Contracts Class Notes 8/28/03

 

Watt v. Nevada Central R.R.

 

But wait, this is a tort case.Why are we looking at this in Contracts?Well, thereís an issue weíre interested in: what is the value of the stack of hay in question?

 

How much does Watt say the hay is worth?Watt wants the market value of the hay plus the baling and transportation costs.

 

The court found that Watt should get $3.50 a ton, because he could have taken the hay to the Austin market, baled it, and sold it, and that would have been his profit.

 

The hay is a hedge against a very bad winter, where the hay could save $100,000 worth of cattle.Nine times out of ten, Watt wonít need the hay at all.

 

Watt wanted the replacement cost of the hedge hay: $18.50 a ton, which would put the hay on his ranch.He doesnít get this.He gets $3.50 a ton, which is the profit he could have realized if he still had the hay to sell.

 

There are two things involved here:

 

1.     The price realizable from selling the hay

2.     The replacement cost of the hay

 

What did we learn about replacement cost in Louise?The replacement cost is the ceiling on the damages that can be recovered by the plaintiff.

 

What about the profit that Watt can get for the hay?This is the floor of the damages that Watt can recover.

 

Stuff is worth at least what you can market it for.Itís worth, at most, the cost to replace it.

 

The trial judge came up with a number in the middle for some reason.The judge valued the stuff at $10 a ton.Itís often easier to come up with reasonably good conclusions than to explain how we come up with them.

 

Why not go with the low number, the price realizable?

 

Why not go with the high number, the replacement cost?The plaintiff did not replace the hay.Sometimes it doesnít make sense to replace stuff.Sometimes it looks like overcompensation, giving the plaintiff in a better condition than if the contract had been performed.

 

What should the plaintiffís attorney have done to get a higher reward than $3.50 per ton?What about presenting evidence of the cost of producing and storing the hay?Thatís some indication of the value of the hay to Watt.

 

Another way to value the hay is by its purpose: itís an insurance policy against the loss of $100,000 of cattle in a very bad winter that happens once a century.What insurance premium would you pay for a policy protecting you against one of these terrible winters?That would be a decent way to value the hay.

 

Replacement cost puts a ceiling on somethingís value, and the price realizable puts a floor on somethingís value.

 

Watt foreshadows the next case.

 

Rockingham County v. Luten Bridge Co.

 

Luten built a bridge that Rockingham County didnít want anymore because it doesnít go anywhere.Luten says, ďWe built the bridge, thereís nothing wrong with it, so pay us the full price of the bridge!Ē

 

Luten doesnít get the $18,000 they asked for.Why not?

 

The county told Luten they didnít want the bridge anymore.Why did Luten keep building the bridge?They figured that if they finished it, they could get the whole amount of money.

 

It turns out that youíll recover the same amount of damages if you stop building or if you continue.When you continue, youíre just digging a hole in your own pocket.Itís a real bad decision to continue.

 

Change the factual pattern: Letís say itís a barn instead of a bridge.Joe makes a contract with Bob Builder to build a barn.Bob starts building, but then Joe says, ďNo!I donít want it anymore!ĒWhat will Bob do?What does common sense dictate?Bob will stop!

 

Whatís different in the present case?Instead of an individual human being, we have an organization, in this case, a governmental organization.Itís not a person, itís a group with lots of people involved.Thereís a question of whether the organization acted effectively.That, in turn, depends on common law rather than on statutes.

 

The bridge company didnít know if Pruitt was still the commissioner, so they had to keep building because they would otherwise be in breach.It turns out that the county had effectively instructed Luten to stop.They guessed wrong, and so they eat the loss.

 

The bigger lesson: Itís sometimes hard to tell whether youíre on the wrong end of a repudiation.

 

Mitigation or Avoidability

 

A person aggrieved by a breach of contract has a duty to mitigate damages.Or in other words, you shouldnít recover damages that you could and should have avoided.

 

[D]amages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation. Ė RESTATEMENT (SECOND) OF CONTRACTS ß 350(1)

 

Fixed costs and variable costs

 

Lutenís profit is the contract price minus the variable costs of the job.Say for example the contract price of the bridge was $18,000 and the variable costs were $13,000.What are they going to do with the $5,000?How do we characterize it?Itís gross profit Ė a mix of overhead and net profit.

 

What is overhead?Overhead is another way to say fixed costs.To the extent that Lutenís costs go up for each bridge they build, those are variable costs.The costs that donít change as they build more bridges are the fixed costs.

 

The spread between the variable costs and the contract price will defray a portion of the overhead and contribute to net profits if there are any.

 

For a variety of purposes, weíll need to separate out net profit and overhead.This is something the business needs to do to help price their bridges, pay the right amount of income tax and report earnings to investors.

 

For our purposes, we donít need to separate the $5,000 into net profit and overhead.We donít even need to think about it.

 

You need your gross profit to put you in the position that performance would have done.

 

It doesnít make any difference whether or not the plaintiffs actually save the savable costs.Thatís their responsilibity.

 

Letís say Luten stopped when they should have.They have two holes in their pocket.Theyíve spent $1,900 that they canít recover (this is their reliance interest).Also, they are missing $5,000 gross profit, and the county didnít pay us a dime.That will put them in the position that performance would have done.

 

ďWe donít let people force things on us and then tell us to pay them for it.Ē

 

If the repudiation of the contract between Luten and the county was clear, no sensible person would have kept building the bridge.

 

Two different formulae for damages:

 

Nonsavable expenses incurred before repudiation

-                     Profit plaintiff would have earned on the job

Damages

 

Unpaid contract price

-                     Savable costs

Damages

 

These turn out to be equivalent.

 

Leingang and Kearsarge

 

In these cases, we get the right results in terms of damages.

 

See also Vitex v. Caribtex (377 F.2d 795) for more good info on overhead and how people sometimes get it wrong.

 

You donít recover for losses that you could have avoided without undue loss, burden or humiliation.

 

Sometimes you have to take action to avoid loss.Tomorrow, weíll look at Parker.Think about this case in relation to Rockingham.If Luten goes and builds another bridge in another county, does that mitigate its damages? How does this compare to Shirley MacLaine going and making another movie during the period of time she would have made ďBloomer GirlĒ?

 

Weíll talk about the problem on p. 56 tomorrow as well as Missouri Furnace v. Cochran.

 

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