Contracts
Class Notes
Okay,
now what?
A bit on the Problem on p. 144
This
is review if it weren’t for the liquidated damages clause.
However,
the contract says, “If the employer breaches, the company must fulfill the
unpaid salary for two years”.
Note
the phrase: “fulfilling the entire”.
We must interpret this clause and figure out what the parties meant by
it. Sometimes, in
If
the clause means the guy gets the full $75,000 and we believe it is
enforceable, then mitigate is probably out of the picture. This violates the Golden Rule[1]
and puts the plaintiff ahead.
One
way you can attack the clause is to claim that you can fix the actual damages,
and therefore, according to the Restatement § 356, the clause should be shot
down. You can only have these clauses if
it is difficult to prove loss whether at the time of contract formation or at
the time of breach (after the fact).
Note
that the actual loss caused by the breach is no more than $25,000…$75,000
is unreasonable in light of that.
In order to get the clause upheld, you must make the clause seem
reasonable in light of the replacement jobs that might be available.
Some
courts will find the clause enforceable and other will knock down the clause as
a penalty clause. In the former case, he’ll
get the full $75,000, and in the latter case he’ll only get $25,000.
But
what if the second employer gave him $150,000?
He almost certainly will not recover the $75,000, or really anything.
Massman
Constr. Co. v. City Council of
There
is no recovery on liquidated damages when there are no actual damages. You can’t collect damages for the delay of a
construction of a bridge when the bridge couldn’t have been used anyway due to
no fault of the contractor. You’re not
going to get damages for a breach that actually does you a favor.
When
you know that a breach caused zero loss (or nominal damages), the authority of
the Restatement and case law tell you that agreed damages clauses are going to
be found to be in the nature of a penalty and are not going to be enforced.
Why
will a court enforce a clause that breaks the Golden Rule? They will do so to uphold the freedom to contract.
On
the other hand, if there was some loss, and the agreed upon damages are
in line either with the real loss or reasonable expected loss,
the court will generally uphold that clause.
It
can be hard to predict the results of these cases. How come?
We’re not sure why we have a policy against penalties! Since we don’t understand it very well, the
way that we formulate it (e.g. Restatement § 356) may not be the best way and may
not be followed consistently by every court.
Some
cases will be clear, and sometimes you will be able to say “this clause is probably
unenforceable”. On an exam, make sure to
“get to maybe” when warranted, and also say when you have a clear answer when
that is the case.
Note
that Restatement (Second) § 356 essentially comes from UCC § 2-718(1). It makes it a little easier to uphold agreed damages
clauses. You get “two looks”.
Can
you construe this section of the Restatement to suggest that you might enforce
an agreed damages clause even when there were no actual damages? Probably not.
You need to look at the facts of each case.
The
contract in this case established agreed damages of 10% of the purchase price
of $19,000. The vendor repudiated and
sold to a third party to $26,000. The court
struck down an agreed damages clause as a penalty.
Fretwell v. Protection Alarm Co.
The
clause in this case is enforced.
Why? The clause in Fretwell is a ceiling or limitation
on damages.
They
don’t use the liquidated damages/penalty test in this case even though the
drafters of the contract made the mistake of using the words “liquidated damages”. They were not trying to fix damages
for a breach, but rather, they were trying to limit their liability.
We
police clauses that create penalties vigorously. However, we allow contracting parties to limit
damages in most cases without much question.
It
is hard to agree to your loss, but it is easy to limit your losses.
Compare
UCC § 2-718(1) to § 2-719: an agreement may limit damages. The UCC gives broad permission to
limit damages except in cases where it is unconscionable.
In
a case like Fretwell, it
would be easier to work with an insurance company, where you can recover for
your loss often without having to resort to a lawyer. When there is a theft, the insurance company
pays you and then subrogates (i.e. steps into your shoes) and attempts to
recover from the thief or whoever else it can.
The insurance company may even try to recover from the possibly negligent
burglar alarm company.
Under
the Fretwell result, the
world is better and cheaper for everybody except for the plaintiffs’ attorneys who
would like nothing more than to collect big fees.
Vines
v. Orchard Hills, Inc.
Here
we have a land contract where the purchaser pays something on the price, but
then defaults and wants to get restitution for some or all of what they have
paid.
There
is also a liquidated damages clause, so labeled, which specifies that the 10%
down payment can be retained as liquidated damages in the event of a breach. In most places, as it was in
Here,
Vines breached deliberately for a good reason.
The court says that this is not a willful breach as far as the law of
De
Here,
there’s a big down payment, and consequently a much bigger
forfeiture. It is highly likely in this
case that there will be restitution and any agreed damages clause that lets the
vendor hold on to a big chunk of cash will be struck down.
What
do you do for a plaintiff in default?
You must give them restitution, but you need not and should not give
them reliance damages.