Chapter 17 Contracts — Breach of Contract and Remedies

2 Introduction Damages. Rescission and Restitution. Specific Performance. Reformation. Recovery Based on Quasi Contract.

3 §1: Damages Types of Damages: Consequential Damages. Breaching party is aware or should be aware, cause the injury party additional loss. Punitive Damages. Available when tort is also involved. Nominal Damages. No financial loss.

4 §2: Mitigation of Damages When breach of contract occurs, the innocent injured party is held to a duty to reduce the damages that he or she suffered. Duty owed depends on the nature of the contract.

5 Liquidated Damages vs. Penalties Liquidated Damages. A contract provides a specific amount to be paid as damages in the event of future default or breach of contract. Penalties. Specify a certain amount to be paid in the event of a default or breach of contract and are designed to penalize the breaching party.

6 §2: Rescission and Restitution Rescission. A remedy whereby a contract is canceled and the parties are restored to the original positions that they occupied prior to the transactions. Restitution. Both parties must return goods, property, or money previously conveyed. Note: Rescission does not always call for restitution. Restitution called for in some cases not involving rescission.

7 §3: Specific Performance Equitable remedy calling for the performance of the act promised in the contract. Remedy in cases where the consideration is: Unique; Scarce; or Not available remedy in contracts for personal services.

8 §4: Reformation Equitable remedy allowing a contract to be reformed, or rewritten to reflect the parties true intentions. Available when an agreement is imperfectly expressed in writing.

9 §5: Recovery Based on Quasi Contract Equitable theory imposed by courts to obtain justice and prevent unjust enrichment. Quantum meruit. Party seeking recovery must show the following: A benefit was conferred to the other party. Party conferring did so with the reasonable expectation of being paid. The benefit was not volunteered. Retaining benefit without paying for it would result in unjust enrichment of the party receiving the benefit.

10 §6: Election of Remedies Doctrine created to prevent double recovery. Nonbreaching party must choose which remedy to pursue. UCC rejects election of remedies. Cumulative in nature and include all the available remedies for breach of contract.

11 §7: Waiver of Breach A pattern of conduct that waives a number of successive breaches will operate as a continued waiver. Nonbreaching party can still recover damages, but contract is not terminated. Nonbreaching party should give notice to the breaching party that full performance will be required in the future.

12 §8: Contract Provisions Limiting Remedies Exculpatory clauses. Provisions stating that no damages can be recovered. Limitation of liability clauses. Provisions that affect the availability of certain remedies.

13 Case 17.1: Fujitsu v. Federal Express (Mitigation of Damages) FACTS: Fujitsu shipped a container of silicon wafers from Japan, to Ross in Austin, TX using FedEx. The next day, the container arrived in Austin and was held for clearance by the U.S. Customs Service. Meanwhile, Ross told FedEx it was rejecting the shipment and that FedEx should return the goods to Fujitsu at Ross’s expense. The goods left Austin in good condition, but when they arrived in Japan, Fujitsu found the goods covered with an oily residue. Fujitsu reported the damage to FedEx.

14 FACTS (cont’d) Fujitsu’s insurance company directed FedEx to dispose the entire container of chips without opening the bags. Fujitsu filed suit for breach of contracts and the court found FedEx liable for $726,640 in damages. FedEx appealed arguing that Fujitsu failed to mitigate its damages. HELD: AFFIRMED. FOR FUJITSU. Fujitsu could not mitigate its damages because because the chips could only be opened in a clean room, which was not possible with the oily residue on the bags. Case 17.1: Fujitsu v. Federal Express (Mitigation of Damages)

15 Case 17.2: Atel Financial v. Quaker Coal Company (Liquidated Damages) FACTS: Atel leased heavy mining equipment to Quaker Coal Company, a Kentucky firm engaged in coal mining. The lease provided for liquidated damages in “an amount equal to the present value of all monies to be paid by Lessee during the remaining Basic Term or any successive period then in effect, plus * * * the anticipated residual of the Equipment.” Later, Quaker asked Atel to temporarily forego payments so that Quaker could refinance its debts. Atel agreed.

16 FACTS (cont’d) Months later, when Quaker was over $700,000 in arrears, Atel declared a default and demanded liquidated damages. Two weeks later, Quaker finalized its debt restructuring and sent Atel a check for all outstanding invoices. The next day, Atel sued Quaker for breach of contract. By the time of trial, Quaker had made all past due payments. Case 17.2: Atel Financial v. Quaker Coal Company (Liquidated Damages)

17 HELD: FOR QUAKER. Court denied Atel’s request for liquidated damages and entered a judgment in favor of Quaker. Court considered the liquidated damages clause to be a penalty clause. “[A] liquidated damages clause will generally be considered unreasonable, and hence unenforceable, if it bears no reasonable relationship to the range of actual damages that the parties could have anticipated would flow from a breach.” Case 17.2: Atel Financial v. Quaker Coal Company (Liquidated Damages)

18 Case 17.3: Maglica v. Maglica (Quasi-Contract) FACTS: Maglica founded a machine shop business, Mag Instrument, in In 1971, he and Halasz began to live together, holding themselves out as man and wife, but they never married. Halasz worked with Maglica to build Mag Instrument, although on its incorporation in 1974, all shares were issued to Anthony. Maglica, as president, and Halasz, as secretary, were paid equal salaries. In 1978, the business began manufacturing the “Mag” flashlights, and thanks to ideas and hard work on Claire’s part, the business boomed.

19 FACTS (cont’d) The couple split in 1992, and Halasz sued Maglica seeking a recovery based on quantum meruit. The jury awarded Claire $84 million, based on the business’s benefit from her services. Maglica appealed. HELD: REVERSED. FOR MAGLICA. Remanded for recalculation of award. Claire could recover for the value of her services, but not for the benefit conferred on the business. In this case, the court will not impose “a highly generous and extraordinary contract that the parties did not make.” Case 17.3: Maglica v. Maglica (Quasi-Contract)