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1. In Hooks Smelting Co. v. Planters' Compress Co., 72 Ark. 275, 79, S.W. 1052 (1904), the defendant on its counterclaim was awarded $5,450 damages for suspension of the operation of its plant caused by plaintiff's delay in repairing defendant's machinery. The cost of the repairs was $712, plaintiff's profits between $100 and $210. In reversing the judgment of the trial court the court said:3
Now, where the damages arise from special circumstances, and are so large as to be out of proportion to the consideration agreed to be paid for the services to be rendered under the contract, it raises a doubt at once as to whether the party would have assented to such a liability, had it been called to his attention at the making of the contract, unless the consideration to be paid was also raised so as to correspond in some respect to the liability assumed.
Id. at 286-287, 79 S. W. at 1056. Read also Horne v. Midland Railway Co., cited in the opinion in the principal case.5
On the "large verdict" problem, see Comment, Lost Profits as Contract Damages: Problems of Proof and Limitations on Recovery, 65 Yale L.J. 992, 1020 et seq. (1956).6
2. As to Bromage v. Genning, cited in the opinion, and Holmes' somewhat inconsistent attitudes toward the idea for which the case is said to stand, see the Introductory Note to Section 2 of this chapter.7
3. The British Columbia Saw-Mill case, cited approvingly in the opinion, was also discussed by Holmes in The Common Law:8
[A]ccording to the opinion of a very able judge, which seems to be generally followed, notice, even at the time of making the contract, of special circumstances out of which special damages would arise in case of breach, is not sufficient unless the assumption of that risk is to be taken as having fairly entered into the contract. If a carrier should undertake to carry the machinery of a saw-mill from Liverpool to Vancouver's Island, and should fail to do so, he probably would not be held liable for the rate of hire of such machinery during the necessary delay, although he might know that it could not be replaced without sending to England, unless he was fairly understood to accept "the contract with the special condition attached to it."
The Common Law 236-237 (M. Howe ed. 1963).10
4. The Hadley formula requires only that a harm be foreseeable to be compensable in damages; consequently, once the promisee has notified the promisor of the existence of certain special facts that will result in larger-than-usual losses if the promisor breaches, the losses in question become compensable unless the promisor disclaims responsibility for them. Under Hadley, liability results from the communication of special facts plus silence on the part of the promisor. Does the same result follow under the test that Holmes proposes in the principal case? ("[T]he mere fact of knowledge cannot increase the liability. The knowledge must be brought home to the party sought to be charged, under such circumstances that he must know that the person he contracts with reasonably believes that he accepts the contract with the special condition attached to it.") If we interpret the Holmes test as requiring explicit consent on the part of the promisor before he can be held responsible for any extraordinary losses, even when he is able to anticipate their occurrence, it seems to follow that the promisor can avoid liability simply by remaining silent (in contrast to the Hadley rule, which requires him to speak up and disclaim liability if he wishes not to be bound). Which approach seems to you the better one? Remember that silence can be ambiguous; by remaining silent, a promisor may encourage the belief that his assumption of liability for certain extraordinary losses is something that goes "without saying."11
5. Mr. Justice Willes, author of the opinion in the British Columbia Saw-Mill case, had been one of England's leading commercial lawyers before his appointment to the Bench, and had participated in many famous lawsuits, including Hadley v. Baxendale, where he represented the defendant shipping company. According to Richard Danzig, Willes' "academic orientation and . . . cosmopolitan outlook caused [him] to be thoroughly familiar with the French Civil Code's provision on damages and with the similar views of Sedgwick, then the outstanding American commentator on the subject," a fact that helps to explain the significant influence these foreign authorities appear to have had on the outcome of the case and that is illustrative, more generally, of the growing influence civilian treatise writers exercised over the common law of contracts in the second half of the nineteenth century, especially in the area of damages. See Danzig, Hadley v. Baxendale: A Study in the Industrialization of the Law, supra p. 1140, at 257-259.12
6. Do you agree with Holmes that a recovery by plaintiff of the difference between contract price arid market price plus the several items of "special damage" alleged "would be making the defendant pay twice for the same thing?" Does it indeed appear that plaintiff was asking for recovery of the contract and market differential? Should Holmes have distinguished between plaintiff's expenses in preparation to perform the contract before having learned of the breach and post-breach expenses which would not have been incurred except for the breach?13
7. Uniform Commercial Code §2-715(2)(a) provides that an aggrieved buyer may recover for "any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise. . . ." The official comment to §2-715 states that the Code's formula for measuring consequential damages rejects the "tacit agreement" test in favor of "the older rule at common law which made the seller liable for all consequential damages of which he had 'reason to know' in advance. . . ." Do you infer from this that Globe Refining v. Landa Cotton Oil is no longer good law in sale of goods cases governed by the U.C.C.? See R.I. Lampus Co. v. Neville Cement Products Corp., 474 Pa. 199, 378 A.2d 288 (1977).14
How would Globe Refining be decided under the Code? Was the buyer attempting to recover "incidental damages" under §2-715(1) or "consequential damages" under §2-715(2)? As counsel for the buyer, would you prefer to argue the case under §2-715(1) or §2-715(2)? Would the buyer's §2-715 recovery be in addition to, or in substitution for, his contract-market damages under §2-713? What do you make of the phrase "together with" in §2-713?15
8. Official Comment 6 to U.C.C. §2-715 states that "[i]n the case of sale of wares to one in the business of reselling them, resale is one of the requirements of which the seller has reason to know within the meaning of subsection (2)(a)." This brings the loss of resale profits under the second branch of the rule in Hadley v. Baxendale. To recover for the loss of such profits, however, a buyer must show that the loss "could not reasonably [have been] prevented by cover or otherwise." Under the Uniform Sales Act, the recovery of lost resale profits was subject to a similar limitation; see Murarka v. Bachrack Bros., Inc., 215 F.2d 547 (2d Cir. 1954).16
The Hadleys, of course, had no intention of reselling their crankshaft once it was repaired: they planned to use it in their business and suffered a loss of profits when they were forced to keep their mill shut for several extra days. Should a loss of profits that comes about in this more indirect way be treated differently from the loss that results when a buyer is unable to resell, to his own customers, the goods for which he has contracted (as was apparently the case in Globe Refining)? Are these two types of losses treated differently under the Uniform Commercial Code? Suppose that a buyer contracts for goods, some of which he plans to use, and some to resell. Assuming he could not have prevented the loss "by cover or otherwise," can the buyer measure his consequential damages by the profit he would have made if he had resold all the goods contracted for (on the theory that even those he planned to keep must have been worth at least this much to him — or else he would have sold them to someone else)? See Everett Plywood Corp. v. United States, 512 F.2d 1082 (Ct. Cl. 1975).
February 15, 2015
10.3.10.2 Notes - Globe Refining Co. v. Landa Cotton Oil Co.
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