Damages limitations stack: filters 1 and 2
Remedies & Third Parties · Apr 12
Floor. ~40 min: R2d § 351 + Hadley. The doctrine the next class assumes you have covered.
Target. ~75 min: Floor + R2d § 352 + synthesis.
Every claimed loss runs a gauntlet of independent filters. Today isolates the first two:
(1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made.
(2) Loss may be foreseeable as a probable result of a breach because it follows from the breach
(a) in the ordinary course of events, or
(b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.
(3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.
Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.
Except as stated in subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation. The injured party is not precluded from recovery to the extent that he has made reasonable but unsuccessful efforts to avoid loss.
9 Ex. 341, 156 Eng. Rep. 145 (1854)
Court of Exchequer
Rule. Damages for breach of contract are recoverable for losses (1) arising naturally, that is, according to the usual course of things, from the breach itself, or (2) such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of its breach. Special damages not within either branch are not recoverable.
Facts. GeneCorp orders a $275,000 cryogenic freezer from Below Zero. GeneCorp gives performance specs but does not disclose that $25M in venture funding turns on demonstrating its concept to first customers. Below Zero delays installation two months. GeneCorp loses the financing.
Question. Can GeneCorp recover the $25M?
Analysis. R2d § 351 / Hadley branch 2: special damages recoverable only if reasonably contemplated. Specs alone are not notice of the financing risk. Below Zero is a refrigeration company, not a financial advisor; a two-month installation delay would not, in the ordinary course, signal $25M in lost funding. Loss exits at foreseeability.
Counter. A reasonable supplier of specialized equipment to a startup might foresee that delay risks investor confidence; $25M is not the ordinary measure of that risk.
Variation. GeneCorp tells Below Zero at contracting: "If you miss the install date, we lose VC funding contingent on a demo to investors." Now the loss enters branch 2, subject to certainty (was the funding really going to close?) and mitigation (could GeneCorp have rescheduled the demo?).
Except as stated in subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation. The injured party is not precluded from recovery to the extent that he has made reasonable but unsuccessful efforts to avoid loss.
R2d § 350: damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation. But the injured party is not barred from recovery to the extent he has made reasonable but unsuccessful efforts to avoid loss.
Two corollaries the rule does the work through:
35 F.2d 301 (4th Cir. 1929)
U.S. Court of Appeals for the Fourth Circuit
Rule. A party that receives notice of cancellation may not continue performance and thereby pile up damages. The non-breaching party's duty to mitigate begins on receipt of repudiation; expenses incurred after that point are not recoverable.
Facts. StreamTech contracts to sell $500,000 of servers to Alpha Streaming. Alpha repudiates two weeks before delivery, citing a market downturn. Despite the notice, StreamTech ships the servers anyway, incurring $15,000 in transportation costs. StreamTech finds no substitute buyer and sues for the full $500,000 plus the $15,000.
Question. Can StreamTech recover the $15,000 in shipping? What happens to the $500,000?
Analysis. The $15,000 is the Luten Bridge problem in UCC clothing. Alpha gave advance notice; under UCC § 2-704(2), a seller learning of repudiation before shipment must use reasonable commercial judgment to avoid unnecessary expense. The shipment was avoidable — the $15,000 is not recoverable (it would be recoverable as incidental damages under § 2-710 only if already shipped before notice).
The $500,000 turns on resale. Under UCC § 2-706, the seller must try to resell in good faith; recovery is then contract price minus resale price. If StreamTech resells for $400,000, Alpha owes $100,000. If StreamTech makes a genuine good-faith effort and the market truly will not absorb the goods, it may recover the full price under § 2-709(1)(b). Alpha's best argument throughout is failure to mitigate.
Variation on GeneCorp. Assume notice was given. Below Zero delays. GeneCorp learns of the delay the day it happens. GeneCorp could have rescheduled the investor demo at a cost of $40,000. It chose not to and lost the funding.
Under R2d § 350, the recoverable loss is the $40,000 reschedule cost, not the $25M financing loss. The injured party is expected to make reasonable efforts to reduce the loss; failure to do so does not bar recovery but limits damages to what could not have been avoided.
The mitigation duty is not punitive; it is informational. It tells parties to plan for substitute performance.
Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.
Two categories of loss sit outside the ordinary expectation measure:
Facts. Jack runs a small custom furniture business with inconsistent sales. He orders $25,000 of rare wood from Elite, telling Elite his client commission is "a big deal." Elite delivers defective material. Jack loses the commission. He claims $75,000 in lost profits, supported only by an unsigned email from the client and no prior earnings data.
Question. Recoverable?
Answer. Two filters fail. (1) R2d § 352 certainty: lost profits for a new or inconsistent business are speculative without historical or contractual baseline. (2) R2d § 351 foreseeability: "big deal" is not the kind of notice that puts Elite on the $75,000 risk.
What would change the result. Signed client contract + historical profit data + explicit notice to Elite of the magnitude. Then certainty and foreseeability both pass.
Rules. R2d § 351 (foreseeability), § 350 (mitigation), § 352 (certainty), § 355 (no punitives).
Cases. Hadley v. Baxendale (foreseeability anchor) · Rockingham County v. Luten Bridge (mitigation: no piling up post-repudiation losses).
Punchline. Independent filters; a loss must pass all of them. Foreseeability is ex ante (breacher at contracting); mitigation is ex post (victim after breach); certainty runs throughout; and contract damages never punish.
Open question. What about the case where the parties have agreed in advance to a damages number? Next class: liquidated damages and Lake River. When does an agreed number bind, and when does the law strike it down?
Next class: Limits on Damages II: Certainty + Liquidated Damages
_Remedies & Third Parties_ · Apr 13
Read Lake River v. Carborundum. Posner refuses to enforce a liquidated-damages clause as a penalty, even between two sophisticated commercial parties. If both sides had lawyers and agreed on a number, why does the court second-guess them? Come ready to answer. You may be called.