IV. Contracts
    E. Breaking contracts
    2. The law regarding breach of contract
    c. Liability for damages (cont'd.)

    Groves (p-lessor) v John Wunder (d-lessee) 205 Minn. 163  (1939)

1. What were the facts of the case?
2. How much would it cost to grade the land? ($60,000K)
3. How much is the graded land worth? ($12,160)
4. You are the judge.
   Would you rule that a breach occurred? (yes, the land was not graded)
5. Would you aim to encourage or discourage a breach in a case like this?
6. VOTE: How much would you recommend for damages?
7. You are the judge: You have two standards to choose from in deciding on what to award for damages:
   (1) "liability for damages has for its basis the value of the promised performance...when the breach occurred." (case dissent)
   (2) "The only losses that can be said fairly to come within the terms of a contract are such as the parties must have had in mind when the contract was made" (Hawkins v. McGee)
   Which standard would you choose, and how large an award?
8. Why do you think the cost and value ended up so far apart?
   (contract signed in 1927, lease expired in 1934)
9. What do you think would have happened with a remedy of specific performance?

    Illustrates an efficient breach

    Posner criticizes the size of this award. Why?
    The entire gain from the breach was awarded to Groves
    Makes the defendant (assuming he had anticipated the result) indifferent between breaching and (inefficiently) performing. (F162-3)

    The case raises the issue of timing in measuring damages:

    Damages of $60K puts both parties closest to where they expected to end up
    Disadvantage per Posner: discourages efficient breach
    Disadvantage of awarding $12K: frustrates and therefore discourages making contracts
        Besides: Groves has the option of renegotiating to let John Wunder out of his contract

    A pretty strong case could be made in general for damages based on expectations at the time of the contract, in the absence of evidence that those expectations were flawed
    Avoids incentives for opportunistic behavior ex post.
    A complication in this case was the Great Depression which depressed property values--unforeseen event

    Peevyhouse v. Garland Coal. 382 P. 2d 109 (1963)

1. What were the facts of the case?
2. How much would it cost to restore the property? ($29K)
3. What is the market value of the restoration? ($300)
4. You are the judge.
   Would you say that a breach occurred? (yes, the defendant acknowledged it)
5. VOTE: How much would you recommend for damages?
6. How do the facts of this case differ from Groves vs. John Wunder? (residence, no evidence of unanticipated change in market conditions)
7. You are the judge. Would any of these matter to you in your decision? (subjective value matters more, no surprises)
8. You are a homeowner.
   You sign a contract with a coal company to strip mine coal and restore the property after they finish. You recognize that it would cost $29K to restore, but property value would fall $300 if not. After completion, the coal company offers you $5K to avoid restoration. You refuse and insist on restoration instead
       How would you defend your decision? 
9. Based on Groves v. John Wunder, how much should you pay in damages?

    Illustrates the reverse outcome of Groves v. John Wunder

    The case suggests that courts will not award damages based on costs of performance if they are substantially disproportionate to the value of performance to the victim

    Do courts usually base contract decisions on efficiency or intent of the parties?

    Do courts usually second-guess subjective valuations?

    Were any unforeseen developments discussed in this case?

    What are some of the incentives that result from this case?

    The case seems to open a can of worms regarding efficiency, freedom of contract, and opportunism

    Which option puts the parties closest to the welfare levels they bargained for?
    specific performance has efficiency advantages
    See Ulen, Thomas S. "The efficiency of specific performance: toward a unified theory of contract remedies." Michigan Law Review 83 (1984): 341.

    irony: cost allowed in Groves v. John Wunder, a commercial property but not in Peevyhouse v. Garland Coal, a residential property where aesthetics and subjective value are likely more important

    Hadley v Baxendale, 9 Ex. 341 (1854) Moral hazard pulls in opposite direction of risk spreading. [this basically illustrates that liability is limited to what damages can in general be anticipated, not special damages such as lost profits, unless specifically warned of special circumstances]

1. What were the facts of the case?
2. You are the judge.
   A photographer takes a roll of film to a camera shop for developing. The camera store promises 24-hour turnaround time. Instead, the camera store loses the film. The photographer sues the camera store.
       Would you conclude that there was a breach?
3. How much would you award in damages?
4. The plaintiff testifies that the pictures were taken under professional contract for a national magazine, and the magazine will now not make any contract payments.
       How much would you award in damages?
5. How much would you award if the plaintiff had disclosed this information to the camera store?
6. The plaintiff testifies that the pictures were from an expensive trip to the Himalayas and had great sentimental value. 
       How much would you award in damages?
7. How much would you award if the plaintiff had disclosed this information to the camera store?

    Illustrates consequential damages, which are not traditionally awarded under the common law
    "The general principle is that if a risk of loss is known to only one party to the contract, the other party is not liable for the loss if it occurs." (P127)

    What incentive does this create during the contracting process?

    Promotes disclosure of information

    Example: the film from a trip to the Himalayas
    Request special handling, but then expect to pay extra for the extra care

    But note that it does result in an asymmetry:
    Without specific disclosure, damages are capped by average circumstances, but there is no floor to damages, so contract damage payments have a downward bias.

    Lake River v. Carborundum Co. 769 F.2d 1284 (1985) is a case where a contract provision was held unenforceable because the court viewed it as a penalty rather than reimbursement of actual damages. (F151) It's a Posner decision, well argued with some economic calculations.

1. What were the facts of the case?
2. What remedy is the plaintiff filing for?
3. Does the defendant deny breaching the contract?
4. So why is the plaintiff complaining?
5. What label does the plaintiff think best describes the key contract clause at issue here?
6. What label does the defendant think best describes it?
7. What's the potential economic problem with a penalty clause?
8. Why was it important to the plaintiff that defendant include such a clause in this case?
9. Did the court decide to enforce it or not? Why?
10. Who wrote the opinion?

    Illustrates liquidated damages--damages actually specified in the contract as the money remedy for a breach
    Right incentive to rely--because damages don't depend on reliance expenditures.
    Right incentive to breach if the amount agreed on is what expectation damages would be

    Penalty clause -- an agreement that the breaching party must pay a large penalty to the other party, representing more than the actual cost of the breach. (F)

    Disadvantage: deters efficient as well as inefficient breaches
    others: create bilateral-monopoly problems; ... might induce the prospective victim to provoke a breach.... and...discourage renegotiation. (P128-9)
    Advantage: signals reliability, compensates for high risk of default (P128)

    "A penalty clause is a private version of a property rule." It gives promisee a right that must be bought back. A property rule may be better than a liability rule--avoids courts, expresses confidence in renegotiation options. Yet the same legal system that routinely enforces property rules created by judges and legislatures refuses to enforce property rules privately created by the people they will bind."  (F151)

    If parties to contracts understand the terms that they negotiate, then the court is unlikely to raise welfare with rules that predispose against enforcing the terms.

    Overall, there seems to be room for improvement in the efficiency-enhancing impact of court decisions regarding contract damages.