Contracts

Class 1 – Introduction to “Enforcement”

Enforcement = relief of promisees to redress breach, not punishment to

compel performance

Contract law is commercial law Mostly about facilitating commercial

exchange

Expectations of promisee Contract remedy is to put promisee in

position it would have been in had the promise been performed

U.S. Naval Institute v. Charter U.S. Naval Institute v. Charter Comm. Inc. (2d Cir. 1991)Comm. Inc. (2d Cir. 1991)

Facts

Licence agreement Berkley could sell paperback starting in 10/84 But they breached agreement, shipped and started

selling a month early

Damages =

How much money Berkley made during the month they were in violation of agreement? OR

How much money Naval Press lost during that month, because some people who would have bought hardcover bought paperback instead?

Damages = expectations (usually) Naval Press put in position it would have

been in had Berkley not shipped early

This is NOT the $724,300 Berkley made that month (Red October a HUGE bestseller) selling paperbacks in breach of agreement

It is the $35,380 lower court estimates Naval Press would have made in additional September hardcover sales, if no breach Estimate based on August sales – close enough

When is disgorgements of profits an appropriate

rememdy?

The interesting case of spy memoirs . . .

Frank Snepp, former CIA agent, and George Blake, Soviet Mole inside of British MI-5, each published books in violation of their employment contracts. Should they be able to keep the profits?

Not if their breach of contract was also a breach of fiduciary duty But this disgorgement remedy is really

not a contract remedy.

It’s a equitable remedy to prevent a wrongdoer from profiting from their wrong

Based on concept of unjust enrichment and restitution

Efficient Breach

Influential but controversial theory

Note that even after Berkley pays Naval Press the (apx.) $35K it lost, Berkley still has a net profit of roughly $690,000

It is efficient for Berkley to breach

Naval Press as well off as if contract performed Berkley better off Damage rules should encourage “Pareto-superior”

outcomes

Sullivan v. O’Connor (Mass. 1973)

(above, before and after rhinoplasty pictures of Ashley Tisdale, star of High School Musical)

Facts –Sullivan v. O’Connor

Plaintiff professional entertainer

Before rhinoplasty, her nose was “straight, but long and prominent”

After 3 surgeries, “concave . . . Bulbous; flattened, broadened” and asymmetrical, and not improvable by further surgery

What should her damages be?

Some subtleties . . .

Courts reluctant to treat contracts for medical procedures as normal commercial contracts

Afraid strict enforcement of expectations will lead to underpromising by medical doctors

OTOH too weak enforcement will lead to overpromising by doctors

Ex post enforcement affects ex ante incentives!

Three contractual “interests” -- Introduction Expectation interest – (amount of money

damages necessary to put) promisee is as good a position as it would have been in, had promise been performed

Reliance interest – (amount of money damages necessary to put) promisee is as good a position as it would have been in, had promisor never made promise

Restitution interest – returning to promisee the benefit it conferred upon the promisor

Plaintiff’s expectations in Sullivan = money damages such that plaintiff in

as good a position as she would have been in had she got the nose she was promised

Strictly: indifferent between the money and the nose, ex ante

Problems . . .

Hard to measure that in money

Therefore, expectations work best in commercial settings, fungible goods, liquid markets

Policy concerns – too hard on doctors, might get defensive

Reliance interest in Sullivan Put plaintiff back in position (so far as money

can) she was in before she relied on the promise

Money back – that’s easy

Difference in money (if measurable) between nose she got, and nose she had before

Pain and suffering? possibly

Problem, p. 16 Farnsworth Assume: Doctor’s fee $300 Hospital fee $100/operation P&S $3000/operation Value promised nose $20,000 Loss from disfigurment $10,000

Plaintiff got 3 operations, and suffered disfigurement instead of getting promised nose

What is expectations interest? Reliance interest? Restitution interest?

Plaintiff’s expectation interest

Plaintiff's expected costs Pl's expected benefits

MD's fee $ 300.00

promised nose

$ 20,000.00

hospital fee $ 100.00  

P&S $ 3,000.00  

total $ 3,400.00 total

$ 20,000.00

   

Expections (net expected benefit)

$ (3,400.00) $20,000.00

$ 16,600.00

disfigurment

$ 10,000.00

[add $6000 P&S if latter 2 operations P&S to be included]

TOTAL EXPECTATIONS

$10,000.00 + $16,000.00 =

26,600.00  

Plaintiff’s Reliance Interest

Plaintiff's costs

MD's fees $ 300.00

$ 300.00

$ 300.00

hospital fee $ 100.00

$ 100.00

$ 100.00

P&S $ 3,000.00

$ 3,000.00

$ 3,000.00

disfigurment* $ 10,000.00

TOTAL RELIANCE $ 20,200.00

Plaintiff’s Restitution InterestPlaintiff's

costs

MD's fees $

300.00

$ 300.00

$ 300.00

hospital fee $

100.00

$ 100.00

$ 100.00

TOTAL REST.

$

1,200.00