Limits on Damages

AuthorFranklin G. Snyder, Mark Edwin Burge
Unit 25
Part Three
Limits on Damages
In evaluating the principal measures of damages in American contract law
expectancy, reliance, and restitutionwe 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
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
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.
Cases and Materials
A. The Foreseeability Limitation
United States District Court for the Southern District of Illinois
2007 U.S. Dist. LEXIS 53776 (No. 03-CV-4215-JPG)
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
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

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