Chapter Ten
Gabriella Santos moved to the United States three years ago as an economist with the World Bank in Washington, DC. She purchased a single family home in the Georgetown area for $1,800,000. She is now ending her assignment in Washington and will be returning to her native country of Brazil. Gabriela entered into a contract to sell her home to Francesco Romano, an Italian economist, who is also coming to the United States to take a position with the World Bank. The price was $1,900,000. The contract called for closing within 90 days. Gabriella’s real estate broker is entitled to a commission of 5 percent ($95,000) payable by Gabriella when and if the sale closes. Unfortunately, shortly before the closing Francesco was told by the Italian Government that he would not be coming to the United States for at least a year and perhaps not at all. If Gabriella brings suit against Francesco, which of the following is most likely to be a correct statement?
C is most likely correct. The general formula for expectation damages contains two items for reduction of damages, one of which is loss avoided, often referred to as mitigation. See the introductory text to Section A on Computing the Value of Plaintiff’s Expectation. It should be noted that Gabriella would be entitled to postjudgment interest at the statutory rate until Francesco paid the judgment, reflecting the fact that Gabriella did not have the investment use of the damage amount until Francesco paid her the amount of the judgment. On postjudgment interest see Note 3 p. 1170following Handicapped Children’s Education Board v. Lukaszewski. Answer A is incorrect. While it may be desirable to hire an expert to establish her damages, an expert is not essential. If Gabriella resells the property in an arm’s length transaction within a reasonable time, the amount of the real sale price will be presumptive evidence of its fair market value. In addition, in most jurisdictions Gabriella, as the owner of the property, is qualified to testify about its fair market value. See Note 3 following Crabby’s Inc. v. Hamilton. Answer B is incorrect. To recover prejudgment interest, a party must show that the damages were a “liquidated” amount. Damages are liquidated when both the amount due and the due date are fixed and certain, or when the damages can be determined by mathematical calculation. Gabriella’s damages depend on a determination of the fair market value of the property at the date of breach. This amount is not fixed or certain nor can it be determined by mathematical calculation because it depends on a number of facts and circumstances which the trier of fact must evaluate. Answer D is incorrect for two reasons. First, Gabriella did not pay the commission because the commission was only due on closing. Second, even if she had paid the commission she would not have been entitled to recover the amount because the commission was a cost that she had to pay in order to receive the purchase price. In fact, Francesco has the right to have the damages that he must pay reduced by the amount of the commission that she would have had to pay to receive the purchase price.
Cathy Coleman (CC) is an expert in refrigeration systems. Beginning in 2001, she was a salaried employee of Eezy Freezy, Inc. (EF), a manufacturer of refrigeration equipment for large commercial uses. CC had no written contract with EF, and worked on an at-will basis. Her salary steadily increased over time; by 2021 she was being paid by EF at an annual rate of $120,000. In late 2021, CC was offered a job by Absolute Zero, Inc. (AZ), a maker of household refrigerators and freezers, selling appliances in bulk to residential developers and large retail dealers. The offer was for a three-year full-time employment contract, with her compensation to be in the form of a 5 percent commission on all sales made by her annually up to $3,000,000. She would receive a $10,000 monthly advance against commissions to be earned. CC was assured that based on past experience of AZ sales agents she could easily make up to $3 million in annual sales, and also that if she was successful in making sales she would be considered for a stock bonus after one year. CC accepted the offer from AZ, and began working on Jan. 1, 2022, pursuant to a written contract signed by both parties. By the end of April, serious differences had developed between CC and AZ’s vice-president in charge of sales. At the end of June 2022, CC had made sales of only $450,000 for AZ, and she was notified by AZ that her employment was being terminated for cause: insufficient productivity and refusal to follow established AZ procedures. p. 1109It is now July of 2022. CC has inquired of EF whether her old job could be available to her again, but the answer was no. She is contemplating suing AZ for wrongful termination of her employment contract. A major issue in such a suit would obviously be whether AZ had sufficient legal cause to terminate her contract. Assuming CC could prevail on that issue, what damages could she expect to be awarded as the successful plaintiff?
The best answer is D. Answers A and B do not allow for the possibility of an offset for reasonable mitigation by CC, so in that respect C and D are better answers. Although CC knows her previous job at EF is now not available, given her experience and expertise it may well be that there are other reasonable employment opportunities open to her. Answer C would be a claim of expectation damages, based on the maximum amount of income she could have earned at AZ from commissions on sales. Since she had performed poorly during her first six months at AZ, it is likely that a court would regard that latter claim as being too speculative. In that case reliance damages should be an alternative claim available to CC, based on the amount of annual salary from EF she gave up to accept AZ’s offer. (Recall the Dialist case, discussed in the Notes following Wartzman.) This is what Answer D calls for. AZ might argue against that claim on the basis that as an at-will employee CC could have been dismissed by EF at any time; there appears to be no reason why that would have happened, however. p. 1172Answers B and D are thus better answers than A and C, but D is the better of the two because it contemplates the possibility of mitigation by CC.
Two years ago Hirato Electrical Supplies, Inc. agreed to sell its business to Construction Supplies, Inc., a large international supplier of materials for home construction. The agreement between Hirato and Construction provided that Construction agreed to keep operating Hirato as a wholly owned subsidiary of Construction for at least two years after the closing of the acquisition. While Hirato’s current employees were all at-will (i.e., may be terminated regardless of cause), as part of Construction’s agreement to continue to operate Hirato as a subsidiary for two years, Construction p. 1158also agreed that it would continue to employ all of Hirato’s current employees for two years, except those for whom good cause for discharge existed. However, one year after the closing of the acquisition Construction decided to merge Hirato’s operations into the parent company. In connection with this transaction, approximately 100 of Hirato’s employees were laid off. The discharged employees have brought suit against Construction claiming that it has breached a contractual duty owed to them. Which of the following statements best describes the legal position of the discharged employees?
D. The promisee, Hirato, intended to benefit the employees, and enforcement of the promise is appropriate to carry out that intent. See Restatement (Second) § 302(1)(b). Answer A is incorrect because a person can have rights under a contract even if the person is not a signatory to the contract if the person qualifies as an intended third-party beneficiary. Answer B is incorrect. While Hirato may not have had a duty to continue the employment of the workers, Hirato could intend to provide them with a benefit of Construction’s promised performance. Under the traditional terminology of third-party beneficiaries, the workers would be viewed as third-party donee beneficiaries. Answer C is also incorrect. Receipt of a benefit is insufficient to establish a person as an intended beneficiary because the person may be an incidental beneficiary. See Restatement (Second) of Contracts § 302(2).
Exorbitant Motors, LLC (EM) is the local distributor of the new Exorbitant E85, an all-electric vehicle that is revolutionizing the automotive market. The E85, as the name of the company indicates, is pricey, starting at $150,000. Nathan Orsinski, a car enthusiast, places an order for a new E85 on the first day that the car is offered for sale. With various options and add-ons, Orsinski’s contract price is $175,000. EM tells Orsinski that because the car is in such high demand, EM has a back order of vehicles for more than a year. Six months after placing his order, Orsinski receives a notice from EM that his order is being cancelled because of “supply difficulties.” Orsinski has learned, however, that EM has delivered the E85 to some “favored buyers” in the area. Orsinski searches in vain to find an E85 available for sale. Assume that Orsinski brings suit against EM for specific performance, or in the alternative, damages. Which of the following is the most accurate statement about Orsinski’s possible recovery?
D is the most accurate answer. Lack of availability of the car on the market is a “proper circumstance” supporting the remedy of specific performance under UCC § 2-716. Answer A is incorrect. While historically specific performance developed in contracts for the sale of land, it is not limited to that type of contract as shown by UCC § 2-716. Answer B is incorrect because specific performance of contracts for the sale of goods under UCC § 2-716 is not limited to situations where the goods are unique. It also applies “in other proper circumstances.” Answer C is incorrect. When a seller breaches a contract for the sale of goods, the basic damage remedy for the buyer is “cover,” UCC § 2-712, measured by the difference between the cover price for the goods and the contract price, plus incidental and consequential damages. Unfortunately for Orsinski, he is unable to find a replacement E85 on the market. In the absence of cover, an injured buyer may recover the difference between the market price for the goods and the contract price, plus incidental and consequential damages. UCC § 2-713. If the price that Orsinski contracted to pay for the E85 is the market price, this remedy will also not be adequate.
A wealthy alumnae agreed to pay for the construction of a new library at the private university that she had attended. The payments would be made over several installments. In exchange, the university agreed to name the new library after the alumnae's family and to give her son a full scholarship. When this agreement was announced, the students at the university were excited, because the old library was too small for the current student body. After making the first installment payment, the alumnae learned that the university had decided not to give her son a full scholarship after all. Angry, the alumnae refused to make the rest of the installment payments, preventing construction of the new library.
At that point, may either the son or the university students sue to enforce the original agreement?
The son may sue to enforce the agreement, but the university students may not.
Mega University, a major urban college, wanted to expand its campus to add more student housing. Mega was bordered by residential and commercial buildings on all sides. Janet Smith owned two modest-sized apartment buildings near the east side of campus. After negotiations, Janet signed a contract with officials from Mega agreeing to sell the two buildings to Mega for $1 million, with closing in 60 days. When it was announced that the sale was taking place, there was immediate protest from activists about the loss of affordable housing. The activists rallied and protested both on campus and near Janet’s buildings. There were newspaper articles with data showing that the two buildings were worth only $700,000 on the open market. After six weeks, Mega announced that due to the protest, it would not go through with the purchase of Janet’s buildings. Instead, Mega would buy warehouse space on the west side of campus, of comparable size, for $1.2 million that would not lead to the same community protests. Assuming that Mega does not have a valid excuse for nonperformance and Janet sues for money damages, what would be Janet’s measure of recovery?
B is the correct answer. The measure of damages for breach of a land sale contract is generally the difference between the contract price and the fair market value on the date for performance. See the Crabby’s case and Note 1 following it. Answer A would not be correct because it would be overcompensation and perhaps punitive damages for Janet to keep the land and get the full contract price, too. Answer C would not be applicable because Mega is the party in breach and Janet is not mitigating. If Janet had breached, then Mega’s substitute contract might have been made in mitigation. Answer D is not correct because the nonbreaching party does not have to show reliance to collect damages where the promise is enforced because there is a contract with consideration and mutual assent.
Assume the same facts as Question 1, except that AZ’s offer to CC of a three-year contract did not include a sales commission as part of her compensation, but instead provided for a fixed annual salary of $100,000. CC decided to accept AZ’s offer even though her salary at EF was higher, because a three-year contract with AZ would provide her with job security. But (as in Question 1) CC was fired by AZ at the end of six months. Assuming again that AZ did not have sufficient cause to terminate her employment, what remedy could CC expect to receive in a lawsuit against AZ for wrongful termination?
The best answer is B, because it provides CC with a full expectation damages remedy. Here, as in the first two answers to Question 1, above, Answer A does not allow for the possibility of mitigation by CC, so Answer B is better than A. Answer C, reliance damages based on her higher salary at EF, is not appropriate in Question 2, because the value of CC’s lost expectation can be calculated and is not speculative. To award CC damages measured by her former salary at EF in this case would be to overcompensate her. Although she elected to accept AZ’s offer because she wanted job security, the remedy of specific performance, as in Answer D, is rarely available to an aggrieved employee as a remedy in a common lawsuit for wrongful termination of an employment contract.
O’Hara Construction, LLC is engaged in the business of construction of office buildings for private developers and governmental entities. From time to time, O’Hara needs capital to support its operations. O’Hara has a working relationship with Capitol City Bank under which O’Hara sells its rights to receive payment under specified contracts to Bank. In the standard transaction, O’Hara sells all of its payment rights under a specified contract to Bank, typically for about 80 percent of the contract amount. When the sale involves a contract with the federal government, O’Hara usually receives about 90 percent of the face amount of the contract because the risk to the Bank is less in such transactions. Sometimes, the transaction involves a sale of only a portion of O’Hara’s right to receive payment under a contract. Which of the following is the most accurate statement about transactions between Bank and O’Hara?
C. At one time partial assignments were unenforceable, but today such assignments are generally enforceable, subject to the requirement of joinder of all interested parties. See Note 4 following Herzog and Restatement § 326. Answer A is incorrect. The transaction between O’Hara and Bank is an assignment because O’Hara is selling its right to receive payment under a development contract to Bank. The sale will be governed by general contract law rather than Article 2 of the UCC because the sale involves contractual rights arising out of development of real estate contracts, rather than contracts for the sale of goods. Note that it is possible that Article 9 of the UCC dealing with secured financing could also apply to this transaction. Under Restatement (Second) § 317, there are three basic grounds by which an assignment may be unenforceable: violation of statute or public policy, material adverse effect on the other party, and valid preclusion by contract term. While there is a public policy in favor of free markets, federal statutes restrict the assignment of any federal government contract or order and of any claim against the federal government probably because of the volume of contracts in which the federal government is involved. See Note 1 following Herzog. Answer B is incorrect. In the absence of a clause prohibiting assignment of a contract right, and the facts do not refer to such a clause, an assignment is valid unless it will have a material adverse effect on the obligor (i.e., the developer). An assignment to a bank does not appear to have such a material adverse effect because it will not change the performance by the developer other than the entity to which payment will be made. Answer D is incorrect. The sale of a right to receive payment under a contract is an assignment but not a delegation of performance. Therefore, Bank would not have any performance obligation if O’Hara breaches a contract. Note that the situation might be different if the transaction between O’Hara and Bank involved a sale of “the contract” or of “all my rights under the contract” or an assignment in similar general terms. See Restatement § 328 and the following problem.
Assume the reverse of the situation in Question 6 above. Six months after Orsinski enters into the contract with EM, EM notifies Orsinski that his new E85 is available for delivery. However, Orsinski notifies EM that he is no longer interested in the vehicle because of the delay in delivery. EM is able to find another purchaser for Orsinski’s car but had to make a small reduction in the price (to $170,000) because some of Orsinski’s extras were not ones that the new purchaser wanted. Assume that EM would have obtained a net profit of $25,000 from Orsinski if he had gone through with the sale. Assume that EM brings suit against Orsinski for breach of contract. How would EM’s damages be measured?
A is the best answer. Of course, the seller (EM) must prove that it gave proper notice under UCC § 2-706 and that the sale was made in good faith and was commercially reasonable. If so, EM may recover the difference between the contract price and the resale price plus incidental damages. Answer B is incorrect because the right to recover profit under UCC § 2-708(2) is dependent on the seller being a “lost volume seller.” Cf. Jetz Service. To establish that it is a lost volume seller, the seller must show that it had: (1) the capacity to make an additional sale; (2) that the additional sale would have been profitable; and (3) that it probably would have made an additional sale absent the buyer’s breach. See Note 2 following Jetz Service. In this case because of the limited supply of E85s, it is highly unlikely that EM could establish that it had the capacity to make an additional sale. Answer C is incorrect because under the UCC the seller may sell at either a public or a private sale, although the notice requirements are different. See UCC § 2-706(2). Answer D is incorrect. Lack of proof of market price would probably be fatal to a seller’s attempt to recover market damages under UCC § 2-708(1). However, an arm’s length resale within a reasonable time after the breach would probably be evidence of market price. In addition, even if the seller does not offer proof of market price, the seller may still recover resale damages under UCC § 2-706.
A caterer agreed to cater a bride’s wedding for $20,000, which would result in an expected profit of $5,000 to the caterer. The contract stated the following: “Caterer will provide catering services for the wedding at Disney World on March 1.” In February, the bride broke off her engagement and canceled the wedding. She then assigned her right to receive catering services to her sister, who was also planning a wedding at Disney World on March 1. The bride notified the caterer of this assignment and reaffirmed that she would be paying the caterer $20,000 under the contract.
Which of the following additional facts, if either, would invalidate the bride’s assignment of rights under the catering contract to her sister?
Both of the above facts would invalidate the assignment.
Tremont Howard is the owner of a family farm in western Pennsylvania. Tremont would like to bring his family property into the twenty-first century while preserving its historical significance. He has hired Modern but Faithful, Inc. (MBF), a construction company that specializes in what it calls “modern preservation.” Under MBF’s approach, which Tremont loves, property is equipped with all modern features while the exterior and much of the look of the interior is preserved. Under the terms of the contract between Howard and MBF, MBF was required to follow various detailed specifications for the work. When MBF had largely completed the project, with only painting and decoration left to be done, Howard discovered that MBF had used wiring for the farm that did not meet the contract specifications. It appears that the subcontractor hired by MBF used the wrong brand of wiring, although the quality of wiring appears to be equivalent to the contract specifications. MBF was unaware of the subcontractor’s error. Howard has demanded that MBF install wiring that complies with the contract, even if it means tearing open walls to do so. MBF has refused to do this work. Expert testimony would show that the use of the wrong brand of wiring has a de minimis effect on the fair market value of the property; however, the cost to repair the problem would be several hundred thousand dollars. If Howard brings suit against MBF seeking to recover the cost of the repair, which of the following is probably correct?
A is probably the correct answer. As discussed by the court in American Standard, when repair would involve economic waste in the sense of undoing work that has been done and the breaching party substantially performed in good faith, the measure of damages is the diminution in market value caused by the breach rather than the cost of repair. See the discussion of Jacob & Youngs v. Kent in American Standard. Answer B is incorrect because, while it is true that Howard might pocket a damage award rather than completing the restoration, that fact is not a sufficient reason to deny recovery. See Emery v. Caledonia Sand & Gravel Co., Note 3 following American Standard. Answer C is incorrect. While the family farm as a whole may have idiosyncratic value, the type of wiring in the walls does not seem to have been a matter of personal value to Howard. Moreover, whether property has idiosyncratic value is not relevant under the economist waste test. Answer D is also incorrect. Under Restatement § 348(2) damages may be measured either by the diminution in market value or the reasonable cost of completing performance if that cost “is not clearly disproportionate to the probable loss in value to him.” In this case, the cost of completion seems clearly disproportionate because the effect on market value is de minimis while the cost of repair is several hundred thousand dollars.
Bonnie Berger is the owner of a popular barbeque restaurant in the city of Austen. On March 15, Bonnie made an oral agreement with Sara Smith, a local contractor, to build two customized “smokehouse sheds” on property in the rear of her restaurant. Bonnie already had plans for the two smokehouses of 10 feet by 20 feet with related equipment and storage bins. Bonnie and Sara agreed upon a price of $50,000 per smokehouse with 50 percent due at the beginning of construction of each smokehouse and the balance due upon completion of each unit. They agreed that Sara would complete the first unit before starting the second. The first smokehouse was to be p. 1110completed by May 1 and the second smokehouse was to be completed by July 1. Sara started work on the first smokehouse on April 1 and Bonnie paid her $25,000 that week. Sara completed the first smokehouse on April 30 and gave an invoice to Bonnie for the $25,000 due upon completion. Before making that payment, Bonnie asked Sara when she would start the second smokehouse. Sara told Bonnie, “I just got a big cabinetry subcontract on an office building and I am not going to have time to build your second smokehouse. You need to get someone else.” Bonnie then said, “I won’t pay you another dime until you keep the contract to build the second smokehouse.” After three months, Bonnie heard no more from Sara and got bids on the second smokehouse from two contractors who both quoted a price of $55,000. Bonnie comes to your law office and wants to know if she might be liable to Sara if Sara should bring suit for payment of the balance of $25,000 on the first smokehouse. Which of the following outcomes is most likely?
The best answer is C. Answer A would not be correct because although the agreement between them is oral, this fact does not keep it from being enforceable. (Recall our discussion of the statute of frauds in Chapter 4.) No ordinary statute of frauds applies here: the agreement is to be performed in less than a year and it is not for a sale of goods, since a contract of this sort is commonly considered to be one primarily for construction services, not covered by UCC Article 2. Nor does it involve the transfer of an interest in land. Moreover, allowing Bonnie to keep the smokehouse without paying anything for it would likely be deemed unjust enrichment, despite any possible writing requirement. See Note 3 following the Alaska Democratic Party case in Chapter 4. Answer B is a plausible answer, given the historical practice among courts to deny any recovery to a breaching party, but the tendency of modern courts and the Restatement (Second) is not to preclude recovery even by a party who commits an intentional, material breach. See the Lancellotti case and the Notes following it. Answer C is supported by Lancellotti and the Restatement (Second) § 374 in allowing recovery to the party in breach for benefit conferred, less any harm caused by the breach. The contract may also be deemed divisible into two parts, thus allowing recovery for the part performed, minus any harm caused by the breach. See Note 8 following the Jacob & Youngs case in Chapter 9 and the Restatement (Second) § 240. The Lancellotti case and cited authority therein are clear, however, that recovery by the party in breach cannot exceed a ratable portion of the contract price. See footnote 3 in Lancellotti. Answer D is incorrect because it would allow recovery in restitution without the limitation of the contract rate.
Livingston Management Services, LLC is an agent for developers of residential apartment buildings located in the Washington, DC area. Livingston provides a wide range of management services to the owners, including p. 1159leasing, maintenance, and rent collection. National Leasing Management, Inc. is a large nationwide company that provides services similar to the ones offered by Livingston. National also operates in the Washington area in competition with Livingston. While National and Livingston are competitors, their competition has been “friendly.” Recently, National approached Livingston about the possibility of acquiring Livingston’s operations. After some negotiations, National agreed to acquire all of Livingston’s Washington contracts with apartment owners. However, National will not purchase Livingston’s facilities, and it will offer employment to only some of Livingston’s personnel. Which of the following is the most correct statement about the relationship among Livingston, National, and the owners of the apartment buildings?
D. When a person acquires the “contract rights” of another person, the acquisition operates as an assignment of rights, a delegation of duties, and as assumption by the assignee/delegate of the duties under the contract. See Restatement (Second) of Contracts § 328(1), (2). Answer A is incorrect. While it is true that some of Livingston’s services involve personal services by its employees, the restriction on delegation of personal service contracts applies to personal services by an individual, not to a business, unless the obligee has a substantial interest in performance of personal services by a particular individual in the business. See Note 2 following Sally Beauty Co. Here there is no indication that the owners have a substantial interest in personal services by a particular individual at Livingston. Answer B is incorrect because it misconceives the holding in Sally Beauty. In that case, the court held that the obligee (Nexxus) was not bound to Sally Beauty as an assignee/delegate of a contract between Nexxus and Best because Sally Beauty was owned by a competitor of Nexxus. This problem does not involve an agreement to distribute products and there is no reason to think that National will have any competitive reason not to use its best efforts to provide management services to its new obligees, the owners. Answer C is incorrect. Delegation of a duty does not relieve the delegating party of its contractual duties to the obligee unless the contract specifically relieves the delegating party of those duties or the obligee agrees to release the original obligor. See Restatement (Second) of Contracts § 318(3).
Ramon Sanchez and his wife Esmerala have lived at their home in Jackson, Texas for more than 35 years. This year their youngest child Sofia was married and moved to live with her husband in Atlanta. Being “empty nesters,” the Sanchezes decided that it was time to move to a much smaller house. Over the next few months they began cleaning out the tangible results of their more than three decades in their current home. In the process of doing so they discovered a treasure trove of old family photographs and papers going back at least 100 years. They decided that they wanted to preserve this material for their children and future generations. After talking with friends, seeking advice from local librarians, and conducting Internet searches, they decided to hire Family Preservation Specialists (FPS), a company that focuses on preservation of materials like the ones found by the Sanchezes. They paid a fee of $7,500 to turn all of the material into digital form, to make it searchable, and to preserve the physical copies in the most protective way. However, to their great sadness, the Sanchezes received a call about two months later from FPS reporting to its great regret that due to a flash flood at its headquarters, all of the Sanchezes’ property had been destroyed. At first the Sanchezes were saddened by the news, but their sadness turned to anger as they learned more about the flash flood and FPS’s failure to institute reasonable precautions to protect the irreplaceable property FPS had received. Suppose the Sanchezes have brought suit against FPS for breach of contract, intentional infliction of emotional distress, and negligence including negligent infliction of emotional distress because of FPS’s failure to preserve their irreplaceable family material. Assume that the Sanchezes are able to establish that FPS breached its contract with them and that FPS was also negligent (but that it did not act intentionally and was not grossly negligent) in failing to preserve and protect their material. Which of the following is the most accurate statement about the remedy available to the Sanchezes?
B is the most accurate answer. The “American rule” provides that a prevailing party in litigation is generally not allowed to recover its attorney fees. There are exceptions to the American rule that allow the awarding of attorney fees to the prevailing party when the parties have a valid contract term allowing for attorney fees, when there is an applicable statute granting such fees, or when there is an established court rule that allows for recovery. None of these exceptions appear to be applicable on these facts. See the Notes following the Zapata case. Answer A is incorrect because the “bad faith” exception to the recovery of punitive damages applies to insurance contracts and has not been extended beyond that particular type of contract. See the Comment above about the Recovery of Punitive Damages for Bad Faith Breach of Contract. Answer C is incorrect. Under the Restatement test, damages for emotional distress may be recovered for breach of contract if either the plaintiff suffered bodily harm or where either the contract or the breach in question was “of such a kind that serious emotional disturbance was a particularly likely result.” Restatement (Second) § 353. Of course, whether this contract meets the “particularly likely result” standard is arguable. See Notes 4-5 following Erlich. Answer D is incorrect because under the Restatement (Third) of Torts § 47 it is possible in some cases to recover damages for emotional distress as a result of negligence. See Note 2 following Erlich.
A national automobile finance company acquired a regional finance company and assigned all of the national company’s contractual rights to the regional company. The assignment included a number of personal automobile loans.
Which company holds the right to collect the assigned automobile loans?
Only the regional company.
Stephanie Zinn was a law professor with the Southeastern Law School, a for-profit law school created about seven years ago. Two years ago Stephanie received tenure from the Law School, which means that she could be discharged only for good cause or for bona fide reductions in staff due to financial exigencies. In awarding her tenure, the school noted that Stephanie was a recognized expert in data privacy and was working on a book on the subject. Many other professors at the law school publish books and obtain royalties from their publications. Six months ago Southeastern notified Stephanie that her employment with the school was being terminated effective at the end of the current school year. The school claims that the termination was proper because it faced financial exigencies due to declining enrollment. However, Stephanie contends that the owners of the school simply wanted to reduce expenses and increase their profits, and this motivation does not satisfy the contractual requirement of a “financial exigency.” Several months after Stephanie received her notice of termination, she received another shock. The publisher of her data privacy book notified her that it was cancelling her contract to publish the book on the ground that she failed to meet one of the requirements for publication—being a tenured professor at an accredited law school. Stephanie tried without success to find another publisher for the book. Assume that Stephanie brings suit against Southeastern for breach of contract and is able to establish that the school breached the contract, will she probably be able to recover damages for lost royalties from her book?
The best answer is D. As explained in Note 3 after Hadley v. Baxendale, foreseeabilty is determined at the time the contract is made. Perhaps the school could argue that it was not foreseeable at the time of her tenure with the school that her publication contract required her to be a tenured professor at an accredited law school, but it is doubtful that foreseeability would be interpreted to require the breaching party to have such detailed information. Note also that Stephanie has taken reasonable efforts to mitigate her damages. Answer A is incorrect. While a plaintiff must establish damages with reasonable certainty, Restatement (Second) of Contracts § 352, royalties are not inherently speculative. If Stephanie is able to establish the fact of damage—perhaps she can obtain testimony that people would have purchased the book if it had been published—then a court or jury will generally be able to determine damages even if they are uncertain in amount. Answer B is incorrect because modern contract law has largely rejected the “tacit agreement” test. See Note 5 following Hadley v. Baxendale. Answer C is also incorrect because foreseeability is determined at the time the contract is made in order to enable the parties to contract out of or limit damage liability. See Note 3 following Hadley v. Baxendale. In addition, foreseeability does not require the nonbreaching party to prove that the amount of damages was foreseeable.
Gateway Drug, Inc. (GD), is a corporation that owns and operates a national chain of retail pharmacies. Recently GD’s staff completed a study showing that because of population growth in that area over the last five years, a new pharmacy on the west side of Smalltown would be a good investment, yielding profits at least at the average level for Gateway stores in that region of the country. GD’s real estate agents identified in that area a three-acre lot of appropriate size and location for its proposed new store. The lot was owned by Rachel Robinson (RR), an elderly widow. RR had lived in a small house on that lot for over 25 years, but during that time the character of the neighborhood had changed from rural/residential to residential/commercial. After the death of her husband two years ago, RR began to feel the burden (financial and practical) of maintaining the house on her own, and finally decided to sell the property and move to live with her daughter in Capital City, some 200 miles to the east. After some negotiation, RR and GD’s agents agreed that GD would buy RR’s property for $455,000, the closing to be held within 60 days after the parties’ signing of the agreement, at a time and place to be mutually agreed upon. The contract provided for a down payment of $25,000 by GD, with the balance to be paid at the closing. p. 1111The agreement also provided that in the event the sale did not take place, RR would be entitled to retain the down payment as liquidated damages. GD’s intention, of which RR was aware, was to demolish the house and erect on the lot a building suitable for a full-size retail pharmacy. Six days after the signing of the contract, RR changed her mind about selling the property to GD, because she could not bear to think of her long-time home being demolished, and notified GD of this fact. Assuming that RR has committed a breach of this contract without legal excuse, which of the following statements is/are accurate description(s) of this situation?
Answer D is the most likely remedy of the four possible answers. It calls for application of the conventional rule which measures damages by the difference between the contract price and the fair market value in a breach of contract to sell real property (recall the discussion in Note 1 after the Crabby’s case in Chapter 10), and it also calls for restitution to GD of its down payment. Answer A is a plausible answer but not clearly correct. The remedy of specific performance, which will ordinarily be limited to situations where money damages are for some reason inadequate, is commonly available to a disappointed purchaser of real property, each parcel of which is deemed to be “unique” for this purpose. Answer A asserts that this remedy will not be granted against an elderly widow. While it is true that specific performance is an equitable remedy over which the court has considerable discretion, the fact that RR was aware of GD’s plans when she made the contract makes it unlikely that her regret about selling would keep a court from awarding specific performance to GD. (Note: The facts do not say that she would have nowhere else to go to live; that might be a more difficult case for the court.) Answer B is correct in suggesting that even an agreement which is not too indefinite to be a binding contract might nevertheless be deemed too indefinite for a court to enforce specifically. However, mere postponement of agreement on the time and place of closing is not likely to be seen as creating a substantial problem in that regard; such provisions are common. Thus, Answer B is not correct. Answer C is probably not correct because consequential damages, including lost profits, must be measurable with reasonable certainty. Based on the given facts, future profits are likely to be considered too speculative. On the other hand, however, (1) GD is an established business with a track record of operating successful pharmacies and (2) before contracting with RR, GD did a study indicating that a pharmacy at this location would be a profitable one. These factors make it plausible that a court would consider an award of lost profits (at least for a reasonable period of time) to be appropriate, but Answer D is the more likely outcome.
A conference planner contracted with an electrician to run power cables to exhibitor booths at a convention for a fee of $2,000. Realizing that he would be out of town on the setup day for the convention, the electrician delegated his duty to perform to an equally qualified contractor. The day before the setup, the electrician called the contractor to confirm that the contractor would perform. The electrician honestly believed that the contractor would fulfill his obligations. However, the contractor did not show up on the day of the setup. The planner was forced to hire another professional at emergency rates.
Is the electrician liable to the conference planner for breach of contract?
Yes, because the electrician’s delegation to the contractor did not relieve the electrician of liability.
A property owner hired a general contractor to build a house. The contract specified that construction would be completed within 365 days. The general contractor hired a number of tradespeople to perform various aspects of the construction, including an electrician hired to install the electrical system. The electrician’s numerous mistakes and repairs substantially delayed completion of the house, resulting in the owner having to renew her construction loan at a higher interest rate.
May the owner recover from the general contractor for breach of contract?
Yes, because the general contractor delegated the electrical work to the electrician.
Consider again the situation of law professor Stephanie Zinn in Question 4 above. Assume that prior to her discharge, her annual salary was $150,000 per year. Assume that after Southeastern gave Professor Zinn a notice of discharge, she considered whether to look for another position as a law professor, but she finally decided that the job market was so tight that it was very unlikely that she would obtain another position. She also considered private employment with a law firm, but the only position that she was able to obtain was that of a contract attorney doing document review work. She was told that she could anticipate 1,000 hours of work over the next year at a rate of $30 per hour, total $30,000. Stephanie concluded that accepting such employment would be so damaging to her reputation and future prospects that even though she needed the money, she would not accept employment doing document review work. She does have some savings and family support that enable her to get by for a while and fortunately she also has a good friend/lawyer who will handle her lawsuit against Southeastern without charge except for court-awarded fees. Several months after filing suit, her lawyer tells her that Southeastern has offered to reinstate her at a salary of $75,000 per year. Stephanie rejects the offer saying, “I will never work for those people again.” Assume that Stephanie is able to establish that they breached her employment contract—what would be the measure of her damages for the first year of breach? (Note that she might be entitled to damages for future years depending on her job prospects, discounted to present value.)
C is the best answer. While it may not have been palatable to Stephanie to accept an offer of reinstatement, this concern probably does not rise to the level of “special circumstances” justifying rejection of Southeastern’s offer. See Fair v. Red Lion discussed in Note 4 after Maness. Perhaps Stephanie could argue that accepting her old job at one-half her original salary amounts to “undue humiliation,” and this constitutes “special circumstances.” While this is a plausible argument, Answer C remains the best choice among the answers offered. Answer A is incorrect because the general rule with regard to contract damages is that the nonbreaching party is only entitled to compensation for her loss of the benefit of the bargain regardless of the willfulness of the breach. The last section of this chapter examines the theoretical p. 1171basis of this principle, including the economic theory of efficient breach. Answer B is incorrect because an employee only has an obligation to accept “comparable” employment. See the Parker case discussed in Note 5 following Maness. Employment as a contract attorney would be considered to be significantly inferior employment by almost all law professors. Answer D is incorrect because the failure of the employee to make any effort to seek comparable employment is insufficient to establish a reduction in damages for lack of mitigation. The employer has the burden of proving that the employee failed to make reasonable efforts to seek comparable employment and the availability and suitability of comparable employment. See Maness.
Assume all the facts in the first paragraph of Question 4, above. Assume also that six days after the signing of their contract, GD changed its mind about buying RR’s property and repudiated their contract, because it had found an equally suitable property in the same general area for a substantially lower price, $400,000. Assuming that GD has thereby committed a breach of its contract with RR without legal excuse, which of the following statements is/are accurate description(s) of this situation?
Answer C is the best answer. It correctly states the conventional rule applicable to a breach by the seller of real property. Answer A is plausible but probably not accurate. Although courts do routinely award specific performance to disappointed buyers of real property, they are less likely to award that remedy to a disappointed seller even though all land is considered unique. See Note 2 after the City Stores case. The seller can usually resort to a sale to another buyer, with a damage claim if necessary, making the seller’s remedy “at law” against the first buyer an adequate one. That might well be the case here, particularly if GD has already contracted to buy a different property. On the other hand, GD’s breach has no legal or (arguably) moral excuse, so a court might award RR specific performance, thus giving her a stronger bargaining chip if GD really wants to get out of its deal with her. Answer B might reach the same result as C, if the price that GD pays for a comparable property is deemed to be sufficient evidence of the market value of RR’s property as well, but it is not the rule articulated by the courts for cases like this. Answer D is generally a p. 1173correct one, except that under the conventional rule (see Answer C), the nonbreaching party will have a claim for consequential or incidental damages even if she makes a substitute contract to resale at the same price as in the contract with the defendant.
A landowner contracted to sell his vacant land to a developer for $75,000. The contract stipulated that the developer would pay the $75,000 to the landowner’s ex-wife to satisfy an outstanding $75,000 debt that the landowner owed to her. The developer entered into the contract because she wished to develop and resell the land for a profit, and she had no interest in the landowner’s debts or in benefitting the ex-wife. When the ex-wife heard about the contract, she agreed to forbear suing the landowner over the debt. The developer’s planned development would have increased the property value of an adjacent neighbor’s property by $30,000. When the neighbor heard about the contract, he decided to purchase another parcel of land nearby, which parcel he expected would also appreciate because of the development. The developer then decided not to buy the land.
Who may sue to enforce the contract?
The original landowner and/or his ex-wife.
A woman lent her van to her neighbor to move his daughter into her college dormitory. When the neighbor returned the van, the van owner discovered that the upholstery fabric covering the back seats had been badly damaged. When the van owner confronted her neighbor, he denied damaging the seats but offered to take the van to his friend’s car dealership and have his friend replace the fabric. The neighbor arranged for his friend at the car dealership to replace the damaged fabric in lieu of repaying $700 the friend had borrowed from the neighbor months earlier.
Which of the following accurately states the beneficiary relationships among the parties?
The van owner is an intended beneficiary of the agreement between the neighbor and his friend at the car dealership.