Expectation Damages

Contracts – Prof. Merges

April 5, 2011

Expectation – in depth

• “Loss in value” plus “other loss”

• Rest. 2d formula

• Concepts:– “Loss in value”– Other loss,– Minus cost avoided (i.e., saved by breach)

What do these terms mean?

• “Loss in value” = direct loss; e.g., drop in price (for seller), price increase (for buyer)

• Other loss: 2nd order effects of the breach (e.g., loss in related contract); also incidental expenses (arranging cover, arranging resale, etc.)

What about the “minus term”?

• Less cost avoided

• Simple example: Gross revenue – cost of production = profit

• If breach saves cost of production, must subtract this from damage award

Example

• K from S to B to split and sell firewood for $100

• B breaches before S has done any work

• Would have cost S $40 to split the wood; no other loss to S

• S gets (100 + 0) – 40 = 60

Vitex v. Caribtex

CARIBTEX

Vitex

• What was the deal?

Vitex

• What was the deal?

• Wool processing to escape import tariffs; quota system

• 125,000 yds cloth, 25 cents per yard

Basic damages calculation

• Gross profit (revenue): $31,250

• Direct costs: $10,136

• Profit: $21,114

Uncertainty in amounts?

• Who gets the benefit of the doubt?

• P. 610

Caribtex’s

• What is Caribtex’s argument re: “overhead expenses”

• Why do they argue this?

Overhead vs. “direct” costs

Costs

Profit

Rev-enue

Overhead vs. “direct” costs

Costs

Profit

Rev-enue

Numerical example

• Revenue – cost = profit (damages)

• $31,250 – 10,136 = 21,114

• $31,250 – 15,136 = 16,114

• Add $5000 in costs, save $5000 in damages owed

Opinion

• IF a portion of overhead should be allocated to the K, then Vitex “tacitly” recovered these expenses as part of its damages award

• Overcompensates Vitex for the breach, p. 610, bottom

“Breach economics”

• The more costs the breaching party can attribute to the contract, the lower the aggrieved party’s damages

• And vice versa . . .

Overhead

• What is the difference between “overhead” and “direct costs”?

• Why does reallocating an expense from “overhead” to “direct costs” have the effect of lowering damages?

• Why does re-allocating an expense from direct cost to overhead have the effect of increasing damages?

Implicit treatment of “overhead” as coming out of “profit” – overhead adds to damages (if it was anticipated); direct costs subtract from damages

The key question

• Which costs are directly attributable to the K, and which are “general costs of doing business”?

Relevance of the UCC

• Does not directly apply (why not?)

• Applies by analogy

• Specifically mentions “overhead” in section on seller’s damages

Overhead and Individual Contracts

Overhead expenses

K1

K2

K3

K4

Overhead and Individual Contracts

Overhead

K1

Overhead and Individual Contracts

Overhead

K2

K3

K4

Laredo Hides Co. v. H&H Meat Products

H&H Foods

Salvadore “Papa”

Hinojosa

Performance and breach

• P. 614: What did H&H do? Who was actually in breach, according to the court?

H&H motive here?

• UCC 2-711

• 2-712

• 2-713

“All about cover”

§ 2-711. Buyer's Remedies In General; Buyer's Security Interest In Rejected Goods(2) If the seller is in breach of contract, the buyer, to

the extent provided for by this Act or other law, may: . . . .

(d) cover and have damages under Section 2-712 as to all goods affected whether or not they have been identified to the contract;

(e) recover damages for nondelivery or repudiation under Section 2-713 . . . .

(j) in other cases, recover damages in any manner that is reasonable under the circumstances.

§ 2-712. "Cover"; Buyer's Procurement Of Substitute Goods

(1) If the seller wrongfully fails to deliver or repudiates or the buyer rightfully rejects or justifiably revokes acceptance, the buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

(2) A buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages under Section 2-715, but less expenses saved in consequence of the seller's breach.

(3) Failure of the buyer to effect cover within this section does not bar the buyer from any other remedy.

Basic principles

• “Loss in value” plus “other loss”

• Rest. 2d formula

• Concepts:– “Loss in value”– Other loss,– Minus cost avoided (i.e., saved by breach)

Basic principles: applied

Loss in value: difference between hides contracted for and hides purchased on cover market: $142, 254.48

Other loss: transportation and handling: $3,448.95

§ 2-712. "Cover"; Buyer's Procurement Of Substitute Goods

(1) If the seller wrongfully fails to deliver or repudiates or the buyer rightfully rejects or justifiably revokes acceptance, the buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

(2) A buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages under Section 2-715, but less expenses saved in consequence of the seller's breach.

Laredo Hides

• What was H&H’s argument?

• What did the court say?

• Why no requirement to prove that aggrieved party paid only “market price”?

Intentional inflation of damages – what result?

• Can Laredo “take H&H to the woodshed” because H&H breached?

RE Davis v. Chem Corp v. Diasonics

RE Davis v. Chem Corp v. Diasonics

• Facts

• History

Does RE Davis have a defense in the suit by Diasonics? What can RE Davis do here?

What is the damages issue?

What is the damages issue?

• Did Diasonics suffer any injury or loss due to the RE Davis breach?

• P. 619, middle: “Diasonics later resold the equipment to a third party for the same price . . .”

“Lost volume seller”

“Lost volume seller”

X

X

Diasonics’ argument

UCC § 2-718: Liquidation or Limitation of Damages; Deposits

(1)[Liquidated damages]

(2) [Return of deposit, less $500]

(3) [Less seller’s offset for other damages]

§ 2-706. Seller's Resale Including Contract For Resale

(1) In an appropriate case involving breach by the buyer, the seller may resell the goods concerned or the undelivered balance thereof. If the resale is made in good faith and in a commercially reasonable manner, the seller may recover the difference between the contract price and the resale price together with any incidental or consequential damages allowed under Section 2-710, but less expenses saved in consequence of the buyer's breach.

§ 2-708. Seller's Damages

(1) Subject to subsection (2) and to Section 2-723:

(a) the measure of damages for nonacceptance by the buyer is the difference between the contract price and the market price at the time and place for tender together with any incidental or consequential damages provided in Section 2-710, but less expenses saved in consequence of the buyer's breach; and

(b) the measure of damages for repudiation by the buyer is the difference between the contract price and the market price at the place for tender at the expiration of a commercially reasonable time after the seller learned of the repudiation, but no later than the time stated in paragraph (a), together with any incidental or consequential damages provided in Section 2-710, less expenses saved in consequence of the buyer's breach.

(2) If the measure of damages provided in subsection (1) or in Section 2-706 is inadequate to put the seller in as good a position as performance would have done, the measure of damages is the profit (including reasonable overhead) that the seller would have made from full performance by the buyer, together with any incidental or consequential damages provided in this Article (Section 2- 710).

Holding, p. 622-23

“We agree with Diasonics that under some circumstances the measure of damages [under 2-708(1)] will not put a reselling seller in as good a position as it would have been had the buyer performed . . .”

Issues on remand