Contracts Class Notes 8/21/03


One thing you should ask yourself after you finish reading a case in the book is: ďWhy is this case in the book?Ē



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.Weíre interested in compensatory damages, not punitive damages.The expectation is that weíll 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 itís 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


Letís talk about an antique dealer who makes a contract to sell an antique table for $5000.Letís 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, ďNyah!You canít have it!I sold it for $6500.Itís gone, you canít have it!ĒShe was upset.She found out that she could have sold it to another dealer for $7000.


The buyerís restitution interest is $500.The dealer was unjustly enriched to the tune of $500.Thereís a very strong moral, common sense interest in her getting this money back.


The buyerís reliance interest is $100.The buyer relied on being able to pick up the desk.Thatís why she got the truck and the dude.But this money did not go into the contract breakerís pocket.Thatís why itís not part of the restitution interest.Itís money thatís wasted if the contract is not performed.


The buyerís expectation interest is $2000.She would have made a $2000 profit if the contract had been performed. This profit is higher than the sellerís 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 weíre the plaintiffís 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 ďnyah nyahĒ 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.


Acme Mills v. Johnson


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 buyerís loss.This is an incomplete formula when, for example, thereís 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?ďWhat a willing buyer will pay a willing seller, both of them being informed, with no fraud, misrepresentation or mistake involved.Ē


Itís usually the plaintiffís burden to prove a contract was breached and what the damages should be.Sometimes it can be hard to prove market price.


Itís pretty easy with agricultural products or with stocks, for example.Just pick up The Wall Street Journal.But itís harder if youíre dealing with something unique like an antique thatís 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 Liberty on July 15th for $1.16 per bushel.Acme sues Johnson!But Acme only gets the money back for the sacks.The sacks are the restitution interest of Acme Mills.So Acme Mills wins the case, but appeals anyway because they say they didnít get enough money.They lose on appeal.


They proved contract and breach.Johnsonís defense is that he admitted he made a contract and admitted he broke it, but ďno harm, no foulĒ.It didnít cause Acme any loss.


Weíre 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.ďItís Kentucky arithmetic.Ē


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 werenít involved, Acme would have only collected nominal damages (sometimes $1).


Suppose Iíd 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 buyerís loss by the market price on that date.


Where did Johnson get the wheat from to sell to Liberty?Itís not that he delivered the wheat on July 14th or 15th; itís that he made a contract with Liberty to sell the wheat when it was ready.


Sometimes the restitution claim is higher than the expectation claim.


Even if Johnson thinks Acme is going out of business, he canít keep the sacks without paying for them.




It doesnít 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 Johnsonís wheat.


If we change the facts, we can see when estoppel comes into play.


Letís say Johnson tells Acme on July 15th that heís not selling wheat to Acme, but is selling to Liberty.So then letís say Acme goes on the market and bought wheat at $1.16.Now estoppel goes into play, and Acme can recover for $1.16 minus $1.03 times the number of bushels.


In fact, the breach doesnít occur until the 29th, when Acme doesnít 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 Johnsonís conduct on the 15th (apparently there was not) then there was no way that Johnsonís 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 itís 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 whatís economically sensible.Breach of contract isnít a good thing, but itís not a crime.You made a promise in the past, you thought it was a good promise, but now youíve 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 itís sensible to breach.


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