Opinion ID: 566068
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Heading: The Measure and Allocation of Damages.

Text: 11 The question which faces us on this appeal is one of some jurisprudential complexity. It has engaged the attention of commentators for many years. As a matter of pure contract law it is generally true that if two individuals enter into a contract and one breaches, the breaching party cannot obtain a recovery from the innocent party. Rather, if the innocent party has suffered, a recovery against the party in breach is generally accorded. See, e.g., California Civil Code Sec. 3300; Bruckman v. Parliament Escrow Corp., 190 Cal.App.3d 1051, 235 Cal.Rptr. 813 (1987). In building contracts [t]he measure of damages ... is the reasonable cost ... to finish the work in accordance with the contract. Walker v. Signal Cos., Inc., 84 Cal.App.3d 982, 993, 149 Cal.Rptr. 119 (1978). 12 On the other hand, if the breaching party has conferred a benefit upon the innocent party rather than a detriment, it would unjustly enrich the innocent party and unduly punish the breaching party if the latter received nothing for its services. Quasi contract principles will supply the remedy for that. See 12 S. Williston, A Treatise on the Law of Contracts Secs. 1479-84 (3rd ed. 1970) (Williston). See also 1 B. Witkin, Summary of California Law (Contracts) Secs. 91-96 (9th ed. 1987); 55 Cal.Jur.3d (Restitution) Sec. 66-67 (1980). 13 These policies appear to conflict to some extent, so anyone who considers them must reconcile their opposing tendencies. When faced with these propositions, the commentators have resolved them by stating that the breaching party is entitled to the reasonable value of its services less any damages caused by the breach. See 5A A. Corbin, Corbin on Contracts Sec. 1124 (1964). They have added that the breaching party should not, in any event, be able to recover more than the contract price, or perhaps even a ratable part of that contract price. Id. See also, 5 A. Corbin, Corbin on Contracts Sec. 1113 at 606 (1964). Williston puts it as follows: 14 The true measure of quasi contractual recovery, where the performance is incomplete but readily remediable, is the unpaid contract price less the cost of completion and other additional harm to the defendant except that it must never exceed the benefit actually received by him. This is the net benefit by which the defendant is enriched. 15 Williston Sec. 1483 at 301. 16 While this phraseology is somewhat more complex, it can readily be seen that the effect is to preclude a recovery by the breaching party which will cause the innocent party to pay more than the contract price itself. 2 The Restatement is in accord with this approach, for while it, too, allows for recovery for part performance, it indicates that the amount of that recovery is not only limited to the extent that the innocent party's gain exceeded its loss, but is also limited to no more than a ratable portion of the total contract price. Restatement (Second) of Contracts Sec. 374 comments a & b (1981). 17 It is interesting to observe that treatise illustrations of the application of these principles demonstrate that the innocent party never winds up paying a total that is more than the contract price itself. See, e.g., Restatement (Second) of Contracts Sec. 374 comment b, illustrations (1981). That is sensible. Were it otherwise, there would be a powerful inducement to breach rather than complete any contract which did not turn out to be profitable. By doing so, the ultimate loss of the bargain would be shifted from the breaching party to the innocent party, which is precisely what would occur in the case at hand if the district court's judgment stands. 18 Palmer has referred us to cases from our and other circuits but not one of them stands for the proposition that an innocent party must pay more than the contract price for the goods or services it sought. See United States ex rel. C.J.C., Inc. v. Western States Mechanical Contractors, Inc., 834 F.2d 1533 (10th Cir.1987) (breaching prime contractor had to pay quantum meruit charges to subcontractor); United States ex rel. Coastal Steel Erectors, Inc. v. Algernon Blair, Inc., 479 F.2d 638 (4th Cir.1973) (same); Sicula Oceanica, S.A. v. Wilmar Marine Eng'g & Sales Corp., 413 F.2d 1332 (5th Cir.1969) (actual amount of damages not decided; no suggestion that innocent party must pay more than agreed upon price); American Surety Co. v. United States ex rel. B & B Drilling Co., 368 F.2d 475 (9th Cir.1966) (breaching party could recover for what it did at the contract rate less setoffs for damages incurred on account of the breach). 19 Moreover, if the breaching party were permitted to recover an amount that leaves the innocent party paying more than the contract price for the goods and services contracted for, that would cause an increase in the loss to the innocent party on account of the breach and would offset the additional amount demanded by the breaching party. However, no such paraphrastic principles are needed if the cost to the innocent party for the goods and services contracted for is limited to the contract price itself. The breaching party would then be required to pay damages for excess costs imposed upon the innocent party. 20 California law is not to the contrary. In the leading case of Roseleaf Corp. v. Radis, 122 Cal.App.2d 196, 264 P.2d 964 (1953), the court dealt with a situation where a purchaser of property was to obtain a new refinancing loan in an amount not to exceed $75,000. Instead, the purchaser obtained a loan for $125,000. That loan was accepted by the seller. When the purchaser sought credit for the costs of obtaining the loan, the seller claimed that the purchaser had no entitlement whatever because the purchaser had breached. The court disagreed and, instead, awarded the purchaser a credit in the amount of the costs that would have been proper if a $75,000 loan had been obtained. 21 In reaching that unexceptional conclusion the court pointed to the fact that the case was one of imperfect performance, accepted without waiver of a claim for damages..... 122 Cal.App.2d at 203-04, 264 P.2d 964. It went on to quote Williston to the effect that the issue of damages for a breaching party is one which has caused great difficulties and differences of opinion because there is a clash of fundamental policies. Those policies were identified as: 22 On the one hand, it seems a violation of the terms of a contract to allow a plaintiff in default to recover--to allow a party to stop when he pleases and sell his part performance at a value fixed by the jury to the defendant who has agreed only to pay for full performance. On the other hand, to deny recovery often gives the defendant more than fair compensation for the injury he has sustained and imposes a forfeiture on the plaintiff. 23 Id. at 205, 264 P.2d 964. 24 The court stated that [t]here is no hard and fast rule in cases of imperfect performance by which liability of the promisee to render compensation, and the amount of an allowable recovery can be judged. Id. at 204, 264 P.2d 964. It then went on to state that there had been no harm to the seller, so that the proper measure of damages would be the contract price, for there was no difference in amount between the contract price, less damages, and the value of the financing to the seller. Id. at 207, 264 P.2d 964. In other words, the seller simply paid the amount it contracted to pay, no more, no less. Similarly Lacy Mfg. Co. v. Los Angeles Gas & Elec. Co., 12 Cal.App. 37, 106 P. 413 (1909), to which Palmer earnestly draws our attention, allowed a party whose performance was late to recover the value of his services, less damages for late performance. It contains no hint that the recovery could be more than the contract price. Palmer also presses Castagnino v. Balletta, 82 Cal. 250, 23 P. 127 (1889) upon us. It is no more to the purpose than the other cases brought to our attention. There the innocent subcontractor recovered the contract price plus agreed upon extras. 25 It is, therefore, apparent that the district court erred when it offset the damages to CSE against the raw value of the work done by Palmer, with the result that CSE was ordered to absorb the loss that Palmer incurred by entering into a contract which turned out to be unprofitable to it. Instead, when it became apparent that Palmer's breach actually cost CSE $6,295.54 more than the contract price, CSE should have been awarded its damages and Palmer should have recovered nothing. 3 B. Attorneys Fees. 26 The contract between CSE and Palmer provided for an award of attorneys fees to the prevailing party. Given that, we apply the law of California to the contract. United States ex rel. Reed v. Callahan, 884 F.2d 1180, 1185 (9th Cir.1989), cert. denied, --- U.S. ----, 110 S.Ct. 1167, 107 L.Ed.2d 1069 (1990). That law approves of the enforcement of attorneys fee provisions. Cal.Civ.Code Sec. 1717. The district court recognized that but, because it considered Palmer to be the prevailing party, 4 fees were awarded to Palmer. In light of our decision on the merits, that was an error. On the contrary, fees should have been awarded to CSE. On remand, the amount of those fees must be determined. 5