DIRECT AND CONSEQUENTIAL DAMAGES

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Faulkner University *

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REMEDIES

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Law

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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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