Hammond’s Contracts Midterm: My Answer

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This is my answer to the practice midterm. As always, my contracts session is Wednesdays 5pm Charney 338.

Hypo

Whether Mel can recover from Wicked’s breach will turn on the trier of fact’s determination as to whether the contract here is enforceable. Though we have a sale of property, because the contract was verbally discussed, we automatically rule out enforceability via Statute of Frauds (note: partial performance is an excuse to the Statute of Frauds requirement). Furthermore, it is unlikely that Mel will recover under the theory of unjust enrichment as neither party was truly unjustly enriched and restitution damages are not reasonably in order. However, there is a (weak) argument to be made under the holding in Kearns v. Andree that though no benefit was conferred, Mel could recover the reasonable value of his services performed (quantum meruit: building the house). This is a weak and unnecessary argument compared to the ones that can be made for recovery under expectancy (agreement w/consideration) and reliance (promissory estoppel) and, therefore, I will not address restitution (unjust enrichment) any further.

Wicked Counter-Argument: Contract is Illusory

The obvious counter-point to be raised by Wicked is that the contract is not enforceable due to lack of mutuality under promissory estoppel. The holding in De Los Santos v. Great Western Sugar Company gives the rule that mutuality of obligation is an essential element of every enforceable agreement. An agreement which depends on the wish, will, or pleasure of one of the parties is unenforceable due to lack of mutuality. Because Wicked stated that she would decide what the reasonable price would be at the end of the contract, it could be argued that the agreement is based upon her wish or pleasure making it unenforceable. If the contract is unenforceable, Mel will not be able to recover because a breach of contract will not be established.

Contract is Enforceable: Promissory Estoppel

However, Wicked will have difficulty proving the contract’s unenforceability based on the rule stated in Section 90 Restatement of Contracts and the subsequent holding in both Hoffman v. Red Owl Stores and Wheeler v. White: “A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”

Wicked provides several details about how she wants the house altered and the explicit purpose of the alterations. These details such as the green painting, the additional landing patio, shortening her commute to Munchkin Ville for lollipops, and making sure the house had no water features or fixtures encourages Mel to reasonably expect her willingness and capacity to follow through with the contract and therefore induce his actions to move forward on the alterations. Furthermore, the only way Mel can recover the massive amount of debt and loss of profits he incurred through the alteration process is by enforcing the contract, allowing him to recover expectancy damages under the agreement with consideration theory.

The court will most likely enforce the promise based on these facts. Thus, I move to the analysis of damages.

Recovery: Reliance (Promissory Estoppel)

Mel could recover reliance damages based on the loan he took out on the house ($200k) which covers the actual house and alteration costs (he reasonably relied on Wicked’s performance). The goal of reliance is to put the non-breaching party in the position it would have been in had the promises never been made. So, it would actually be better for Mel to recover expectancy damages instead because he would also be entitled to the profit he would have made off a sale to Wicked instead of Dorothy. Reliance would just make him even. Thus, I will count the $200k as part of the contract price from which the market value of the house is to be subtracted and continue the analysis under the theory of agreement w/consideration.

Recovery: Expectancy (Agreement W/Consideration)

Since the contract has been deemed enforceable under promissory estoppel, agreement with consideration can be established (an act or promise to buy the house by Wicked). Article 2-710 of the U.C.C and the holding in Neri v. Retail Marine Corp states that in the case where the buyer repudiates the contract, damages are measured as the (1) “difference between the market price…and the unpaid contract price together with any incidental damages.”

Mel borrowed $200k from the bank at 5% interest per year. The $200k covers the house he bought to alter ($100k), the raw materials ($40k), Oz permits ($5k), and the construction ($55k). The contract price was $220 so Mel expected a $20k profit. When Wicked breached, Mel incurred incidental damages when he tried to reasonably mitigate the breach through advertising the property ($2k) and re-constructing the home so that it would be more appropriate to sell to Munchkins ($20k).

Under 710 (1) damages are measured as the ($220k (contract price) – $80k (market price)) + $22k (incidental damages) = $162k to make Mel “whole.” The goal of expectancy is to put the non-breaching party in the position it would have been in had the contract been performed. Recovering under this theory ensures Mel is not only “made even” regarding the expenses he made toward the alterations and mitigation but that also he still profits the $20k as originally promised.

Wicked could make a counter-point that Mel’s mitigation was unreasonable as seen with the holding established in Handicapped Children’s Education Board… v. Lukaszewski in that “an injured party must take all reasonable steps to mitigate damages.” Did he really need to spend $2000 on advertisements? I would argue that Mel’s steps were reasonable as evidenced by the fact that he actually sells at a loss due to his own desperation to sell the property, similar to the education board’s hiring of the one and only job applicant they received.

Wicked Counter-Argument: Health Issues Excuse Non-Performance

Wicked could argue that the allergic reaction she suffered from her overdose on lollipops is a reasonable excuse for her breach due to a health danger. However, again, seen in the holding established by Handicapped Children, “a health danger will not excuse non-performance of a contractual obligation when the danger is caused by the non-performing party.” The sheer fact that the allergy was caused by an overdose obviously implies that the reaction was self-inflicted.

Conclusion

The contract between Mel and Wicked is enforceable under the theory of promissory estoppel. Because the contract is enforceable, Mel should recover expectancy damages in the amount of $162k to make him justifiably whole. It is not wise for Mel to attempt to recover reliance or restitution damages as neither will account for the $20k lost profit to which he is entitled.

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