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The Goals of Contract Remedies
Mark P. Gergen *
This article offers a general account of the rules that regulate exit and loyalty in contract disputes to make some fundamental points about the goals of contract remedies. 1 The dominant goal of these rules, like all of contract remedies, is vindicating contracting rights. 2 When contract rights give way it is almost always for one of two reasons. Rights sometimes give way to advance the goal of efficient performance. This goal is familiarly expressed by the mitigation principle and, in American contract law, by the theory of efficient breach. Rights also give way to advance the goal of remedial simplicity. In a nutshell, the rules that regulate exit and loyalty in contract disputes, like all of contract remedies, vindicate contract rights at the least cost and with the least fuss. This should be utterly unsurprising.
More interesting are the trade offs made when these goals conflict. A contract right’s certainty is of crucial significance. I define a contract right as certain when the right to a performance from another is indisputable. There is an important distinction between the right to a performance and the worth of that performance to the right-holder. Often the right a performance is certain while its worth to the right-holder is uncertain. When a contract right is certain or indisputable contract law permits a right-holder to take a self-help measure, such as exiting from a contract, to avoid suffering an uncompensated
- (^) I thank Hans Baade, Andrew Kull, Douglas Laycock, and Alan Rau with whom I have had
enlightening conversations about many of the issues discussed in this paper. This article grew out of a paper presented at the International Conference on Comparative Remedies for Breach of Contract at the Buchmann Faculty of Law, Tel Aviv University (June 2002). That paper will appear as a chapter of a book edited by Ewin McKendrick and published by Hart Publishing.
(^1) By exit I mean when a person suspends or withholds performance, refuses performance, or
obtains substitute performance due to his dissatisfaction with the other’s performance or demands. Exit is an important self-help remedy for breach of contract. By loyalty I mean when a person performs, accepts performance, or awaits performance despite his dissatisfaction with the other’s performance or demands. Exit and loyalty are regulated by rules that dictate when a person has the power to exit (e.g., material breach and conditions), by rules that dictate when delaying exit will cause a person to lose the power to do so or other rights (e.g., waiver, estoppel, and election of remedies), by rules that dictate that when a person who performs a disputed obligation may recover the value of his performance if it was not due (e.g., the voluntary payment doctrine and a restitution claim on breach), and by rules that dictate when it is appropriate to threaten exit to get a more favorable resolution of a dispute (e.g., accord and satisfaction and duress).
(^2) Usually when we talk about vindicating contract rights we speak of the rights of the non-
defaulting party. The stated goal, familiarly expressed by the expectation principle, is to give the non- defaulting party the benefit of his bargain or to put him in the promised position. As you shall see, contract law also is concerned, though not equally concerned, with vindicating the rights and the bargain of the defaulter.
loss even though the measure inflicts a disproportionate loss on the defaulter. In other words, the goal of vindicating rights trumps the goal of efficient performance when it comes to self-help remedies that do not unduly tax courts. More bluntly, the theory of efficient breach is bunk as a descriptive matter when it comes to the rules that regulate self-help responses to an indisputable default. 3
The goal of efficient performance drives other aspects of contract remedies. Trivially, the mitigation doctrine and other rules compel a party to vindicate a right in the cheapest way possible. 4 More interestingly, the goal of efficient performance explains the law’s response to loyalty in the face of contract uncertainty. By this I mean when a party performs a disputed obligation or accepts performance of disputed adequacy. I show that performance of a disputed obligation (or acceptance of performance of disputed adequacy) does not preclude the later assertion of a claim of a lesser obligation (or of a greater right), but only if performance (or acceptance of performance) avoids a loss.^5 This point, which I believe is novel but seems obvious once you think about it, systematizes what now is a very tangled thicket of law.
There is scant authority on the related question whether contract uncertainty warrants withholding or refusing performance. I think this is because courts have not had to confront the question directly. It tended not to arise under traditional common law rules, which made contract rights and obligations certain or unenforceable. 6 This is changing. I highlight a fascinating decision by Judge Posner that confronts the question and answers that contract uncertainty does warrant exit, indeed his reasoning suggests uncertainty may require exit.^7 Judge Posner is on to something important. However, putting the issue in a broader frame shows that the power to exit from an uncertain contract is cosseted by other rules that discourage exit when it would result in a consequential loss.
Before I proceed I want to say a few words about the nature of my argument. I am making abstract doctrinal arguments, or, if you will, conceptual arguments. 8 I am
(^3) Daniel Friedmann, The Efficient Breach Fallacy, 18 J. Legal Stud. 1, 18-23 (1989), argues that
the theory of efficient breach is descriptively inaccurate in other respects.
(^4) See Part 3.
(^5) See Part 4.
(^6) Thus Grant Gilmore’s wry comment that traditional contract law “seems to have been dedicated
to the proposition that, ideally, no one should be liable to anyone for anything.” The Death of Contract 15 (1974)(1995 ed.).
(^7) C.L. Maddox, Inc. v. Coalfield Services, 51 F.3d 76 (7 th (^) Cir. 1995).
(^8) A conceptual argument is an odd duck. It does not reproduce the stated or actual reasons for a
decision. A highly abstract conceptual argument is not really an argument of law if by that we mean an argument that a lawyer would make to a judge, or a judge would make to a litigant, to persuade him of the legal correctness of a decision. But neither is a conceptual argument normative in the sense that it justifies
obligation to recover the value of his performance if the performance avoids a loss. 11 This article situates that rule within a broader frame. The broader frame illuminates the nature of contract rights and how (and perhaps why) contract rights differ from property rights. It also reminds us of the importance of remedial simplicity in contract law.
1. The duty to mitigate and the relative importance of vindicating rights, efficient performance, and remedial simplicity
My old Contracts casebook,^12 like many others, uses Rockingham County v. Luten Bridge Co. ,^13 and Parker v. Twentieth Century-Fox Film Corp. , 14 to introduce the mitigation doctrine. Their familiarity makes these cases good vehicles for illustrating the interplay between the goals of vindicating rights, efficient performance, and remedial simplicity in contract remedies. What they teach is that a party may act in response to default to protect herself from suffering an uncompensated loss even though her action inflicts a disproportionate loss on the defaulter.
Shirley MacLaine Parker had a contract with Twentieth-Century Fox to play the female lead in Bloomer Girl, a musical about gender and racial conflict in the antebellum south with a precociously progressive female lead. The studio cancelled plans for Bloomer Girl and offered MacLaine as a substitute the female lead in “Big Country, Big Man,” a dramatic western, with the same guaranteed compensation, $750,000 for fourteen weeks work. MacLaine turned down the second part and sued for the guaranteed compensation. In its defense, the studio argued that MacLaine failed to mitigate damages by not taking the second role. The trial court rejected this defense on a motion for summary judgment. The fighting issue in the case was whether the question of the comparability of the roles (framed as whether the second role was “different and
(^11) Restatement Third of Restitution and Unjust Enrichment, Council Draft No. 5, § 35 (Nov. 24,
- The Reporter’s Note generously credits my Restitution as a Bridge Over Troubled Contractual Waters, 71 Fordham L. Rev. 79 (2002), as having suggested the rule. That article is an extended argument for one point made in this article.
(^12) Dawson, Harvey & Henderson, Contracts (7 th (^) ed. 1998).
(^13) 35 F.2d 301 (4 th (^) Cir. 1929).
(^14) 3 Cal.3d 176, 86 Cal. Rptr. 737, 474 P.2d 689 (1970). As often happens to cases in the canon,
Parker has been used by others to make a variety of points. See Victor Goldberg, Bloomer Girl Revisited Or How to Frame an Unmade Picture, 1998 Wisc. L. Rev. 1051 (explaining that the decision should have been rested on the ground that base price in the contract was paid by the studio to have an option on Parker’s time); William J. Woodward, Jr., Clearing the Brush for Real-Life Contracting, 24 Law & Social Inquiry 99, 105 (1999)(explaining that the case is a good vehicle for exploring the difference between book law and real life); Mary Joe Frug, Re-reading Contracts: A Feminist Analysis of a Contracts Casebook, 34 Am. U. L. Rev. 1065, 1114-25 (1985) (discussing feminist issues raised by the case).
inferior” to the first) should have gone to the jury. The California Supreme Court said no affirming the trial court.^15
The goals of vindicating rights, efficient performance, and remedial simplicity clash in Parker. The goal of efficient performance was sacrificed for the others. MacLaine did no work for fourteen weeks at a time when she “was one of the biggest female stars in Hollywood.”^16 The goal of vindicating rights is roughly served. Awarding MacLaine the fee did more than vindicate her rights for she may well have gotten a windfall at the studio’s expense. She got fourteen weeks of pay while she took what may have been a much-needed break. It was a particularly busy time in her career. This outcome was tolerated in the interest in remedial simplicity. 17 There is good reason to believe that MacLaine genuinely preferred the role in “Bloomer Girl” to the role in “Big Country, Big Man.” To protect MacLaine’s from suffering a loss from doing the less desired role while encouraging efficient performance the law might have required her to take the role in the Western while giving her damages for her loss. This the law does not do. Indeed, had MacLaine taken the second role she would have been denied damages for her artistic, political, or reputational loss because it would be too speculative. The only way MacLaine could avoid suffering an uncompensated loss was to do what she did, which is to reject the role in “Big Country, Big Man” and collect the contract price. Remedial simplicity is the self-evident reason for preferring this outcome though it probably is wasteful in the short-run and may give MacLaine a windfall at the studio’s expense.
An important lesson of Parker is that a person may refuse substitute, nonconforming performance to avoid suffering an uncompensated loss though her refusal inflicts a disproportionate loss on the defaulter. Parker shows that the trope of a contract as a partnership is misleading. Partners are expected to set aside their individual interests for the interests of their firm. The duty to mitigate did not require MacLaine to set aside her reasons for preferring the role in Bloomer Girl for the greater good of the Twentieth- Century Fox/MacLaine partnership. A larger lesson is that the theory of efficient breach is bunk even as a description of the law on the books. The theory comes from focusing
(^15) Parker is representative of the case law. A survey of recent contract and Title VII cases
concludes that courts require that two positions be “virtually identical” before they will require a terminated employee to take another position to mitigate damages. Richard J. Gonzales, Satisfying the Duty to Mitigate in Employment Cases: A Survey and a Guide, 69 Miss. L.J. 749, 760-762 (1999). The author adds that courts have been more willing to require an employee to relocate when his line of work and past behavior indicated he was not averse to relocating. In Title VII cases (but not breach of contract claims), an employee may be denied full back wages for an extended period of time on the theory that he should have less desirable and lower paying work to mitigate damages.
(^16) Goldberg, 1998 Wis. L. Rev. at 1052. I take the facts not found in the opinion from Goldberg’s
excellent article. Goldberg argues that there was an alternative basis for decision because the contract had a “play or pay” provision that required the studio to pay MacClaine if it cancelled the project. Goldberg argues this was an easier basis. I think it was an easy mitigation case as well.
(^17) The fighting issue in the case – whether the question of comparability of the roles should have
gone to the jury – is also over remedial simplicity.
There are only a handful of cases like Luten Bridge in which a person hired to do work that is uniquely of value to another continues to do work after the other says stop and then sues for the contract price. 22 Even in this unusual situation the right-holder will recover the contract price if he must continue work to avoid an uncompensated loss. 23 Indeed, a party may continue work to avoid an uncompensated loss to himself even if this imposes a disproportionate loss on the other. As in Parker , courts do not try to balance interests except in the grossest sense.
Bomberger v. McKelvey^24 illustrates. McKelvey bought a lot from Bomberger and agreed to pay Bomberger $3,500 to demolish a building on the lot. McKelvey planned to build a large drug store on several lots. McKelvey decided to delay construction of the store and ordered Bomberger not to proceed with demolition. Bomberger demolished the building anyway claiming that he needed skylights salvaged from the building, which were worth around $540, to fulfill another construction contract. The demolished building was worth around $26,000 and was generating $300 monthly rent. The case holds that Bomberger acted reasonably because getting substitute skylights may have delayed completion of his other project by several months. The court made no effort to quantify or to balance the parties’ respective losses.
The power to act to protect a contract right is not absolute. English judges, who start from the premise that there is a general right to perform and collect the contract price in the face of a repudiation, have struggled to define when this right gives way. One judge summed it up this way: “How one defines that point is obviously a matter of some difficulty, for it involves drawing a line between conduct which is merely unreasonable and conduct which is wholly unreasonable.” 25 This seems to me an apt description of the balance the courts struck in Parker v. Twentieth Century Fox and Bomberger v. McKelvey. In countenancing “merely unreasonable” behavior the English
stopping performance ” and poses as the difficult case where avoiding loss requires “taking affirmative steps .”
(^22) The classic case is Clark v. Marsiglia, 1 Denio (N.Y.) 317, 43 Am. Dec. 670 (1845)(holding that
a painter who completed painting after stop order could not recover contract price). Corbin cites four other cases. Corbin on Contracts § 1039 n. 18.
(^23) O’Hare v. Peacock Dairies, Inc., 26 Cal. App.2d 345, 79 P.2d 433 (1938)(holding that farmer
could continue to produce and deliver milk to defendant under long-term contract because he ought not be obliged to sell his herd to stop production); Southern Cotton-Oil Co. v. Heflin, 99 Fed. 339 (1900)(holding that manufacturer of cotton seed who contracted to sell manufacturing by-products to defendant could continue production after stop order and recover difference between contract price and market price); Northern Helix Co. v. United States, 19 Ct.Cl. 118, 455 F.2d 546 (1972), 207 Ct.Cl. 862, 524 F.2d 707 (1975), cert denied 429 U.S. 866 (1976)(holding that manufacturer could continue to produce and deliver helium under long-term contract where production was inter-related with other operations, manufacturer had no storage facilities, and there were no other buyers).
(^24) 35 Cal.2d 607, 220 P.2d 729 (1950).
(^25) Clea Shipping Corp. v. Bulk Oil International Ltd., Queen’s Bench [1984] 1 All E.R. 129.
judge is saying that an aggrieved party may act to avoid an uncompensated loss though his action imposes a significantly larger loss on the defaulter.
2. The power to exit to vindicate an indisputable right
In American law, the doctrine of material breach and the cognate doctrines of total breach and substantial performance dictate when a party has the power to withhold or refuse performance in response to default in the absence of an express condition.^26 The mitigation doctrine performs a similar function when called upon, as it was in Parker , to fault a person for not accepting an offer of substitute performance from a
(^26). A finding of material or total breach triggers several possible legal responses. They include the
power to suspend performance, the power to abandon a contract and find substitute, and the power to recover in Restitution to reverse a bad bargain or perhaps even to compel the defaulting party to disgorge his profits from breach. The Second Restatement of Contract distinguishes between material and total breach on the basis of whether the harm from the breach is curable. Under the Restatement, a material breach that is curable justifies suspending performance. See Restatement, Second, of Contracts § 242, comment a. A total breach – meaning an uncurable material breach -- discharges the non-defaulting party, justifying his withdrawal from the contract. Restatement, Second, of Contracts §§ 236, 243(1), (2). It also seems to justify the optional Restitution remedy. Restatement, Second, of Contracts § 373.
It is a mistake to emphasize the possibility of cure in defining when a breach justifies withdrawal from a contract because that derogates from other equally important considerations, such as whether damages are likely to be an adequate remedy if the non-defaulting party accepts performance or continues to perform. I suspect that cure was emphasized in the Restatement to solidify its relevance under the common law. That a party ought to give notice and and opportunity to cure before withdrawing from a contract is well-established in the common law. See, e.g., Pollard v. Saxe & Yolles Dev. Co., 12 Cal.3d 374, 525 P.2d 88, 92, 115 Cal.Rptr. 648, 652 (1974); Sturdy Concrete Corp. v. Nab Constr. Corp., 65 A.D.2d 262, 411 N.Y.S.2d 637, 644 (1978); United States ex rel. Cortolano & Barone, Inc. v. Morano Constr. Corp., 724 F.Supp. 88, 98 (S.D.N.Y.1989); Cyclo Floor Machine Corp. v. National Housewares, Inc., 296 F.Supp. 665, 682 (D.Utah 1968); McClain v. Kimbrough Construction Company, 806 S.W.2d 194 (Tenn. App.1990).
The concept of substantial performance is associated with a claim by a party who fails to perform in minor respects to be paid for work done. In most states a party who substantially performs has a right to recover the contract price less damages caused by his breach (the contract remedy), otherwise he recovers in restitution. Reynolds v. Armstead, 166 Colo. 372, 443 P.2d 990 (1968); Levan v. Richter, 152 Ill. App.3d 1082, 504 N.E.2d 1373 (1987); Plante v. Jacobs, 10 Wis.2d 567, 103 N.W.2d 296 (1960). In a few states a party who substantially performs recovers in restitution, otherwise he forfeits compensation. J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 494 N.E.2d 374 (1986). The New York rule on construction contracts is a variant. A contractor who substantially performs is paid on the contract (less damages) otherwise he has no claim in restitution. Steel Storage & Elevator Constr. Co. v. Stock, 225 N.Y. 173, 121 N.E. 786 (1919). New York law has softened in other settings. Hadden v. Consolidated Edison Co. of New York, 34 N.Y.2d 88, 356 N.Y.S.2d 249, 312 N.E.2d 445 (1974), states that willfulness of default is only a factor to be considered in deciding if employee substantially performed and holds that employee who had taken bribes from contractors might not forfeit his pension. The second time round the New York Court of Appeals concluded forfeiture of the pension was appropriate on a technical ground. Hadden v. Consolidated Edison Co. of New York, Inc., 45 N.Y.2d 466, 382 N.E.2d 1136, 410 N.Y.S.2d 274 (N.Y. Oct 26, 1978).
of substance these two lists of five can be reduced to three factors: (1) whether the aggrieved party needs to withhold or refuse performance to avoid suffering an uncompensated loss 30 ; (2) the burden imposed on the defaulter by withholding or refusing performance 31 ; and (3) whether the default was willful or in bad faith. 32
The Restatement is conspicuously opaque about the relative weight assigned to these factors when they cut in different directions.^33 It is as we saw in Part One. A party may refuse non-conforming performance or withhold performance in response to default to avoid suffering an uncompensated loss though his action inflicts a disproportionate loss on the defaulter. Sales law on the power to revoke acceptance provides a telling example. Revocation is more troublesome than rejection because the seller is likely to incur a loss when it must recover and resell goods that have been used by the buyer. Under the Uniform Commercial Code, a buyer may revoke acceptance for a hidden defect only if the defect ‘substantially impairs’ the value of the goods to him.^34 Commentators who have looked closely at the cases have found that courts are very
rely on the other party's future performance; (e) the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated.
(^30) Restatement factors (a), (b), and (d); UNIDROIT factors (a), (b), and (d).
(^31) Restatement factor (c) states the principle against forfeiture. UNIDROIT factor (e) speaks of
avoiding a “disproportionate loss” to the defaulter. It is much the same thing. The Second Restatement defines forfeiture as “the denial of compensation that results when the obligee loses his right to the agreed exchange after he has relied substantially.” Restatement, Second, of Contracts, § 227 comment b. The Restatement’s definition of forfeiture suggests two baselines for measuring forfeiture. The reference to “reliance” and “the denial of compensation” suggests a baseline of the defaulter’s pre-contractual position. The reference to the defaulter’s “right to the agreed exchange” suggests a baseline of the defaulter’s position if the contract was fully performed by both sides. I think the latter view is more in accord with the law. Countless insurance cases invoke the principle opposing forfeiture to protect the right of an insured to collect on what is in effect a winning bet notwithstanding his default on a technical term of the bet. Sales cases that prevent a buyer from rejecting goods because of a minor defect to get out of a losing bargain are similar. See James J. White & Robert S. Summers, Uniform Commercial Code 355-357 (3d ed. 1988)(concluding that “relatively little is left” of the UCC perfect tender rule because courts have used a variety of devices to prevent sellers from rejecting goods in bad faith to escape a disadvantageous bargain).
(^32) Restatement factor (e); UNIDROIT factor (c). It is uncontroversial that the quality of the
defaulter’s conduct is relevant when his misconduct bears on the likelihood that the aggrieved party will suffer a loss if he does not withhold or refuse performance. Less clear is whether forfeiture may be countenanced to punish willful or intentional breach.
(^33) Restatement, Second, of Contracts, § 241, comment (a)(“This Section therefore states
circumstances, not rules, which are to be considered in determining whether a particular failure is material.”); comment (b)(“ no simple rule based on the ratio of the one to the other can be laid down, and here, as elsewhere under this Section, all relevant circumstances must be considered.”)
(^34) UCC 2-608(1). The CISG has a fundamental default standard.
protective of buyer’s rights in applying this seemingly seller-friendly standard so long as a buyer acts to revoke promptly upon discovering a defect. 35
Colonial Dodge Inc v Miller^36 nicely illustrates. Miller bought a station wagon with special ordered extra wide tires. The car was delivered without a spare extra wide tire. Miller discovered the tire was missing within a day but after he had driven the car four hundred miles. He demanded a spare from the dealer and was told that it could not be supplied because of a strike at the factory. Miller immediately parked the car in front of his house and demanded that the dealer retrieve it. Eventually the car was towed from the street by the police where it was impounded for a number of years as the case passed through the courts. The dealer sued for the price. He won in the trial court, lost on appeal, won on rehearing, and finally lost at the state supreme court by a vote of six to three. The expected loss to Miller from the temporary lack of a spare was small but, perhaps, meaningful to him.^37 Much of the loss would have been in worrying while driving without a spare. There was also a small chance that Miller would be stranded without a spare. None of these losses were compensable in damages. Returning the car imposed a large loss on the dealer for the car could no longer be sold as new. That the case was thought close despite the imbalance between Miller’s likely loss if he drove the car for a short while without the spare and the loss to the dealer from returning the car – the thirteen judges who heard the case split seven to six with one switching – is telling evidence of the unwillingness of judges to require a party to take and pay for clearly defective performance when that might leave him with even a small uncompensated loss though the defaulter is subjected to a certain larger loss.
There are counter-examples of cases where a person is required to accept and pay for non-conforming performance. Perhaps the most famous counter-example is Jacobs & Young v. Kent.^38 Kent was made to pay the full contract price for the construction of a home though the builder substituted Cohoes pipe for Redding pipe specified in the contract. But it may not be a good example. There is a plausible argument that Redding pipe was specified as a standard making the substitution of equivalent Cohoes pipe not a default. A better counter-example is Plante v Jacobs^39 for it is undeniable that the Jacobs
(^35) JA Sebert Jr ‘Rejection, Revocation, and Cure Under Article 2 of the Uniform Commercial
Code: Some Modest Proposals’ 84 Northwestern U L Rev 375, 399–408 (1990), is a good review of the case law. DW Garland, ‘Determining Whether a Nonconformity Substantially Impairs the Value of Goods: Some Guidelines’, 26 Uniform Commercial Code L J 129 (1993), comes to much the same conclusions.
(^36) 420 Mich 452, 362 NW 2d 704 (1984).
(^37) The dealer and the manufacturer thought Miller was returning the car on a pretext. Local
newspaper and television had reported that dealers were delivering new cars without spares because of the auto strike. This being Detroit it was understandably big news. MacCauley, Kidwell, and Whitford, Contracts Law in Action: The Concise Course 130-131 (Lexis-Nexis 2003).
(^38) Jacob and Youngs v Kent 230 NY 239, 129 NE 889 (1921).
(^39) 10 Wis 2d 567, 103 NW 2d 296 (1960).
If you remain unconvinced that these rules are not about avoiding economic waste, an often overlooked companion rule clinches the point. This rule applies when the aggrieved party actually repairs the defect. The law denies recovery of money spent on substitute performance on the ground that the substitute is better than the promised performance, but it does not deny recovery of money spent on substitute performance on the ground that the loss in market value from the defect in the original performance does not warrant the outlay. 43 If the aggrieved party spends the money to fix a defect, the law does not question his reasons. Ironically, the combination of this rule and the rule sometimes limiting damages to loss in market value if a defect is not repaired may actually encourage wasteful repair for the two rules give the aggrieved party an incentive to repair a defect to avoid being under-compensated for a subjective loss. 44
Another feature of the law on material breach and substantial performance strengthens the point that these rules do not promote efficient breach. Under the traditional rule, a defaulter may recover the contract price or in restitution for defective performance only if the defect in his performance is inadvertent. 45 A plausible account of this rule is that it discourages a party from unilaterally modifying a contract by denying him compensation for a knowing deviation.^46 This is without regard to the
(^43) Kirkpatrick v. Temme, 98 Nev. 523, 654 P.2d 1011 (1982)(awarding $84,333.73 spent to
complete construction where contract price was $175,000 despite defaulter’s testimony that work was 80% complete and that he could have finished for $39,2000 where the owner and second contractor testified original plans and specifications were followed); Hi-Valley Constructors, Inc. v. Heyser, 163 Colo. 1, 428 P.2d 354 (1967)(awarding cost of repainting exterior of house); Carlin v. Comstock, 38 Conn. Super. 424, 450 A.2d 875 (1982)(awarding $2,106.44 to complete porch though only $143 was due on the original contract).
(^44) For example, the rules seem to give the Plantes an incentive to spend $4,000 to move the wall,
though they place only a $1,000 value on having the wall moved, because the Plantes bear the $1,000 loss if the wall is not moved while Jacobs bears the $4,000 cost of moving the wall. But the law tempers the incentive to make wasteful repairs by allowing the hirer to keep the balance due on the contract or recover remedial cost as damages unless those amounts are substantially disproportionate to the hirer’s loss from the faulty construction So, for example, if the Plantes had personal reasons to move the wall that would justify them spending a sum as substantial as $1,000, then they might think they have a fair chance of keeping the $5,000 balance due if they do not make the repairs and present their reasons for wanting the wall moved as good enough to retain the balance. Your guess is as good as mine as to how people actually respond to these rules.
(^45) There is a fair amount of old case law countenancing forfeiture to punish willful default. Corbin,
who strongly condemned these cases, gave as an extreme example McNeal-Edwards Co. v. Frank L. Young Co., 35 F.2d 829 (1 st^ Cir. 1929). The seller delivered defective oil causing the buyer $10,730 in damages. In response the buyer retained possession of drums belonging to the seller causing the seller $100 in damages. The court held that this was wrong (and indeed that the buyer committed the tort of conversion) and as a consequence it denied the buyer’s larger claim for damages. Corbin on Contracts § 1254.
(^46) Andrew Kull, Restitution’s Outlaws, 78 Chi.-Kent L. Rev. 17 (2003), makes the general point
that restitution punishes wrong-doers by withholding a claim that it would otherwise allow to prevent unjust enrichment. The Restatement Third of Restitution and Unjust Enrichment points in this direction in stating that restitution to the builder who knowingly deviates from plans should be qualified or denied in order to avoid subjecting the owner to a forced exchange. Council Draft No. 5, § 36(b) and comment b.
efficiency of the modification. While American law may be softening towards knowing default (more on this in a moment), it seems to remain the law that a builder will not recover the contract price or in restitution for a knowing deviation from a contract absent a default or other conduct by the other justifying the deviation. 47 A contract right is treated like a property right in that a knowing default is subject to the punitive sanction of forfeiture. 48
The Second Restatement of Contracts does not condemn knowing default tout court. Rather it makes the defaulter’s bad faith one factor among several to be weighed in deciding if a default is material. 49 This in itself means little. More significant is the implicit drift of the Restatement’s comments, which never suggest forfeiture may be justified to punish knowing default. 50 The leading treatises delve a little deeper and intimate that moderate forfeiture is preferred to a risk of leaving the aggrieved party with an uncompensated particularly if the breach is knowing or in bad faith. 51 But this is not
(Nov. 24, 2003). This analogizes the builder who deviates from plans to the knowing trespasser who builds an improvement.
(^47) Many cases state the rule though there seem to be few occasions to apply it. Tolstoy Constr. Co.
v. Minter, 78 Cal. App. 3d 665, 671, 143 Cal. Rptr. 570 (Cal. App. 1978); Moore's Builder and Contractor, Inc. v. Hoffman, 409 N.W.2d 191, 195 (Iowa Ct. App. 1987); Peabody N.E., Inc. v. Town of Marshfield, 426 Mass. 436, 689 N.E.2d 774 (1998); Sear-Brown Associates, P.C. v. Blackwatch Development Corp., 492 N.Y.S.2d 266 (N.Y.A.D. 1985)(applying the rule); Merrill Iron & Steel, Inc. v. Minn-Dak Seeds, Ltd., 334 N.W.2d 652 (N.D. 1983); Ahlers Bldg. Supply, Inc. v. Larsen, 535 N.W.2d 431, 435 (S.D. 1995); Uhlir v. Golden Triangle Development Corp., 763 S.W.2d 512 (Tex. Civ. App.-Fort Worth,1988). Cf. Hayeck Bldg. & Realty Co. v. Turcotte, 361 Mass. 785, 282 N.E.2d 907 (1972)(requiring good faith and countenancing switch to less costly method of doing work). In Mathis v. Thunderbird Village, 236 Or. 425, 389 P.2d 343 (1964), which is the basis for Restatement, Second, § 241, illustration 7, a builder’s intentional failure to complete the work in a minor respect was excused because it was prompted by the hirer’s failure to pay. Vincenzi v. Cerro, 186 Conn. 612, 442 A.2d 1352, 1354 (1982), excuses failure to complete work in a timely fashion though it was alleged to be willful.
There is also a fair amount of case law for the proposition that a willful deviation warrants an award of remedial cost however disproportionate this amount may be to the apparent loss. Kangas v. Trust, 100 Ill. App. 3d 876, 65 Ill. Dec. 757, 441 N.E.2d 1271 (1982); Roudis v. Hubbard, 176 App. Div. 2d 388, 574 N.Y.S.2d 95 (NYAD 1991); Fidelity & Deposit Co. v. Stool, 607 S.W.2d 17 (Tex. Civ. App. 1980). To the contrary is Grossman Holdings, Ltd. v. Hourihan, 414 So.2d 1037 (Fla. 1982)(denying remedial cost though contractor built house facing in wrong direction over repeated protests of owner).
(^48) Even property rights can give way if an infringement is minor and enjoining the infringement
would inflict an undue hardship on the infringer. Mannillo v Gorski 54 NJ 378, 255 A2d 258 (1969)(innocent encroacher is only made to pay the market value of what he has taken). Typically the doctrine of undue hardship protects only innocent infringers. Ariola v Nigro 16 Ill 2d 46, 156 NE 2d 536 (1959)(relying on rule that an intentional encroachment will always be enjoined).
(^49) Restatement, Second, of Contracts § 241(e).
(^50) Restatement, Second, of Contracts § 241, comment (d).
(^51) A. Farnsworth, Contracts § 8.12 (2 nd (^) ed. 1990); J. Perillo, Calamari and Perillo on Contracts, §
11.18 (5 th^ ed. 2003).
afield. One point to be taken from this is that contractual obligations differ on multiple dimensions that affect their enforcement at multiple points. This is commonplace in the remedy of specific performance where different rules apply to the sale of land and labor. The modern tort of bad faith breach applies to a limited class of contracts that has at its core insurance. Forfeiture is the traditional way to punish knowing breach. That this is thought appropriate for some contractual obligations but not others is unsurprising. Nor need all contractual obligations be treated the same in respect to the degree of tolerance of forfeiture to avoid a risk of under compensating the aggrieved party. In construction cases, some states assignto the builder the burden of establishing the cost of completing undone work at pain of forfeiture if he cannot. 57 This should not commit them to assigning to a worker who leaves a job the burden of proving his employer’s damages for it is easy to think of reasons for treating these cases differently.
It may seem that the Second Restatement unnecessarily confuses the issue of the culpable state of mind by targeting bad faith default rather than knowing default. Generally, knowing trespass merits punitive damages 58 and the punitive sanction of forfeiture of a restitution claim for improvements.^59 But the bad faith standard is apt when the default is on a doubtful obligation, as it often is. In Part Four we will see that an honest belief a performance is not owed cuts against treating default as material. We will come to this. The point for now is that the rules on material breach and substantial performance come down hard on a person who knowingly defaults on an indisputable contractual obligation. Occasionally forfeiture is used to punish knowing default. Generally forfeiture is preferred to a risk of leaving the aggrieved party with an uncompensated loss. None of this is consistent with promoting efficient breach.
3. Mitigation redux: efficient vindication of rights
While contract law does not promote efficient breach, it does promote efficient vindication of rights. Thus, sales law encourages a buyer and a seller to make a substitute transaction and recover the difference in price on repudiation because this usually is the cheapest and simplest way to achieve the promised position. Cases that twist the text of the Code to achieve this end attest to the strength of the basic idea. The Dawson casebook highlights a trio of cases where courts read the text in different ways to encourage a buyer to make a substitute transaction on anticipatory repudiation.^60 Sales law encourages a
(^57) Mirisis v. Renda, 83 A.D.2d 572, 441 N.Y.S.2d 138 (2d Dep't 1981); BPR Const. &
Engineering, Inc. v. Rivers, 608 S.W.2d 248, 249-250 (Tex.Civ.App.-Dallas 1980). Often the burden of establishing forfeiture is placed on the party seeking relief from forfeiture. MacFadden v. Walker 97 Cal.Rptr. 537, 5 Cal.3d 809, 488 P.2d 1353 (1971).
(^58) Jacque v. Steenberg Homes, Inc., 563 N.W.2d 154 (Wisc. 1997).
(^59) Restatement, Third, Restitution and Unjust Enrichment, Tent. Draft No. 1, § 10, comment e and
illustrations 5 and 6 (2001).
(^60) Oloffson v. Coomer, 11 App.3d 918, 296 N.E.2d 871 (1973)(reasoning that damages are
measured at time is repudiation is final under § 2-713 because that is when buyer “learned of the breach”); Cargill, Inc. v. Stafford, 553 F.2d 1222 (10 th^ Cir. 1977)(reasoning that while damages are measured at time
buyer to make a substitute transaction when that appears to be the easiest way to vindicate his rights even if the seller wants to continue. Thus, a buyer is encouraged to reject a tender of non-conforming goods by rules that strip him of prerogatives if he accepts a tender of goods he knows are non-conforming unless he has good reason to believe that continuing with the transaction will be a cheap and easy way eventually to get what he was promised.^61 These rules function like the mitigation doctrine in that they encourage the aggrieved party to pursue the cheapest path to vindicating his rights. The difference is that the mitigation doctrine cuts off the right to damages while these rules cut off the power to return goods.
The doctrines of waiver and equitable estoppel sometimes serve the same function. They deprive a party of a right or prerogative when his negligence in asserting the right or prerogative inflicts a loss on the other. Few areas of private law are as poorly mapped as these two, particularly the law of waiver. 62 One of the better American Contracts treatises states that “contractual rights are not waivable, conditions are.” 63 At best this is misleading, at worst it is deeply confused.^64 On a more practical level cases
of performance under § 2-713 (which was the common law rule), if buyer could have covered through forward contract they should be measured at what the cover price would have been under § 2-712); Cosden Oil & Chemical Co. v. Karl O. Helm Aktiengesellschaft, 736 F.2d 1064 (5 th^ Cir. 1984)(laying down a rule to require cover without trying to find a textual hook in the UCC).
(^61) Much of this is in UCC § 2-608(1), which bars revocation of acceptance if a buyer accepted goods knowing of a non-conformity unless he did so on the seller’s assurances the non-conformity would be cured. Even if a buyer satisfies this requirement, revocation is prohibited under § 2-608(2) if there has been a substantial change in the value of the goods not caused by the defect. This is buttressed by § 2- 605(1), which preclude a buyer from relying on ascertainable defect to justify rejection or establish breach if he fails to notify the seller of the defect and the seller could have cured had he been notified.
(^62) The doctrine of equitable estoppel is perplexing because of the old saw that estoppel may be
used as a shield but not as a sword. Dickerson v. Colgrove, 100 U.S. 578, 580-581 (1879)(“This remedy..
. is available only for protection, and cannot be used as a weapon of assault.”) In the insurance context the upshot of the old saw is that estoppel can be used to override a condition to coverage but it cannot be used to expand coverage. Martinelli v. Travelers Insurance Companies, 687 A.2d 443, 447 (R.I.1996); ABCD ... Vision, Inc. v. Fireman's Fund Insurance Companies, 304 Or. 301, 744 P.2d 998, 1001-02 (1987). The old saw is not a categorical rule. Potesta v. United States Fidelity & Guaranty Co., 202 W. Va. 308, 504 S.E.2d 135 (1998), notes three exceptions: estoppel based on an agent’s misrepresentation of the scope of coverage when the policy was made; estoppel based on a liability insurer tendering a defense without a reservation of rights; and, estoppel based on bad faith by an insurer in failing to settle a claim.
(^63) John D. Calamari & Joseph M. Perillo, The Law of Contracts 442 (4 th (^) ed. 1998).
(^64) A right to a performance is described as a condition when default allows the right-holder to
withhold or refuse performance. If the statement quoted in text was correct, then it would be more accurate to say that what is waived is the power to withhold or refuse performance on default. UCC § 2- 607(2) is consistent for it states that a person who accepts non-conforming goods waives his right to reject the goods while retaining his right to damages. But sometimes the concept of waiver is used to deny a right-holder damages for infringement of a right. For example, under UCC § 2-605 a buyer who fails to inform the seller of curable defects is said to waive his right to damages. Of course, the rule in UCC § 2- 605 could be restated as a rule of mitigation. The concept of waiver tends to be associated with conditions (meaning the power to withhold or refuse performance on default) because other doctrinal tools exist to
cases involve agreements to accept substitute performance. 71 In these cases waiver and estoppel go to important terms but require something close to assent by the obligor and a change of position by the obligee. 72 The similarity to promissory estoppel is obvious.
A third use of waiver and estoppel is to deny a person of a contractual right or prerogative when his negligence in asserting the right or prerogative causes a loss to the defaulter. A familiar example already noted is the rule that bars a buyer from returning accepted goods when he should have known the goods were defective. 73 In this setting, unlike the other two, waiver and estoppel do not require unjust enrichment or an overt act or a deliberate choice by the right-holder. The doctrines may be used to strip a person of contractual prerogative, such as the power to return goods or to exit from a contract, to cast upon him a loss he caused inadvertently but negligently. 74 The gist of the doctrines is neglect in asserting a power or right and resulting harm. The obvious parallel between the mitigation doctrine and the negligence doctrine and this last use of waiver and
(^71) Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280 (7 th (^) Cir. 1986), illustrates. The case involves an apparent agreement by buyer to stretch out delivery dates that could not be enforced as such because of a no oral modification clause in the original contracts. The statute of frauds was not an issue because there was a writing by the seller acknowledging the modification, which satisfies the statute as against the buyer under UCC 2-201(2). The case plays out as a waiver case under UCC 2-209(4) and (5) because a no oral modification clause can be waived. This suggests a justification for Judge Posner’s conclusion that waiver requires a showing of reliance. Historically waiver does not require reliance, but in this context waiver is being used to get around the absence of a writing signed by the defendant attesting to the modification. This, of course, is usually done by estoppel, where reliance is the heart of the matter. Reliance should be the heart of the matter because of its evidentiary value.
(^72) There is also an overlap with the doctrine of ratification, which requires apparent assent but
does not require reliance. Merrill v. DeMott, 113 Nev. 1390, 1396-97, 951 P.2d 1040 (1997).
(^73) This is codified in Sales law. A buyer who accepts goods must pay for them unless he has the
power to revoke his acceptance. The buyer is said to have waived his power to reject. UCC 2-607(2). The power to revoke is conditioned upon the buyer having been ignorant of the defect or having been assured of its repair by the seller at the time of the acceptance. UCC 2-608. The buyer is left with a claim for breach of warranty under UCC 2-614. A buyer waives his claims for damages if the seller could have cured the defects upon notification. UCC 2-605. Avoidable damages may also be denied through the mitigation doctrine.
(^74) Mahban v. MGM Grand Hotels, 100 Nev. 593, 691 P.2d 421 (1984), is an example. A lease
gave either party the power to cancel in event the premises were destroyed. After a fire the lessor sent a letter to the lessee indicating that it planned to rebuild and asking the lessee to advise it of any plans it had to do work on the space. Relying on the letter the lessee ordered new merchandise. A month later the lessor cancelled the lease. The trial court held that the lessor had waived this power. The court of appeals held that the lessor was estopped from canceling.
Pike v. Howell Building Supply, Inc., 748 So.2d 710 (Miss. 1999), is a striking example of the use of waiver to do the work of the doctrines of contributory negligence or assumption of risk. An owner of gas station sued a contractor when concrete poured by the contractor buckled rupturing a gas line. The contractor had warned the owner of the risk of this happening but the owner had instructed him to proceed. Reasoning that the claim sounded in Contract and not Tort the court refused to apply the doctrines of contributory negligence and assumption of risk. Instead it held that the owner waived claim he might have for unworkmanlike construction.
estoppel suggest that forbearance in asserting a right or power should not trigger waiver or estoppel if the forbearance was a reasonable effort to mitigate loss. Judge Posner has drawn this connection.^75 Of course, it also is written into sales law rule on rejection and revocation of nonconforming goods.
There is a curious asymmetry in how the law treats avoidable losses and avoidable remedial uncertainty. While it is commonplace to speak of a duty to mitigate, 76 it would be quite odd to say that Shirley MacLaine had a duty not to take the role in Big Man, Big Country to avoid being in a situation where her loss was too speculative to compensate. We do not think about the choice MacLaine is put to in Parker in such terms because speculative damages are denied without regard to their avoidability. Perhaps this is a testament to the strength of the interest in remedial simplicity. This may change. There is a movement to liberalize the law to allow awards of speculative damages. This creates a space for a rule that conditions a person’s right to recover speculative damages on his having no other simpler remedial option. There are intimations of such a rule in the law of equity on specific performance. 77 If such a rule were to enter the law, then it would squarely pose the conflict between the goal of
(^75) McElroy v. B.F. Goodrich, 73 F.3d 722 (7 th (^) Cir. 1996)(declining to find waiver or estoppel
where the plaintiff “was simply making the best of a bad deal—and incidentally mitigated his damages.”) This point was unnecessary to reach the holding for the decision goes on to find the plaintiff’s claim of default was unfounded.
(^76) The description of mitigation as a duty is thought to be misleading for two reasons. One is that
failure to mitigate triggers no obligation or liability. The other is that the mitigation rule is really a rule of causation. Charles McCormack, Handbook on the Law of Damages section 33, at 127 (1935), Corbin on Contracts section 1039 at 241 (1964); Restatement, Second, of Contracts section 350 comment b. Neither reason holds water to my mind. The mitigation doctrine is more than a rule of causation for it requires a determination that the claimant was at fault in not avoiding a loss. The first reason assumes that an obligation can be described as a duty only if breach is sanctioned by imposition of a secondary obligation. This is not self-evident. We might well say that a person has a duty to perform a contract even if the only consequence of non-performance is forfeiture of his rights under the contract.
Michael B. Kelly, Living Without the Avoidable Consequences Doctrine in Contract Remedies, 33 San Diego L. Rev. 175 (1996), has a more challenging argument for why it is misleading to speak of avoidable consequences or duty to mitigate. The gist of his argument is that when a person fails to take curative action in response to breach he reveals that the value to him of the position he is on breach is worth more than the value to him of the promised position (which the corrective measure would put him in). The cost of untaken curative action is denied to avoid putting the aggrieved party in better than his rightful position. This is an interesting way to think about a person who intelligently chooses not to take curative action in response to breach. But this way for framing the issue generates needless complexities if a person stupidly fails to take curative actions.
(^77) The availability of specific performance will justify a court requiring greater certainty of proof
if a plaintiff elects to recover damages. Restatement, Second, of Contracts section 352, comment 8. Further, egregious behavior by a defaulter may justify an award of speculative damages. Native Alaskan Reclamation and Pest Control, 685 P.2d 1211, 1222 (1987), endorsing Restatement, Second, of Contracts section 352, comment a (“A court may take into account all the circumstances of the breach, including willfulness, in deciding whether to require a lesser degree of certainty, giving greater discretion to the trier of the facts.”)
