Contracts Class Notes 9/18/03


Plaintiff in default seeking restitution


If you paid a down payment but then repudiated before the UCC, you would lose your down payment.  That was seen as the purpose of a down payment.


Under the UCC, however, the seller has to give back the whole down payment except for $500 or 20% of the contract price, whichever is smaller.  You look at § 2-718(2)(b).


So we take the restitution interest and subtract (in this case) $500 and that’s what the breaching buyer gets back.


Why does the statute say this?


A buyer in default will not get restitution to the extent that the seller suffers damages.  § 2-718(2)(b) has nothing to do with compensatory damages.  If the buyer hasn’t made any payments, this subsection doesn’t apply.


But what the heck is this 20%/$500 thing?  This is a significant “ding” into the restitution interest when the contract price is small, but it gets smaller and smaller as the contract price goes up.


Check out the new version of § 2-718.  It gets rid of the 20%/$500 thing.  Well, now I’m just as confused.


The drafters explained that the $500/20% is a special exception.  They say these are small amounts.  This has nothing to do with compensation.  This is a penal provision.  We will penalize a buyer under these circumstances.  But waaaait a minute…this is contracts, not torts!!!  Whaaa?


Only when you have a plaintiff in default trying to get restitution do you have this funny little penal provision.


Keep in mind that the law at the time of the drafting of the UCC was “no restitution at all”.  They wanted to get rid of that.  They would have had a political problem if they had put in full restitution.  They “soften the blow” by adding a small penal amount so that state legislatures will get on board.


Now that the UCC is well-established, we’re going to move to eliminate this penal doohickey.


Let’s say that the buyer’s breach actually damages the seller.  Let’s say that the buyer was going to give the seller more money than he could get out on the market.  Now we’re going to have to ding restitution more in order to put the seller in the position that performance would have done.  You ding the restitution for the $500/20% and then you further ding it for the seller’s damages.  You can find this in § 2-718(3).


This is what the Neri court did, except they didn’t actually ding the plaintiff for the penal amount.


Whenever the compensatory damages exceed the penal amount, you can usually predict that the penal damages aren’t going to get dinged.  This is contrary to the plain language of the statute, but courts just plain don’t like it.  They like to disregard it.


When there are no compensatory damages or small compensatory damages, they will impose the penal damages.


Another weird thing about § 2-718(2) is that it only applies when the buyer has made a down payment and when the buyer is coming into court as the plaintiff and trying to get their down payment back.


What if, on the other hand, the seller had big time damages and they choose to come into court as a plaintiff?  The buyer would get 100% credit for the down payment.  This “dinging” stuff only kicks in when the breaching buyer comes in as a plaintiff.


Say you have a contract for the construction of a barn.  When the builder is done, the owner is supposed to pay $30,000.  The owner hasn’t paid anything yet.  The builder runs off after two-thirds of the work is done.  The builder spent $20,000 at that point.  Most builders would have charged $18,000 for that amount of work.  The owner hires a third party who completes the work for $15,000.


So how much money can the original builder get?  If the court is mad, they might say no soup for you.


Compare this situation to Kelly v. Hance.  If the builder willfully breaches, the court may say you can’t recover anything.


Let’s say that’s not so and the builder gets restitution.  What’s her restitution interest?  It’s $18,000, because that’s the benefit conferred upon the owner.  But the builder won’t get all of it.  The restitution gets dinged for the owner’s loss, which was $5,000.  We want to protect the owner’s expectation interest.


What is the owner’s expectation interest?  He should get a completed barn and a $30,000 hole in his pocket.  He’s already paid out $20,000.  The plaintiff ought to recover no more than $15,000, because otherwise we’re not protecting the owner’s expectation interest.  In a sense here, we have competing interests.


We will cap the builder’s restitution interest recovery by the owner’s damages.  Since the owner didn’t break his promise, we don’t want to hurt his expectation interest.


Pinches v. Swedish Evangelical Lutheran Church


Pinches finishes a building, but it’s not quite exactly to the original plans and specifications.  There aren’t any huge problems.  In other words, it’s still a perfectly good church.  What shall we do in this situation?


Let’s say, for the sake of simplicity, that the church hasn’t paid anything yet.  There is a doctrine (except in New York) known as substantial performance.  The builder doesn’t perform 100%, but gets close.  That triggers the owner’s obligation to pay the contract price.  However, the owner can set off against the contract price any damages the owner has suffered due to the shortfall in performance.


If you build any significant building, something is going to be screwed up.  It can’t be totally perfect.  We need to allow for recovery based on the contract price that still protects the builder’s expectation interest.


Substantial performance is performance that meets the essential purposes of the contract.  You could say, in other words, that substantial performance is performance free from serious defects.


Sometimes the standard of damages is “diminution of value” and sometimes it’s how much it would cost to fix the defects.  Courts don’t like to throw away existing valuable things.


Sometimes diminution in value is smaller in dollars than fix-up cost, but sometimes it’s a lot more than fix-up cost.


For example, say you have a car that won’t go.  What’s it worth?  You could look at the car in terms of junk value, or you could look at the cost to replace one spark plug which could be far less.


The Restatement § 348 lays out these alternatives.


If it would cost a lot to fix a small defect, you’ll probably recover the diminution of value.  If it would cost very little to fix a big problem, you’ll more likely recover the fix-up cost.


The standard you’d use to decide is what damages appropriately compensate the injured party.


How about the 2/3rds completed barn?  We’re not going to protect the contractor’s expectation interest.  The most they can hope for is restitution, lessened by the owner’s expectation interest.


Much depends on the quality of the breach: was it willful?  Deliberate?  Or was it unintentional and in good faith?  We’ll be more helpful to the builder if he made an honest mistake.  If he was a jerk, we’ll try to screw him.


Look at the Restatement § 374.  It doesn’t say anything about the moral quality of the breach.  The modern view is that we don’t place fault when people breach, or at least that’s what we’re moving towards.


Next, we’ll go back to Groves v. Wonder.  Groves leases land to Wonder and wonder pays $105,000 cash for the right to mine sand and gravel.  Wonder promises that he’ll return the land level to the railroad bridge.  Instead, Wonder returns the land much higher than the railroad bridge and all roughed up.


The majority in this opinion makes a lot of to-do about the “reprehensible nature” of the breach.  How credible is that?  Would anyone in his right mind have performed this contract?


Had the land been leveled, it would have been worth $12,000 more than it is the way it is.  However, the cost of leveling would have been $60,000.  What will it take to protect Groves’s expectation interest?  What will put Groves in the same position performance would have done?


The majority and the minority disagreeeeeeeeeee!


The majority comes up with $60,000, while the minority wants to stick to the trial court’s figure.


In Peevyhouse v. Garland Coal & Mining Co., it would have cost $29,000 to level land in such a way as to make it worth only $300 more.


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