Expectation damages that the plaintiff can recover from include loss in value and “other loss.” Other loss is defined by the Restatement 2d of Contracts include consequential injuries. These consequential injuries are subject to limitations on expectation damages including foreseeability, certainty, and causation.
Hadley v. Baxendale
156 Eng. Rep. 145 (1854).
The plaintiff’s originally obtained a jury verdict in their favor.
What damages should be considered for recovery?
Damages can only be considered when the consequence was within the contemplation of the parties when the contract was made.
Here, the is no evidence that the defendants contemplated the damages and thus the plaintiff cannot recover for that loss. Thus, there needs to be a new trial to provide proper instruction.
The plaintiff’s were owners of a mill whose operation was dependent on the functionality of a shaft. Well, the shaft broke and operations came to a halt. Thus, the plaintiff’s went to the defendant (a mail carrier) with the broken shaft and told them that they needed it to be sent to the manufacturer immediately (overnight delivery) for repair. The plaintiff’s were told that the new shaft can be delivered within a day if the order is placed before noon the previous day. Consequently, the plaintiff’s made the order.
However, due to the neglect of the defendant, the shaft was not delivered for several days resulting in large losses at the mill. So, Hadley sued for breach of contract and sought damages for a refund of the shipping charges and lost profits. A jury gave a verdict in favor of the plaintiffs for 25 pounds beyond the refund costs (lost profits).
Here, the parties did not contemplate the potential damages. The defendant’s could have assumed that the plaintiff’s had an extra shaft that they were using, or perhaps the defendant’s waited for the plaintiff’s to bring an old shaft as a model for a new shaft. Either way, the plaintiff’s failed to state the reason for the new shaft and the necessity for its immediate delivery. As such, the parties did not contemplate the damages that could occur from a delayed recovery. Thus, the case was retried with instructions to not award the plaintiff damages for loss of profits (from the resulting lack of an operating mill).
The modern version of this rule is called the foreseeability of the loss and is outline in the Restatement 2d of Contract § 351 and the UCC §2-715(2).
This case introduces the difference between general direct damages in 347(a) and the circumstantial damages in 347(b).
Should the plaintiff collect gross damages or net damages? Well, lost profit is net because we do not want to overcompensate the plaintiff. If the contract would have been performed, they would have expended costs meaning their net loss of profits are all they should be able to recover.
There are two types of categories: See 347(a) and (b)
- Direct damages that occur naturally, according tot he usual course of things (such as a breach). These are general damages. Additionally, these are damages that are always obtained (e.g. the refund).
- Indirect damages that may incur if it is reasonably within the contemplation of the parties. These are consequential damages. In other words, these are costs that are incurred by special circumstances. Those special circumstances need to be communicated to obtain the special damages. Simply, there is a requirement of foreseeability.
This case requires the reasonable contemplation of the parties.
“General damages – including profit on the contract breached – require no special proof that they were within the contemplation of the parties, although proof of the amount of damages is still required.
“Consequential damages – including profit on collateral damages, including a requirement of foreseeability.
- Damages are not recoverable for loss that the party in breach did not have a reason to foresee as a probable result of the breach when the contract was made.
- Loss may be foreseeable as a probable result of a breach because it follows from the breach
- in the ordinary course of events, or
- as a result of special circumstances, beyond the ordinary course of events, that the party has a reason to know.
Note that the consequences must be foreseeable at the time of the contract formation.
Also note that there is no need to inform if the breach flows from an ordinary course of events (e.g. a builder’s beam fails and the house crashes down. A beam is used in the ordinary course of events and the builder should not need to inform the supplier of the intended use).
UCC § 2-715(2) Incidental and Consequential Damages
Again, make sure that the contracting party has reason to know of the potential loss.
Florafax International, Inc. v. GTE Market Resources, Inc.
933 P.2d 282 (Ok. 1997).
Florafax is the plaintiff who obtained a jury judgment against GTE. GTE appealed.
Are damages proper?
- Damages must be within the contemplation of the parties.
- Only a party subject to a notice termination clause has the right to limit damages to cancellation.
- The damages must be caused by the breach of the contract.
- The loss is capable of a reasonably accurate measurement.
The damages were contemplated, GTE was not subject to a cancellation benefit, and the breach reasonably caused the damages. Affirmed.
Florafax was a floral company that specialized in taking phone orders for flowers from customers, processing, and fulfilling those orders for their clients (actual florists). In other words, Florafax was the equivalent of the companies that allow you to make an order online (e.g. Stripe or PayPal) but specialized in floral orders. One of Florafax’s clients was Bellerose, a well known floral company who received between 100,000-200,000 floral orders a year. The contract between Florafax and Bellerose could be terminated by either party with 60 days notice.
To help manage the number of orders coming in, Florafax hired GTE to accept calls at a floral hotline (1-800-FLOWERS). This hire occurred two weeks after the contract with Bellerose was executed. Within the GTE contract, the termination clause said that a default by GTE would cause significant costs to Florafax. Thus, GTE would be liable for any loss of profits that derived from that default.
Well, GTE struggled to perform under the terms of the contract. Around Valentines day, there were substantial performance issues. Further, around Mother’s Day, GTE was lacking to the extent that Bellerose complained about the lack of orders being taken by GTE. Most of these performance issues arose because GTE failed to properly staff the call center to anticipate a large volume of calls.
Consequences of GTE’s lack of performance included:
- Florafax had to establish their own call center to make up for GTE’s failures.
- Florafax lost Bellerose as a client.
Florafax’s expert estimated over 1 million in lost profits while GTE’s expert estimated only 500,000. The jury awarded damages of 750,000 in lost profits and about 820,000 for other damages (such as setting up a new call center).
GTE argued that the loss in profits cannot be derived from a third-party contract. However, this is not the case because GTE knew of the relationship Florafax had with Bellerose and knew that those two parties had recently executed a contract. Additionally, GTE knew that the relationship was likely to continue based on the performance of the parties. GTE also knew of their potential liability because the termination clause mentioned that a breach would result in significant injuries for Florafax. As such, damages were well within GTE’s contemplation at the time the contract was executed.
Second, GTE argues that their liability for damages would only be limited to 90 days because the contract between Florafax and Bellerose could be terminated within 90 days. However, GTE was not a party to that contract and is not subject to benefit from a cancellation clause they have no right to invoke.
Finally, there is sufficient evidence to show that GTE’s breach was the cause of the damages. Bellerose’s executive officer had testified that he expected a longstanding relationship with Florafax as long as performance remained high. However, when performance sank due to GTE’s breach, Bellerose became averse to a continued relationship with Florafax. Thus, the loss of profits due to a loss of client was because of GTE’s breach. Further the damages were certain. There was a fact of damage, the dispute was really in how much damage. However, a dispute of the amount of damages does not preclude the fact that there were actually damages present.
Consequently, GTE is liable for the damages awarded by the jury because those damages were foreseeable, caused by a breach, and not precluded by any other provisions.
A court may limit damages for foreseeable loss by excluding recovery for lost profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that justice requires the limitation.
New Business Rule
Recovery of lost profits from a start-up business is often unsuccessful. Traditionally, there was no recovery. Now, there may be recovery, but it is hard to prove that new profits are likely to remain. In other words, the court wants to see at least some history of successful business engagement.
Sometimes parties add “liquidation” damages in the contract clauses so a set amount of recovery is allowed.
Expectation damages are subject to limitations set in the Restatement § 350-53
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