Contracts Class Notes 9/10/03

Hadley v. Baxendale – know this case by name and know the doctrine it stands for. Clovis thinks this doctrine is pretty vague because the phrase “arise naturally” has little or no meaning.

The judges are taking hold of more power in Hadley than they had before.

Hadley also means that the Golden Rule:

The injured party needs to be put in the position performance would have done.

...will not always hold or pan out the same way as before.

Judges won’t award damages unless they were foreseeable to the contract breaker at the time of contract formation.

Victoria Laundry (Windsor) Ltd. v. Newman Indus., Ltd.

In Victoria Laundry, the court describes “imputed” knowledge and “actual” knowledge. Everyone who is a reasonable person has a good idea of what will happen “in the ordinary course of things” if a contract gets breached, and thus is “charged with foreseeing” such consequences.

The second rule, and the second type of knowledge, involve special circumstances outside the course of normal events. If you were told about something in advance, that would also make it foreseeable, even if it was out of the ordinary.

A bit of vocabulary

General damages – this encompasses almost all of the damages we have discussed so far. These would be damages that you could calculate by taking your Restatement off the shelf and looking them up.

Special or consequential damages – these damages arise under the “second rule” of Hadley. There is recovery of, for example, lost profits only if the seller had reason to know of the possibility of such lost profits at the time of contract formation.

Look at the present case: what the heck would laundry dudes do with a boiler? Well, they’d boil water so they can wash some clothes! That’s what we’d call foreseeable and recovery of general damages could follow.

If we were trying this case today, we would look to UCC § 2-715(2)(a), which sort of codifies Hadley.

What did the seller not know at the time of contract formation? The boiler dudes didn’t know about the special dyeing contracts that Victoria was going for. They weren’t told. Victoria can’t recover for this loss, even though it was caused by the breach. Notice how recovery falls short of the Golden Rule here.

Can’t you foresee whatever you want to foresee? There’s a lot of flexibility here. It’s a mistake, though, to look at the first Hadley rule as having any sort of empirical meaning. It’s not, in other words, something a court would take testimony on.

In Hadley, we get this assertion: “it is obvious”…“foreseeability” can be manipulated, and “knowledge possessed” can also be manipulated to a degree. There’s a lot of vagueness here.

When the judge has found out everything about the contract and breach, the judge can decide for himself that he is surprised by the damages or that they’re disproportionate. Judges make policy judgments. Clovis wants us to question whether this ought to be the case.

The Restatement on foreseeability

§ 351(3) says a court may limit damages for foreseeable loss for whatever reason in order to avoid disproportionate compensation. The recovery can thus be less than “make-whole” recovery.

Clovis says “You’ll usually recover the damages unless the judge is shocked out of his mind.”

Lamkins v. International Harvester Co.

Did the contract breaker tacitly agree to be subject to the liability that occurred? Most courts do not require this test. You can be liable even if you didn’t tacitly agree to be liable, and you can even be liable even if you didn’t actually foresee the damages, so long as you reasonably could have.

In this case, there should be no recovery because the plaintiff failed to mitigate. This is a distinct idea from the rules of Hadley, but can come to similar results.

In The Heron II

The law lords gab. They argue about how likely damages have to be in order to be a “probable” result. They vote on various phrases like “a real danger” or “a serious possibility” (which were good) and “odds on” or “on the cards” (which were bad). We learn that what will “probably” result isn’t really about “probability”. Our standard is a policy standard. Will we make this defendant bear this loss? Is it just? Is it wise? Is it economically efficient? We decide, and then we dress up our decision in terms of foreseeability.

We need to think of foreseeability with two minds: one that sticks to the letter of the law and one that lets in pure policy decisions.

When you make a contract you may foresee that the other party could incur a substantial loss. How can you deal with this as the potential breacher? You can turn away the other party, or you can exclude or limit liability.

The rules we’ve been learning can, in many instances, be contracted out.

Example: FedEx contract

FedEx limits their liability unless you choose to buy insurance. They limit their liability to the value of the goods that they lost or delayed. So even if you lost profits due to their breach, you can’t recover save for the actual value of the goods in question.

Another example is the fine print on a roll of film. If you get a valuable picture but the film is no good, the film manufacturer’s liability is limited to replacing the roll of film you bought.

Note that avoidable consequences and mitigation are separate concepts from the Hadley concept of foreseeability.

Valentine v. General American Credit, Inc.

Sharon Valentine had an employment contract and she got fired in a wrongful breach of contract. Valentine wants damages, and she can get them if the contract was breached and if she couldn’t have mitigated her loss by taking another similar job.

Here’s the rub: Valentine also wants emotional distress damages. She doesn’t get them. Why? Is it due to Hadley? Were emotional distress damages (being sad because of getting fired and not having job security) not foreseeable under Hadley? Emotional distress is foreseeable; nobody likes getting fired. When you get fired, you’ll suffer emotional distress. This loss was foreseeable at the time of contract formation.

So it’s not due to Hadley that Valentine doesn’t recover damages.

This is another hole in the Golden Rule. In many cases, when the plaintiff says part of their loss is emotional distress, we’re not going to give them damages for emotional distress.

First off, how do you quantify emotional distress damages? Other damages we’ve discussed in this course can be easily quantified; for example, we can look to the market price for guidance.

Secondly, the primary purpose of employment contracts is not emotional, it’s economic. But how does the judge know? This is merely a judicial pronouncement. It sounds alright, but there’s no proof.

In Hancock v. Northcutt, out of Alaska, the idea of emotional distress claims in breach of construction contracts for building a home is rejected on policy grounds. Erlich v. Menezes in California notes that emotional distress liability would increase housing costs, which is not a desirable policy result. You don’t want contracts to be expensive to make, and you don’t want to deal with damages that are difficult to calculate.

However, emotional distress damages may be allowed if they are particularly foreseeable, or if physical harm accompanied the emotional disturbance. Examples include breaches related to weddings and funerals. Another example would be when you send a telegram saying someone died and the telegram was not correctly delivered. There may be very little in terms of economic damages that can be claimed, but there might be big emotional distress damages.

Ohio is a little different. In 2001, the Ohio Supreme Court, in Kishmarton v. William Bailey Const. Co., 93 Oh.St.3d 226, 754 N.E.2d 785 stated a rule that when you build a single-family residence, you have a contract of a kind in which serious emotional disturbance is a particularly likely result, even though they didn’t allow recovery in the particular case they were looking at. In making the rule, they relied on the Restatement § 353 and on a provision in the Ohio Constitution.

Notice in Valentine that in most contracts cases, we do not give compensation for emotional distress, just as we do not give compensation for the plaintiff’s attorney’s fees. How come? This is the so-called “American rule”.

The “English rule” is different. In England, the loser bears the winner’s attorney’s fees in litigation. If you are a plaintiff there and prove a contract breach and damages, the defendant must bear your reasonable attorney’s fees.

What can we conclude from that? You can do it either way. One justification for the English rule is to prevent frivolous lawsuits. On the other hand, the American rule keeps the courthouse door open and doesn’t deter people from litigating by saying you’re running a risk of paying your own fees and the other party’s fees as well.

When you can collect your attorney’s fees from the losing party, all of the sudden your fees will go up.

Either system is okay, but there’s no chance it’s going to change. Each system has its benefits and its costs.

Unless there is a totally frivolous suit, each side will pay its own attorney’s fees. On the other hand, the losing side of a case will usually pay the court costs. These costs are much lower than attorney’s fees because we subsidize court costs with taxpayer money. We do that to keep the courthouse door open and encourage people to settle disputes peacefully.

Note that we also do not give punitive damages for breach of contract. Emotional distress damages and punitive damages are not the same thing. Emotional distress damages compensate an injury. Also, since it’s so hard to figure out what emotional distress damages are, and there’s a chance to tell stories, such damages would involve a punitive component anyway. If the jury doesn’t like the contract breaker, the contract breaker will get penalized. The attitude that we have against punitive damages probably contributes to our attitude against emotional distress damages.

What about when a breach is also a tort? Usually you cannot get punitive damages, because the tort is most frequently negligence, when you couldn’t get punitive damages in the absence of a contract. If you’ve got an intentional tort, you may have punitive damages unless you’re in a particularly stingy state.

Think about attorney’s fees: under the American rule, we don’t make the losing party bear the winner’s attorney’s fees. However, people can contract them in. It’s not uncommon for agreements to say that if you don’t perform and I have to sue you, you’ll have to pay my lawyer. But is this really enforceable?

Back to Class Notes