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COLUMBIA LAW REVIEW
Vol. 70 NOVEMBER 1970 No. 7

LEGAL REMEDIES FOR BREACH OF CONTRACT

E. ALLAN FARNSWORTH*

The woods are lovely, dark and deep.

But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.
-Robert Frost

This is an article about the remedies that our legal system provides when
men do not keep their promises. It sets out the principal options that were avail-
able as those remedies developed, describes the choices that were made, and
suggests some of the factors that influenced those choices. It will be seen that
there were seven critical choices, and that from these the reader who has the
patience to work through the analysis can deduce the bulk of the law of contract
remedies.

I. FIRST CHOIcE: CoMPULsIo N OR RELIEF?

Why do men keep their promises? Surely for reasons as varied and com-
plex as men and promises themselves. Sometimes, like the father who promises
to take his son to the ball game, they do so because they "want" to. At other
times, like Frost's traveller on a snowy evening, they do so because they "have"
to-because they feel themselves under some compulsion.' Surprisingly, al-
though it might be supposed that at least one of the objectives of any system of
legal remedies for breach of contract would be to compel promisors to keep their
promises, our own system nevertheless purports to reject such compulsion as a
goal.
If a society were seriously concerned with compelling men to keep their
promises, it might be expected to treat a breach of contract as a crime and to
punish defaulting promisors. Ours has not done so, and in this we are representa-
* Professor of Law, Columbia Law School; B.S., 1948, Univ. of Mich.; M.A., 1949,
Yale Univ.; LL.B., 1952, Columbia Univ.; Visiting Professor of Law, Harvard Law
School, 1970-71.
1. For a discussion of "ethical," "social" and "jural" compulsions to perform promises,
see Wignore, The Scope of the Contract Concept, 43 COLUm. L. RFv. 569, 569-70 (1943).
See also Farnsworth, The Past of Promise: An Historical Introduction to Contract, 69
CoLum. L. REv. 576, 604-06 (1969).
1146 COLUMBIA LAW REVIEW [Vol. 70:1145

tive of mankind as a whole.2 Even in the communist countries, where the con-
tracts of state enterprises are designed to carry out an economic plan in which
there is the plainest public interest, breach of such a contract is not a crime.
And this is said to be true of Communist China too, although performance of
such contracts has there been declared to be a "political task" and party control
over the individual is used to assure it.s
If a society were seriously concerned with the compulsion of promisors, it
might at least be expected to impose civil penalties for breach of contract if it
chose not to impose criminal ones. The state, rather than exact the penalty itself,
might simply allow the promisee to claim a sum of money designed to punish
the defaulting promisor. The communist countries do just this in enforcing con-
tracts between state enterprises under an economic plan, by assessing a fine
against the defaulting promisor, payable to the injured promisee, as a "form of
social criticism." 4 In contrast, courts in this country, as in most of the rest of
the world, expressly reject the notion that remedies for breach of contract have
punishment as a goal, and with rare exceptions, refuse to grant "punitive dam-
ages" for breach of contract.5 In so refusing they confidently claim to be blind
to fault, and they purport not to distinguish between aggravated and innocent
breach.6 So Holmes said, "If a contract is broken the measure of damages gener-
ally is the same, whatever the cause of the breach." 7 The skeptical reader may
well ask whether even men of judicial temperament are immune from the
temptation to depart from a rule so oblivious of blame" and, indeed, some excep-
2. Criminal penalties are, however, available for some abuses of the bargaining process
itself. Thus the MODEL PENAL CODE § 223.3(a) (P.O.D. 1962? defines the crime of theft
to include deception by creation of a false impression as to 'intention or other state of
mind," but it specifically provides that "deception as to a person's intention to perform a
promise shall not be inferred from the fact alone that he did not subsequently perform
the promise."
3. Hsiao, The Role of Economic Contracts in Communist China, 53 CALIF. L. REV.
1029, 1049 (1965).
4. Grossfeld, Money Sanctions for Breach of Contract in a Communist Economy, 72
YALE L.J. 1326, 1332 n.41 (1963). For other discussions of the role of such contracts, see
J.HAZARD, COMMUNISTS AND THEIR LAw ch. 13 (1969) ; Hsiao, supra note 3; Kiralfy,
A New Civil Code of the R.S.F.S.R.: A Western View, 15 INT'L & Comp. L.Q. 1116
(1966). Grossfeld discusses the shift in East German law from a system of fines added on to
compensatory damages to one of fines in lieu, at least in part, of damages, to prevent the
temptation to induce breach. Grossfeld, supra at 1340-41. Penalties under the Comecon
General Conditions, adopted for use in foreign trade by the Council for Mutual Economic
Assistance, are discussed in Hoya, The Comecon General Conditions-A Socialist Unifica-
tion of International Trade Law, 70 COLUm. L. REv. 253, 287-97 (1970). On the factors
that determine whether the aggrieved party will pursue these remedies, see Loeber, Plat
and ContractPerformance in Soviet Society, in LAw IN TH SoVIET Socm-= 128, 169-72
(W. LaFave ed. 1965).
5. Simpson, Punitive Damages for Breach of Contract, 20 OHIo ST. L.J. 284 (1959).
A leading case is Addis v. Gramophone Co., [1909] A.C. 488. A leading exception is
Welborn v. Dixon, 70 S.C. 108, 49 S.E. 232 (1904).
6. The .term "innocent breach" should not be confused with "excusable nonperfor-
mance," which involves no breach at all. Instances of "subjective impossibility," which
is not an excuse for nonperformance, are typical examples of "innocent breach." See E-
STATEMENT OF THE LAW OF CoNTaRcrs § 455 & Illustrations (1933) [hereinafter cited as
RESTATEMENT].
7. Globe Refining Co. v. Landa Cotton Oil Co., 190 U.S. 540, 544 (1903).
8. See Lagerloef Trading Co. v. American Paper Products Co., 291 F2d 947, 956
19701 CONTRACTUAL BREACH 1147

tions to the rule will be suggested in the pages that follow.9 In its essential
design, however, our system of remedies for breach of contract is one of strict
liability and not of liability based on fault, 10 and this would be a strange design
indeed if it were a system directed at the compulsion of promisorsi
Our system, then, is not directed at compulsion of promisors to prevent
breach; rather, it is aimed at relief to promisees to redress breach. It is not
much concerned with the question suggested by Frost's lines: How can men be
made to keep their promises? It is instead preoccupied with a different ques-
tion: How can men be encouraged to deal with those who make promises?
Perhaps it is more seemly for a system of free enterprise to promote the use of
contract by encouraging promisees to rely on the promises of others, rather
than by compelling promisors to perform their promises out of fear that the
law will punish their breaches. In any event, this at least adds to the celebrated
freedom to make contracts, a considerable freedom to break them as well.

II. SECOND CHOICE: RESTITUTION, RELIANCE, OR EXPECTATION?

How can men be encouraged to deal with those who make promises? The
answer given by our legal system is: By protecting their expectations in the
event of breach. The principal objective of the system, once breach has occurred,
is to put the promisee in the position in which he would have been had the prom-
ise been performed, i.e., had there been no breach." This is accomplished by
(7th Cir. 1923), in which the court said, "Repudiators of fair and solemn and binding
promises are commercial sinners." But our system of damages for breach of contract
ordinarily imposes no penalty for this sort of sin. This is not to say that there are no
areas of contract law in which account is taken of the character of the bieacb. There
is, for example, a substantial body of authority that makes distinctions based on the
character of the breach in determining whether to allow a party in default to recover for
what he has performed before default. In one seminal case the court said: "Nothing can be
more unreasonable than that a man, who deliberately and wantonly, violates an engage-
ment, should be permitted to seek in a court of justice an indemnity from the consequences
of his voluntary act... Wherever there is a reasonable dxcuse, however, the law allows
a recovery." Stark v. Parker, 19 Mass. (2 Pick.) 267, 273 (1824), discussed it Lee, The
Plaintiff in Default, 19 VAiN L. REv. 1023, 1028 (1966). Cases that take account of the
character of the breach in determining whether performance has been "substantial" afford
another example. E.g., Jacob and Youngs, Inc. v. Kent, 230 N.Y. 239, 244, 129 N.E. 889,
891 (1921) ("The transgressor whose default is unintentional and trivial may hope for
mercy if he will offer atonement for his wrong").
9. See the discussion of Flureau v. Thornhill, text accompanying notes 13-16 infra;
of the choice between cost and market price, text accompanying notes 98-117 infra; of
recovery based on reliance, text accompanying note 133 infra; of recovery based on
market price, text accompanying note 189 infra; of unforeseeable loss, text accompany-
ing note 274 infra; and of uncertain loss, text accompanying note 301 infra.
10. Grossfeld points out that in East German law, liability for breach is based
primarily on the "fault principle" rather than on strict liability so that the r sr is
not liable at all for a breach occasioned by circumstances that the promisorp "could not
avoid." Grossfeld, supra note 4, at 1332-35. Contract liability is therefore more narrowly
confined than in most legal systems including our own, and this narrows the applicability
of the system of fines for the most part to cases of "fault."
11. THE UNrFoRm CoMMxtccA. CODE § 1-106(1) [hereinafter cited as UCC] provides
that Code remedies "shall be liberally administered to the end that the aggrieved party
may be put in as good a position as if the other party had fully performed." Of course a
legal system that falls as far short as does ours of recognizing the costs of litigation when
awarding relief may, for that reason, fail to attain that goal in practice. This is not,
however, a problem peculiar to contracts.
1148 COLUMBIA LAW REVIEW [Vol. 70:1145

giving the promisee relief based on the disappointment in his expectation, as

measured by the net gain that he would have enjoyed had the promise been
performed, or, as it is often said, by giving him the "benefit of the bargain."
Fuller and Perdue described the interest that is protected as the promisee's
"expectation" interest, and called it "a queer kind of 'compensation,'" in that it
gives the promisee something he never had; they found it justifiable, however,
as a means of encouraging and protecting reliance on promises. 12
There are, of course, alternative interests of the promisee that the law
might have singled out as paramount. It might have selected the promisee's
"restitution" interest, as measured by the gain that the defaulting promisor
made at the promisee's expense. The objective under this theory would be to put
the promisor back in the position in which he would have been had the promise
not been made. Or the law might have chosen the promisee's "reliance" interest,
as measured by the loss he sustained as a result of his reliance on the promisor's
promise. The objective here would be to put the promisee back in the position
in which he would have been had the promise not been made.
In Flureauv. Thornhill,13 decided in 1776, the court did in fact choose to
protect the promisee's reliance interest. That case announced the rule that re-
covery against a vendor who promised to convey land, but is unable without any
bad faith to give a good title, is limited to the expense incurred by the pur-
chaser in reliance on the promise, including any down payment." As DeGrey,
C. J., stated, "I do not think that the purchaser can be entitled to any damages
for the fancied goodness of the bargain, which he supposes he has lost."15 The
rule attempts to protect only the reliance interest by putting the promisee in the
position in which he would have been had the promise not been made, rather
than to protect the expectation interest by putting him in the position in which
he would have been had the promise been performed, But although the rule has
persisted in England as to contracts for the sale of land and has found its way
into the law of a number of states, the tendency even in these jurisdictions has
been to restrict its application.' 6 In spite, then, of a few exceptions, some of
which will be discussed later, where our law of remedies recognizes the alterna-
12. Fuller & Perdue, The Reliance Interest in Contract Damages: 1, 46 YAIE L.J.
52, 53 (1936). See atso Farnsworth, supra note 1, at 593-97.
13. 2 BI. W. 1078, 96 Eng. Rep. 635 (K.B. 1776).
14. Since it turns on good faith, the rule introduces an element of "fault" not
usually found in contract law. See note 8 supra. For a discussion of the rule, and its
checkered career, see 5 A. CoRBIN, CONTmACTS § 1097 (2d ed. 1963) [hereinafter cited as
CORBN]; C. McCo MIcK, HANDBOOK ON THE LAW OF DAMAGES § 178 (1935) [hereinafter
cited as McCousmcK]. The rule has been defended on the ground that the difficulty of
establishing the market value of land makes the evaluation of the expectation interest
too uncertain and on the ground that allowing recovery of the expectation -would be a
hardship on the vendor because of the risks inherent in the usual practice of making con-
tracts to sell land without a preliminary title search. See Fuller & Perdue, The Reliance
Interest & Contract Damages: 2, 46 YALE L.. 373, 377 (1936).
15. 2 BI. W. at 1078, 96 Eng. Rep. at 635. See also the mention of Ames' view that
inthe early development of assumpsit, damages were based on the value of the considera-
tion given, in Farnsworth, supra note I, at 595 n.77.
16. For the history of the rule in the United States, see 5 Coman" § 1098; McCoRAmcit
§§ 179-83.
1970I CONTRACTUAL BREACH 1149

tive restitution or reliance interest upon breach of contract, the dominant theme
is one of relief based on the promisee's expectation interests.
The use of the expectation interest for measuring recovery leads to results
that may fall far short of compulsion. This may be seen from the following
illustration:
Illustration 1. Manufacturer contracts to sell goods for $100,000 to
jobber, who expects to resell them to dealers at a profit. For financial
reasons, Manufacturer decides that it will be to his advantage to dis-
continue manufacture of the line of goods and fails to deliver to Jobber,
who is unable to obtain such goods elsewhere. jobber sues Manufac-
turer for breach of contract. The evidence shows that because of a drop
in the market on which jobber sells, he would have realized only $101,-
000 on resale of the goods, which happens to be exactly equal to the
cost, $100,000, of the goods, plus the expenses, $1,000, that he would
have incurred in reselling them.
Had there been no breach, Jobber would have had to spend $101,000 to gain
$101,000; consequently, he requires no relief to put him in the position in which
he would have been had the contract been fully performed. Manufacturer is
liable for only nominal damages, trivial in amount, as the result of his decision
not to perform. 17 Clearly there is no compulsion here.
There may, of course, be circumstances in which the law's use of the ex-
pectation measure will afford some compulsion for a promisor to perform his
promise. He may well find it cheaper to perform than to give relief to the prom-
isee for his disappointed expectation. And the mere possibility of a controversy
that may lead to an adverse decision in court may reenforce the other compul-
sions that society exerts apart from law.'8 The extent to which the expectation
measure does, in fact, operate as a sanction to compel performance is a matter
worthy of study. 19 The point here is only that it is not designed to achieve that
end.

III. THnuD CnOICE: SPECIFIC OR SU3STITUTIONAL RELIEF?

The relief available to the promisee is of two main kinds.20 It is said to be

"specific" when it is intended to secure for the promisee the very benefit that he

17. Nominal damages are given since in principle a breach of contract always gives
rise to a right of action; costs are not always awarded with the nominal damages, how-
ever, and in some jurisdictions a failure to award nominal damages is not grounds for
reversal. Even if the injured party is awarded costs along with nominal damages, this
will fall far short of reimbursing him for the actual expenses of litigation. See 5 CoRBni
§ 1001.
18. There is also the possibility that such compulsions will tend to dissuade the
promisee from seeking to hold the promisor to his promise, perhaps resulting in com-
promise. On the strong tendencies along these lines in Japan, see T. Kawashima, Dispute
Resolution in Contemporary Japan,in LAw Ix JAPAx: THE LEGAL ORDER IN A CHANGING
Socmry 41 (A. von Mehren ed. 1963). See also Lubman, Mao and Mediation: Politics
and Dispute Resolution in Communist China, 55 CAw. L. REv. 1284 (1967); Cohen,
Chinese Mediation on the Eve of Modernization, 54 CALIF. L. REV. 1201 (1966).
19. See Macaulay, Non-ContractualRelations in Business: A Preliminary Study, 28
Am. SoCoLOGIcAL REv. 55 (1963).
20. RESTAMMNT § 326 lists restitution as a third kind of relief. It is, however, better
1150 COLUMBIA LAW REVIEW [Vol. 70:11.45

was-promised, as where the court confers the promised benefit on the injured.
party or orders the defaulting promisor to do so. It is said to be "substitutional"
when it is intended to provide him with something in substitution for that bene-
fit, as where the court awards the injured party money damages.2 '
Although damages will, in some cases, permit the injured party to arrange
an adequate substitute for the expected benefit, specific relief is clearly the form
better suited to the objective of putting the promisee in the position in which he
would have been had the promise been performed. Of course the passage of time
may reduce the effectiveness even of specific relief. The benefit will at best
usually be delayed since contract remedies are ordinarily not available until after
breach has occurred. 22 And there are some situations in which specific relief is
simply not possible at all. For example, the promise may have been one to
deliver particular goods which turn out to be defective, or to have been de-
stroyed, or to have been sold to a third person. But there remain many in-
stances in which specific relief will be both timely and feasible. They can be
put into two broad categories.
In one category of cases, specific relief does not require the cooperation of
the defaulting promisor. If the promise is to deliver goods, an officer of the court
may seize and deliver them; if it is to convey land, he may execute a binding
conveyance; if it is to pay money, he may seize and sell enough of the promisor's
assets to yield the required sum. In this category the practical impediments to
specific relief are at a minimum. In the other category of cases, however, specific
relief does require the cooperation of the promisor. Consider, for example, a
promise to act in a play, to paint a house, or to build a building. To assure
specific relief in each of these cases some form of coercion may be needed, so
that the practical impediments are substantial.
The civil law system, i.e., those descended from Roman law, have by and
to view restitution as an interest to be protected (where the attempt is to put the promisor
back in the position in which he would have been had the promise not been made), rather
than as a kind of relief. As § 326 itself points out, restitution may be either "specific" or
"substitutional."
21. Substitutional redress need not be limited to money, but may be in kind. Isaac
Schapera tells of a case among the Tswana in which a man who broke his promise to
deliver a cow-to another was obliged to deliver four cows, one in substitution for the cow
he should have given and three in substitution for its offspring. Schapera, Contract in
Tswana Case Law, 9 J. AFPCAN L. 142, 148 (1965). Charles Wright notes the incidence
of this in everyday dealing--"If I lose the ski poles I have borrowed from a friend, I
buy a new pair and return them to him"--and suggests that legal sanctions of this sort
might be considered. Wright, The Law of Remedies as a Social Institution, 18 U. DaT.
L.J. 376, 378 (1955). In a society with a market economy, however, the tendency is to
assume that the injured party can procure a substitute himself and need only be com-
pensated for the expense involved. In French law, for example, if the promisor fails to
perform his duty to do work, as where a landlord fails to repair the leased premises, the
court may authorize the promisee to have it done at the promisor's expense. P. HERZOG,
Civnx PROcEDURE Ix FRANcE 557 (1967). Cf. the buyer's remedy of "cover" under
UCC 2-712, discussed in text accompanying notes 166-73 infra.
22. In the exceptional case where a party repudiates his obligation in advance of the
time for performance, specific relief might be given without delay. And where a declara-
tory judgment is granted before the time for performance, it at least reinforces the extra-
legal compulsions to perform, although it adds no legal compulsion.
19701 CONTRACTUAL BREACH 1151

large proceeded on the premise that specific redress should be ordered when-
ever possible, not only for cases in the first category, but even for those in the
second category as well, unless the disadvantages of the remedy outweigh its
advantages. As Dawson has said of the German law,
The main reservations are for cases where specific relief is impossible,
would involve disproportionate cost, would introduce compulsion into
close personal relationships or compel the expression of special forms
of artistic or intellectual creativity. Presumably German courts, like
French courts and our own, would 23 not affirmatively order
painters to
paint pictures or singers to sing.
The logic of the civil law is reenforced by practical considerations in communist
countries that lack markets on which aggrieved parties can arrange substitute
transactions. The task of manufacture imposed on a state enterprise by a gov-
ernment plan, for example, can only be accomplished if the enterprise receives
the specific raw materials that it has been promised for production; money
24
damages are not an adequate substitute.
The common law countries escape both the civil law's doctrinal logic and
communism's practical need for compulsion. The early common law courts did
know specific relief, for many of the first suits after the Norman Conquest were
proprietary in nature, designed to regain something of which the plaintiff had
been deprived.25 Even the action of debt was of this character, since it was
based on the notion of an unjust detention of something belonging to the plain-
tiff.2 6 But it became the' practice in these actions to allow money damages for
the detention in addition to specific relief, and with the development of new
forms of action, such as assumpsit, that were in no way proprietary, subsitu-
tional relief became the usual form.
The typical judgment at common law declared that the plaintiff recover
from the defendant a sum of money, which in effect imposed on him a new obli-
gation as redress for the breach of the old. The new obligation required no
cooperation on his part for its enforcement since, if the sum was not paid, a writ
23. Dawson, Specific Performance in France and Germany, 57 MIcrH. L. Rxv. 495,
530 (1959). In France, however, a distinction is made between promises "to give," and
those "to do or not to do." Id. at 506-25. As to the latter, the system for enforcement of
court orders of specific performance, known as the astreinte, is of questionable effective-
ness. "An outside observer will be excused, I hope, for describing such a principle [of
allowing specific performance] as almost wholly meaningless where the astreinte is the
only means employed for its realization." Id. at 524-25. Another writer, describing specific
performance and the astreinte in French law, reports that since a 1959 decision of the
Cour de Cassation, "French law professions no longer share this scepticism." P. HERzoG,
supranote 21, at 563.
24. See Grossfeld, supra note 4, at 1330-31. On the impact of "economic revisionism,"
see M. GAmARNiKov, EcoNo Ic REFORMs in EASTERN EUROPE (1968), where the author
describes how "communist economics began to emerge from the era of absolute scarcity
and strictly controlled production and distribution into a stage of a limited buyer's market,"
and points out that "the impact of the Western prosperity on economic thinking in the
Soviet bloc can be seen in various attempts to incorporate the principles of a market
economy into the framework of central planning." Id. at 12, 19.
25. See Washington, Damages in Contract at Common Law, 47 L.Q. REV. 345 (1931).
26. See Farnsworth, supra note 1, at 586-87.
1152 COLUMBIA LAW REVIEW [Vol. 70:1145

of execution would issue empowering the sheriff to seize and sell so much of the
defendant's property as was required to pay the plaintiff. The proprietary ac-
tions remained, so that there were a few instances where relief at common law
was specific; for example, in an action by a buyer for replevin of goods sold to
him but not delivered, the sheriff might first seize them from the seller and turn
them over to the buyer,27 and the judgment would then declare that the buyer
was entitled to them. And, of course, where the claim was to a sum of money
that the defendant had promised to pay, the effect, as in the original action for
debt, was to give the promisee specific relief; for example, in an action by the
seller for the price of goods delivered but not paid for, judgment would be given
against the buyer for the full amount of the price. 28 But these instances were the
exception rather than the rule, and even where the common law courts granted
specific redress, they were unwilling to exert pressure directly on the defendant
to compel him to perform. The judgment itself was seen as a mere declaration
of rights as between the parties, and the process for its execution was directed
not at the defendant but at the sheriff, ordering him to put the plaintiff in pos-
session of real or personal property or to seize the defendant's property and sell
29
such of it as was necessary to satisfy a money judgment.
The enforcement of promises in equity developed along very different lines.
Prior to the development of assumpsit by the common law courts in the six-
teenth century, most of the cases brought before the chancellor were based on
promises that would not have been enforceable at common law, and the question
was whether they would nevertheless be enforced in equity. After the develop-
ment of assumpsit, equity accepted the test for enforcement that had been
developed by the rival common law courts, and refused to enforce simple prom-
ises made without "consideration." To this extent its jurisdiction in contract
became concurrent with that of the common law courts, and its concern shifted
from the enforceability of the promise to the nature of its enforcement.3 0
Under the influence of the canon law (for the early chancellors were usu-
ally clerics), decrees in equity came to take the form of a personal command to
the defendant to do or not to do something. His cooperation was assumed, and
if he disobeyed he could be punished not only for criminal contempt, at the
instance of the court, but also for civil contempt, at the instance of the plaintiff.
This put into the plaintiffs hands the extreme sanction of imprisonment, which
might be supplemented by fines payable to the plaintiff and sequestration of the
27. Since replevin was generally available only to the owner of property, the
rationale was that the ownership of the goods in the seller's possession had passed to the
buyer. See UNIFORM SALEs Act § 66 (now replaced by the UCC).
28. On the enforcement in equity of decrees for payment of money, see W. WAI.su,
A TREATIsE ON EQUITY 62-63 (1930).
29. C.A. -usTON, THE ENFORCEMENT OF DEmcEs IN EQuiTy 7 (1915). On the
common law's use of imprisonment for debt, see 8 HoLDswoRTH, A HISTORY OF ENGLISH
LAw 231-33 (1926).
30. H. McCLINTOcK, HANDBOOK OF THE PRINrIPLES OF EQuITy 125-27 (2d ed.
1948) ; W. WALsH, supra note 28.
19701 CONTRACTUAL BREACH 1153

defendant's goods. 3' So it was said that equity acted in personam, against the
32
person of the defendant, while the law acted in rem, against his property. But
it did not follow that the chancellor stood ready to order every defaulting
promisor to perform his promise. Equitable relief was confined to special cases
in light of both practical and historical limitations.
The practical limitations grew out of the problems inherent in coercion.
Our courts, like those of civil law countries, will not undertake to coerce a per-
formance that is personal in nature-to compel an artist to paint a picture or a
singer to sing a song. (They have, to be sure, been ingenious in framing orders
enjoining contracted parties from acting inconsistently with their promises as a
substitute for orders directing them to perform them-the court that will not
order the singer to sing may enjoin him from singing elsewhere.) 3 3 Our courts
have also been reluctant to order specific performance where difficulties of
supervision or enforcement are foreseen, e.g., to order a building contractor
specifically to perform his contract to repair a house. It has been suggested that
in their origins these ideas carried a load of snobbery, expressed in distaste for
menial tasks-'how can a Master judge of repairs in husbandry?' "4 Today
they are more often justified as a means of avoiding conflict and unfairness
where no clear standards can be framed in advance. The practical exigencies
of drafting decrees to guide future conduct under threat of contempt have also
moved courts to require that contract terms be expressed with somewhat
greater certainty if specific performance is to be granted than if damages are
to be awarded. 85 But these practical limitations are on the whole far less sig-
nificant than the historical ones.
31. The development of these supplementary sanctions is traced in C.A. HusTo,
supra note 29, at 76-83; W. WALSHr, supra note 28, at 47-48. Huston notes the measures
required "to coerce obedience from the stubborn seventeenth-century Englishman. Thus in
1598, after one Walter had been already subjected in vain to close imprisonment for some
time, the court ordered him to perform within a fortnight 'which if he shall not do ...
then his Lordship mindeth without further delay not only to shut the defendant close
prisoner but also to lay as many irons on him as he may bear.'" Id. at 79, citing Clerk
v. Walter, Monro 718.
32. See generally F. JAmEs, CIVIL PRocEDuRE 21-24 (1965). For a discussion of the
power of equity to act in rein, see C.A. HusToN, .supranote 29, at 71-86; H. McCLNrocic,
supra note 30, at 94-96; W. WALsH, supra note 28, at 45-50. Declaratory relief) in which
the court states the rights of the parties but does nothing further to enforce them, may
operate to secure performance of promises through non-jural sanctions that coerce per-
formance. F. Jsams, supra at 26-31.
33. Lumley v. Wagner, 1 De G.M. & G. 618, 42 Eng. Rep. 687 (Ch. App. 1852). A
more extreme example is that of a suit for specific performance of a contract to run
street cars to connect with the plaintiff's trains, in which the court enjoined the defendant
from operating any cars unless it performed its contract. Prospect Park & Coney Island
MR. v. Coney Island & Brooklyn R.R., 144 N.Y. 152, 39 N.E. 17 (1894).
34. Dawson, supra note 23, at 537, quoting from Rayner v. Stone, 2 Eden 128, 130, 28
Eng. Rep. 845, 846 (1762). Consider also the remark of Chancellor Walworth, in a suit
against an opera singer for specific performance: "I am not aware that any officer of this
court has that perfect knowledge of the Italian language, or possesses that exquisite
sensibility in the auricular nerve which is necessary to understand, and to enjoy with a
proper zest, the peculiar beauties of the Italian opera, so fascinating to the fashionable
world." DeRivafinoli v. Corsetti, 4 Paige 263, 270 (N.Y. 1833). See generally 5A CoRBIN
§§ 1171-72.
35. Bethlehem Eng'r Export Co. v. Christie, 105 F.2d 933, 934 (2d Cir. 1939) (per
1154 COLUMBIA LAW REVIE[7 [Vol. 70:1145

The most important of the historical limitations derives from the circum-
stance that, since the chancellor had first granted equitable relief in order to
supply the deficiencies of the common law, equitable remedies were readily char-
acterized as "extraordinary." When, during the long jurisdictional struggle be-
tween the two systems of courts, some means of accommodation were needed, an
"adequacy" test was developed to prevent encroachment by the chancellor on
the powers of the common law judges. Equity would stay its hand if the remedy
at law was "adequate."3 6 To this test was added the gloss that the money dam-
ages awarded by the common law courts were ordinarily "adequate"--a gloss
encouraged by the philosophy of free enterprise, since in a market economy
money ought to enable an aggrieved promisee to arrange a substitute trans-
action. As one writer put it:

The law, concerning itself more and more with merchandise bought
or sold for money, with things having a definite and calculable ex-
change value, came to conceive that the money compensation, which
was an entirely adequate remedy in the common case, and in many
cases the only possible one when once the wrong complained of had
been committed, was [generally] the only remedy available for their
37
use ....
So it came to be that, in sharp contrast to the civil law approach, money dam-
ages were regarded as the norm and specific relief as the deviation, even where
the law could easily have provided specific relief without any cooperation from
the defaulting promisor.
Land, which the common law viewed with particular esteem, was singled
out for special treatment. Each parcel, however ordinary, was considered to be
"unique," and from this it followed that if a vendor defaulted on his promise to
convey land, not even money would enable an injured purchaser to find a sub-
stitute. The remedy at law being in this sense "inadequate," a decree of specific
performance would 'ordinarily issue.38 Although the case for allowing the
vendor to have specific performance when the purchaser defaulted was less com-

Learned Hand, J.: "This contract is so obscure, and, strictly taken, so incoherent, that
nobody can be sure of its meaning.... Arguendo, we shall assume that these promises
created a valid contract which could be enforced at law like any other; but it does not
follow that equitable remedies would also be available ... "); Van Dyke v. Norfolk
Southern 1LR., 112 Va. 835, 72 S.E. 659 (1911). But cf. City Stores Co. v. Ammerman,
266 F. Supp. 766 (D.D.C. 1967).
36. According to Holdsworth, "It was not till the eighteenth century that it was
settled that equity would only grant specific relief if damages were not an adequate
remedy." 1 W. HoLDswoRTH, A HisTORy OF ENGLISHE LAW 457 (7th ed. 1956).
37. CA. HusToN, supra note 29, at 74. Holmes, with some overstatement, wrote that
"The duty to keep a contract at common law means a prediction that you must pay
damages if you do not keep it-and nothing else." Holmes, The Path of the Law, 10
HAv. L. Rnv. 457, 462 (1897).
38. E.g., Kitchen v. Herring, 42 N.C. 190 (1851) (principle in regard to land
adopted, not because it was fertile or rich in minerals, or valuable for timber, but simply
because it was land-a favorite and favored subject in England, and in every country of
Anglo-Saxon origin).
 CONTRACTUAL BREACH 1155

pelling, equity also granted him relief.3 9 But no such reason applied to the
contract for the sale of goods, for in a market economy it was supposed that,
with rare exceptions for such "unique" items as heirlooms and objects of art,
substantially similar goods were available elsewhere. 40 Some attempts have been
made to liberalize this restriction. The draftsmen of the Uniform Commercial
Code state in its Comments that it introduces "a new concept of what are
'unique' goods," 4' and they assert that "where the unavailability of a market
price is caused by a scarcity of goods of the type involved, a good case is nor-
mally made for specific performance under this Article." 42 But specific perfor-
mance is still the exception, not the rule, and in contrast to the view held in
socialist countries, it is to be justified on the basis of the peculiar needs of the
aggrieved party and not the general welfare of society as a whole. Although a
court, in determining the adequacy of an award of damages, may take account
of such factors as the difficulty of their ascertainment (e.g., under a long-term
"output" or "requirements" contract 43 ) and the improbability of their collection
(e.g., against an insolvent defendant 44 ), the typical buyer of goods must still
content himself with money as a subsitute for the goods in the event of breach.
A second historical limitation, or group of limitations, is premised on the
notion that equitable relief is "discretionary." Since the chancellor was to act
according to "conscience" (a circumstance that prompted the famous charge
that his conscience might vary with the length of his foot 45), he might withhold
relief where considerations of "fairness" or "morality" dictated. Some of the
most renowned of these equitable restrictions are embodied in equity's colorful
maxims: "he who seeks equity must do equity" ;46 "he who comes into equity

39. E.g., Hopper v. Hopper, 16 N.J. Eq. 147 (1863). For discussion of the basis of
this rule, see 5A CoR~iw § 1145.
40. E.g., McCallister v. Patton, 214 Ark. 293, 215 S.W.2d 701 (1948) (specific per-
formance denied buyer of automobile in spite of short supply following World War II).
But see Morris v. Sparrow, 225 Ark. 1019, 287 S.W2d 583 (1956) (specific performance
granted cowboy who had been promised horse after he trained him).
41. UCC § 2-716, Comment 2, which goes on to say that
output and requirements contracts involving a particular or peculiarly available
source or market present today the typical commercial specific performance situa-
tion, as contrasted with contracts for the sale of heirlooms or priceless works of
art which were usually involved in the older cases.
See, e.g., Curtice Bros. v. Catts, 72 NJ. Eq. 831, 66 A. 935 (1907) (supply of tomatoes for
canning could not be replaced in time). See also UCC § 1-106 and note 11 supra.
42. UCC § 2-713, Comment 3.
43. E.g., Eastern Rolling Mill Co. v. Michlovitz, 157 Md. 51, 145 A. 378 (1929).
44. E.g., White Star Refining Co. v. Hansen, 251 Mich. 224, 231 N.W. 577 (1930).
But cf. Heilman v. Union Canal Co., 37 Pa. 100 (1860) (insolvency alone not sufficient).
Where the defendant is insolvent, the situation of his other creditors should not, however,
be overlooked. Cf. UCC § 2-502 on the buyer's right to the goods on the seller's insolvency.
45. "'Tis all one, as if they should make his foot the standard for the measure we
call a Chancellor's foot; what an uncertain measure this would be l One Chancellor has
a long foot, another a short foot, a third an indifferent foot; 'tis the same thing in the
Chancellor's conscience." SELDEN, TABLE TALx, quoted in Gee v. Pritchard, 2 Swanst.
402, 414, 36 Eng. Rep. 670, 679, (Ch. 1818).
46. E.g., Hazzard v. Westview Golf Club, - Me. -, 217 A2d 217, 225 (1966).
1156 COLUMBIA LAW REVIEW [Vol. 70:1145

must come with clean hands" ;47 and "equity aids the vigilant." 48 One of the
most troublesome is the now largely discredited "mutuality of remedy" rule,
under which specific performance would not be granted to the aggrieved party
unless it would have been available to the other party had the aggrieved
party been the one in breach.4 9 It is one of the curious inconsistencies to arise
out of the dual jurisdiction of law and equity that these restrictions operated to
bar only equitable relief and did not prevent the award of damages at law.50
The historical development of the parallel systems of law and equity may
afford an adequate explanation of the reluctance of our courts to grant specific
relief; it is scant justification for it. A more rational basis might be the severity
of the sanctions available under the contempt power for their enforcement.5 1 In
any event, the current trend is clearly in favor of the extension of specific relief.
The fusion of law and equity into a single court system at least facilitates a
major change in this direction, and commentators have urged such a change.
Why not, as in both French and German law, give specific perfor-
mance as to any physical object that can be found and is reachable by
direct execution? It is true that whenever speed is a factor and markets
reasonably organized, promisees will not often ask for it .... But
why not leave this to the promisee's choice ?52
Still, for the present, the promisee must ordinarily be content with money dam-
ages.
The award of money to one aggrieved by a civil wrong dates back to a
time when its primary purpose was to keep the peace. As one writer explained:
The root idea of primitive law is not compensation for injury but com-
position for revenge .... With the growth of the power of the state
and the consequent respect for the law which found its sanction in that
power, composition gradually became53 compensation. The idea of pen-
alty grew into that of reparation.
Ultimately, the remedies recognized for delicts by primitive law were extended
by the common law to give a remedy for breach of promise, and so the modern
47. New York Football Giants v. Los Angeles Chargers Football Club, 291 F.2d 471,
473 (5th Cir. 1961) (Giants denied injunction to prevent Charles Flowers from playing
with Chargers, in violation of his contract with Giants; Giants did not have "clean
hands" because they had kept contract secret so that Flowers would not be barred from
playing in Sugar Bowl). But cf. Washington Capitols Basketball Club v. Barry, 419 F2d
472 (9th Cir. 1969) (dispute between Washington "Caps" and San Francisco Warriors
over services of Rick Barry).
48. Swiss Oil Corp. v. Fyffe, 296 Ky. 178, 186, 176 S.W.2d 398, 402 (1943).
49. For a case invoking the rule to allow specific performance, see Hopper v. Hopper,
16 N.J. Eq. 147 (1863). For an extensive criticism of the rule, see 5A ComiN §§ 1178-1204.
50. An exception is the equitable rule against enforcement of an "unconscionable"
bargain, which has been made a rule of law for contracts of sale by UCC § 2-302.
51. See Dawson, supra note 23, at 537-38.
52. Dawson, supra note 23, at 532. See also 5A Coannr § 1136; Van Heeke, Changing
Emphases in Specific Performance,40 N.C. L. REv. 1 (1961).
53. C.A. HuSTON, supra note 29, at 39-40 (1915). This article does not deal with
remedies in tort for acts amounting to breach of contract, for example, action in conver-
sion for the seller's failure to deliver goods is not included within its scope.
 CONTRACTUIL BREAC1 1157

contract grew out of the delictual action of assumpsit. We acknowledge this

origin through the indiscriminate use of the word "damages" in describing any
award of money in an action based on contract, including instances in which the
award amounts to specific relief. As Pound pointed out, "we speak of recovering
damages even in the case of a liquidated debt. Obviously damages are not what
is really covered." 54
With the extension of the action of assumpsit that had been achieved by
the end of the sixteenth century, courts were confronted with the task of fash-
ioning a system for the award of money to enforce the newly created rights
based on promises. An initial question went to the division between judge and
jury of the power to fix damages. Although the judges might have been ex-
pected to reserve this power largely to themselves, there were practical reasons
to confide it in the jury.55 The common law judges were intent on expanding
their influence, and since trial by jury was seen as a means of attracting litigants
who might otherwise have gone elsewhere, the popular course was to leave the
assessment of damages in the jury's hands. Once this had been done, it became
apparent that the courts had both to devise procedures to enable them to control
the jury in order to prevent abuse of its power and to formulate principles to be
used in the exercise of that control. For roughly two centuries after the develop-
ment of the action of assumpsit, however, the courts were so absorbed in the
procedural problems of control that they paid scant attention to the principles
6
to be used in its exercise.5
Among the various procedures that were developed for the control of the
jury were those by which the trial court judge ruled on the admissibility of evi-
dence, instructed the jurors on the law, and was enabled after trial to set aside
the jury's verdict and grant a new trial before another jury. It was the last of
these that was the most significant. Since the trial court judge could order a
new trial on the ground that the jury had disregarded his advice, e.g., by
awarding excessive damages, he gained some assurance, beyond that derived

54. Pound, IndividualInterests of Substance-PromisedAdvantages, 59 HA~v. L. RPv.

1, 3 (1945). Lord Mansfield noted in such a case,
Although this be nominally an action for damages, and damages be nominally
recovered in it; yet it is really and effectually brought for a specific perfor-
mance .... For pecuniary damages upon a contract for the payment of a thing
are, from the nature of the things, specific performance.
Robinson v. Bland, 2 Burr. 1077, 1086, 97 Eng. Rep. 717, 722 (K.B. 1760). After Slade's
Case, 4 Co. Rep. 92b, 76 Eng. Rep. 1074 (K.B. 1602), when a suit to enforce a debt could
be brought in assumpsit, it was natural to speak of "damages," even in such an action.
See Farnsworth, supra note 1, at 597-98.
55. A simple expedient for avoiding this would have been to fashion a schedule of
damages, although this would scarcely have been suitable in view of the protean quality
of the wrongs comprehended by contract. A biblical example, in tort, is found in the
schedule that the Lord gave Moses, as set out in Exodus 22:1: "If a man shall steal an
ox or a sheep, and kill it, or sell it, he shall restore five oxen for an ox, and four sheep for
a sheep."
56. Washington, supra note 25, at 346. The earliest treatise on damages is A. SAYER,
THE LAW OF DAMAGES (1770). The first American work is T. SEDGWIcx, A TREATiSE
ON THE MEAsuRE OF DAMAGES (1st ed. 1847).
1158 COLUMBIA LAW REVIEW [Vol. 70:1145

from his prestige alone, that his instructions would be given proper weight.
And from this it was only a short step to direct control over the assessment of
damages by a specific instruction to the jury as to the amount to be allowed
should there be recovery. The trial court judge might also grant aLnew trial on
the ground that he had himself erred in ruling on the admissibility of evidence,
including evidence as to damages, or in his charge to the jury, including his
instructions as to damages. Most important, the ruling of the trial judge on a
motion for a new trial was a matter of "law" which could be considered on
appeal by a higher court. It was out of appeals from these rulings that the
courts, toward the end of the eighteenth century, finally began to limit the body
of principles that were to govern the award of damages for breach of contract. 7
To the general principle of recovery based on the promisee's expectation
interest there emerged three important limitations. They guard against the
possibility, suggested by the following illustration, that a crushing burden might
be imposed on the promisor.
Illustration2. Supplier contracts to sell Manufacturer a replacement
part for Manufacturer's broken machine for $100. Supplier fails to
deliver the part and the machine remains idle. Manufacturer sues Sup-
plier for $100,000 in damages based on the loss of anticipated profits
through the use of the machine in his business over the ten-year life of
the part.
Full protection of the expectation interest has been described by one commenta-
tor as "one of those generous aspirations which the law does well to put but
58
sparingly into practice.
One of the limitations that have emerged concerns the aggrieved party's
behavior after breach. The calculation of the damages that are required to put
him in the position in which he would have been had the promise been per-
formed takes, as its point of departure, his situation after breach. It is often
open to him to take steps to ameliorate, or at least to avoid aggravating, that
situation. Should he be expected to do so even though this will redound to the
benefit of the defaulting promisor by diminishing his liability? If, in Illustration
2, Manufacturer can obviate his loss of profits by purchasing a similar part in
substitution for the one promised by Supplier, should he be expected to do so?
Courts have commonly answered such questions in the affirmative and refused
to allow the injured party to recover for loss that was "avoidable."
A second limitation relates to the extent of the risk undertaken by the party
in breach. The classic, if apocryphal, case is that "where a man going to be mar-
ried to an heiress, his horse having cast a shoe on the journey, employed a
blacksmith to replace it, who did the work so unskillfully that the horse was
lamed, and, the rider not arriving in time, the lady married another; and the

57. Washington, Damages in Contract at Common Law II, 48 L.Q. Rm,. 90-93 (1932).
58. Id. at 107.
19701 CONTRACTUAL BREACH 1159

blacksmith was held liable for the loss of the marriage." 5 How far can the
aggrieved party hold the other accountable for the loss of such expectations as
these? In Illustration 2, even assuming that no similar part could have been
obtained as a substitute, does it follow that Manufacturer can hold Supplier ac-
countable for all of his anticipated profits over a ten-year period? To answer
such questions courts developed a test of "foreseeability" as an outer limit, and
refused recovery for loss that was "unforeseeable."
A third limitation goes to the adequacy of proof. Generally it is the ag-
grieved party who has the burden of persuasion on this point. How convincingly
must he establish, for example, the position in which he would have been had
the promise been performed? If Manufacturer in Illustration 2 is to recover his
anticipated profits, how persuasive must be his evidence as to their amount?
Through the attempts during the eighteenth century to control the jury's assess-
ment of damages, there evolved a principle that "certainty" was required in the
proof of contract damages and that there could be no recovery for loss that was
"uncertain." As De Grey, C. J., said in 1774, "In contract the measure of dam-
ages is generally matter of account, and the damages given may be demonstrated
to be right or wrong. But in torts a greater latitude is allowed to the jury: and
the damages must be excessive and outrageous to require or warrant a new
trial.60 The operation of this requirement of "certainty" within the framework
of the procedure for new trial is said to have caused the body of rules for dam-
ages to develop more rapidly in contract than in tort. 61
The general principle as it has evolved, then, is that-subject to these
three limitations-the injured party's expectation interest will be protected by
subsitutional relief that will secure for him the "benefit of the bargain." The re-
mainder of this article will consider, in turn, (a) the operation of this general
principle and some of the problems that arise in calculating the amount of re-
covery appropriate for the protection of the injured party's expectation interest;
(b) two alternatives to this general principle, namely, the alternatives of basing
recovery on the injured party's restitution interest or on his reliance interest,

59. Willes, J., in British Columbia Saw Mill Co. v. Nettleship, L.R. 3 C.P. 499, 508
(1868). A similar illustration is that "where a Canon of the church, by reason of the non-
delivery of a horse pursuant to agreement, was prevented from arriving at his residence
in time to collect his tithes." Griffin v. Colver, 16 N.Y. 489 (1858). This is evidently taken
from that of Pothier quoted in note 235 infra.
60. Sharpe v. Brice, 2 Black, W. 942, 943, 96 Eng. Rep. 557 (K.B. 1774). Common
Pleas would not grant a new trial in tort unless the amount awarded was "monstrous
and enormous ... such as all mankind must be ready to exclaim against, at first blush."
Accord, Beardmore v. Carrington, 2 Wils. K.B. 244, 250, 95 Eng. Rep. 790, 793 (1764).
See Washington, supra note 25, at 363-66. A test of "reasonable certainty" is now said to
be applied in tort cases. See 2 F. HARPER & F. JAMEs, THE LAW OF TORTS § 25.3 (1956).
But it is often less strongly phrased than is the test for contract cases. Compare RESTATE-
MENT OF THE LAW OF TORTS § 912 (1938) ("such certainty as the nature of the tort and
the circumstances permit") and Comment d ("a fair degree of certainty") with RESTATE-
MENT § 331 (1) ("reasonable certainty") and Comment a ("a reasonable degree of
certainty"). See also McCoRmicK, § 32. But see 5 CoRirN § 1028.
61. Washington, supra note 57, at 92.
1160 COLUMBIA LAW REVIEW [Vol. 70:1145

and the situation in which these alternatives are appropriately put to use; and
(c) the operation of the three principal limitations that have been placed on the
principle of protecting the injured party's expectation interest with regard to
loss that is "avoidable," "unforeseeable," or "uncertain."

IV. FOURTH CHOICE: COST TO COMPLETE OR DIMINUTION IN VALUE?

A system of damages for breach of contract which has as its general basis
the protection of expectations suffers from two handicaps. The first is that it
requires a hypothesis-a hypothesis of the position in which the injured party
would have found himself had both he and the party in breach performed. Some
of the problems involved in this hypothesis are discussed later in connection
with the requirement of foreseeability. The second handicap is that it requires
an estimate-an estimate of a sum of money considered adequate to put him in
that position. This estimate might be based on cost to complete, that is, the
additional financial sacrifice that the injured party would have had to incur in
order to obtain a substitute performance considered adequate to put him in the
desired hypothetical position. Or it might be based on diminution in value, that
is, on the loss of advantage to the injured party that resulted from his not
62
being in that position.
Basing the estimate on cost to complete has initial appeal, as seeming to
come closer to actually assuring the injured party's expectation. This assumes,
however, that a substitute performance will be generally available at some cost
to put the injured party in the desired hypothetical position. Yet in many
instances no substitute performance is available at any cost. The party in breach
may be uniquely capable of performing his promise, e.g., a promise to star in a
play or to disclose a secret process. Or the delay occasioned by his failure to
perform his promise may have made any performance impossible, e.g, a promise
to perform an emergency operation or to install a fire alarm. 3 And even in
those instances where an adequate substitute performance can be found, prob-
lems of valuation are not necessarily eliminated. The injured party ought to be
compensated for any delay that has occurred, and cost to complete is not a
suitable basis for this because no amount of money can turn the clock back. In
the face of such practical difficulties in basing the estimate on cost to complete,
it is not surprising that the preference in our legal system is for an estimate
based on diminution in value."
62. According to Bonbright "'value'... refers to the advantage that is expected to
result from the ownership of a given object of wealth (or to the market price that this
advantage will command), whereas ['cost'] refers to the sacrifice involved in acquiring
this object. This distinction is clearly in our minds when we ask whether any thing, or
any desirable human achievement, 'is worth what it costs."' 1 J.BONBRIGHT, THE VALUA-
TION OF PROPERTY 19 (1937).
63. Note 21 supra collects some examples where substitutional relief is in kind rather
than in money. But such relief is practicable in only a small proportion of cases.
64. It would still be possible to fashion a rule that based the estimate on cost to
complete to the extent that this was possible, and used diminution in value only where
19703 CONTRACTUAL BREACH

In principle the diminution in value sought is that to the injured party him-
self, quite without regard to the diminution in value to anyone else, and depends
on his own particular circumstances, including his personal needs and resources
or of those of his, enterprise. According to Bonbright, value in this sense "repre-
sents a state of mind, a favorable attitude of a particular person or group of
persons."65 Basing the estimate on diminution in value, therefore, requires the
sometimes questionable assumption that this loss of advantage to the injured
party can be expressed in terms of money. Still, where the injured party's ex-
pected advantage consists largely or exclusively of the realization of profit, as is
the case for most commercially significant exchanges, it can be so expressed with
some assurance, and our courts have been able to live with this assumption.
Two ingredients enter into this estimate of the difference between the value
to the injured party of the hypothetical situation in which he would have found
himself after full performance of the exchange, and his actual situation after
breach. The first ingredient is the injured party's loss on the bargain,which he
suffers because the exchange for which he originally bargained has been
frustrated. It may have two components. One component is the loss in value to
the injured party of the other party's performance, and is equal to the difference
between the value to the injured party of what the other party was to have done
under the contract and the value of what he in fact did. This component is
always present, regardless of whether the breach is partial or total. Where the
breach is total, the injured party may elect to rely on it as an excuse for not
rendering the balance of his own performance; if he does so elect, a second
component enters into the calculation of his loss on the bargain.This component
is the cost that he avoided as a result of being excused. His loss on the bargain
is then the difference obtained by subtracting this cost avoided from the loss in
value.66

Loss on the bargain = loss in value - cost avoided

In addition to loss on the bargain, there may be a second ingredient,

namely, other loss such as physical harm to the injured party's person or pro-
perty and expenses incurred by him in an attempt to salvage the transaction
after breach. The general measure of recovery, then, is the sum of these two
ingredients of the injured party's loss.

cost to complete could not be used. In this connection, see the discussion of cost to
complete as a measure of diminution in value, at text accompanying notes 89-120 infra. For
a case holding that the estimate is to be based on diminution in value, see Guardian Trust
Co. v. Brothers, 59 S.W2d 343 (Tex. Civ. App. 1933), in which, however, the court
seems to have overlooked the point, made at note 89 infra, that cost of completion fixes the
upper limit of diminution in value.
65. 1 3. BONBRGHT, supra note 62, at 67. It therefore takes into account the value of
money itself to the injured party. Id. at 70.
66. Problems of allowing interest on the amounts in question, to take account of
differences in times of performance, will be ignored here for the sake of simplicity.
1162 COLUMBIA LAW REVIEW [Vol. 70:114.5

Damages = loss on the bargain+ other loss. 7

Combining these two equations gives Formula A:

(A) Damages = loss in value - cost avoided + other loss
8
Since in most agreements one of the parties is required to pay money,
the estimation of loss in value and cost avoided usually poses problems only in
connection with the performance of the other party, who may be required, for ex-
ample, to furnish goods, land, or services in return. The party who is to furnish
this latter performance will here be call the "supplier" and the one whose per-
formance is to be the payment of money will be called the "recipient."
It is convenient to consider separately, first, cases in which the supplier is
the injured party and, second, cases in which the recipient is the injured party.
The reason for this is that where the supplier is the injured party and the breach
consists of the recipient's failure to pay, the difficulty in determining the sup-
plier's loss on the bargainlies in the determination of his cost avoided; his loss
in value is already expressed in terms of money, namely, what the recipient
failed to pay. The reverse is true where the recipient is the injured party and
the supplier is in breach. Here, in determining the recipient's loss on the bar-
gain, the difficulty lies in the component of loss in value sustained by the recipi-
ent; his cost avoided is already expressed in terms of money. 9
This difference can be seen in a simple example involving a construction
contract.7 o
67. The terms loss on the bargain and other loss are used here in preference to the
more popular "gains prevented" (lucruin cessans) and "losses caused" (dalnnumn emer-
gens). Under the latter terminology it is unclear, for example, whether what is here
called cost avoided should be included under "gains prevented" or under "losses caused."
68. Bargains that call, for example, for an exchange of goods for goods, or of land
for services, are the exception in our society. A more common sort of exception is the
bargain that calls upon the party who is to pay money to do something else in addition.
Examples are the Groves and Peevyhouse cases, discussed in text accompanying notes
100-20 infra. There are undoubtedly many bargains in which, although one party's
performance is expressed in terms of the payment of money, the value of performance
to the other party should theoretically take into account the enhancement of his ex-
perience or reputation or good will, for example, a contract between a fledgling portrait
painter and a distinguished subject. English courts have recognized a right of recovery for
such value in some cases. E.g., Herbert Clayton & Jack Waller, Ltd. v. Oliver, [19301
A.C. 209, 220 ("Here both parties knew that as flowing from the contract tie plaintiff
would be billed and advertised as appearing at the Hippodrome, and in the theatrical
profession this is a valuable right."). The practical importance of this is greatly reduced
by the difficulty of meeting the standard of certainty, discussed in text accompanying notes
279-81 infra, with respect to such increments of value.
69. Furthermore, other loss in the form of physical harm to person or property, is
generally present only where the supplier is the party in breach.
70. A constuction contract is chosen as a simple example because it does not pose
some of the problems that would arise, for example, under a contract for the sale of
goods. Under a contract for the sale of goods, a buyer may be faced with a choice
between accepting and rejecting the goods, a choice that is not available to an owner on
whose land a structure has been erected. Under a contract for the sale of goods, a seller
who has begun their manufacture may be faced with a choice between stopping manu-
facture upon the buyer's breach and completing manufacture, a choice that is not available
to a builder engaged in erecting a structure on another's land. See text accompanying
notes 163-65 infra.
1970I CONTRACTUAL BREACH 1163

Illustration3. Builder contracts with Owner to construct a factory on

Owner's land for $1,000,000 payable on completion.
If the recipient (Owner) is the party in breach and the supplier (Builder) has
used the breach to excuse himself from performance, the controversy will center
on the cost avoided by Builder through his not having to complete construction
of the factory after breach. The loss in value to Builder will be simply the
amount remaining unpaid. If, however, the supplier (Builder) is the party in
breach, by refusing to construct the factory or by constructing it improperly,
the controversy will center on the loss in value to Owner that resulted from
the breach. Here the cost avoided by Owner will be simply the amount re-
7
maining unpaid. '
When the recipient (Owner) is in breach, the simplest case is that in which
Builder has finished the work.
Illustration3a. The facts being otherwise as stated in Illustration 3,
Owner breaches by refusing to pay after Builder has finished perfor-
mance. Builder sues Owner for damages.
Here the loss in value to Builder is $1,000,000,72 and since there was no cost
avoided, this is also Builder's loss on the bargain. Assuming no other loss,
Builder's damages under Formula A are $1,000,000.
Almost as simple is the case of breach by the recipient (Owner) where
Builder has done nothing by way of performance or preparation for perfor-
mance.
Illustration3b. The facts being otherwise as stated in Illustration 3,
Owner breaches by repudiating the contract soon after its making,
and before Builder has done anything in performance or preparation
for performance. It would have cost Builder $900,000 to build the
factory. Builder sues Owner for damages.
Here the loss in value to Builder is $1,000,000, and his cost avoided is $900,000,
making his loss on the bargain$100,000, which happens to be the profit that he
would have made had both parties fully performed. Again assuming no other
loss, this would be his recovery under Formula A. In practice, of course, the
determination of the cost to Builder to complete the contract, in order to find
the cost avoided, involves stubborn problems of proof, one of which goes to the
extent to which Builder must include items of overhead in this figure. 73
71. If the controversy arises out of Builder's claim to the amount remaining unpaid,
he will be barred from any recovery under the contract if he cannot show substantial
performance. See 3A CoRniN §§ 700-12. In this event, Owner's general measure of recovery
operates as a floor, and Builder may well forfeit a larger amount depending upon how much
of the price remains unpaid.
72. Construction contracts commonly provide for progress payments, not for payment
on completion as in Illustration 3, so that the amount remaining unpaid upon Builder's
completion of performance is ordinarily only a fraction of the total price. To the extent
that such payments have been made, Builder's recovery should be accordingly reduced.
This obvious adjustment for part payments has been omitted from the formulas and dis-
cussion for the sake of simplicity.
73. E.g., Vitex Mfg. Corp. v. Caribtex Corp., 377 F2d 795 (3d Cir. 1967). The prob-
1164 COLUMBIA LAW REVIEW [Vol. 70:1145

Although the profit sought is the profit that this Builder, not some hypothetical
builder, would have realized, a court may well mistrust his own optimistic esti-
mates and rely on the testimony of experts.7 4
A more difficult and revealing example lies between these two extremes,
when Owner's breach occurs before completion but after Builder has begun
performance, or at least preparation for performance, and has incurred expenses
which either cannot be returned to him, such as materials affixed to Owner's
land, or cannot be put to other use, such as plans and drawings made to suit
Owner's needs.
Illustration3c. The facts being otherwise as stated in Illustration 3,
Owner breaches by repudiating the contract after Builder has begun
performance, at a time when it would have cost him $400,000, out of a
total cost of $900,000, to complete the factory. Builder sues Owner for
damages.
Here, again assuming no other loss, Builder's recovery under Formula A is
simply his loss on the bargain,which is equal to the loss in value, $1,000,000,
less cost avoided, $400,000, or $600,000. In practice, of course, it is no simple
matter to determine the cost avoided, the amount that it would have cost Builder
to finish performance.7 5 One way for Builder to meet his burden with respect
to this figure is to use the information usually available to him with regard to
the costs already incurred in reliance on the contract. The cost of reliance,which
in Illustration 3c would necessarily be $500,000, is then subtracted from the
estimated cost of complete performance, $900,000, to give $400,000.76
Cost avoided _ cost of complete performance - cost of reliance.
Therefore, a convenient alternative for calculation of the loss on the bargain is
simply to add the cost of reliance, here $500,000, to the estimated profit, here
$100,000, which again gives $600,000.
Loss on the bargain = cost of reliance + profit.
lem of overhead saved by a builder or manufacturer is discussed in Harris, A General
Theory for Measuring Seller's Damages for Total Breach of Contract, 60 MicH L. Rxv.
577, 588-92 (1962) ; Note, Seller's Recovery When Buyer Repudiates Before Completion
of Manufacture, 99 U. PA. L. REv. 229, 232-33 (1950). The Code gives litte help in this
area. See UCC §§ 2-704(2), 2-708(2). A leading case before the Code is Jessup & Moore
Paper Co. v. Bryant Paper Co., 297 Pa. 483, 147 A. 519 (1929).
The burden of persuasion as to cost avoided is generally on the injured party. E.g
Allen, Heaton & McDonald v. Castle Farm Amusement Co., 151 Ohio St. 522, 86 N.E2d
782 (1949) (suit by advertising agency on contract to provide services). In the "corre-
spondence school" cases, however, courts have been unusually willing to allow the school
to recover the full price of the course, at least unless the student in breach can show the
school's cost avoided. E.g., International Correspondence School, Inc. v. Crabtree, 162
Tenn. 70, 34 S.W.2d 447 (1931) ; La Salle Extension Univ. v. Ogburn, 174 N.C. 427, 93
S.E. 986 (1917). See notes 204-05 infra.
74. See Patterson, Builder's Measure of Recovery for Breach of Contract, 31 CoLum.
L. REv. 1286, 1292-94 (1931).
75. There is a thorough discussion of this in Harris, supra note 73.
76. To the extent that Builder has savings that result from salvage, for example,
through materials that can be put to other use, they should be excluded from cost of
reliance and included in cost avoided.
19701 CONTRACTUAL BREACH 1165

This gives Formula B as an alternative to Formula A:

7
(B) Damages = cost of reliance + profit + other loss.

It is important to realize that the cost of 'reliance enters only as a means of

arriving at the cost avoided. There is no assumption that Owner has recieved
a comparable benefit or, indeed, any benefit at all. Nor is there any assumption
that the expenses that go to make up the cost of reliance were reasonable ex-
penses.7 8 However, the profligate builder, who has incurred unreasonable
79
expenses, may encounter difficulty in his attempt to prove profit.
When it is the supplier (Builder) rather than the recipient (Owner) who
is in breach, it is loss in value and not cost avoided that is the troublesome com-
ponent in determining the loss on the bargain.
Illustration3d. The facts being otherwise as stated in Illustration 3,
Builder breaches by failing to follow the contract specifications, and
Owner sues Builder for damages.
Disregarding other loss, Owner's recovery under Formula A is equal to his
loss on the bargain calculated as the difference between loss in value and cost
avoided. Since cost avoided is simply the amount yet unpaid by Owner, or
$1,000,000 if he has paid nothing, loss in value is the only troublesome
component.
For a typical commercial structure, such as a factory that is to be used for
profit, an estimate of the loss in value to Owner can be derived from the loss,
resulting from the breach, in the income that he would have realized in collateral
transactions with other parties.80 Where he is a middleman who intends to
lease or sell the structure to another, this estimate is based on the loss in the
rental or sale price. Where he is the ultimate user of the structure and antic-
ipates manufacturing a product for sale to others, the estimate is based on the
loss in income from such sales. 8' The ultimate user presents the more difficult
problem of estimation of loss in value and here a more refined terminology will
82
help.

77. Where Builder has been delayed by Owner's breach, prior to Builder's decision
to treat that breach as total, loss caused by that delay should be treated as other loss.
78. Under the rules relating to mitigation, however, Builder will be held to a standard
of reasonableness with respect to savings that might have resulted from salvage.
79. See Patterson, supra note 74, at 1289-91.
80. To the extent that the income is deferred income, it will have to be capitalized,
a problem that is ignored here for the sake of simplicity. See 1 J. BONBRIGHT, supra note
62, at 216-32.
81. The same is true where the breach consists of a delay in completion. Owner will
be allowed damages based on the difference between the income that the factory would
have produced had performance been timely and that which it will produce as a result of
the delay. He is not confined to the rental price of the premises during the delay, the price
that some hypothetical lessee would have paid on the market for their use during that
period.
82. As will be seen later, the ultimate user also poses the more difficult problems with
regard to unforeseeable loss, text accompanying notes 219-76 infra, and uncertain loss,
text accompanying notes 277-303 infra.
1166 COLUMBIA LAW REVIEW [Vol. 70:1145

The cost of complete performance by Owner of his bargain with Builder

(here, the payment of $1,000,000) will be referred to as the cost of complete
direct performance and will be regarded as being made up of the cost of direct
reliance (payments already made by Owner to Builder) and the direct cost
avoided (payments not yet made by Owner to Builder). The cost of complete
performance by Owner of collateral transactions will be referred to as the cost
of complete collateralperformance and can be regarded as being made up of the
cost of collateralreliance (cost already incurred in those transactions) and the
collateral cost avoided (cost avoided by not completing those transactions). 3
Owner's profit on his bargain with Builder will be called his direct profit and is
equal to the collateral income lost (the income that he has lost on collateral
transactions) less both the cost of complete direct performance and the cost of
complete collateralperformance.84 Using this terminology, then, the loss in value
of the structure to Owner as a result of the breach is readily seen as equal to the
difference between the collateralincome lost and the collateralcost avoided.
Loss in value = collateralincome lost - collateralcost avoided.
Substitution of this in Formula A gives Formula A':
(A') Damages = collateralincome lost - collateralcost avoided -
direct cost avoided + other loss.
Disregarding other loss, where Owner has yet done nothing in either direct or
collateral reliance, his damages will be simply his direct profit. If, for example,
the collateralincome lost is $20,000,000, and the collateral cost avoided is $17,-
000,000, damages, assuming no other loss, will be equal of the first of these less
the second and less the $1,000,000 that Owner would have had to pay Builder
for the factory, or $2,000,000.
Often, however, Owner will already have made commitments or expendi-
tures in anticipation of collateral transactions. He may, for example, have
ordered machinery to be installed in the factory and incurred expenses for ad-
vertising its future products. In order to reflect this cost of collateral reliance
more clearly, Formula A' can be transformed into Formula B' by a process
similiar to that used to transform Formula A into Formula B.8 6

83. Fuller & Perdue, supra note 12, at 78, use the terms "essential reliance" and "in-
cidental reliance" instead of direct reliance and collateral reliance. The latter terms are
used here as parallel to the commonly used terms direct profit and collateral profit.
84. Owner's profit on collateral transactions, or his collateral profit, would be cal-
culated with no deduction for the cost of complete direct performance and would be equal
to the collateral income lost less the cost of complete collateral performance.
85. The equivalence of the two formulas can be established by showing that:
collateral income lost - collateral cost avoided - direct cost avoided = cost of
direct reliance + cost of collateral reliance+ direct profit
Rearranging the terms gives:
collateral income lost = (cost of direct reliance + direct cost avoided) + (cost of
collateral reliance+ collateral cost avoided)+ direct profit
And substitution gives:
collateral income lost = cost of complete direct performance + cost of complete
19701 CONTRACTUAL BREACH 1167

(B') Damages = cost of directreliance + cost of collateralreliance

+ directprofit + other loss.
Assuming, for example, that Owner had spent $500,000 on machinery and ad-
vertising in collateral reliance, his damages would equal this amount plus the
$2,000,000 direct profit.8 6
Where, however, the injured party's expected advantage does not consist
largely or exclusively of the realization of profit, but involves substantial matters
of personal taste or welfare, both formulas, A' and B' are inadequate. The
practical problems of determining his recovery are apparent. The division be-
tween judge and jury of the power to determine damages requires a fairly simple
and objective measure that can be administered by juriors and supervised by
judges in accordance with the requirement of certainty. Yet where matters of
personal taste or welfare are concerned, only the injured party himself may be
able to shed light on his actual "state of mind" or "favorable attitude," and he
can hardly be expected to give dispassionate testimony on the subject. Although
market prices and the opinions of experts can be used to test his claims, courts
have been reluctant to take account of such loss and have often expressed their
reluctance by saying that there can be no recovery for ."sentimental" or for
"fanciful" value.8 7 As to matters of personal taste and welfare, therefore, courts
have frequently felt compelled to look to objective measures to approximate
value to the injured party. It should be borne in mind, however, that diminution
in value is still the basis for recovery, and that what is sought is merely a
88
measure of that diminution in value and not a distinct basis of recovery
The two most common measures are cost to complete and diminution in
market price.
Illustration 4. Builder contracts with Owner to build a house on
Owner's land for $50,000, paid in advance. Builder fails to follow the
contract specifications. The cost to Owner to have another builder
complete performance would be $15,000. The difference between the
price that the house and land would have brought on the market if the
collateral performance + (collateral income lost - cost of complete direct per-
fornance - cost of complete collateral performance).
86. Since direct profit has been defined to exclude both the cost of complete direct
performance and the cost of complete collateral performance, double recovery is avoided.
Cf. Fuller & Perdue, supra note 12, at 82-83.
87. Most of the discussion of "sentimental" and "fanciful" value has come in connec-
n with the owner's claim for loss or damage to property for which he has a special
attachment, a type of claim that more commonly sounds in tort than in contract. Illustra-
tive is MacGregor v. Watts, 254 App. Div. 904, 5 N.Y.S2d 525, 526 (1938), an action
in conversion for the loss of a manuscript of a play, in which the court stated that "all
sentimental or fanciful values are eliminated and disregarded." See 5 CoRnm § 1004;
McCormwxc § 44 at 169-70; 1 J. BONBRIGHT, supra note 62, at 350-53. See also the dis-
cussion of the requirement of certainty in text accompanying notes 277-303 infra.
88. Fuller & Perdue, supra note 12, at 65-66, suggest that were it not for such factors
as the natural preference for the expectation interest on the ground that it offers the most
easily administered standard, one would expect a tendency away from expectation and
towards reliance as one progresses away from a credit system. The further removed the
contract is from the credit system, the more difficult it is to measure expectation, and the
less pressing are the basic policies that justify protection of the expectation interest in
the ordinary business agreement.
1168 COLUMBIA LAW REVIEW [Vol. 70:1145

specifications had been followed and that which it will bring as built
is $10,000. Owner sues Builder for $15,000 in damages.
Damages measured by the cost to Owner to complete performance are subject
to the objection that they may compensate him for more than the diminution in
value to which the laws says he is entitled. If the cost to complete performance,
here $15,000, exceeds the diminution in value to him, so that it would not be
"worth what it would cost" for him to complete, then damages measured by that
cost will leave him with a windfall in the amount of the excess. To allow this
windfall would be to go beyond protection of his expectation and, in effect,
penalize Builder, thereby departing from the principal objective of contract
remedies. Cost to complete is, however, useful in fixing an upper limit for re-
covery since, even if that cost is less than the diminution in value to him
making it advantageous for him to complete, the "principle of substitution"
operates so that damages measured by that cost will at least be sufficient to
enable him to obtain a substitute performance. 89
Damages measured by the diminution in the price that Owner could realize
on the market,90 here $10,000, avoid the above objection, but are subject to the
converse objection that they may undercompensate Owner. If Owner planned
to keep the building for his own use, the advantage that he expected may well
exceed that to those who would buy on the market. As Bonbright pointed out,
many properties, highly prized for the special purposes for which they
are designed, are of trivial value [on the market] because only the
present owner is in a position to exploit them.9 1
To this extent of this excess, damages measured by the decline in market price
will fail to compensate Owner for his loss in value. But if he anticipated selling
the building on completion, damages measured by the price that the building
would have brought him in a hypothetical sale on the market may closely ap-
proximate its value to him. Diminution in market price is, therefore, useful in
fixing a lower limit for recovery, since the value of property to its owner is
usually no less than the net price at which he could sell it.
When diminution in value is elusive, then, cost to complete is a useful mea-
sure in fixing an upper limit for recovery and diminution in market price is a
useful measure in fixing a lower limit.9 2 The diminution in value to Owner in
Illustration 4, for example, can be assumed to lie between $10,000 and $15,000,
89. According to Bonbright, the rule "that replacement costs sets the approximate
upper limit of ... value" is "one of the most useful rules of thumb" in appraisal theory.
1 J. BONBRIGHT, supra note 62, at 157. The "principle of substitution" is discussed in text
accompanying notes 166-69 infra.
90. Bonbright calls this "the highest price for which the owner could sell it, under
prevailing conditions of the market." 1 J. BONBRIGHT, supra note 62, at 56.
91. 1 3. BONBRIGn1T, supranote 62, at 66.
92. Disregarding the element of damage due to delay in completion, the cost to com-
plete operates as an upper limit on diminution in market price, so that damages measured
by cost to complete will not be less than damages measured by diminution in market price.
19701 CONTRACTUAL BREACH J169
Which measure more closely approximates this diminution in value will depend
on the circumstances. When damages measured by cost to complete will not
greatly exceed those measured by diminution in market price, so that the error
will not be large whichever is chosen, courts generally favor the former as the
more generous of the two. 93 Owner can therefore expect to recover $15,000 in
Illustration 4. Where, however, they differ widely,: the preference may shift to
damages measured by diminution in market price.
In some cases the contract itself may suggest which measure gives the
better approximation of value to Owner.
Illustration4c. The facts being otherwise as stated in Illustration 4,
the contract states that of the $50,000 price, $40,000 is for the house
itself and $10,000 is for ornamental sculpture on its exterior. Builder's
departure from specifications consists of his failure to add the sculp-
ture. Although the cost to Owner to have another builder add the
sculpture would be $15,000, its addition would raise the market price
of the property by only $1,000.
Here the figures for cost to complete and diminution in market price show only
that the diminution in value to Owner, because of Builder's failure to add the
sculpture, lies between the disparate limits of $1,000 and $15,000, but the fact
that when the contract was made Owner was evidently willing to pay $10,000
for it, suggests that $15,000 is the more appropriate approximation of diminu-
tion in value to him at the time of breach. 94 This, in fact, will ordinarily be the
measure of his recovery in such a case. As one court put it:
A man may do what he will with his own....and if he chooses
to erect a monument to his caprice of folly on his premises, and em-
ploys and pays another to do it, it does not lie with a defendant who
has been so employed and paid for building it, to say that his own per-
formance would not be beneficial to the plaintiff. 5
Yet to the extent that Owner's expected advantage consists of the realization of
profit to the exclusion of matters of personal taste and welfare, diminution in
market price may be the better measure of that benefit.96 If, for example, Owner
is a developer who plans to place the house on the market, and if his earlier
willingness to pay $10,000 for the sculpture was due simply to his gross mis-
calculation, at the time the contract was made, of the eff6ct that it would have

93. RESTATEMENT § 346(1) (a) (i), for example, states a basic rule allowing damages
for "the reasonable cost of construction and completion in accordance with the contract."
See also Illustration 4 to that section.
94. The value of the sculpture on which damages are to be based, however, is its value
to the owner at the time of breach and not the value that he thought, at the time of con-
tracting, it would have. Bonbright discusses "real" and "esteemed" value in 1 J. BONBRIGHT,
supra note 62, at 82-84.
95. Chamberlain v. Parker, 45 N.Y. 569, 572 (1871) (Andrews, J.),
96. In Chamberlain v. Parker, id. at 572-73, the court continued: "The point to be
considered is, whether the plaintiff in any sense, actual or legal, has lost by the default of
the defendant a sum equal to the expense of digging the well," i.e., the cost of completion.
It held that he had not.
1170 COLUMBIA LAW REVIEW[ [Vol. 70:1145

on the market price of property, $1,000 is a more appropriate approximation

than $15,000 of the diminution in value to him at the time of breach.0 7
At this point, the skeptical reader may well suspect that this is an instance
in which it is difficult for judges to suppress the natural inclination to take
some account of fault in contract matters. Should the developer who plans to
market the house be limited to $1,000 even if it appears that Builder's breach
resulted from his discovery that to add the sculpture would cost him, say,
$14,000, compared to the $10,000 allocated in the contract, and that rather than
absorb the resulting $4,000 loss he decided it would be cheaper to refuse to per-
form and pay $1,000 damages instead? If relief of promisees to redress breach is
the only objective, he should be so limited. As might be supposed, however,
where the breach appears to have been the result of such a decision, courts have
been reluctant to accept this conclusion. Rather than favor the party in breach
by ascribing a discrepancy between contract price and market price to the
injured party's gross miscalculation, at the time the contract was made, of the
effect that performance would have on the market price of the property, the
natural inclination is to favor the injured party by attributing his willingness to
pay so high a price to some advantage that is peculiar to him and not, therefore,
reflected in the market price.08 The fact that the breach was "willful" or "delib-
erate" may, therefore, be seen by the court as an additional argument for using
cost to complete, and not diminution in market price, as the measure of damages
in cases like Illustration 4a.
The argument for using cost to complete are weaker when the contract
itself sheds no light on value to Owner.
Illustration4b. The facts being otherwise as stated in Illustration 4a,
the contract does not allocate the $50,000 price between the house and
the sculpture.
Here there is less justification for assuming that the loss in value because of the
failure to add the sculpture is substantially greater than $1,000. It is still pos-
sible that had the parties allocated a figure in the contract to the sculpture alone,
it might still have been $10,000; but it is also possible that it might have been
only $1,000, and that the discrepancy between this figure and the $15,000 figure
for cost to complete might be due to a gross miscalculation made by Builder of
what his own costs would be in adding the sculpture. 9 On that assumption, the
$15,000 approximation measured by cost to complete is less appealing, and the
$1,000 approximation measured by diminution in market price seems closer to
97. This would be so regardless of whether he simply misjudged the existing market
at the time of contracting or whether he correctly judged it then only to have it fall
before breach.
98. The house to be marketed by the developer might, for example, be intended as a
prototype to stimulate other sales.
.,99. It is unlikely that it would be due primarily to an increase in costs between con-
tracting and breach, since this would probably be reflected in an increase in market price
as well.
19701 CONTRACTUAL BREACH 1-171:

the probable value to Owner. Courts have been particularly baffled by such
situations in which the contract calls for more than one sort of performance with
no allocation of the return performance which would -suggest their relative
values to the injured party. I
Two leading decisions are the Minnesota case of Groves v. John Wunder
Co., 00° and the Oklahoma case of Peevyhouse v. Garland Coal Mining Co.1°- In
Groves, one party agreed to lease to the other, with the right -to excavate, a
twenty-four acre tract of industrial property. The lessee paid $105,000 and pro-
mised to leave the property at a uniform grade. Instead it left the grade uneven.
Had the lessee performed, the market price of the property upon termination of
the lease would have been $12,160; for th6 owner to have the grading done
would have cost upwards of $60,000. The owner sued for damages measured by
the latter figure, but recovered only damages measured by the $12,160. On ap-
peal, it was held that the trial court erred in limiting the owner to damages
measured by market price.10 2 In Peevjhouse,the owners of a farm leased -it to
a mining company for five years for strip-mining. The lessee paid a sum of
money and promised to do restorative and remedialwork on the land: It failed
to do the work. Had the lessee performed, the market price of the farm would
haGe been increased by only $300; for the owners to complete wotild have cbst
about $29,000. The owners sued for $25,000 and recovered $5000 in the trial
court. On appeal, it was held that the trial court erred in allowing damages
greater than those measured by market price and reduced the judgment
to $300.10.
In each case the party leasing for the- purpose of excavation was in a
position analogous to that of Builder. In each casethe lessee's performance was
to be of two sorts, paying money for the right to excavate and restoring the.land
after excavation. In each ca e the return performance was the lease 'ith thr
right to excavate which was not, of course, allocated as between the -"yment
and the restoration. 04 In each case the excavator paid the money, analogous to
Builder's construction of the house, and in each case he failed to restore the
land, analogous to Builder's failure to add the sculpture. In Groves the court
concluded that cost to complete was the proper measure of damages; iii Peevy-
house it concluded that diminution in market price was the proper measure.
In Groves the court stressed the "willful" character of the breach*'5:an4
remarked that the "objective of this contract.., was the improvement of real

100. 205 Minn. 163, 286 N.W. 235 (1939).

101. 382 P.2d 109 (Okla. 1962).
102. The decision was three to two, with two judges taling no part.
103. Four of the nine judges dissented..-
104. In addition, the lessee in Groves incidentally eliminated the lessor as a competitor.
105. 205 Minn. at 165, 286 N.W. at 236. The dissenting opinion denied that there was
any finding to support this characterization of the breach. 205 Minn. at 172, 286-N.W.
at 239.
1172 COLUMBIA LAW REVIEW[ [Vol. 70:1145
estate."108 It evidently thought that the value to the owner of restoration was
approximately $60,000 even though this was over half the amount paid for the'
lease and was nearly five times the market price of the land as restored. Had
the sum to be paid for the lease originally been $165,000 with no provision for
restorative work, and had the parties subsequently modified the agreement to
reduce the price to $105,000 and include the restorative work, this conclusion
would be difficult to dispute. But the court had no such convincing evidence to
support its conclusion.
In Peevyhouse the court emphasized the "relative economic benefit" and
"the relationship between the expense involved and the 'end to be attained'-
in other words, the 'relative economic benefit.' "107 It concluded that "the con-
tract provision breached was merely incidental to the main purpose in view,
and.., the economic benefit which would result to lessor by full performance
of work is grossly disproportionate to the cost of performance." 08 It evidently
concluded that the value to the owner of the restoration was approximately
$300, even though it would have cost the owner nearly a hundred times that
amount to do it. Had the sum to be paid for the lease originally been fixed with
no provision for restorative work, and had the parties subsequently modified
the agreement to reduce the price by $300 and include the restorative work, this
conclusion would be difficult to dispute. But this court, too, had no such con-
vincing evidence to support its conclusion. Indeed, the fact that the property
in Groves was industrial in character might have made market price a more
appealing alternative, 0 9 and the fact that the property in Peevyhouse was a
farm might have made cost a more appealing alternative, but both courts chose
to ignore the character of the land involved." 0
Both courts were met with and rejected the contention that recovery mea-
sured by cost to complete would involve "economic waste."" 1 The term
"economic waste" is, at the very least, misleading. It is commonly used in situa-
tions in which completion of performance would require demolition and recon-
struction of a structure. The Restatement of the Law of Contracts,for example,
says in this context that the owner may recover the "reasonable cost of
106. 205 Minn at 170, 286 N.W. at 238.
107. 362 P2d at 113.
108. Id. at 114.
109. The opinion in Peevyhouse does not, however, indicate whether the owners
planned to live on the farm after the land was restored.
110. It has been suggested that attention be given to
the parties' purposes in making the contracts. If it appears from all the facts that
the promisee was interested in the construction solely for its immediately effect
upon the sale value of his adjacent property, the charnge in value [market price?]
rule obtains; on the other hand, if he was interested in the construction either for
its use value or as one step in a comprehensive scheme, cost of completion is
granted. ... Viewing the facts of this case [Groves] with the above criteria in
mind it appears that a level grade was not uppermost in mind of the promisee at
the time the contract was made; it dealt mainly with the removal of gravel....
In such a case the difference in value rule is indicated.
40 CozuL. L. Rav. 323, 325-27 (1940).
111. 205 Minn. at 170-71, 286 N.W. at 238; 362 P.2d at 112.
19701 CONTRACTUAL BREACH 11"73

construction and completion.., if this is possible and does not involved un-
reasonable economic waste."'112
Illustration 4c. The facts being otherwise as in Illustration 4b, the
sculpture is to be built into the foundation in such a way that its addi-
tion, once the house has been completed, will require considerable
demolition and reconstruction.
In this situation, Owner will usually be confined to damages measured by
diminution in market price. In Jacob & Youngs v. Kent,1 13 for example, a con-
tractor built a $70,000 country residence for the owner, but inadvertently
departed from the contract specifications by using the plumbing pipe of
Cohoes, rather than of Reading Manufacture. The two types of pipe were
identical in all characteristics except their origin, and to have replaced the
Cohoes pipe with Reading would have required demolition of substantial parts
of the structure. Judge Cardozo wrote for the New York Court of Appeals:
In the circumstances of this case, we think the measure of the
allowance is not the cost of replacement, which would be great, but the
difference in value, which would be either nominal or nothing ... The
owner is entitled to the money which will permit him to complete,
unless the cost of completion is greatly out of proportion to the good
to be attained. When this is true, the measure is the difference in
'value."i 4
The result seems not to have turned on the fact that the departure was in-
advertent rather than intentional."15 Presumably the court concluded that the
nominal diminution in market price was a closer approximation to the loss in
value to the owner than was the considerable cost of demolition and replacement.
This is a reasonable conclusion in any situation in which the cost to complete
has been substantially increased by the breach itself and consists in large part
of undoing work already done and then redoing it, and only in small part of
making improvements that directly affect the value to the owner. Loss in value
to the owner is likely to be only a small fraction of the cost to complete, and
damages measured by the diminution in market price are probably the better
approximation of this.
It is misleading, however, to suggest that the award of damages measured
by cost to complete would result in "economic waste" in such a situation. What
is meant by "economic waste" seems rather to be a use of assets in a way con-
sidered "wasteful" according to standards shared by society in general.
112. RESTATEMENT § 346(1) (a) (i).
113. 230 N.Y. 239, 129 N.E. 889 (1921).
114. 230 N.Y. at 244, 129 N.E. at 891. Accord, Hansen v. Anderson, 246 Iowa 1310,
'71 N.W2d 921 (1955).
115. Because suit was by the contractor against the owner, there was also a question
whether there had been .substantial performance on the contractor's part, in the light of
which the character of the owner's breach was regarded as significant. 230 N.Y. at 244,
129 N.E. at 891. Three judges dissented, arguing that-there had not been substantial
performance.
1174 COLUMBIA LAW REVIEW[ [Vol. 70:1145

Certainly there would have been "economic waste" in this sense if the con-
tractor in Jacob & Youngs had been compelled to replace the Cohoes pipe with
Reading at a cost greatly in excess of what society in general, as evidenced by
the market, would regard as the resulting increase in value. But awarding
damages measured by cost to complete results in no such compulsion, for the
law does not supervise the injured party's disposition of the money that he
recovers as substitutional relief.11 If he recovers a sum measured by cost to
-complete, he is free to choose whether he will "waste" it on completion or put
it to other use. Even if he were limited to a lesser sum measured by diminution
,in market price, he will still be'free to waste it along with other assets, on
completion, and it is doubtful that recovery of the larger sum will appreciably
increase the likelihood that he will do so. 1 7 It is perhaps more likely that the
threat of, damages measured by cost to the owner to complete might coerce the
builder into correcting the defect himself, which he could probably do at some-
what lesser cost than could the owner; this course however, would probably
be less' attractive to' both parties than settlement at some figure short of the
cost to the builder but above the difference in market price.
Much of the talk of "economic waste" thus misses the mark. Usually the
only valid point to be made is that there is the probability of an excessive
windfall for the owner and a heavy penalty for the builder if cost to complete
rather than diminution in market price is adopted as the measure of loss in
value. This is so where, as in Jacob & Youngs, much of the cost to complete
results from the breach itself and consists of expenses in undoing and redoing
work that is not directly productive of value to the injured party, so that there
is' reason to suppose that theloss in value to him is much farther from cost to
complete and closer to diminution in market price than it would otherwise be.
But on this analysis the "economic waste" argument is a spurious one in both
Groves and Peevyhouse. There was no suggestion 'n either case that the cost
;to complete was increased by the breach and would have been less had restora-
tion been carried 'out during the regular course of the lessee's operations. Al-
though if is possible to imagine a situation in which restoration at the end of
the lease would involve undoing and redoing work to achieve an end that could
have been attained much more efficiently had it been done over the period of
the lease, it does not appear that this was so in either case.118 As far as can
116. As has aiready been pointed out, courts are particularly reluctant to give specific
relief-to-the owner ior breach of a construction contract. Text accompanying note 34
supra.
117. The subsequent history of Groves supports this. After the reported decision, the
lessee paid $55,000 to the owner to settle the claim. The land was left until 1951, when
some grading was done on a portion at a cost of $6,000 and in 1953 this portion was sold
for $45,000 to a buyer who planned to use it for a factory. J. DAWSON & W. HARWvEY,
CASES ON CONTRAcrs AND CoNTRAcr RExmDrEs 12 (2d ed. 1969).
118. It is sometimes suggested that, as the court said in Peevyhouse, "the 'economic
waste' referred'to consists of the destruction of a substantially completed building or other
structure." 382 P 2d at 112. See also RESTATEMNT § 346, Comment b. To the extent that
19701 CONTRACTUAL BREACH 1175

be seen, all of the cost of the restorative work included in the $60,000 and
$29,000 figures was that contemplated at the time of the contract.
All this does not suggest that the court should have measured damages by
cost rather than market price in Peevyhouse or by market price rather than
cost in Groves. It merely suggests that there was little reason in either case
to prefer the one to the other. If, in fact, the value to the owner in both cases
lay somewhere between the two extremes, the solution reached by the trial court
in Peevyhouse accords with common sense. Rather than accept the Draconian
choice between the Scylla of overcompensation through cost and the Charybdis
of undercompensation through market price, it gave judgment for an inter-
mediary amount, $5,000, roughly a sixth of the cost of completion, but over
fifteen times the diminution in market price." x9 It was reversed, but it is indeed
doubtful that the appellate court improved upon the compromise in the court
below. The "certainty" achieved by insisting on a choice between cost or mar-
ket price is plainly illusory if there is no reliable way of connecting either of
the two measures to the loss in value to the owner. Where the loss in value
to the owner is uncertainj and cost to complete and diminution in market price
differ widely, it would be better to give the trier of fact discretion to fix any
figure, not unreasonable under the circumstances, as long as it lies within
those two limits. On this basis, then, both Groves and Peevyhouse were wrongly
decided. 20

V. -SECOND CHOIcE REVISITED: ALTERNATIVES TO EXPECTATION

Ordinarily the injured party will be content to base his recovery on his
expectation interest, since this will be more favorable to him than recovery
based on either his restitution interest or his reliance -interest. There are,
however, some exceptions.
One instance in which restitution may appear an attractive alternative
occurs when the party in breach has committed a total breach in spite of the
fact that the bargain has turned out to favor him - that is, when the value to
the party in breach of the benefit conferred upon him would exceed the value
of his promised performance to the injured party. Needless to say, this sort
of situation is not common since there is usually no reason for the more
favored party to refuse to perform his part of a bargain that is favorable to
him. Nevertheless, when this situation does arise, restitution is allowed if the
the "economic waste" argument has any merit, however, it is applicable to any situation
which involves undoing and redoing work, whether or not a structure is involved.
119. Since the trial court arrived at its $12,160 figure in Groves by concluding that
the land as surrendered to Groves was "without any value," neither the $60,000 nor the
$12,160 was an "intermediary amount." J. DAwsoN & W. HARVEY, supra note 117, at 2 n.l.
120. This point is made more eruditely, if more abstrusely, in Birmingham, Damage
Measures and Economic Rationality: The Geometry of ContractLaw, 1969 Duxa L.J. 49.
For a case in which the matter was disposed of by a clause in the contract calling for
reimbursement for expenses incurred by the aggrieved party, see Eastern S.S. Lines v.
United States, 112 F. Supp. 167 (Ct. Cl. 1953).
1176 COLUMBIA LAW REVIEW [Vol. 70.-1145

benefit conferred on the party in breach consists simply of the payment of

21
money.1
Illustration3e. The facts being otherwise as stated in Illustration 3,
Owner pays the $1,000,000 in advance and Builder breaches by failing
to construct the factory. Owner sues Builder for return of the full
$1,000,000, although the value of the factory to Owner would in fact
have been only $700,000.
Owner will be allowed restitution of the full $1,000,000, with no deduction
for the $300,000 loss he would have suffered had Builder constructed the fac-
tory. Owner's position after the breach is consequently better than it would
have been had Builder performed.
Restitution is not, however, generally allowed where the benefit con-,
ferred on the party in breach consists of something other than the payment:
22
of money1
Illustration3f. The facts being otherwise as stated in Illustration 3,
Builder constructs the factory in advance and Owner breaches by fail-
ing to pay the price. Builder sues Owner for $2,000,000, the actual
value of the factory to Owner, rather than for the $1,000,000 that
Owner promised to pay.
Here Builder's recovery will be limited to the $1,000,000 promised, which was
the limit of his expectation. The results in Illustrations 3e and 3f, both of which
favor the party who has agreed to pay money, can be reconciled on the ground
that in each case the court chooses the measure of recovery that permits it to
avoid the problem of determining loss in value due to nonperformance of the
promise to do something other than pay money.123 If, however, the benefit
conferred on the party in breach consists of other than the payment of money,
and if the injured party has performed only in part, as where Owner breaches
by repudiating when Builder is in the process of constructing the factory, the
problem of valuation cannot be avoided. Here courts have genierally allowed
recovery based on the restitution interest, a point that will be illustrated shortly
24
in connection with the protection of the reliance interest in this situation.1
Dawson points out a second instance in which recovery based on the
121. Bush v. Canfield, 2 Conn. 485 (1818), discussed in Palmer, The Contract Price
as a Limit on Restitution for Defendant's Breach, 20 OHio ST. L.J. 264-65 (1959);
RESTATEMENT § 347(1) (a).
122. E.g., Oliver v. Campbell, 43 Cal. 2d 298, 273 P.2d 15 (1954) ; RESTATPMEXT
§ 350.
123. For this reason RESTATFMENT § 350 allows restitution where, for example, the
injured party has parted with goods in return for a promise to perform services. See
Palmer, supra note 121, at 267.
124. RESTATEmENT §§ 347(1) (a), 351. See text accompanying notes 132-38 infra. The
formulas for recovery based on the expectation interest and the restitution interest,
respectively, have a discontinuity at the line between part and full performance. An
example is Oliver v. Campbell, 43 Cal. 2d 298, 273 P.2d 15 (1954), in which a five-judge
majority held that a lawyer had fully performed his services for his client and was
limited to the $750 fee that they had fixed, while two dissenting judges contended that the
services were not fully performed so that he was entitled to their reasonable value, $5,000.
19701 CONTRACTUAL BREACH 1177
restitution interest, broadly conceived, might, exceed the expectation.'-r This
occurs where one party refuses to perform so that he may take advantage of
another, more attractive, opportunity.
Illustratir
n 3g. The facts being otherwise as stated in Illustration 3,
Builder would have made a profit of $100,000 on this contract. Im-
mediately after making the contract, he receives from another owner
an offer of a contract under which he can make a profit of $300,000.
He accepts it, although he cannot do both jobs, and repudiates his
contract with Owner. Owner sues Builder for restitution of the
$200,000 additional profit that Builder made as a result of his breach,
although it appears that Owner would not have made a profit had the
factory been built.
Dawson concludes, however, that Owner would be denied recovery of the
$200,000:
This kind of recovery could not be explained as restitution under
present day tests; there would be a fatal break in the chain of causa-
tion, for the asset or conduct that was merely promised would not
have come from the promisee [Owner]. Perhaps another way to ex-
press the idea is that the prevention of profit through mere breach of
contract is not yet an approved aim of our legal order, as it is with
26
breach of "fiduciary" duties.'
The limits on the restitution interest as a basis of recovery, therefore, usually
make it unattractive to the injured party as an alternative to the expectation
interest. The reliance interest, however, is more promising.
One instance in which the injured party might prefer recovery based on
his reliance interest occurs when his expectations under the contract were less
than his expectations under some other bargain that he declined in reliance on
the contract.
Illustration 3h. The facts being otherwise as stated in Illustration
3
g, Builder would have made a-profit of $100,000 on this contract.
Builder rejects the other offer because he cannot do both jobs. Owner
then breaches by repudiating the contract after it is too late for Builder
to accept the other offer. Builder sues Owner for $300,000 in damages,
based on what he lost in reliance on his contract with Owner, rather
than for $100,000 based on what he lost in disappointed expectations
upon its breach.
Although $300,000 would be required to put Builder in the position in which

125. Dawson, Restit tion or Damages?, 20 OHIO ST. L.J. 175, 186-87 (1959).
126. Dawson, supra note 125, at 187. He cites Acme Mills & Elevator Co. v. Johnson,
141 Ky. 718, 133 S.W. 784 (1911), in which a seller failed to deliver wheat which he had
contracted to sell for $1.03 a bushel, sold it before the delivery date to another buyer for
$1.16 a bushel, and was held liable for nominal damages only when the market dropped
below the contract price by the delivery date. See also RESTATEMENT (SECOND) OF
AGEcCY § 404 (1957), Illustration 2. But in Timko v. Useful Homes Corp., 114 N.J. Eq.
433, 168 A. 824 (1933), it was held that a vendor of lots, for which the purchaser had
tartly paid, held them in trust -for the purchaser and waS liable to him for damages
based on the price at which he wcongfully'sold them to a third party.
 COLUMBIA LAW REVIEW [Vol. 70:1145

27
lie would liave been had he not made the contract with Owner, no court
would allow him this larger sum. A court will not, as Fuller and Perdue stated
it, "knowingly put the plaintiff in a better position than he would have occupied
28
had the contract been fully performed."' Expectation here operates as an
upper limit on recovery, a defensible limit since one of the justifications for
the protection of the expectation interest in the first place is that it yields
rules that are superior, because of their certainty and ease of application, to
20
those derived from the reliance interest. Businessmen regularly rely on
contracts by foregoing other opportunities and adjusting their business to the
expected performance, and basing recovery on such reliance would pose grave
problems of measurement.
A second exceptional case, in which the injured party may prefer damages
based on reliance to those based on expectation, arises when the breach has
relieved him from finishing performance of what has turned out to be a losing
30
contract.'

Illustration3i. The facts ,being otherwise as stated in Illustration 3,

Owner breaches by repudiating the contract after Builder has begun
performance. Builder has already spent $500,000 and would have to
spend $600,000 more to finish perf6rmance, which would result in a
$100,000 loss on the contract. Builder sues Owner for $500,000 in
damages, based on his expenditures in reliance on the contract and
ignoring the $100,000 loss, rather than for the $400,000 to which he
would otherwise be entitled.
,Here too, for reasons similar to those giyen in connection with the previous
exception, most courts have persisted in limiting recovery on,the contract
to,that based on expectation so that breach does not have the consequence of
shifting to the party in breach a loss that would have been suffered by the
injured party had the contract been fully performed. 1 1 In an illustrative case,

127. To eliminate the possibility that Builder, might have repudiated the contract with
Owner and accepted the more profitable offer, remaining liable to Owner for damages,
assume that those damages would be at least $200,000, so that this course of action would
have been less desirable for Builder..
128. Fuller & Perdue, supra note 12, at 79. $ee also their discussion of the compen-
sability of gains prevented through reliance at 417-18.
129. Id. at 61-62. They also suggest that
in a hypothetical society in which all values were available on the market and
where all markets were "perfect" in the economic sense ... there would be no
difference between the reliance interest and the expectation interest. The plain-
tiff's loss in foregoing to enter another contract would be identical with the
expectation value of the contract he did make.
Id. at 62. They give the illustration of a "physician who by making one appointment
deprives himself of the opportunity of making a precisely similar appointment with another
patient . .." Id. at 74:
130. It may be that the injured party entered into the contract 'because of some
special advantage, such as the enhancement of his experience or reputation or good will,
with respect to which his proof fails to meet the standard of certainty, discussed in text
.accoinpanying notes 277-303 infra. What he then regarded as an advantageous contract
may thus appear as a 'losing" contract. Cf. note 68 supra.
131. See RFSTATEMEZiT § 333. This means that not only is the cost of reliance limited
by the contract price in an extreme case, but that a negative profit term must be included
19701 CONTRACTUAL BREACH 1179

Millen v. Gulesian, 32 the Supreme Judicial Court of Massachusetts approved

an award to Builder of only $3,057, calculated as the difference between the
contract price of $8,825 and the cost avoided of $5,768. The Builder, as the
injured party, had sought recovery of $7,625, the amount of his costs incurred
in reliance on the contract. Despite owner's breach, builder's recovery was thus
less than his cost of reliance by $4,568, the amount he would have lost had
the contract been fully performed.'4 3 However, as has already bden mentioned,
Builder is generally allowed restitution of the benefit that he has conferred
upon Owner, to put the party in breach in the position in which he would have
been had the contract not been made. 34 Some courts, therefore, have been
able to avoid the limitation applicable to recovery on the contract by character-
izing the reasonable cost of part performance as the benefit to the Owner, 35
ignoring the fact that there may be a difference between recovery based on the
reliance interest and that based on the restitution interest. The language of
the Supreme Court of Pennsylvania in one such case, Philadelphia v.
Tripple,'3 6 is representative of this view:
It may, of course, be contended that [Owner] did not receive an
actual benefit co-extensive with [Builder's] expenditure. It is a suf-
ficient answer to this contention to observe that . . . [Builder] ex-
pended the money
37
in good faith and in the course of attempted
performance.
to account for any loss. When the party in breach is a seller of goods, however, the buyer
may elect to reject the goods and cancel the contract. By doing so, he puts himself in the
position he would have been in had there been no contract, and since he seeks no damages,
he need take no account of any loss he would have had on the contract. See Peters,
Remnedies for Breach of Contracts Relating to the Sale of Goods Under the Uniform
Commercial Code: A Roadmap for Article Two, 73 YALE L.J. 199, 270-71 (1963).
132. 229 Mass. 27, 118 N.E. 267 (1917). Adjustment was made for interest and for
$1,100 already received by Builder on account.
133. Fuller & Perdue, supra note 12, at 77, suggest, however, that
it is quite possible in a case of a particularly inexcusable breach that the court
might feel that it was not imposing too heavy a penalty on the defendant to shift
to him the loss which the plaintiff would have incurred even if the defendant had
performed his contract.
134. See note 124 supra. Although RESTATEMENT § 349, Comment a, points out that
"there is no literal rescission of the contract," some courts do speak in terms of rescission.
E.g., Seaboard Sur. Co. v. United States, 355 F-2d 139 (9th Cir. 1966).
135. E.g., United States v. Zara Contracting Co., 146 F2d 606 (2d Cir., 1944);
Boomer v. Muir, 74 Cal. App. 435, 24 P.2d 570 (Cal. App. 1933), discussed in Palmer,
supra note 121, 269-73. Recovery here is limited to the reasonable cost of performance,
in contrast to the cost of performance under Formula B, in which no limit of reasonable-
ness need be imposed because the profit term has a compensating effect. See text accom-
panying notes 77-79 supra.
136. 230 Pa.480, 79 A. 703 (1911).
137. 230 Pa. at 487, 79 A. at 706. REsTATE ENT § 347, Comment c, reads as follows:
If the plaintiff's performance is part of the very performance for which the
defendant bargained as part of an agreed exchange, it is to be valued, not by
the extent to which the defendant's total wealth has been increased thereby, but
by the amount for which such services and materials as constituted the part
performance could have been purchased from one in the plaintiff's position at
the time they were rendered. . . The rate of payment agreed upon in the
contract is admissible in evidence on the question of value, but it is not conclusive.
However, the contract price operates as an upper limit where the contract, or some
severable part of it, has been fully performed by the injured party, and all that remains
to be done by the party in breach is to pay money. Id. §§ 350-51.
1180 COLUMBIA LAW REVIEW [Vol. 70:1145

The argument, of course, overlooks the fact that the measure of Owner's
actual benefit from Builder's performance may well be less than the cost to
13 8 ,
Builder of that performance.
The case for Builder is more appealing where it is unclear whether he
would have made a profit or sustained a loss had the contract been fully per-
formed. A court might limit him to nominal damages on the ground that he had
not proved damages. But most courts have been more generous to Builder, and
there is substantial authority that he may simply ignore the profit term in
Formula B 139 and recover on the contract itself for his cost of reliance,at least
so far as it is reasonable. 40 Thus in United States v. Behan 41 the Supreme
Court of the United States allowed a contractor to recover for his reasonable
expenditures, including unavoidable losses on materials on hand, incurred in
reliance on a contract which the government ordered stopped. The project was
an experimental one in which the contractor was to lay down an artificial cover-
ing of cane mats on the bed of the Mississippi River to keep the channel clear
for navigation. It did not appear from the evidence whether he would have
made a profit or sustained a loss had performance been permitted. According to
the Court:
It does not lie.., in the mouth of the party, who has voluntarily and
wrongfully put an end to the contract, to say that the party injured
has not been damaged at least to the amount of what he has been
induced fairly and in good faith to lay out and expend (including his
own services), after making allowance for the value of materials on
hand ... unless he can show that the expenses of the party injured
have been extravagant, and unnecessary for the purposes of carrying
out the contract. 142
The effect is to leave the burden of persuasion as to profit on Builder, if he
seeks to use profit to increase his recovery beyond the cost of reliance, but to
put the burden as to loss on Owner ifhe seeks to use loss to reduce Builder's
143
recovery below the cost of reliance.
138. See the discussion at note 78 supra. This may work a kind of rough justice
where the contract is a losing one for the reason suggested in note 125 spra.
139. Formula B is set out in text at note 77 supra.
140. Since the profit term is ignored, a limit of reasonableness must be imposed. See
note 135 supra. But see the criticism of this in Patterson, supra note 74, at 1298-99.
141. 110 U.S. 338 (1884).
142. 110 U.S. at 345-46. To the extent that this language suggests that the injured
party can recover in full his reasonable outlay, even though the party in breach proves
that he would have sustained a loss, it goes too far. See L. Hand in L. Albert & Son v.
Armstrong Rubber Co., 178 F2d 182, 189 (2d Cir. 1949).
143. A few courts have allowed pro rata recovery of the contract price, a result that
may be justified as a compromise. In Kehoe v. Rutherford, 56 N.J.L. 23, 25, 27 A. 912,
914 (1893), the court-allowed the builder "only such a proportion of the contract price
as the fair cost of that work bore to the fair cost of the whole work required" for ex-
cavation where the contract fixed the price by the cubic yard. In Shapiro Eng'r Corp.
v. Francis 0. Day Co., 215 Md. 373, 137 A.2d 695 (1958), the court allowed recovery
of that amount of the contract price apportioned for the purpose of payment to the part
of the contract that had been completed, on the ground that it was "divisible."
19701 CONTRACTUAL BREACH 1181

Although the Behan case was concerned with Builder's recovery under
Formula B of the cost of reliancewhere profit was in doubt, a similar question
arises with respect to Owner's recovery under Formula B' of the cost of direct
reliance and the cost of collateral reliance where direct profit is in doubt. 144
Judge Learned Hand concluded that recovery should be allowed in such a case.

On principle therefore the proper solution would seem to be that the

promisee may recover his outlay in preparation for the performance,
subject to the privilege of the promisor to reduce it by as much as he
can show that the promisee would have lost, if the contract had been
performed.145
Indeed, the importance to Owner of this rule allowing him to recover
the cost of direct reliance and the cost of collateralreliance is probably greater
than the importance to Builder of the comparable rule allowing him to recover
the cost of reliance, because Owner will ordinarily have greater difficulty in
proving profit than will Builder. This can be illustrated by several well-known
cases. The earliest is Nurse v. Barns,146 an English'case from the seventeenth
century, in which an entrepreneur promised to pay £10 to the owner for the
use of the latter's iron mills. When the owner denied him their use, the entre-
preneur was allowed to recover the 6500 that he had lost in stock laid in. The
recovery can be viewed as consisting under Formula B, of the cost of collateral
reliance,there being no cost of direct reliance,no other loss, and no evidence
of direct profit.
In Security Stove & Manufacturing Co. v. American Railway Express
Co.,31 7
a frequently cited American case, a manufacturer contracted with a
carrier to ship a newly-designed combination oil and gas burner to -atrade
association convention where it could be exhibited to prospective customers.
When the carrier failed to deliver one of the parts, so that the burner could
not be exhibited, the manufacturer was allowed to recover its cost of direct
reliancein the form of the shipping charges plus its cost of collateralreliance in

144. Formula B' is set out in text following note 85 supra.

145. L. Albert & Son v. Armstrong Rubber Co., 178 F2d 182, 189 (2d Cir. 1949).
Hand, however, erroneously characterized the reliance as "essential" (i ., direct reliance)
when it was "incidental" (i.e., collateral reliance). 178 F.2d at 191. See note 83 upra.
RESTATEMNT § 333 provides only for the recovery of expenditures "in performance of the
contract or in necessary preparation therefor," which would allow only the cost of direct
reliance and not the cost of collateral reliance. Fuller & Perdue, supra note 12 at 89-96,
rightly take issue with the Restatement on this.
146. Haym. Sir T. 77, 83 Eng. Rep. 43 (1664).
147. 227 Mo. App. 175, 51 S.W2d 572 (1932). The court asserted that, "There were
no profits contemplated." Id. at 183, 51 S.W.2d at 577. What it must have meant was that
none had been proved. Cf. Rabinovitz v. Marcus, 100 Conn. 86, 123 A. 21 (1923), in which
the court allowed a purchaser of real property to recover his deposit of earnest money plus
his expenses in examining title and preparing 'papers. The court said that he had chosen
to "rescind" the contract and evidently 'viewed the recovery as based on a combination of
the restitution and reliance interests, although it could as well be regarded as being based
on the reliance interest alone.
1182 COLUMBIA LAW REVIEWV (Vol. 70:1145

the form of the travel and living expenses of its employees together with an
allowance for their salaries and wages, and the rental of the exhibition booth.
Here the recovery consisted of both the cost of direct reliance and the cost of
collateral reliance,there being no other loss and no proof of direct profit.
In L. Albert & Son v. Armstrong Rubber Co.,148 from which the earlier
statement by Learned Hand is taken, a manufacturer contracted to buy from a
seller, during the Second World War, four machines designed to recondition
old rubber. The manufacturer abandoned the venture when the seller failed
to deliver the machines in time to be of use. The court allowed the manufacturer
to recover the cost of collateral reliance, the amount it had expended to lay
the foundation for the machines. Again, recovery can be viewed as that under
Formula B' with no proof of direct profit. In this case, however, the court
allowed the seller the privilege of deducting from the recovery any losses that
it could prove the manufacturer would have sustained had the seller delivered
the machines on time.
The complexity of the problems that can arise out of such claims for the
cost of collateralreliance is well illustrated by a 1954 English case, Cullinane
v. British "Rema" Manufacturing Co.14 9 A seller sold to a manufacturer a
machine warranted capable of producing six tons of dry clay powder per hour.
When delivered and installed it produced only two tons per hour, a rate that
made it commercially useless. The manufacturer included in his claim for
damages against the seller the amount that he had paid on the purchase price
of the machine (the cost of direct reliance) and his expenses in the construction
of buildings to accommodate the machine (the cost of collateral reliance).150
To this he added the direct profit that he had already lost during the first three
years of the expected ten-year life of the machine, the period that had elapsed
between the delivery of the machine and the trial of the case. In effect, his
claim for damages had two parts. One was based on his expectation for the first
three years, the period that had passed at the time of the trial and for which
he was prepared to prove direct profit. He based his calculations of direct profit
on estimated collateral income lost during each year less estimated cost of
complete collateral performance for that year and less an appropriate amount
for depreciation of the machine and buildings for that year. The other part
was based on his cost of reliance over the remaining seven years of the expected
life of the machine, the period that still lay ahead at the time of the trial and
for which he was not prepared to prove profits. There is no reason why such a
claim should not be honored. Under Formula B', the manufacturer would be
entitled to damages based on the cost of direct relianceand the cost of collateral
reliance plus his entire direct profit over the machine's expected life of ten
148.'178 F.2d 182 (2d Cir. 1949).
149. [1954] 1 Q.B.D. 292.
150. To take account of salvage, the manufacturer directed a sum tor the "residual
value" of the machine and the "break up value" of the buildings. Id. at 293.
19701 CONTRACTUAL BREACH 1183

years. His recovery of the cost of direct reliance and the cost of collateral
reliance should not be prejudiced merely because he limited his claim for
recovery based on his expectation of direct profit to the first three years of
that life, as long as proper account was taken for depreciation during that time.
In effect, the manufacturer quite rightly attempted to use Formula B' in its
entirety for the three-year period for which he was prepared to prove profits,
and Formula B' with the direct profit term disregarded for the remainder of
the ten years, using an appropriate figure for annual depreciation to allocate
the proper fraction of the cost of complete direct performance and the cost of
complete collateral performance to the first three years. Unfortunately, the
court rejected this attempt. Evershed, M.R., concluded that the manufacturer
had to choose between recovery based on "the capital cost he has incurred" and
recovery "on the basis of the profit which he has lost,"'151 and accepted the
seller's argument that the manufacturer's claim "really involves giving damages
twice over."' 1 2 The court limited the manufacturer to the larger of the two
items, the direct profit for the three-year period. The case appears to be one in
which the court would have benefited from a more careful analysis, along the
53
lines suggested here, of these complex damage problems.'

VI. FiFr CHoicE: Loss OR AvoIDABLE Loss?

Up to this point the discussion has focused on the promisee's interest in

his bargain. Yet a society that depends so heavily on private bargains has itself
a stake in how bargains fare. And although our legal system does not, as we
have already seen, generally regard that stake as sufficient to justify it in
compelling parties to perform their promises by penalizing them for failure to
perform, it does show concern if adequate attempts are not made to avoid
unnecessary waste once a bargain miscarries. In order to encourage the injured
party to make reasonable efforts to salvage the transaction, it penalizes him, if
his efforts are found wanting, by denying him recovery for loss that he could
have avoided through reasonable efforts following breach. 154 As a corollary, it
compensates him for the cost of such reasonable efforts as he has made.
151. Id. at 303.
152. Id. at 300.
153. In criticism of the decision, see the dissenting opinion by Morris, L.J., at 313;
H. STREET, PRINCIPLES OF THE LAW OF DAMAGES 243-45 (1919).
154. The word "penalizes" is used advisedly. Since the promisee is ordinarily entitled
to recovery based on his actual loss, a rule that denies him recovery for that part of the
loss that he could have avoided has the effect of penalizing him for not having avoided it.
But see RESTATEMENT § 336, Comment d ("The law does not penalize his inaction"). The
promisee who does not avoid the loss is distinguished from the promisee who does, since
only the former suffers loss without compensation. In this respect the rule differs sig-
nificantly from the spurious doctrine of "economic waste," discussed in text accompanying
notes 111-118 supra in connection with the building contract cases. There the choice of
diminution in market price, rather than cost to complete, as a measure of loss in value af-
fords no significant incentive to the owner to avoid any "economic waste" that might be
involved in completion, since whichever measure of recovery is chosen, the decision whether
to complete or not will turn on whether the owner thinks that it will be "worth what it will
cost."
1184 COLUMBIA LAW REVIEW[l [Vol. 70:1145

It is, however, misleading to say, as is sometimes done, that the injured

party is under a "duty" to mitigate damages. 155 He incurs no liability to the
party in breach for his failure to mitigate; in principle his recovery is the same
regardless of whether he takes steps in mitigation or not. 6 0 He is simply pre-
cluded from recovering for loss that he could reasonably have avoided. In
Virtue v. Bird,157 a quaint illustration from three centuries ago, the plaintiff
contracted to carry timber to Ipswich and to deliver it to a place to be
appointed by the defendant. When the plaintiff arrived in Ipswich, however,
"the defendant delayed by the space of six hours the appointment of the place;
insomuch that his horses being so hot ... and standing in aperto aere, they
died soon after."' 5 8 The court denied him recovery of this loss, on the ground
that "it was the plaintiff's folly to let the horses stand,"16 9 "for the plaintiff
might have taken his horses out of the cart, or have laid down the [timber]
any where in Ipswich ....16 0 Although the avoidable loss in this case took
the form of other loss in Formula A, 6 1 the rules concerning mitigation apply
equally to loss on the bargain and to its two components, loss in value and
cost avoided.'62
As to cost avoided, after a repudiation by the party in breach the injured
party is expected to maximize this component in order to minimize his loss on
the bargain and, therefore, his damages. Ordinarily this means that he is
expected to stop work. In Rockingham County v. Luten Bridge Co., 0 3 a
graphic example, a contractor persisted in building a bridge in spite of a repu-
diation by the other party, a county, directing him not to proceed because it
had decided not to build the road of which the bridge was to be a part. The
court mused:
The bridge, built in the midst of the forest, is of no value to the county
because of this change in circumstances .... [The builder] had no
right thus to pile up damages by proceeding with the erection of a
useless bridge.' 64
155. In Rock v. Vandine, 106 Kan. 588, 590, 189 P. 157, 158 (1920), the court analyzed
mitigation in Hohfeldian terms and concluded that the injured party was under a "legal
disability to [claim] damages which he might have prevented."
156. If, however, his efforts to mitigate are even more successful than would have
been expected, so that he avoids more loss than would have been anticipated, he is
limited to his actual loss. See text accompanying notes 190-91 infra. And if his efforts,
although reasonable, are less successful than would have been expected, so that he
avoids less loss than would have been anticipated, he is sometimes allowed recovery on his
actual loss. See text accompanying notes 192-95 infra.
157. 3 Keble 766, 84 Eng. Rep. 1000, (same case) 1 Ventris 310, 86 Eng. Rep. 200
(1678). The latter report speaks of "corn"' rather than "timber," but a third report, 2
Lev. 196,' says "timber."
158. 1 Ventris at 310, 86 Eng. Rep. at 200.
159. Id.
160. 3 Keble at 767, 84 Eng. Rep. at 1000.
161. Formula A is set out in text following note 67 supra.
162. Where it takes the form of other loss, the considerations are much like those
encountered in connection with contributory negligence in the law of torts.
163. 35 F.2d 301 (4th Cir. 1929).
164. Id. at 307. See also Clark v. Marsiglia, 1 Denio (N.Y.) 317, 318-19 (1845), in
which the court said:
To hold that one who employs another to do a piece of work is bound to
19701 CONTRACTUAL BREACH 1185

To the extent that his obstinacy reduced his cost avoided and thereby increased
his loss on the bargain,the contractor was denied recovery. The Uniform Com-
mercial Code does empower a manufacturer of goods that he has contracted
to sell to elect to complete their manufacture in spite of a repudiation by the
buyer if "in the exercise of reasonable commercial judgment" the manufacturer
concludes that less loss will result from completing the goods and then dis-
posing of them than from halting their manufacture and salvaging them while
in process. If he does so he may then base his recovery on the goods as com-
pleted, even if his "reasonable commercial judgment" turned out to be in
error.Y65 Ordinarily, however, the injured party is expected to stop work as a
means of maximizing the cost avoided, and if he proceeds he does so at his
own risk.
As to loss in value, the injured party is expected to minimize this com-
ponent in order to minimize his loss on the bargain and, therefore, his damages.
Here the "principle of substitution" limits the loss in value to him, due to a
performance that is not forthcoming, to the cost at which he could replace that
performance, with an allowance for any additional loss occasioned by delay in
replacement.' 66 This is the same principle that makes the cost to complete the
upper limit of recovery in the building contract cases, 167 and it is the source
of some of the most important of the rules used in calculation of damages.
According to this principle, the injured party, on learning of the breach, is
expected to take affirmative action to avoid loss by making such substitute

suffer it to be done in all events, would sometimes lead to great injustice. A man
may hire another to labor for a year, and within the year his situation may be
such as to render the work entirely useless to him. The party employed cannot
persist in working, though he is entitled to the damages consequent upon his
disappointment. So if one hires another to build a house, and subsequent events
put it out of his power to pay for it, it is commendable in him to stop the work,
and pay for what has been done and the damages sustained by the contractor.
He may be under a necessity to change his residence; but upon the [contrary
rule], he would be obliged to have a house which he did not need and could not
use.
165. UCC § 2-704(2). For a discussion of the seller's options under the Code, see
Harris, A Radical Restatement of the Law of Seller's Damages: Sales Act and Commer-
cial Code Results Compared, 18 STAr. L. Rxv. 66, 70-72, 100-09 (1965).
166. This, of course, assumes that the situation is among the exceptional ones in which
specific relief is available.
167. See text accompanying note 89 supra. Cost to complete in the building contract
cases is one instance of replacement cost, since completion of the building according to
specifications involves arranging a substitute transaction with another builder. Of the
principle of substitution, Bonbright says:
Having a house to live in may be so important to me that I would give my entire
fortune rather than go without it. But having this particular house is much less
important, since I could buy another, equally attractive house, say, for $10,000.
Recognition of this principle of substitution has led appraisal writers to lay down
the rule that the replacement cost of property ordinarily sets the approximate
upper limit of its value.... Yet this [principle] is not invariably valid, and its
universal acceptance would sometimes result in a gross undervaluation. Owners
and prospective buyers of property cannot secure substitutes instantaneously;
sometimes the delay is serious, not to say fatal. In consequence, property which
is now available may be worth much more than the cost of a substitute which
would be quite as satisfactory save for the fact that it cannot be 'secured until
a future date.
I J. BONBRiGHT, supra note 62, at 156-57.
1186 COLUMBIA LAW REVIEW (Vol. 70:1145

arrangements as are reasonable under the circumstances. He is then limited to

recovery based on the loss that he would have sustained had such arrangements
been made and, as a corollary, is allowed any cost that he has incurred in
making such arrangements.' 6 8 The loss in value is the difference between the
value that performance under the contract would have been to the injured
party and the value of the substitute obtained. The cost avoided is the cost of
that performance less the cost of the substitute. Formula A then becomes
Formula C :169

(C') Damages = [value of performance - value of substitute]

- [cost of performance - cost of substitute] + other loss.

The buyer of goods, for example, on learning of breach by the seller, is

expected to attempt to cover by procuring substitute goods from another source.
So, in Illustration 2,170 if upon breach a satisfactory substitute for the re-
placement part were available for $110, Manufacturer's damages for breach by
Supplier would be limited to $10, the additional cost of substitute above the
contract price of $100 that Manufacturer would have to pay for it, plus any
costs of making arrangements to obtain it plus any loss occasioned by the
delay in obtaining it.1 71 As one nineteenth century court put it:

Here the plaintiff had his money in his possession and he might have
purchased other bacon of the like quality the very day after the con-
tract was broken, and if he has sustained any loss, by neglecting to do
so, it is his own fault.17 2
Assuming that the buyer is able to find a fully equivalent substitute, the loss in
value (represented by the first bracketed term of Formula C) is zero and,
since the buyer's cost of performance equals the contract price and his cost of
substitute equals the cover price, Formula C becomes Formula C-B:

(C-B) Buyer's damages = cover price - contract price + other loss.

Exactly what kinds of substitute transactions are reasonable will, of course,

depend upon the circumstances. 78 One difficult question arises when buyer has
already paid part or all of the purchase price to the seller so that obtaining

168. UCC § 2-713. In practice, however, it is unlikely that the injured party will be
compensated in full for the trouble and inconvenience he has been caused by having to
make substitute arrangements.
169. Any cost that he has incurred in making the arrangement and any loss that he
has sustained as a result of delay in replacement should be included in other loss.
170. Illustration 2 is set out in text following note 57 supra.
171. UCC § 2-715(2) (a) allows the buyer consequential damages only to the extent
that they "could not reasonably be prevented by cover [under UCC § 2-712] or other-
wise." See UCC § 2-715(1) on incidental damages.
172. Gainsford v. Carroll, 2 B. & C. 624, 625, 107 Eng. Rep. 516 (K.B. 1824).
173. It has been held, for example, that an advertising agency need not "cut its rates
for unsold space, with incidental disturbance of its business" to avoid loss. Barron G.
Collier, Inc. v. Kindy, 146 Minn. 279, 178 N.W. 584 (1920).
 CONTRACTUAL BREACH 1187

substitute goods will require the buyer to finance a second transaction. 174 An-
other arises when a buyer has an opportunity to avoid loss by making a less
favorable contract with the repudiating seller himself, assuming of course that
the buyer is not asked to surrender his rights under the repudiated contract. 175
Rules similar to those governing recipients of goods apply to recipients of, for
10
example, services and land.. 7 7
Furthermore, supplier, on learning of breach by the recipient, is also
expected to arrange a substitute transaction. Thus a seller of goods, on learning
of breach by the buyer, is expected to arrange a resale to another buyer.'73
Since the seller is expected to dispose of all of the contract goods, for which he
will presumably receive a lower price, his cost avoided (represented by the
the second bracketed term of Formula C) is zero, and since seller's value of
performance equals the contract price and his value of substitute equals the
resale price, Formula C becomes Formula C-S:
(C-S) Seller's damages= contract price - resale price + other loss.
Analogous requirements apply to other suppliers, for example, those of ser-
vices' 70 and land. 8s0
That this limitation of recovery, spawned by the principle of substitution,
is not an inevitable one can be seen from the fact that at one time it was not
applied to the supplier of personal services. In Gandell v. Pontigny,'8' an 1816
174. RESTATEMENT § 336, Illustration 10 indicates that he is not expected to finance
a second purchase. See also T. SEDGWicsc, A TREATiSE ON THE MEAsURE OF DAMAGES
§ 744 (9th ed. 1912). But the Code makes no such exception to the general rule that
bases damages on the assumption that a substitute transaction is possible. UCC § 2-713.
Cf. UCC § 2-502. -_ ,
175. The possibility of personal humiliation may also be a factor. See Lawrence v.
Porter, 63 F. 62 (6th Cir. 1894), for a case in which the court concluded that the buyer
should have made the second contract where the seller had breached by refusing to
deliver on credit and insisted on cash. Contra, Coppola v. Marden, Orth & Hastings Co.,
282 Ill. 281, 118 N.E. 499 (1917). The problem is discussed in 5 ComIm § 1043 and, in
connection with the availability of replevin under UCC § 2-716(3), in Peters, supra note
131, at 234. An interesting variation occurs when a customer incurs substantial damage by
his refusal to pay the unjustified bill of a utility, such as a water company, which has a
monopoly on its services. Compare Schultz v. Town of Lakeport, 5 Cal. 2d 377, 54 P.2d
1110 (1936), viodified, 55 P2d 485 (1936), with Severini v. Sutter-Butte Canal Co., 59
Cal. App. 154, 210 P. 49 (1922).
176. See 5 Coann; § 1096. These rules based on the cost of a substitute transaction
apply not only to contracts for personal service but also to construction contracts to the
extent that cost of completion is the measure of recovery applied. See text accompanying
notes 89-120 supra.
177. See 5 Conn; § 1098. As was pointed out in text accompanying note 38 supra,
the purchaser of land usually can compel specific performance. See also the discussion of
Flureau v. Thornhill, text accompanying notes 13-16 mpra. The rule limiting the injured
party to recovery based on the cost of a substitute transaction may pinch especially where
the broken promise is one to lend money, since whatever the impact on the prospective
borrower, recovery is generally limited to the difference between interest at the market
rate and interest at the contract rate. See 5 CoRBiN § 1078.
178. UCC § 2-708.
179. See 5 CoRBiN § 1095. These rules apply to contracts for personal service. Dif-
ferent rules apply, for example, to construction contracts for the reasons indicated in text
accompanying note 208 infra.
180. See 5 Com § 1098A.
181. 4 Camp. 374, 171 Eng. Rep. 119 (1816).
1188 COLUMBIA LAW REVIEWl1 [Vol. 70:1145

English case, a merchant was sued by his clerk, whom he had wrongfully dis-
charged in the middle of a quarter. The clerk was allowed to recover the agreed
compensation for the entire quarter, including the part when he had not worked,
on Lord Ellenborough's reasoning that:
Having served a part of the quarter and being willing to serve the
residue, in1 8contemplation
2
of law he may be considered to have served
the whole.
In Howard v. Daly,'8 3 a leading American case decided in 1875, however, this
doctrine of "constructive service" was regarded as
so wholly irreconcilable to that great and-beneficient rule of law, that
a person discharged from service must not remain idle, but must
accept employment elsewhere if offered, that we cannot accept it ....
The doctrine of "constructive service" is not only at war with prin-
ciple but with the rules of political economy, as it encourages idleness
and gives compensation to men who fold their arms and decline ser-
vice, equal to those who perform with willing hands their stipulated
amount of labor184
The doctrine has now been replaced by a rule analogous to that applicable
to the seller of goods, under which the employee is expected to make reason-
able efforts to arrange a substitute transaction by finding similar employment
with another employer. His recovery is then determined by what he would
have earned under the contract with the party in breach less what he did or
could with reasonable efforts have earned elsewhere.185
Because ours is a free enterprise economy, there has been a natural ten-
dency to assume that the injured party has available to him a market on which
he can arrange a substitute transaction. It is supposed that through the
encouragement of substitute transactions on such markets society can avoid
waste without relying, as do the communist countries, on a system of generally
available specific redress. This supposition is reinforced by the fact that a
common purpose of contracting parties in a free enterprise economy is to shift
the risk of market fluctuations. In consequence, the substitution principle has
182. Id. at 375, 171 Eng. Rep. at 120.
183. 61 N.Y. 362 (1875).
184. Id. at 373.
185. Prima facie the measure of such damage is "the wage that would be payable
during the remainder of the term ;" but this is only the prima facie measure. The
actual damage is measured by the wage that would be payable during the re,
mainder of the term reduced by the income which the discharged employee has
earned, will earn, or could with reasonable diligence earn during the unexpired
term.
Lehman, J., In Holl-wedel v. Duffy-Mott Co., 263 N.Y. 95, 101, 188 N.E. 266, 268 (1933).
On the burden of persuasion, see text accompanying notes 203-05 infra. The employee need
not, however, take other employment that is not of the same general character. E.g.,
Hussey v. Holloway, 217 Mass. 100, 104 N.E. 471 (1914). Courts have disagreed over
whether the employee's recovery should be reduced by amounts received as unemployment
compensation or similar benefits. Compare Pennington v. Whiting Tubular Prod. Inc., 370
Mich. 590, 122 N.W.2d 692 (1963) (not reduced), witfl United Protective Workers v.
Ford Motor Co., 223 F2d 49 (7th Cir. 1955) (reduced).
19701 CONTRACTUAL BREACH 1189

been generalized to yield the familiar standardized damage formulas. Thus the
buyer's damages came to be calculated on the basis of
the difference between the contract price and the [market] price which
the article bore at or about the time
8s
when, by the terms of the contract,
it ought to have been delivered.'
Assuming, then, that the cover price is equal to the market price, Formula C-B
becomes Formula C-B':
(C-B') Buyer's damages= market price - contractprice + other loss.
Buyer's cost of entry into the market along with his loss due to any delay are
properly included under other loss, although there is a tendency to assume that
187
markets are frictionless and to neglect such additional items as these.
Illustration 5. Seller contracts with Buyer to deliver goods on a
specified date for $100,000. Seller fails to deliver on that date. The
market price of similar goods at and immediately after the delivery
date is $110,000.
Buyer's recovery under the standard damage formula is based on the $10,000
difference between market price and contract price. Since the objective is com-
pensation of Buyer and not punishment of Seller, this is so even though the
the damages that Seller must pay Buyer are compensated for by the enhanced
value of the goods to Seller as a result of the rise in their market price. Further-
more, assuming that there is a market on which he can arrange a substitute
transaction, Buyer is limited to this recovery even though he might have made
a larger profit on resale of the goods.
Illustration5a. The facts being otherwise as stated in Illustration 5,
Buyer, after making his contract with Seller but before Seller's breach,
makes a contract to resell the goods to another purchaser for $125,000.
Buyer's recovery is still based on the $10,000 difference between market price
and contractprice, and not on the $25,000 gross profit that he would have made
on the resale, since it is assumed that by spending only $10,000 more on the
market he could obtain goods to enable him to perform his resale contract and
18
realize a gain based on that same resale contract.
Buyer has been allowed damages based on the difference between market
price and contract price even when this gives him a larger recovery than that
based on his gross profit on resale.
186. Gainsford v. Carroll, 2 B. & C. 624, 107 Eng. Rep. 516 (1824).
187. UCC § 2-713(1) allows the buyer "any incidental . . . damages," which are
defined in UCC § 2-715(1) to include "any commercially reasonable charges, expenses
or commissions in connection with effecting cover," but it is not clear that such charges
would be available where the buyer based his recovery on a hypothetical rather than an
actual transaction. Any expenses saved by the buyer as a result of the seller's breach
should, of course, be included as a negative term in other loss. See UCC § 2-713(1).
188. Gross profit is cited as a base because of the ease of illustration. If profit is used
as a measure of recovery, of course, adjustment must be made so as to limit the injured
party to his net profit. See note 201 infra.
1190 COLUMBIA LAW REVIEW[ [Vol. 70:1145

Illustration5b. The facts being otherwise as stated in Illustration 5a,

the market price of similar goods at and immediately after the delivery
date is $130,000.
Buyer may recover damages based on the $30,000 difference between market
price and contract price, although in this instance it exceeds the gross profit
that he would have made on the resale, since in order to meet his resale obliga-
tion he must pay on the market $30,000 more than the contract price.180
The goal, however, is still only compensation so that the buyer who covers
is limited to his actual loss, and if he is able to cover at a price below the
market price, he is limited to recovery based on that cover price.100
189. Brightwater Paper Co. v. Monadnock Paper Mills, 161 F2d 869 (1st Cir. 1947);
Tennessee Fertilizer Co. v. International Agricultural Corp., 146 Tenn. 451, 243 S.W. 81
(1921). Contra, Texas Co. v. Pensacola Maritime Corp., 279 F. 19 (5th Cir. 1922) ; Kaye
v. Eddystone Ammunition Corp., 250 F. 654 (E.D. Pa. 1918). The justification for this
result is that Buyer will still honor his resale contract, although it is now a losing one,
if he has to buy on the market. If, however, Buyer in making his resale contract has
protected himself by reserving the power to cancel on breach by Seller, Buyer's loss in
value should be based on his loss of profit in the resale transaction. Foss v. Heineman,
144 Wis. 146, 128 N.W. 881 (1910). Here Buyer's situation differs from that where, as in
Illustration 5, there is no resale contract because there Buyer might go into the market
and buy substitute goods at the enhanced price and still resell them at a profit on his
resale market where prices would also be enhanced by the price rise. Here, however, if
he goes into the market and buys substitute goods at the enhanced price, he is bound
to sell them to his purchaser at his lower resale price, resulting in a greater loss than if
he had cancelled, so that arranging a substitute transaction will not avoid loss. This,,
however, means that Seller can, to the extent of $5,000, benefit by his refusal to deliVer
the goods to Buyer if he can resell them on the market for $30,000 over the price that
Buyer had contracted to pay, and then discharge his liability for breach by paying Buyer
only $25,000. (Compare this with Illustration 3g.) To this extent, in effect, he takes ad-
vantage of Buyer's power of cancellation. (The alternative, of course, is to allow Buyer
to benefit to this extent by exercising his power of cancellation.) With this in mind, the
court in Foss v. Heineman remarked that there was no "moral unfairness" on the part
of Seller, who had delivered all that he could, and that had Seller breached in order to
take advantage of the rise in the market, the result might have been otherwise. See
note 9 supra.But cf. Iron Trade Prod. Co. v. Wilkoff Co., 272 Pa. 172, 116 A. 150 (1922)
(buyer's damages based on difference between cover price-not resale price-and contract
price, and the fact that the purchaser on resale released him was immaterial since, "To
hold otherwise would inject collateral issues in trials for breaches of such contracts."
Id. at 178, 116 A. at 152.) Similar reasoning applies where Seller, after contracting with
Buyer, makes commitments with his supplier to procure the goods. On Buyer's breach,
Seller should be allowed damages based on the difference between the contract price
and the price on his resale market, even if this exceeds the profit that he would have
made on the transaction, as long as it is assumed that he must still honor his commitment
to his supplier. Cf. Foglino & Co. v. Webster, 244 N.Y. 516, 155 N.E. 878 (1926) (even
though the seller's supplier released him, "the rule to be adopted does not vary because
of the generosity of third parties." Id. at 518, 155 N.E. at 879) ; United States v. Burton
Coal Co., 273 U.S. 337 (1927) (the seller was not limited to profits although it was not
shown that he was bound to take and pay for the goods or that lie suffered loss under
his agreements with suppliers).
190. UCC § 2-713, Comment 5, which lays down the Code's version of the standard
formula-for the buyer's recovery based on the difference between market and contract
price, asserts that, "The present section provides a remedy which is completely alternative
to cover ... and applies only when and to the extent that the buyer has not covered."
The principle that recovery is based on actual loss, even when a market price formula
would give a larger amount, also applies to contracts for personal services. Griffin v.
Oklahoma Natural Gas Corp., 132 Kan. 843, 297 P. 662 (1931). But for an argument
that both buyers and sellers should be allowed recovery based on a hypothetical substitute
transaction on the market, even though that recovery exceeds the recovery based on the
actual loss, where breach was followed by a more favorable actual substitute transaction,
see Peters, supra note 131, at 259-61.
However, the buyer who does not cover may base his recovery on the market, even
19701 CONTRACTUAL BREACH 1191

Illustration5c. The facts being otherwise as stated in Illustration 5,

Buyer obtains similar goods for $105,000.
Buyer will be allowed damages based on the $5,000 over the contract price
that he actually paid and not the $10,000 over the contract price that he
yould have had to pay on the market. : " If, however, the buyer has arranged
cover at a price above the market price, he has traditionally been limited to
recovery based on market price, although his cover price might be admitted as
92
evidence of that market price.
Il1ustratioft 5d. The facts being otherwise as stated in Illustration 5,
Buyer obtains similar goods for $115,000.
This sort of discrepancy may occur, for example; ,when the terms, such as
quantity, of the substitute transaction are not identical with those of the original
transaction. Courts have in the past limited Buyer to recovery based on the
$10,000 difference between market price and contract price, rather than the
$15,000 difference between cover price and contract price. The Uniform Com-
mercial Code makes a substantial change here by allowing the buyer to base
his recovery on a reasonable substitute contract that he actually made rather
than the hypothetical one that he might have made on the market. The buyer
who reasonably covers by arranging a substitute purchase is given recovery
based on the difference between the cover price and the contract price, or
15,000 in Illustration 5d, together with incidental expenses incurred, such as
193
the cost of his entry into the market, to make the substitute transaction.
though he was wise or lucky in not going into it. Suppose that Buyer's resale contract
does not require him to deliver to his purchaser until six months after Seller's breach.
Instead of going into the market after the breach and buying at $110,000, he does nothing
for six months, by which time the market has dropped to $80,000. His recovery is still
based on the $10,000 difference, and he has gained $30,000 by his inaction. Of course if
the market had risen further during his delay, he would have lost $20,000 by his inaction.
Cf. Friedman Iron & Supply Co. v. J.B. Beaird Co., 222 La. 627, 63 So. 2d 144 (1953)
(seller retained scrap steel after buyer's breach and market then rose).
191. Illinois Cent. R.R. v. Crail, 281 U.S. 57 (1930), is an interesting illustration of
this. A coal dealer claimed damages from a carrier, due to a 5,500 pound shortage in an
88,700 pound carload of coal, and argued that they should be measured by the higher mar-
ket price for coal sold at retail rather than the lower market price for coal sold in carloads
lots. The Supreme Court rejected this argument on the ground that he had in fact purchased
no coal to replace the shortage except in carload lots. Mr. Justice Stone wrote,
This contention ignores the basic principle underlying common law remedies that
they shall afford only compensation for the injury suffered .... The test of mar-
ket value is at best but a convenient means of getting at the loss suffered.
Id. at 63-64.
192. The price of cover effected without obtaining quotations from other suppliers was
disregarded in Sauer v. McClintic-Marshall Constr. Co., 179 Mich. 618, 146 N.W.
422 (1914). In most instances, however, cover price has been accepted as evidence of
market price. E.g., Donald W. Lyle, Inc. v. Heidner & Co., 45 Wash. 2d-806, 278 P2d 650
(1954); King v. D. E. Ryan Co., 179 Minn. 385, 229 N.W. 348 (1930); Growers' Ex-
change v. John A. Eck Co., 66 Utah 340, 242 P. 391 (1925). But sometimes the price in the
substitute transaction has not even been regarded as evidence. Cf. Rees v. R.A. Bowers Co.,
280 Pa. 474, 124 A. 653 (1924), in which an aggrieved seller of eggs found another buyer
after breach and was denied recovery based on that resale price. The court concluded that
A private resale by a factor in a large, open and available market, of a commodity
so universally demanded, is not evidence of market value.
Id. at 482, 124 A. at 656.
193. UCC § 2-712.
1I192 COLUMBIA LAW REVIEW [Vol. 70:1145

Comparable rules apply to the seller, on breach by the buyer. 194 In this
case Formula C-S reduces to Formula C-S':
(C-S') Seller's damages= contractprice - market price + other loss.
Under the Code a rule parallel to that on cover by the buyer also protects
the seller who arranges a substitute transaction after the buyer's breach, allow-
ing him recovery based on the difference 19 5
between the contract price and the
resale price if the resale was reasonable.
Permitting the injured party, as the Code does, to base his recovery on
terms of reasonable substitute arrangements that he has made may require
the court to police the injured party's choice of the substitute arrangements
on which he bases his damages. This will be so in any situation in which he
regularly makes contracts for similar goods on a fluctuating market, since his
tendency in such a situation will be to claim as the substitute that transaction
which will yield the largest recovery.19 6 The availability of a ready market has,
however, the substantial advantage for the injured party of relieving him of
the task of establishing market price, a task that may raise difficult problems
of proof.lor Therefore, although the injured buyer is not required to cover
nor the injured seller to resell, and either can instead claim damages based on
market price, the use of actual rather than hypothetical substitute arrangements
as the basis for recovery has an obvious practical advantage. Although For-
mulas C-B' and C-S' can be extended to transactions not involving goods, such
as those involving land or services, there are in these areas no counterparts to
the Code's rules allowing the injured party to base recovery on an actual as
opposed to a hypothetical substitute transaction.
The principle of substitution has some important restrictions, however,
for by its very nature, it applies only where an adequate substitute contract
could have been arranged by the injured party. Where no such transaction
was possible, the general measure of recovery applies. Thus, the availability of
an adequate substitute must be determined by the court and depends on two
circumstances.
The first and more obvious circumstance is the accessibility of reasonable
opportunities to enter into similar transactions or, in other words, the avail-
ability of a market. For when no actual substitute transaction has been arranged,
the principle of substitution operates only when there is a market, and in the

194. UCC § 2-708.

195. UCC § 2-706. In the unlikely event that the seller should realize a profit on the
resale, he is not accountable to the buyer for it. For further complications, see Norstrom,
Seller's Damages Following Resale Under Article Two of the UCC, 65 Micii. L. REv. 1299
(1967).
196. On the applicable Code provisions, see Peters, supra note 131, at 256-57.
197. On proof of market price, see UCC §§ 2-723, 2-724. See also UCC § 2-713, Com-
ment 3, which says that "where no market price is available, evidence of spot sales is
proper."
1970] CONTRACTUAL BREACH 119B

absence of a market the general measure of recovery obtains. However, in

speaking of "market price," as Lord Dunedin said, "You have always to ask
yourself, 'what market."'-198 Here, the answer is, the market in which the
substitute transaction would be arranged. The middleman who 'buys in one
market and sells in another affords a good example. If his seller breaches, the
principle of substitution requires that the middleman look to the market in
which he buys to find a substitute seller, and market price is the price in that
market.19 9 If his buyer breaches, the principle requires that he look to the
market in which he sells to find a substitute buyer, and market price is the price
in that market. In Orester v. Dayton Rubber Manufacturing Co., 200 the exclu-
sive distributor of the "Daytoni pneumatic- tire" for the Syracuse area claimed
damages from the manufacturer for its refusal to supply the tires he had
ordered. The New York Court of Appeals held that it was error to allow
recovery based on the difference between the price on the market in which
the distributor sold and the contract price, for this would allow him his gross
profit on resale. It gave these rules for fixing the damages:
In the case of sales, where the articles may be purchased in the
market, the value of the contract to the purchaser is the difference
between the price at -which in like 'quantities they may be bought at
the time and place of delivery, and the price which he would have to
pay under the contract. This rule assumes, however, the possibility
of such a purchase on the market .... The plaintiff could not pur-
chase tires from others in Syracuse. He himself was the sole source
of supply .... If there was a market elsewhere at which tires in the
quantity desired by the plaintiff could be freely purchased the damages
would be the difference between the contract price and the price at
that market plus the transportation charges to Syracuse .... In the
absence of such a foreign market, if the plaintiff might purchase a
substitute tire, equally available for his reasonable purposes, then his
damages would be the difference between the market price of such
substitute and the contract price. . . .Whether another tire, even
equally as good, but sold under another trade name, would be a satis-
factory substitute to a dealer in Dayton tires, may be at least doubtful.
... Finally, if none of these tests are practicable another must be
adopted.... [I]f the other tests fail, he may prove the ordinary and
198. Charrington & Co. v. Wooder, [1914] A.C. 71, 84.
199. E.g., Buyer v. Mercury Technical Cloth & Felt Corp., 301 N.Y. 74, 92 N.E.2d 896
(1950). This situation should be contrasted with that discussed in text accompanying notes
89-120 supra, where market price is used as a surrogate 'for value, because the market
price there would be the price that the middleman would realize if he sold the goods on the
market, with appropriate deduction for his resale costs. The difference between these two
market prices gives the middleman his profit. Where there is merely a delay in performance,
so that no substitute contract is feasible, market price is clearly used as a surrogate for
value and is therefore the market price which the middleman would realize, not that which
he would pay. E.g., Losei Realty Corp. v. City of New York, 254 N.Y. 41, 171 N.E. 899
(1930) (recovery for delay in improving land was measured by the difference in price at
which the injured party, the owner, could have rented the land to others with and without
improvements) ; Shepherd, Croan & Co. v. Templeman's Adm'r, 143 Ky. 334, 136
S.W. 648
(l1911) .(recovery for delay in allowing the buyer of timber to remove it was measured by
the difference in the price at which he could have sold it without and with the delay).
200. 228 N.Y. 134, 126 N.E. 510 (1920).
1194 COLUMBIA LAW REVIEW [Vol. 70:1145

usual net profits resulting from business conducted in the ordinary

and usual way, which he has lost by reason of such breach. 20 1
Although it is often said that the place at which market price is to be determined
is that at which performance was to take place, it is better to say that it is the
place at which it is assumed that the injured party will make substitute
arrangements, which will often, but not always, be the place of performance.
And although it is often said that the time at which market price is to be deter-
mined is also that at which performance was to take place, it is better to say
that it is the time at which it is assumed that the injured party will make sub-
stitute arrangements, so that at the very least there should be added a reason-
2 02
able period for the injured party to make substitute arrangements.
201. Id. at 137-39, 126 N.E. at 511-12. UCC § 2-723(2) allows evidence of market price
at another time or place to be used as a substitute where necessary. And UCC § 2-712
presumably allows the buyer who covers by purchasing on the market at another place,
although not at another time ("without unreasonable delay"), to recover the cost of trans-
portation as incidental damages under UCC § 2-715.
202. The UCC provides curiously inconsistent rules for buyers and sellers. Their
failings can best be understood if it is assumed that Seller is to tender the goods in
Sellersville to an independent carrier, such as a railroad, which will receive them on
Buyer's behalf and then transport them to Buyersville, where Buyer himself will then
receive and inspect them. If Buyer discovers on inspecting the goods in Buyersville that
they are defective and rightfully rejects them, UCC § 2-713 allows him damages measured
by the difference
between the market price at the time when
the buyer learned of the
breach and the contract price .... Market price is to be determined as of the place
for tender or, in cases of rejection after arrival ... as of the place of arrival,
This sensibly assumes that he should arrange a substitute transaction by effecting cover in
Buyersville, although it unreasonably supposes that he can do so without delay. If, however,
the goods are conforming and Buyer wrongfully rejects them on their arrival in Buyersville,
Seller's measure of damages under UCC § 2-708(1) is "the difference between the market
price at the time and the place for tender and the unpaid contract price."i This is based on
the absurd assumption that Seller should have arranged a substitute transaction in Sellers-
ville at the time of his tender to the carrier who received them on Buyer's behalf, even
though Buyer's breach did not occur until later. See Peters, supra note 131, where it is
pointed out that this rule is likely to be highly prejudicial to sellers, since buyers are most
likely to breach in a falling market. Where the injured party elects to treat an anticipatory
repudiation as a breach, under UCC § 2-610, and relies on a market-price formula instead
of actually arranging a substitute transaction, the time between breach and tender may be
substantial and the discrepancy between the "breach" test for buyer's recovery under UCC
§ 2-713 and the "tender" test for seller's recovery under UCC § 2-708 will be magnified.
The buyer who properly covers is, however, protected under UCC § 2-712, as is the seller
who properly resells under UCC § 2-706. For discussion of the complications arising out of
anticipatory repudiation under the Code, see Peters, supra note 131 at 263-67.
If Seller simply fails to deliver to the carrier in Sellersville, Buyer's damages under
UCC § 2-713 are to be determined by the market price in Sellersville. This is a logical con-
clusion if it is assumed that Buyer will arrange a substitute transaction on the same market.
This assumption was severely tested in Globe Ref. Co. v. Landa Cotton Oil Co., 190 U.S.
540 (1903), in which Buyer, located in Louisville, Kentucky, had incurred expenses to
send tank cars to Seller's mill in New Braunfels, Texas, where Seller was to tender crude
oil. When Seller failed to deliver, Buyer claimed this expense in addition to damages based
on the difference between market price at New Braunfels and the contractprice. Mr. Justice
Holmes rejected the claim:
If it had received the oil these were deductions from any profit which the plaintiff
would have made. But if it gets the difference between the contract price and the
market price it gets what represents the value of the oil in its hands, and to allow
these items in addition would be making the defendants pay twice for the same
thing.
Id. at 546. But this reasoning depends on the assumption that the market was such that
Buyer could actually have been expected to arrange a substitute purchase in New Braunfels
and not elsewhere. See the criticism of this case in Fuller & Perdue, supra note 12, at 83.
19701 CONTRACTUAL BREACH 1195

Since conflicting evidence may be produced as to the availability and

terms of opportunities to enter into similar transactions on a market, the
burden of persuasion as to these matters is plainly of great practical importance.
Where the contract is one for the sale of goods, it is assumed that there is a
market, and the burden is on the injured party to show that there was no
market available if he seeks to recover profit under the general measure of
damages. If he cannot show that, then the burden is on him to show the
20 3
price at which he could have arranged a substitute transaction on the market.
Where the contract is to supply personal services and the breach is by the
employee, an analogous rule has been applied.204 When the breach is by the
employer, however, no market is assumed, and the burden is on the employer
to show that there was a market if he would limit recovery under the principle
of substitution. If he can show that, then the further burden as to the price of
20 5
a substitute transaction is likewise on him.
The second and more subtle circumstance, bearing on the availability of
a substitute for purposes of applying the principle of substitution, is the
character of the second transaction, assuming its availability, as truly a sub-
stitute for the first. Even if there is a market, a transaction arranged on it may
not be a substitute, for only if the second transaction would not have been
effected but for the breach of the first can it be viewed as a substitute. Here,
too, the subject matter of the contract is important. Where the injured party
is a supplier of personal services, under a contract of fultime employment for
example, another comparable opportunity is viewed as a substitute since "No
man can serve two masters" ;206 the employee could not have taken advantage
of the opportunity had the original contract not been broken.20 7 Where, how-

203. UCC § 2-713 says flatly that the buyer's "measure of damages ... is the differ-
ence between the market price... and the contract price... ." UCC § 2-708 says that the
seller's "measure of damages ... is the difference between market price ... and the unpaid
contract price ... ," but if this measure "is inadequate to put the seller in as good a position
as performance would have done then the measure of damages is the profit (including
reasonable overhead) which the seller would have made from full performance by the
buyer .... " Courts have been even readier to assume a market for money than for goods.
Recovery for breach of a promise to lend money is ordinarily limited to the difference be-
tween the contract rate of interest and the market rate of interest, i.e., that at which the
aggrieved borrower could get a substitute loan. "There is no other thing so generally dealt
in, and so universally prevalent, as money." New York Life Ins. Co. v. Pope, 139 Ky. 567,
571, 68 S.W. 851, 852-53 (1902).
204. Roth v. Speck, 126 A2d 153 (Mun. Ct. App. D.C. 1956) ("The measure of
damages for breach of an employment contract by an employee is the cost of obtaining
other services equivalent to that promised and not performed." Id. at 155) ; Triangle Waist
Co. v. Todd, 223 N.Y. 27, 119 N.E. 85 (1918) ; Fugua & Smith v. Massie & Sons, 18 Ky.
L. Rptr. 842, 37 S.W. 587 (1896) (burden is on employer to show that no replacement was
available).
205. E.g., Levy v. Tharrington, 178 Okla. 276, 62 P.2d 641 (1936). For a minority
view, see Abrams v. Jackson County Bd. of Educ., 230 Ky. 151, 18 S.W2d 1000 (1929).
The problem does not ordinarily arise where the injured party is a supplier of services that
are not personal, for the reasons indicated at note 209 infra. For the related problem of
allocating the burden of persuasion as to cost avoided in contracts for services that are not
personal, see note 68 supra.
206. Matthew 6:24.
207. See note 185 stupra.
1196 COLUMBIA LAW REVIEW [Vol. 70:1145

ever, the injured party is a supplier of services that are not personal, under a
contract for construction of a building for example, another comparable oppor-
tunity is not viewed as a substitute. Rather, it is assumed that the contractor
could have expanded his business to undertake additional jobs so that the
breach of the original contract resulted in "lost volume" that could not be
recaptured by a second similar contract.2 0 8 Even if it can be proved that there
was a market on which other similar opportunities were available, the principle
of substitution would not apply and the general measure of recovery would
obtain. And even if the contractor actually enters into another similar trans-
action after breach, it is assumed that he would have done so anyway and it is
20 9
not regarded as a substitute.
This second aspect is of particular importance in connection with contracts
for the sale of goods because of the assumption in such cases that there is a
market. Yet even if there is a market, where the injured party is a seller whose
supply exceeds his demand, a second sale of the same goods on that market will
not recapture his profits, for it will cost him a sale of other goods that he would
otherwise have sold.210 Where the injured party is a manufacturer who has
contracted to sell goods that he produces, this assumption is ordinarily made,
the manufacturer being treated like the building contractor and allowed to
recover under the general measure of recovery and without regard to the
principle of substitution. 21 1 In spite of the existence of a market, the manufac-
turer is thus allowed to recover for his lost volume, since the assumption is
that his supply is at least equal to his demand and that he has, therefore, lost
a sale if he is obliged to sell the same goods twice.
Illustration 6. Manufacturer contracts with Buyer to produce and
deliver goods to Buyer for $100,000, the market price of the goods at
208. E.g., Mount Pleasant Stable Co. v. Steinberg, 238 Mass. 567, 131 N.E. 295 (1921).
On the problem of overhead saved in such a case, see note 73 supra.
209. This is true even if the other transaction is one which would not have been avail-
able to him but for the breach. In Olds v. Mapes-Reeve Constr. Co., 177 Mass. 41, 58 N.E.
478 (1900), a subcontractor, after breach by the contractor, made a second contract directly
with the owner to do substantially the same work called for by the first contract, and the
court held that it was error to base the subcontractor's recovery against the contractor on
the difference between the price in the first contract with the contractor and the price in
the second contract with the owner. Accord, Kunkle v. Jeffe, 71 N.E.2d 298 (Ohio Ct.
App. 1946) (a real estate broker, after the vendor breached by failing to sell to a puchaser
procured by the broker, arranged the sale of other property to the same purchaser at an
even larger commission) ; Grinnell Co. v. Voorhies, 1 F.2d 693 (3d Cir.), ceri. denied, 266
U.S. 629 (1924) (a contractor who had agreed with the owner to install an automatic
sprinkler system, after the owner became insolvent and breached, made a similar contract
vith the firm that took over the insolvent owner's premises).
210. The same holds true where the injured party is a buyer whose demand exceeds his
supply, a circumstance that may be occasioned by wartime shortages, for example. Cover
will not recapture the buyer's profits, for it will require him to purchase goods that he
would otherwise have purchased anyway for another transaction. Although UCC § 2-713
on buyer's damages contains no provision allowing profits comparable to that in UCC
§ 2-708 on seller's damages, it was held before the Code that buyer could claim profits in
such a case. Norwood Lumber Co. v. McKean, 153 F.2d 753 (3d Cir 1946).
211. See Oswego Falls Pulp & Paper Co. v. Stekher Lithographic Co., 215 N.Y. 98,
109 N.E. 92 (1915); Allegheny Iron Co. v. Teaford, 96 Va. 372, 31 S.E. 525 (1898);
Hincldey v. Pittsburgh Steel Co., 121 U.S. 264 (1887).
19701 CONTRACTUAL BREACH 1197

the time of the contract. By the time for delivery the market price of
the goods has fallen to $80,000 and Buyer wrongfully rejects them.
It cost Manufacturer $70,000 to produce them, but because of a drop
in the cost of production that parallels the drop in the market price of
the goods, it would cost him only $60,000 to produce them if he began
at the time of the Buyer's rejection. Manufacturer sues Buyer for
damages.
Regardless of the availability of a market on which Manufacturer could sell
the goods, he is not limited to the $20,000 difference between the contract price
and the price that he would have realized had he resold the goods on the
market, for it assumed that by reselling these goods he would have lost a sale
of other goods that he would otherwise have arranged. He is allowed damages
under the general measure of recovery of Formula A. 212 The problem is not as
simple as that in Illustration 3a,213 however, for there a completed building
was involved, which had to be left on the premises of Owner, the party in
breach. Here, after rejection, the goods are in the hands of Manufacturer so
that in applying Formula A there must be subtracted from the $100,000 loss in
value, a sum as cost avoided that is equal to the value of the unsold goods to
Manufacturer. That sum is not the $80,000 market price, because a sale on the
market at that price would cause the loss of another sale; it is not the $70,000
actual cost, since if he were to produce them now he could do so for less; it is
rather the $60,000 reduced cost of production that would apply to a new order
arranged within a reasonable time after rejection, since it is this amount that
he could presumably save by adjusting his production as of that time to make
use of the rejected goods. His recovery is then based on the difference between
the $100,000 loss in value and the $60,000 cost avoided, or $40,000,214 of
which $30,000 can be attributed to the loss in volume and would have been
recoverable had there been no change in the market, and $10,000 can be
attributed to the market drop as reflected in the reduced cost of production.
Courts have not been so liberal where the injured party is a middleman
whose buyer has breached a contract for the sale of goods that the middleman
has bought from another. The middleman is generally treated like the em-
ployee under a personal service contract and is remitted to damages based
on the difference between contract price and market price, with no allowance
for lost volume. The assumption is that his demand exceeds his supply and that
therefore he has not lost a sale if he is obliged to sell the same goods twice.215

Illustration 6a. Jobber contracts with Buyer to deliver goods to

Buyer for $100,000, the market price of the goods at the time of the
contract. By the time for delivery the market price of the goods has
212. Formula A is set out in text following note 67 supra.
213. Illustration 3a is set out in text following note 71 supra.
214. See Comment, Remedies for Total Breach of Contract Under the Uniform Re-
vised Sales Act, 57 YALE L.J. 1360, 1373 (1948).
215. E.g., Charles Street Garage Co. v. Kaplan, 312 Mass. 624, 45 N.E2d 928 (1942).
.1198 COLUMBIA LAW REVIEW (Vol. 70:1145

fallen to $80,000 and the Buyer wrongfully rejects them. It cost

Jobber $70,000 to acquire and deliver them, but because of a drop in
the market on which Jobber acquires goods that parallels the drop on
the market in which he sells them, it would now cost him only $60,000
to fill
new orders. Jobber sues Buyer for damages.
Regardless of whether Jobber's demand does or does not exceed his supply, he
is generally limited to recovery based on the $20,000 difference between con-
tract price and market price on the assumption that a sale on the market would
not result in a loss of volume and is, in fact, a substitute sale. Should this not be
the case, his actual loss would be the difference between $100,000 and $60,000,
or $40,000, so that recovery based on market price would here compensate him
only to the extent of half of that actual loss. Courts have traditionally, however,
been reluctant to allow middlemen to recover damages based on lost volume,
even when, as in the case of an item with standard price, there is no market
fluctuation so that damages based solely on the difference between contract price
and marketprice are purely nominal. 216 The extent to which the Uniform Com-
mercial Code will encourage courts to allow recovery for lost volume is un-
21 7
clear.
Where the principle of substitution applies, it has the major consequence
of relieving the court of much of the burden of calculating loss. As long as it is
supposed that the injured party can procure a satisfactory substitute, which
along with an appropriate allowance for any resulting delay and expense will
put him in the position in which he would have been had the promise been per-
formed, the court can avoid what might be a difficult inquiry into the difference
between the value to the injured party of the position he bargained for and the
value to him of the position in which he found himself following breach. And
when there is added a readiness to assume that markets are available on which
such substitute transactions can be arranged, the result is a further depersonal-
ization through the development of the standard damage formulas. If, in
Illustration 2218 for example, it is assumed that the market price of substitute

216. For an extensive discussion of the lost volume problem, see Harris, supra note 73,
at 599-605; Harris, A Radical Restatement of the Law of Seller's Damages: Michigan
Results Compared, 61 MicH. L. Rxv. 849, 906-10, 918-19 (1963). Exceptional cases in
which a middleman has been allowed to show lost volume include Locks v. Wade, 36 N.J.
Super. 128, 114 A.2d 875 (1955) (lease of a juke box of which the lessor had an unlimited
supply) ; Smead v. Sutherland, 118 Vt. 361, 111 A2d 335 (1955) (sale of a "Henry J.
Vagabond," a car not readily marketable) ; Wilhelm Lubrication Co. v. Brattrud, 197
Minn. 626, 268 N.W. 634 (1936) (sale of grease in a "highly competitive market").
217. The Code provisions are discussed in Harris, supra note 165, at 94-99, and the
author concludes that "while it is easy to reach bad results under section 2-708, it is not
absolutely necessary." Id. at 101. Comment 2 to that section says that it "permits the re-
covery of lost profits in all appropriate cases, which would include all standard priced
goods." This confuses standard price, which should not be determinative, with lost volume,
which should. Furthermore, even if UCC § 2-708(2) is applied to illustration 6(a) in spite
of the fact that the goods are not standard priced, it allows only damages based on the
"profit ... which the seller would have made from full performance by the buyer" and thus
would appear to limit him to $30,000, the difference between $100,000 and $70,000, and not
his full loss of $40,000, the difference between $100,000 and $60,000. In short, the draftsmen
evidently did not address themselves to problems of lost volume in a fluctuating market.
218. Illustration 2 is set out in text following note 57 supra.
19701 CONTRACTUAL BREACH 1199

replacement part is $110, Buyer's damages can be based on $10 and any inquiry
into the value of the part to him personally can be avoided. Where the principle
of substitution cannot be applied, however, calculation of recovery will often be
complicated by factors that are peculiar to the particular circumstances of the
injured party. It is here that questions of foreseeability and certainty arise.

VII. SIXTH CHOICE: Loss OR FORESEEABLE Loss?

As was observed earlier, one of the handicaps that attends a system of con-
tract damages aimed at protecting expectations is that it requires a hypothesis of
the position in which the injured party would have found himself had both
parties performed. It is that hypothetical position that determines the loss in
value, and consequently the loss on the bargain,that resulted from the breach.
Although the determination of contract damages, and particularly of other loss,
may involve the same problems of multiple cause
21 9
and intervening cause 220
that enliven discussions of torts, they are of relatively less importance than the
problems of causation that are involved in the hypothesis required to fix the
loss in value.221
Even this aspect of causation, however, is often rendered academic by the
additional and more stringent requirement that the loss must have been foresee-
able by the party in breach at the time he made the contract.2 2 2 This means that
the court must put itself in the position of that party at that earlier time and
imagine what he could have foreseen with regard to the other party's position in
the event of full performance. Since the calculation of loss in value is based on
the court's later hypothesis in this regard, foreseeability and not causation ordi-
narily marks the effective limit of liability for breach of contract.
This requirement of foreseeability grew out of a realization that even where
the injured party has taken such steps as the law expects to avoid loss, a rule
allowing full compensation might impose on the party in breach a crushing
burden, greatly out of proportion to the benefit that he originally expected to

219. E.g., Krauss v. Greenbarg, 137 F2d 569 (3d Cir. 1943).
If a number of factors are operating one may so predominate in bringing about
the harm as to make the effect produced by others so negligible that they cannot
be considered substantial factors and hence legal causes of the harm produced.
Id. at 572 (Goodrich, I.).
220. E.g., Newsome v. Western Union Tel. Co., 153 N.C. 153, 69 S.E. 10 (1910), dis-
cussed at text accompanying note 260 infra; Nirdlinger v. American Dist. Tel. Co., 245 Pa.
453, 91 A. 883 (1914) (failure of burglar alarm system, which the defendant had contracted
to maintain, "did not cause the burglary"). Such cases usually, however, turn on the issue
of foreseeability rather than causation. See also note 252 infra.
221. For the peculiar difficulties posed in determining the loss in value where the party
in breach could have rendered alternative promises, see RESTATEMENT § 344; 5 Co"IN
§ 1079; 11 S. Wmnm.SToN & W. JAEGER, A TREATISE ON THE LAw OF CONTRACTS § 1407
(3d ed. 1961).
222. Another reason why causation tends to play a lesser role in contract than in tort
is the higher standard of certainty in the latter, which also tends to make the issue of
causation academic. Furthermore, although the issue of causation is an essential part of a
tort action in negligence, nominal damages may be awarded for breach of contract without
regard to the element of causation.
1200 COLUMBIA LAW REVIEW[ [Vol. 70:n145

derive from his bargain. This is particularly true of compensation for loss of
collateral profits. As Hart and Honor6 have pointed out:

The need for limitation is especially clear in regard to compensation

for loss of economic stipulated opportunities, since the provision of
opportunities for gain may223have a snowball effect: opportunities
breed further opportunities.
If, in Illustration 2,224 Manufacturer is unable to obtain a substitute replacement
part for a month following Supplier's breach, does it follow that he can recover
from Supplier his loss of profits during that period of delay? This was the issue
raised in the famous English case of Hadley v. Baxendale,225 which in 1864, as
the culmination of nineteenth-century attempts to reach a workable general-
ization on contract damages, laid down general principles that have endured
until today. That case involved a miller's claim against a carrier for loss of
profits during a period when his steam grist-mill was shut down due to the
carrier's delay in delivering the broken crankshaft of the steam engine to its
manufacturer for duplication and replacement. According to Baron Alderson's
now familiar statement,
the damages... should be such as may fairly and reasonably be con-
sidered either arising naturally, i.e., according to the usual course of
things, from such breach of contract itself, or such as may 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.220
Applying these principles, the court granted the carrier's motion for a new trial
on the ground that it was error to have held it liable for the loss of profits of the
miller, who had communicated only the circumstances "that the article to be
carried was the broken shaft of a mill, and that the plaintiffs were the millers of
that mill."22 7 For all the carrier knew the miller might have had a spare crank
shaft as a replacement or the machinery might have been defective in other
respects, so that the carrier's delay would have had no effect upon the profits of
the mill.
Subsequent gloss on the case has given rise to two rules. Under the "first
rule" the party in breach is liable for loss "arising naturally, i.e. according to the

223. H. HARuT & A. HoxoRk, CAUSATION IN THE LAW 281 (1959), Cf. F. BACON,
MAxIMs OF THE LAW 1 (1936) :
It were infinite for the law to judge the causes of causes, and their impulsions one
of another, therefore it contenteth itself with the immediate cause, and judgeth the
acts by that, without looking to any further degree.
224. Illustration 2 is set out in text following note 57 supra.
225. 9 Ex. 341, 156 Eng. Rep. 145 (1854).
226. Id. at 354, 156 Eng. Rep. at 151.
227. Id. at 355, 156 Eng. Rep. at 151. The facts of Hadley v. Baxendale are not entirely
clear. The head-note states, among the facts that "appeared" at the trial below, that, "The
plaintiffs' servant told the clerk that the mill was stopped, and that the shaft must be
sent immediately." Id. at 344, 156 Eng. Rep. at 147. And yet "it is reasonably plain from
Alderson B's judgment that the court rejected this evidence," as the court pointed out in
Victoria Laundry (Windsor) Ltd. v. Newman Indus. Ltd., [1949] 2 K.B. 528, 537.
19701 CONTRACTUAL BREACH 1201

usual course of things, from such breach of contract itself."2 28 Under the "sec-
ond rule" he is liable for such loss "as may 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." 22 91 Damages recoverable under the second
rule have sometimes been described as "consequential" or "special" to distin-
guish them from damages recoverable under the first, which are termed "direct"
or "general." The use of the terms "general" and "special" is unfortunate, how-
ever, since they originated in, and are still properly applied to, the distinction
between those losses that are so usual that they need not be specifically set out
230
in the pleadings and those that are so unusual that they must be so set out.
Since it is best not to confuse problems of substantive liability with those of
pleading by employing the same terminology for both, it is better to use the
23 1
terms "direct" and "consequential."
That portion of Baron Alderson's dictum described as the "first rule" has
occasioned little controversy. In the typical case, the losses "arising naturally,"
and therefore recoverable under that rule, are those afforded under the standard
formulas based on market price and discussed earlier. This is so because losses
due to market shifts are classed among those "arising naturally," although as
Bonbright remarked:
Some of the most extraordinary and most unpredictable losses re-
sulting from breaches of contract are those due to unusual changes in
market price. On the other hand, one of the most "normal" and most
predictable types of loss resulting from a breach is the "incidental
expense" or loss of sales imposed upon a businessman by a failure to
2 32
receive a shipment of goods on the promised date of delivery.
In Illustration 2, for example, the "first rule," in the form of Formula C-B'2 33
using market price, is ordinarily applied on the assumption that Manufacturer
can find a substitute for the replacement part promised him by Supplier, even
though he may have to pay a higher price. If Manufacturer disputes this
assumption and claims damages for lost profits, he must bring himself within the
"second rule."
It is this branch of Hadley v.Baxendale that has been significant. By con-
fining damages, other than those arising "naturally," to those "in the contem-
plation of the parties, at the time they made the contract, as the probable result
of the breach of it," the courts in following the rule imposed an important new
228. 9 x. 354, 156 Eng. Rep. 151.
229. Id.
230. See McComitmIcK § 8. See, e.g., FED. I. Crv. P. 9(g).
231. See UCC § 2-715 which speaks of "consequential damages." See also 5 Corbin
§ 1011.
232. 1 J. BOx=InaIT, supra note 62 at 291. Cf. B.P. Ducas Co. v. Bayer Co., 163
N.Y.S. 32 (Sup. Ct. 1916) (failure of supply and sharp rise in prices, caused by embargo
when war broke out, were not "contemplated" at time of contract). It should be kept in
mind, however, that protection of the parties against shifts in the market is considered in
our society to be a principal function of the institution of contract.
233. Formula C-B' is set out in text following 186 supra.
1202 COLUMBIA LAW REVIEW[l [Vol. 70:1145

limitati6n on the scope of recovery that the jury could allow. The restriction
was not unheralded. Courts during the eighteenth century had, for example,
limited recovery for breach of a promise to pay money to the principal sum with
interest, for in such a case, as Sedgwick wrote in the decade before Hadley v.
Bazendale, "it is well settled that the consequences of the nonperformance can-
not be inquired into any way."2 4 Even the test of "contemplation" was not an
original one and showed, among other influences, that of French law.2 8
In the course of his opinion, Baron Alderson suggested that, "had the
special circumstances been known, the parties might have specially provided for
the breach of contract by special terms." 238 Some of the cases that followed
picked up this dictum and read into the "contemplation" test a requirement of
"tacit assumption." In Globe Refining Co. v. Landa Cotton Oil Co., 23 7 Justice
Holmes declared that
the extent of liability ... should be worked out on terms which it
fairly may be presumed he would have assented to if they had been
presented to his mind.... [It] depends on what liability the defendant
fairly may be supposed to have assumed consciously, or to have war-
ranted the plaintiff reasonably to suppose that it assumed, when the
contract was made .... [M] ere notice to a seller of some interest or
probable action of the buyer is not enough. 238
The trend has now, however, gone the other way. The Restatement's
formulation of the rule states merely that
compensation is given for only those injuries that the defendant had
234. T. SFDGwicK, supra note 56, at 111.
235. Pothier gives the example of
a canon, who for want of having the horse that I had engaged to deliver to him,
and not having been enabled to get another, was prevented from arriving at the
place of his benefice in time to be entitled to his revenue; I should not be liable for
the loss which he sustained thereby, although it was occasioned by the non-per-
formance of my obligation; for this is a damage which is foreign to the obligation,
which was not contemplated at the time of the contract, and to which it cannot be
supposed that I had any intention to submit.
R. POTWER, THE LAw OF OBLIGATI NS 91-92 (W. Evans trans. 1806). See generally,
Washington, supra note 57, at 97-108.
236. 9 Ex. at 355, 156 Eng. Rep. at 151.
237. 190 U.S. 540 (1903).
238. Id. at 543-45. See also British Columbia Saw Mill Co. v. Nettleship, L.R. 3 C.P.
499 (1868), on which Holmes relied in part. There Bovill, C.J., said that the liability "must
be something ... to which he has assented expressly or impliedly by entering into the
contract." Id. at 506. And Willes, J., added that if the liability claimed "had been presented
to the mind of the ship-owner at the time of making the contract, as the basis upon which
he was contracting, he would at once have rejected it." Id. at 508. Holmes had already
stated his view in 0. HOLrmES, THE CommoN LAw 302-03 (1881):
It is true that, when people make contracts, they usually contemplate the perfor-
mance rather than the breach .... [But] as the relation of contractor and con-
tractee is voluntary, the consequences attaching to the relation must be voluntary..
What the event contemplated by the promise is, or in other words what will
amount to a breach of contract, is a matter of interpretation and construction.
What consequences of the breach are assumed is more remotely, in like manner,
a matter of construction, having regard to the circumstances under which the
contract is made.
 1203
19701 CONTRACTUAL BREACH

reason to foresee as a probable result of his breach when the contract

239
was made.
Similarly the Uniform Commercial Code allows the buyer
[C] onsequential damages... [for] any loss resulting from general or
particular requirements and needs of which the seller at the time of
contracting had reason to know .... 240
The prevailing test is most commonly expressed as one of "foreseeability" of
241
probable consequences.
Concerning this obviously vague criterion, a few things can be said with
some assurance. One is that since the foreseeability of probable consequences is
to be determined as of the time of the making of the contract, it is unaffected by
events subsequent to that time.24 2 Another is that, although Baron Alderson
spoke of "the contemplation of both parties," the Restatement and the Code
speak of foreseeability by the party in breach alone. 243 And a third is that this
foreseeability has an objective character: a contracting party takes the risk not
only of those consequences which he actually thought were probable, but also of
those consequences which he-or a reasonable man- in his place-should have
2 44
thought were probable.
Beyond this it is difficult to speak with precision. It has, for example, been
argued by Fuller and Perdue that the requirement of foreseeability does not

239. RESTATEMENT § 330. It goes on to say:

If the injury is one that follows the breach in the usual course of events, there is
sufficient reason for the defendant to foresee it; otherwise, it must be shown
specifically that the defendant had reason to know the facts and to foresee the
injury.
Both of Baron Alderson's rules are therefore comprehended under the single test of fore-
seeability. The tendency to speak of two rules persists nonetheless.
240. UCC § 2-715(2) (a). Where, however, the buyer sues for breach in regard to
accepted goods, UCC § 2-714(1) allows him "the loss resulting in the ordinary course of
events from the seller's breach," and where he sues for breach of warranty, UCC § 2-715
(2) (b) allows him to recover for "injury to person or property proximately resulting
from" the breach.
241. See UCC § 2-715, Comments 2, 3.
242. See authorities quoted in text at notes 239, 240 supra. See also 5 CoRBrN § 1008.
243. See quotations in text at notes 239, 240 supra. See also 5 CoRmIN § 1010.
244. See authorities quoted in text at notes 239, 240 vtpra. See also 5 CoRann § 1009.
One of the leading restatements of the rule came in Victoria Laundry (Windsor) Ltd. v.
Newman Indus. Ltd., [1949] 2 K.B. 528, 539:
In cases of breach of contract, the aggrieved party is only entitled to recover
such part of the loss actually resulting as was at the time of the contract reasonably
foreseeable as liable to result from the breach.
What was at that time reasonably so foreseeable depends on the knowledge
then possessed by the parties or, at all events, by the party who later commits the
breach.
For this purpose knowledge "possessed" is of two kinds; one imputed, the
other actual. Everyone, as a reasonable person, is taken to know the "ordinary
course of things" and consequently what loss is liable to result from a breach of
contract in that ordinary course.... But to this knowledge ... there may have to
to be added in a particular case knowledge which he actually possesses, of special
circumstances outside the "ordinary course of things," of such a kind that a breach
in those special circumstances would be liable to cause more loss.
1204 COLUMBIA LAW REVIEW [Vol. 70:1145

apply to the cost of direct reliancebut only to collateralreliance,24u and by Hart

and Honor6 that it does not apply to other loss but only to loss on the bar-
gain.2 46 But the central question remains, with what degree of clarity and with
what probability must the actual loss have been foreseeable? Although the
requirement neither demands absolute clairvoyance nor admits of vague pre-
monition, it leaves considerable latitude between these extremes.
In Czarnikow-Rionda Co. v. Federal Sugar Refining Co.,247 Federal con-
tracted to sell 75,000 tons of sugar to Czarnikow to be delivered directly to
Czarnikow's customers. Czarnikow in turn made contracts with its customers
for the sale to them of sugar described as "Federal" brand. When the sugar
delivered by Federal turned out to be defective, Czarnikow spent $340,000 in
the settlement of claims and the defense of law suits brought by its customers.
The New York Court of Appeals reversed a judgment for Czarnikow allowing
recovery for this loss and granted a new trial. Liability for the special loss in-
curred by Czarnikow could be visited on Federal
only if it "knew that other goods of the kind contracted for could not
be obtained by the buyer."... [I]f the circumstance that Czarnikow
sold sugar specified to be "Federal Sugar Refining Co. brand" entered
in to swell the damage suffered by it, that circumstance could not have
been foreseen by Federal when contracting, and for2 48the special con-
sequence resulting therefrom it should not be liable.
245. So far as essential [direct] reliance is concerned, there is usually no occasion
to deny reimbursement for "remote" items, and the problem of Hadley v. Baxendale does
not normally give any difficulty. Applying the test of foreseeability, one would not hesitate
to say that the defaulter should have foreseen that the plaintiff would undertake those
acts necessary to perfect his rights on the contract. Furthermore, the limitation of recov-
ery by the full contract price is a limitation sufficiently drastic to dispense with the need
for any other device for reducing recovery. Fuller & Perdue, supra note 12, at 87-88.
But see Rochester Lantern Co. v. Stiles & Parker Press Co., 135 N.Y. 209, 31 N.E. 1018
(1892), in which the plaintiff, who planned to begin manufacturing lanterns, rented a room
and paid employees in reliance on the defendant's promise to furnish the dies for the
lanterns, only to be denied recovery for these expenses on the ground that they were not
contemplated since it could, at the most, have been expected that the plaintiff would have
had to pay more to obtain other dies.
246. H. HART & A. HoqoRi, supra note 223, at 287:
Where compensation is sought from a defendant who has failed to provide a
stipulated opportunity for gain, liability must necessarily be assessed by reference
to hypothetical gains, and it is reasonable to limit these to gains which would be
made in circumstances likely to occur or contemplated by the parties. Where
however, physical harm, etc., which would not have occurred without defendant's
earlier wrongful act has actually occurred, the question whether liability should
extend to it is more reasonably determined by considering not hypothetical events
but the character of the intervening events and circumstances.
Yet it cannot be said that the distinction we have urged between these two
types of problems is recognized in the case ....
The requirement of foreseeability ought not, however, be applied to bar unforeseeable
windfalls to the party in breach. For example, if an aggrieved buyer spent $10,000 in
reliance on the contract before a sudden turn of events showed he would have lost $5,000
had the contract been performed, the $5,000 should be subtracted from the $10,000 even
though his loss was not foreseeable. Otherwise the buyer will get more than his expectancy.
See quotation in text at note 145 supra.
247. 255 N.Y. 33, 173 N.E. 913 (1930).
248. Id. at 46-47, 173 N.E. at 917. Cf. UCC § 2-715(2) (a), quoted in text at note 240
supra, and Comment 3 ("Particular needs of the buyer must generally be made known to
the seller.. ").
19701 CONTRACTUAL BREACH 1205

Two judges dissented. Federal knew, they argued, that the sugar was destined
for resale by Czarnikow.
I do not understand the law to be that before a seller is liable for loss
of profits, he must have known the terms and conditions of the sub-
contracts made on resale by his purchaser. That Federal did not know
the price or the terms of the contracts which Czarnikow had made
with its consignees
2 49
of the sugar was for the purpose of this action
immaterial.
Similar controversies may arise where there are claims for profits based on an
abnormal use of the goods 250 or an unusually profitable subcontract, 251 or for
losses due to the occurrence of an unexpected intervening event 252 or a peculiar
penalty provision in a subcontract. 253 The extent to which each of these must be
specifically foreseeable under the test of Hadley v. Baxendale is a matter on
which courts have disagreed.
Equally troublesome has been the substantial claim for a foreseeable loss of
profits against a promisor whose undertaking was in return for a relatively
insignificant fee. In the typical case the injured party's loss in value greatly ex-
ceeds the benefit that the party in breach was to have received in return. Indeed,
had the miller in Hadley v. Baxendale made his situation known to the carrier
when he gave him the broken shaft, the court would have been faced with such
2 54
a case and would, on its own dictum, have had to allow the miller's claim.
Many of the most notable examples of such cases have involved undertakings
by carriers to deliver goods, 255 by telegraph companies to transmit messages, 256

249. Id. at 53-54, 173 N.E. at 920.

250. E.g., Cory v. Thames Ironworks Co., [1868] 3 Q.B. 181 (hull of floating boom
derrick intended for novel use, to contain machinery, rather than ordinary use, to store
coal).
251. E.g., Macchia v. Megow, 355 Pa. 565, 50 A.2d 314 (1947) (seller's default in
delivery caused cancellation of buyer's resale contract with the government).
252. E.g., Coppola v. Kraushaar, 102 App. Div. 306, 92 N.Y.S. 436 (1905) (delay in
delivery of wedding gowns caused cancellation of wedding); Otter v. Church, Adams,
Tatham & Co., [1953] 1 All E.R. 168 (bad advice by solicitor prevented client from
disentailing property before he was killed in war). See also note 220 spra.A particularly
troublesome situation arises when the loss in value turns out to be greater than might
have been anticipated for the reason that the value of the performance promised by the
party in breach has turned out to be greater than was at first supposed. Bonbright uses
the term "hindsight" value in discussing such situations, as, for example, that of the man
who contracts to buy land which turns out to be rich in oil. 1 J. BONBRIGHT, supra note
62, at 82-84. As for the man who contracts to buy what he thinks is oil-rich land and
discovers, before the other party's breach, that it contains no oil, see note 246 supra.
253. See Krauss v. Greenbarg, 137 F2d 569 (3d Cir. 1943) (delay in delivery of
webbing resulted in imposition on buyer of penalties under his resale contract with the
government).
254. Excerpt from the court's opinion in Hadley v. Baxendale quoted at text accom-
panying note 226 supra. But see Harper Furniture Co. v. Southern Express Co., 148
N.C. 87, 62 S.E. 145 (1908) (carrier liable for closing of mills during delay in delivery
of shaft, but damages based on interest on invested capital and pay of idle employees]
rather than lost profits).
255. Hadley v. Baxendale is itself an example.
256. E.g., Kerr S.S. Co. v. Radio Corp. of America, 245 N.Y 284, 157 N.E. 140
(1927), discussed in note 261 infra.
1206 COLUMBIA LAW REVIEW [Vol. 70:1145

and by financial institutions to lend money.2 57 But these are by no means the
only instances in which courts have shown a reluctance to impose upon a prom-
isor a loss which, although foreseeable, is greatly out of proportion to the
benefit that he received in return for his promise. In a case with facts very
similar to those of Illustration 2, the Arkansas Supreme Court relied upon the
gross disproportion between the damages claimed and the benefit received in
25 s
denying recovery for lost profits.

Suppose, for instance, that a large manufacturing establishment is

driven by power from a single engine, and that, by reason of an acci-
dent to some small but important part of the engine or machinery, it
becomes necessary to stop the operation of the whole plant until a new
part can be made or the old one repaired. If thereupon a blacksmith or
machinist is called in, and for the price of a few dollars undertakes to
make the repairs, but, through some mistake or unskillfulness, the part
supplied by him should fail to fit, requiring it to be remade, and en-
tailing still further delay, would any court hold that the blacksmith or
machinist could be held liable for all the damages entailed by the
delay, when they were large, in the absence of a contract on his part
to be thus liable, unless the notice and the circumstances under which
he made the contract were such that he ought reasonably to have
known that in the event of his failure to perform his contract the other
party would look to him to make good the loss ?2s9
Often a court in such a situation can find grounds to deny recovery under
one of the other limitations, such as the requirement of certainty or that of
causation itself. A colorful example involved the lumberman who wired for four
gallons of whiskey, informing the telegraph operator that he required it for his
raft hands who would not make the trip downstream without it. Because the
transmission was garbled, the whiskey was not sent, the raft hands refused to
take the raft, the river subsided, and the lumberman sued the telegraph com-
pany for damages based on a decline in market value of the timber and his
payments to the-raft hands while they waited. Avoiding a holding on the issue
of foreseeability, the North Carolina Supreme Court refused to allow such
"remote and speculative damages," and allowed nominal damages only.210

It requires quite a stretch of the imagination to conceive that had

the four gallons of corn whiskey arrived at Thomas, the raft would
have been properly constructed, loaded and safely conducted over a
257. E.g., Shurtleff v. Occidental Bldg. & Loan Ass'n, 105 Neb. 557, 181 N.W. 374
(1921) (delay due to failure to make loan caused increase in construction costs and loss
in rents). See also notes 203, 234 supra and note 274 in!ra.
258. Hooks Smelting Co. v. Planters' Compress Co., 72 Ark. 275, 79 S.W. 1052 (1904).
259. Id. at 285, 79 S.W. at 1056. In McKinnon v. McEwan, 48 Mich. 106, 109, 11
N.W. 828, 829 (1882), the court asked: "If a vessel were delayed in port for want of a
bowsprit, should a loss of freight, to the amount perhaps of thousands of pounds, be
obtained in damages?" For an expression of this view under the UCC, see Keystone Diesel
Engine Co. v. Irwin, 411 Pa. 222, 191 A.2d 376 (1963). And see Missouri Dist. Tel. Co.
v. Morris & Co., 243 F. 481 (8th Cir.), cert. denied, 245 U.S. 651 (1917), where the court
stressed the large compensation in allowing recovery.
260. Newsome v. Western Union Tel. Co., 153 N.C. 153, 69 S.E. 10 (1910).
19701 CONTRACTUAL BREACH 1207

heavy freshet to Wilmington and the merchandise duly and profitably

marketed. Whiskey is very potential at times, but it cannot be relied
upon to produce such beneficent results as claimed for it in this case. 20'
As is often true for carriers and telegraph companies, the issue of foreseeability
may also be avoided because recovery of consequential damages has been
expressly precluded through a contract provision to that effect. Nonetheless, the
residue of these troublesome cases that cannot be disposed of on such other
grounds is sufficient to call into question the adequacy of the test of foresee-
ability.
Why, it should be asked at the outset, should any such limitation at all be
imposed on liability in contract? Liability in tort knows no such restriction and
is bounded only by the limits of "proximate cause. ' 26 2 The most satisfactory
answer is that the requirement of foreseeability in contracts is a desirable means
of shifting entrepreneurial risk. As Patterson wrote:

If we may assume that the defaulting promisor is usually an entre-

preneur, a businessman who has undertaken a risky enterprise, the
law here manifests a policy to encourage the entrepreneurby reducing
the extent of his risk below that amount of damage which, it might be
plausibly argued, the promisee has actually been caused to suffer. 2 3
According to Charles McCormick, this diminution of the risk of business enter-
prise "hamonized well with the free trade economic philosophy . . . during
which our law of contracts became systematized." 2 The common law, having
come by the end of the seventeeth century to protect the promisee's expectation
interest, 26 5 came during the middle of the nineteenth century to place significant
limitations on the extent to which he could recover damages for disappointed

261. Id. at 156, 69 S.. at 11. It is also possible that the court may deny recovery by
simply refusing to admit foreseeability. A typical example is Kerr S.S. Co. v. Radio Corp.
of America, 245 NY. 284, 157 N.E. 140 (1927), in which a business sent a long and
expensive radiogram in cipher directing the loading of a ship. When the radiogram was
not transmitted, the ship was not loaded, the freight was lost, and the business sued the
telegraph company for damages based on this loss. The New York Court of Appeals
reversed the judgment of the two lower courts which had held that, although the telegraph
company could not read the cipher, the message must have been understood, judging from
its length, its cost, and the names of the parties, as relating to a business transaction.
According to J. DAWS01" & W. HARVEY, CASES ON CONTRACTS AND CONTRACT REMmDES
46 (1969), the record indicated that a copy of the code book, which was widely used by
business firms, was kept along with others in the telegraph company's office for the use of
its customers, and about 80% of the radiograms sent were in some kind of code. But
Judge Cardozo wrote:
The defendant upon receiving from a steamship company a long telegram in
cipher to be transmitted to Manila would naturally infer that the message had
relation to business of some sort. Beyond that, it could infer nothing... Notice
of the business, if it is to lay the basis for special damages, must be sufficiently
informing to be notice of the risk.
245 N.Y. at 288, 157 N.E. at 141.
262. The RESTATEMENT uses the term "legal cause." RESTATEMENT (SECOND) OF
TORTS § 9 (1965).
263. Patterson, The Apportionment of Business Risks Through Legal Devices, 24
COLUm. L. REV. 335, 342 (1924).
264. McCoRmicK § 138 at 567.
265. Farnsworth, supra note 1, at 590-99.
1208 COLUMBIA LAW REVIEWV [Vol. 70 :11k5

expectations. Analogous is the limitation that generally denies liability in con-

tract for mental suffering or emotional distress, the risk of which must ordinar-
ily be borne by the injured party. 266
If some limitation is desirable, one based on foreseeability is a reasonable
choice. Although it is now generally denied that the limits of a promisor's
liability are in effect "implied terms," to be derived from the "intention" of the
parties, real or fictitious, 26 7 it is still common to rationalize the test of fore-
seeability, as did Baron Alderson, 208 on the ground that if the promisor foresaw
or could have foreseen the risk, he could have taken it into account, as by an
express provision in the contract if he chose not to assume it. The following
analysis by Hart and Honor6 reflects this rationalization:
If loss likely to occur at the time of breach but not at that of con-
tracting was taken into account, defendant would be forced to pay
compensation for items the possibility of which might have led him,
had he known of2 them, not to conclude the contract or to limit his
liability under it. 69

This argument rests on the same assumptions as does that for implied terms in
general: that reasonable contracting parties foresee what is foreseeable, and
that they provide expressly for risks that they foresee-assumptions that are
questionable at best, at least outside the realm of carriers, telegraph companies,
270
and the like.
The difficulty, however, in the cases where the injured party's loss in value
is greatly out of proportion to the benefit that the party in breach was to have
received in return, is not that the test of foreseeability unduly circumscribes
liability; on the contrary, it is that it does not restrict it enough. Although
Hadley v. Baxendale was originally seen as a limitation on liability, the problem
here is that it may not limit it enough. This difficulty even moved McCormick to
see merit in the widely repudiated "tacit agreement" test, although he recog-
nized that it
adds the fiction of a tacit promise to the original fiction of "contempla-
tion," and seldom is there anything in the situation more definite and
mandatory than the judge's sense of justice to tell him to find the
presence or absence of this silent promise to assume the risk. The re-
current cropping up of the idea in the opinions of the courts indicates
266. E.g., Gefter v. Rosenthal, 384 Pa. 123, 119 A.2d 250 (1956) (defendant caterer
charged the plaintiff's guests for checking their coats at plaintiff's wedding anniversary
dinner). There are, however, exceptions where recovery has been allowed. E.g., Lamm v.
Shingleton, 231 N.C. 10, 55 S.E.2d 810 (1949) (defendant's failure adequately to seal
the vault containing the body of the plaintiff's husband caused her shock) ; Westesen v.
Olathe State Bank, 78 Colo. 217, 240 P. 689 (1925) (defendant bank's failure to honor
the plaintiff's checks left him without financial resources on a trip to California).
267. See 5 Coanrm § 1010. For the older view, see note 238 supra.
268. See note 236 supra.
269. H. HART & A. HoNoRA, supra note 223, at 283-84.
270. Farnsworth, Disputes Over Omission in Contracts, 68 COLum. L. Rav. 860,
872-73 (1968).
19701 CONTRACTUAL BREACH 1209

that some of the judges have found the conception useful in giving
expression to this sense of justice of the situation.27 '
Such a patent fiction is, however, a poor device to use to gain flexibility.
Leon Green urged abandonment of the test of foreseeability of consequences
in favor of another which he described in this way:
The formula is one for use in determining whether the interest in-
volved is protected by the agreement. And it is not a contemplation of
consequences from a possible breach, but a contemplation of interests
which may be protected by the contract. Parties, in making contracts,
rarely contemplate the losses which would result from its breach. But
they do count the advantages they will gain from its performance.
What interests does the contractpromote or serve ?272
But in applying his suggestion he had difficulty in avoiding traditional reasoning.
Thus, in regard to a seller's breach of his promise to deliver goods, Green
stated that
the only interest, in the absence of peculiar information that will be
recognized as covered by their contract, will be [the buyer's] interest
in making a resale of the goods on the market .... Ma

A more satisfactory solution would be to preserve the test of foreseeability

as the outer limit of liability in contract, but to recognize a judicial prerogative
to further reduce that liability in the light of a convincing showing that although
the consequences were foreseen, or at least foreseeable, the risk was not assumed
by the promisor or, to use Green's terminology, the interest was not protected
by the contract. Such a showing might, for example, be made by demonstrating
the kind of disproportion that has just been discussed. Factors that might be
influential in rebutting such a showing would include the ease with which the
promisor, such as a carrier or telegraph company, might have included an ex-
press limitation if it had chosen to do so, and the intentional or willful char-
acter of the breach.2 74 In an appropriate case it is conceivable that a court might
even tailor recovery so as to split the risk between the two parties and meet the
objection of one commentator that the traditional rule "usually permits only

271. McCopmicK § 141 at 580. But cf. McKibbin v. Pierce, 190 S.W. 1149 (Tex.
Civ. App. 1916) (promisor held liable although he refused to assume liability based on
special circumstances when he was given notice of them).
272. L. GRazz, RATioNALE oP PgoxmATz CAUSE 51 (1927).
273. Id. at 53.
274. McCoRmcK § 140.
Our rules should sanction, as our actual practice probably does, the award of
consequential damages against one who deliberately and wantonly breaks faith,
regardless of the foreseeability of the loss when the contract was made.
Id. § 141 at 581. For an example of a case in which the "wilful" nature of the breach was
taken account of in this connection, see Miholevich v. Mid-West Mut. Auto Ins. Co., 261
Mich. 495, 246 N.W. 202 (1933) (the insured, "a man without means," was not limited to
damages based on interest when his automobile insurer's "wilful neglect" to pay a judgment
caused his imprisonment and consequent "shame and mortification as well as loss of time").
See notes 203, 234 and 257 supra.
 COLUMBIA LAW REVIEW [Vol. 70:1145

all-or-nothing recovery."2 75 In any event, the solution suggested here would

have the dual advantage that judicial departure from the traditional test of fore-
seeability would be exceptional, to be made only on an affirmative showing of
appropriate circumstances, and that it would be done overtly without reliance
276
on fiction.

VIII. SEVENTH CHOICE: PREPONDERANCE

OF EVIDENCE OR CERTAINTY?
,The requirement of "certainty" in the proof of contract damages, which
had taken root in eighteenth-century England, fell on fertile soil in nineteenth-
century America, where judges were more inclined than their English brethren
to control the discretion of jurors in awarding damages. The requirement
serves as a basis not merely for instructing the jury, but for passing on the
admissibility of evidence and for withdrawing some elements of damage from
the jury's consideration altogether. McCormick regarded its development here
as "probably the most distinctive contribution of the American courts to the
common law of damages."-2 77 An early American phrasing of the requirement
insisted that
damages claimed should in all cases be shown by clear, and satisfac-
tory evidence, to have been actually sustained. It is a well established
rule of the common law that the damages to be recovered for a
breach of contract must be shown with certainty, and not left to
speculation or conjecture... 278
Although contemporary statements commonly soften the phrasing of the
requirement to insist only on "reasonable certainty" rather than "certainty"
itself,279 its effect is nonetheless to increase the injured party's burden of per-
suasion well beyond the usual one of making out his case by the "preponder-

275. Comment, Lost Profits as Contract Damages: Problems of Proof and Limitallons
on Recovery, 65 YALa L.J. 992, 1020 (1956).
276. Frequently it is said that the defendant ought not to have to pay for un-
forseen injuries, because if he had foreseen such a liability he would have required
a larger compensation. This may sometims be true. It is probable in most cases,
however, that when a man is assenting to a contract he does not regard the risk
of his own nonperformance as great and he fixes the compensation with reference
to the cost of his performance and not with reference to the penalty for non-
performance.
5 CORBIN § 1008.
277. McCoRaicK § 32 at 124. McCormick also points out that in England "Problems
of certainty of amount are usually discussed under the vague rubric of 'remoteness.'" Id.
§ 25 at 98.
278. Griffin v. Colver, 16 N.Y. 489, 491 (1858).
279. RESTAATMENT § 331(1) provides that damages are recoverable "only to the ex-
tent that the evidence affords a sufficient basis for estimating their amount in money with
reasonable certainty." Comment 1 to UCC § 1-106 goes far beyond this and states that
the Code's provision that its remedies are to be "liberally administered to the end that the
aggrieved party may be put in as good a position as if the other party had fully performed,"
is intended to reject any doctrine that damages must be calculable with mathematical
accuracy. Compensatory damages are often at best approximate: they have to be proved
with whatever definiteness and accuracy the facts permit, but no more.
 1970] CONTRACTUAL BREACH "1211

ance or greater weight of the evidence." 28 0 In practice its major impact is

limited to the ingredient of loss on the bargain, as contrasted with other loss,
for it is in hypothesizing the position in which the injured party would have
found himself if the contract had been performed-in order to determine the
component of loss in value-that certainty is hardest to attain.2 81
Even as to loss on the bargain,there is ordinarily little difficulty in meeting
the requirement in the situations typified by Illustrations 3b and 6,282 in which
a supplier sues a recipient for damages. In these cases the maximum loss on
the bargain under Formula A 28 3 is equal to the component of loss in value,
which is simply the price fixed in the contract. Courts have not generally been
deterred from awarding damages by such relatively minor difficulties as lack
of precision in allocating indirect costs so as to determine exactly how much
28 4
should be subtracted as cost avoided.
Nor have courts been much troubled by uncertainty in the situations
typified by Illustration 1,285 where a recipient who is a middleman sues his
supplier for damages, claiming that the breach prevented him from realizing
a profit on resale. 288 In these cases the loss in valve, which is the outer limit
of his loss on the bargain under Formula A, may be established by an actual
contract of resale, should there be such a contract, or by the price on the
resale market, should there be such a market. The most substantial part of the
cost avoided is ordinarily the price fixed by the contract in suit. To this must
be added such specific costs as those for delivery as well as an appropriate
portion of the general overhead for such activities as merchandising and
advertising. Even if these additional costs cannot be determined with great
accuracy, recovery is limited by the difference between the actual or hypo-
thetical resale price and the contract price. Of course where the middleman is
280. See F. JxAmzs, sipra note 32, at § 7.6.
281. Some cases in the early part of the nineteenth century had suggested that there
could be no recovery for loss of profits.
Both the English and American cases have generally adhered to this denial
of profits as any part of the damages to be compensated, and that whether in.
cases of contract or of tort.
T. SmnwIcK, supranote 56, at 78. In Griffin v. Colver, 16 N.Y. 489, 491 (1858), however,
the court explained,
It is not a primary rule, but is a mere deduction from that more general and
fundamental rule which requires that the damages claimed should in all cases be
shown, by clear and satisfactory evidence, to have been actually sustained ...
[I]t is under this rule that profits are excluded from the estimate of damages...,
and not because there is anything in their nature which should per se prevent their
allowance.
Some courts still deny recovery for loss of "good will." E.g., Harry Rubin & Sons v.
Consol. Pipe Co. of America, 396 Pa. 506, 153 A2d 472 (1959) (claimed loss of cus-
tomers was "entirely too speculative" for recovery under UCC § 2-715).
282. Illustrations 3b and 6 are set out in text following, respectively, notes 72 and 211
supra.
283. Formula A is set out in text following note 67 supra.
284. See Comment, supra note 275, at 1000-05, 1016 n.137. In order to recover his
direct profits, the seller must, as has already been pointed out, show that his supply
exceeded his demand.
285. Illustration 1 is set out in text following note 16 supra.
286. Comment, supra note 275 at 1005-11, 1016 n.137.
1212 COLUMBIA LAW REVIEW [Vol 70:-1145

to receive an indefinite quantity of goods over a period of time under a continu-

ing relationship, the problems of proof are more acute, the risks of an excessive
287
award are greater, and courts have been less inclined to allow recovery
The most difficult sort of case in which to meet the requirement is that
typified by Illustration 2,288 in which a manufacturer or other entrepreneur
claims that his supplier's failure to furnish capital goods, raw materials, land,
or services has prevented him from realizing a collateral profit in a business
venture for which they were indispensible 9 Here it is much harder to estab-
lish loss in value which, as Formula A shows, 290 involves proof of collateral
income lost and collateral cost avoided. It is no easy task to reduce to simple
statements the substance of the plethora of decisions that have applied the
requirement of certainty to such cases. Where the venture involves merely a
continuation or expansion of an existing and relatively stable business, records
of previous transactions may help to show demand for the purpose of cal-
culating collateralincome lost, particularly where it can be shown that condi-
tions in the relevant market have not changed significantly during the period
in question.2 9 1 Costs may be established by past records and sometimes by
opinion evidence 29 2 Where, however, the venture involves special risks, courts
have been reluctant to allow recovery on this basis, even where it is possible
t6 show comparable figures for similar ventures. Especially is this so where the
inherent nature of the business gives rise to fluctuations that make it particu-
larly speculative, as it sometimes thought to be the case in the entertainment
field, 29a for example. The same is true where the novelty of the venture makes
its success unsually uncertain, as may be the case for an enterprise that is
wholly new or that inVolves a new product or service. 20 4 So, in a Maryland
case, Evergreen Amusement Corp. v. Milstead,295 in which a contractor's delay
necessitated the postponement of the opening of a drive-in movie theatre from
287. As to the particular complexities introduced by a franchise agreement for brand-
name goods, see id. at 1006-08. A case analogous to that of the middleman is Brigham &
Co. v. Carlisle, 78 Ala. 243 (1884), where the plaintiff was instead a travelling salesman
who was to sell shoes on commission over an eight-month period. The court denied him
recovery for his lost profits, saying:
The number and amounts of sales depended on many contingencies-the state of
trade, the demand for such goods, their suitableness to the different markets,
the fluctuations of business, the skill, energy and industry with which he prose-
cuted the business, the time employed in effecting different sales, and upon the
acceptance of his sales by the defendants.
Id. at 249-50.
288. Illustration 2 is set out in text following note 57 supra.
289. See Comment, supra note 275, at 1011, 1016 n.137.
290. Formula A' is set out in text following note 84 supra.
291. See RESTATEMENT § 331, Comment d, and the cases cited in 5 CoRBrx § 1023;
McCoitmicx § 29 at 107-08; Note, The Requirement of Certainty in the Proof of Lost
Profits, 64 HARv. L. REv. 317, 319-20 (1950).
292. On manner of proof, see McCoRmicz § 29; Comment, sipranote 275, at 1026-30.
293. See the cases cited in Comment, supra note 275, at 1013-14; Note, supra note 291,
at 320.
294. See the cases cited in Comment, supra note 275, at 1012; Note, supra note 291,
at 321-22.
295. 206 Md. 610, 112 A2d 901 (1955).
19701 CONTRACTUAL BREACH 1213

the beginning of June until the middle of August, the appellate court upheld
the exclusion of the testimony of an expert witness with respect to the estimated
profits made by other drive-in theatres in the area during the same period and,
by that particular theatre during the comparable period of the following year
and with respect to a market survey made before the theatre operator selected
the site. In the court's words,
loss of profits from a business which has not yet gone into operation
may not be recovered because they are merely speculative and in- 296
capable of being ascertained with the requisite degree of certainty.
The extent to which changes in the law of evidence, such as the relaxation of
the hearsay rule to admit business records more freely, and changes in the
techniques of business, such as greater reliance on analyses of costs and studies
of market behavior, will help claimants in meeting the requirement of certainty
remains problematical. 297
McCormick said that, like the test of foreseeability,

the standard of "certainty" was developed, and has been used, chiefly
as a convenient means for keeping within the bounds of reasonable
expectation
298 the risk which litigation imposes upon commercial enter-
prise.
Since there can be no recovery for profits which are not foreseeable, the
practical effect of the requirement of certainty is to deny recovery for some
profits even though they are foreseeable. It thus has an impact, beyond that
296. Id. at 618, 112 A.2d at 904.
297. See Comment, supra note 275, at 1018-19. Courts have even differed on whether
to award the value of a "chance of winning" where the alternatives are a certain gain
or nothing, and turn on a single event rather than on a number of transactions. In
Collatz v. Fox Wis. Amusement Corp., 239 Wis. 156, 300 N.W. 162 (1941), Collatz, by
estimating the number of jelly beans in a jar, became one of the nine contestants in a
quiz contest, in which he was one of the last two survivors. When both survivors failed on
the final round, the prize, a new automobile, was awarded to the other survivor on the
ground that, because he had been asked his question after Collatz, he was the last con-
testant eliminated. Collatz's claim for half the value of the car was denied, "for it cannot
be assumed nor is it susceptible of proof that had the contest proceeded to a proper finish
he would have become the winner." Id., 239 Wis. at 158, 300 N.W. at 164. In Wachtel v.
Nat'l Alfalfa Journal Co., 190 Iowa 1293, 176 N.W. 801 (1920), the plaintiff entered a
contest in which she could win one of many prizes, including a new automobile, by selling
subscriptions to the defendant's newspaper. After several weeks, when the plaintiff was
leading in her contest district, the defendant abandoned the contest in that district. The
court held that she was entitled to recovery, the amount to be determined by the jury on
the basis of the value of the prizes and her reasonable probability of winning one of them.
See, favoring recovery, RzSTATEMENT '§ 332; 5 CoPamx § 1030; McConacKc § 31. See atso
Pollack v. Pollack, 39 S.W2d 853 (Tex. Comm. App. 1931), where life expectancy tables
were used to calculate whether, and for how long one brother would outlive the other.
That case is criticized in 45 HA.v. L. Rnv. 585-86 (1932). According to Bonbright, the
value of a chance is the discounted value of what it will confer on its possessor. 1 J. BON-
BRrGHT, supra note 62, at 348. Courts have been less sympathetic toward recovery where
the uncertain event is within the control of the injured party himself. See, e.g., Western
Union Tel. Co. v. Hall, 124 U.S. 444, 458 (1888) (sender's telegram ordering purchase
on market delayed a day, following which no purchase was made because of large ad-
vance in market during delay; damages based on market rise were denied on ground that
"it is not found that he would have resold the next day at the advance").
298. McCoumcir § 28 at 105.
 1214 COLUMBIA LAWF REVIEW7 [Vol. 70:114 5

of the test of foreseeability, in shifting part of the risk of the contracted venture
from the promisor to the promisee, and further diminishes the protection that
the law affords the promisee's expectations. Fuller and Perdue suggested that
Where the test of foreseeability is met, but the court still feels that liability
would impose on the party in breach a risk disproportionate to the rewards
that he expected under the contract, "the test of certainty is the most usual
surrogate."29 9 As has already been observed, it may be that in some cases where
the test of foreseeability is met, full compensation for collateral profits would
nonetheless be objectionable. Still, the requirement of certainty has, in this
regard, the same disadvantage as the test of foreseeability, in that it tends to
support all-or-nothing recovery rather than the sharing of the risk. Further-
more, it has the additional drawback that it purports to be directed, not at
considerations of risk, but at considerations of proof and of control of excessive
awards.
Even in situations where the claim is to collateral profits, so that the
problems of proof are greatest and the risk of excessive verdicts is highest,
it is hard to defend a requirement that attempts to cope with the necessity for
speculation by denying recovery altogether rather than by resorting to reason-
able approximation. That there is some judicial sympathy for this view is
suggested by two lines of cases that have eroded the requirement of certainty.
In the first, courts have relaxed or abandoned the requirement where they have
concluded that it has been met with respect to the "fact" of loss and the only
remaining questions go to the "extent" of loss.800 In the second, they have
relaxed or abandoned the requirement where the breach has been characterized
as "willful," 301 in spite of the general tenet that the amount of contract damages
does not depend on the character of the breach. To the extent that these cases
herald a general relaxation of the requirement of certainty in favor of the
normal burden of persuasion, they are to be applauded.
- Sometimes, failure to meet the requirement of certainty does not pre-
clude all recovery, but merely results in a lesser amount of damages. Where
loss in value is uncertain, the expectation interest may be protected by resort
to market price, as where compensation for delay in the construction of a

299. Fuller & Perdue, supra note 12, at 376.

300. See RESTATEMENT § 331, Comment a; McComnucx § 27 at 101-02. The distinction
is criticized in Note, Damages-Loss of Profits Caused by Breach of Contract-Proofof
Certainty, 17 MNN. L. REv. 194 (1933).
301. E.g., Wood v. Pender-Doxey Grocery Store, 151 Va. 706, 144 S.E. 635 (1928).
In Vitex Mfg. Corp. v. Caribtex Corp., 377 F2d 795, 797 (3d Cir. 1967), the court said:
It must be remembered that the difficulty in exactly ascertaining Vitex's costs is
due to Caribtex's wrongful conduct in repudiating the contract before performance
by Vitex. Caribtex will not be permitted to benefit by the uncertainty it has
caused.
See McCoamcK § 27 at 101-03; Bauer, The Degree of Moral Fault as Affecting Defen.
danet's Liability, 81 U. PA. L. REv. 586 (1933). Corbin gives as an illustrative situation,
"the case of a defendant who has sold his business and good-will and then in breach of his
promise opens up a competing business in the immediate vicinity." 5 Cmiaxx § 1020.
19701 CONTRACTUAL BREACH 1215
802
building is awarded on the basis of rental price for the period of delay. Or
recovery may be limited to protection of the reliance interest, as was done in
the Behan case.30 3 Both techniques were applied in the Evergreen Amusement
case, where the damages awarded to the theater operator were based on the
rental price of the theater property for the period of delay together with
out-of-pocket costs for that time. At least to the extent that a lesser sum may
be awarded, the requirement of certainty does not impose the Draconian choice
of all or nothing.

CONCLUSION

Viewed in retrospect, our system of remedies for breach of contract can be

seen to have inherent in it seven critical choices: (1) to aim at relief to the
promisee to redress breach rather than compulsion of the promisor to prevent
breach; (2) to base relief on the promisee's expectation interest rather than
on his reliance or restitution interest; (3) to make the usual form of relief
substitutional rather than specific; (4) to base recovery on diminution in value
rather than on cost to complete; (5) to limit recovery to unavoidable loss
rather than all loss caused; (6) to limit recovery to foreseeable loss rather
than all loss caused; and (7) to limit recovery to loss proved with certainty
rather than loss proved by the preponderance of the evidence.
None is more ingrained than the first of these, the choice of relief over
compulsion. Virtually never is it departed from overtly, and even covertly only
under the most appealing of circumstances. 30 4 Indeed, so compelling is the
policy favoring relief over compulsion that the party who attempts to reverse
it by express provision runs the risk that the provision will be stricken as a
"penalty clause" rather than a "liquidated damage clause." Curiously, however,
this aversion to penalty does not pervade the law of contract as a whole, and

302. See RESTATErmET § 331(2) ; 5 CoaniN § 1029. Where there is such an alterna-
tive under a standard formula, a court may be particularly reluctant to allow profits in
the face of an objection that they are uncertain.
303. The Behan case is discussed in text accompanying notes 141-43 supra. See
Fuller & Perdue, supra note 12, at 373-77, and note that this is one of the explanations
of the rule of Flureauv. Thornhill mentioned in note 14 supra.
304. Examples of instances in which courts have taken some account of the nature
of the breach are collected in note 9 supra. In none of these instances do the courts speak
in terms of "penalty," however, but rather in terms of the basis or measure of damages
or the applicability of some limitation on damages-whether damages are to be based
on the expectation or the reliance interest, whether damages are to be measured by cost
to complete or by market price, whether damages are to be measured by the rise in
market price or the loss of resale profit, or the extent to which the loss must be foreseeable
and certain. But if the consequence of an aggravated breach is to impose on the party in
breach a heavier liability than would be imposed for an innocent breach, the effect is to
penalize him for the aggravated nature of the breach. The most appealing of the instances
are those discussed in text accompanying notes 98-117 supra and in note 189 supra, for if
no account is there taken of the nature of the breach, the party in breach may wilfully have
broken his promise for the purely selfish reason that he would be financially better off by
nonperformance than by performance. See the discussion of Illustration 3g in text following
note 125 supra, indicating that a gain of this sort is not directly recoverable by the injured
party.
1216 COLUMBIA LAW REVIEW

it is often possible under the law of conditions to do what is not permitted

under the law of damages. For example, the owner who is interested in having
his building constructed exactly to specifications will be better advised to con-
dition the builder's right to payment on compliance with those specifications to
the owner's "honest satisfaction" than to attempt to provide a schedule of
penalties for noncompliance. The condition will be upheld although it smacks
of compulsion that would be impermissible if attempted through the tailoring
of remedies.
All seven of the choices have been influenced, to some extent at least,
by the free enterprise economy within which the system of remedies operates.
As for (1), the factors that have made compulsion of promisors attractive in
a planned economy are plainly absent in a free enterprise economy. As for
(2), the expectation interest, rather than the reliance or restitution interest,
is of particular significance in a market economy in which one of the principal
functions of promise is to provide protection against adverse market fluctua-
tions 0 5 With respect to choice (3), the preference for substitutional rather
than specific relief is peculiarly appropriate in an economy where it is assumed
that markets make substitutes freely available. The choice (4) of diminution in
value over cost to complete is an understandable one in situations in which
expected advantage consists of the realization of profit, as is characteristic of
commercially important exchanges in our economy. As to (5), the rule that
limits recovery to unavoidable loss has its major impact in situations in which
the injured party can avoid loss by going into the market to arrange a sub-
stitute transaction. And finally, with respect to both (6) and (7), the limitation
of damages to those that are foreseeable and certain can be viewed as reducing
the risk undertaken by entrepreneurs in a system of free enterprise.
In the same vein, it is noteworthy that of the seven choices, all except
choice (2) have the effect of restricting rather than enlarging the responsibility
of the party in breach. All in all, our system of legal remedies for breach of
contract, heavily influenced by the economic philosophy of free enterprise, has
shown a marked solicitude for men who do not keep their promises.
305. See Farnsworth, supra note 1, at 588.