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VIII. SUITS IN QUASI-CONTRACT A. Where allowed: There are a number of
situations where recovery "on the contract" is not possible or allowed:
(1) situations where there was no attempt even to form a contract, but the
plaintiff deserves some measure of recovery anyway; (2) cases where there
was an attempt to form a contract, but the contract is unenforceable
because of statute of frauds, impossibility, illegality, etc.; (3) cases
where there is an enforceable contract, but the plaintiff has materially
breached, and therefore may not recover on the contract; and (4) cases
where the defendant has breached but the plaintiff is not entitled to
damages on the contract. In all of these situations, the plaintiff will
often be allowed to recover in "quasi-contract."
1. Measure of damages: Courts almost never award expectation damages in quasi-contract suits. Both reliance damages and restitution damages are frequently awarded in quasi-contract suits (with courts deciding which of these two to use based on the equities of the particular case.). B. No contract attempted: The courts sometimes award P a recovery where no contract was even attempted. The most common example is where P supplies emergency services to D, without first forming a contract to do so. (Example: P, a doctor, sees D lying unconscious in the street, and gives D CPR. The court will probably allow P to recover the fair market value of his services, in an action in quasi-contract.) C. Unenforceable contracts: The parties may attempt to form a binding contract which turns out to be unenforceable or avoidable. This may happen because of the Statute of Frauds, mistake, illegality, impossibility, or frustration of purpose. In any of these cases, the court will usually let P sue in quasi-contract, and recover either the value of the services performed (restitution) or P's reasonable expenditures (reliance). D. Breaching plaintiff: A plaintiff who has materially breached may normally bring a quasi-contract suit, and recover his restitution interest, less the defendant's damages for the breach. This is sometimes called a "quantum meruit" ("as much as he deserves") recovery. Example: P agrees to work for D for one year, payment of the $20,000 salary to be made at the end. P works for six months, then unjustifiably quits. P cannot recover "on the contract," because he has not substantially performed. But he will probably be allowed to recover in quasi-contract, for the fair value of the benefits he has conferred on D. The court will estimate these benefits (which will probably be one-half of the $20,000 annual salary), and will subtract the damage to D of P's not performing the second six months. 1. Construction cases: Quasi-contract recovery by a breaching plaintiff is most often found in construction cases. Here, the builder gets to recover the value to the owner of the work done, even where the work does not constitute substantial performance of the contract. 2. Limited to pro-rata contract price: When a defaulting plaintiff sues in quasi-contract for his restitution interest, recovery is almost always limited to the pro-rata contract price, less the defendant's damages for breach. 3. Willful default: In many states, a defaulting plaintiff may not recover in quasi-contract if his breach is "willful." (Example: Contractor agrees to build a house for Owner for $100,000. The contract expressly provides that all walls will be insulated with non-asbestos-based insulation. Contractor instead knowingly installs asbestos-based insulation, in order to save $2,000 in material costs. Even though the resulting house has substantial value, many courts will not permit Contractor to recover anything at all, on the grounds that his breach was not only material but "willful," in the sense of intentional and for Contractor's financial advantage.) 4. UCC gives partial restitution to breaching buyer: The UCC gives a breaching buyer a right to partial restitution with respect to any deposit made to the seller before the buyer breached. Under §2-718(2), the seller can only keep 20% of the total contract price or $500, whichever amount is smaller — the balance must be refunded to the breaching buyer. IX. FORESEEABILITY A. General rule: The "rule of Hadley v. Baxendale" limits the damages which courts will award for breach of contract. The "rule" says that courts will not award consequential damages for breach unless the damages fall into one of two classes: 1. Arise naturally: The damages were foreseeable by any reasonable person, regardless of whether the defendant actually foresaw them; or 2. Remote or unusual consequences: The damages were remote or unusual, but only if the defendant had actual notice of the possibility of these consequences. Example: P operates a mill, which has suspended operations because of a broken shaft. He brings the shaft to D, a carrier, to have it brought to another city for repairs. D knows that the item to be carried is a shaft of P's mill, but does not know that the mill is closed because of the broken shaft. D negligently delays delivery, causing the mill to stay closed for extra days. P sues for the profits lost during these extra days. Held, P cannot recover for these lost profits. The lost profits were not foreseeable to a reasonable person in D's position, nor was D on notice of the special fact that the mill was closed due to the broken shaft. [Hadley v. Baxendale] B. Parties may allocate risks themselves: The rule of Hadley may always be modified by express agreement of the parties. For instance, if P puts D on notice of the special facts, this may cause damages to be awardable which would not otherwise be. Alternatively, the parties can simply agree that even unforeseen consequential damages shall be compensable. A. General rule: Where P might have avoided a particular item of damage by reasonable effort, he may not recover for that item if he fails to make such an effort. This is sometimes called the "duty to mitigate" rule. (But it's a "duty" only in the sense that if P fails to do it, he'll lose the right to collect damages, not in the sense that P has breached some obligation.) Example: P agrees to work as an employee of D for a two-year period, at an annual salary of $30,000. After two weeks on the job, P is wrongfully fired. P must make reasonable efforts to get another job. If he does not, the court will subtract from his recovery the amount which it believes P could have earned at an alternative job with reasonable effort. Thus if the court believes that P could have lined up a $20,000 a year job, P will only be allowed to recover at the rate of $10,000 per year for the remainder of the contract. 1. Reasonableness: The "duty to mitigate" only requires the plaintiff to make reasonable efforts to mitigate damages. For instance, P does not have to incur substantial expense or inconvenience, damage his reputation, or break any other contracts, in order to mitigate. B. Sales contracts: Here's what the UCC says about an aggrieved buyer or seller's obligation to mitigate: 1. Buyer: If the seller either fails to deliver, or delivers defective goods which the buyer rejects, the buyer must "cover" for the goods if he can reasonably do so — he may not recover for those damages (e.g., lost profits) which could have been prevented had he covered. See UCC §2-715(2)(a) (defining "consequential damages" to include only those losses "which could not reasonably be prevented by cover or otherwise…"). (If buyer does not cover when he could have done so, he will still be entitled to the difference between the market price at the time of the breach and the contract price, but he'll lose the ability to collect consequential damages that he might otherwise have gotten.) 2. Seller: The seller has much less of a duty to mitigate, when it is the buyer who breaches by wrongfully rejecting the goods or repudiating before delivery. The seller can choose between reselling the goods (and collecting the difference between resale price and contract price), or not reselling them (and recovering the difference between market price and unpaid contract price); seller may also be able to recover lost profits. 3. Summary: So in UCC cases, it is really only the buyer who has a practical duty to mitigate. C. Losses incurred in avoiding damages: If the aggrieved party tries to mitigate his damages, and incurs losses or expenses in doing so, he may recover damages for these losses or expenses. As long as plaintiff acted reasonably in trying to mitigate, it does not matter whether his attempt was successful. XI. NOMINAL AND PUNITIVE DAMAGES A. Nominal damages: Where a right of action for breach exists, but no harm has been done or is provable, P may get a judgment for nominal damages. That is, he may recover a small sum that is fixed without regard to the amount of harm he has suffered. B. Punitive damages: Punitive damages are rarely awarded in breach of contract cases. 1. Tort: But if the breach of contract also constitutes a tort, punitive damages are recoverable. (Example: D, a car dealer, sets back the odometer on a used car before selling it to P. D then falsely claims that the car is "new." P will probably be able to recover punitive damages, because seller's act, although it was part of a contract, also constitutes the independent tort of fraud.) a. Bad faith as torts: Many courts now regard a party's bad faith conduct in connection with a contract as being itself a tort, for which punitive damages may be awarded. For instance, if a party breaches voluntarily, in order to make a better deal elsewhere, the court may find that this conduct constitutes bad faith punishable by punitive damages. i. Insurance company refusal to settle: If an insurance company refuses in bad faith to settle a claim that is covered by a policy it wrote, courts are quite likely to hold that the insured has suffered a tort, and can recover punitive damages against the insurer. |