Contracts Class Notes 9/24/03


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 Clovis’s opinion, courts play games with these clauses.  If the court wants to play games, it can fool with this clause either by taking it very strictly or judging it more sensibly.


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 Greenville, Miss.


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.


Wilt v. Waterfield


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 Connecticut in this case, the clause will be tested by liquidated damages/penalty analysis.


Here, Vines breached deliberately for a good reason.  The court says that this is not a willful breach as far as the law of Connecticut goes.  “Willful” seems to mean “reprehensible” in this case.  But what difference does it makes whether it was an intentional breach or not?  How bad a reason does the reason have to be before we will deprive Vines of his restitution interest?


De Leon v. Aldrete


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.


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