Contracts Class Notes
But
wait, this is a tort case. Why are we
looking at this in Contracts? Well,
there’s an issue we’re 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
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 won’t 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 doesn’t 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.
It’s 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. It’s 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 doesn’t 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 plaintiff’s 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?
That’s some indication of the value of the hay to Watt.
Another
way to value the hay is by its purpose: it’s 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 something’s value, and the price realizable puts a floor on
something’s value.
Watt foreshadows the next case.
Rockingham County v. Luten Bridge
Co.
Luten
built a bridge that
Luten
doesn’t get the $18,000 they asked for.
Why not?
The
county told Luten they didn’t 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 you’ll recover the same amount of damages if you stop building
or if you continue. When you continue,
you’re just digging a hole in your own pocket.
It’s a real bad decision to continue.
Change
the factual pattern: Let’s say it’s a barn instead of a bridge. Joe makes a contract with Bob Builder to
build a barn. Bob starts building, but
then Joe says, “No! I don’t want it
anymore!” What will Bob do? What does common sense dictate? Bob will stop!
What’s
different in the present case? Instead
of an individual human being, we have an organization, in this case, a
governmental organization. It’s not a
person, it’s a group with lots of people involved. There’s a question of whether the
organization acted effectively. That, in
turn, depends on common law rather than on statutes.
The
bridge company didn’t 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:
It’s sometimes hard to tell whether you’re 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 shouldn’t 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. – RESTATEMENT (SECOND) OF CONTRACTS
§ 350(1)
Fixed
costs and variable costs
Luten’s
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? It’s gross profit – a mix of overhead and net
profit.
What
is overhead? Overhead is another way to
say fixed costs. To the extent
that Luten’s costs go up for each bridge they build, those are variable
costs. The costs that don’t 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, we’ll 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 don’t need to separate the $5,000 into net profit and
overhead. We don’t even need to think
about it.
You
need your gross profit to put you in the position that performance would
have done.
It
doesn’t make any difference whether or not the plaintiffs actually save
the savable costs. That’s their
responsilibity.
Let’s
say Luten stopped when they should have.
They have two holes in their pocket.
They’ve spent $1,900 that they can’t recover (this is their reliance
interest). Also, they are missing $5,000
gross profit, and the county didn’t pay us a dime. That will put them in the position that
performance would have done.
“We
don’t let people force things on us and then tell us to pay them for it.”
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.
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
don’t recover for losses that you could have avoided without undue loss, burden
or humiliation.
Sometimes
you have to take action to avoid loss.
Tomorrow, we’ll 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
“Bloomer Girl”?
We’ll
talk about the problem on p. 56 tomorrow as well as Missouri Furnace v.
Cochran.