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

Caribtexs
What is Caribtexs argument re:
overhead expenses
Why do they argue this?

Overhead vs. direct costs

Profit
Revenue

Costs

Overhead vs. direct costs

Profit
Revenue

Costs

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 partys 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 sellers damages

Overhead and Individual

Contracts
K1

K2

K3

K4

Overhead
expenses

Overhead and Individual

Contracts
K1

Overhead

Overhead and Individual

Contracts

K2

Overhead
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?

All about cover

UCC 2-711
2-712
2-713

 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&Hs 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

Diasonics argument
UCC 2-718: Liquidation or Limitation of
Damages; Deposits
(1)[Liquidated damages]
(2) [Return of deposit, less $500]
(3) [Less sellers 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 2710, 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