AMERICAN CONTRACT LAW FOR

LLM STUDENTS
Fall 2022: Prof Stephen Ross

Class #25: Consequential and Liquidated Damages

Review 24(A): Sellers Remedies
• Basic expectation damages: seller’s contract price minus saved
expenses plus incidental costs
• UCC gives sellers options
• resell and recover damages if contract price higher
• resale in good faith and in a commercially reasonable manner
• don’t resell and recover difference between contract and market price
• where can’t resell, action on price
• Dealers presumed to have a “virtually unlimited amount of business”
so sale of non-specific commodity to another buyer is not mitigation,
and can recover full lost profit from breaching buyer
Review 24: Duty to Mitigate
• Rest § 350(1): damages not recoverable if loss avoidable “without
undue risk, burden, or humiliation”
• Parties must engage in reasonable efforts to mitigate, but whether an
actual alternative buyer/seller is a good substitute is based on victim’s
good faith judgment
• Courts distinguish bargains where purpose is “solely in the profit” and
bargains where parties have broader purposes, where mitigation may
not be required
• Where mitigation involves risks, victim of breach is not obligated to
mitigate if it would “exalt the interests of the defaulter” over zhir own
Core premise re damages: remedies are also
subject to bargain
• Recall UCC § 2-719: parties may agree to remedies in addition to
those provided for in UCC, in substitution for those in UCC, or to limit
remedies, subject to general principle of unconscionability
• Implicit in Moscatiello refusal to enforce waiver of limit on consequential
damages where waiver was not knowing but in form contract’s fine print is
view that such a waiver would be enforceable if M had known about it and
defendant had explicitly bargained for it
• Official comment: “parties are left free to shape their remedies to
their particular requirements”, as long as “minimum adequate
remedies be available”
Consequential Damages: The Basic Rule
• Siegel v Western Union Telegraph Co [266]:
• WU contracts to transfer $200 to S’s friend
• Undisputed that friend planned to place legal bet on horse race, and S would have won $1650
• Why does Siegel reject damage award to S?
the court held that under the rule of Hadley v. Baxendale Western Union was not liable, because it
“had no notice or knowledge of the purpose for which the money was being transmitted.” -> no short
amount of monet to guarantee the lost.
• Victoria Laundry explains that limit on consequential damages is an exception to the “governing
purpose of damages” [267]
• Why did Asquith LJ award VL lost profits for general laundry business at rate of £16/wk (reasonably
forseeable), but not lost profits from government contract at £262/wk? (not reasonably
forseeable)
• Generally, contract damages are designed to put the contracting parties into the same
position that they would have been had the contract not been breached (To make them
whole). However, one limitation on such damages is that the losses caused by a breach be
foreseeable. What was foreseeable depends upon the knowledge the breaching party
possessed at the time it entered the contract. In this case,
• Newman had knowledge at the time it entered the contract, and while the contract was
pending, that Victoria Laundry intended to put the new boiler to use immediately. Although
Newman may not have known exactly what business or contracts Victoria Laundry intended
to obtain through its new boiler, Newman certainly understood that Victoria Laundry would
lose laundering business and possible dyeing contracts as a result of the 20-week delay of the
boiler’s delivery. This loss of profits was reasonably foreseeable (reasonable to expect of the
loss,the loss is likely seen, but not necessary), and Victoria Laundry may recover for it. For this
reason, Victoria Laundry’s appeal is granted, and a referee will determine what damages
Victoria Laundry is entitled to in addition to the £110 it was awarded by the lower court.
Rule is a default in lieu of other
communication or agreements
• Suppose Victoria Laundry had specifically informed Newman
Industries of the lucrative government supply contract available if
delivery of the boiler was timely?
• What would you advise, as in-house counsel to Newman at time of
negotiations, if you had learned of huge government contract based
on timely delivery? signed insurance to cover the breach
• Information forcing: Judges award consequential damages absent
specific communications, when they conclude that result is
sufficiently likely and foreseeable and P therefore need not have
made it explicit
JUDICIAL REASONING ABOUT
FORESEEABILITY
1. Parties should think about risk from breach
2. If parties did think about it, would they ask for different terms if
liable for the loss
3. Not liable for harm so remote that it is “unforeseeable to a
reasonable [person] at the time of contracting” [271+] because
don’t want wasteful bargaining to minimize these losses
4. For foreseeable losses, party bearing the risk of loss should have
burden to raise issue in bargaining
5. Distinguish ‘reasonable care’ in tort, where parties can’t bargain
Restatement § 351 and UCC § 2-715(2)(a)
• Restatement: No damages where defendant “did not have reason to
foresee” loss
• UCC: no damages where defendant did not “have reason to know”
• § 351(3) allows judges discretion to limit damages where needed to
avoid “disproportionate compensation”
• Parties assumed that party in breach would NOT bear the risk
• Loss too great in light of price charged for service
• Loss significant, and parties probably did not carefully allocate risks in bargaining
• UCC specifically provides that consequential damages are NOT available
if the plaintiff opted not to cover, and cover was commercially reasonable
Apply the Basic Rule: I

• How would you apply the Basic Rule to the following cases?
• Koufous [269]: buyer/victim suffered fall in price of sugar due to
late delivery |
• Hector Martinez [271]: buyer/victim suffered lost rental value of
item shipped late
• Wroth [272]: buyer/victim suffered huge expectation damages
because price of housing went up rapidly
• Apply foreseeable damage, the defendant shipowner might not know the intention of the plaintiff is to sell sugar, but he was aware of the fact that there wa
market for sugar at Basrah. The sugar was in fact sold at Basrah in lots between Dec. 12 and 22 but shortly before that time the market price had fallen partly
reason of the arrival of another cargo of sugar. It was found by the umpire that if there had not been this delay of nine days the sugar would have fetched £3
per ton. The actual price realized was only £31 2s.9d. per ton. The charterers claim that they are entitled to recover the difference as damage for breach of
contract. The shipowner admits that he is liable to pay interest for nine days on the value of the sugar and [plaintiff’s cable] expenses but denies that fall in m
value can be taken into account in assessing damages in this case.
the shipowner was liable for damages measured by the fall in the sugar price. Again, Lord Reid:
• . . . There is no finding that [the charterers] had in mind any particular date as the likely date of arrival at Basrah or that they had any knowledge or expectati
that in late November or December there would be a rising or a falling market. The shipowner was given no information about these matters by the chartere
did not know what the charterers intended to do with the sugar. But he knew there was a market in sugar at Basrah, and it appears to me that, if he had thou
about the matter, he must have realized that at least it was not unlikely that the sugar would be sold in the market at market price on arrival. And he must be
to have known that in any ordinary market prices are apt to fluctuate from day to day: but he had no reason to suppose it more probable that during the rele
period such fluctuation would be downwards rather than upwards—it was an even chance that the fluctuation would be downwards. . . .

Hector Martinez
• Yes. The common law will award general damages to an innocent party if they are reasonably foreseeable. Special damages are awarded only if actual notice
given regarding the possibility of injury. Foreseeable damages resulting from a delay in transport “are those that are the proximate and usual consequences o
carrier’s actions.” The non-breaching party is not required to show that the actual harm suffered was the most foreseeable, only that it was foreseeable to a
reasonable man at the time the agreement was made. Machines have a use value, which may be the rental value or interest value, and it is foreseeable that
would cause a loss in rental or interest value.

• A different view was taken in Wroth v. Tyler, [1974] Ch. 80. There, a husband had contracted to sell a house, but was unable to perform the contract because
wife legally prevented him from selling. The husband agreed to pay damages, but argued that he could not have foreseen a dramatic increase in property val
Justice Megarry held that a defendant cannot escape liability because the amount of damages was unforeseeable. Once a contracting party is held liable for
of damage, the party will be liable for the full extent of those damages:
• It was beyond question that a rise in the price of houses was in the contemplation of the parties when the contract was made in this case. But Mr. Lyndon-St
[the defendant’s barrister] took it further. He contended that what a plaintiff must establish is not merely a contemplation of a particular head of damage, bu
of the quantum under that head. Here, the parties contemplated a rise in house prices, but not a rise of an amount approaching that which in fact took place
rise which nearly doubled the market price of the property was, as the evidence showed, outside the contemplation of the parties, and so it could not be
Apply the Basic Rule: II

• You are a trial court judge in a jurisdiction where the state

supreme court has approved of the decisions in Siegel v
Western Union, Victoria Laundry, Koufous, Hector Martinez,
and Worth
• Hypo: Historic Washington Grist Mill was reopened on the
Youghioheny River south of Pittsburgh, PA; the crank shaft for
wheel broke and D agreed to ship it to a repair shop in
Pittsburgh for $25,000; WGM’s agent told D’s clerk that mill
was shut down and this had to be shipped immediately;
however, D decided to wait for barge down river to be loaded
with other products; WGM lost profits of $290,000
• Based on precedents, would you rule in favor of WGM?
Yes..
Side note to the actual Hadley decision
• Baron Parke limited contract liability to “the damages foreseen, or which
might have been foreseen, at the time of the executive of the contract, when
it is not owing to his fraud that the agreement has been violated” [262+],
quoting French Code Civil
• Art 1150 of The French Civil Code provides: “Le débiteur n'est tenu que des
dommages et intérêts qui ont été prévus ou qu'on a pu prévoir lors du contrat,
lorsque ce n'est point par son dol que l'obligation n'est point exécutée »
• The word « dol », however, is broader than fraud, connoting willfulness
• Cf LA Civ Code use of « bad faith »
• Arguably, had judges a better understanding of French, might have found for
Hadley as breach was willful
Consequential damages and workability
• Causation is a difficult legal concept in the easiest of cases, where
courts struggle to develop “substantial factor” test [275] to reach a
“fair solution to a difficult problem” [276]
• Recall Hawkins v McGee limit on damages on grounds that accurate
award is too difficult; note Lord Denning MR disagrees [293] because
same damages are manageable in tort
• Valentine [288-89] exemplifies common law reasoning
• Tort claim for emotional distress raises different social proposition than
contract claim for consequential damages to make victim economically whole
from commercial bargain
• Acknowledges that judicial rejection of award for mental distress is not
consistent with goal of making plaintiff whole for all foreseeable loss
Consequential damages for mental distress
1. What additional social propositions justify a rule denying recovery for vexation and annoyance
when a commercial contract is breached?
1. to hard to define, calculate and assess the award
2. we dont want every party bring the claim in the contract.
• Courts recognize damage for mental distress in some cases, as the exception-to-the-exception
• Beach of promise to deliver child by caesarian section
• Failure pay money foreseeably resulting in P being jailed for non-payment of debt
• Breach of promise to look after for child requiring medication while in child care
• Breach of warranty for residential home
• Failure to notify a close relative of a recent death
2. Given these precedents, should an employee be awarded damages for peace of mind associated
with job security? An employment contract will indeed often have a personal element.
Employment is an important aspect of most persons’ lives, and the breach of an employment
contract may result in emotional distress. The primary purpose in forming such contracts,
however, is economic and not to secure the protection of personal interests. The psychic
satisfaction of the employment is secondary.
Liquidated Damages
• Recall that parties can knowingly and voluntarily agree, as part of the bargain, to significant limitation on
damages
• But courts will NOT enforce such limitations if unconscionable (unfair surprise or oppression) or duress
• Burden on party opposing the clause; reasonable doubts resolved in favor of enforcement [297]
• UCC § 2-718(1) limits a bargain that fixes damages to “an amount which is reasonable in light of” –
• anticipated or actual harm
• difficulty of proving loss
• inconvenience of obtaining an adequate remedy at law
• Rest § 356 explains: “unreasonably large liquidated damages” is unenforceable on grounds of public
policy (even if bargain is NOT otherwise unconscionable)
• What is the public policy that precludes such large awards? A penalty clause is a clause within a contract that seeks to
make the counterparty responsible for paying a large sum of money if they breach the contract. However, this sum of
money is usually not proportionate to the loss that will be suffered due to the breach. Instead, the sum is inflated,
making it excessive in many instances. In fact, penalty clauses are different from other clauses that discuss awarding
damages since they propose a sum of money that is so large that it ‘punishes’ the breaching party, rather than just
compensating for the losses they have caused. -> fair compensation, as the total sum in the contract or actual damage.
COGNITIVE BIAS
• In 1829, F, a comedian, signed a contract with Covent Garden Theatre to be
paid £3 ½ per show for 4 seasons and conform to theater’s usual regulations;
both parties agreed that any breach would result in payment of £1000
• Do you think F contemplated that if CGT should breach by missing timely
payment by one day, he would get £1000?
• Do you think CGT contemplated that if F missed a single performance, they
would receive £1000?
• Why would parties agree to this?
because their position with respect to contractual limitations is the same in
each situation, so they can more respect the agreement.
Law seeks binary distinction between a to a reasonable estimate of actual damages” [296]
bargained-for estimate of damages and • Unenforceable penalty includes when amount “grossly disproportionate
an unenforceable penalty
NPS, LCC v. Minahane [295]
But note doctrine is not stated as an • Amount reflects a reasonable forecast of damages expected to occur
exception to the Bargain Principle; • Damages hard to ascertain
enforce LD clauses where:

1) At time of contract, what might parties estimate damages to be? The license agreement required Minihane to pay
$3,750 annually for each of the 10 football seasons. (37.500)

2) Why did the MA SJCt find that • What about the Patriots’ duty to mitigate?
payment of the entire amount promised
by Minahane was appropriate?
• In this case, the trial judge found that, at the time the parties entered into the license agreement, the harm
resulting from a possible breach was difficult to ascertain. That finding was supported by the evidence,
which indicated that the damages sustained by NPS would vary depending on the demand for tickets at the
time of breach. Although the Patriots had won their first Super Bowl championship in 2002, shortly before
the parties entered into their agreement, the demand for luxury stadium seats was then and remains
variable and depends, according to the evidence, on the current performance of the team, as well as other
factors, such as the popularity of the players and the relative popularity of other sports, that are
unpredictable at the time of contract. Therefore, to predict at the time of contract how long it would take
NPS to resell the defendant’s seat license would be extremely difficult, if not impossible.
• The judge went on to find, however, that the sum provided for in the agreement—acceleration of all
payments for the remaining term of the contract—was “grossly disproportionate to a reasonable estimate of
actual damages made at the time of contract formation.” That finding was not supported by the evidence. It
is the defendant’s burden to show that the amount of liquidated damages is “unreasonably and grossly
disproportionate to the real damages from a breach” or “unconscionably excessive.”
Uncertain doctrine
• MA test: don’t enforce if “amount due was grossly disproportionate to a reasonable
estimate of actual damages made at the time of contract formation” [296]
• How would an economist estimate damages at the time a contract is signed:
• Estimate range of economic harm victim of breach might suffer
• Assign each harm a probability
• Develop a single number reflecting the probability
• In NPS, clause “anticipates a worse-case scenario”, but court reasons that this outcome
is not “sufficiently unlikely” that it renders amount grossly disproportionate [298-9]
• Court does not say how unlikely the worst-case scenario has to be
• “Second look” test
• MA rejects [297] review to compare actual damages to LD clause at time of breach
• Eisenberg [306]: huge discrepancy between actual damages and LD may suggest an evaluative
mistake BUT may also suggest that the LD was the result of limited cognition, and BP really was
not operative at time of contract formation
Other LD cases
1. Why did court refuse to enforce $5000 liquidated damages clause for sale of Rolls-Royce in Lee
Oldsmobile [300]?
“We reject the application of the liquidated damage clause in the present case . . . because it is clear
that the actual damages are capable of accurate estimation. We do not say this from hindsight
made possible because the actual figures claimed were in evidence. We say it because at the time
the contract was made, it was clear that the nature of any damages which would result from a
possible future breach was such that they would be easily ascertainable. ”
2. Why did court refuse to enforce $100K liquidated damages clause for change of ownership in
Norwalk Door Closer?
• Do you agree with the court’s decision?\
Norwalk and Eagle had a contract to manufacturer door closers exclusively for Norwalk, using tools, dies,
patterns, and equipment provided by Norwalk. The contract had a seven-year term and provided that
Eagle would pay $100,000 liquidated damages, if Eagle terminated the agreement, ceased operations, or
there was a change in ownership. Eagle was acquired by new owners in breach of this term. Norwalk sued
seeking liquidated damages. The trial court held the liquidated damage term was unenforceable, finding
that Norwalk suffered no harm as a result of the change in ownership as the new owners employed the
same local management and continued production “without loss to Norwalk of either business or time.”
Affirmed.
(Alcorn, J.) “. . . ‘[N]o provision in a contract for the payment of a fixed sum as damages, whether stipulated
for as a penalty or as liquidated damages, will be enforced in a case where the court sees that no damage