Limits on Damages

• Author: Franklin G. Snyder, Mark Edwin Burge
• Pages: 521-541

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UNIT 25: LIMITS ON DAMAGES 521

Unit 25

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REMEDIES

Part Three

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Limits on Damages

FOCUS OF THIS UNIT

In evaluating the principal measures of damages in American contract law—

expectancy, reliance, and restitution—we first focused on the general methods of

calculating the damages in each category. Much of the initial dispute among

contracting parties regarding those calculations relates to valuation of items that

parties agree, at least in principle, should be part of the damages formulation.

Outside of valuation, however, American contract law sets limits on the means and

methods by which parties can prove damages. Particularly with expectancy damages,

where contract law is necessarily imagining an alternative future without a contract

breach, it should come as no surprise that courts will let imaginations run only so far.

A party seeking to prove its claim must work around three important limits on its

ability to recover damages. The limitations of foreseeability, avoidability, and

certainty are the subject of this unit.

Foreseeability. Today’s concept that contract damages must be foreseeable to

the breaching party in order to be recoverable by the non-breaching party traces back

to the famous English case of Hadley v. Baxendale, 156 Eng. Rep. 145 (Ex. Ch. 1854).

In Hadley, plaintiffs owned a flour mill that went out of service because of a break in

the crankshaft that worked the mill. Through neglect by the defendant delivery

service, a needed replacement part arrived five days late, and plaintiffs sought to

recover their loss of five days of output by the mill. The court declined to award those

damages because they could not “reasonably be supposed to have been in the

contemplation of both parties, at the time they made the contract, as the probable

result of the breach of it.” More than 160 years later, American contract law prohibits

the awarding of damages that were not foreseeable to both parties at the time of

contracting. The Hadley rule shows up in many places, including in section 351 of the

Restatement (Second) of Contracts and in Article 74 of the CISG.

Avoidability and the “Duty to Mitigate.” Once a contracting party knows that

it is the victim of a breach, is it allowed to do nothing and let its damages award keep

ticking upward? The general answer to this question is no. Section 350 of the

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522 CHAPTER VIII: REMEDIES

Restatement (Second) of Contracts states the typical rule: If a non-breaching party

can avoid breach-of-contract damages “without undue risk, burden, or humiliation,”

but fails to do so, it will not be awarded those damages. Lawyers and courts

sometimes refer to this concept as the “duty to mitigate,” but you should understand

that this is not a “duty” in the sense of being an affirmative obligation such as the

duty of ordinary care in negligence law. A party is free to not mitigate its damages,

but the cost of it doing so is that it will not be awarded tho se damages it could have

avoided.

Certainty. Our final limiting doctrine is very easy to state but somewhat

challenging to apply. Section 352 of the Restatement (Second) of Contracts provides

that “[d]amages are not recoverable for loss beyond an amount that the evidence

permits to be established with reasonable certainty.” What exactly does “reasonable

certainty” mean? Where buyer Burge’s new business venture suffers because of seller

Snyder’s contract breach, proving expectancy damages can be quite diffi cult because

of the certainty test. Burge might claim that his line of collectable law professor

figurines would have generated enormous profits if only Snyder had delivered the

rare marble required to make them. Can Burge prove his claim in a way that rises

above the level of pure (and self-interested) speculation? Application of this test ends

up being very fact specific and allows for a great deal of creative advocacy by lawyers.

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Cases and Materials

A. The Foreseeability Limitation

SOUTHERN ILLINOIS RIVERBOAT/CASINO CRUISES, INC.

v. HNEDAK BOBO GROUP, INC.

United States District Court for the Southern District of Illinois

2007 U.S. Dist. LEXIS 53776 (No. 03-CV-4215-JPG)

GILBERT, U.S.D.J.

This matter comes before the Court on a motion for partial summary judgment

on the issue of liability for plaintiff’s fire watch expenses filed by defendant Hnedak

Bobo Group, Inc. (“HBG”). The plaintiff, Southern Illinois Riverboat/Casino Cruises,

Inc. (“Harrahs”), has responded to HBG’s motion and HBG has replied to the

response.

Harrahs and HBG entered into an agreement on June 29, 2000, under which

HBG agreed to design the docking facility for a riverboat casino Harrahs planned to

build on the Ohio River in Metropolis, Illinois. Harrahs wanted to replace the casino