Second
edition, revised by Peter B. Friedman
for a
conference on Damages in Municipal and County Courts
for
Magistrates, Judges, and Acting Judges sponsored by
the Judicial College of the Ohio Supreme Court,
September 28, 2007.
First
edition prepared by Brian D. Wassom and
Peter B. Friedman
for a similar conference on October 31, 1997.
An Outline
I. Basic Principles
a. Basic scope of damages for breach of contract: damages foreseeable by the
parties at the time of contracting.
i.
ii.
A plaintiff
can recover damages that were directly and proximately caused by the
defendant's breach of contract and which were within the contemplation of the
parties at the time they entered into the contract.
1.
"This has been the nearly universal rule for some
time." Digital & Analog Design Corp. v. North Supply Co.,
2.
Reason for
limiting damages to those in the contemplation of the parties at the time they
entered into the contract is to allow the parties to relate the contract’s
consideration to the contract’s contemplated risks. Concrete Steel Co. v.
Erie R. Co., 1931
3. See also, e.g., Payne v. Wood, 1995 U.S. App. LEXIS 22551 (6th Cir. 1995)(unpublished) (direct cause and contemplation of the parties); Sperau v. Ford Motor Co., 674 So. 2d 24 (Ala. 1995) (contemplation of the parties); Lord's & Lady's Enters. v. John Paul Mitchell Sys., 46 Mass. App. Ct. 262, 705 N.E.2d 302 (1999) (compensate party); Burnside v. State Farm Fire & Cas. Co., 208 Mich. App. 422, 528 N.W.2d 749 (1995) (contemplation of the parties); Neb. Nutrients, Inc. v. Shepherd, 261 Neb. 723, 626 N.W.2d 472, 504-505 (2001) (basic contract damages).
4.
Thus, defendant must have knowledge of special
circumstances creating a risk of loss to be liable, otherwise recovery is
limited to the normal consequences flowing from the breach. Patrick v. The
Western Union Telegraph Co., 86
b. Compare tort remedies: Tort actions usually allow recovery for damages that were directly or proximately caused by the tort. Such actions allow recovery for foreseeable losses. Contract actions frequently speak of damages that were within the contemplation of the parties. Such actions allow recovery for expectation losses. Burnside v. State Farm Fire & Cas. Co., 208 Mich. App. 422, 528 N.W.2d 749 (1995).
c.
Lost profits are
recoverable as long as they are not conjectural or depend upon chances of
trade.
i. To recover lost profits, an injured party must show both (a) what he would have received from full performance, and also (b) what such performance would have cost him (or the value to him of relief therefrom). Unless he proves both of those facts, he cannot recover as damages the profits he would have earned from full performance of the contract. Allen, Heaton & McDonald, Inc. v. Castle Farm Amusement Co., 151 Ohio St. 522, 526, 39 O.O. 330, 332, 86 N.E. 2d 782, 784 (1949).
a.
Courts are especially skeptical of new businesses that
have no prior history of profitability, though plaintiff's experience and
diligence are considered. AGF, Inc.
v. Great Lakes Heat Treating Co.,
b.
Of course, lost profits must have been reasonably in
the contemplation of the parties at the time of contracting as possible damages
in order to be recovered. AGF, Inc. v. Great Lakes Heat Treating
1. Compare Great Oaks Company, Inc. v. Cincinnati Insurance Company, No. 83AP-42, Ohio App. Ct., 10th App. Dist., slip. op., (March 29, 1984))(speculative profits from collateral enterprises are not recoverable; they must be explicitly within the contemplation of the parties ).
2. See also, e.g., Protectors Ins. Serv. v. United States Fid. & Guar. Co., 132 F.3d 612 (10th Cir. 1998) (lost profits); Roboserve, Inc. v. Kato Kagaku Co., 873 F. Supp. 1124 (N.D. Ill. 1995) (lost profits); Neb. Nutrients, Inc. v. Shepherd, 261 Neb. 723, 626 N.W.2d 472, 504-505 (2001) (lost profits).
II.
The
Expectancy Remedy a/k/a Benefit of the Bargain
a. The Expectancy is the default remedy for breach of contract.
b. Defined: A party damaged by contract breach is entitled to damages that will reasonably grant to the plaintiff the benefit of the bargain that the plaintiff expected to receive. To determine those damages, courts and juries consider the difference between the value of the goods or services as the plaintiff expected them to be and the actual price paid. In addition, the plaintiff is entitled to consequential losses that were directly and proximately caused by the conduct of the defendant and within the contemplation of the parties at the time they entered into the contract.
i.
Allen Heaton
& Mcdonald, Inc. v. Castle Farm Amusement Co., (1949),
When a plaintiff sues on a contract to recover the amount he would have received for the full performance prevented by a defendant's breach, he seeks in effect to recover as damages the profit from performance of the contract which profit defendant's breach prevented him from earning. In such a case, plaintiff has the burden of alleging and proving not only (a) what he would have received from the performance so prevented, but also (b) what such performance would have cost him (or the value to him of relief therefrom). Unless he proves both of those facts, he cannot recover as damages the profits he would have earned from full performance of the contract.
ii. See, e.g.,. Penny/Ohlmann/Nieman, Inc. v. Miami Valley Pension Corp., 399 F.3d 692, 2005 FED App. 0105P (6th Cir. 2005) (Under Ohio law, the damages awarded for a breach of contract should place the injured party in as good a position as it would have been in but for the breach); F. Enterprises, Inc. v. Kentucky Fried Chicken Corp., 47 Ohio St. 2d 154; 351 N.E.2d 121; 1 Ohio Op. 3d 90 (1976) (limiting recovery from breach of a lease contract to the difference between the contract price and fair rental value, plus special damages); Restatement of the Law 2d, Contracts (1981) 102-103, Remedies, Section 344, followed by Meisel v. Buildt, 1996 Ohio App. LEXIS 4577 (8th Dist., Cuyahoga Co.); (Allen, Heaton & McDonald Inc. v. Castle Farm Amusement Co., 151 OS 522, 39 O Ops 330, 86 NE2d 782 (1949)(expectancy minus savings); Digital & Analog Design Corp. v. North Supply Co.,44 Ohio St. 3d 36, 41; 540 N.E.2d 1358, 1363 (1989)(if plaintiff’s savings from not having to perform exceed damages, plaintiff recovers nothing); Allen, Heaton & McDonald Inc. v. Castle Farm Amusement Co., 151 OS 522, 39 O Ops 330, 86 NE2d 782 (1949)( plaintiff gets full contract price when he/she has completely performed).
iii. See also e.g., Hess Energy, Inc. v. Lightning Oild Co., 338 F.3d 357 (4th Cir. 2003) (comparing out of pocket with benefit of the bargain); Commercial Prop. Invs. v. Quality Inns Int'l, Inc., 61 F.3d 639 (8th Cir. 1995) (out of pocket and loss of bargain defined); Schwab v. Philip Morris USA, Inc., 449 F. Supp. 2d 992, 1058 (E.D. N.Y. 2006) (benefit of bargain); Utica Mut. Ins. Co. v. Stockdale Agency, 892 F. Supp. 1179 (N.D. Iowa 1995) (benefit of bargain); Cargill, Inc. v. Sears Petroleum & Transp. Corp., 388 F. Supp. 2d 37, 70 (N.D. N.Y. 2005) (measure of loss to put party in position that the party would have been in if the contract had been fully performed); Brady v. State, 965 P.2d 1 (Alaska 1998) (compare out of pocket and benefit of bargain); Kerndt v. Rolling Hills Nat'l Bank, 558 N.W.2d 410 (Iowa 1997) (as if the agreement had been performed); Hall v. Lovell Regency Homes L.P., 121 Md. App. 1, 708 A.2d 344 (1998) (compare out of pocket and benefit of bargain); Lord's & Lady's Enters. v. John Paul Mitchell Sys., 46 Mass. App. Ct. 262, 705 N.E.2d 302 (1999) (benefit of bargain); Williams v. Finance Plaza, 78 S.W.3d 175, 181 (Mo. Ct. App. 2002) (explains benefit of bargain rule); Latham v. Castillo, 972 S.W.2d 66 (Tex. 1998) (compare out of pocket and benefit of bargain);
iv. See also, e.g., Melvin A. Eisenberg and Brett H. McDonnell, Expectation Damages and the Theory of Overreliance, 54 Hastings L.J. 1335 (2003); Steven Bennett, Construction Contract Damages: The ''Measured Mile,'' 16 Touro L. Rev. 77 (1999); Roy Ryden Anderson, Damage Remedies Under the Emerging Article 2B An Essay Against Freedom, 34 Houston L. Rev. 1065 (1997).
c. Benefit of bargain damages are used in situations that are similar to those where out of pocket damages are allowed. Jurisdictions tend to select one or the other to use for such claims as misrepresentation. Some jurisdictions suggest that the selection of the appropriate measure will depend on which of the two will make the party whole. The purpose of the benefit of bargain damages is to place the plaintiff in the economic position he or she would have enjoyed if the transaction had been completed as expected. Utica Mut. Ins. Co. v. Stockdale Agency, 892 F. Supp. 1179 (N.D. Iowa 1995) .
i. In a misrepresentation action, the plaintiff may recover either out of pocket or benefit of bargain damages. Quest Med. v. Apprill, 90 F.3d 1080, 1085 (5th Cir. 1996) .
ii. For a good discussion of out of pocket and benefit of bargain damages, see City Solutions, Inc. v. Clear Channel Communications, Inc., 242 F. Supp. 2d 720, 725-728 (N.D. Calif. 2003). See also, e.g., Melvin A. Eisenberg and Brett H. McDonnell, Expectation Damages and the Theory of Overreliance, 54 Hastings L.J. 1335 (2003); Steven Bennett, Construction Contract Damages: The ''Measured Mile,'' 16 Touro L. Rev. 77 (1999); Roy Ryden Anderson, Damage Remedies Under the Emerging Article 2B An Essay Against Freedom, 34 Houston L. Rev. 1065 (1997).
III.
Reliance
Remedy
a.
An injured party may elect to recover his reliance interest; the
reliance remedy seeks to put the injured party in the same position that he/she
would have been in had the contract not been made (rather than in the position
he would have been in had the contract been performed. In addition, a court may impose a reliance remedy as an
alternative measure of damages in certain instances in which the expectancy
remedy might otherwise be considered inadequate or excessive.
b.
Thus, for example, where the contract is formed by promissory estoppel,
the Restatement of the Law 2d, Contracts (1981) § 90, provides that the “remedy granted for
breach may be limited as justice requires.” The reliance remedy
may be appropriate too where expectation damages are unforeseeable or too
speculative, where the parties’ performances are largely executory, or where
there is some policy reason for doubting the existence or the enforceability of
the contractual promise.
c.
A damage award in a promissory estoppel
claim under Restatment §90 can be based upon either reliance damages or expectancy
damages. 1A Corbin, Corbin on Contracts (1963) 221, Section 200. The remedy
depends on what justice requires in a particular case. Factors to be considered
are the definiteness in measuring the damages caused by the reliance and
whether the promise relied upon obligates the promisor into the future. 1A
Corbin, Corbin on Contracts (1963) 221, Section 200, 240-241, Section 205.
d.
There is not very much
e.
In Patrick
v. Painesville Commercial Properties, Inc., (Ohio 11 App. Dist. 1997), 123 Ohio
App.3d 575, 704 N.E.2d 1249, the court affirmed a jury verdict
awarding plaintiff-employee wages from termination to age 72 (expectancy
remedy). He turned down another offer
after speaking with defendant-employer.
Employer asked when plaintiff planned to retire, and when he said he
would at age 72, employer responded, “Fine, that’s what I want.” The cause of action is based on promissory
estoppel rather than contract because the job was terminable at will. The court observed that damages on a
promissory estoppel claim can be based on reliance or expectancy, citing 1A Corbin, Corbin on Contracts (1963) 221, Section
200, and stated that “[t]he remedy is dependent on what
justice requires.
f.
In contrast, in Hunter
v.. Hayes (Colo. App. 1975), 533 P. 2d 952, an employee who quit
her job on a promise of another job, terminable-at-will, was granted reliance
damages when the prospective employer refused to hire her.
g.
See also,
e.g., McIntosh v.
Micheli Restaurant, Inc. (1984), 22
IV.
Duty to mitigate
a.
One always has a duty to mitigate damages. Hough v. Stone, 21 O App 444, 153 NE
313; Shaker Bldg. Co. v. Federal Lime & Stone Co., 28 O Misc 246, 57
O Ops 2d 486, 277 NE2d 584.
b. Compensatory
recovery is limited to that which victim could not reasonably have
prevented. F. Enterprises, Inc. v.
Kentucky Fried Chicken Corp.,
c. "[T]he general rule of damages gives recognition to a prospective lessor's obligation to minimize damages by renting on the open market to others." (F. Enterprises, Inc. v. Kentucky Fried Chicken Corp., 47 Ohio St. 2d 154, 160; 351 N.E.2d 121, 125; 1 Ohio Op. 3d 90 (1976))
V.
Liquidated
Damages
a. Validity of liquidated damage stipulations.
i.
Terms governing procedures following breach are valid
and enforceable. Ladd v. NY Cent. R.Co., 170 OS 491, 11 O Ops 2d 245,
166 NE2d 231 (1960), cert denied, 364
ii.
Remedy for breach of contract when no election of
remedy is made by plaintiff is made is the alternative least onerous to the
defendant. Ach v. Herman A. Strauss, Inc., 67 O App 452, 21 O Ops 400,
37 NE2d 99 (1941); this rule is meant to recognize the flexibility bargained
for in the contract. Podlesnick v. Airborne Express, Inc., 627 F. Supp.
1113, 1116 (S.D.
iii.
Reasonable liquidated damages provisions are fully
enforceable. Samson Sales, Inc. v. Honeywell, Inc.,
iv. parties can even stipulate no damages, at which point performance becomes merely elective. Lowry v. Barelli, 21 OS 324.
b. Liquidated Damages versus Penalties
i.
When liquidated damages begin to depart from the
purpose of compensating for actual loss, construing them as a penalty is
favored. Samson Sales, Inc. v. Honeywell, Inc.,
ii. To be considered liquidated damages rather than a penalty, an agreed-upon remedy must satisfy the following 3-part test: (1) the damages must be uncertain as to amount and difficult of proof, (2) the contract as a whole cannot be so manifestly unconscionable, unreasonable, and disproportionate as to justify the conclusion it does not express the true intention of the parties, and (3) the contract must be consistent with the conclusion that the parties intended the liquidated damages as the remedy for breach.
1. Ordinarily, the courts state that the amount of the liquidated damages must be reasonably related to the injury suffered, difficult to ascertain the exact amount, and not in the nature of a penalty. Austin Hill Country Realty v. Palisades Plaza, 948 S.W.2d 293 (Tex. 1997) .
2.
Liquidated damages stipulations often treated as
penalties and not enforced because of inequity. Samson Sales, Inc. v.
Honeywell, Inc.,
iii. The intent of the parties is most relevant and usually determinative factor. To ascertain intent, one must construct contract as a whole, looking at language used and the surrounding circumstances. Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St. 3d 27; 465 N.E.2d 392 (1984) (refusing to apply provision limiting negligent alarm company's liability for burglary to $50, when the provision was preprinted in small type and no other provision indicated concious intention of insured to consider or estimate the amount of damages flowing from breach.)
1.
A recital that a provision is "liquidated damages
and not a penalty" is in no way determinative. Samson Sales, Inc. v.
Honeywell, Inc.,
2.
Interpreting liquidated damages is a case-by-case
process, since no two contracts are alike Samson Sales, Inc. v. Honeywell,
Inc.,
iv. Specific Examples
a. Tending to be enforced
1.
Liquidated damages tend to be enforced more when
calculating damages is difficult or speculative. Samson Sales, Inc. v.
Honeywell, Inc.,
2.
Contracts containing liquidated damages
provisions offering two alternative remedies are generally valid, even if
intended as incentives to party behavior Avey v. Leather Products Co.,
73 Ohio App. 245; 55 N.E.2d 813 (1942).
3.
Liquidated damages for delay tend to be
enforced, because damages are not easily assessed. Avey v. Leather Products
Co., 73
4.
Contract involving money deposit that provides
for liquidated damages upon breach is generally enforced. Frank's Nursery
Sales v. American Natl. Ins. Co.,388 F. Supp. 76 (E.D. Mich 1974).
b. Tending to be treated as unenforceable penalties.
1.
If liquidated damages provision covers several
promises, courts will construe it as a penalty; the provision must apply to a
specified breach. Miller v. Blockberger,
2.
Liquidated damages provisions in contracts to
pay money that exceed the amount to be paid (including interest owed) almost
always treated as penalties. Berry v. Wisdom,
3.
Where a contract provides for payment of money
in monthly installments for a certain period and in consideration thereof an
unconditional promise to pay a certain amount on a stated future date is made,
a provision that failure to pay an installment, the default continuing for
three years, should cause a forfeiture of all rights under the contract, is a
penalty and not liquidated damages. Weissenberger v. The Central Acceptance
Corp., 64
VI.
a. In General (UCC §2-703): meant to be liberally applied in order to put aggrieved party in as good a position as it would have been in had the contract been performed.
i. Courts may restrict remedies if the would put the party in a better position than they would have been in without liquidated damages provision.
ii. UCC recognizes duty to mitigate damages
b. Seller’s Remedies
i. In general, under UCC §2-703, in addition to seeking remedies for breach, seller may also withhold delivery, cancel delivery, or cancel the contract.
ii. Under UCC §2-706, a seller can conduct a commercial resale to recover the difference between the contract price and the commercially reasonable resale value of the items. Unless the goods are perishable, such a resale requires notice to the buyer.
iii. Under UCC §2-708, the seller can recover difference at time of breach between contract price and market price of items. If this remedy is inadequate to return Seller to as good a position as the contract would have provided, the measure of damages is the profit that would have been made from the contract.
iv. Incidental damages under UCC §2-710: in addition to the remedies set forth above, the seller may recover any commercially reasonable charges or expenses incurred in stopping delivery, in transport or custody of the goods after breach, or in connection with the resale of the goods.
c. Buyer’s Remedies
i. Under UCC §2-711, the buyer may cancel and recover as much of the price as paid.
ii. Whether or not the buyer cancels, he may pursue damages
d. Cover
i. Under UCC §2-712, buyer can "cover," or recover difference between contract price and the price of purchasing replacement property without unreasonable delay.
ii. Buyer ma
e. Market Price: under UCC §2-713, buyer can recover difference at time of breach between the contract price and the market price of the items.
f. Resale: under UCC §2-711, in certain cases the buyer may take a security interest in goods in his possession and resell them in the same manner as an aggrieved seller. See also UCC §2-706.
g. Incidental and Consequential Damages under UCC §2-715
i. Incidental damages include expenses incurred in inspection, receipt, transport, and care of goods rightfully rejected, and other reasonable expenses.
ii. Consequential damages are those injuries resulting from the breach that Seller had reason to know of and could not be reasonably prevented
h. Deduction of damages from the price under UCC §2-717: buyer may deduct the amount of damages from the price of goods yet to be paid for.
i. Replevin under UCC §2-716
i. The legal equivalent of the equitable remedy of specific performance; replevin is only available where cover is reasonably unavailable and the goods have been identified. UCC §2-716, Official Comment 4.
ii. In practice, replevin is rare. Calamari & Perillo, Contracts at 584 (2d Ed. 1977)).
j. Liquidated Damages under UCC §2-718
i. Liquidated damages provisions are valid under the UCC, but only for a reasonable amount in light of the actual or anticipated harm, the difficulty of proof of loss, or infeasibility of adequate remedies.
ii. Unreasonably large amounts are treated as penalties and not enforced
iii. Under UCC §2-719, parties may contract to alter or limit damages.
VII.
Implied
Contracts
a. Implied Personal Service Contracts
i.
Usually involve implied promises to pay for requested
services. In the Matter of: The Guardianship of George Hall, Jr., 1996
ii.
Recovery is reasonable value or customary rate. Terex
Corp. v. Grim Welding Co., 58
b. Implied Construction Contracts
i. Contractor who is orally requested to do small jobs in addition to the contracted-for project may recover for their reasonable value. Strawser v. Vulic, 1993 Ohio App. LEXIS 3226 (reversed and remanded on other grounds).
ii.
VIII. Quasi-contract/Quantum Meruit
a.
Requirements of Quasi-Contract
i.
one party provided a benefit to another
ii.
the benefit was provided with reasoanble
expectation of compensation.
iii.
there was an express or implied request for the
benefit
iv.
party receiving the benefit would be unjustly
enriched if not forced to compensate the other party for the benefit. Blond
& Petrillo, BLOND'S CONTRACTS 29 (5th Ed. 1995).
b. Quantum meruit is an equitable principle; recovery requires a benefit conveyed to the defendant by plaintiff such that it would be unconscionable for him/her not to compensate the plaintiff. Katz v. Banning, 84 Ohio App. 3d 543; 617 N.E.2d 729 (1992) (opportunity to acquire and develop property not an unconscionable benefit to retain); National City Bank v. Jim Roberts Buick, Inc., 24 Ohio Misc. 2d 18, 21; 494 N.E.2d 470, 473 (1986)(recovery from car owner's creditor of value of auto repairs denied to dealership that repaired the vehicle because creditor was not directly benefited).
c.
quasi-contracts are not available when there was an
express contract governing the services for which compensation is sought. Pawlus
v. Bartrug, 109
d. How Quasi-Contracts are applied.
i. the terms "quasi-contract" and "restitution" are often used interchangeably in modern usage. Calamari & Perillo, Contracts at 571 (2d Ed. 1977).
ii. Measure of recovery is the reasonable value of the benefit conveyed to the defendant. Tom v. Hock, 1989 Ohio App. LEXIS 5172 (awarding to contractor reasonable value of services requested by homeowner in addition to written contract); Kellam & Assocs. v. Central Ohio Transit Auth., NO. 83AP-729 (Ct. App. OH., 10th App. Dist., Franklin Co., April 25, 1985).
iii.
Recovery is not limited to contract price except as
evidence of value. Tom v. Hock, 1989