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Living Without the Avoidable Consequences Doctrine in Contract Remedies

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Living Without the Avoidable Consequences Doctrine in Contract Remedies Living Without the Avoidable Consequences Doctrine in Contract Remedies MICHAEL B. KELLY* TABLE OF CONTENTS INTRODUCTION . 176 I. A VOIDABLE CONSEQUENCES AS A COROLLARY OF THE EXPECTATION INTEREST . • . 18 I A. Peripheral Aspects of the Avoidable Consequences Doctrine . 18 I I. Affirmative Uses of the Avoidable Consequences Doctrine . I 81 2. Avoided Consequences . I 83 B. Unsuccessfal Efforts To Avoid the Loss . 185 C. The Benefits of Breach of Contract . 187 I. Identifying the Benefits of Breach . 187 2. Quantifying the Benefits . I 90 3. The Effect of Transaction Costs . 201 D. The Benefits in Other Contract Contexts . 205 I. Discharged Employees . 206 a. To what extent does the plaintiff benefit despite reasonable • Professor of Law, University of San Diego School of Law; B.G.S. 1975, University of Michigan; M.A. 1980, University of Illinois at Chicago; J.D. 1983, University of Michigan. Christopher Wonnell' s contributions to this article and to my writings generally deserve particular thanks and recognition. Tom Smith's contributions prevented this paper from floundering. I am also grateful for the contributions of Larry Alexander, Gail Heriot, Michael Rappaport, Emily Sherwin, Kristine Strachan, Paul Wohlmuth, Fred Zacharias, and many others who encouraged or hounded me during this project. The research assistance of Geoffrey Morrison, Ronald Webb, John Doherty, and David Boyd and financial support from the University of San Diego also contributed to the successful completion of this article. 175 but unsuccessful efforts to minimize the loss? . 206 b. Why limit the value of the benefit to the amount of loss that could have been avoided by reasonable efforts? . 2 I 8 2. Buyers of Goods . 225 a. Extraordinary Efforts . 233 b. Unforeseen Losses . 238 c. Moral Hazard . 240 3. Summary . 245 II. THE INDEPENDENCE OF BENEFIT ANALYSIS . 246 A. The Superfluous Avoidable Consequences Doctrine . 249 B. Generating the Offeet Without the Avoidable Consequences Doctrine . 253 Ill. ADVANTAGES OF RETHINKING AVOIDABLE CONSEQUENCES . 261 A. The Avoidable Consequences Doctrine as Contributory Negligence . 263 B. Improved Judicial Focus: Substitute Employment for More Pay . 278 CONCLUSION . 288 INTRODUCTION The avoidable consequences doctrine, sometimes called the duty to mitigate damages, precludes plaintiffs from recovering damages for losses they could have prevented by reasonable efforts. 1 Legal authorities generally treat the doctrine as an exception to or a limitation on the expectation interest.2 The expectation interest normally permits the nonbreaching plaintiff to recover damages sufficient to put the I. See RESTATEMENT (SECOND) OF CONTRACTS § 350 (1979); RESTATEMENT (SECOND) OF TORTS § 9 I 8 ( 1977). This Article will frequently rely on these Restatements to summarize state law, rather than producing long and unnecessary string citations of case law. 2. The headings for the Restatement sections in the preceding footnote reveal the general view: "Avoidability as a Limitation on Damages," RESTATEMENT (SECOND) OF CONTRACTS§ 350, and "Diminution of Damages," RESTATEMENT (SECOND) OF TORTS § 918. (Technically, "Diminution of Damages" is the title of Topic 2 in Chapter 47 (Damages). Section 918 is the first section of Topic 2). Section titles in contracts treatises and contracts and remedies casebooks reveal the degree to which scholars share this conception of the avoidable consequences doctrine. See, e.g., E. ALLAN FARNSWORTH, CONTRACTS § 12.12 (2d ed. I 990) ("Avoidability as a Limitation"); JOHN E. MURRAY, JR., MURRAY ON CONTRACTS § 122 (3d ed. 1990) ("The Mitigation Limitation"); JOHN P. DAWSON ET AL., CASES AND COMMENT ON CONTRACTS 37 (5th ed. 1987) ("Limitations on Expectation Damages," a section that begins with avoidable consequences cases); CHARLES L. KNAPP & NATHAN M. CRYSTAL, PROBLEMS IN CONTRACT LAW: CASES AND MATERJALS 940 (3d ed. 1993) ("Restrictions on the Recovery of Expectation Damages: Mitigation of Damages"); DOUGLAS LAYCOCK, MODERN AMERJCAN REMEDIES: CASES AND MA TERJALS 13 1 (I 985) ("Limits on the Basic Principle," which begins with a subsection on "Avoidable Consequences"); ROBERT S. THOMPSON & JOHN A. SEBERT, JR., REMEDIES: DAMAGES, EQUITY AND RESTITUTION § 2.03 (2d ed. I 989) ("The Major Limitations on Damages Recoveries," which includes subsection [C] labelled "Avoidable Consequences"). 176 [VOL. 33: 175, 1996] Contract Remedies SAN DIEGO LAW REVIEW plaintiff in the position she would have occupied if the defendant had performed the contract.3 Application of the avoidable consequences doctrine may leave the plaintiff short of that position,4 If the plaintiff failed to avoid some part of the loss because she failed to act reasonably, the damage award will not compensate her for the avoidable portion of the loss. This apparently leaves her worse off than if the contract had been performed.5 The avoidable consequences doctrine imposes a portion of the loss on the plaintiff rather than on the breaching defendant. This Article challenges the traditional approach to the avoidable consequences doctrine. The avoidable consequences doctrine produces results entirely consistent with the expectation interest. In every contract case where the avoidable consequences doctrine reduces a damage award, the breach appears to bestow some benefit on the plaintiff for which the expectation interest must account. The expectation interest insists that courts not make the plaintiff better off than if the contract had been performed.6 If the breach left the plaintiff with some benefit, then the damage award must subtract the value of that benefit from the amount that the plaintiff may recover. The avoidable consequences doctrine serves this function, estimating the value of benefits that courts might have difficulty recognizing or valuing directly. 3. See, e.g., RESTATEMENT (SECOND) OF CONTRACTS § 347 cmt. a (1979); FARNSWORTH, supra note 2, §§ 12.1, 12.6, at 840,871. 4. See, e.g., DOUGLAS LAYCOCK, TEACHER'S MANUAL: MODERN AMERICAN REMEDIES 84 ( 1985). 5. For example, if a discharged employee refuses to take a comparable job when available, the court should reduce the award by the amount that the employee could have earned by accepting the job. RESTATEMENT (SECOND) OF CONTRACTS § 350 cmt. c, illus. 8; see, e.g., Sutherland v. Wyer, 67 Me. 64 (1877) (employee took substitute employment, but quit before expiration of contract term with defendant). Reducing the recovery in these circumstances leaves the plaintiff with less money than she would have received if she had continued to work for the defendant. 6. See, e.g., Thorne v. White, I 03 A.2d 579 (D.C. 1954). Without this insistence, the award would miss the target: the position that the plaintiff would have occupied if the defendant had performed. Indeed, even the reliance interest, as applied by courts, cannot place the plaintiff in a better position than if the contract had been performed. RESTATEMENT (SECOND) OF CONTRACTS § 349 ( I 979). The theoretical justifications of this limitation to the reliance interest have been explored elsewhere. See Lon L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages, 46 YALE L.J. 52, 79 (1936); Michael B. Kelly, The Phantom Reliance Interest in Contract Damages, 1992 WIS. L. REV. 1755, 1783-1811; Mark Pettit, Jr., Private Advantage and Public Power: Reexamining the Expectation and Reliance Interests in Contract Damages, 38 HASTINGS L.J. 417, 445-52 (1987), 177 Part I develops this theme in several contexts. Basically, when a plaintiff chooses not to avoid losses, her choice implies a judgment that she would be better off to incur those losses rather than to avoid them. That judgment suggests that she expects to benefit from the breach, either directly (such as leisure to a discharged worker) or indirectly (such as by redirecting productive capacity to projects she could not have pursued if the defendant had performed the contract). If courts compensate the plaintiff for the full loss, without accounting for the benefit of the breach, they leave the plaintiff in a better position than she could have occupied if the defendant had performed. Since the expectation interest cannot justify this result, it must create an offset for the benefits. Because the decision not to avoid the loss implies that the value of the benefit to the plaintiff at least equals the loss she could have avoided by reasonable efforts, the amount of avoidable loss becomes a reasonable estimate of the amount to subtract when accounting for the benefit. Thus, rather than reducing damage awards below what the expectation interest normally would require, the avoidable consequences doctrine simply implements a limitation inherent in the expectation interest. Standing alone, Part I deserves attention. It identifies a previously unrecognized purpose served by the subtraction of avoidable losses from contract damage awards. Future discussions of the avoidable conse­ quences doctrine need to take this function into account, along with other goals the avoidable consequences doctrine serves. In addition, Part I reconciles the avoidable consequences doctrine with the expectation interest. We no longer need to explain why the law accepts undercompensation in the name of mitigation. Mitigation is necessary to avoid overcompensation. Part II advances a more extreme implication of the arguments presented here: the law could live without the avoidable consequences doctrine. Even if courts never again mentioned the avoidable conse­ quences doctrine or a duty to
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