Contracts Quiz 2nd Semester 1995

13. Identify the pressure put on the consideration doctrine by including a express liquidated damages clause that requires specific performance of the contract as a remedy.

The consideration doctrine seems to require that if the parties have negotiated a particular remedy as a response to the risk of breach, then it must be enforced. Since specific performance precludes the payment of monetary damages, it is a broad reservation of power. Thus, allowing the specific performance clause may not be an objective reading of the contract. This puts pressure on the consideration doctrine because it requires an reading of the contract that appears to be in conflict with the express terms of the contract. However, this can be reconciled if one realizes that regardless of the express language the contract might use, the remedy must be in keeping with an objective view of the consideration.

14. In fashioning the ideal remedy, the court must keep in mind the bottom line regulatory message it will be sending out as a precedent. To this end, what must the ideal remedy accomplish?

Since most breaches are not litigated, courts are stuck with the fact scenarios that they are brought. The particular case being adjudicated may not be the ideal vehicle to carry the regulatory message they wish to send. However, they must use what they are given to make the greatest impact on regulation. The success of the ideal remedy can be measured according to how well it encourages parties to continue to negotiate in good faith and allow the consideration to evolve because only then can we be certain that the parties own consideration has been best served. Thus, the more clearly the remedy portrays that the costs of breach outweigh the costs of performance (or the costs of allowing the consideration to evolve), the better that contract law can promote contractual stability and encourage parties to continue to negotiate in good faith.

15. Why might an arbitration award of specific performance be given more weight by a court than an express specific performance clause in a contract?

By consenting to arbitration, the parties import the risk that the arbitrator’s judgment might be unfavorable to them in their own consideration. In doing so, the risks are balanced more equally than if a naked specific performance clause had been included expressly in the contract as a power grab by one side. It is much easier to say that an objective reading of the contract included the risk of an arbitrator granting specific performance than it is to read a naked specific performance clause as being objectively part of the consideration because the balance of power would be more lopsided in the latter.

16. Why does an objective view of contract require that in a standard sale of goods contract a buyer’s damages for lost profits due to seller’s breach be based on whether he has effected cover?

Lost profits (like any other damages) must be part of the objectively understood consideration in order to be recoverable. In a standard sale of goods contract, an objective reading of the contract must take into account whether the buyer was purchasing the goods for end use, or for resale. If the purchase was for end use, and there was to be no resale, the buyer was not going to make a profit. The only objective means to know whether the buyer objectively “intended” resale is to require him to act in the market as he would have had the seller performed. Thus, if the buyer does not effect cover, then he is given only the contract-market differential which would enable him to acquire substitute goods for end use. Any lost profits awarded if he has not effected cover could represent a windfall. However, if the buyer does effect cover and make a resale, then he is entitled to his lost profits because they can be objectively viewed as being contemplated by the consideration. That is to say that the seller objectively “knew” in this kind of commercial setting that the buyer had commitments to meet that would have to be covered in case of his breach.

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