Contracts
Class Notes
One
thing you should ask yourself after you finish reading a case in the book is: “Why
is this case in the book?”
Why
is Hawkins v. McGee in the book?
-
It
illustrates how common law is made.
-
It
illustrates the role of various actors.
-
It
gives you practice in reading and understanding appellate opinions, especially
poorly written ones.
-
It
introduces some principles of contract damages.
We’re interested in compensatory damages, not punitive
damages. The expectation is that we’ll
be engaged in putting the aggrieved party in the financial position that would have
resulted from the performance of the contract.
-
It
gets you started with learning some legal vocabulary. Some of the vocabulary is useful; some of it
is just jargon. But it’s important to
understand all of it.
For
example, what does assumpsit mean?
There are lots of words in Hawkins you need to look up.
The
antique desk
Let’s
talk about an antique dealer who makes a contract to sell an antique table for
$5000. Let’s say the buyer made a $500
down payment. The terms said that the
buyer was going to come and pick up the desk and pay the remaining $4500. The buyer rented a truck and hired a guy to
move the desk. That cost her $100. When she showed up, the seller said, “Nyah! You can’t have
it! I sold it for $6500. It’s gone, you can’t have it!” She was upset. She found out that she could have sold it to
another dealer for $7000.
The
buyer’s restitution interest is $500.
The dealer was unjustly enriched to the tune of $500. There’s a very strong moral, common sense
interest in her getting this money back.
The
buyer’s reliance interest is $100.
The buyer relied on being able to pick up the desk. That’s why she got the truck and the
dude. But this money did not go
into the contract breaker’s pocket. That’s
why it’s not part of the restitution interest.
It’s money that’s wasted if the contract is not performed.
The
buyer’s expectation interest is $2000.
She would have made a $2000 profit if the contract had been performed. This profit is higher than the seller’s gain
from breaching the contract. Another way
to look at it: her gross expectation interest is $2000, but her net
expectation interest is $1900. If the
contract had been performed, she still would have had to get the truck and
moving guy.
So
what do we do if we’re the plaintiff’s lawyer?
We have a choice of which interest to pursue. We could go for the $500, the $100, or the
$2000. Well, take the big bucks,
right? Yep. But if the facts were different, it might
have been possible that one of the other dollar amounts was greater.
So
if we go after the expectation interest, we want to get her in the position
that performance would have done. How
much do we sue for?
Full
performance would have meant $1900 in profit.
She comes into the court with a hole in her pocket of $600. So we want to get her $2500, to get her in
the same position that performance would have done.
Her
total cost, had the transaction have gone through, her gross expenses would
have been $5100, her gross income would have been $7000, and so her net gain
would have been $1900.
Here
we have a non-delivery breach by a seller.
What
if the seller called her on the phone before she hired the dude and truck to “nyah nyah” her? She ought not to spend the $100. In those circumstances, she only needs $400
to be put in the same position performance would have done.
Sometimes
putting someone in the position performance would have done means awarding
restitution and expectation.
Sometimes it means awarding all three.
Can
a non-party to a contract recover on a contract? Not in this case.
This
is a real-life example of a non-delivery breach by the seller. The court gives a useful formula for finding
the buyers loss.
You
subtract the contract price from the market price. That gives you a measure of the aggrieved
buyer’s loss. This is an incomplete
formula when, for example, there’s a down payment the buyer needs to get back.
The
buyer has a loss whenever the market price is higher than the contract price.
What
does market price mean? “What a
willing buyer will pay a willing seller, both of them being informed, with no
fraud, misrepresentation or mistake involved.”
It’s
usually the plaintiff’s burden to prove a contract was breached and what the
damages should be. Sometimes it can be
hard to prove market price.
It’s
pretty easy with agricultural products or with stocks, for example. Just pick up The Wall Street Journal. But it’s harder if you’re dealing with
something unique like an antique that’s being sold on a much less organized market.
The
promise made to Acme by Johnson is written down, unlike in Hawkins.
We even have the text! Johnson
breaks his promise! He sells his wheat
to
They
proved contract and breach. Johnson’s
defense is that he admitted he made a contract and admitted he broke it, but “no
harm, no foul”. It didn’t cause Acme any
loss.
We’re
interested in compensating loss and not interested in disgorging a
gain from breach.
Where
did the $240 come from? 13 cents times
2000 is $260. “It’s
What
did Acme Mills lose here? Nothing. So they get
no recovery.
This
case rubs our noses in the fact that we only care about
compensating the aggrieved party. We do
not punish the breaching party for gains from breach.
If
the sacks weren’t involved, Acme would have only collected nominal damages
(sometimes $1).
Suppose
I’d been advising Johnson. What should I
have told him to do? He could have
bought wheat at $1 and then sold it for $1.03 and made a profit of $60. Johnson could have performed the contract and
made a gain.
What
delivery date does the writing give us? He
was to deliver it whenever he finished threshing it. He finished threshing on July 29th. We measure the buyer’s loss by the market
price on that date.
Where
did Johnson get the wheat from to sell to
Sometimes
the restitution claim is higher than the expectation claim.
Even
if Johnson thinks Acme is going out of business, he can’t keep the sacks
without paying for them.
Estoppel
It
doesn’t work for Acme in this case.
What
does it take to make estoppel go? Some
conduct, usually words, by one party that the other party goes out and relies
upon reasonably and detrimentally. When this happens, we hold the party that did
the conduct to their word because the other party acting on it.
In
this case, Acme did nothing to change their position in reliance on
Johnson’s wheat.
If
we change the facts, we can see when estoppel comes into play.
Let’s
say Johnson tells Acme on July 15th that he’s not selling wheat to
Acme, but is selling to
In
fact, the breach doesn’t occur until the 29th, when Acme doesn’t
have a loss, but actually a gain.
In
order for estoppel to hold, there must be evidence of reliance on
the conduct.
Unless
there was reliance on Johnson’s conduct on the 15th (apparently
there was not) then there was no way that Johnson’s conduct on the 15th
damaged Acme Mills and there was no breach until the 29th, when due
to the market price of wheat, Acme Mills suffered no loss.
Sometimes
it’s a good idea to break a promise. If
you are a general practitioner of law, you will frequently advise your clients
to break their promises. You advise them
to do what’s economically sensible.
Breach of contract isn’t a good thing, but it’s not a crime. You made a promise in the past, you thought
it was a good promise, but now you’ve changed your mind. When we enforce contracts, we are punishing
people for changing their mind.
Sometimes it makes sense to punish people, but other times it’s sensible
to breach.