Cigarette Advertising Campaign
If we look at the case of Mary and RJR there is a contract formed between them for Mary to undertake a year long advertising campaign to present the companies cigarettes in a positive light, her remuneration was to be 25% of the increase in sales that the campaign created. It was also recognised that this was a very vague amount, and may be difficult to assess, as a result an additional clause was put for liquidated damages, which, stated that in a breach by RJR that Mary would be entitled to $25,000. The contract has been breached after only one month, Mary has incurred costs of $25,000 and RJR is refusing to make any payment.
The first consideration must be if there was a valid contract in place, and if there was, has it been breached and by whom. For a contract to be valid there has to be an offer, acceptance and consideration, as well as a mutual intent to create legal relations. This appears to be the case. The contract was to run for twelve months, it is RJR that has ended it, despite an increase in sales. It is also RJR that has refused to pay the liquidated damages, indicating that they will not do so. Therefore, we appear to have a breach by RJR, and as such Mary may seek remedy in the courts.
If we look at this in terms of the breach, not allowing the contract to run for a year there are three types of remedy, but only one may be sought. Contract law provides protection by way of an expectant interest, in reliance interest or for out of pocket expenses, for which Mary has $40,000 a restitution interest. Expectation may be difficult to claim, in the case of Hawkins v McGhee, here the expected condition less the current condition are the damages, but this is difficult to prove. It is also possible that the expectation may be seen as greater than the actual level of reliance. There is also no set amount, and as such there cannot be a specific reliance, expectation may be easier to determine. The next stage is to consider how this amount should be determined.
If we look further at the breach it is also not the failure of Mary to perform the duty, in the case of Aiello Construction V. Nationwide Trailor there was a formula laid down, which looked at the amount agreed, less the costs saved by the contracted party in not completion, less any payments made to them already. However, this is difficult as the amount was not specific. The damages for the out of pocket expenses may be seen as more straight forward, but there is also the liquidation clause, which states that were there is a breach b y RJR a set amount will be paid.
If we apply the case of Truck Rent-A-Center V. Puritan Farms then it would appear Mary has a very good case to claim her $25,000. Although under out of pocket expenses or the use of expectation in a breach may gain her more, it is also likely that this clause will be used as this states it will be used when RJR are in breach. In the Puritan Farms case the defendant leased a truck from the plaintiff with a contract that had a liquidated damages clause which stated where there was a breach the defendant would pay 50% of the lease rent that would have been due on the truck. The markets did not behave as expected, and the defendant breached the contract, the court found in favour of the plaintiff.
For the liquidated damages to be enforceable there are several requirements. The actual damages must be difficult to ascertain. This is the case with Mary, as there was an increase in sales, but it is difficult to quantify. The liquidated damages must also be seen as a reasonable estimate. This is more questionable, but as it was quantified on the contract this may be held, and the enforcement should not be seen as unconscionable or against public policy. It is also worth noting that under the UCC 2-718, it is stated that "Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty." This does not appear to be the case here.
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