Contracts Class Notes 9/5/03

Neri v. Retail Marine Corp.


Let us consider lost-volume sellers.  Some sellers only have one widget to sell.  Think of them as analogous to full-time employees in the labor market.  Any job taken when they’re wrongfully dismissed from a job will mitigate, because it’s something they couldn’t have done otherwise.


On the other hand, Luten Bridge can make one bridge, two bridges, or 10.  They deserve their lost profit from a breach of contract.  It could be the same way with car dealers, and so also with Retail Marine in Neri.


What is the argument against the way the case was decided?  Well, did the breach make the second sale possible?  If so, the second sale is relevant, that is to say, it mitigates.  If it mitigates, the only loss Retail Marine suffers would be the incidental damages.


However, if they could have made both sales, they need to recover their lost profit.


Suppose that Neri asserts that the only reason the second buyer bought was because the boat was in stock, which in turn was due to Neri’s breach.  If it can be shown that these are the facts, then only Neri made the second sale possible, and the second sale must mitigate the lost profits.


How do we obey the Golden Rule of Contracts, but do it with the minimum expenditure of time and money?  Sometimes it will depend on the quality of the lawyers on each side.


Notice in Neri that there’s a problem with messy language in the statute.  UCC § 2-708 (2) seems aimed at a lost profits recovery, yet it allows for resale.  Harris argues that the language in the statute refers to something called a component seller.


What is a component seller as opposed to a standard lost-volume seller?


Say we’re selling a fancy, ostentatious desk to Pompous.  He’s going to pay $20,000 for the desk.  He puts $2,000 down.  The cabinet maker spends $4,000 buying lumber and starts cutting it such that it won’t be useful for other purposes.  Pompous then repudiates.  The cabinet maker claims it would have cost $6,000 more to finish the desk, i.e. it would have cost him $10,000 to make the desk, and thus he would have made a $10,000 had the contract been fully performed.


The language in § 2-708 (2) fits in this case.  What is the plaintiff’s recovery?


The recovery is the plaintiff’s profit ($10,000) plus the allowance for costs irrevocably incurred ($4,000) minus the payments already made ($2,000) and the amount the injured party can get reselling the lumber ($1,000).  That is, the plaintiff should collect $11,000 in damages.


In the new version of the section, this confusing clause is eliminated.


A couple more hypotheticals


Say we have a car dealer.  Does the car dealer really have an inexhaustible supply of goods?  Say we’re talking about a used car.  A used car is unique in some sense.


“This is the straight banana!”


If a buyer repudiates on a used car, it’s more likely that a second sale mitigates damages, because maybe the next guy would have only wanted to buy that car.


Say Carl buys a refrigerator that costs $800 delivered.  The store sells a lot of refrigerators that are just like the one they’re selling to Carl.  The store has a virtually inexhaustible supply.  Say that $25 is the cost of delivery, $75 is the overhead cost, and $650 is the wholesale price.  Therefore, this is strong evidence that $800 is the market price.  If Carl repudiates on the day before the delivery, neither § 2-706 nor § 2-708 (1) establishes damages for the seller.


The store can collect under § 2-709.  They can get their lost profit minus the delivery cost that they didn’t have to spend.  They would collect $125.


Change the factual pattern:  say the repudiation occurs when the store pulls up at the buyer’s house and the buyer says “Nyah, nyah.  I don’t want it.”  In other words, the delivery cost is gone.  Now the seller needs to get their entire profit in damages.  Delivery is no longer a savable cost.  So in this case, they will collect the full $150 in profit.


The language at the end of § 2-708 (2) doesn’t make any sense for the lost-volume seller, though it does for the component seller.


Don’t forget the Golden Rule of Contracts.

When contract price minus resale price or contract price minus market price is insufficient to satisfy the Golden Rule, the seller is entitled to their profit.


Say we’re in the world of the refrigerator delivery and the lost-volume seller.  When might there be no delivery?  What about statute of frauds?  If there was no contract to buy the refrigerator, and no money down, the contract may be unenforceable against the buyer.


It’s true that at some retailers, they have returns.  That’s not the law, rather, that’s a service that you pay for.


Also, if you’re buying a big-ticket item, you will not have the opportunity to change your mind without breach.


Hadley v. Baxendale


This is a case you need to know by name.  This is probably the most famous contracts case there is.


Hadley needed to send a shaft to Greenwich so they could make a new one.  Without the shaft, the mill couldn’t run.  There was an oral promise to deliver the shaft in a certain time period and they broke their promise.  The carrier has broken his promise.  They delivered it later than promised.


Hadley says that because of the delay, the mill had to be shut down longer.


The contract price for this contract was 2 pounds, 4 shillings.  However, the damages awarded were 50 pounds.  These damages seem disproportionate.  We have a relatively small ticket item (here, really a service) and the damages are a zillion times the fee.


The trial judge let the jury decide what damages to give out.


Whenever a trial judge is referred to as “learned”, he’s about to get reversed.


Why did this trial judge do what he did?  Why is this trial judge upset?  Well, in a prior case involving the same carrier, it was established that “reasonableness” should be left to a jury.  The judge is pissed!  He was just following precedent!


Keep the date of 1854 in mind.  The law of damages was created in this period.  Between 1840-1870 a lot was written that created our modern law of contract damages.


What’s the most important thing in this case?  Baron Alderson says they must state an explicit rule for the jury.  This is a total flip-flop from Black v. Baxendale just seven years before.  We’re creating a much more organized law of damages, and this is one of several cases where we start doing it.  We’re not going to trust the jury as much as we’re trusted them in the past.


The recounting of the facts is inconsistent within the case.  Yow!  How do we explain the inconsistency?


Those two statements on p. 69 and p. 71 were written by two different people.  The statement on p. 71 was written by the judge.  The statement on p. 69 was written by a court reporter, and probably not a lawyer.  So we might figure we can trust the judge more than the court reporter.


In Victoria Laundry, Lord Justice Asquith points out this inconsistency and inaccuracy in the statement of facts.


Rule nisi – a ruling that will stand unless the opposing party can show cause otherwise.


The rule of Hadley


“Where two parties have made a contract which [has been breached] the damages…should be (1) such as may be…considered either arising naturally…from such breach of contract itself, or (2) such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.”


What do we mean by damages arising naturally from the usual course of things?


What about damages that both parties could have contemplated?  In modern times, we consider what consequences the contract breaker could have contemplated at the time of contract formation.


We don’t have much use for the second rule in this case.  The facts show that the clerk was not told that the mill was stopped.  The defendants didn’t know the special circumstances.  So what damages arise in the usual course of things when you are late in delivering a broken millshaft?


The court asserts that usually when broken shafts are sent off, loss profits probably won’t occur, therefore, the plaintiff can’t recover the lost profits here.  The court says this happens in the “great multitude of cases”…but they have no evidence.  They merely say it’s “obvious” and assert it.


We have judges taking over from juries and exercising their own judgment as to which damages ought to be recovered or should not be recovered.  To the extent that you brought the loss on yourself, you don’t recover.  Otherwise, follow the Golden Rule.


The court in Hadley says: “We believe you have suffered a loss because of the defendant’s breach and failure to deliver in a timely way, but we’re not going to let you recover that loss.  We are going to put you in a lesser position than performance would have done.”

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