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1. An extract from the celebrated Fuller & Perdue article cited by Judge Rabin is reproduced infra p. 1172. The tripartite distinction drawn in that article between the promisee's restitution, reliance and expectation interests has become an established part of our legal vocabulary and its repeated invocation has tended to give our law of contract damages an appearance of reassuring orderliness. Whether the appearance is an illusion and the distinction a source of more mischief than illumination are questions to be kept in mind as you work through the materials collected in this section.3
2. The basic aim of contract damages (to "secure to the injured party the benefit of his bargain" and thus to place him in the position he would have been in if the contract had been performed) is often contrasted with the purpose of compensation in tort (to restore to the victim whatever he has lost as a result of his injury, thereby returning him to the status quo ante). The famous case of Hawkins v. McGee, 84 N.H. 114, 146 A. 641 (1929), illustrates the difference between these two approaches. Hawkins had a badly scarred hand and Dr. McGee promised to make it "perfect." McGee also said that only a few days of hospitalization would be required, after which Hawkins could return to work. The doctor botched the job and Hawkins was left with a hand even more unsightly than the one he had had before the operation. Hawkins sued, asserting both negligence (a tort claim) and breach of warranty (a contract claim). The negligence count was nonsuited, but Hawkins was held entitled to recover on his contract claim. On the question of damages, the trial judge instructed the jury as follows: "If you find the plaintiff entitled to anything, he is entitled to recover for what pain and suffering he has been made to endure and what injury he has sustained over and above the injury he had before." On appeal, this instruction, which would have been perfectly appropriate in a tort action, was held to be in error. According to the New Hampshire Supreme Court, Hawkins' damages for breach of contract ought to have been measured by "the difference between the value to him of a perfect hand or a good hand, such as the jury found the defendant promised him, and the value of his hand in its present condition. . . ." Moreover, the court asserted,4
The extent of the plaintiff's suffering does not measure this difference in value. The pain necessarily incident to a serious surgical operation was a part of the contribution which the plaintiff was willing to make to his joint undertaking with the defendant to produce a good hand. It was a legal detriment suffered by him which constituted a part of the consideration given by him for the contract. It represented a part of the price which he was willing to pay for a good hand, but it furnished no test of the value of a good hand or the difference between the value of the hand which the defendant promised and the one which resulted from the operation.
Id. at 118, 146 A. at 644.6
The difference between compensation for a tortious injury and for breach of contract is sometimes expressed by saying that while the former is backward-looking or restitutionary, the latter is essentially forward-looking since it aims to give the promisee the anticipated (but as yet unrealized) benefit of his bargain. But is the line between tort and contract as clear as this traditional way of viewing the matter suggests? A tort victim may, after all, sue for the loss of future income — something he merely "expected" at the time of his accident; and while it could be said that this expectancy is a species of property that already belonged to the victim's estate when the accident occurred (so that compensation for its loss or destruction is restitutionary), the same could be said, without stretching things too far, of the contractual expectancy that "belonged" to young Hawkins and that was destroyed by the doctor's breach. To be sure, the source of the property destroyed differs in the two cases, since in one (but not the other) the doctor's promise is needed to create it. But is this a difference that matters, or matters as much, as the traditional view suggests?7
3. What is the justification, if any, for protecting the promisee's expectancy rather than merely compensating him for his out-of-pocket losses? Consider Professor (now Judge) Posner's explanation of the expectation rule. If two people make a contract, Posner argues, each has an incentive to breach whenever8
[h]is profit from breach would exceed his expected profit from completion of the contract. If his profit from breach would also exceed the expected profit to the other party from completion of the contract, and if damages are limited to loss of expected profit, there will be an incentive to commit a breach. There should be. The opportunity cost of completion to the breaching party is the profit that he would make from a breach, and if it is greater than his profit from completion, then completion will involve a loss to him. If that loss is greater than the gain to the other party from completion, breach would be value-maximizing and should be encouraged. And because the victim of the breach is made whole for his loss, he is indifferent; hence encouraging breaches in these circumstances will not deter people from entering into contracts in the future.
An arithmetical illustration may be helpful here. I sign a contract to deliver 100,000 custom-ground widgets at $.10 apiece to A, for use in his boiler factory. After I delivered 10,000, B comes to me, explains that he desperately needs 25,000 custom-ground widgets at once since otherwise he will be forced to close his pianola factory at great cost, and offers me $.15 apiece for 25,000 widgets. I sell him the widgets and as a result do not complete timely delivery to A, who sustains $1000 in lost profits from my breach. Having obtained an additional profit of $1250 on the sale to B, I am better off even after reimbursing A for his loss. Society is also better off. Since B was willing to pay me $.15 per widget, it must mean that each widget was worth at least $.15 to him. But it was worth only $.14 to A the $.10 that he paid plus his expected profit of $.04 ($1000 divided by 25,000). Thus the breach resulted in a transfer of the 25,000 widgets from a less to a more valuable use. To be sure, had I refused to sell to B, he could have gone to A and negotiated an assignment of part of A's contract with me to him. But this would have introduced an additional step and so imposed additional transaction costs.
Thus far the emphasis has been on the economic importance of not awarding damages in excess of the lost expectation. It is equally important, however, not to award less than the expectation loss. Suppose A contracts to sell B for $100,000 a machine that is worth $110,000 to B, i.e., that would yield him a profit of $10,000. Before delivery C comes to A and offers him $109,000 for the machine promised B. A would be tempted to breach were he not liable to B for B's loss of expected profit. Given that measure of damages, C will not be able to induce a breach of A's contract with B unless he offers B more than $110,000, thereby indicating that the machine really is worth more to him than to B. The expectation rule thus assures that the machine ends up where it is most valuable.
R. Posner, Economic Analysis of Law 89-90 (2d ed. 1977).10
4. Suppose that Professor Freund had been denied tenure on the grounds that his scholarly publications were insufficient, and had had to take another (lower paying) teaching job as a result. Would he have been entitled to compensation for his loss of income (supposing this could be measured with precision)? Could he have refused to seek alternative employment and simply sued for the full amount of his lost salary? Consult Jameson v. Board of Education, infra p. 1317.
February 15, 2015
10.3.2.2 Notes - Freund v. Washington Square Press
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