In our previous lesson on expectation damages, I noted that the remedy of the expectation is one that involves imagining a future that did not actually happen. If we are going to try to put the non-breaching party in as good a position as it would have been in if the contract had been performed, we are essentially working out on a factual premise that didn't actually happen. Sometimes that's easy to do.
Sometimes the damages are based on well-known public market values of various goods or services, such as commodities. So we can have a fair amount of precision there. Other times, the amount is far less certain, and yet there is still a possibility of proving expectancy damages, at least to some degree of satisfaction for a court. So, as we look at the uncertainty of expectation damages, let's consider the case of U.S.
Naval Institute v. Charter Communications, Inc. This case is sometimes better known as the Hunt for Red October case. Novelist Tom Clancy had written the novel, The Hunt for Red October, in the mid-1980s, and it became a runaway bestseller.
The original publisher of the novel, in hardback was Naval Institute Press. Naval Institute Press was an imprint of the U.S. Naval Institute, and it in turn granted a license to Charter Communications, and Charter's Berkeley imprint is who would release the novel in its paperback version. In the publishing industry, the paperback version typically comes out after a specified time.
after which only the hardback is available. The idea being that if people want to read this particular book, they're willing to pay the higher amount for the hardback version when it is the only one available. Thus, there is money that's going to be lost by releasing the paperback version too early.
In this case, the license said that Charter, through its Berkeley imprint, could publish the paperback, quote, not sooner than October 1985. But Berkeley released it, in fact, on September 15th, clearly a breach of contract. It was a consequential release for Berkeley because the book was already a bestseller in paperback by the time October 1st rolled around which is the day under the contract it should have first hit the shelves. So that is our problem. In one of our review questions, we note that this situation is really like an alternative history novel. We're trying to picture what would happen if things had gone differently in the world.
The Red October case is a great instance where we can consider the evidence that the court discusses and how it goes about imagining what the alternative world would have been like. This often happens in cases where lawyers and their clients are having to prove expectation damages that cannot be calculated with complete certainty. So do pay attention, as you read the opinion in this case, to what the court actually does. But let's look at some excerpts from that opinion. The court first notes that the purpose of damages for breach of contract is to compensate the injured party for the loss caused by the breach.
Such damages are usually measured by the actual loss. Of course, if we knew exactly what the loss was, that is what the court would want to go with. Here, where the breach was the early release of the paperback, we do not know exactly how many hardback sales were lost, so we have to figure out another way to compute that.
The court says, while on occasion the defendant's profits are used as a measure of damages, this generally occurs when the profits tend to define the plaintiff's loss. For an award of the defendant's profits, where they greatly exceed the plaintiff's loss, and there has been no tortious or illegal conduct on the part of the defendant, would tend to be punitive. And this next part is an important point.
Punitive awards are not a part of the law of contract damages. You need to know that. You need to remember that punitive damages, as a general matter, there are a few rare exceptions, but they're very rare.
And for the most part, punitive damages are not available for breach of contract. The reason for that rule is that, unlike tort law, which sometimes attempts to punish a party for bad behavior, we don't think in terms of punishment for breach of contract. All we want to do is get the injured party what it would have gotten if the contract had been performed. Thus, the central objective behind the system of contract remedies is compensation, not punishment.
So it is not the punitive damages that the court is going to award here. Given this inherent uncertainty, what will happen in the case? The trial court ultimately had to find some way to compensate U.S.
Naval Institute for the sales it lost. by virtue of the fact that the paperback version came out early. The appellate court ultimately concludes, we think it was in within the prerogative of the court, that's the trial court, as finder of fact to look to Naval's August 1985 sales.
In other words, look at the last full month of sales that the Naval Institute had before the September early release of the paperback version. Though there was no proof as to precisely what the unimpeded volume of hardcover sales would have been for the entire month of September, any such evidence would necessarily have been hypothetical. That, by the way, is exactly the point. We can't come up with evidence that would show precisely what happened.
So the concern here is, is there so much uncertainty that we ought not to be awarding damages? because doing so would be pure speculation. The appellate court notes that using the August figures was not an error. It was appropriate, quote,"...to lay the normal uncertainty in such hypothesis at the door of the wrongdoer who altered the proper course of events, instead of at the door of the injured party."The court just said there a principle that you should keep in the back of your mind.
To the extent that there is some degree of uncertainty, and by the way, note that there's no uncertainty that U.S. Naval Institute lost some sales. The problem is we don't know exactly how many sales.
The principle that the court is articulating here is that while there is an amount of uncertainty, we ought to err on the side of the party who was wronged and to give it, the non-breaching party. the benefit of the doubt for uncertainty instead of the wrongdoer. In this case, that would be Charter Communications, which was the party who breached the contract.
So, taking that benefit into doubt, the court says that nothing in the record foreclosed the possibility that, absent Berkeley's breach, sales of hardcover copies in the latter part of September would have outpaced sales of those copies in the early part of the month. Though the court accurately described its selection of August 1985 sales as the benchmark as being, quote, generous, it was not improper. So again, the principle is that We, or the court, will err on the side of the non-breaching party.
We want to give the non-breaching party the benefit of the doubt. So, it was not improper, given the inherent uncertainty, to exercise... generosity in favor of the injured party rather than in favor of the breaching party. So an important point that you should take away from the Hunt for Red October case is the notion that we are not always going to be able to pinpoint damages with precision.
To the extent we cannot pinpoint expectancy damages with precision, by the way, we can't do it based on nothing. And we can't do it based on rank speculation. We have to have some amount of data. But here, the data of the sales from the earlier month was good enough. The trial court, and this was upheld on appeal, was well within its discretion to use that figure as the measure of expectancy damages.
That brings us to the end of this lesson on dealing with the occasional uncertainty of calculating expectation damages. In the next lesson, we will turn to the impact of fixed and variable production costs and their role in calculating expectancy damages.