Contracts
Class Notes
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
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.
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
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.