Contracts Quiz 2nd Semester 1995

17 Oct

17. Under what circumstances might lost profits be denied even when they are part of an objective view of the consideration? Give one example from the cases we have read where this might have occurred.

When they can not be proved. In Fruend, the author made a contract with the publisher for royalties on book sales. Royalties represent a portion of profits. Thus, the consideration provided for the award of lost profits upon the publisher’s breach. However, Fruend was unable to provide evidence of what his lost profits would have been. Past book sales could have been presented to make a case for what the lost profits would have been.

18. All other facts remaining the same, would it have made any difference at the bottom line in Kerr if the telegraph company were able to decipher the encoded telegram and understand its contents? Why or why not?

If the cost of the telegram were the same, it may have made no difference. In any contract, the damages must be in line with an objective view of the consideration. The ability of the telegraph company to decipher the telegram tends to indicate that they objectively understood the nature of the commercial transaction and that they understood the consequences to the parties if the telegram were not transmitted. The more likely that a particular item of damages would result from a breach, the more likely that the parties identified and redistributed that risk. However, just because a RCA has notice as to damages does not necessarily mean that the parties distributed the risk of that damage to RCA, especially if the contract price (price of the telegram) did not reflect the magnitude of that risk. Kerr could not reasonably rely on RCA ensuring their multi-thousand dollar profit for a mere $25 cost of telegram transmission. Objectively, RCA can be understood to have borne only the risk that Kerr could have chosen to spend that $25 more profitably.

19. Identify the “increment of risk” that is brought about by anticipatory repudiation of the seller in a standard sale of goods case. Why does the consideration doctrine require that this increment of risk be assigned to the repudiating seller?

The “increment of risk” refers to the risk associated with the change in market conditions between the time of contract formation and anticipatory repudiation. Parties to a contract are normally shielded from market changes that occur between the time of contract formation and the time of performance. This leads to an increment of reliance on the contract itself. Thus, when a seller repudiates, the buyer is suddenly exposed to the risk that the market price is different than the contract price at the time of repudiation, as well as the risk that he may incur additional costs effecting cover, or that he may not be able to effect cover at all. This is the increment of risk that was not previously distributed. The consideration doctrine requires that the parties bear the risks that were distributed to them at contract formation. Since the risks have necessarily changed in the meantime, assigning the increment of risk brought about by seller’s repudiation to the seller himself is the only way to salvage the consideration. If the buyer were to have to bear that risk, there would be a sudden lopsidedness of risk that could not be tolerated by an objective view of the consideration.

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