Buisness Law Today Chapter 15

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-DAMAGES

-EQUITABLE REMEDIES

-RECOVERY BASEDON QUASI CONTRACT

-CONTRACT PROVISIONSLIMITING REMEDIES

-ELECTION OF REMEDIES

CHAPIER OUTTII{E TEARI{I I {G OBIECIIVES56Men keep theirengagementswhen it is to theadvantage ofboth not tobreak them.!!

Solon, sixth cenhrry B.c.E.(Atlienian legal reformer)

t64tmCONTRACTS

AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TOANSWER THE FOLLOWING QUESTIONS:

What is the difference between compensatorydamages and consequential damages? What arenominal damages, and when do courts awardnominal damages?

What is the standard measure of compensatorydamages when a contract is breached? How aredamages computed differently in constructioncontracts?

Under what circumstances is the remedy ofrescission and restitution available?

When do courts grant specific performance as aremedy?

What is the rationale underlying the doctrine ofelection of remedies?

l f , lI A I r the Athenian political leader Solon instrr-rcted centuries ago in the chapter-openingtf l l| - - | quotation, a contract will not be broken so long as "it is to the advantage of both"

parties to fulfill their contractual obligations. Normally, a person enters into a conhact with

another to secure an advantage. When it is no longer advantageous for a party to fulfill her

or his conhactual obligations, that party rnay breach the contract. As noted in Chapter 14, a

breach of contract occurs when a party fails to perform part or all of the reqr-rired duties under

a contract.l Once a parf fails to perform or performs inadequately, the other party-the non-

breaching party-can choose one or more of several remedies.The most common remedies available to a nonbreaching party under contract law

include damages, rescission and restitution, specific performance, and reforrnation. As dis-

cussed in Chapter l, courts distinguish behveen remedies at law and remedies in equity.

Today, the remedy at law is normally monetary damages. We discuss this remedy in the first

part of this chapter. Equitable remedies include rescission and restitution, specific perfor-mance, and reformation, all of which we examine later in the chapter. Usually, a court willnot award an equitable remedy unless the remedy at law is inadequate. In the final pages

of this chapter, we look at some special legal doctrines and concepts relating to remedies.

L Restatement (Second) ofContracfs, Section 235(2).

A breach of contract entitles the nonbreaching party to sue for monetary damages. As you

read in Chapter 4, damages are designed to compensate a party for harm suffered as a

result of another's wrongful act. In the context of contract law, damages are designed to

compensate the nonbreaching party for the loss of the bargain. Often, courts say that

innocent parties are to be placed in the position they would have occupied had the con-

hact been fully performed.2

Types of DamagesThere are basically four broad categories of damages:

I Compensatory (to cover direct losses and costs).

2 Consequential (to cover indirect and foreseeable losses).

5 Punitive (to punish and deter wrongdoing).

4 Nominal (to recognize wrongdoing when no monetary loss is shown).

Compensatory and punitive damages were discussed in Chapter 4 in the context of tort

law. Here, we look at these types of damages, as well as consequential and nominal dam-

ages, in the context of contract law.

Compensatory Damages Damages compensating the nonbreaching party for the loss of

the bargain are known as compensatory damages. These damages compensate the iniured

party only for damages actually sustained and proved to have arisen directly from the loss

of the bargain caused by the breach of contract. They simply replace what was lost

because of the wrong or damage.The standard measure of compensatory damages is the difference behveen the value of

the breaching party's promised performance under the contract and the value of her or his

achral performance. This amount is reduced by any loss that the injured party has avoided.

FTxArvrprETll You conhact with Marinot Indushies to perform certain personal services

exclusively for Marinot during August for a payment of $4,000. Marinot cancels the contract

and is in breach. You are able to find another job during August but can earn only $1,000.You normally can sue Marinot for breach and recover $1,000 as compensatory damages. You

may also recover from Marinot the amount that you spent to find the other iob. El Expenses

that are direcdy incurred because of a breach of conhact-such as those incurred to obtain

performance from another source-are called incidental damages.The measurement of compensatory damages varies by type of contract. Certain types

of contracts deserve special mention-contracts for the sale of goods, contracts for the sale

of land, and construction contracts.

SaIe of Goods. In a contract for the sale of goods, the usual measure of compensatory

damages is the difference between the contract price and the market price'r

f.€n-EMFiFlsA MediQuick Laboratories contracts with Cal Computer Industries to pur-

chase ten model UTS nehvork seryers for $8,000 each. If Cal Computer fails to deliver the

ten servers, and the current market price of the seryers is $8,950, MediQuick's measure of

damages is $9,500 (10 X $950), plus any incidental damages (expenses) caused by the

breach. E If the buyer breaches and the seller has not yet produced the goods,

2. Restatement (Second) of Contracts, Section 347;and Section 1-106(l) of the Uniform Commercial Code (UCC).

3. This is the difference behveen the contract price and the rnarket price at the time and place at which the goods

were to be delivered or tendered. [See UCC 2-708, 2-71], and 2-715(l), discussed in Chapter 19.]

16'EIMtrBREACH AND REMEDIES

ll'lTrtf{fiEElE The terms of a contractmust be sufficiently definite for acourt to determine the amount ofdamages to award.

INCIDENTAT DAMAGESDamages awarded to compensatefor expenses that are directlyincurred because of a breach ofcontract-such as those incurred toobtain performance from anothersource.

I66mmmlCONTRACTS

For a summary of howcontracts may be breachedand other information on contractlaw go to

CONSEQUENTIAL DAMAGEsSpecial damages that compensatefor a loss that does not directly orimmediatelv result from the breach(for example, lost profits). For theplaintiff to collect consequentialdamages, they must have beenreasonably foreseeable at the t imethe breach or iniury occurred.

conpensator)' damages normall1, equal the seller's lost profits on the sale, rather than the

difference behveen the contract price and the market price.

Sale of Land. Ordinarily, because each parcel of land is unique, the reinedy for a seller's

breach of a contract for a sale of real estate is specific performance-that is, the buyer is

arvarded the par cel of property for which he or she bargained (specific perfonnance is dis-

cussed nore ftrlly later in this chapter). When tl-ris remedy is ur-ravailable (because the

properh,has been sold, for example) or when the buyer is the party in breach, the mea-

sure of damages is typically the difference behveen the contract price and the n'rarket

price of the lar-rd. The n-rajority of states follow this rule.

Construction Contracts. The measure of dair-rages ir-i a builclir-rg or construction con-

tract varies deper-rdir-rg on which party breaches and when the breach occurs. The owner

can breach at three different stages of the construction:

I Before performance has begun.

2 During performance.

3 Ntei performance has been completed.

If the owner breaches before performance has begun, the contractor cat-t recover ottly

tlie profits tl'rat r,vould l'rave been made on the contract (that is, the total contract price less

the cost of rnaterials and labor) . If the owner breaches during performance, the contractor

can recover the profits plus the costs incurred in partially constructing the buiiding. If the

owner breach es after the construction has been completed, the contractot can recover the

entire contract price plus interest.Wl-ren the contractor breaches the construction contract-either by failing to begin

constructiorr or by stopping work partway through the project-the measure of dan-rages

is the cost of completion, rvhich includes reasonable compensation for any delay in per-

formance. If the contractor finishes late, the measure of dan'rages is the loss of use. The

Concept Summary below sumnarizes the rules concernir-rg the measurement of damages

in breached consfuuction contracts.

Consequential Damages Foreseeable damages that re sult fron-i a party's breach of con-

tract are referrecl to as consequential damages, or special damages. Consecluential dam-

ages differ from con'ipensatory clamages in that they are caused b,v special circttmstances

beyond the contract itself. They flow fron'r the consequences, or results, of a breach.

WLen a seller fails to deliver goods, knowing that the buyer is planning to use or resell

PARTY IN BREACH

0rruncr

dlurner

Owner

{ontra cto r

eontractor

TIME OF BREACH

Before construction has begun.

During construction.

After construction is completed.

Before construction has begun.

Before construction is completed.

MEASUREMENT OF DAMAGES

Profits (contract price less cost of materials and labor).

Profits plus costs incurred up to time of breach.

Contract price plus interest.

Cost above contract price to complete work.

Cenerally, all costs incurred by owner to complete.

those goods imnlediately, consequential damages are awarded for the loss of profits from

the planned resale.| . l , I

lsEXAMptE l5. I l Ul l lnole Cont lacts lo nave e Specl l lc l lem sl l lPPeC io l ler-one l l lat sne

desperately needs to repair her printing press. In her contract with the shipper, Gihnorestates that she must receive the item by Monday, or she will not be able to print her paperand will lose $1,000. If the shipper is late, Gilmore norrnally can recover the consequen-tial damages causecl by the delay (that is, the $3,000 in losses), Ei

'fo recover consequential darrages, the breaching party must know (or have reason toknow) that special circumstances will cause the nonbreaching party to suffer an additional1oss.4 See this chapter's LandmarkintheLaw feature on the following page for a discus-sion of Hadley v. Baxendale, a case decided in England in 1854.

B$siness owners and managerc should realiue that it is sometlmes irnpossible toprex/ent c$ntraet disputes. They should also understand that cclleetlng damagesthrcugh a court judgment requires litigation, which can be exp*nsive and timeconsarming. Furtherrncre, (ourt iudgrnents are cften difficult to emforce,particularly if the breaching party does nst have sufficient assets to pay thedarcages arrvarded.5 For these reasons, parties generally choose to settle thelr€ontract disputes befsre trial rather than litigate in hopes of being alryarded-andbeing able to collect-damages {or other remedies}. In sum, there is *ltisdo*n inthe cld saying, "a bird in the hand is worth two in the bsshj'

Punitive Damages Recall from Chapter 4 that punitive damages are designed to pun-

ish a wrongdoer and to set an example to deter similar conduct in the ftiture. Punitive

dan'iages, or exemplary damages, generally are not awarded in ar-r action for breach of con-

tract. Such damages have no legitimate place in contract law because they are, in essettce,

penalties, and a breach of contract is not unlawful in a criminal sense. A contract is sirr-r-

ply a civil relatior-iship between the parties. The law may compensate one party for the loss

of the bargain-no more and no less.In a few situations, a person's actions can cause both a breach of contract and a tort.

EilaTTLE t57l Two parties establish by contract a certain reasonable star-rdard or duty of

care. Failure to live up to that standard is a breach of the contract. The same act that

breached the contract may also constitute negligence, or it may be an ilitentional tort if,

for example, the breaching party committed fraud. In such a situation, it is possible for

the nonbreaching party to recover punitive damages for the tort in addition to compensa-

tory and consequential dan-rages for the breach of contract. E

Nominal Damages When no actual damage or financial loss resr-rlts from a breach of

contract and only a technical injury is involved, the court may award nominal damages

to tl-ie inr-rocent party. Nominal damages awards are often small, sucl-r as one dollar, but

they do establish that the defendant acted wrongfuliy. Most lawsuits for norninal damages

are brought as a natter of principle under the theory tl-rat a breach has occurred and some

damages must be imposed regardless of actual loss.

4. UCC 2-715(2). See Chapter 20.

5. Colrts dispose of cases, after irials, by entering judgrnents. A judgment may order the losing party to pay monetary

damages to the winning party. Collecting a judgnent, horvever, can pose problems. For exanple, the juclgrnent

debtor rnay be irsolvent (unable to pay his or her bills when they come due) or have onll a small net u'orth, or

exenption laws nay prevent a creditor from seizing the debtor's assets to satis& a debt (see Chapter 26).

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567 ENEffitrBREACH AND REMEDIES

trEIH n seller who does not wishto take on the risk of consequentialdamages can l imit the buyer'sremedies via contract.

NOMINAL DAMAGES

A small monetary award (often onedollar) granted to a plaintiff when noactual damage was suffered.

568 llNIIi@CONTRACTS

The rule that notice of special ("consequentialJcircumstances must be given if consequential damagesare to be recovered was first enunciated in Hadley uBaxendole,a a landmark case decided in 1854.

Case Background This case involved a broken crankshaft used in a flour mill run bythe Hadley family in Gloucester, England. The crankshaft attached to the steam engine inthe mill broke, and the shaft had to be sent to a foundry located in Greenwich so that anew shaft could be made to fit the other parts of the engine.

The Hadleys hired Baxendale, a common carrier, to tlansport the shaft fromGloucester to Greenwich. Baxendale received payment in advance and promised todeliver the shaft the following day. lt was not delivered for several days, however. As aconsequence, the mill was closed during those days because the Hadleys had no extracrankshaft on hand to use. The Hadleys sued Baxendale to recover the profits they lostduring that time. Baxendale contended that the loss of profits was "too remote."

In the mid-l8o0s, it was common knowledge that large mills, such as that run by theHadleys, normally had more than one crankshaft in case the main one broke and had tobe repaired, as happened in this case. lt is against this background that the parties

argued their respective positions on whether the damages resulting from loss of profits

while the crankshaft was out for repair were "too remote" to be recoverable.

The lssue before the Court and the Court's Ruling The crucial issue beforethe court was whether the Hadleys had informed the carrier, Baxendale, of the specialcircumstances surrounding the crankshaft's repair, in particular that the mill would haveto shut down while the crankshaft was being repaired. lf Baxendale had been notif ied ofthis circumstance at the time the contract was formed, then the remedy for breachingthe contract would have been the amount of damages that would reasonably followfrom the breach-including the Hadleys' lost profits.

In the court's opinion, however, the only circumstances communicated by the Hadleysto Baxendale at the time the contract was made were that the item to be transportedwas a broken crankshaft of a mill and that the Hadleys were the owners and operators ofthat mill. The court concluded that these circumstances did not reasonably indicate thatthe mill would have to stop operations if the delivery of the crankshaft was delayed.

Today, the rule enuncioted by the court inthis cose still opplies. When domages ore oworded, compensotion is given only for thoseinjuries thot the defendont could reosonqbly hove foreseen os o probable result of theusuol course of events following o breoch. lf the injury comploined of is outside the usuolond foreseeable course of events, the plointiff must show specifically thot the defendonthod reason to know the focts ond foresee the injury. This rule opplies to contracts in theonline environment os well. For exomple, suppose thot o Web merchont /oses business(ond profits) due to o computer system's failure. lf the foilure wos coused bymolfunctioning softwore, the merchont normolly moy recover the lost profits from thesoftwore maker if these consequentiol domoges were foreseeable.

To bcote information on the web concerning fhe Hadley v.

Baxendale decision, go to this text's Web site ot"Chopter | 5," and click on "URLs for Londmorks!'

a. 9 Exch. 341, 156 Eng.Rep. 145 (1854).

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570 EIIIECONTRACTS

CASE l5. l -Cont inued

f N THE W0RDS 0F THE COURT . . . MARNa, Justice.

DECISI0N AND REMEDY rtre supreme court of NorthDakota affirmed the lower court's judgment' The state

supreme court concluded that the lower court did not

misapply the law in finding that Hanson had attempted to

mitigate his damages and that the evidence supported the

lower court's findings on lost profits.

x * * fBoeder] claims Hanson did not mitigate his dan-rages because Hanson had an

opportr-rnity to continue farming the Boeder land, which r'vould have substantially

*d."1.1n;t damages, and chose not to.

x * x For the breach of an obligation arising from contract, the measure of damages,

except when othetwise expressly provided by the laws of this state, is the amount which will

com.pensate the party aggrieted for all the detriment proximately caused thereby or which in

the ordinary course of thi,ings would be likely to result therefrom. No damages can be recov--

ered for a Lreach of contract if they are not clearly ascertainable in both their nature and

ori gin. lF,mphasis added. lA person injured by the wrongful acts of another has a du[, to mitigate or minimize

the damages and must protect himself if he can do so with reasonable exertion or at tri-

fling expJnse, and can i..ou", from the delinquent party only such_damages as he could

not, wiih reasonable effort, have avoided. The du$ to mitigate damages is sometimes

referred to as the doctrine of avoidable conEequences' fEmphasis added.]

The flower] court found that Hanson tried to mitigate his damages by looking for other

farmland to rent, but was unsuccessful. The couri also found that Hanson was farming

4,000 acres including the land he leased from Boeder, but had the manpower and equip-

ment to farm up to 5,000 acres. The court concluded that even if Hanson was able to find

other farmland to rent, it would not have been replacement land but land to expand his

farming operation, and therefore it would not have reduced his damages.

The euidence presented at trial supports the court's findings. Hanson testified ihat he

was not aware of any farmland available for rent and he ran advertisements in the iocal

newspapers looking for farmland to rent. He also testified that during the course of the

l"^r., h" was farming a total of 4,000 acres but he had the ability to farm 5,000 acres, and

he was always looking for more land to rent to expand his farming operation.

Boeder agrees ihaiHanson attempted to find other farmland to rent and adn'rits he did

not present any evidence to rebut Hanson's claim ihat he was unable to find any other

land available to rent.

F0R CRITICAL ANAtYSIS-SocialConsideration ouring the triol, Boeder tried to

retract his repudiotion of the leose to ollow Hanson to continue

forming for the rest of the lease term. Should the court hove

considered this on occeptoble way for Hanson to mitigate his

damoges?

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TIQUIDATED DAMAGESAn amount, stipulated in a contract,that the parties to the contractbelieve to be a reasonableestimation of the damages that willoccur in the event of a breach.

[ iquidated Damages versus Penal t iesA liquidated damages provision in a contract specifies that a certain dollar amount is to

be oaid in the evenl of a future default or breach of contract. (Liquidated means deter-

mined, settled, or fixed.) For example, a provision requiring a construction contractor to

pay $300 for every day he or she is late in completing the proiect is a liquidated damages

provision. Liquidated damages differ frorn penalties. A penalty specifies a certain amountto be paid in the event of a defar-rlt or breach of contract and is designed to penalize thebreaching party. Liquidated damages provisioirs normally are enforceable. In contrast, ifa court finds that a provision calls for a penalty, the agreement as to the amount will notbe enforced, and recovery will be limited to actual damages.6

To determine whether a particular provision is for liquidated damages or for a penalty,the court must ans\\et hvo questions:

I At the time the contract was formed, was it apparent that darnages would be difficultto estimate in the event of a breach?

2 Was the amount set as damases a reasonable estimate of those potential damages andnot excessive?7

If the answers to botl-r questions are yes, the provision normally will be enforced. If eitheranswer is no, the provision normally wil l not be enforced. Liquidated darnages provisionsare frequently used in construction contracts because it is difficult to estimate the amountof damages that would be caused by a delay in completing the work.

Should o court enforce d liquidated domoges clouse when the omount due under thotclouse exceeds the actuol value of the controcted goods so significantly thot it seemsunfoir? A court had to answer this question in a case involving leased equipment. EatonHydraulics, Inc., entered a contract to lease nearly $9 mill ion of computer equipment fromWinthrop Resources Corporation, a computer leasing company. Four years later, Winthropsued Eaton for breach of contract, alleging that Eaton had failed to meet numerous paymentobligations (often because the payments were late), failed to properly maintain the equip-ment, and failed to properly pack and ship the equipment back to Winthrop. The parties' con-tract included a l iquidated damages clause that provided a formula for calculating the"Casualty Loss Value (CLV)," which would be the damages in the event of a breach.

Based on this clause, Winthrop claimed that Eaton was liable for more than $4 mill ion indamages. Eaton argued thatthe CLVwas an unreasonable and unenforceable penalty. Eatonpresented evidence showing that when the lease ended and the computers were returnedto Winthrop, each had a fair market value of about 975. The value calculated under the CLV,however, was behrueen 9500 and gToo-considerably more than four times their marketvalue. The court rejected Eaton's argument, noting that the provision was "clearly not a fair

market value calculation." The court held that the l iquidated damages provision was proper

because of "the speculative nature of the value of the computers at termination of the lease

schedules." The court reasoned that Winthrop and Eaton were both sophisticated interna-tional companies that had negotiated this contract knowing that the damages for breachingit could be several t imes the fair market value of the equipment. In essence, the court wouldnot consider whether the amount due under the l iquidated damages clause was fair becausethe parties were sophisticated businesses that had agreed on the method of calculation.s

@

The Concept Summary on the next page summarizes the rules on the availability ofthe different types of damages.

6. This is also the rule under the UCC. See UCC 2-718( l ) .

7. Restatement (Second) ofContracts, Section 356(l).

8. Winthrop Resources Corp. tt. Eaton Hydraulics, Inc., ]61 F.3d 465 18th Clr. 2004)

]7I GIMEEBREACH AND REMEDIES

PENATTYA contractual clause that states thata certain amount of monetarydamages will be paid in the eventof a future default or breach ofcontract. The damages are aounishment for a default and nota measure of compensation for thecontract's breach. The agreementas to the penalty amount will notbe enforced, and recovery will belimited to actual damages.

572 IINIIUEICONTRACTS

REMEDY

CompensatoryDamager

Consequent ialDamages

Punit ive Damages

Nominal Damages

Liquidated 0amages

RESTITUTIONAn equitable remedy under whicha person is restored to his or heroriginal position prior to loss orinjury or placed in the position heor she would have been in had thebreach not occuned.

AVAILABITITY

A party sustains and proves an injury arisingdirectly from the loss of the bargain.

Special circumstances, of which the breach-ing party is aware or should be aware,cause the injured party additional loss.

Damages are normally available only whena tort is also involved.

There is no financial loss.

A contract provides a specific amount tobe paid as damages in the event that thecontract is later breached.

RES U tTThe injured, party. is compensated for theloss of the barsain.

The injured party is given the entire beneflof the bargain, such as forgone profits.

The wrongdoer is punished, and others aredeterred from committing similar acts.

Wrongdoing is established without actualdamages being suffered. The plaintiff is awardeda nominal amount (such as gl) in damages.

The nonbreaching party is paid the amountstipulated in the contract for the breach, unlessthe amount is construed as a penalty.

ti,rl tittti*lii,.

In some situations, damages are an inadequate remedy for a breach of contract. In thesecases, the nonbreaching party may ask the court for an equitable remedy. Equitable reme-dies include rescission and restitution, specific performance, and reformation.

Rescission and Rest i tut ionAs disctrssed in Chapter 14,rescission is essentially an action to undo, or cancel, a contract-to return nonbreaching parties to ihe positions that they occupied prior to the transaction.When fraud, mistake, duress, or faiiure of consideration is present, rescission is available.The failure of one party to perform under a contract entitles the other party to rescind ihecontract.e The rescinding party must give prompt notice to the breaching party.

Restitution To rescind a contract, both parties generally must make restitution to eachother by returning goods, property, or funds previously conveyed.l0 Ifthe physical prop-erty or goods can be returned, they must be. If the property or goods have been consumed,restitution must be made in an equivalent dollar amount.

Essentially, restitution involves the recapture of a benefit conferred on the defendantthat has unjustly enriched her or him. Andrea pays $32,000 to Myles inreturn for his promise to design a house for her. The next day, Myles calls Andrea and tellsher that he has taken a position with a large architectural firm in another state and cannotdesign the house. Andrea decides to hire another architeci that afternoon. Andrea canrequire restitution of $12,000 because Myles has received an un just benefit of $32,000. E

Restitution Is Not Limited to Rescission Cases Restitution n'ray be required when acontract is rescinded, but the right to restitution is not limited to rescission cases.

9. The rescission discussed here refers to unilateral rescission, in which only one party u'ants to undo the contract.ln mufual rescission, both parties agree to undo the contract. Mutual rescission discharges the contract; unilateralrescission is generally available as a rernedy for breach of contract.10. Restatement (Second) of Contracts, Section 370.

Restitrition may be sought in actions for breach of contract, tort:ctions, and other actior-rs at law or in equity. Usually, restitutionian be obtained when funds or property has been transferred bynistake or because of fraud. An award in a case may include restihrtion of funds or property obtained through embezzlement, con-

'. ersion, theft, copyright infringement, or misconduct by a party ina confidential or otl-rer special relationship.

Speci f ic PerfotmanceThe equitable remedy of specific performance calls for the perfor-nrance of the act promised in the contract. This remedy is often:Llractive to a nonbreaching party becar,rse it provides the exact bargain pron-rised in the;onhact. It also avoids some of the problems inherent in a suit for monetary damages.Frrst, the nonbreaching party need not worry about collecting the judgment. Second, thenonbreaching party need not look around for another contract. Third, the actual perfor-nance n-ray be more valuable than the monetary damages.

Norn'raily, however, specific performance_ will not be granted r-rnless the party's legalremedy (monetary damages) is inadequate.tl For this reason, contracts for the sale of

.oods rarely qualify for specific performairce. Monetary damages ordinarily are adequatein such situations because substantially identical goods can be bought or sold in the mar-ket. Only if the goods are unique will a court grant specific performance. For instance,paintings, sculptures, and rare books and coins are often unique, and n-ionetary damages'n'ill not enable a buyer to obtain substantially identical srrbstitutes in the market.

Sale of Land A court will grant specific performance to a br-ryer in an action for a breach

'rf contract involving the sale of land. In this situation, the legal remedy of monetary dam-:ges will not cornpensate the buyer adequately because every parcel of land is unique;,r'rbriously, the buyer cannot obtain the same land in the same location elsewhere. Only,,r'hen specific performance is unavailabie (for exarnple, when the seller has sold the prop-erh'to sorneone else) wil l damages be awarded instead.

Is specific performance warranted when one of the parties has substantially-but noti1lr'-performed under the contract? That was the question in the following case.

l l. Restatement (Second) of Contracfs, Section 359

Court of Appeals of Indiana, 842 N.E.2d 586 (2006).

i ?, BAcKcRoUND AND FAcTs

375 GIEffitrBREACH AND REMEDIES

Suppose thot a seller controds to sellsome valuoble coins to a buyer. Ifthe seller breoches the contract,would specific performonce be onoppropriate remedy for the buyer toseek? Why or why not?(PhotoDisc/Cetty lmages)

SPECIFI€ PERFORMANCE

An equitable remedy requiringexactly the performance that wasspecified; usually granted only whenmonetary damages would be aninadequate remedy and the subjectmatter of the contract is unrque.

over on Stainbrook, and he died. Stainbrook's son Davidbecame the executor of his father's estate. David asked Low towithdraw his offer to buy the forty acres. Low refused and fileda suit in an Indiana state court against David, seeking to enforcethe contract. The court ordered specific performance. Davidappealed to a state intermediate appellate court, arguing,among other things, that his father's contract with Low was"ambiguous and inequitablel '

I \:i-.S/ ;;, 'qJrs*/. ; In April 2004, Howard

Stainbrook agreed to sell to Trent Low forty acres of land inJennings County, Indiana, for $45,000. Thirty-hruo of the acreswere wooded and eight were tillable. Under the agreement,Low was to pay for a survey of the property and other costs,including a tax payment due in November. Low gave Stainbrooka check for $1,000 to show his intent to fulfill the contract. Theyagreed to close the deal on May I l, and Low made financialarrangements to meet his obligations. On May 8, a tractor rolled CASE 15.2-Cont inues next page

r74 t!8tm!tCONTRACTS

CASE 15.2-Cont inued

f N Il{E WORDS 0t THE C0URT . . . vAtDtK, Judge.

il ;;a. fDavid] * * * contends that Low failed to preserve the remedy of specific per-

formance here because he failed to perform sufficiently r-rnder the Agreement. * * * TheEstate argues that "in order to be entitled to specific performance, the claimant has the bur-den to prove full and complete performance on their part of the conhact." Low x * * arguesthat specific performance was appropriate because he either substantially performed his obli-gations under the Agreement or offered to do so, and this, rather than full and complete per-formance, is all that is required to presewe a claim for specific performance.

We agree with Low. Because Low offered to perform his obligations under theAgreement, specific performance was a proper remedy. x * * The Estate argues that Lowis not entitled to the remedy of specific performance because he did not pay theNovember 2004 property taxes. Low, however, * * * offered to make the tax paymentand the Estate refused his offer.

The Estate also contends * * * that specific performance was inappropriate becauseLow failed to tender the purchase price listed in the Agreement and arrange for a surveyof the land before the closing date. * * * The Estate's argument assumes that a party maynot be granted specific performance unless that party has fully and completely performedunder the terms of the contract. On the contrary, x * * specific performance is an appro-priate remedy to a pafi who has substantially performed under the terms of the contract.Regarding Low's payment of the purchase price, we note that Low * * * had obtainedfinancing before the closing date, and there is nothing x x * to indicate that he was notprepared to meet his financial obligations at that time. Further, * * * shortly afterStainbrook's death, the Executor of the Estate requested that Low withdraw his offer, andLow declined to do so, indicating that he was prepared to go forward. Regarding Low'sfailure to order a land survey, the Estate presents no evidence to suggest that this matter,particularly in isolation, reaches the level of failure to perform under the Agreement, andr".d"fll;r: to sanction such a rule. [Emphasis added.]

The Estate finally argues that the trial court should not have awarded specific perfor-mance here because the Agreement between Low and Stainbrook was unfair. * * *

Since Low was hventy-hvo years old and Stainbrook was eighty-nine at the time of con-tract, and because the combined estimates of property and timber values was as high as$121,000.00 and Low and Stainbrook had agreed to a $45,000.00 purchase price, theEstate argues that the trial court should have found the contract to be unfair or uncon-scionable and to have found that Low would be uniustly enriched by its execution.

* * * The Estate stipulated at trial that Stainbrook was co*petent at the time of con-tract, and evidence was presented that Stainbrook consulted a lawyer regarding theAgreement and that he insisted upon several handwritten changes to the contract thatbenefited his own interests. We find no support for the Estate's contention that Stainbrookwas anything less than a party entirely capable of entering into this Agreement, nor for itscontention that the Agreement was unfair.

DICISI0N AND REMEDY rne state intermediate party's substantial performance is sufficient to support aappellate court held that specific performance was an court's order for specific performance. Here, "Low bothappropriate remedy in this case and affirmed the lower offered to perform and substantially performed hiscourt's order. The appellate court explained that a contracting contractual obligationsl'

CASE 15.2-Cont inues next page

tASE t5.2-Cont inued

' l_ t "

tE= wHY ls THls cAsE IMPORTAryT? rhecourtf!$ reaffirmed the principle thot "[s]peciftc performonce is

t iotter of course when it involves contracts to purchose reol

:stote." The court also emphosized that "[o] porty seeking spe-

dfic performonce of o real estqte controct must prove thot he

575 gmfiHEBREACH AND REMEDIES

has substontiolly pertormed his contracl obligotions or offeredto do sol'The court's reasoning underscores the importance offocusing on the elements of o principle to resolve a cose foirly-

@

Contracts for Personal Services Personal-service contracts require one party to work

:,,rsonally for another party. Courts norrnally refuse to grant specific performance of con-

::its for personal services. This is because to order a party to perfornr personal services

.:rinst his or her will arnounts to a type of involuntary servitude, which is contrary to

.-,- public policy expressed in the Thirteenth Amendment to the U.S. Constitution.

l,frrrlover, the courts do not want to monitor contracts for personal services.

€TAMilE rJ^el If you contraci with a brain sllrgeon to perform brain surgery on yolr

,rd the sllrgeon refuses to perform, the court will not compel (and you certainly would

.-.i ri'ant) the surgeon to perform under these circunstances. There is no way the court

-rn assure n-reaniigful p.iforrr.lrtt.. in such a situation.l2 @

Ref ormat ionl.;+omntiort is an equitable rernedy used when the parties have imperfectly expressed tl-reir

.-:reement in writing. Reforrnation allows a court to rewrite the contract to reflect the par-

:..s' lrue intentions. Courts order reformation rnost often when fraud or rnutual mistake

: present. fBExAMFG-r5sl If Keshan contracts to buy a forklift from Shelley but the writ-

=1 contract refers to a crane, a mutual rnistake has occurred. Accordingly, a court could

;iorm tfie contract so that the writing conforms io the parties' original intention as to

'. i ich piece of equipment is being sold' ECourts frequently reform contracts in two other situations. The first occurs when hvo

:ties who have made a binding oral contract agree to put the oral contract in writing

-1t. in doing so, rnake an error in stating the terrns. Universally, tlre courts allow into evi-

*-1ce the correct terms of the oral contract, thereby reforming the written contract. The

..cond situation occurs when the parties have executed a written covenant not to cotn-

:.te (see Chapter I l). If the covenant not to compete is for a valid and legitimate PurPose.uch as the sale of a business) but the area or tirne restraints are unteasonable, some

- rurts will reform the restraints by making thern reasonable and will enforce the er-rtire

- ,-ntract as reforn-red. Oiher courts, however, will ihrow the entire restrictive covenant out

.. illegal. Exhibit l5-l or-r the following page grapl'rically preser-rts the remedies, includ-

rq reforr-nation, that are available to ihe nonbreaching party.

R..cali from Chapter B that a quasi contract is not a true contract but rather a fictional

:rrltLract that is imposed on the parties to prevent unjust enrichment. Hence, a quasi con-

.:ct provides a baiis for relief when no er-rforceable contract exists. The legal obligation

l?. Similarly, courts often refuse to order specific performance of constructiotl contracts becanse coutts are not set uP

- , 'perale ar col ls l rucf io l l suPCrvi50rs or el lg l l leers.

575 llNIImEtCONTRACTS

FfiT.Efffiim The function of aquasi contract is to impose a legalobligation on a party who made noactual promise.

arises because the law considers that the party accepting the benefits has made an implied

promise to pay for them. Generally, when one party confers a benefit on another party,justice requires that the party receiving the benefit pay a reasonable value for it.

When Quasi Contracts Are UsedQr-rasi contract is a iegal theory under which an obligation is imposed in the absence of

an agreement. It allows the courts to act as if a contract exists when there is no actual con-tract or agreement behveen the parties. The couris can also use this theory when the par-ties have a contract, but it is unenforceable for some reason.

Quasi-contractual recovery is often granted when one party has partially performedunder a contract that is unenforceable. It provides an alternative to suir-rg for damages and

allows the party to recover the reasonable value of the partial performance.

lxExAMpLE r5Tol Ericson contracts to build two oil derricks for Petro Industries. The der-

ricks are to be built over a period of three years, but the parties do not create a written

contract. Therefore, the Statute of Frauds will bar the enforcement of the contract.l3 After

Ericson compleies one derrick, Petro Industries informs him il-rat it will not Pay for the

derrick. Ericson can sue Petro Industries under the theory of quasi contract. E

The Requirements of Quasi ContractTo recover on a quasi contract theory, the party seeking recovery must show the following:

t The party conferred a benefit on the other party.

2 The party conferred the benefit with the reasonable expectation of being paid.

5 The pariy did not act as a volunteer in conferring the benefit.

4 The party receiving the benefit would be unjustly enriched by retaining the benefit

wi thout pay ing for i t .

lgExAMprEls.fil In Example I 5.10, Ericson can sue in quasi contract because all of the

conditions for quasi-contractual recovery have been fulfilled. Ericson built the oil derrick

with the expectation of being paid. The derrick conferred an obvious benefit on Peho

Industries, and Petro Industries would be unjustly enriched if it was allowed to keep the

derrick without paying Ericson for the work. Therefore, Ericson should be able to recover

the reasonable vaiue of the oil derrick that was built (under the theory of quantum

13. Contracts that by their terms cannot be performed within one year from the day after the date of contract

formation must be in writ ing to be enforceable (see Chapter 13).

r-

meruitl4 -"as mllch as he or she deserves"). The reasonable value is ordinarily equal to the

iair market value. E

-\ contract may include provisions stating that no damages can be recovered for certain

hpes of breaches or thatdamages wil l be l imited to a maximum atnottnt. The contract

may also provide that the only remedy for breach is replacenent, r-epair, or refund of the

pui.hrr. price. Provisions stating that no damages can be recovered are callecl exculpatory

,lourn, (see Chapter ll). Provisions that affect tfie availability of certain remeclies are

called limitation-of-liability clauses.

Whether these contract provisions ar-rd clauses will be enforced clepends on the type of

breach that is excused by the provision. For example, a clause exch-rding liability for neg-

ligence may be enforced in some cases. When an exculpatory clause for negligence is

cJntained in a contract made between parties who have roughly equal bargaining porver,

the clause usr-rally will be enforced. The Uniform Commercial Code (UCC) specifically

allows limitation-ofliability clauses to be included in contracts for the sale of goods, as

ri. i l1 be discussed in detail in Chapter 20.15 A provision excluding l iabil i ty- for fraudulent

or intentional injury, however, will not be enforced. Likewise, a clause excluding liabilit,v

tbr illegal acts or violations of the law will not be enforced.

At iir,t. ir-r the following case was the enforceability of a limitation-ofJiability clause in

a home-inspection cor-rtract.

14. Pronounced ftuahrl-tuhm mehr-oo-rvuht

15. LICC 2-719.

3il ffilTffiiErlBREACH AND REMEDIES

fi|.ftIll Exculpatory clauses may beheld unconscionable, dePending onthe relative bargaining positionsof the parties and the importance tothe oublic interest of the businessseeking to enforce the clause.

Such causes include, but are not limited to, CA[s negligence,

errors, omissions, * * * [or] breach of contractl' Lucier

reluctantly signed the contract. On CALs behalf, Al Vasys

performed the inspection and issued a rePort' The buyers paid

CAL $385. Shortly after Lucier and Haley moved into the house,

they noticed leaks, which required roof rePairs estimated to cost

$8,OOO to $10,000. They filed a suit in a New Jersey state court

against CAL and others, seeking damages for the loss. CAL filed

a motion for summary judgmen! claiming that under the

limitation-of-liability clause, its liability, if any, was limited to one-

half of the contract price, or $192.50. The court granted the

motion. The plaintiffs appealed to a state intermediate appellate

court.

Superior Court of NewJersey, Appel,late Division, 366 N.J.Super. 485,841 A2d9O7 (2OO4)'

lawi ibrarv.rutgers.edu/search.shimla

BACKGROUND AND FACTSEric Lucier and Karen Haley, first-

time home buyers, contracted to buy a single-family home for

SI2B,5OO from James and Angela Will iams in Berlin Township,

New Jersey. The buyers asked Cambridge Associates, Limited

(CAL), to perform a home inspection. CAL presented the buyers

with a contract that limited cAljs liability to "$500, or 50o/o of

fees actually paid to CAL by Client, whichever sum is smaller'

a. Click on the link to "search by party name'" Select'Appellate Division,"

and type "Lucier" in the first box and "Williams" in the second box Click

on "submit Form" to access the opinion. Rutgers University School of Law

in Camden, New Jersey, maintains this Web site.

lN THE WQRDS 0F Tt lE CQURT . " . L1SA, J.A.D. [Judge,Appel late Div is ion]

****

we beein our analysis of the enforceabiliq' of tl-re lirnitation of liabilitv clause with the

f.rndarneital proposition that contracts will be enforced as written. Ordiliarily, courts will

not rewrite contracts to favor a party, for the PurPose of giving that party a better bargain'

However, courts have not hesitated to strike limitecl liabilih- clauses that are uncon-

scionable or in violation of public policy. CASE 15.3-Cont inues next Page

I78 :tr[iIUETCONTRACTS

CASE 15.5-Cont inued

DECISI0N AND REMEDY rhe state intermediateappellate court held that the provision was unenforceable.The limitation-of-liability clause in the CAL contract did notlimit the plaintiffs' recovery. The court reversed the ruling ofthe lower court and remanded the case for furtherproceedings.

There is no hard and fast definition of unconscionability. x x x Unconscionability isan amorphous concept obttiously designed to establish a broad business ethic. The standardof conduct that the term implies is a lack of good faith, honesQ in fact and observance of

fair dealing. fEmphasis added.]In determining whether to enforce the terms of a contract, we look not only to its adhe-

sive nature, but also to the subject matter of the contract, the parties'relative bargainingpositions, the degree of economic compulsion motivating the adhering party, and thepublic interests affected by the contract. Where the provision limits a party's liability, wepay particular attention to any inequality in the bargaining power and status of the par-tieq as y.f ,, the substance of the contract.

We also focus our inquiry on whether the limitation is a reasonable allocation of riskbetween the parties or whether it runs afoul of the public policy disfavoring clauses whicheffectively immunize parties from liability for their own negligent actions. To be enforce-able, the amount of the cap on a party's liability must be sufficient to provide a realisticincentive to act diligently.

Applying these principles to the home inspection contract before us, we find the limi-tation of liability provision unconscionable. We do not hesitate to hold it unenforceablefor the following reasons: (l) the contract, prepared by the home inspector, is one of adhe-sion; (2) the parties, one a consumer and the other a professional expert, have grosslyunequal bargaining status; and (3) the substance ofthe provision eviscerates the contractand its fundamental purpose because the potential damage level is so nominal that it hasthe practical effect of avoiding almost all responsibility for the professional's negligence.Additionally, the provision is contrary to our state's public policy of effectuating the pur-pose of a home inspection contract to render reliable evaluation of a home's fitness forp"rf}r; and holding professionals to certain industry standards.

The foisting of a contract of this type in this setting on an inexperienced consumerclearly demonstrates a lack of fair dealing by the professional. * x *

x x * If, upon the occasional dereliction, the home inspector's only consequence isthe obligation to refund a few hundred dollars (the smaller of fifu, percent of the inspec-tion contract price or $500), there is no meaningful incentive to act diligently in the per-formance of home inspection contracts. To compound the problem, such excessivelyrestricted damage allowance is grossly disproportionate to the potential loss to the home-buyer if a substantial defect is negligently overlooked. The impact upon the homebuyercan be indeed monumental, considering issues such as habitability, health and safety, and0"1":t1*:Oligations.

Of course, we express no comment on whether or not Vasys or CAL breached any dutyto Lucier and Haley under their agreement. Our holding here is only that if they areliable, the extent of any damages for which they should be liable is not limited by theterms of the contract.

F0R CRITICAt ANALYSIS-SocialConsideration whot isthe difference between

the limitation-of-liobility clause in this cose and on exculpotoryclouse (discussed in Chopter I I on poge 301)?

tr

579 EIIUHtrBREACH AND REMEDIES

In many cases, a nonbreaching party has several remedies available. Because the remedies

may be inconsistent with one"artother, the common law of contracts requires the- party to

.hoor. which remedy to pursue. This is called elsction of remedies. ]\ lurpoge of the doc-

trine of electio,t of ,emedies is to prevent double recovery' FExEMFIFEA )efferson agrees

io sell his land to Adams. Then iefferson changes his mind and repudiates the contract'

Adams can sue for compensatory damages or for specific performance..If Adams receives

a"-"g.r as a result of th. br"".h, she sf,ould not also be granted specific l9rfoP.anle of

the sales contract because that would mean she would unfairly end up with both the land

and the damages. The doctrine of election of remedies requires Adgs to choose the rem-

edy she wantsl and it eliminates any possibility of double recovery. l51 ,'In

contras! remedies under ihe UCC are cumulative. They include-all of the reme-

dies available under the UCC for breach of a sales or lease contract.lb We will examine

the ucc provisions on limited remedies in chapter 20, in the context of ihe remedies

available on the breach ofa contract for the sale or lease ofgoods.

le S"" UCC Z-lO' ,na Z-tt .

llE t$ltfllfl Which remedy aplaintiff elects dePends on thesubject of the contract, thedefenses of the breaching PartY'anv tactical advantages of choosinga particular remedY, and what theplaintiff can Prove with resPect tothe remedy sought'

producing. Bruno is widely known as the best motorcycle

stuntman in the business, and the movie, Xfreme Rlders, has

numerous scenes involving high-speed f reestyle street-bike

stunts. Filming is set to begin August I and end by December I

so that the film can be released the following summer' Both

parties to the contract have stipulated that the filming must end

on time in order to capture the profits from the summer movie

market. The contract states that Bruno will be paid l0 Percent

of the net proceeds from the movie for his stunts' The contract

also includes a liquidated damages provision, which specifies

that if Bruno breaches the contract, he will owe X Entertainment

gl million. In addition, the contract includes a limitation-of-

liability clause stating that if Bruno is injured during filming,

X Entertainment's liability is limited to nominal damages' Using

the information presented in the chapter, answer the following

questions.

I One day, while Bruno is preparing for a difficult stunt, he

gets into an argument with the director and refuses to

perform any stunts' Can X Entertainment seek specific

performance of the contract? Why or why not?

2 Suppose that while performing a high-speed wheelie on a

motorcycle, Bruno is injured by an intentionally reckless act

of an X Entertainment employee' Will a court be likely to

enforce the limitation-of-liability clause? Why or why not?

5 What factors would a court consider to determine if the

gt mill ion l iquidated damages clause is valid or is a penalty?

4 Suppose that there was no l iquidated damages clause

(or the court refused to enforce it) and X Entertainment

breached the contract. The breach caused the release of the

film to be delayed until after summer. Could Bruno seek

consequential (special) damages for lost profits from the

summer movie market in that situation? Explain'

Kyle Bruno entersinto a contract withX Entertainment to be

a stuntman in a moviethat X Entertainment is

consequential damaSes 566incidental damages 565liquidated damages 570

mitigation of damages 569nominal damages 557penalty 571

restitution 372specific Performance 575

580 llNIIUnCONTRACTS

Damages(See pages 365-372.)

Rescissionand Restitution(See pages 372-373.)

Specific Performance(See pages 373-375.)

Reformation(See page 375.)

COMMON REMEDIES AVAILABLE TO NONBREACHING PARTY

The legal remedy designed to compensate the nonbreaching party for the loss of the bargain. Byawarding monetary damages, the court tries to place the parties in the positions that they wouldhave occupied had the contract been fully performed. The nonbreaching party frequently has aduty to mitigate (lessen or reduce) the damages incurred as a result of the contract's breach.Damages can be classified in the following broad categories:

1. Compensotory damages-Damages that compensate the nonbreaching party for injuriesactually sustained and proved to have arisen directly from the loss of the bargain resulting fromthe breach of contract.

a. ln breached contracts for the sale of goods, the usual measure of compensatory damages isthe difference between the contract price and the market price.

b. In breached contracts for the sale of land, the measure of damages is ordinarily the same asin contracts for the sale of goods.

c. ln breached construction contracts, the measure of damages depends on which partybreaches and at what stage of construction the breach occurs.

2. Consequential damages-Damages resulting from special circumstances beyond the contractitself; the damages flow only from the consequences of a breach. For a party to recoverconsequential damages, the damages must be the foreseeable result of a breach of contract,and the breaching party must have known at the time the contract was formed that specialcircumstances existed that would cause the nonbreaching party to incur additional loss onbreach of the contract. Also called special damages.

3. Punitive domoges-Damages awarded to punish the breaching party. Usually not awarded inan action for breach of contract unless a tort is involved.

4. Nominal domoges-Damages small in amount (such as one dollar) that are awarded when abreach has occurred but no actual injury has been suffered. Awarded only to establish that thedefendant acted wrongfully.

5. Liquidoted domoges-Darnages that may be specified in a contract as the amount to be paidto the nonbreaching party in the event the contract is breached in the future. Clauses providingfor liquidated damages are enforced if the damages were difficult to estimate at the time thecontract was formed and if the amount stipulated is reasonable. lf the amount is construed tobe a penalty, the clause will not be enforced.

l. Rescission-A remedy whereby a contract is canceled and the parties are restored to theoriginal positions that they occupied prior to the transaction. Available when fraud, a mistake,duress, or failure of consideration is present. The rescinding party must give prompt notice ofthe rescission to the breaching party.

2. Restitution-When a contract is rescinded, both parties must make restitution to each other byreturning the goods, property, or funds previously conveyed. Restitution prevents the unjustenrichment of the parties.

An equitable remedy calling for the performance of the act promised in the contract. This remedyis available only in special situations-such as those involving contracts for the sale of uniquegoods or land-and when monetary damages would be an inadequate remedy. Specificperformance is not available as a remedy for breached contracts for personal services.

An equitable remedy allowing a contract to be "reformed," or rewritten, to reflect the parties'trueintentions. Available when an agreement is imperfectly expressed in writing.

58I EItrEETEBREACH AND REMEDIES

Recovery Basedon Quasi Contract(See pages 375-377.)

Contract ProvisionsLimiting Remedies(See pages 377-378.)

Election of Remedies(See page 379.)

An equitable theory imposed by the courts to obtain justice and prevent unjust enrichment in asituation in which no enforceable contract exists. The party seeking recovery must show thefollowing:

t. A benefit was conferred on the other party.

2. The party conferring the benefit did so with the expectation of being paid.

3. The benefit was not volunteered.

4. Retaining the benefit without paying for it would result in the unjust enrichment of the partyreceiving the benefit.

CONTRACT DOCTRINES RELATING TO REMEDIES

A contract may provide that no damages (or only a limited amount of damages) can be recoveredin the event the contract is breached. Clauses excluding liability for fraudulent or intentional injuryor for illegal acts cannot be enforced. Clauses excluding liability for negligence may be enforced ifboth parties hold roughly equal bargaining power. Under the Uniform Commercial Code (UCC),remedies may be limited in contracts for the sale of goods.

A common law doctrine under which a nonbreaching party must choose one remedy from thoseavailable. This doctrine prevents double recovery. Under the UCC, remedies are cumulative for thebreach of a contract for the sale of goods.

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Answters for the even-numbered questions in this Far Review section can be found on this text's occomponying Web site otwrrvw.cengage.com/blaw/blt. Se/ecf "Chapter t5" ond click on "For Review."

I What is the difference behveen compensatory damages and consequential damages? What are nominal damages, andwhen do courts award non-rinal danages?

2 What is the standard measure of compensatory damages when a contract is breached? How are damages computed differ-ently in construction contracts?

5 Under what circumstances is the remedy of rescission and restitution avaiiable?

4 When do courts grant specific performance as a remedy?

5 What is the rationale underlying the doctrine of election of remedies?

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E

ffi HVIoTHETrcAr scENARros AND cAsE pRoBtEMs

E5"t Liquidated Damages. Carnack contracts to sell his house andlot to Willard for $100,000. The terms of the contract call lorWillard to pay l0 percent of the purchase price as a deposittoward the purchase price, or as a down payment. The termsfurther stipulate that should the buyer breach the contract,Carnack will retain the deposit as liquidated damages. Willard

pays tlie deposit, but because her expected financing of the

$90,000 balance lalls through, she breaches the contract. 'lwo

weeks later, Carnack sells the house and lot to Balkova for

$105,000. Wil lard demands her $10,000 back, but Carnackrefuses, claiming that Willard's breach and the contract termsentitle him to keeo the deposit. Discuss who is correct.