Certainty of Damages

1. Certainty of Damages Contracts – Prof. Merges April 14, 2011

4. Fera • Facts • Procedural History

5. Fera • What was “the deal” • Look at lease terms

6. Fera • What was “the deal” • Look at lease terms • $1000 min. plus % of receipts over $240,000  Why structured this way?

7. Fera • Modification – top p. 674 • Consideration required? Present here?

8. View from Precedent • Sedgwick, Jarrait case – what is their view in the availability of lost profits in a breached lease case? • What damages do they say are appropriate?

9. Is there a “prospective profits” rule?

10. Is there a “prospective profits” rule? • Not really: application of a more general principle: the “certainty principle”

11. Is there a “new business” rule?

12. Is there a “new business” rule? • No; more like a “rule of thumb” • Again, certainty is the problem with proving lost profits from a “new business”

13. Why did Supreme Ct. reinstate jury verdict here?

14. Why did Supreme Ct. reinstate jury verdict here? • Extensive testimony, by experts in liquor and book businesses • Reasonable damage figure from jury -- $200,000, inside range of $275,000 to $0 • P. 676

15. Dissent – approach & result • “Remittur” device • Rationale?

16. § 352. Uncertainty As A Limitation On Damages Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.

17. Hall v. Earthlink, 396 F3d 500 (2d Cir 2005) Independent-film producer, who had planned to use e-mail account to promote his newest film, sued Internet-service provider (ISP) after ISP incorrectly included him on its list of e-mail abusers and cancelled his e-mail account. Summary dismissal of consequential-damages claim was appropriate where producer did not present any reasonably reliable evidence of anticipated profits or any objective evidence of damages to producer's career and business opportunities due to film's failure.

18. RSB Laboratory Services, Inc. v. BSI, Corp., 847 A.2d 599, 611 (NJ Super 2004) Medical laboratory sued equipment supplier for breach of contract, breach of warranty, and consumer fraud after supplier provided faulty equipment that prevented laboratory from operating. Trial court entered judgment on a jury verdict awarding plaintiff damages, including lost profits. Affirmed: questioning “new business rule,” and holding it inapplicable here.

19. Evergreen Amusement Corp.

20. Drive-ins, NY State • 147 – 1958 • 33 - 2009

22. The Drive in, RIP

23. Evergreen Amusement • “no case has permitted recovery of lost profits under comparable circumstances”

24. Liquidated Damages • Why “liquidated”?

25. Wasserman’s Inc. v. Middletown Township

28. Wasserman’s Inc. v. Middletown Township • Facts • Procedural History

29. Lease terms • $458.33 rental per mo.; store expanded from 3200 to 5600 sq. feet • Signed May 21, 1971 • 33 year term • Cancellation term

30. Lease terms • $458.33 rental per mo.; store expanded from 3200 to 5600 sq. feet • Signed May 21, 1971 • 33 year term • Cancellation term  Why was this important to the Township?

31. Cancellation clause • Who had right to terminate? On what conditions? • P. 681

32. Cancellation clause • Who had right to terminate? On what conditions? • Hard to say, seems open-ended

33. Cancellation clause: damages • Pro rata improvement costs • How lessees are compensated for improvements they pay for • 2nd part: 25% of average gross receipts for 3 years prior to termination

34. Why is this problematic?

35. Why is this problematic? • $290,310 – excessive on its face? • Compared to what?

36. Why is this problematic? • $290,310 – excessive on its face? • Compared to what? • Sublessee’s income prior three years?

37. Why might court suspect the clause was a “deterrent” rather than an “estimate”? • Wasserman clearing $1400 per month in lease; paying out only $450 • No other takers for property; did Wasserman’s have (too) powerful bargaining position?

38. Factors on remand • Reasonableness of gross receipts • Reasoning of parties in arriving at 25% figure • Etc. – p. 686

39. Liquidated damages: pro and con • Pro: freedom of K, parties in best position to negotiate • Con: In terrorem effect; “remedies are for the court” (?)

40. § 356. Liquidated Damages And Penalties (1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.

41. § 2-718. Liquidation Or Limitation Of Damages; Deposits (1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual harm caused by the breach and, in a consumer contract, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.

42. What are the key elements? • Reasonable estimate of loss due to breach; not penal “on its face” • Restatement: “reasonable” in light of EITHER (1) facts at time K executed; OR (2) facts as they actually occurred

43. Dave Gustafson v. State

45. Gustafson BuildersPO Box 1376Rapid City, SD  57709605-342-3144

47. Dave Gustafson v. State • Facts • History

48. Gustafson • $530,000 due for work • State withholds $14,070 for 67 days’ late performance • K term: 500 k - $ 1mil, damages of $210 per day for each day of delay

49. Court’s analysis • Rough calibration of damages to lost value of public works • State in best position to estimate these losses?

50. Law and economics opposition to liquidated damages doctrine • Historical overhang • Freedom of K • Comparative law aspects