DIRECT AND CONSEQUENTIAL DAMAGES
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REMEDIES
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Law
Date
Apr 29, 2024
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docx
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DIRECT AND CONSEQUENTIAL DAMAGES
1. A company contracted with NASA to launch a communications satellite. Several
months prior to the scheduled launch, NASA told the company it would not
launch the satellite due to political pressure. The company then had to sell the
satellite for a significant loss because the satellite no longer had a launch
contract. The company filed suit, claiming breach of contract. It argued that it was
entitled to the difference in value between the satellite with NASA’s launch
contract and the actual sale price of the satellite. The parties’ contract limited any
award for breach of contract to direct damages
and specifically excluded
consequential damages
. Is the company entitled to its requested damages? YES, because the diminution in value of a party’s assets due to another party’s
breach represented the benefit of the bargain. Direct damages in contract cases
represent the plaintiff’s lost benefit of bargain, meaning the loss of the monetary
value of the defendant’s promised performance, usually as of the date that the
defendant breached the contract. New Valley Corp. v. United States
. Here, the loss
the company took on the sale of the satellite was directly caused by NASA
breaching the launch contract. Because this diminution in value represented the
benefit of the bargain to the company, it was direct damages as allowed under the
party’s breach of contract agreement.
2. A rock band broke down in their touring van in a small town in the mountains.
The band went to get the van repaired, and the repairman said that he needed a
special gasket to fix the van. He told the band to take the van’s broken gasket to a
shipping office in town and have it shipped overnight to the manufacturer, who
would then send a replacement gasket via overnight return shipment. The band
went to the shipping company and told the shipping clerk that the gasket had to
get to the manufacturer by noon the next day and specifically explained their
situation. They told the clerk that, if the band could not get a replacement gasket
within two days, they would be unable to have their van repaired in time to drive
to the city and play a show, where they were expected to make $10k in profits. The
clerk agreed to ship the gasket, and the band paid the shipping company $50 for
the expedited shipment. However, the clerk negligently forgot to send the gasket
until later in the day, resulting in the manufacturer getting it too late to send the
band a replacement in time. Consequently, the band missed the show. The gasket
did eventually arrive, the van was fixed, and the band continued its tour. The
band sued the shipping company for the loss of $10k. Can the band recover the
$10k?
YES, because the band told the clerk about the importance of the gasket.
Consequential damages in contract cases may only be recovered if they were
within the subjective contemplation of the parties at the time they entered into
the contract of reasonably foreseeable to the defendant at the time the parties
entered into the contract. Hadley v. Baxendale
, Here, because the band members
told the clerk about the specific circumstances about why they needed the gasket,
including how much money they would lose if it weren’t delivered on time, they
are likely entitled to their lost profit from missing the show.
3. An oil company chartered a supertanker from a shipping company. At the oil
company’s request, the shipping company outfitted the supertanker with special
turbines. The shipping company’s president specifically told the turbine
manufacturing company that the oil company needed the turbines to speed up its
oil shipments because each day of delay in shipping oil cost the oil company
$1million. A month later, a defective part within the turbines caused most of the
turbines to malfunction. The malfunctioning turbines caused no personal or
property damage but did result in 10 days of delay in the shipment of oil,
ultimately resulting in $10million in lost profits for the oil company. The turbine
manufacturer replaced the defective parts at no cost. Although it had no
contractual privity with the turbine manufacturer, the shipping company sued the
turbine manufacturer based on a theory of negligence for the defective turbines
and sought the $10million in lost profits as damages. Is the court likely to award
the company’s lost profits?
NO, because the company only suffered an economic loss. In most American
jurisdictions, if the only injury to the plaintiff from a defendant’s negligence was
economic loss (typically lost profits) and there was no privity between the parties,
the remoteness limitation always prevents recovery of such consequential
damages, even if the economic loss was reasonably foreseeable. East River SS
Corp. v. Transamerica Delaval, Inc.
, here, because the company suffered only
economic loss, it would not be entitled to lost profits, even if the damages were
foreseeable.
4. A woman entered into a purchase sales agreement with a businessman to buy
his company, which manufactured a specific product, for $5m. However, the
businessman decided to breach the contract and sell the company to a third-party
buyer for a higher price. The woman sued the businessman for the breach,
claiming $20m in lost profits based on a 20-year projection by an expert witness
who admitted on cross-examination that her projection include a “good deal of
speculation” based on “uncertain long-term economic conditions and changing
consumer preferences.” The businessman’s expert witness testified that his 20-
year projection showed that, in the best scenario, the woman had a “small chance”
of earning as much as $10m in profits but was more likely to make little or no
profit over 20 years because of changing economic and market conditions that
would render the company’s product much less popular. Between the time of the
breach and the lawsuit, which was one year, the third party made $2m in profits
from the joint venture. The court ruled in the woman’s favor on the issue of
liability. What is the woman’s likely recover? $2m, the amount of profits by the third party in the prior year. Compensatory
damages do not need to be calculable with mathematical accuracy and, instead,
may be approximated if there is a rational basis in the evidence. However,
damages should not be awarded when they are based solely on speculation.
Thermo Electron Corp. v. Schiavone Constr. Co.
, here, because the other damage
calculations are based on mere speculation or the cost of the contract itself, the
court is most likely to award the woman lost profits in the amount the third party
actually made form the venture.
5. A month before Halloween, a candy retailer entered into a contract with a
candy wholesaler. According to the agreement, the wholesaler would sell the
retailer 500 crates of candy for $50 each, to be delivered two weeks before
Halloween. However, two weeks before Halloween, the wholesaler told the retailer
that he could not deliver the candy as promised. On the day of the breach, the
wholesale market value of a crate of candy was $75 each. Because the candy was a
new product that had not been sold by the retailer before, the retailer believed he
lost $5k in profit when the wholesaler backed out of the deal. The retailer sued
the wholesaler for damages. What amount of damages will the retailer likely
recover?
$12,500, the difference between the contract and market price. Direct damages in
contract cases represent the plaintiff’s lost benefit of the bargain, meaning the
loss of the monetary value of the defendant’s promised performance, usually as of
the date that the defendant breached the contract. Here the wholesale market
value of candy crates on the day of the wholesaler’s breach was $75.
Consequently, the retailer would most likely be able to recover the benefit of the
bargain, $25 per crate ($75 minus $50) for 500 crates, or $12,500.
6. A man owned a large commercial zoo and aquarium. The aquarium’s most
popular attraction was a whale named Pepe, who did tricks for the aquarium
audience. One day, a special gasket broke in Pepe’s tank. The gasket was
necessary to keep his tank properly oxygenated. To get a new gasket, the
aquarium had to send the old one to a special gasket maker. The man contracted a
shipping company, who told him that if he could get the gasket to them by noon,
they could get it to the special gasket maker that day. The man delivered the
gasket to the shipping company before noon and paid the full shipping price.
However, the clerk at the shipping company dropped the gasket behind a table,
and the gasket wasn’t found until two days later. The shipping company
immediately mailed the gasket, and the special gasket maker delivered a new
gasket to the aquarium within a week. However, by that time, Pepe’s tank had
become deoxygenated, killing Pepe. The man sued the shipping company for $20m
in lost profits due to the shipping company’s failure to send the gasket. Which of
the following facts must be true in order for the man to recover lost profits?
The man told the shipping company about the gasket’s importance. Consequential
damages in contract cases may only be recovered if they were within subjective
contemplation of the parties at the time they entered into the contract or
reasonably foreseeable to the defendant at the time the parties entered into the
contract. Hadley v. Baxendale
, here, if the man did not tell the shipping company
about the gasket’s importance, he would not be entitled to lost profits. 7. The captain of an oil tanker was drunk when he negligently sailed the tanker
into a sandbar. The tanker broke in half, spilling millions of gallons of oil along
the South Carolina coast. The spill killed all the fish and wildlife in the area, and
the beaches had to be closed for the entire summer to allow clean-up. A group of
restaurants and hotels that were situated in resort towns along the South
Carolina coast sued the tanker’s owner in tort for their lost profits due to reduced
business caused by the oil spill. The plaintiffs based their amount of lost profits
on 10 years of financial data, although they could not prove the amount of lost
profits to an absolute certainty. Is a court likely to allow the plaintiffs to recover
their lost profits?
No, because the plaintiffs suffered only economic loss. In most American
jurisdictions, if the only injury to the plaintiff was economic loss, typically lost
profits, the remoteness limitation always prevents recovery of such consequential
damages, even if the economic loss was reasonably foreseeable. Here, because they
plaintiffs suffered only economic loss, they would not be entitled to lost profits.
8. A law professor entered into a contract with a publisher to publish the
professor’s new book. The professor had never published a book before, although
he did have a semi-popular blog. The contract stipulated that the publisher
agreed to publish the new book in a hardbound edition within 18 months of its
receipt and to pay royalties to the professor based on this percentage of sales. The
professor delivered the book to the publisher as required under the contract, and
the publisher refused to publish it. The professor sued, seeking damages for lost
royalties and the cost of publication if the professor had to publish the book
himself. Is a court likely to award the professor his requested damages? NO, because lost royalties would be based on pure speculation. Compensatory
damages in contract cases needn’t be proved with mathematical precision and,
instead, may be approximated if there is a rational evidentiary basis. However,
contract damages shouldn’t be awarded if they’re merely speculative.
9. A new video game company licensed its first game to a game publisher. The
contract required the publisher to pay a 15-percent royalty on all games that it
sold. However, the publisher breached the contract six months later, before any
games were sold. The video game company sued, arguing that it was entitled to
lost royalties in the amount of $4m, based on its own sales projections and the
sales of similar games during that year. It claimed that the publisher’s failure to
market the game resulted in a foreseeable loss in sales. Is the company likely to
recover its claim for lost royalties?
NO, because this is the first game licensed by the video game company. Ther is a
new business rule in many jurisdictions that either place an additional burden on
a plaintiff to prove damages with certainty, or categorically prohibits
compensatory damages, if a defendant’s breach of contract prevented the
plaintiff’s operation of a brand-new business. Here, since this is a new video game
company and this is its first game, it is likely that the company will be covered by
the new business rule and be unable to prove compensatory damages to the
necessary degree.
INCIDENTAL DAMAGES, DUTY TO MITIGATE, THE COLLATERAL SOURCE
RULE.
1. The CEO of a company was injured in a car accident. The CEO filed suit
against the other driver for negligence, claiming $150,000 in medical expenses
and $1m in lost income. Before the case went to trial, the CEO received $150,000
from his health insurance company for medical expenses and $500,000 from his
disability insurance company for his lost income. Ultimately, the jury ruled in his
favor for the full amount of damages ($1,150,00). The other driver asked the court
to offset the CEO’s damages by $650,000 based on what his insurance companies
had paid him. In view of the requested offset, what is the CEO’s likely recovery?
$5,150,000. The collateral source rule provides that, in a tort case where the
plaintiff receives compensation for the damages caused by the defendant from the
plaintiff’s own insurance company or from some other third-party source
unrelated to the defendant, the plaintiff’s damages won’t be offset. Perreira v.
Rediger
, here the CEO would be entitled to the full amount of his damages,
without any offset resulting from the payments by his health insurance or
disability insurance policies.
2. A construction supply company sued a bank for tortiously interfering with a
contract to sell 100,000 tons of stone owned by the company. The stone was being
stored on another corporation’s property, and when the corporation defaulted on a
loan held by the bank, the bank sold the stone to a landscaper. The company sued
the bank for lost profits for not being able to sell the stone at the retail level.
Although the bank admitted it had tortiously interfered with the stone, it argued
that the company presented no evidence that it tried to obtain replacement stone
to sell at the retail level after learning of the bank’s tortious interference. Is the
court likely to award the company lost profits?
NO, because the company did not try to get replacement stone to sell. After a
defendant tortiously interferes, a plaintiff may be required to take action to
reduce, or mitigate, the damages sustained. Such a duty to mitigate damages
arises if a reasonably amount of effort on the plaintiff’s part would significantly
minimize the damages. Martin Marietta Corp. v. New Jersey Nat’l Bank
, here, the
court is unlikely to award the company lost profits unless it can show it could not
have reasonably mitigated the lost profits unless it can show it could not have
reasonably mitigated the lost profits damages by obtaining replacement stone and
selling at the retail level after learning.
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