article 2): “The remedies provided by this Act shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed * * *.”¹⁷² The remedial rules of Article 2, designed to achieve the goal of section 1–305, are a rich subject that is often taken up in upperclass commercial law courses. I will only provide a broad outline here.

Consequential and incidental damages We just encountered UCC section 2–715, dealing with consequential damages, and we saw that the section adopts the Hadley rule that consequential damages must be reasonably foreseeable.¹⁷³ If you break a contract to sell your piano to Alice, you will be liable for any reasonably foreseeable consequential damages.¹⁷⁴ If you have reason to know that Alice is a piano teacher, for example, you may be liable for her lost profits if she cannot give lessons. Further, section 2–715 provides that the lost profits must not be reasonably preventable.¹⁷⁵ If Alice reasonably could have obtained a substitute piano immediately after your breach and therefore could have avoided losing profits, you will not be liable for her lost profits.

Suppose Alice breaches the contract before you deliver the piano. Section 2–710 allows you, as a seller, to recover “incidental damages” consisting of any “charges, expenses or commissions incurred in stopping delivery,” any expenses in transporting and caring for the goods after the breach, and any similar damages.¹⁷⁶ You can conceptualize incidental damages as a form of consequential damages for sellers, in that some, but not all, sellers will suffer such damages after breach.¹⁷⁷ Amended section 2–710 specifically would allow sellers to recover consequential damages, although a comment suggests that sellers rarely will need to avail themselves of this right.¹⁷⁸

General damages Obviously, buyers and sellers may incur greater damages than consequential or incidental damages. Article 2 sets forth parallel provisions for buyers and sellers that allow them to recover their general damages as well.

Injured buyers Suppose you break your promise to sell Alice your piano for $1000 when the market price is $1200. Alice can recover $200 under the market price-contract price differential formula of section 2–713.¹⁷⁹ Under the section, courts must determine the market price “at the time when the buyer learned of the breach,”¹⁸⁰ because this is the time when a reasonable buyer could purchase a substitute piano.

If Alice actually purchases a substitute, Alice can recover the cover price-contract price differential under section 2–712.¹⁸¹ (The “cover” price is the price of the substitute purchase.) If the substitute purchase is “in good faith,” is “without unreasonable delay,” and is otherwise reasonable,¹⁸² she can recover more under section 2–712 than she could under section 2–713. If Alice pays $1300 for the substitute piano, when the market price is $1200, she can recover $300 if her actions were reasonable. Alice’s actions would be reasonable, for example, if she can get the $1300 piano soon enough to avoid losing profits in her piano teaching business. The theory for allowing Alice this remedy, of course, is that it better measures Alice’s actual damages.

Article 2 is not very clear on what happens if Alice purchases a substitute piano for $1100 when the market value is $1200. Can she recover $200 under section 2–713? This seems inconsistent with the lost expectancy principle codified in section 1–305, because Alice lost only $100 in that she purchased a piano at less than the market price. However, section 2–712(1) says the buyer “may” cover, suggesting that the section is optional and that Alice can recover under section 2–713.¹⁸³ Further, Alice can claim that her $1100 piano purchase was a separate investment and that she is going to sell that piano on the market for $1200. She will then have to pay $1200 for another piano and her damages are legitimately $200. The ambiguity in the UCC on Alice’s recovery when she “covers” at less than the market price has never been satisfactorily resolved. Amended Article 2 includes a comment that the cover remedy “is not mandatory” and that “buyer is always free to choose between cover” and section 2–713.¹⁸⁴ But Amended Article 2 does not expunge the expectancy damages principle of section 1–305, so you can argue that giving Alice $200 puts her in a better position even under the revision. At any rate, amended Article 2 has not been adopted by any state.

Section 2–714 sets forth the remedy for a buyer who accepts and keeps defective goods. The remedy 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 * * *.”¹⁸⁵ Suppose the market value of a piano like yours is $1100, and you contract to sell the piano to Alice for $1000. Neither you nor Alice know that the piano is defective and worth only $800. Alice keeps the piano. Under section 2–714(2), you owe her $300, the difference between the value of what she received ($800) and what you promised her ($1100).

Injured sellers We have already discussed sellers’ incidental and consequential damages under the UCC.¹⁸⁶ We focus on sellers’ general damages here. When a buyer breaches a contract, the injured seller can look to UCC sections 2–708(1) and 2–706 in much the same way as sections 2–713 and 2–712 work for injured buyers. For example, if Alice promises to purchase your piano for $1000 and it is only worth $900 “at the time and place for tender” (usually the time she breaches), you can recover the contract price-market price differential of $100 under section 2–708(1).¹⁸⁷ In the alternative, if you resell the piano for $850, and the resale is “in good faith and in a commercially reasonable manner,” you can recover $150.¹⁸⁸ “Good faith” and commercial reasonableness roughly mean that the resale must be honest and comparable to other sales in the trade.¹⁸⁹ You can’t sell at a discount in order to penalize Alice or to curry favor with a particular customer. As with the relationship between sections 2–713 and 2–712 on the buyer’s side,¹⁹⁰ whether section 2–708(1) is available to a seller when the seller resells for more than the market price is unclear. If you resell for $950 when the contract price is $1000 and the market value is $900, for example, can you claim the larger contract price-market price differential of $100, or are you stuck with a $50 damages award? Section 1–305, which sets forth the expectancy formula, would suggest the latter, but sections 2–708(1) and 2–706 are also written as if they were alternatives for the seller.¹⁹¹

Amended section 2–708(1)(b) provides that the time for measuring the market price when the buyer repudiates the contract before the time for tender is “at the expiration of a commercially reasonable time after the seller learned of the repudiation * * *.” The explanation for the change is that “[t]his time approximates the market price at the time the seller would have resold the goods * * *.”¹⁹²

Lost volume sellers Suppose Alice contracts to purchase a piano from Peter’s Retail Piano Store for $1000, instead of from you. She then breaches the contract, but Peter’s sells the same piano to Leonard for $1000. (You may be thinking, “why is he going over this easy resale price-contract price example again?¹⁹³ I have enough to learn as it is.”) If Peter’s can obtain from the manufacturer-supplier as many pianos as Peter’s requires to sell to the public, the resale price-contract price formula of section 2–706 will not put Peter’s in as good a position as if Alice had performed. For that matter, neither will the contract price-market price differential of section 2–708(1). This is because, as the result of Alice’s breach, Peter’s has lost one sale and one profit ($1000 minus the price Peter’s paid for the piano from the manufacturer). If Alice had not breached, Peter’s would have sold two pianos. After the breach, Peter’s sells only one. If Peter’s was purchasing the pianos wholesale for $800 and selling retail for $1000, then Peter’s lost $200 as a result of Alice’s breach. A court explained this “lost volume” principle as follows (in an example dealing with cars):

If the dealer has an inexhaustible supply of cars, the resale to replace the breaching buyer costs the dealer a sale, because, had the breaching buyer performed, the dealer would have made two sales instead of one. The buyer’s breach, in such a case, depletes the dealer’s sales to the extent of one, and the measure of damages should be the dealer’s profit on one sale.¹⁹⁴

The drafters of UCC section 2–708(2) recognized the lost-volume predicament of the seller and provided that the seller can recover lost profits in lieu of another remedy.¹⁹⁵ The section has caused some confusion, however, because it also provides that the buyer should get “credit for payments or proceeds of resale.”¹⁹⁶ In the example above, should Alice get credit for the proceeds of resale against what she owes Peter’s? If so, this defeats the whole idea of allowing lost profits to a lost-volume seller. But don’t worry. Courts and commentators interpret the “credit for resale” reference to apply only to a resale of a manufacturer’s raw materials as scrap after a breach by the buyer.¹⁹⁷ The “credit for resale” clause should be ignored, in other words, in cases such as our example. Further, amended section 2–708(2) deletes the offending language, laying to rest the issue of what it means in retail sales cases.¹⁹⁸

We have already seen that the “lost volume” idea applies not only to sales of goods, but in the construction-contract arena as well.¹⁹⁹ In fact, it should apply in any context where the injured party loses volume as the result of a breach.

Here’s one more example of lost volume in another context before I have milked the subject for all it is worth. Michael Jordan was “one of the most popular athletes in the world” at the time of an agreement with MCI to license Jordan’s name to promote MCI’s telecommunications products and services. (I’m not making this example up, and the claim about Jordan’s popularity is the court’s.²⁰⁰ As a Knicks fan, I’m not so sure.) The agreement allowed Jordan to endorse other products and required him to be available for four days per year, but not more than four hours in a given day.²⁰¹ For this, Jordan’s compensation was, brace yourself, $5 million for signing, and $2 million per year for ten years.²⁰²

When MCI went bankrupt, Jordan made a claim with the bankruptcy court for payments due.²⁰³ One objection asserted by MCI was that Jordan should have mitigated damages by making other arrangements.²⁰⁴ However, Jordan claimed that he could have made other endorsement contracts even if MCI had performed the agreement in full.²⁰⁵ Additional endorsement deals, in short, would not have been substitutes for the MCI agreement and thus the duty to mitigate damages did not apply.²⁰⁶

The bankruptcy court held that Jordan did not intend to continue marketing his services had MCI honored the contract because of his fear that he was “diluting his image.”²⁰⁷ Further, Jordan worried that the NBA would frown upon granting him a franchise (something he wanted) if he had committed to too many endorsement deals.²⁰⁸ So the court denied Jordan lost-volume status and applied the duty to mitigate to him.²⁰⁹ Poor Michael.

What can we learn from this case (that we don’t already know)? To gain lost-volume status in this context, not only must a plaintiff show that she could have made another contract if there had been no breach, but that she would have done so.²¹⁰

d.Sale of Real Property

Damages for breach of a real-property sales contract resemble damages for breach of a sale-of-goods contract, but with a few differences. Injured sellers can recover the difference between the contract price and market price of the land,²¹¹ together with any consequential damages.²¹² Under one line of authority, injured purchasers of land also can recover the difference between the market price and contract price.²¹³ Another approach, however, limits the injured purchaser to restitution of the amount the purchaser has already paid, unless the seller’s breach was willful or in bad faith.²¹⁴ In the absence of seller willfulness or bad faith, why should an injured purchaser be deprived of expectancy? The idea seems to be that sellers often breach inadvertently because of title problems, and such contract breakers should be treated more leniently.²¹⁵ More important to you, which “rule” should you apply on your exam or in practice? Know both of them for the exam, and indicate the result either way (that’s how you should treat all “splits” in authority). When you are a lawyer, do research in your state to find out the rule applied there!

e.Summary of Limitations on Expectancy Damages as Illustrated by the Various Contexts

Although we have focused on contract expectancy damages in various contexts, general principles have emerged. The goal in each context is the same—to give the injured party the money equivalent of what she expected from performance. Moreover, we have set forth various formulae for achieving this goal. Each formula takes into account the position the injured party is in after the breach and the position the injured party would have been in had there been no breach. Contract law then awards money damages to move the injured party from the former to the latter position.

Of course, you also must be mindful of the limitations on expectancy recoveries that we have surveyed. For example, injured parties must mitigate their damages. Recall that an injured builder usually must quit work after a landowner’s repudiation and an injured employee must accept a reasonable substitute offer.²¹⁶ In addition, injured parties must prove their damages with sufficient certainty. Courts may deny a new business owner lost profits, for example, because of the absence of persuasive proof of the amount the business lost.²¹⁷ Further, contracting parties also must prove that their damages were reasonably foreseeable. For example, courts may bar a miller unforeseeable lost profits when a carrier delays delivering the miller’s broken crank shaft.²¹⁸

5.Reliance Recoveries for Breach of Contract in Lieu of Expectancy Damages

In limited situations in breach of contract cases, courts grant an injured party reliance damages instead of expectancy damages. You should not confuse the situations we are about to discuss in this section with those involving remedies after a finding of promissory estoppel.²¹⁹ In the cases to be discussed here, an injured party has proven that the other party has breached an enforceable contract. Still, the court awards reliance damages instead of expectancy damages. Later, we will look at the remedies after a party has succeeded in a promissory estoppel action.²²⁰

a.Reliance Damages Defined

First, what do we mean by reliance damages instead of expectancy damages? Suppose you are a concert promoter and you sign Lea Salonga (you know, from “Miss Saigon”) to give a concert in Chicago on September 1. You project that the gross receipts from the concert will be $2,000,000 and the total costs of putting on the concert will be $1,400,000. You envision a nice profit of $600,000. Unfortunately, Lea breaks the contract so that she can perform elsewhere after you have already sunk $300,000 into the project. What can you recover?²²¹

Recall that a serious impediment stands in the way of your recovering expectancy damages. You expected to make $600,000, and you now are out $300,000, so you would have to recover $900,000 to be in as good a position as if Lea had not breached. But you will have difficulty proving with sufficient certainty the amount of your expected profit. Has Lea performed before in comparable forums and under similar conditions so that you can prove your damages with sufficient certainty? Do you have other evidence that you would have grossed $2,000,000? Can you even prove that the concert would not have lost money? All of this seems very speculative,²²² so you can’t count on recovering full expectancy damages.

What about your expenditures of $300,000 incurred before the breach and made in reliance on the contract? You should be able to prove this amount with sufficient certainty. (You kept records, didn’t you?) So, your difficulty in proving lost profits should have no impact on your ability to collect your reliance losses.²²³

What if Lea claims that her concert would not have been a success, meaning that the costs of the concert would have been greater than the gross receipts? (Lea may not like the implications of this example concerning her “star” power, of course.) In fact, Lea claims that gross receipts would have been only $1,000,000, so that you would have lost $400,000 if Lea had not broken the contract. (Remember the costs of producing the concert would have been $1,400,000.) Contract law allows defendants in Lea’s position to present this defense, but they must prove the amount of the loss with the same precision that you would have to prove the gain.²²⁴ If Lea can prove gross receipts from the concert would have been $1,000,000, you should not recover any of your $300,000 reliance loss because you would have lost $400,000 if she had not breached. (But contract law does not reward Lea for breaching by allowing her to recover your $100,000 savings caused by her breach.) If neither party can prove with sufficient precision the amount of profits or losses on Lea’s concert, which is the most likely outcome, courts give the benefit of the doubt to the injured party and therefore would award you the full $300,000 reliance loss,²²⁵ provided you can jump other hurdles to the recovery of your reliance loss (to follow).

b.More Hurdles to Reliance Recoveries

Do other hurdles stand in your way? In short, all of the limitations on expectancy recoveries discussed earlier also apply in the context of reliance recoveries for breach of contract.²²⁶ This makes sense. After all, Lea should not be responsible for your expenditures if they were not reasonably foreseeable²²⁷ or you could have avoided them after hearing about her breach.²²⁸

Further, suppose $100,000 of the $300,000 of your expenditures consisted of a payment to reserve a concert hall in Chicago for Lea’s concert, but that you committed to the venue and paid the money before Lea had even signed your contract to perform. Can you recover this money as part of your reliance damages for breach of contract?

One argument against your recovery of the $100,000 is that you didn’t make the expenditure in reasonable reliance on Lea performing for you because you knew that she might never sign the contract. You accepted that risk when you committed yourself.²²⁹ On the other hand, when Lea did sign the performance contract, she reasonably should have understood that if she broke the contract you would lose any money you already had committed to the concert. In effect, by joining the project she impliedly agreed to indemnify you for any pre-contractual reliance.²³⁰ Authority exists for adopting either of these propositions.²³¹

c.Fixed Overhead

Recall that we are assuming that you are a promoter and that you arrange lots of concerts. One expense of your business is known as “fixed overhead,” which, most basically, consists of the general cost of running your business. For example, you pay secretaries, for the heating and cooling of your office, rent, taxes, etc. to keep your business running.²³² Can you recover any of these expenses after Lea’s breach?

At first blush, you may think not.²³³ After all, you would have incurred these expenses even if Lea had never been born (which would have been a real blow to musical theater). But consider the following. Suppose you had four projects for the accounting period at issue in our problem, including Lea’s. You produced three other concerts that took place without a hitch (say the Indigo Girls, the Backstreet Boys, and Men at Work), each of which cost $150,000 to produce and grossed $230,000. You therefore made a total of $240,000 on the Girls, Boys, and Men ($230,000 minus $150,000 for each of three concerts). Suppose your total fixed overhead for this accounting period was $36,000. If Lea had not breached, your accountant would allocate $9,000 of the fixed overhead to each of the four events. If Lea breaches and you cannot recover $9,000 of the fixed overhead allocated to her concert, your accountant now has only three projects with which to allocate the fixed overhead. Your accountant therefore would allocate $12,000 of fixed overhead to each of the successful concerts. In effect, then, Lea’s breach would reduce the net profit on each of the other projects by $3000 ($12,000 of overhead for each of the projects instead of $9000). You would not be in as good a position as if Lea had performed. So you should recover the $9000 fixed costs allocated to the Lea concert as reliance expenses. This should be the rule any time an injured party can prove that it could have “recouped its overhead expenses on other projects.”²³⁴

d.More Theories for Awarding Reliance Damages

Up to this point in our discussion of reliance damages for breach of contract, we have been looking at situations in which full expectancy damages are too speculative. Another ground for awarding reliance damages in lieu of expectancy damages pertains to the strength of the contract claim itself. An example, based on an important case, helps illuminate this point.

In Sullivan v. O’Connor,²³⁵ a doctor promised to improve a patient’s nose in two operations. Instead, the doctor performed three operations, and the patient’s nose actually became worse.²³⁶ Among other things, the court discussed whether the patient should recover reliance or expectancy damages for the doctor’s breach of a contract. Reliance damages would put the patient in the position she was in before the operation. She would recover damages for the pain and suffering of the three operations and for the worsening of her nose. She would also recover the fees she already paid to the doctor. These are all losses the patient suffered because she relied on the doctor’s promise of a better nose.

Expectancy damages would put the patient in the position she would have been in had the doctor performed as promised. If the doctor had performed, she would have the value of an improved nose, and would have incurred the costs of getting that nose, namely two operations and the doctor’s fees. Under an expectancy theory, she should recover the difference in value between that position and the woeful position she is in as a result of the doctor’s breach (with a worse nose, three operations, and payment of her fees). You can see that, ordinarily, the patient would recover more under a lost expectancy theory than a reliance theory because the patient would recover the value of the promised nose (minus the costs of getting it) and not merely compensation to put her back in the position she was in before the operations.

The Sullivan court was wary of granting expectancy damages precisely because of the relative weakness of the contract theory of recovery. The court stated:

It is not hard to see why the courts should be unenthusiastic or skeptical about the contract theory. Considering the uncertainties of medical science and the variations in the physical and psychological conditions of individual patients, doctors can seldom in good faith promise specific results. Therefore it is unlikely that physicians of even average integrity will in fact make such promises. Statement of opinion by the physician with some optimistic coloring are a different thing, and may indeed have therapeutic value. But patients may transform such statements into firm promises in their own minds, especially when they have been disappointed in the event, and testify in that sense to sympathetic juries.²³⁷

The court stopped short of declaring that all promises made by doctors should be unenforceable. The court feared that such a rule would create incentives for doctors to make promises that they could not keep in order to entice prospective patients. Instead, the court intimated that it supported a compromise position of enforcing doctors’ promises, but awarding only reliance damages.²³⁸ Sullivan v. O’Connor certainly illustrates the significant relationship between the theory for enforcing a promise and the remedy for breach of the promise.

The court reinforced its position in favor of reliance damages in this context by referring to two distinct remedial concerns. First, the court noted the difficulty of placing a firm monetary amount on the value of a good nose, something that the court could avoid by granting a reliance recovery.²³⁹ Further, the court emphasized the large discrepancy between the doctor’s fee and the doctor’s potential liability for his patient’s lost expectancy.²⁴⁰

6.Liquidated Damages

Within limits, contract law allows contracting parties to agree in their contract on their damages liability if they later breach.²⁴¹ Parties may want to include such a provision, called an “agreed” or “liquidated” damages provision for lots of reasons. In case of a breakdown, the parties can avoid the expense of calculating and proving damages.²⁴² Liquidated damages provisions also create an incentive for the parties to perform.²⁴³ In addition, liquidated damages clauses ensure that an injured party can recover when damages would be too difficult to prove.²⁴⁴

Liquidated damages clauses are not always enforceable, however. Most courts apply some variation of two tests, both of which must be satisfied. First, the agreed damages must be a “reasonable forecast of just compensation for the harm that is caused by the breach.”²⁴⁵ Second, “the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation.”²⁴⁶ Yes, you are correct—these requirements seem contradictory. How can the parties reasonably forecast damages if they are incapable of accurate estimation? Nevertheless, courts take the two-prong test seriously and appear willing to enforce agreed damages clauses only when prospective damages for breach are uncertain,²⁴⁷ and the parties make a good faith effort to estimate them.²⁴⁸ Although these two requirements for enforcing agreed damages clauses focus on the situation at the time of contracting,²⁴⁹ some courts seem unable to resist looking at the situation at the time of the breakdown of the contract. These courts strike agreed damages clause when the actual damages at the time of the breach bear no relationship to the amount of agreed damages.²⁵⁰

When an injured party cannot satisfy either of the two tests for enforcement—the damages provision is either not a “reasonable forecast” of harm or the harm is not difficult to estimate²⁵¹—a court will not enforce the agreed damages clause and will call it a “penalty.”²⁵² Courts balk at penalty provisions even when the parties intend to include one to create incentives for performance:²⁵³

A clause which provides for an amount plainly disproportionate to real damage is not intended to provide fair compensation but to secure performance by the compulsion of the very disproportion. A promisor would be compelled, out of fear of economic devastation, to continue performance and his promisee, in the event of default, would reap a windfall well above actual harm sustained.²⁵⁴

Suppose you contract to sell your piano, worth $1200, to Alice for $1000. Alice is not a piano teacher and would sustain no consequential damages if you breach. The contract provides that you will pay Alice $5,000 if you fail to deliver the piano. Courts will not enforce this term. Alice’s damages of $200 (market price minus contract price) are easy to prove and the $5000 term looks like a vehicle to compel your performance, not a reasonable estimate of Alice’s damages.

Here’s a wrinkle courts sometimes employ to avoid the morass of the liquidated damages versus penalties inquiry. Suppose in the hypo above the contract between you and Alice contains a provision in which you promise to deliver the piano or pay Alice $300. A court may call this term an “alternative performance provision” and enforce it on that basis. The court might reason that at the time of contracting you and Alice bargained for your right to have an option either to deliver the piano or to pay $300 ($200 plus $100 for Alice’s possible incidental damages). Courts taking this position focus on whether the parties bargained for a damages provision in case of your breach (a liquidated damages issue) or for a true option that would not involve your breach at all (an alternative performance provision).²⁵⁵ Even if the court believes the term is the latter, however, the court will not enforce it if the choices (perform or pay the fee) are not “reasonably equivalent.”²⁵⁶

For reasons not self-evident, courts appear to be more willing to strike agreed damages clauses than most other provisions in contracts.²⁵⁷ Courts and commentators offer several explanations. One is historical. A penal bond, the historical forerunner to modern penalty provisions, was a promise to pay a certain amount if the promisor broke a contract.²⁵⁸ English courts of equity refused to enforce penal bonds,²⁵⁹ focusing instead on awarding “just compensation,”²⁶⁰ and modern courts have endorsed this response:²⁶¹ “[T]here is no sound reason why persons competent and free to contract may not agree upon [liquidated damages] as fully as upon any other, or why their agreement, when fairly and understandingly entered into with a view to just compensation for the anticipated loss, should not be enforced.”²⁶² The focus on just compensation, both historically and today, presumably is meant to encourage people to enter contracts free from the fear of inordinate liability.²⁶³ Of course, this does not explain why courts strike penalty provisions when the evidence demonstrates that both parties understood and sought the provision.

In fact, courts are also suspicious of the quality of the parties’ bargaining over agreed damages provisions.²⁶⁴ Some courts and analysts apparently believe that contracting parties do not pay attention to liquidated damages provisions²⁶⁵ or understand their meaning. This is because parties may be too optimistic that nothing will go wrong²⁶⁶ or may misunderstand the nature of their remedial rights.²⁶⁷ The evidence in actual cases is not compelling to support these conclusions, however.²⁶⁸

Some lawyer-economists explain and support the judicial approach to liquidated damages on the basis of economic efficiency. The proof of the economic efficiency of the law here is complex and inconclusive and, for the most part, I am going to spare you.²⁶⁹ One perspective from this school is worth mentioning, however. Recall our earlier discussion of efficient breach of contract.²⁷⁰ Legal economists point out that if contract law enforced penalties, parties would be deterred from breaching even when the breaching party could pay off the injured party’s expectancy damages and still come out ahead by dealing with a third party.²⁷¹ So, contract law strikes penalty provisions to encourage efficient breach of contract.

Recall in our earlier discussion of efficient breach, you agreed to sell your piano to Alice for $1200. The piano was worth $1400. Bob then offered to buy the piano from you for $1800. Recall that the efficient breach theory encourages you to breach your contract with Alice and to pay her $200 (her market price-contract price differential damages), and to deliver the piano to Bob, who outbid Alice for the piano.²⁷² (You and Bob are better off and Alice is no worse off.) But suppose your contract with Alice included an agreed damages clause that required you to pay her $700 if you did not perform. You will not breach the contract because you will lose $100 by doing so (you’ll get $600 extra from Bob, but you will be liable to Alice for $700). The benefits of breaching described above (two people better off and no one hurt) will not be realized. Efficient breach adherents explain the lack of enforcement of the $700 agreed damages clause on the ground that contract law wants to encourage breach in this situation.²⁷³

I have now discussed the theory of efficient breach twice. It is time to discuss some of the important criticisms of the theory, lest you think that everyone agrees with it.²⁷⁴ For example, we have already mentioned and seen in various contexts that, because of limitations on expectancy damages, injured parties are rarely put in as good a position as if the breaching party had performed.²⁷⁵ But the efficient breach theory depends on the assumption that injured parties are made whole. (Remember, nobody is supposed to be worse off as a result of the breach.) In addition, breaching parties will rarely, if ever, know in advance the full amount of their liability for breach. For example, Alice may have reasonably foreseeable consequential damages that are very difficult to estimate at the time you contemplate breaching the contract, but that are provable with sufficient certainty at trial. Further, efficient breach theory does not adequately take into account the harm to your reputation by breaching the contract. Such harm may be too indistinct to include in your calculation of whether you should breach the contract, but it still may be very real. In addition, if you and Alice cannot agree on the precise amount of your damages liability, you may incur significant negotiation or litigation expenses. These costs may be much greater than the costs of an alternative strategy to breaching, namely negotiating a release from Alice of the obligation to deliver the piano.²⁷⁶

Perhaps the most worrisome aspect of efficient breach theory is that it ignores the potential harm caused by undermining people’s faith in their contracting partner’s promises. Although some have argued otherwise, people contract for performance, not the right to a monetary equivalent of performance.²⁷⁷ If people thought that contract law actually encouraged parties to breach when it is profitable, people might be reticent to enter contracts in the first place. As Lon Fuller warned, the “regime of exchange would lose its anchorage and no one would occupy a sufficiently stable position to know what he had to offer or what he could count on receiving from another.”²⁷⁸ A related concern is the distaste that people would feel for a system that actually encourages what is arguably immoral behavior, namely breaking one’s promise simply to get a better deal.²⁷⁹

The new Restatement of Restitution (Third) does not subscribe to the concept of efficient breach. It provides that a breaching party must disgorge gains from a breach if the breach is both profitable and deliberate.²⁸⁰ The injured party may elect this remedy if contract damages are inadequate.²⁸¹ According to the Restatement, damages are inadequate if they “will not permit the promisee to acquire a full equivalent to the promised performance in a substitute transaction.”²⁸² As comment h to section 39 acknowledges, “[t]he rationale of the disgorgement liability in restitution, in a contractual context or any other, is inherently at odds with the idea of efficient breach * * *.” Specifically, the rationale is that “[t]he obligor who elects * * * to take without asking—calculating that his anticipated liability for breach is less than the price he would have to pay to purchase the rights in question, and leaving the obligee to the chance of a recovery in damages—engages in precisely the conduct that the law of restitution normally condemns.”²⁸³ Of course, the premise of the Restatement that the promisor is “tak[ing] without asking” is subject to the counter-argument of legal economists that the promise in the agreement implicitly granted the promisor the right to choose between performance and payment of damages. But the Restatement follows substantial case law.²⁸⁴

Sorry, the last few pages on efficient breach have been a bit of a diversion from our topic of liquidated damages. But before we leave liquidated damages, we can sum up by focusing on what a lawyer drafting a contract should do to try to ensure the enforcement of an agreed damages clause. Most obviously, of course, the lawyer should make sure to satisfy the two tests of enforcement. Specifically, damages must be difficult to ascertain, but the estimate must be reasonable. To show that the agreed damages clause is a reasonable estimate, the lawyer should incorporate a sliding scale of damages based on the circumstances during performance. Obviously, courts will frown on a term providing for a fixed amount of damages no matter how serious the breach or when it occurs during the course of performance. So, in an equipment lease, for example, base the damages for a breach by the lessee on the amount of rent due at the time of breach, minus a reasonable estimate of what the lessor can save by the return of the equipment.²⁸⁵

Incidentally, don’t be lulled into believing that if you draft an enforceable liquidated damages provision for your client, you are a brilliant lawyer and have saved your client from the prospect of breach by the other party. One of my favorite examples to make this point is White v. Benkowski.²⁸⁶ The Benkowskis agreed to supply water to their neighbors, the Whites, through a well on the Benkowskis’ property. The Whites claimed that the Benkowskis maliciously withheld water, and brought a lawsuit against them. The Whites prevailed on their substantive claim, but could not prove serious damages. What is important here, the judicial decision reports that the neighbors were initially friendly, but the relationship deteriorated to the point of hostility. Here’s what actually happened, as revealed by a transcript of the trial:

Gwynneth [White] testified that the relationship of the families was good until * * * the Whites’ daughter picked an apple in the Benkowskis’ yard. Ruth Benkowski then called the daughter an “S.O.B.” Gwynneth told Ruth that “she didn’t like this.” Later, Ruth called Gwynneth “a redheaded bitch.” Virgil White stated that Paul Benkowski lodged a complaint with Virgil’s superior that Virgil had tried to run over Paul’s child. The district attorney’s investigation absolved Virgil. Paul Benkowski also complained to the police chief that Virgil * * * had wild parties at home. Virgil was again absolved of any wrongdoing.²⁸⁷

The transcript reveals the deep animosity of the parties, leading to irrational behavior by the Benkowskis. I doubt that a liquidated damages clause in the agreement would have deterred the Benkowkis from turning off the water.

7.Emotional Distress and Punitive Damages

Contract law is reluctant to grant emotional distress damages²⁸⁸ and outright prohibits punitive damages.²⁸⁹ Let’s investigate the reasons.

a.Emotional Distress Damages

Suppose you hire Paul’s Plumbing Co. to install a new hot tub in your master bath and, because of faulty installation, the hot tub floods your home and destroys your new home entertainment center, among other things. You must move out of your home for three weeks while workers repair the water damage. You can recover consequential damages for your inconvenience and property losses, but you may wonder whether you can recover for your emotional distress, of which you seem to have no shortage. After all, if contract damages are really supposed to put you in as good a position as if the contract had been performed, why shouldn’t you recover for your suffering caused by the breach? Sorry, few courts would compensate you for your emotional distress.²⁹⁰

Contract law allows emotional distress damages only when a party suffers emotional distress because of the breach of a “personal agreement,”²⁹¹ as opposed to a “commercial” contract.²⁹² You have probably read enough of this book to understand that such distinctions are not always very clear. Generally, “personal” contracts involve “deep, personal human relations”²⁹³ or “personal rights of dignity.”²⁹⁴ For example, breaches of contract involving nursing home care of a family member, funeral home services, and medical treatment fit the bill, but not breaches involving the sale of goods or services, such as a sale of a furnace, construction of a home, or storage of personal goods.²⁹⁵ In addition, breaches that cause injury to the person may qualify for emotional distress damages, but not breaches that cause only property damage or amount to no more than the “normal frustrations or inconveniences” that people experience in their lives.²⁹⁶ What about breaches of employment contracts? These seem to involve personal relations, but few courts have awarded emotional distress damages to injured employees.²⁹⁷

Courts justify the distinction between personal and commercial contracts on the theory that emotional distress is not foreseeable in commercial or employment contracts.²⁹⁸ Such reasoning may be true in the typical mundane commercial contract, but is less than persuasive in some commercial contexts and certainly is fallacious in many employment settings. Shouldn’t the seller of your hot tub reasonably foresee that you would have emotional distress damages if the hot tub floods and causes water damage to your property? What could be more distressing (calm down, this is only a hypothetical)? Shouldn’t an employer reasonably foresee that wrongfully terminating an employee from her livelihood would lead to emotional distress? A better explanation for the commercial-personal distinction may be courts’ reluctance to allow juries to quantify emotional distress damages in commercial contract cases.²⁹⁹ How can juries possibly establish an appropriate sum? Would juries be tempted to award a huge sum that would discourage commercial parties from offering their goods or services in the first place?³⁰⁰ This may be a real concern.

b.Punitive Damages

The Restatement (Second) of Contracts restates (that’s its job) the rule found in hosts of opinions and treatises: “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.”³⁰¹ We will discuss when torts arise in the exchange setting in Chapter 6.³⁰² For now, understand that in certain situations, often involving “professionals,” including doctors, lawyers and engineers, courts have found that a duty exists, independent of the contract, to “exercise a reasonable degree of care, skill and ability, such as is ordinarily exercised under similar conditions * * *.”³⁰³ A tortious performance of contract, for example, requires unreasonable conduct, such as a doctor leaving a glove in her patient’s intestines or a lawyer using a form lease when his client wanted to purchase a house. This section focuses on the rule barring punitive damages in situations not involving a tort. The section will be short, because, basically, you’ve just learned all there is to know. No punitive damages for breach of contract, even intentional breaches.³⁰⁴ Courts award punitive damages only when a breach also constitutes an independent tort.³⁰⁵

What explains the aversion to punitive damages? To encourage contracting, contract damages are supposed to make people whole, not to punish the breaching party.³⁰⁶ Many breaches are inadvertent and undeserving of punishment, and awarding punitive damages in such contexts would only discourage parties from making contracts in the first place. Further, as with agreed penalty clauses, punitive damages would discourage breach even when it would be efficient.³⁰⁷ Suppose, as before, you agree to sell your piano to Alice for $1200. The piano is worth $1400. Bob then offers to buy the piano from you for $1800. Efficient breach theory encourages you to breach your contract with Alice and to pay her $200 (her market price-contract price differential damages), and to deliver the piano to Bob, who outbid Alice for the piano. You and Bob are better off and Alice is no worse off. But if you faced the prospect of punitive damages, you hardly will be enthusiastic about breaching.

Still another explanation for the lack of punitive damages in contracts cases involves the commercial contract-personal contract dichotomy, which we have just discussed with respect to emotional distress damages.³⁰⁸ Contract law, the argument goes, “governs primarily commercial relationships, where the amount required to compensate for loss is easily fixed, in contrast to the law of torts, which compensates for injury to personal interests that are more difficult to value, thus justifying noncompensatory recoveries.”³⁰⁹

OK, you’ve already learned not to trust anyone who asserts absolute rules, such as “no punitive damages in contracts cases.” And yes, there are a few exceptions, even beyond the tort exception. For example, courts have awarded punitive damages to an insured party when her insurance company refuses to settle a claim against her even though settlement would be in her best interest.³¹⁰ Suppose you cause a car crash and you are sued for $500,000. You have $25,000 of liability insurance and the plaintiff offers to settle for $20,000. The insurance company refuses to settle for $20,000 because, at most, it will lose only $5000 more, even though it is in your best interest to settle. The jury returns a judgment against you for $450,000. You may recover punitive damages against the insurance company.

8.Specific Performance

Specific performance has been called an “extraordinary” contract-law remedy.³¹¹ It is probably more accurate to say that the remedy is less common than money damages. Why is specific performance less favored than money damages? For that matter, what precisely is specific performance? These questions and more are the subject of this subsection.

First a little history.³¹² In the middle ages in England, courts of equity and law existed side-by-side. These courts differed in procedure (for example, equity courts had no juries), substance, and remedy. Courts of law applied the common law, from which evolved some rather rigid legal rules, some of which you have already studied. For example, you saw that the donee of an oral gift of land who made improvements on the land in anticipation of receiving a deed could not recover anything in a law court if the donor broke the promise, because the donee supplied no consideration and the gift promise was not in writing.³¹³ Courts of equity arose in part because of the inflexibility of such legal rules, and the Chancellor and deputies, who administered the equity court, developed various equitable doctrines to alleviate harsh results in the law courts, including the outcome in the donee example. The donee’s improvements barred the donor from asserting the statute of frauds and constituted “in equity” consideration for the donor’s promise to convey the land.³¹⁴

Courts of equity also developed remedial principles, including specific performance. The donee of land who made improvements could obtain a court order requiring the donor to convey the property.³¹⁵ This order was very different from the ordinary legal remedy consisting of a judgment that the donor owed the donee money damages, which judgment the donee could enforce by arranging for a sheriff to seize the donor’s property to pay the judgment.³¹⁶ An order of specific performance was a direct order to the donor to convey, which the equity court enforced by exercising its contempt power.³¹⁷ A party, such as the donor of land, who ignored an order of specific performance could be held in contempt and could be thrown in jail, fined or both and the punishment could last until the party obeyed the court order.³¹⁸ In part because of the reluctance of equity courts to intrude on the law court’s domain, equity courts granted specific performance only when the legal remedy of money damages was inadequate to make the injured party whole.³¹⁹

The equity-law division of the English courts was carried over to the United States, but gradually both federal and most state courts eliminated the distinction and unified their courts into one court hearing all cases. Nevertheless, these courts retained many of the differences between substantive legal and equitable principles and between remedial legal and equitable principles. Of concern here, courts continued to grant specific performance only when money damages were inadequate.

Contract law presumes that land is unique, so courts grant specific performance when a seller of land breaks the contract.³²⁰ The theory is that money damages are inadequate because the purchaser cannot use her damages award to purchase equivalent property.³²¹ If the breaching seller already has resold to a bona fide purchaser, obviously the injured purchaser cannot get specific performance. If you contract to sell your house and lot to Alice, but you convey the property to a bona fide purchaser instead (a bona fide purchaser is someone who doesn’t know about your contract with Alice and pays a fair price for the property³²²), contract law obviously must deny Alice specific performance against you. Alice may recover damages, often including any amount you gained by breaching and selling to the bona fide purchaser. For example, if the market value of the property is $190,000, the contract price is $180,000, and you sell the property to Ms. BFP for $200,000, then Alice can recover $20,000.³²³

Some courts grant specific performance of land sale contracts to sellers as well as buyers,³²⁴ in part to create symmetry between the seller’s and buyer’s remedies. Obviously, the purchase price due a seller is not unique. Courts that grant specific performance to sellers typically condition their decree on the seller tendering a deed to the buyer.³²⁵ Some courts don’t buy the symmetry concern, however, and deny specific performance to sellers.³²⁶ These sellers can still get a money judgment.

Unlike contracts involving land, courts rarely grant specific performance to employers or employees.³²⁷ First, let’s review some Constitutional law (see how “rich” contract law is?). The Thirteenth Amendment prohibits involuntary servitude, remember?³²⁸ Courts fail to grant employers specific performance because ordering an employee to work would be unconstitutional.³²⁹ Courts have had less trouble barring an employee from working for someone else,³³⁰ which often persuades the employee “voluntarily” to return to work for the injured employer. Courts also rarely grant specific performance to an employee, unless the employee’s rights are based on a statute.³³¹

UCC section 2–716 governs specific performance of contracts for the sale of goods. It provides in part: “Specific performance may be decreed where the goods are unique or in other proper circumstances.”³³² Obviously, money damages cannot make an injured buyer whole when the goods are unique (one-of-a-kind), such as a Beatles record signed on the label by John Lennon. But the “other proper circumstances” language invites expansion of the remedy of specific performance. For example, a court may grant specific performance to a buyer even though substitute goods are available on the market, if the buyer reasonably cannot cover her losses because the seller’s breach causes the buyer financial difficulties.³³³ A court may also grant specific performance when a seller breaches a long-term supply contract and the buyer cannot procure a contract of similar length.³³⁴

The availability of specific performance becomes murkier when the subject matter of the contract is not land, employment, or sale of goods. Courts have ordered specific performance in favor of a lessee of a store in a shopping center because money damages could not compensate for “the almost incalculable future advantages that might accrue to it as a result of extending its operations into the suburbs.”³³⁵ On the other hand, courts often decline to specifically enforce construction contracts because of the need to continue supervising the project to make sure the builder doesn’t mess up on purpose.³³⁶

As many of the above examples suggest, courts enjoy considerable discretion in determining whether to award specific performance.³³⁷ Here are some additional “rules” that add to judicial discretion. Courts may refuse to grant specific performance when they believe that a plaintiff’s conduct was unsavory.³³⁸ Courts also may decline to award specific performance if the parties have omitted too many terms in their contract,³³⁹ even if the contract is not too indefinite to enforce by granting money damages.³⁴⁰ Courts also consider the hardship of a specific performance decree on the promisor.³⁴¹

9.Rescission

After a party fails to satisfy an express condition, fails to substantially perform, or materially breaches (Chapter 8 discusses each of these concepts), the other party can elect to rescind the contract. The rescission remedy returns the parties to the status quo ante (meaning the position the parties were in before contracting).³⁴² Restoring the parties to the status quo ante may be complicated, especially if the contract was partially performed before the rescission. It may entail a recovery of any benefit conferred under the unjust enrichment theory and even a recovery of damages.³⁴³

Suppose on May 1 you agree to sell your piano to Alice for $1200, with delivery on May 8. On May 2, Alice sends you a deposit of $200. On May 3, to make room for the piano, Alice sells some furniture to a neighbor for $300. This is well below the $600 market value of the furniture, but Alice needed the space and was in no position to bargain. On May 7 you decide to keep the piano after learning how to play MacArthur Park on it. (The song, a big hit in the 1960s, has perhaps the worst lyrics ever written: “MacArthur’s Park is melting in the dark. All the sweet, green icing flowing down. Someone left the cake out in the rain, I don’t think that I can take it, cause it took so long to bake it * * *.”³⁴⁴) You refuse to deliver on May 8 and Alice elects to rescind the contract. Alice should recover the $200 deposit based on unjust enrichment and $300 in damages based on the difference between the market price and contract price of the furniture she sold (the latter only if Alice can show that the furniture sale was reasonably foreseeable to you and the price she received for the furniture was reasonable under the circumstances).

B. REMEDIES FOR PROMISSORY ESTOPPEL

1.Introduction

Under the theory of promissory estoppel, recall that a promisee can recover for a broken promise when the promisor reasonably should expect the promise to induce reliance, the promisee does rely, and justice requires enforcement of the promise.³⁴⁵ At the time of the drafting of Restatement (First) of Contracts, section 90, which first encapsulated this principle, a controversy developed over the appropriate measure of damages. At an ALI meeting discussing the issue, the chief draft person, Samuel Williston, posited the following hypothetical: Johnny B. Goode (well, Williston just used Johnny) tells his uncle he wants to buy a Buick. His uncle promises Johnny $1000. Johnny buys the car because of the uncle’s promise, but for $500. Is Johnny entitled to $1000 or $500?

Williston thought that Johnny should get $1000, the value of the promise. But a member of the Institute had this caustic reaction: “In other words, substantial justice would require that uncle should be penalized in the sum of $500.”³⁴⁶ The gist of the nervy guy’s complaint was that Johnny’s out of pocket loss was $500, which is precisely the harm that promissory estoppel addresses.³⁴⁷ On the other hand, Williston thought that Johnny should get $1000 because “[e]ither the promise is binding or it is not.”³⁴⁸ Williston thought the promise is binding and therefore Johnny was entitled to expectancy damages.

The controversy over whether the Johnnys of the world (meaning people who detrimentally rely on promises) should get $500 (detrimental reliance damages) or $1000 (expectancy damages) still rages today. This is mainly so because the drafters of the Restatement (Second) did nothing to resolve the issue. In fact, they exacerbated the confusion by adding the following sentence to section 90: “The remedy granted for breach may be limited as justice requires.” A comment confirms that the drafters’ intent was to give courts plenty of discretion on this issue.³⁴⁹ But how should courts decide which remedy is appropriate in a given case?

2.Judicial Decisions

Some courts have considered the appropriate measure of damages in promissory estoppel cases, but the results reflect Section 90’s fogginess. In short, some courts grant reliance damages, some grant what looks like lost expectancy.³⁵⁰ Moreover, the decisions do not spend a lot of time explaining why they grant one measure of damages over the other.

Instead, they seem to assume that one or the other measure is the law. For example, in Goodman v. Dicker,³⁵¹ the court awarded reliance damages to the plaintiff, a prospective franchisee of Emerson radios, who incurred expenses preparing for the franchise after a distributor represented that the plaintiff would get the franchise and an initial delivery of radios. The court refused to grant the plaintiff lost profits, proclaiming that “[t]he true measure of damage is the loss sustained by expenditures made in reliance upon the assurance of a dealer franchise.”³⁵²

In Walters v. Marathon Oil Co.,³⁵³ on the other hand, the court awarded lost profits. Marathon Oil broke a promise to supply oil products to the Walters after they had improved a gas station in reliance on the promise.³⁵⁴ Marathon Oil claimed that the Walters did not suffer reliance damages because the increase in the market value of the Walters’ land more than made up for the cost of the improvements. Further, Marathon Oil insisted that the Walters could not recover lost profits in a promissory estoppel case.

The court awarded the Walters lost profits on the theory that they forewent the opportunity to invest and make the profits elsewhere:

[I]n reliance upon [Marathon Oil’s] promise to supply gasoline supplies to them, [the Walters] purchased the station, and invested their funds and their time. It is unreasonable to assume that they did not anticipate a return of profits from this investment of time and funds, but, in reliance upon [Marathon Oil’s] promise, they had forgone the opportunity to make the investment elsewhere.³⁵⁵

The court then discussed evidence of the number of gallons of gasoline previous owners of Walters’ station had pumped, the amount of gasoline Marathon Oil had promised the Walters, and the amount of profit the Walters would have made on each gallon of gasoline they would have sold. Based on this evidence, the court concluded that the Walters proved lost profits with sufficient certainty.³⁵⁶ The court therefore affirmed the trial court’s computation of lost profits.³⁵⁷

In sum, the Walters court justified the recovery of lost profits on the theory that, but for the broken promise, the Walters would have made the profit elsewhere. Based on this reasoning, the Walters’ lost profits were like a reliance recovery because Marathon Oil’s promise induced the Walters to rely by forgoing other opportunities. To support this reasoning, the court had to make the leap that the Walters would have made a profit on another investment, in fact an identical profit to the one expected from the Marathon Oil project. This assumption is clouded by the court’s additional conclusion that the Walters did not fail to mitigate damages by finding a substitute supplier because no other suppliers were reasonably available.³⁵⁸ This conclusion is inconsistent with the position that the Walters would have made an equivalent profit on an alternative investment were it not for Marathon Oil’s promise.

In one line of cases, courts appear comfortable with limiting the promissory estoppel recovery to reliance damages. These cases involve an employer’s promise of a job that induces an employee to leave other employment and incur expenses relocating to the new employer’s place of business. The employee usually cannot recover for breach of contract because the new employment is terminable at will.³⁵⁹ Nevertheless, courts have found in favor of the employee on the basis of promissory estoppel, although limiting the recovery to reliance damages: “The doctrine of promissory estoppel may be available to an at-will employee, but the remedy is limited to damages actually resulting from the detrimental reliance * * *.”³⁶⁰ This conclusion makes sense because the employer generally has the right to terminate the new employee before she has earned any salary, so her expectancy is very uncertain.

Notwithstanding the definitive turn to reliance damages in these employment cases, other questions persist. Can an employee recover lost salary from the job she quits in order to take the new job? Can she recover lost salary from other job offers that she declined in order to work for the defendant employer? Such recoveries would be consistent with the “opportunities forgone” rationale of reliance damages discussed above in the Walters case.³⁶¹ Some courts appear to agree with this analysis: “Since * * * the prospective employment might have been terminated at any time, the measure of damages is not so much what [the employee] would have earned from [the employer] as what [the employee] lost in quitting the job he held and in declining at least one other offer of employment elsewhere.”³⁶²

C. REMEDIES FOR UNJUST ENRICHMENT

Recall that under the theory of unjust enrichment, a party who confers a benefit on another party can recover the benefit when it would be unjust for the party receiving the benefit to keep it without paying for it.³⁶³ The remedial challenge when the remedy is the money equivalent of the benefit conferred and not specific restitution (return of specific property) is how to measure the benefit in dollars. The Restatement (Second) of Contracts, section 371, sets forth two possible measures:

If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured by either

(a)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

(b)the extent to which the other party’s property has been increased in value or his other interests advanced.³⁶⁴

Suppose Alice hires you to level her backyard in preparation for the construction of a swimming pool. She agrees to pay you $1000. You complete the work, but she is not satisfied and refuses to pay you anything. The work cost you $1050, and it increases the market value of her land by $750. Alice could have hired someone else to do the work for $1200. (Why did you agree to do it for $1000? You didn’t do your homework and thought the job was worth only $1000.)

If you sue Alice and prove that your work was perfectly acceptable and that she broke the contract, recall that you have an election to recover on the contract for expectancy damages or, in the alternative, to recover based on Alice’s unjust enrichment.³⁶⁵ With respect to the latter, she has a leveled yard and hasn’t paid you anything. Contract law can measure this benefit in many ways. You bid too low for the work and should have gotten $1200, the fair market value of the work. Restatement (Second), section 371(a), authorizes an award of $1200.³⁶⁶ You increased the market value of her property by $750. Restatement (Second), section 371(b), allows a recovery based on this measure. A third possibility is to measure the benefit conferred by your cost of performing the services, here $1050.³⁶⁷ A fourth measure of the benefit would be the contract price, not because you want the court to enforce the contract, but because the contract rate might be the best evidence of the true value of the benefit to Alice.³⁶⁸

Which measure is a court likely to adopt? Commentators have found a relation between the conduct of the breaching party and the likely measurement of restitution.³⁶⁹ Alice has breached a contract, which does not put her in a favorable light right out of the starting block. To the extent the evidence shows willful or negligent reasons for her failure to pay, her stock with the court goes down even further. The worse Alice’s conduct, the more likely the court will adopt the highest measure. The lesson from all this is that courts appear to enjoy considerable discretion in determining monetary remedies for unjust enrichment.

Don’t count on collecting your $1200 just yet, however, for two reasons. First, some courts have balked at allowing a recovery greater than the contract rate would permit (here $1000),³⁷⁰ on the theory that contract law should not ignore the agreement you made with Alice even if she breaches the contract.³⁷¹ You agreed to do the work for $1000, why should you now get $1200?³⁷² However, probably a greater number of courts allow the $1200 recovery, reasoning that a nasty contract breaker should not be able to use the very contract that she breached as a shield against the additional liability.³⁷³ Obviously, this reasoning has a punitive element to it, but the Restatement (Second) is quite explicit in allowing a recovery:

The right of the injured party under a losing contract to a greater amount in restitution than he could have recovered in damages has engendered much controversy. The rules stated in this Section give him that right. He is entitled to such recovery even if the contract price is stated in terms of a rate per unit of work and the recovery exceeds that rate.³⁷⁴

Wait another minute before you celebrate your $1200 recovery. In cases such as yours, where you have completed all of the work prior to a breach by the other party, and all that is left to complete the contract is for the other party to pay you an agreed sum, courts may balk at giving you any more than the agreed sum: “The remedy of restitution in money is not available to one who has fully performed his part of a contract, if the only part of the agreed exchange for such performance that has not be rendered by the defendant is a sum of money constituting a liquidated debt.”³⁷⁵ (The parties don’t dispute the amount of a “liquidated debt.”³⁷⁶) Courts adopting this rule seem motivated by their unease over ignoring the contract rate of $1000. But if this is the reason for the rule, courts should explicitly say so. Creating an exception to the right to receive a recovery greater than the contract rate based on whether the plaintiff has completed performance only will confuse the law and lead to silly results. For example, under this rule, if you had completed 99% of the leveling job at the time of Alice’s breach, you could collect more than the contract rate. But if you completed the last bit of work (say removing your tools), you would be limited to the contract rate.

¹Restatement (Second) of Contracts § 344 (1981) (“ ‘[E]xpectation interest’ [is the] interest in having the benefit of [the] bargain by being put in as good a position as [the plaintiff] would have been in had the contract been performed * * *.”).

²Id. (“ ‘[R]eliance interest’ [is the] interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as [the plaintiff] would have been in had the contract not been made * * *.”).

³Black’s Law Dictionary 418 (8th ed. 2004) (“An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches.”).

⁴Restatement (Second) of Contracts § 344 (“ ‘[R]estitution interest’ [is the] interest in having restored to [the plaintiff] any benefit that he has conferred on the other party.”).

⁵See, e.g., Curtice Bros. Co. v. Catts, 66 A. 935 (N.J. Ch.1907).

⁶Goldstick v. ICM Realty, 788 F.2d 456, 464 (7th Cir. 1986) (“[T]he value of the promise is the presumptive measure of damages for promissory estoppel * * *.”); Jarboe v. Landmark Cmty. Newspapers of Ind., Inc., 644 N.E.2d 118, 122 (Ind. 1994) (“[T]he remedy [for promissory estoppel] is limited to damages actually resulting from the detrimental reliance * * *.”).

⁷Wuliger v. Manufacturers Life Ins. Co., 567 F.3d 787, 799 (6th Cir. 2009) (“ ‘Recovery under unjust enrichment is designed to compensate the plaintiff for the benefit he has conferred upon another, not to compensate him for a loss suffered.’ ”) (quoting Jones v. Jones, 903 N.E.2d 329, 337 (Ohio Ct. App. 2008)); Ramsey v. Ellis, 484 N.W.2d 331, 333 (Wis. 1992) (“[D]amages in an unjust enrichment claim are measured by the benefit conferred upon the defendant * * *.”).

⁸See, e.g., supra note 1, and accompanying text.

⁹See, e.g., Stern Oil Co. v. Brown, 908 N.W.2d 144, 151 (S.D. 2018) (“The ultimate purpose behind allowance of damages for breach of contract is to place the injured party in the position he or she would have occupied if the contract had been performed * * *.”) (quoting Ducheneaux v. Miller, 488 N.W.2d 902, 915 (S.D.1992)); Virginia Electric and Power Co. v. Bransen Energy, Inc., 850 F.3d 645 (4th Cir. 2017) (same); Aristocrat Leisure Ltd. v. Deutsche Bank Trust Co. Ams., 618 F. Supp.2d 280, 292 (S.D.N.Y. 2009) (same); see also Restatement (Second) of Contracts, ch. 16, Introductory Note 100 (1981) (“The traditional goal of the law of contract remedies has not been compulsion of the promisor to perform his promise but compensation of the promisee for the loss resulting from breach. ‘Willful’ breaches have not been distinguished from other breaches, punitive damages have not been awarded for breach of contract, and specific performance has not been granted where compensation in damages is an adequate substitute for the injured party.”).

¹⁰Hirst v. St. Paul Fire & Marine Ins. Co., 683 P.2d 440, 447 (Idaho Ct. App. 1984) (“[T]he purpose of awarding damages for breach of contract is to fully recompense the non-breaching party for its losses sustained because of the breach, not to punish the breaching party.”); see infra notes 301–310, and accompanying text.

¹¹Robert A. Hillman, Contract Lore, 27 J. Corp. L. 505 (2002).

¹²Dan B. Dobbs, Law of Remedies 752 (2d ed. 1993) (“Expectancy damages are sometimes measured by ‘general damages’ or market measures. Such measures use the market value of the very thing promised, at the time of performance, as a basis for calculation.”).

¹³See infra notes 179–180, and accompanying text.

¹⁴See infra notes 62–66, and accompanying text.

¹⁵See Hillman, supra note 11, at 506.

¹⁶See L. L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages, 46 Yale L.J. 52, 62 (1936) (explaining that “[t]o encourage reliance we must * * * dispense with its proof”).

¹⁷E.I. DuPont de Nemours & Co. v. Pressman, 679 A.2d 436, 446 (Del. 1996) (“Punitive damages would increase the amount of damages in excess of the promisee’s expectation interest and lead to inefficient results.”) (citing 3 E. Allan Farnsworth, Farnsworth on Contracts 155–56 (1990)); see also E. Allan Farnsworth, Contracts 736–37 (4th ed. 2004) (noting that the ban on punitive damages preserves efficient breaches).

¹⁸An interesting general treatment of economic analysis of contract law, with a discussion of several cases you will read in your contracts course, is Victor Goldberg, Framing Contract Law (2006).

¹⁹Giampapa v. American Family Mut. Ins. Co., 64 P.3d 230, 251 (Colo. 2003) (“The theory of ‘efficient breach’ posits that the purpose of contract law is not to discourage all breaches. To the contrary, certain breaches, such as those where the breaching party’s gains exceed the injured party’s losses, are thought to be desirable. When such a situation arises, the measure of damages under contract law—the expectancy interest—provides an incentive to encourage the breach.”) (Bender, J. concurring).

²⁰Richard A. Posner, Economic Analysis of Law 120 (6th. ed. 2003) (“[I]n some cases a party would be tempted to break his contract simply because his profit from breach would exceed his profit from completion of the contract. If it would also exceed the expected profit to the other party from completion of the contract, and if damages are limited to the loss of that expected profit, there will be an incentive to commit a breach.”).

²¹See, e.g., Robert A. Hillman, The Richness of Contract Law 217–19 (1997).

²²But see William S. Dodge, The Case for Punitive Damages in Contracts, 48 Duke L.J. 629, 663 (1999) (“Allowing a party to breach a contract and pay damages is not as efficient as forcing that party, with the threat of punitive damages, to negotiate with the other party for a release from the contract.”).

²³Id. at 664 (“If the breaching party is not responsible for the non-breaching party’s full losses, then there is an incentive to breach even when the breach would not be efficient.”).

²⁴See infra notes 274–279, and accompanying text. For a discussion of various criticisms of the efficient breach theory, see Hillman, supra note 21, at 220–24.

²⁵See, e.g., Robert S. Summers, Robert A. Hillman, & David A. Hoffman, Contract and Related Obligation: Theory, Doctrine, and Practice 341–343 (7th ed. 2016).

²⁶See Deborah L. Rhode, Legal Scholarship, 115 Harv. L. Rev. 1327, 1350 (2002) (“Studies of medical malpractice, unsafe products, and auto and airline accidents consistently find that most victims do not recover the majority of their costs.”).

²⁷See infra notes 94–103; 139–171, and accompanying text.

²⁸See infra notes 288–300, and accompanying text; see also John A. Sebert, Jr., Punitive and Nonpecuniary Damages in Actions Based Upon Contract: Toward Achieving the Objective of Full Compensation, 33 U.C.L.A. L. Rev. 1565, 1568 (1986) (“[C]ontract plaintiffs normally may recover for emotional distress only infrequently and in narrowly restricted circumstances.”).

²⁹See infra notes 70–83, and accompanying text; see also Englewood Terrace Ltd. P’ship v. U.S., 479 F. App’x 969, 973 (Fed. Cir. 2012) (involving costs avoided because of the breach).

³⁰See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 101 (1989) (arguing that the unforeseeable damages rule promotes overall efficiency by inducing the more informed party to reveal pertinent information to the other party).

³¹Joseph M. Perillo, Misreading Oliver Wendell Holmes on Efficient Breach and Tortious Interference, 68 Fordham L. Rev. 1085, 1096 (2000) (“[The Hadley v. Baxendale foreseeability requirement] encourages contract-making.”).

³²Restatement (Second) of Contracts § 347, cmt. b.

³³Id.

³⁴E.g., Radford v. De Froberville, 1 All Eng. Rep. 33 (Ch. 1977).

³⁵Id. at 34.

³⁶286 N.W. 235 (Minn. 1939).

³⁷Id. at 235.

³⁸Id. at 236.

³⁹Id. at 238–39.

⁴⁰Id. at 241 (Olson, J., dissenting).

⁴¹Id. at 236.

⁴²Id. at 239. (Olson, J., dissenting).

⁴³Highland Inns Corp. v. American Landmark Corp., 650 S.W.2d 667, 674 (Mo. Ct. App. 1983) (“The essential objective of a contract remedy is to compensate, not punish * * *.”). See generally, Symposium, Fault in American Contract Law, 107 Mich. L. Rev. 1341 (2009) .

⁴⁴Groves, 286 N.W. at 237 (quoting Chamberlain v. Parker, 45 N.Y. 569, 572 (1871)).

⁴⁵Id. at 241 (Olson, J., dissenting).

⁴⁶Id.

⁴⁷Id.

⁴⁸Id. at 244.

⁴⁹Id. at 244–45.

⁵⁰Groves, 286 N.W. at 235.

⁵¹382 P.2d 109 (Okla. 1962).

⁵²Id. at 114.

⁵³Id. at 115; see also Judith L. Maute, Peevyhouse v. Garland Coal & Mining Co. Revised: The Ballad of Willie and Lucille, 89 Nw. U. L. Rev. 1341 (1995).

⁵⁴See Melvin Aron Eisenberg, The Responsive Model of Contract Law, 36 Stan. L. Rev. 1107, 1163–64 (1984) (“[I]n many cases the disparity between cost of completion and diminished market value results in large part from circumstances that were not anticipated when the contract was made.”).

⁵⁵698 F.2d 1075 (10th Cir. 1983).

⁵⁶Nelson v. Brostoff, 689 P.2d 1056, 1061 (Or. Ct. App. 1984).

⁵⁷Rock Island, 698 F.2d at 1078.

⁵⁸Id. at 1079.

⁵⁹Id. at 1080.

⁶⁰Hadley v. Baxendale, 156 Eng. Rep. 145, 151 (Ex. 1854).

⁶¹UCC § 2–708(1).

⁶²Roanoke Hosp. Ass’n v. Doyle & Russell, Inc., 214 S.E.2d 155, 160 (Va. 1975) (“Consequential damages are those which arise from the intervention of ‘special circumstances’ not ordinarily predictable.”).

⁶³See, e.g., Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 945 N.Y.S.2d 258, 260 (N.Y. App. Div. 2012) (“[A] plaintiff suing to recover profits that it would have made by reselling the defendant’s goods to third parties * * * is seeking consequential damages.”).

⁶⁴See, e.g., Stern Oil Co. v. Brown, 908 N.W.2d 144 (S. D. 2018) (discussing the distinction and finding that it is based on whether the damages arose directly from the contract or were the result of a separate agreement with a third party); see also Restatement (Second) of Contracts § 351, cmt. b (“These terms are often misleading, however, and it is not necessary to distinguish between ‘general’ and ‘special’ or ‘consequential’ damages for the purpose of the rule stated in this Section.”).

⁶⁵Cancun Adventure Tours, Inc. v. Underwater Designer Co., 862 F.2d 1044, 1049 (4th Cir. 1988) (“To be recoverable, consequential damages must have been foreseen or reasonably foreseeable and the buyer must prove them with reasonable certainty.”).

⁶⁶San Carlos Irrigation & Drainage Dist. v. United States, 111 F.3d 1557, 1563 (Fed. Cir. 1997) (“[C]ontract law precludes recovery for speculative damages.”); Bi-Economy Mkt., Inc. v. Harleysville Ins. Co., 886 N.E.2d 127, 130 (N.Y. 2008) (“Of course, proof of consequential damages cannot be speculative or conjectural.”).

⁶⁷Warner v. McLay, 103 A. 113, 113–14 (Conn. 1918) (“[T]he plaintiff ha[s] the right to recover such sum in damages as he would have realized in profits if the contract had been fully performed. To ascertain this, it [is] necessary to find the cost and expense of the work and materials necessary to complete the contract. This sum, deducted from the contract price, [gives] a balance which would be the profit which would have accrued to the plaintiff out of the contract, if it had been fulfilled. This the plaintiff ha[s] a right to receive in addition to his expenditures for work and labor supplied toward the completion of the contract.”).

⁶⁸Williams v. Kerns, 265 S.E.2d 605, 609 (Ga. Ct. App. 1980) (“The basic component of damages recoverable by a contractor when a construction contract is wrongfully breached by the owner is the net profit to which the contractor would have been entitled had full performance of the contract been permitted* * *. [T]here must be deducted from the recovery those amounts received by the contractor from the owner as prepayment or progress payment.”).

⁶⁹McGee Constr. Co. v. Neshobe Dev., Inc., 594 A.2d 415, 420 (Vt. 1991) (“[T]he proper measure of recovery is the contract price minus the cost of completion and other costs avoided.”).

⁷⁰Davis v. First Interstate Bank, N.A., 765 P.2d 680, 681 (Idaho 1988) (“The duty to mitigate, also known as the doctrine of avoidable consequences, provides that a plaintiff who is injured by actionable conduct of the defendant, is ordinarily denied recovery for damages which could have been avoided by reasonable acts, including reasonable expenditures, after the actionable conduct has taken place.”) (citing Dan B. Dobbs, Handbook on the Law of Remedies § 3.7, at 186 (1973)).

⁷¹Rockingham County v. Luten Bridge Co., 35 F.2d 301 (4th Cir. 1929).

⁷²Clark v. Marsiglia, 1 Denio 317 (N.Y. Sup. Ct. 1845); see also Hawa v. Moore, 947 N.E.2d 421, 428 (Ind. Ct. App. 2011) (“Moore should not have incurred the $1500 cost of hauling more materials after Hawa had filed the small claims suit.”).

⁷³Marsiglia, 1 Denio at 318.

⁷⁴Rockingham County, 35 F.2d 301.

⁷⁵Id. at 307.

⁷⁶Id.

⁷⁷Id. at 308 (“The measure of plaintiff’s damage, upon its appearing that notice was duly given not to build the bridge, is an amount sufficient to compensate plaintiff for labor and materials expended and expense incurred in the part performance of the contract, prior to its repudiation, plus the profit which would have been realized if it had been carried out in accordance with its terms.”).

⁷⁸Coughlin Constr. Co. v. Nu-Tec Indus., Inc., 755 N.W.2d 867, 871–72 (N.D. 2008) (“ ‘A person injured by the wrongful acts of another has a duty to mitigate or minimize the damages and must ‘protect himself if he can do so with reasonable exertion or at trifling expense, and can recover from the delinquent party only such damages as he could not, with reasonable effort, have avoided.’ ”) (quoting Hanson v. Boeder, 727 N.W.2d 280 (N.D. 2007)); Schiavi Mobile Homes, Inc. v. Gironda, 463 A.2d 722, 724 (Me. 1983) (“[W]hen a contract is breached, the nonbreaching party has an affirmative duty to take reasonable steps to mitigate his damages.”).

⁷⁹See Farnsworth, supra note 17, at 787.

⁸⁰See UCC § 2–704(2).

⁸¹Complete Gen. Constr. Co. v. Ohio Dep’t of Transp., 760 N.E.2d 364, 370 (Ohio 2002) (“[T]he contractor also has the duty to mitigate damages * * *. [I]f able, the contractor must take on other work to absorb the overhead allotted to the delayed project.”).

⁸²Richard A. Posner, Let Us Never Blame a Contract Breaker, 107 Mich. L. Rev. 1349, 1359 (2009).

⁸³Id. (“One can if one wants denounce the temporary monopolist’s conduct as wrongful, but the adjective adds nothing to the analysis.”)

⁸⁴Cf. R.E. Davis Chem. Corp. v. Diasonics, Inc., 826 F.2d 678, 683 n.7 (7th Cir. 1987) (“[B]y definition, a lost volume seller cannot mitigate damages through resale. Resale does not reduce a lost volume seller’s damages because the breach has still resulted in its losing one sale and a corresponding profit.”).

⁸⁵See Restatement (Second) of Contracts § 350, cmt. d and § 347, cmt. f.

⁸⁶58 N.E. 478 (Mass. 1900).

⁸⁷Id. at 479–80. Under the actual facts of Olds, the subcontractor performed the original and some extra work for the landowner. Id.

⁸⁸Id. at 479.

⁸⁹Schiavi Mobile Homes, Inc., 463 A.2d at 724 (“[W]hen a contract is breached, the nonbreaching party has an affirmative duty to take reasonable steps to mitigate his damages.”).

⁹⁰Thorne v. White, 103 A.2d 579 (D.C. 1954).

⁹¹Cf. Handicapped Children’s Educ. Bd. v. Lukaszewski, 332 N.W.2d 774 (Wis. 1983) (employment contract setting). For more on the “foisting” principle, see Chapter 3, Section (B)(3)(a).

⁹²Morello v. J.H. Hogan, Inc., 468 A.2d 1248 (Conn. App. Ct. 1984).

⁹³See supra notes 60–66, and accompanying text.

⁹⁴Florafax Int’l, Inc. v. GTE Mkt. Res., Inc., 933 P.2d 282, 292 (Okla. 1997) (“[The] loss of future or anticipated profit—i.e. loss of expected monetary gain—is recoverable in a breach of contract action: 1) if the loss is within the contemplation of the parties at the time the contract was made, 2) if the loss flows directly or proximately from the breach * * * and 3) if the loss is capable of reasonably accurate measurement or estimate.”).

⁹⁵See infra notes 139–171, and accompanying text for more difficult applications of the foreseeability hurdle.

⁹⁶Evergreen Amusement Corp. v. Milstead, 112 A.2d 901 (Md. 1955).

⁹⁷MCR Federal, LLC v. JB&A, Inc., 808 S.E.2d 186 (Va. 2017) (“ ‘When it is certain that substantial damages have been caused by the breach of a contract, and the uncertainty is not whether there have been damages, but only an uncertainty as to their true amount, then there can rarely be any good reason for refusing all damages due to the breach merely because of that uncertainty.’ ”) (quoting E.I Du Pont de Nemours & Co. v. Universal Moulded Prods. Corp., 62 S.E.2d 233, 254 (Va. 1950)); Lakota Girl Scout Council, Inc. v. Havey Fund-Raising Mgmt., Inc., 519 F.2d 634, 643 (8th Cir. 1975) (“ ‘If the mind of the court is certain that profits would have been made if there had been no breach by the defendant, there will be a greater degree of liberality in allowing the jury to bring a verdict for the plaintiff, even though the amount of profits prevented is scarcely subject to proof at all.’ ”) (quoting 5 Arthur Linton Corbin, Corbin on Contracts, at 142–43 (1994)).

⁹⁸Compare Evergreen Amusement Corp., 112 A.2d 901 (delay by construction company) with Lakota Girl Scout Council, Inc., 519 F.2d 634 (fund raising company failed to reach expected goal).

⁹⁹See, e.g., Nycal Offshore Dev. Corp. v. U.S., 106 Fed. Cl. 222, 227 (Fed. Cl. 2012) (requiring only a “fair and reasonable approximation of damages”); Totaro, Duffy, Cannova & Co., L.L.C. v. Lane, Middleton & Co., L.L.C., 921 A.2d 1100, 1108 (N.J. 2007) (“[M]ere uncertainty as to the quantum of damages is an insufficient basis on which to deny the non-breaching party relief. Although it complicates the precise calculations of damages, our courts have long held that ‘[p]roof of damages need not be done with exactitude * * *. It is therefore sufficient that the plaintiff prove damages with such certainty as the nature of the case may permit, laying a foundation which will enable the trier of the facts to make a fair and reasonable estimate.’ ”) (quoting Lane v. Oil Delivery Inc., 524 A.2d 405 (N.J. Super. Ct. App. Div. 1987)).

¹⁰⁰Evergreen Amusement Corp., 112 A.2d at 904.

¹⁰¹Lakota Girl Scout Council, Inc., 519 F.2d at 640.

¹⁰²In re Merritt Logan, Inc., 901 F.2d 349, 357 (3d Cir. 1990) (“Recent cases have eroded the once generally accepted rule that lost profits damages for a new business were not recoverable * * *. The trend of the modern cases is plainly toward replacing the old rule of law with a rule of evidence—the unquestionable principle that damages for loss of profits must be proven with reasonable certainty and that the evidence must support that finding by the trier of fact.”); Vickers v. Wichita State Univ., 518 P.2d 512 (Kan. 1974).

¹⁰³Evergreen Amusement Corp., 112 A.2d at 904 (“[D]amages are recoverable for profits prevented by breach of contract ‘only to the extent that the evidence affords a sufficient basis for estimating their amount in money with reasonable certainty’, and that where the evidence does not afford a sufficient basis, ‘damages may be measured by the rental value of the property.’ ”) (quoting Restatement (First) of Contracts § 331).

¹⁰⁴AM/PM Franchise Ass’n v. Atlantic Richfield Co., 584 A.2d 915, 924 (Pa. 1990).

¹⁰⁵Stancil v. Mergenthaler Linotype Co., 589 F. Supp. 78, 84 (D. Haw.1984); Quinn v. Straus Broad. Group, Inc., 309 F. Supp. 1208, 1209 (S. D. N. Y.1970).

¹⁰⁶AM/PM Franchise Ass’n, 584 A.2d at 926.

¹⁰⁷Handicapped Children’s Educ. Bd., 332 N.W.2d 774.

¹⁰⁸Id. at 779.

¹⁰⁹Id.

¹¹⁰See supra note 91, and accompanying text.

¹¹¹332 N.W.2d 774 (Wis. 1983).

¹¹²Id. at 779.

¹¹³See Chapter 3, Section (B)(3)(a).

¹¹⁴Lukaszewski, 332 N.W.2d at 779.

¹¹⁵Boehm v. American Broad. Co., 929 F.2d 482, 485 (9th Cir. 1991) (“[A]n employee who has been wrongfully terminated has a duty to mitigate damages through reasonable efforts to achieve other employment.”).

¹¹⁶Id. at 485 (“The general rule is that the measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon for the period of service, less the amount which the employer affirmatively proves the employee has earned or with reasonable effort might have earned from other employment.”) (citing Parker v. Twentieth Century-Fox Film Corp., 474 P.2d 689, 692 (Cal. 1970)).

¹¹⁷Parker v. Twentieth Century-Fox Film Corp., 474 P.2d 689, 692 (Cal. 1970) (“[B]efore projected earnings from other employment opportunities not sought or accepted by the discharged employee can be applied in mitigation, the employer must show that the other employment was comparable, or substantially similar, to that of which the employee has been deprived; the employee’s rejection of or failure to seek other available employment of a different or inferior kind may not be resorted to in order to mitigate damages.”).

¹¹⁸474 P.2d 689 (Cal. 1970).

¹¹⁹Id. at 691.

¹²⁰Id. at 694.

¹²¹Id. at 693–94.

¹²²Id. at 693.

¹²³Id. at 693–94.

¹²⁴Id.

¹²⁵Id. at 694.

¹²⁶See id.

¹²⁷Id. at 696 (Sullivan, Acting C.J., dissenting).

¹²⁸Id.

¹²⁹See, e.g., Boehm, 929 F.2d 482.

¹³⁰Parker, 474 P.2d at 695 (“Only work which is in the same field and which is of the same quality need be accepted.”) (Sullivan, Acting C.J., dissenting).

¹³¹Id. at 694.

¹³²Id.

¹³³Boehm, 929 F.2d 482.

¹³⁴See generally Robert A. Hillman, Keeping the Deal Together After Material Breach—Common Law Mitigation Rules, the UCC, and the Restatement (Second) of Contracts, 47 U. Colo. Law Rev. 553 (1976) .

¹³⁵Farnsworth, supra note 17, at 780 (“The burden of showing that the injured party could have, but has not, taken appropriate steps generally rests upon the party in breach * * *.”).

¹³⁶See Hillman, supra note 134, at 564–70.

¹³⁷Marshall Sch. Dist. v. Hill, 939 S.W.2d 319 (Ark. Ct. App. 1997).

¹³⁸Smith v. American Gen. Corp., 1987 WL 15144, at *11 (Tenn. Ct. App. 1987) (“When calculating damages for wrongful discharge courts strictly apply the rules of foreseeability, mitigation, and certainty and rarely award consequential damages. Damages for injury to the employee’s reputation, for example, are generally considered too remote and not in the parties’ contemplation.”).

¹³⁹156 Eng. Rep. 145 (Ex.1854).

¹⁴⁰Id. at 151.

¹⁴¹Id.

¹⁴²Id.

¹⁴³Schroeder v. Barth, Inc., 969 F.2d 421, 425 (7th Cir. 1992) (“Ever since Hadley v. Baxendale, courts have allowed recovery in breach of contract actions for all damages that were reasonably foreseeable to the parties at the time of contract formation.”).

¹⁴⁴See supra notes 60–66, and accompanying text for a discussion of general and consequential damages.

¹⁴⁵Hadley, 156 Eng. Rep. at 151.

¹⁴⁶Armstrong v. Bangor Mill Supply Corp., 145 A. 741 (Me. 1929) (crankshaft repair shop liable for lost profits after defective repairs). In addition, an insurance company should know that its insured may suffer loss of its business when the company sells the insured business interruption coverage. See Bi-Economy Mkt., Inc. v. Harleysville Ins. Co., 886 N.E.2d 127 (N.Y. 2008).

¹⁴⁷Hadley, 156 Eng. Rep. at 151.

¹⁴⁸Id. at 145.

¹⁴⁹Id. at 151.

¹⁵⁰Spang Indus., Inc. v. Aetna Cas. & Sur. Co., 512 F.2d 365, 371 n.8 (2d Cir. 1975) (relying on Victoria Laundry, Ltd. v. Newman Indus., Ltd., 2 K.B. 528, 537 (1949)).

¹⁵¹Hadley, 156 Eng. Rep. at 151.

¹⁵²Id. (“[H]ad the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them.”).

¹⁵³See Posner, supra note 20, at 106–07.

¹⁵⁴See id.

¹⁵⁵Id.; see also In re Brame, 23 B.R. 196, 201 (Bankr. W.D. Ky. 1982) (“Economic analysis of loss-shifting suggests that losses should be borne by the ‘superior risk-bearer’—a designation given, in the esoteric parlance of economics, to the party to a transaction who is in the best position to appraise the nature and extent of risks contractually assumed and the possibility of losses resulting from their occurrence.”).

¹⁵⁶See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 101 (1989).

¹⁵⁷See Chapter 7, Section (B)(3); Chapter 9, Section (B)(1)(c).

¹⁵⁸Ayres & Gertner, supra note 156, at 101 (“The holding in Hadley operates as a penalty default. The miller could have informed the carrier of the potential consequential damages and contracted for full damage insurance.”).

¹⁵⁹Id.

¹⁶⁰Id. at 101–104.

¹⁶¹See Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615, 622 (1990).

¹⁶²Ayres & Gertner, supra note 156, at 104.

¹⁶³Melvin Aron Eisenberg, The Principle of Hadley v. Baxendale, 80 Cal. L. Rev. 563, 595 (1992) (“In many cases the communication of information concerning consequential damages would involve a cost much more substantial than the cost of assembly and transmission. Information that is valuable to a party might lose much of that value when transmitted.”).

¹⁶⁴Id. at 594–95.

¹⁶⁵Id. at 595–96.

¹⁶⁶Id. at 594–95.

¹⁶⁷Id. at 592–94.

¹⁶⁸Id. at 593.

¹⁶⁹UCC § 2–715(2)(a); see also Restatement (Second) of Contracts § 351.

¹⁷⁰UCC § 2–715, cmt. 2.

¹⁷¹Lamkins v. International Harvester Co., 182 S.W.2d 203, 205 (Ark. 1944) (“[I]n order to render a seller liable to the buyer for special or consequential damages arising from delay in delivering the article of sale, it is necessary that at or before the time of the making of the contract of sale he knew of the special circumstances which would expose the buyer to special damages by reason of the delay in delivery, and that such seller at least tacitly consented to assume the particular risks arising from such delay.”).

¹⁷²UCC § 1–305.

¹⁷³See supra notes 169–171, and accompanying text.

¹⁷⁴UCC § 2–715(2) (“Consequential damages resulting from the seller’s breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise * * *.”).

¹⁷⁵Id.

¹⁷⁶UCC § 2–710.

¹⁷⁷See supra notes 60–66, and accompanying text, for a definition of consequential damages.

¹⁷⁸Amended UCC § 2–710, cmt. 2 (proposed final draft April 18, 2003). Article 2 amendments have not been adopted in any jurisdiction.

¹⁷⁹UCC § 2–713(1) (“[W]ith respect to proof of market price (Section 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 (Section 2–715), but less expenses saved in consequence of the seller’s breach.”).

¹⁸⁰Id.

¹⁸¹UCC § 2–712(2) (“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 (Section 2–715), but less expenses saved in consequence of the seller’s breach.”).

¹⁸²UCC § 2–712(1).

¹⁸³Id.

¹⁸⁴Amended UCC § 2–712, cmt. 6.

¹⁸⁵UCC § 2–714(2).

¹⁸⁶See supra notes 173–178, and accompanying text.

¹⁸⁷UCC § 2–708(1).

¹⁸⁸UCC § 2–706(1).

¹⁸⁹UCC § 1–201(19).

¹⁹⁰See supra notes 179–184, and accompanying text.

¹⁹¹UCC § 2–706(1) (“Under the conditions stated in Section 2–703 on seller’s remedies, the seller may resell the goods concerned or the undelivered balance thereof.”) (emphasis added).

¹⁹²Amended UCC § 2–708, cmt. 4. Amended Article 2 has not been adopted by any state.

¹⁹³See supra notes 188–189, and accompanying text.

¹⁹⁴Neri v. Retail Marine Corp., 285 N.E.2d 311, 314 (N.Y. 1972) is a leading case. Stern Oil Co. v. Brown, 908 N.W.2d 144 (Supreme Ct. S. D. 2018), is another example. The court stated:

Brown and Stern Oil entered into two ten-year Motor Fuel Supply Agreements (MFSAs) for Stern Oil to supply ExxonMobil branded fuel to Brown to sell at his two convenience stores. The MFSAs required Stern Oil to sell and deliver up to a contractually determined ‘Maximum Annual Volume’ of fuel to Brown. Brown was obligated to purchase at least 75% of that amount annually. Approximately a year and a half into the ten-year agreements, Brown stopped purchasing fuel from Stern Oil. * * * The circuit court instructed the jury on the question whether Stern Oil was a lost volume seller. Stern Oil presented unrefuted evidence that it had an unlimited supply of fuel available from ExxonMobil and lost the opportunity to sell the volume of fuel it otherwise would have sold to Brown under the MFSAs. The jury awarded lost profits to Stern Oil, and neither party has appealed the lost volume seller determination.

Id. at 148, 150.

¹⁹⁵UCC § 2–708(2) (“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 (Section 2–710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.”).

¹⁹⁶Id.

¹⁹⁷Neri, 285 N.E.2d at 314 n.2 (“The concluding clause, ‘due credit for payments or proceeds of resale,’ is intended to refer to ‘the privilege of the seller to realize junk value when it is manifestly useless to complete the operation of manufacture.’ The commentators who have considered the language have uniformly concluded that ‘the reference is to a resale as scrap under * * * Section 2–704.’ Another writer, reaching the same conclusion, after detailing the history of the clause, says that ‘proceeds of resale’ previously meant the resale value of the goods in finished form; now it means the resale value of the components on hand at the time plaintiff learns of breach.”) (citations omitted).

¹⁹⁸Amended UCC § 2–708(2).

¹⁹⁹See supra notes 84–89, and accompanying text.

²⁰⁰In re Worldcom, Inc., 361 B.R. 675, 679 (Bankr. S.D.N.Y. 2007).

²⁰¹Id.

²⁰²Id.

²⁰³Id. at 680.

²⁰⁴Id.

²⁰⁵Id. at 685.

²⁰⁶Id.

²⁰⁷Id. at 687.

²⁰⁸Id.

²⁰⁹Id. at 690.

²¹⁰Id. at 687.

²¹¹Orr v. Goodwin, 953 A.2d 1190, 1195 (N.H. 2008) (“[I]n a land sale contract the proper measure of damages is the seller’s loss of bargain; that is, the difference between the contract price and the actual value of the real estate at the time of the bargain.”); Gilmartin Bros. v. Kern, 916 S.W.2d 324, 332 (Mo. Ct. App. 1995) (“[W]here the seller of real estate brings suit for breach of contract against the buyer, the appropriate measure of damages is the difference between the contract price and the market value of the property on the date the sale should have been completed.”).

²¹²Turner v. Benson, 672 S.W.2d 752, 754–55 (Tenn. 1984) (“[The injured party] may recover special damages, if any, that arise out of the breach of contract in order to compensate the [injured party] for any loss or injury actually sustained by reason of the [breaching party’s] breach.”).

²¹³See Charles L. Knapp, Nathan M. Crystal & Harry G. Prince, Problems in Contract Law 854 (6th ed. 2007) (citing cases).

²¹⁴Id.

²¹⁵Id.

²¹⁶See supra notes 70–81, 115–138, and accompanying text.

²¹⁷See supra notes 93–106, and accompanying text.

²¹⁸For a case discussing all of these issues, see Stern Oil Co. v. Brown, 908 N.W.2d 144 (S.D. 2018). See also supra notes 139–171, and accompanying text.

²¹⁹See Chapter 3, Section (A) for a discussion of the theory of promissory estoppel.

²²⁰See infra notes 345–362, and accompanying text.

²²¹This example is loosely based on Chicago Coliseum Club v. Dempsey, 265 Ill. App. 542 (App. Ct.1932).

²²²See supra notes 94–103, and accompanying text.

²²³Wartzman v. Hightower Prods., Ltd., 456 A.2d 82, 86 (Md. Ct. Spec. App. 1983) (“[P]rofits lost due to a breach of contract are recoverable. Where anticipated profits are too speculative to be determined, monies spent in part performance, in preparation for or in reliance on the contract are recoverable.”); Chicago Coliseum Club, 265 Ill.App. at 554 (“The items recoverable are such items of expense as were incurred between the date of the signing of the agreement and the breach * * * by the defendant and such as were incurred as a necessary expense in furtherance of the performance.”).

²²⁴L. Albert & Son v. Armstrong Rubber Co., 178 F.2d 182, 189 (2d Cir. 1949) (“[P]romisee may recover his outlay in preparation for the performance, subject to the privilege of the promisor to reduce it by as much as he can show that the promisee would have lost, if the contract had been performed.”); Merry Gentleman, LLC v. George & Leona Prods., Inc., 799 F.3d 827, 829–830 (7th Cir. 2015) (dicta); Wartzman, 456 A.2d at 86; see Restatement (Second) of Contracts § 349 (“[T]he 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.”).

²²⁵L. Albert & Son, 178 F.2d at 188–89.

²²⁶See supra notes 216–218, and accompanying text.

²²⁷American Capital Corp. v. F.D.I.C., 472 F.3d 859, 867 (Fed. Cir. 2006) (“In order to recover reliance damages, the ‘plaintiff’s loss must have been foreseeable to the party in breach at the time of contract formation.’ A loss may be foreseeable and therefore recoverable ‘as a probable result of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.’ ”) (quoting Landmark Land Co., Inc. v. F.D.I.C., 256 F.3d 1365 (Fed. Cir. 2001)).

²²⁸Westfed Holdings, Inc. v. United States, 55 Fed. Cl. 544, 562 (Fed. Cl. 2003) (“A party may not recover for ‘loss that the injured party could have avoided without undue risk, burden or humiliation.’ ”) (quoting Restatement (Second) of Contracts § 350(1)).

²²⁹Chicago Coliseum Club, 265 Ill.App. at 551 (“Any obligations assumed by the plaintiff prior to [signing of the agreement] are not chargeable to the defendant.”).

²³⁰Anglia Television Ltd. v. Reed, 1 Q.B. 60, 64 (C.A. 1971) (“If the plaintiff claims the wasted expenditure, he is not limited to the expenditure incurred after the contract was concluded. He can claim also the expenditure incurred before the contract, provided that it was such as would reasonably be in the contemplation of the parties as likely to be wasted if the contract was broken.”).

²³¹See, e.g., Chicago Coliseum Club, 265 Ill.App. 542 (precontractual reliance not recoverable); Anglia Television Ltd., 1 Q.B. 60 (precontractual reliance recoverable).

²³²Chicago Coliseum Club, 265 Ill.App. at 553.

²³³Id. (fixed overhead not recoverable).

²³⁴Autotrol Corp. v. Continental Water Sys. Corp., 918 F.2d 689, 693 (7th Cir. 1990).

²³⁵296 N.E.2d 183 (Mass. 1973).

²³⁶Id. at 185.

²³⁷Id. at 186.

²³⁸Id. at 187–88 (“For breach of the patient-physician agreements under consideration, a recovery limited to restitution seems plainly too meager, if the agreements are to be enforced at all. On the other hand, an expectancy recovery may well be excessive. The factors, already mentioned, which have made the cause of action somewhat suspect, also suggest moderation as to the breadth of the recovery that should be permitted * * *. There is much to be said, then, for applying a reliance measure to the present facts * * *.”).

²³⁹Id. at 188 (“To attempt, moreover, to put a value on the condition that would or might have resulted, had the treatment succeeded as promised, may sometimes put an exceptional strain on the imagination of the fact finder.”).

²⁴⁰Id. (“We should recall here that the fee paid by the patient to the doctor for the alleged promise would usually be quite disproportionate to the putative expectancy recovery.”).

²⁴¹Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 361 N.E.2d 1015, 1018 (N.Y. 1977) (“In effect, a liquidated damage provision is an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement. Parties to a contract have the right to agree to such clauses, provided that the clause is neither unconscionable nor contrary to public policy.”). A similar rule applies if the parties agree on a remedy other than damages. See, e.g., Elderberry of Weber City, LLC v. Living Centers-Southeast, Inc., 794 F.3d 406, 412 (4th Cir. 2015) (parties may agree on an exclusive remedy if not against public policy or other law).

²⁴²Leeber v. Deltona Corp., 546 A.2d 452, 455 (Me. 1988) (“[T]he traditional role of liquidated damages provisions [is to serve] as an economical alternative to the costly and lengthy litigation involved in a conventional breach of contract action.”); Farnsworth, supra note 17, at 841 (“For both parties, stipulating a sum may facilitate the calculation of risks and reduce the cost of proof.”).

²⁴³Matthew T. Furton, Note, The Use of Penalty Clauses in Location Incentive Agreements, 70 Ind. L.J. 1009, 1018–19 (1995).

²⁴⁴Farnsworth, supra note 17, at 811, 814–15; see also Charles J. Goetz & Robert E. Scott, Liquidated Damages, Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach, 77 Colum. L. Rev. 554, 557 (1977) (“The expected cost of establishing true losses under conventional damage measures will * * * induce parties who face uncertain or nonprovable anticipated losses to negotiate stipulated damage agreements.”).

²⁴⁵H.J. McGrath Co. v. Wisner, 55 A.2d 793, 795 (Md. 1947), quoting Restatement (First) of Contracts § 339 (1932).

²⁴⁶Id.

²⁴⁷See supra notes 94–103, and accompanying text for a discussion of the certainty requirement in another context.

²⁴⁸McQueen, Rains & Tresch, LLP v. Citgo Petrol. Corp., 195 P.3d 35, 46 (Okla. 2008) (“[A] liquidated damages provision will not be considered a penalty if: 1) the injury caused by the breach is difficult or impossible to estimate accurately; 2) the parties intend to provide for damages rather than a penalty; and 3) the sum stipulated is a reasonable pre-breach estimate of the probable loss.”).

²⁴⁹Truck Rent-A-Center, Inc., 361 N.E.2d at 1018 (“In effect, a liquidated damage provision is an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.”); see also Berggren v. Hill, 928 N.E.2d 1225, 1231 (Ill. App. Ct. 2010) (liquidated damages provision enforceable in part because damages at the time of contracting were uncertain).

²⁵⁰See, e.g., Massman Constr. Co. v. City Council of Greenville, 147 F.2d 925 (5th Cir. 1945) (no actual damages at the time of breach).

²⁵¹Melvin Aron Eisenberg, The Limits of Cognition and the Limits of Contract, 47 Stan. L. Rev. 211, 230–32 (1995); Farnsworth, supra note 17, at 844–47.

²⁵²Atel Fin. Corp. v. Quaker Coal Co., 132 F. Supp. 2d 1233, 1239 (N.D. Cal. 2001) (“A liquidated damages clause will generally be considered unreasonable, and hence unenforceable, if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach. An amount disproportionate to the anticipated actual damages is termed a ‘penalty.’ ”). But see DJ Mfg. Corp. v. United States, 86 F.3d 1130, 1134 (Fed. Cir. 1996) (“[F]ederal law ‘does not look with disfavor upon ‘liquidated damages’ provisions in contracts.’ ”) (quoting Priebe & Sons v. United States, 332 U.S. 407, 411 (1947)).

²⁵³See, e.g., Mason v. Fakhimi, 865 P.2d 333 (Nev. 1993) (“ ‘[The] distinction between a penalty and liquidated damages is that a penalty is for the purpose of securing performance, while liquidated damages is the sum to be paid in the event of non-performance.’ ”) (quoting 22 Am. Jur. 2d Damages § 684 (1980)); Farnsworth, supra note 17, at 811.

²⁵⁴Truck Rent-A-Center, 361 N.E.2d at 1018.

²⁵⁵See, e.g., Hemlock Semiconductor Corp. v. Kyocera Corp., 2017 WL 1632885, *3–4 (E.D. Mich. 2017) (enforcing a “take or pay” term because it constitutes the “purchaser’s performance obligation rather than as a form of agreed-upon remedy”); Minnick v. Clearwire U.S. LLC, 275 P.3d 1127, 1131 (Wash. 2012) (enforcing an early termination fee in a contract for wireless Internet and telephone services where “the parties intended * * * to give the promisor a real choice between reasonably equivalent choices”).

²⁵⁶Id.

²⁵⁷Farnsworth, supra note 17, at 811.

²⁵⁸Id. at 842 (“A penal bond * * * took the form of a promise to pay a stated sum, coupled with a provision that this obligation was ‘null and void’ if the promisor rendered the required performance under the contract.”).

²⁵⁹See A.W.B. Simpson, A History of the Common Law of Contract 119–25 (1975); see also Goetz & Scott, supra note 244, at 593 (“Since the roots of the penalty rule were nourished on fairness concerns, it is not surprising that generations of lawyers have clung to the view that penalties are ‘bad.’ ”). For a brief discussion of courts of equity, see infra notes 313–319, and accompanying text.

²⁶⁰Farnsworth, supra note 17, at 811 n.3 (citing Jaquith v. Hudson, 5 Mich. 123 (1858)); see also Goetz & Scott, supra note 244, at 561.

²⁶¹Robert A. Hillman, The Limits on Behavioral Decision Theory in Legal Analysis: The Case of Liquidated Damages, 85 Cornell L. Rev. 717, 727 (2000) (“Modern courts apparently have greeted with open arms the equity court’s response to penal bonds.”).

²⁶²Wise v. United States, 249 U.S. 361, 365 (1919) (emphasis added).

²⁶³See supra note 17, and accompanying text.

²⁶⁴See Hillman, supra note 261, at 727.

²⁶⁵See Phillip R. Kaplan, Note, A Critique of the Penalty Limitation on Liquidated Damages, 50 S. Cal. L. Rev. 1055, 1072 (1977) (courts do not believe that “parties have capitalized the risk of breach and included this value in the price”).

²⁶⁶Jeffrey B. Coopersmith, Comment, Refocusing Liquidated Damages Law for Real Estate Contracts: Returning to the Historical Roots of the Penalty Doctrine, 39 Emory L. J. 267, 268 n.6 (1990) (“It is characteristic of men * * * that they are likely to be beguiled by the ‘illusions of hope,’ and to feel so certain of their ability to carry out their engagements in [the] future, that their confidence leads them to be willing to make extravagant promises and commitments as to what they are willing to suffer if they fail.”) (quoting C. McCormick, Damages 601 (1935)).

²⁶⁷Id.

²⁶⁸Hillman, supra note 261, at 728.

²⁶⁹See, e.g., 3 E. Allan Farnsworth, Farnsworth on Contracts 303 n.8 (3d ed. 2004) (citing the opposing views of Goetz & Scott and Clarkson, Miller & Muris).

²⁷⁰See supra notes 19–29, and accompanying text.

²⁷¹See Posner, supra note 20, at 128 (“It might seem obvious that the law would not—and in fact does not—enforce penalty clauses in contracts. A penalty would deter efficient as well as inefficient breaches, by making the cost of the breach to the contract breaker greater than the cost of the breach to the victim * * *.”); David Brizzee, Liquidated Damages and the Penalty Rule: A Reassessment, 1991 BYU L. Rev. 1613, 1625 (1991); but see Lawyers Title Ins. Corp. v. Dearborn Title Corp., 118 F.3d 1157, 1161 (7th Cir. 1997) (“As for any concern that penalty clauses might discourage efficient breaches—breaches in which the profit from the breach exceeds the cost to the promisee—the promisee can always waive the penalty and will do so if compensated by the promisor.”).

²⁷²See supra notes 19–29, and accompanying text.

²⁷³Posner, supra note 20, at 127–28.

²⁷⁴See generally Daniel Friedmann, The Efficient Breach Fallacy, 18 J. Legal Stud. 1 (1989).

²⁷⁵See supra notes 216–218, and accompanying text.

²⁷⁶Ian R. Macneil, Efficient Breach of Contract: Circles in the Sky, 68 Va. L. Rev. 947, 968–69 (1982) (“ ‘[T]alking after a breach’ may be one of the more expensive forms of conversation to be found, involving * * * engaging high-priced lawyers, and gambits like starting litigation, engaging in discovery, and even trying and appealing cases.”); William S. Dodge, The Case for Punitive Damages in Contracts, 48 Duke L.J. 629, 634 (1999) (“[B]ecause the transaction costs of negotiating a release are typically lower than the assessment costs of establishing damages at trial, contractual entitlements should be protected with property rules, including punitive damages.”).

²⁷⁷But see Oliver Wendell Holmes, The Path of the Law, 10 Harv. L. Rev. 457, 462 (1897) (“The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it, and nothing else.”); see also Bodum USA, Inc. v. La Cafetiere, Inc., 621 F.3d 624, 634 (7th Cir. 2010) (Posner J., concurring) (“As Holmes remarked, the common law conceives of contracts as options—when you sign a contract in which you promise a specified performance you buy an option to either perform as promised or pay damages, * * * unless damages are not an adequate remedy in the particular case. Whether you were at fault in deciding not to perform—you could have done so but preferred to pay damages because someone offered you a higher price for the goods that you’d promised to the other party * * * —is therefore irrelevant.”).

²⁷⁸Lon L. Fuller, The Morality of Law 28 (rev. ed. 1969).

²⁷⁹Patricia H. Marschall, Willfulness: A Crucial Factor in Choosing Remedies for Breach of Contract, 24 Ariz. L. Rev. 733, 734, 740 (1982) (“Even if the theory of efficient breach were realistic, the values that support it are of less importance to society than the principle of good faith and fair dealing in the performance and enforcement of contracts * * *. Courts ought to be putting more emphasis on the notion of sanctity of contract and the resulting moral obligation to honor one’s promises.”); see also Richard R.W. Brooks, The Efficient Performance Hypothesis, 116 Yale L.J. 568 (2006) (choice of breach should be the promisee’s).

²⁸⁰Restatement (Third) of Restitution § 39(1) (2010).

²⁸¹Id.

²⁸²Id. § 39(2).

²⁸³Restatement (Third) of Restitution § 39, cmt. h; see also Andrew Kull, Restitution as a Remedy for Breach of Contract, 67 S. Cal. L. Rev. 1465, 1482–83 (1994) (“[C]ourts in some circumstances favor a punitive remedy for breach of contract, and that stripping a defendant of the benefits secured by a contract he has failed to perform * * * [is] no more than poetic justice. If promise-breakers are wrongdoers we can * * * choose to punish them any way we see fit * * *.”); Watts v. Watts, 405 N.W.2d 303, 313 (Wis. 1987) (“[A]n action for recovery based upon unjust enrichment is grounded on the moral principle that one who has received a benefit has a duty to make restitution where retaining such a benefit would be unjust.”).

²⁸⁴See cases cited in Rptrs. Notes to Restatement (Third) of Restitution § 39.

²⁸⁵Truck Rent-A-Center, 361 N.E.2d at 1019.

²⁸⁶155 N.W.2d 74 (Wis. 1967).

²⁸⁷Summers, Hillman & Hoffman, supra note 25, at 19–20.

²⁸⁸Chrum v. Charles Heating and Cooling, Inc., 327 N.W.2d 568, 570 (Mich. Ct. App. 1982).

²⁸⁹WIS-Bay City, LLC v. Bay City Partners, LLC, 2009 WL 1661649, at *6 (N.D. Ohio 2009) (“ ‘[P]unitive 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.’ ”) (quoting Lake Ridge Acad. v. Carney, 613 N.E.2d 183 (1993)); Blasko v. Petland, Inc., 2009 WL 1617075, at *2 (S.D. Ohio 2009) (“ ‘[I]f the facts of the case show an intentional tort committed independently, but in connection with, a breach of contract and such tort is accompanied by conduct which is wanton, reckless, malicious or oppressive, then punitive damages may be awarded.’ ”) (quoting R & H Trucking v. Occidental Fire & Cas. Co., 441 N.E.2d 816, 819 (Ohio Ct. App. 1981)).

²⁹⁰See generally Restatement (Second) of Contracts § 353. But see B & M Homes v. Hogan, 376 So.2d 667 (Ala. 1979) (emotional distress damages recoverable for severe defects in home construction).

²⁹¹Stewart v. Rudner, 84 N.W.2d 816, 824 (Mich. 1957) (“When we have a contract concerned not with trade and commerce but with life and death, not with profit but with elements of personality, not with pecuniary aggrandizement but with matters of mental concern and solicitude, then a breach of duty with respect to such contracts will inevitably and necessarily result in mental anguish, pain and suffering.”).

²⁹²Chrum, 327 N.W.2d 568 at 570 (“Where an action is for a breach of a commercial contract, damages for mental distress are not recoverable.”).

²⁹³Id.

²⁹⁴Gaglidari v. Denny’s Rests., Inc., 815 P.2d 1362, 1370 (Wash. 1991).

²⁹⁵See Sullivan v. O’Connor, 296 N.E.2d 183 (Mass. 1973) (patient’s condition worse after operations, emotional distress damages allowed); Avery v. Arnold Home, Inc., 169 N.W.2d 135 (Mich. Ct. App. 1969) (nursing home failed to notify plaintiff of mother’s grave condition, emotional distress damages allowed); Chrum, 327 N.W.2d 568 (faulty furnace causes fire that destroys plaintiffs’ home, emotional distress damages denied); Jankowski v. Mazzotta, 152 N.W.2d 49 (Mich. Ct. App. 1967) (faulty construction of home, emotional distress damages denied).

²⁹⁶See In re Hannaford Bros. Co. Customer Data Sec. Breach Litig., 4 A.3d 492 (Me. 2010) (normal life frustrations); Chrum, 327 N.W.2d at 570 (“Where property loss is involved, the courts have generally not allowed recovery for mental distress in breach of contract actions.”).

²⁹⁷Gaglidari, 815 P.2d at 1370 (“[T]ort damages for emotional distress caused by breach of an employment contract are not recoverable.”).

²⁹⁸Sullivan, 296 N.E.2d at 188.

²⁹⁹Id. (“To attempt * * * to put a value on the condition that would or might have resulted, had the treatment succeeded as promised, may sometimes put an exceptional strain on the imagination of the fact finder.”).

³⁰⁰Gaglidari, 815 P.2d at 1374 (“The impact of allowing emotional distress damages for breach of contract would indeed be enormous.”).

³⁰¹Restatement (Second) of Contracts § 355; see also 24 Samuel Williston & Richard A. Lord, Williston on Contracts § 65:2 (4th ed. 2002); 11 Arthur Linton Corbin, Corbin on Contracts § 59.2 (Revised ed. 1995); Timothy J. Sullivan, Punitive Damages in the Law of Contract: The Reality and the Illusion of Legal Change, 61 Minn. L. Rev. 207, 207 (1977).

³⁰²See Chapter 6, Section (B)(3).

³⁰³Mauldin v. Sheffer, 150 S.E.2d 150, 155 (Ga. Ct. App. 1966).

³⁰⁴Thyssen, Inc. v. S.S. Fortune Star, 777 F.2d 57, 63 (2d Cir. 1985) (“[No punitive damages] although the breach is intentional or even when it has been effected with malicious intent.”).

³⁰⁵Federal Express Corp. v. Dutschmann, 846 S.W.2d 282, 284 (Tex. 1993) (“Recovery of punitive damages requires a finding of an independent tort with accompanying actual damages.”).

³⁰⁶Hillman, supra note 11, at 509 (“The goal is to make the injured party whole, not to punish contract breakers.”).

³⁰⁷See supra notes 271–273, and accompanying text; see also Commercial Real Estate Inv., L.C. v. Comcast of Utah II, Inc., 285 P.3d 1193, 1207 (Utah 2012) (Durham, J., concurring) (punitive damages “would have the troubling effect of deterring efficient breach”).

³⁰⁸See supra notes 290–300, and accompanying text.

³⁰⁹Thyssen, 777 F.2d at 63.

³¹⁰Id. at 57. For more detail, see Chapter 6, Section (B)(3).

³¹¹Barbers Local 552 v. Sealy, 118 N.W.2d 837, 839 (Mich. 1962) (“The remedy of specific performance is an extraordinary one granted only in unusual cases to prevent irreparable harm. It is a matter of grace and not of right.”); E. Allan Farnsworth, Legal Remedies for Breach of Contract, 70 Colum. L. Rev. 1145, 1154 (1970).

³¹²See generally Farnsworth, supra note 17, at 739–43.

³¹³See Chapter 3, Section (A)(1).

³¹⁴Seavey v. Drake, 62 N.H. 393, 394 (1882) (“[E]quity protects a parol gift of land equally with a parol agreement to sell it, if accompanied by possession, and the donee has made valuable improvements upon the property induced by the promise to give it.”).

³¹⁵Akins v. Heiden, 7 S.W.2d 15 (1928) (“[W]hen a donee enters into possession and makes valuable improvements on the land, the money thus expended on the faith of the gift is a consideration on which to ground a claim for specific performance.”).

³¹⁶Farnsworth, supra note 311, at 1151–52 (“[I]f the sum was not paid, a writ of execution would issue empowering the sheriff to seize and sell so much of the defendant’s property as was required to pay the plaintiff.”).

³¹⁷Aaron S. Edlin & Alan Schwartz, Symposium: Private Law, Punishment, and Disgorgement: Optimal Penalties in Contracts, 78 Chi.-Kent L. Rev. 33, 33 (2003) (“[A]n award of specific performance is enforced by the court’s contempt power * * *.”); Farnsworth, supra note 311, at 1152.

³¹⁸Farnsworth, supra note 311, at 1152–53.

³¹⁹Wolf v. Anderson, 334 N.W.2d 212, 215 (N.D. 1983) (“A complaint which requests the equitable remedy of specific performance must clearly show that the legal remedy of damages is inadequate.”); Farnsworth, supra note 311, at 1154 (“Equity would stay its hand if the remedy at law was ‘adequate.’ ”).

³²⁰Farnsworth, supra note 311, at 1154; see also Fazzio v. Mason, 249 P.3d 390, 396 (Idaho 2011) (“presumption that damages are inadequate in an action for a breach of land sale contract”).

³²¹Breitbach v. Christenson, 541 N.W.2d 840, 843 (Iowa 1995) (“[I]t is clear from our case law this court presumes real estate to possess a unique quality such that mere monetary damages may not always constitute adequate remedy for a breach of contract.”); Kitchen v. Herring, 42 N.C. 190 (1851); see also Restatement (Second) of Contracts § 360, cmt. e (“Contracts for the sale of land have traditionally been accorded a special place in the law of specific performance. A specific tract of land has long been regarded as unique and impossible of duplication by the use of any amount of money.”).

³²²Black’s Law Dictionary 1271 (8th ed. 2004) (“One who buys something for value without notice of another’s claim to the item or of any defects in the seller’s title; one who has in good faith paid valuable consideration for property without notice of prior adverse claims.”).

³²³Cf. Timko v. Useful Homes Corp., 168 A. 824 (N.J. Ch. 1933).

³²⁴Jackson v. Schultz, 151 A.2d 284 (Del. Ch. 1959).

³²⁵Summers, Hillman & Hoffman, supra note 25, at 414–415.

³²⁶Wolf, 334 N.W.2d at 215–16 (“We find nothing unique or special in these circumstances warranting the remedy of specific performance. In the instant case there is no indication that monetary damages will not adequately compensate the [seller]. Although [North Dakota law] supports a buyer’s right to specific performance on the ground that monetary damages are presumed to be inadequate, no similar statutory presumption exists to support an action by the seller for specific performance.”).

³²⁷E.g., Pingley v. Brunson, 252 S.E.2d 560, 561 (S.C. 1979) (“Courts of equity will not ordinarily decree specific performance of a contract for personal services, particularly where the performance of the services contracted for would be continuous over a long period of time.”).

³²⁸American Broad. Co., Inc. v. Wolf, 420 N.E.2d 363, 366 (N.Y. 1981) (“It has been strongly suggested that judicial compulsion of services would violate the express command of [the Thirteenth] amendment.”) (citing Arthur v. Oakes, 63 F. 310, 317 (7th Cir. 1894)).

³²⁹Id. (“For practical, policy and constitutional reasons, therefore, courts continue to decline to affirmatively enforce employment contracts.”).

³³⁰Id. at 367 (“[W]here an employee refuses to render services to an employer in violation of an existing contract, and the services are unique or extraordinary, an injunction may issue to prevent the employee from furnishing those services to another person for the duration of the contract.”).

³³¹Gargano v. Diocese of Rockville Ctr., 888 F. Supp. 1274 (E.D.N.Y. 1995), aff’d, 80 F.3d 87 (2d Cir. 1996). I have refrained from textual footnotes throughout this book, but I can’t resist mentioning that Rockville Centre is my home town. Go South Side High!

³³²UCC § 2–716(1).

³³³Stephan’s Mach. & Tool, Inc. v. D & H Mach. Consultants, Inc., 417 N.E.2d 579 (Ohio Ct. App. 1979).

³³⁴Laclede Gas Co. v. Amoco Oil Co., 522 F.2d 33 (8th Cir. 1975) (“[Plaintiff] probably could not find another supplier of propane willing to enter into a long-term contract such as the [breached] agreement * * *.”).

³³⁵City Stores v. Ammerman, 266 F. Supp. 766, 776 (D.D.C. 1967), aff’d, 394 F.2d 950 (D.C. Cir. 1968).

³³⁶Id. (but specific performance awarded); Lester’s Home Furnishers, Inc. v. Modern Furniture Co., 61 A.2d 743, 746 (N.J. Super. Ct. Ch. Div. 1948) (“[T]he items of renovation and construction work are numerous, and noticeably diversified. Moreover by their nature they are such as to render their actual performance and accomplishment provocative of frequent disputes. ‘The difficulty in supervision that would be necessary is obvious.’ ”) (quoting Fiedler, Inc. v. Coast Fin. Co., 18 A.2d 268 (N.J. 1941)).

³³⁷Farnsworth, supra note 17, at 741–42; see also Anthony T. Kronman, Specific Performance, 45 U. Chi. L. Rev. 351, 369 (1978) (“There is * * * some basis for believing the uniqueness test [of specific performance] reflects the typical solution that contracting parties would arrange for themselves * * *.”).

³³⁸Wollums v. Horsley, 20 S.W. 781, 781 (Ky. 1892) (“Thus a hard or unconscionable bargain will not be specifically enforced, nor, if the decree will produce injustice or under all the circumstances be inequitable, will it be rendered.”).

³³⁹City Stores v. Ammerman, 266 F. Supp. 766 (D.D.C. 1967), aff’d, 394 F.2d 950 (D.C. Cir. 1968); Linderkamp v. Hoffman, 562 N.W.2d 734, 735 (N.D. 1997) (“ ‘[S]pecific performance of an agreement must be denied when its terms are not sufficiently certain to make the precise act which is to be done clearly ascertainable.’ ”) (quoting Beebe v. Hanson, 169 N.W. 31, 32 (N.D. 1918)).

³⁴⁰See Summers, Hillman & Hoffman, supra note 25, at 426.

³⁴¹Van Wagner Adver. Corp. v. S & M Enters., 492 N.E.2d 756, 761 (N.Y. 1986) (“It is well settled that the imposition of an equitable remedy must not itself work an inequity, and that specific performance should not be an undue hardship.”).

³⁴²See, e.g., Schwartz v. Rose, 634 N.E.2d 105, 109 (Mass. 1994).

³⁴³See, e.g., Petrus Fam. Trust v. Kirk, 415 P.3d 358, 363 (Idaho 2018) (“Rescission and restitution are remedies available in contract law.” 26 Williston on Contracts §§ 68:2, 68:3 (4th ed. 2017); Restatement (Third) of Restitution and Unjust Enrichment §§ 37, 38, 39, 54 (2011));” Schwartz v. Rose, 634 N.E.2d 105, 109 (Mass. 1994) (damages recoverable after rescission); Posner v. Seder, 68 N.E. 335, 335 (Mass. 1903) (“[T]he innocent party may either sue on the contract for damages for the breach, or, if he so elects, he may regard the action of the defendants as indicating a purpose on their part to repudiate the contract, may accept the repudiation, and recover upon a quantum meruit the value of his services * * *.”).

³⁴⁴For more on Macarthur Park and other great (but bad) hits, see Dave Barry, Book of Bad Songs (1997).

³⁴⁵See Chapter 3, Section (A).

³⁴⁶Summers, Hillman & Hoffman, supra note 25, at 384.

³⁴⁷See Chapter 3, Section (A).

³⁴⁸Summers, Hillman & Hoffman, supra note 25, at 384.

³⁴⁹Restatement (Second) of Contracts § 90, cmt. d.

³⁵⁰See Robert A. Hillman, Questioning the “New Consensus” on Promissory Estoppel: An Empirical and Theoretical Study, 98 Colum. L. Rev. 580, 601–02 (1998) (exceptionally fine article analyzing the cases).

³⁵¹169 F.2d 684 (D.C. Cir. 1948).

³⁵²Id. at 685; see also Woodland Harvesting, Inc. v. Georgia Pac. Corp., 2011 WL 4596041, at *2 (E.D. Mich. 2011) (“The standard measure of recovery under a theory of promissory estoppel is typically reliance damages.”); Walser v. Toyota Motor Sales, U.S.A., Inc., 43 F.3d 396, 402 (8th Cir. 1994) (“[T]he district court [did not] abuse[ ] its discretion in limiting the award of damages on the promissory estoppel claim to out-of-pocket expenses.”).

³⁵³642 F.2d 1098 (7th Cir. 1981).

³⁵⁴Id. at 1099.

³⁵⁵Id. at 1100.

³⁵⁶Id. at 1100–01 (“[Plaintiff] suffered a loss of profits as a direct result of their reliance upon the promise made by appellant, and the amount of the lost profits was ascertained with reasonable certainty.”).

³⁵⁷Id. at 1101.

³⁵⁸Id. at 1099.

³⁵⁹Andrade v. Jamestown Hous. Auth., 82 F.3d 1179, 1186 (1st Cir. 1996) (“[I]t is well established that ‘a promise to render personal services to another for an indefinite term is terminable at any time at the will of either party and therefore creates no executory obligations.’ ”) (quoting School Comm. v. Board of Regents for Educ., 308 A.2d 788, 790 (R.I. 1973)).

³⁶⁰Jarboe v. Landmark Cmty. Newspapers of Ind., Inc., 644 N.E.2d 118, 122 (Ind. 1994); see also D & G Stout, Inc. v. Bacardi Imps., Inc., 923 F.2d 566, 568–70 (7th Cir. 1991).

³⁶¹See supra notes 353–358, and accompanying text.

³⁶²Grouse v. Group Health Plan, Inc., 306 N.W.2d 114, 116 (Minn. 1981).

³⁶³See Chapter 3, Section (B).

³⁶⁴Restatement (Second) of Contracts § 371.

³⁶⁵See Chapter 3, Section (B)(2)(a).

³⁶⁶See, e.g., Uncle Henry’s Inc. v. Plaut Consulting Co., 399 F.3d 33, 46 (1st Cir. 2005) (“ ‘[D]amages are * * * based on the value of the services provided by the plaintiff.’ ”) (quoting Paffhausen v. Balano, 708 A.2d 269, 271 (Me. 1998)).

³⁶⁷See City of Philadelphia v. Tripple, 79 A. 703 (Pa. 1911).

³⁶⁸United States v. Zara Contracting Co., 146 F.2d 606, 611 (2d Cir. 1944) (“It is * * * appropriate here, particularly in default of any challenging evidence, to base recovery on proper expenditures in performance or for extra work and to make use of the contract as fixing the basic price.”).

³⁶⁹Richard Craswell, Against Fuller and Perdue, 67 U. Chi. L. Rev. 99, 142 (2000) (“[T]here is some evidence that courts are influenced in their choice of measurement by how well or badly the breaching party behaved.”).

³⁷⁰Johnson v. Bovee, 574 P.2d 513, 514 (Colo. Ct. App. 1978) (“We believe using the contract price as a ceiling on restitution is the better-reasoned resolution of this question. Had [plaintiff] fully performed, his recovery would be limited to the contract price, since he would be suing for specific performance of the liquidated debt obligation under the contract. It is illogical to allow him to recover the full cost of his services when, if he completed the house, he would be limited to the contract price plus the agreed upon extras.”).

³⁷¹See, e.g., Robert Childres & Jack Garamella, The Law of Restitution and the Reliance Interest in Contract, 64 Nw. U. L. Rev. 433, 439–40 (1969) (“There is no justification for the position that the terms of the promise do not regulate the recovery of reliance damages in some cases which may be twisted into an ‘action in quantum meruit.’ ”).

³⁷²See Joseph M. Perillo, Restitution in a Contractual Context, 73 Colum. L. Rev. 1208, 1224 n.104 (1973) (“When restitution is awarded because of breach of contract, most courts have held that the contract rate does not set an upper limit. Such a result of course disturbs the allocation of risks made by the parties.”).

³⁷³Bausch & Lomb Inc. v. Bressler, 977 F.2d 720, 730 (2d Cir. 1992) (“The terms of the agreement do not control an award of restitution.”); United States ex rel. Coastal Steel Erectors, Inc. v. Algernon Blair, Inc., 479 F.2d 638, 641 n.7 (4th Cir. 1973) (“[I]n suits for restitution there are many cases permitting the plaintiff to recover the value of benefits conferred on the defendant, even though this value exceeds that of the return performance promised by the defendant. In these cases it is no doubt felt that the defendant’s breach should work a forfeiture of his right to retain the benefits of an advantageous bargain.”); see also Andrew Kull, Restitution as a Remedy for Breach of Contract, 67 S. Cal L. Rev. 1465, 1482 (1994) (“[C]ourts in some circumstances favor a punitive remedy for breach of contract, and * * * stripping a defendant of the benefits secured by a contract he has failed to perform has seemed to judges, in some circumstances, to be no more than poetic justice.”).

³⁷⁴Restatement (Second) of Contracts § 373, cmt. d.

³⁷⁵Oliver v. Campbell, 273 P.2d 15, 20 (Cal. 1954) (quoting Restatement (First) of Contracts § 350).

³⁷⁶Black’s Law Dictionary 433 (8th ed. 2004) (“A debt whose amount has been determined by agreement of the parties or by operation of law.”).