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30. In an action against the bank for breach of contract, which of the following amounts is the merchant likely to recover?
A bank agreed to lend a merchant $10,000 for one year at 8% interest. The loan proceeds were to be disbursed within two weeks. The merchant intended to use the loan proceeds to purchase a specific shipment of carpets for resale at an expected profit of $5,000 but said nothing about these plans to the bank. The bank failed to disburse the proceeds and refused to assure the merchant that it would do so. The merchant was able to secure a loan from another lender at 10% interest for one year. However, by the time the merchant started the application process for a substitute loan, it was too late to pursue the opportunity to buy the shipment of carpets.
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Consequential damages can be recovered on a contract if the damages were the natural and probable consequences of the breach. In order for consequential damages to be recoverable, they have to be «in the contemplation of the parties at the time the contract was made,» or if they were otherwise foreseeable. Hadley v. Baxendale. In other words, for one party to get consequential damages from the other, the type of damages had to be a known risk at the time of contract formation.
C is correct. The correct answer is the difference in cost over time between a loan at 10% and a loan at 8%. Here, the bank did not know about the carpets that the merchant intended to purchase, or the short time frame he had to purchase them when the contract was made. Expectation damages are the correct measure of damages. Here, the benefit of the bargain with the bank was the fixed interest rate, only. The contract was for the bank to lend money, and the merchant to pay the bank back, with interest, over a set period of time. Since no other deals were discussed, it is clear that the only thing the merchant can ever recover from the bank in the event of a bank breach is the difference, if any, in the interest rate from a replacement loan.
A is incorrect. Damages for lost opportunities may be recoverable in some cases as consequential damages for a breach of contract. Here, consequential damages for the lost opportunity to purchase the carpets are not appropriate under these facts for two reasons. First, because of the presumed wide availability of credit, the bank had no reason, at the time of contract formation, to foresee that the merchant would not be able to obtain a substitute loan. Second, at the time of contract formation, the bank was not aware and had no reason to be aware of the merchant's opportunity to purchase the carpets. However, the answer states that these types of damages are never recoverable, which is false.
B is incorrect. A tacit agreement is never required to recover damages. However, this answer hints at the requirement for consequential damages, and so, may have been tempting. If the parties had discussed the carpet deal, and the importance of the loan in completing the deal, then reliance damages could have been allowed.
D is incorrect. Damages for lost opportunities may be recoverable in some cases as consequential damages for a breach of contract. Consequential damages can be recovered on a contract if the damages were the natural and probable consequences of the breach. Here, consequential damages for the lost opportunity to purchase the carpets won't work because, at the time of contract formation, the bank was not aware and had no reason to be aware of the merchant's opportunity to purchase the carpets.