Contracts II: Class Notes: 8/9/2004 Revision 0.1 Author: Philip Larson 703.798.5244 (Tel)

Contracts II: Class Notes
8/9/2004 Revision 0.1 Author: Philip Larson 703.798.5244 (tel)
Contracts II: Case Briefs
Table of Contents
1. Lecture 1....................................................................................................................................3
Philip Larson
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1. Lecture 1
1.1 What is Contracts? Interpreting the Terms of an Agreement: The UCC o Plain meaning (ex post) vs. Context (ex ante) o Context wants to know what these two people meant to the best of the courts ability. Plain meaning wants to know what the document actually says, regardless of what they meant. o Size of audience: context (Small); plain meaning (Large)
Columbia Nitrogen Corp. v. Royster Corp. Plaintiff Royster Corp. had been a long time customer of defendant Columbia Nitrogen. Then, plaintiff built a plant that made more phosphate than they could use, so, after long negotiations, agreed to sell the phosphate to defendant. The parties agreed to a minimum amount that would be provided and a set price. There was also a provision to escalate the price if the market changed. Disputed terms: Price, Quantity There is also an escalation clause. Allows you to change the price based on the cost of manufacturing. - Under the UCC, ambiguity is IRRELEVANT - Ambiguity is NEVER a relevant question when analyzing using the UCC The UCC ranks terms - express terms rank first - usage of trade ranks next UCC 2-202 (and UCC 1-205 and UCC 2-208) - Can we explain (interpret) the terms - They can be explained by course of performance, usage of trade or express terms. - We still are asking whether the terms are contradicted - B: dont forget about the Contradiction term in the opening paragraph. - The contract is silent about price and quantity. - The UCC weakens the effect of merger clauses. 2/14/2004 - Reformation o Reformation was originally allowed to fix a transcription error when a secretary or someone typed up a final agreement. This was a tool for the court to step in and say there was a mistake that both parties want fixed. o Is the court supposed to be enforcing the parties intent or enforcing the terms as they are actually written? There is no legally clear answer to this. Courts go both ways. o What is the difference between reformation and modification?
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Reformation may be a more limited remedy that requires more than modification. Boardman does not think there is much difference in modern cases. o Boardman: Aluminum Co. of America v. Essex Group, Inc. - There are a few indices that go into the price. The one we are interested in . The non-labor production costs. A large portion of this is energy problem is that the price of oil has skyrocketed (OPEC crisis) so energy is much more expensive. ALCOA is getting screwed because their price term is insufficiently taking into account the new price of energy. ALCOA wants a modification or reformation of the contract to better represent its intention which was to limit the variability of the price within 3 cents up and down. - B: what are the elements this court cares about to show that reformation for mutual mistake is required? - ELEMENTS OF o 1. mutual mistake of fact o 2. basic assumption of the contract o 3. goes to the intent of the parties. o 4. material/severe imbalance o 5. who bore the risk? - B: if ALCOA was losing $1000 would we be here? No. Court says severe imbalance in the expected profits. - Analyzing this case with regards to these elements o 1. Mutual Mistake of Fact: In this case, both parties knew what ALCOA was trying to do when setting the price and both thought that they were effectively limiting ALCOAs risk. Essex says that this was a prediction about the future rather than a mistake of fact. Court says they were mistaken about a present actuarial fact. Boardman does not believe this is a mutual mistake of fact even though the court found it was. Why would we allow people to get out of mutual mistake about present facts but not allow them in future predictions? B: someone must bear the risk about the future. However, she thinks there are some instances in which allowing mutual mistake of future predictions be enough for reformation. Essex did not care whether the index would under-represent the costs but were worried about over-representing the costs. They put a price ceiling in the contract. Essex did not go into the contract thinking that ALCOA was going to get screwed. However, that doesnt necessarily mean. Essex may admit that they wanted the long-term contract to go on, so they wanted the contract to be ok for ALCOA, however, they understood they were making a prediction and we put a ceiling in to cover our risk and if they didnt put in a floor, that is their mistake and not ours. Was this a mutual mistake?
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Yes. Essex and ALCOA were mistaken about whether it would be a good indicator of an appropriate price. No. It was a faulty predictive model in which ALCOA took the risk of major energy fluctuations. B: in between its discussion of mutual mistake, the court brings up foreseeability. Why would they bring this up? Answer: things that are completely unforeseen form the basic assumptions of the contract. If you look at the amount Essex is requiring, you would expect that they would be asking for morePerhaps o 2. Basic Assumption of the Contract: Court says this is not addressed. o 4. Severe Imbalance/Materiality: the court says there is clearly a severe imbalance. At the time of the problem, ALCOA is up $9,000,000. Their position must be that they should get 4 cents out of every unit whereas Essex would argue that you have to look at the life of the contract. For the life of the contract, ALCOA is doing okay. One thing ALCOA could say is that if they werent in this contract they would really be able to make a ton of money. The opportunity cost is very large. Is 4 years of loss enough for a severe inbalance? Materiality that without which you would not have entered into the contract. Materiality is not enough in this case. Even if ALCOA o 5. Who bore the risk?: Court says you can bear risk Ways to bear the risk 1. expressly assume the risk 2. customary dealings to assume risk 3. court can allocate the risk 4. parties enter into a state of conscious ignorance of the facts. (Boardman believes that this one is often not true. What is this courts reason for saying they did not bear the risk? They hired Alan Greenspan. The main purpose of the contract was not to hedge their bets about future aluminum prices. The point of the contract was to find a fair measure of the price of aluminum so that both can profit from its sale. If you believe that one party has to bear the risk, then ALCOA, however hard they try, will have had to bear the risk. This court comes up with a different theory that if both parties agree that that is not the point of the contract, the court will adjust it. p822 to complaints that the court is essentially writing the contract the court says yes, and we get to. The court also says this is just
dispute resolution about the price. Boardman thinks this is hogwash and they should have just stuck with their other reasons. Atlas Corporation v. United States - Atlas, representing many companies, are suing the US because they have to deal with radioactive materials when they were lured into the contract by the US government. The claimed mistake was that the clean-up costs were not foreseen and not incorporated into the contract. - 1. Mutual mistake: there was mutual mistake about what was required in order to perform the whole job. They didnt think there was radioactive waste that would have to be handled. Boardman: they had a belief about the tailings. It was that they were not radioactive or that they were not expensive to deal with. o Was this a basic assumption of the contract? Did you really assume something in the general realm of this fact. The profit margin was supposed to be high. Active vs. Passive assumptions It was a basic assumption that it would cost X to take care of tailings. This is probably an active assumption. The assumption that the tailings were not radioactive probably was passive because it never entered into their minds. o The purpose of the government. Cost + profit outcome. Why not make the argument just like ALCOA that the mutual mistake was cost + profit which is an active assumption. - 2. Basic assumption of the contract: ALCOA (mutual mistake) compared to ATLAS (not mutual mistake) - existing but unknowable fact o for ALCOA, this counts as a fact and there could be a mistake - or unknown but knowable o for ALCOA, this counts as a fact that could be mistaken - unknown existence of a fact; no concept of the fact (e.g. radioactive tailings) o for ATLAS, there could not be a mistake because the fact wasnt known - no belief about fact o for ATLAS, there could not be a mistake because the fact wasnt known Problem: ALCOA was about a future fact. To say that the price index is an existing fact may be a stretch. Problem: there is an existing fact in ATLAS (tailings are dangerous) but it was unknown. Scholars are disturbed by ATLAS because they think the court is playing a word game. B: ALCOA court says that in ALCOA they were unconscious of the risk that there would be wild swings and therefore were not taking on the risk. The court also says there was a way they were taking on a conscious risk but it was limited. The variation of 3 cents in either direction was the limit. B: in ATLAS, the court says that you have to have conscious ignorance that is different than ALCOA. If you are completely unconscious of it, then no one takes it on. If you are conscious of it but you dont deal with it then you dont get mutual
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mistake. ALCOA is saying did you deal with it. ATLAS is about were you conscious of it B: Considers ALCOA to be more defensibleALCOA is considered the tail end of how far a court may go. Concept of no risk versus i
MUTUAL MISTAKE - so what is the test? - Farnsworth said o Decisions on mistake are not marked by consistency - Boardmans Elements of Mutual Mistake o 1. Mistake must go to a basic assumption Pitfall usually comes down to what an assumption is. Boardman thinks this is the main problem in ALCOA. o 2. Must be a material affect (e.g. severe imbalance) 152(2) of the 2nd Restatement o 3. Risk is one that is not born by either of the parties IMPOSSIBILITY: Excuse for Nonperformance Taylor v. Caldwell - FACTS: P contracts to rent Ds music hall. Music hall burns down. Performing the contract found to be impossible so Ds have an excuse for not performing. - RULE: court adds the step that says nobody owes anything. - Original rule: You bind yourself to a duty and have to perform the duty no matter what. - Note: it would be strange for Caldwell to make this argument. - What if the musician dies? Would no one owe anyone anything? Howell v. Coupland - Is Coupland selling his potatoes or is he willing to sell others potatoes from some other person. What was Howell buying? One way performance is not impossible is that you can still get potatoes. Another way would be to give him more money. Are these the right outcome or should we decide it is impossible. - B: this shows that impossibility is clearly an excuse doctrine. - To support impossibility you would have to argue that by saying from my land you would be excluding being required to purchase potatoes from someone else to fulfill the contract. Court rules that this is what the parties intended. Perhaps this was the four corners test. The judge therefore probably ruled based on what the contract said rather than what the parties intended. - Today, the default rule would be you either perform or you pay me. Carroll v. Bowersock - FACTS: The defendant had a warehouse and the plaintiff was re-flooring it. Before the work could be completed, the warehouse burned down through neither partys fault. Plaintiff sues for recovery of work done. The trial ct. apparently grants this and defendant appeals.
If a contractor should engage to furnish all labor and material and build a house, and the house should burn before completion, the loss falls on him. If a contractor should engage to refloor two rooms of a house already in existence, and should complete one room before the house burned, he ought to be paid something. p838 o This is dealing with where the risk lies. Why is this said? Perhaps this is because a contractor may be because the P in the 2nd case already owns the house and is the one in primary control over it? o Insurance? It is easier to insure if you are building a whole house rather than reflooring. This goes to the implied proportion of risk Asking the insurance question is getting at who was bearing the risk. You have to have some insurable interest in what you are insuring Dont invest too much in the analysis of who actually purchased insurance. Court looks at the value of what the homeowner has before the fire by looking at what the floor layer has spent, ..etc. o The test is whether or not the work would have inured to his benefit as contemplated by the contract if the fire had not occurred. HYPO: you use a really expensive tool for creating the floor and it burns away. It is impossible to have this floor built. Even if you rebuilt the warehouse, it would be impossible to have this contract enforced. What if the court said that he had to perform? You could pay the contract price. o If we dont find impossibility, we arent going to say that you have to pay the full contract price. If it is restitution, it would be a damages calculation similar to this one. Often what the courts are doing here is creating a default rule similar to what contracting parties probably would come up with anyway. o B: Courts are actually just trying to figure out what the parties actually believe. This just happens to oftentimes be similar to what a default rule would look like. The default rule logic is probably not what decides the case. o
Seitz v. Mark-o-Lite Sign Contractors, Inc. - FACTS: Plaintiff is a contractor and defendant is a subcontractor. Plaintiff gets bid on a neon sign from defendant for $12,800 and thus incorporates it into his bid to restore a theatre. Plaintiff signs Ks with both defendant and theatre. Defendants expert sheet metal worker becomes incapacitated b/c of diabetes. Defendant tries to find someone else to do the job, but cant for less than $20k. Defendant returns deposit to plaintiff and says it cant do the job. Plaintiff ends up having to contract another sign-maker for $20k. He sues for the difference. Defendant asserts impossibility and points to a cause majeure clause in the K that excuses the defendant for fire, flood, strike, war, acts of God, and other events outside defendants control.
ANALYSIS o It is not objectively impossible for them to complete the K D could have written into the K that they did not bear this risk. D could have hired more than one sheet-metal worker. D could contract the work out to someone else. o Therefore, should they win on impossibility? Probably not. o HYPO: Does the K cover the company if Jorgensen dies from an Act of God ? Probably not, because the company can still perform(see above) o B: Does it matter if they are aware of the risk (diabetes) compared to unaware of the risk (Act of God)? Well, they would have more of a case for why they didnt contract away the risk o Efficiency argument Mark-o-Lite was the party that should have been monitoring the situation. Always try to make the argument about what the parties actually believed o Does the $7000 matter? Well, perhaps Jorgensen was the key to their ability to do this work much cheaper If you go down this road, the shift in risk may require analysis of what the cheaper prices actually means, etc. o Impossibility If the contract is performance for $13,000 then, without Jorgensen, this contract is impossible to do. However, the court doesnt look at it this way. o Who is bearing the risk? Here, whats Kd for is a sign for a certain price. The work can be done, just not by the defendants particular worker. Excuse is only when the work Kd for cant be done at all (ie. if you hire Tom Jones to sing at your party and he dies, they just cant send in Bon Jovi.) Can the work be delegated to another person and performance still be completed.
Canadian Industrial Alcohol Co. v. Dunbar - FACTS: The plaintiff Ks with the defendant for 1.5 million lbs. of molasses from a particular refinery (National). When National cuts back on production, defendant isnt able to deliver all he promised. Plaintiff sues for breach. Defendant says that given the term requiring the molasses come from National, and that theyre not producing, then impossibility prevents him from performing. - Is performance impossible? o Dunbar is just a middle man. If it has to come from National, it is impossible today. It was not impossible when they entered into the contract.
o Timing is part of the answer. However, it was possible at the time of the contract to redo the floors in the previous case, but it was still impossible after the fire. Test o p846. The inquiry is merely this, whether the continuance of a special group of circumstances appears from the terms of the contract, interpreted in the setting of the occasion, to have been a tacit or implied presupposition in the minds of the contracting parties, conditioning their belief in a continued obligation. o Performance is still possible from other refineries. o In the event the condition fails, there is no contract at all. It is difficult to think that in Mark-o-Lite, if Jorgensen gets sick, we no longer have a contract. Similarly, it is difficult to think that if a refinery starts producing less, a companys contract with a middle man is no longer valid.
2/22/05 - closing in on all the excuse doctrines. Questions that we will ask: 1. Is performance impossible? 2. Was there a specific item required? 3. Fault? 4. Was the risk allocated to any particular party? a. If the party trying to get out of the K bore the risk but is arguing impossibility, this probably wont work. b. If the party trying to get the K enforced, this might work. c. If the buyer bears the risk, seller shouldnt have to argue impossibility because it is just a general breach of contract questionDefense of Impossibility is redundant. - If risk is expressly stated in the contract, you probably are not in court. - Court cases are about who is bearing the risk. - Who is bearing the risk? o Is it the party seeking redress? If so, they are out of luck. - Foreseeability is not a good test for this o Courts are all over the map on foreseeability. ***IMPOSSIBILITY IS A DEFENSE*** (I) impossibility found (NI) no impossibility found - Taylor (I) o 1. yes o 2. yes o 3. no o 4. not allocated - Howell (I)
o 1. if specific potatoes were required, yes. If you argue he should have gotten the potatoes from another source, then no. o 2. thats the question. Yes. o 3. no o 4. risk was allocated to the buyer? Probably. He said that he would buy potatoes that came from the specific farm. Given the way the K is written, the court probably would find the risk on the buyer. risk? Destruction of potatoes by Blight. It looks like it has been allocated Carroll (I) o 1. yes o 2. yes o 3. no o 4. not allocated. Seitz (NI) o 1. no o 2. no Jorgensen was a specific person but this was not part of the K o 3. yes o 4. yes, employer has the risk. Dunbar (NI) o 1. no (yes at a particular time) o 2. yes o 3. yes o 4. yes, the whole purpose of the middle man relationship was to shift the risk.
Impossibility can be stronger than impracticability. Impossibility is harder to prove but you shouldnt get away from it entirely. Impossibility and Commercial Impracticability: Modern Excuse Doctrine Transatlantic Financing Corp. v. United States - FACTS: Plaintiff shipper was contracted by defendant U.S. to carry a cargo of wheat from Texas to Iran. K was executed after Suez Canal had been nationalized by Egypt. When the plaintiffs ship was to cross canal, it couldnt b/c Egypt had obstructed it as a consequence of its war with Israel. Plaintiff called defendant and asked for authorization and more money to go around Cape of Good Hope. Defendant said K didnt state how plaintiffs ship was top get to Iran, only that it would. District ct. found for defendant. - ANALYSIS: Is it commercially impracticable to deliver the goods through the Suez Canal? If it is impossible, it is definitely impracticable! It is impossible to go around the Cape of Good Hope? No, but court does find it commercially impracticable. - RULE: o Courts Test: 1. Is there an unexpected contingency
2. Risk allocated 3. Is it commercially impracticable? (this is obviously circular and therefore a bad test) o Better Test for Commercial Impracticability (according to Boardman and classmate) 1. Unexpected contingency B: Does not think we have an unexpected contingency. 2. Risk allocation (customs and usage of trade) 3. Severity of the change If the contract had set a very specific date and had a schedule of damages for delay, and then this happens so they are much delayed, do they have to pay? o This is less a question of commercial impracticability, it may be impossible to deliver on time. We may have to consider who bore the risk and you may come down differently than you do with the current facts. Why wouldnt transatlantic argue a mutual mistake? They are wrong about something that has to happen in the future. Therefore, mistake probably is not an option.
Eastern Air Lines v. Gulf Oil Corp. - FACTS: same as last semester. Delivery of fuel made impracticable because of the OPEC oil embargo. - ANALYSIS: UCC 2-615 primary reason they lose is that the crisis was foreseeable. o (a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic UCC 2-615 o Summary: if A and B assume that Event E will not occur for the purposes of K, B does not breach his duty for sale if performance is made impracticable because Event E occurs. - ***UNDERSTAND UCC 2-615*** - Is this a contract we should enforce? o Legally, we want to conclude this is a contract that should be enforced, regardless of impracticability. - What about the test? o 1. Unexpected contingency? Arguably. o 2. Was the risk allocated? Not sure. o 3. Severe shift in value? Probably not. - Judge asks for specific performance - FINAL QUESTION: If Gulf had gone from expecting a 10% profit to expecting a 50% loss on the contract. What if Eastern says, 100% of this contract means nothing to you. Youre Gulf, and you are huge.
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Review of Commercial Impracticability - Two tests o 1. Transatlantic (suez canal) Test from this court: p850 1. Unexpected Contingency foreseeability weaves itself into the element of contingency. 2. Risk of contingency must be something that is not allocated between the parties by agreement or by custom. o Court further states whether the risk was a condition of the contract (p851). Court connects contingency with whether there is a condition on which the contract is based. If the condition is not met, there is no agreement. o i.e. is performance conditioned on the risk NOT materializing. (e.g. was it a condition of performance that the Suez Canal remain open Court concludes No) 3. Is it Commercially Impracticable discussion of whether it will be hard to go ahead. Court adds whether there is a very large gap between what was expected and what we have now. How much do you have to lose before you have a large gap? Who knows. Courts will focus on what you expected to make and what you did make. They dont focus as much on what one person will make compared to the other party. o 2. Eastern Airlines (Section 2-615) Test from this court: B: 2-615 language here is not the whole test. Bs recommendation 1. Is there a failure of a presupposed condition which was an underlying assumption of the contract? 2. Was failure unforeseeable? p846 3. Was the risk not specifically allocated to either of the two parties? 4. Do we have a huge variance between what the parties expected and what we have now? ALCOA - Alan Greenspan comes in to set price and it doesnt account for all the costs. A decent percentage of courts would not have found - It should be a mistake about something at the time of contract formation and this is a mistake about a future event. - Mutual mistake at or before the time of contract - Commercial Impracticability and Impossibility after the time of the contract. - DONT TAKE AWAY
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o p860 in Henry v. Crell, there is a way that frustration grew out of the concept of impossibility. B: thinks the court here made an error. This is not a mistake. It is a prediction about the future that turns out to be incorrect. court finds mutual mistake what about impossibility? No. Maybe impracticable. If we were to look at the Transatlantic test, what would we find? o 1. Unexpected contingency it would meet that test in that the figures they had to perform, they did not expect a deviation of that size. They believed in price changes but not that big. o 2. Allocation of risk court says risk was not allocated. o 3. Is it commercially impracticable? Loss was $60 million. They were expecting profit. This is a very big deviation. B: Is this a good case for frustration? Are they frustrated in their purpose? Their main purpose was to gain profit and now Im not. Bs favorite test for impracticability = 2nd Restatement Section 261 If ALCOA is a good case for mistake, the mistake must be the price formulation they had at the time the contract was created. One problem with conflating, The thing that you are mistaken about may be different Mistake o Commercial Impracticability Impossibility Supervening impracticability -
Krell v. Henry - FACTS: one of the first coronation cases. Defendant rented rooms from plaintiffs home on Pall Mall on June 26 and 27 for the specific purpose of seeing a coronation procession that would pass in front of it then. The king became very ill, however, and the procession cancelled. Plaintiff sues for the 50 balance on the debt and defendant counterclaims for the 25 already paid. Trial ct. held for defendant. Plaintiff appeals. - ANALYSIS o 1. is there a mistake? Not at the time o 2. is it impossible? Its impossible for him to see the king. It is not impossible for him to rent the flat. o 3. commercial impracticable? This guy would be out another 75 lbs. o The only real argument here is frustration of purpose. What is the purpose of the contract? To rent a place where he can see the coronation from? o Was the performance of the contract prevented? This relies heavily on Taylor v. Caldwell, which is not a frustrated purpose case This question might not be very useful in the context of this case
o Does it matter if either of the parties is at fault? For example, what if one of the parties is the agent of the frustration. o Where else can p872 whether the test could be guarded against test seems to be whether the event which causes the impossibility might have been anticipated and guarded against foreseeability, assumption of risk, and fault. There is no statement in here that specifically says that if you create the frustration (e.g. causing the kings appendicitis, some how) that the test fails, but it definitely does. o Courts have never been able to figure out whose purpose has to be frustrated. All contracts have some purposes that are common, some that are cross, and some that are completely separate. Therefore, it is possible for one parties side to be frustrated and not the others. Lloyd v. Murphy - FACTS: Murphy leases land to sell cars in LA. They sometimes sell used cars and gasoline. Government passes a law restricting the ability to sell new cars. Lloyd says not only can you sublet, but if you cant make the payments well talk about lowering the rent. FRUSTRATION was not found in this case. - Stipulation that the purpose was to sell new cars, was that the seller. If the government had completely banned selling new cars, this case would be even stronger. The price of the lease would have to be tied to the fact that this guy will be selling cars. - Why not find frustration? Clamp down on new cars was probably foreseeable. Perhaps you could see this coming (MISSING CLASS NOTES) Anticipatory repudiation - repudiation can turn into absolute breach - repudiation can also turn into anticipatory breach o if the other party accepts the other parties anticipatory repudiation, you cut off that parties ability for retraction and therefore it turns into anticipatory breach. - HYPO: if you anticipatorily repudiate and then Anticipatory breach - anticipatory breach vs. absolute breach Truman L. Flatt & Sons Co., Inc. v. Sara Lee Schupf - FACTS: original K was for land for an asphalt plant. How does the closing work? They are supposed to close the deal on or before June 20th or before the rezoning, whichever comes first. What is the potential repudiation? P goes to a meeting and finds out that the reasoning isnt being well taken and they decide to withdraw the request. Why would they withdraw the request? They psychologically cant handle the blow? They said they had zero chance of
success. So what part of that is repudiation? They think it is impossible to get the rezoning but they still want the land. The letter is the potential repudiation. What is it about the letter that suggests repudiation? It seems like a counteroffer or a new offer. This is a little strange given that you already have a contract. Would a counteroffer be a repudiation? For anticipatory repudiation, does it matter if the repudiation is ambiguous? Yes. Saying, I know we have a deal but I would like to pay less, thats probably not repudiation. Repudiation would be more like Accept less, or we wont buy. The laws position is that if you tell another party that you will not perform unless the other party does something they dont have to do, that is repudiation. If you are just asking to renegotiate, that probably is not repudiation. Was the sale of the land was contingent on the zoning going through? Since the contract allowed them to get out if there was no rezoning, its not clear how this could be repudiation. For it to be repudiation, they would have to be refusing something in the contract that they are compelled to do.
A lot of the problems in cases is just determining whether or not there is repudiation. Cosden Oil & Chemical Co. v. Karl O. Helm Aktiengesellschaft - FACTS: - If they had said, were having some problems, well probably be late, and it is pretty likely we wont get everything done. Is this repudiation? Repudiation is an intentional act. You have to choose not to perform. Therefore, a good faith effort actually is evidence that repudiation has not taken place (this is obviously different than breach). They cancel contracts 5 through 7. What is this? This is definitely showing they cant fulfill the Ks. This is anticipatory repudiation. Is it anything to 4. - You cannot make Ks contingent on each other. You cant say, I know I owe you $24,000 on K1 but I wont pay until you start performing on K5. This doesnt work. - Always have at least two scenarios about who is repudiating. - Language in UCC is conflicting. - 4,5, & 6 Ks. We treat them separately. There is anticipatory repudiation for 5,6,7 well before performance is required. There is a rising market, but we only knew that after the fact. (note: there are lots of situations in which it is not clear they have repudiated and it may be in your interest to get them to cover or remove their repudiation.) Cosden wants damages to be what Helm would have to pay at the moment of repudiation. This is because the market continues to rise. - UCC - a reasonable period of time after you learn of the breach (more than repudiation). What you will need here is certainty that what you have is repudiation. This is probably why it definitely makes sense for 5-7. - Another option is to wait until the date of performance. - Repudiate you can retract a repudiation as long as the other party has not made it clear that it considers the repudiation final. - Cover vs. Remediation vs. Retraction o Preparing a reasonable time
o One size fits all scenario that might not make sense. When to calculate damages? o 1. A reasonable time after learning of the breach o 2. At the time you learn of the breach o 3. At the time of expected performance UCC 2-610 this allows you to choose your response to repudiation. It does allow you to wait a commercially reasonable time before performance. (this does not support 2if you have to cover at the time you learn of the breach, you do not have a reasonable time to think after repudiation; however, you could argue that 610 just talks about repudiation and #2 says breach and that there should be some amount of time between repudiation and breach). You can suspend your own performance. Does this create any problems? Well, this could present a problem for 2. If you do cover, at a time that is reasonable, chances are we will just provide the damages of the contract price and what you got by covering. UCC 2-708 sellers damages UCC 2-713 buyers damages o Conflates damages for non-delivery or rejection OR repudiation. the measure for damages is the difference between the market price when the buyer UCC 2-723 o This is how you calculate if the party has repudiated and youve gotten to court prior to the time of performance. That means that the damage calculation in 713 is only for when you get to court after the expected time of performance is passed. B: it is slightly incoherent to have different rules based on how quickly courts work in your jurisdiction. Once you sue, 610a and 611 are no longer relevant because there is no more option for retraction Modern courts will give you a broader perspective on breach and will give you a reasonable period after the breach.
Roye Realty & Developing, Inc. v. Arkla, Inc. - FACTS: provides half the gas provided by certain wells to Arkla. How much gas you take out tomorrow depends on what you take out today. Part of the amount required means they have to keep the well producing gas. The other option is that they dont take any gas but they pay a set amount of money as deficiency payments. The deficiency payments are based on the same test. Why would you ever pay and get something rather than pay and not take anything? Why bother having this in the case law? Arkla doesnt take and pay nor do they pay. Is that breach? Eventually, it would be breach. Since we are in anticipatory repudiation section of the book, we know this isnt quite breach. They have repudiated. How are we going to calculate damages? o 1. Difference b/w K price & market price of the gas at time of repudiation.
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Potential problem: the wells end up going dry. Therefore, if you charge damages based at repudiation, rather than as the K would go on naturally into the future, it would be a higher damage measure. o 2. Calculate damages based on the amount of the deficiency payments. Given that that amount is based on deliverability, you could Generally, there are good arguments for why you would want to calculate the deliverability down the road. We dont want to punish you for taking mitigation steps that make it more difficult to perform later. However, that is not the case here. The wells have just run dry. Generally, (MAJORITY) its calculated at repudiation even though there is this problem. Damages for anticipatory repudiation are more difficult than other damages because you get into the depths of the UCC. Some of the language is conflicting and some is misleading. B: were not looking to see if the seller attempted to sell to another party. What we care about is how damages will be calculated. Since we have a take and pay, we dont care What clause is being breached? o The second one, because they passed on the first alternative leaving them with the second alternative. o What is the courts aim in awarding damages? They want Roye to be where they would have been under the contract. Under an alternative contract, which alternative do you use to choose damages? In this case, the court picks the lower of the two values. It wants them no better off than the least good position. What does Corbin say? It matters when you repudiate. If as the person breaching you simply dont perform and you dont say anything, you have elected yourself out of which one the damaged party pushes on you. How do you find the least of the two alternatives? If you have two alternatives and you would choose the second one, our liquidated hackles go upIt is the general rule that if you have two alternatives, you choose the least valuable of the two damages situations. If the second alternative is just one for money, then this is not the case. Liquidated damages clauses can be tricky. In some ways its easy. However, a lot of courts are suspicious of choosing damage measures in advance. They have to at least come close to what the court would have come to himself.
RIGHT TO DEMAND ASSURANCES - if we didnt have anticipatory repudiation we would not have the right to demand assurances.
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Under common law, your assurances were your own problem. You could ask them to reassure you but that discussion would not have legal ramifications in the sense that they had committed to a higher level of the contract. Right to seek assurances o UCC 2-609 o 2nd Restatement Section 251 2nd Restatement has suggestions that are more than restatements. 251 is a suggestion not a restatement. It is something that is slowly being adopted but not all states are going to adopt it. Right to seek assurances can sometimes happen outside the sale of goods.
National Farmers Organization v. Bartlett & Co., Grain - Facts: NFO (seller) sells grain to Bartlett (buyer). They had about 14 Ks and NFO was failing to deliver. Bartlett withheld payment until they caught up. NFO delays and provides partial delivery and says if they get no money they wont deliver. - ANALYSIS: even if you are really late you havent repudiated or breached until it substantially harms the other party. Court concluded that time was not of the essence. - UCC Section 2-609 o When can you rely on an assurance? o HYPO: I ask you for assurance and you give it to me. After that time they say actually we cant do it. I can probably seek assurances again from you. o If I think it is impossible for you to perform, you dont have to agree with me that youve repudiated. I can just say you have repudiated. o A contract imposes that the exp o Seeking assurances is NOT a new condition so it is not repudiation. o Even if you dont have reasonable grounds you can seek assurances. In writing, blah blah blah. This demand is often ignored by courts. Niagara v. Norcon - FACTS: period one in K there is fixed price. In period 2 the formula is based on the cost avoided from buying from Norcon. There is a floor and a ceiling. The purpose of period two is simply to make the amount owed during that stable during that period. They pay the fixed price in period 1. In period 2, Niagara Mohawk pays the floor of the cost avoided. (they are paying more than in the end they will owe). In period three, Norcon will owe money $610 million. This is the way they have calculated it out. This fact makes Niagara nervous (e.g. will Norcon be able to pay it back.) This is a 25 year contract and there is a way in which they are loaning millions of dollars interest free. That belief is not adequate reason to seek assurance. However, being afraid they wont be able to pay it back could be adequate assurance. - ANALYSIS: What has Norcon done to make them insecure? Nothing. Is this a reasonable ground for seeking assurances? The K has simply been executed exactly. The financial stability could make you nervous. What if it is the same as when they first came into the contract. It is probable that Niagara misjudged how
the contract would pan out. B: Niagara probably has no grounds for seeking assurance. 3/22/05 What is the law for seeking assurances? - traditional common law, you cantyou just follow rules of anticipatory repudiation. o Exception: If you were moving into solvency, you could seek assurances - UCC context o Court in Niagara o Are they insecure? o Did they have reasonable grounds for being insecure? - Up to Norcon, you did not have to respond. However, in Norcon, the court changed the law allowing people to seek assurances outside a UCC (sale of goods) context. - Part of what the court is saying is it so happens that electricity does not count as a good. Other sources of electricity do count as goods under the UCC but electricity does not. The court is saying that in this context it doesnt make sense to treat it differently than what is generally covered by the UCC. It applies the UCC by analogy. o Therefore, even though this is a services contract. - What about the grounds for Niagaras insecurity (for the purposes of having a right to seek assurances)? o Court is silent on this point of law. There is a lot of suggestion of the law in the opinion. However, you could conclude both ways. o Most courts would say that they did not have sufficient grounds because the contract has not changed, nothing is wrong, the contract just worked out in a way that was disadvantageous to Niagara. - Why isnt Norcon adjusting the contract? Most likely because they are making Wrap up of assurances - traditional common law does not allow you to demand assurances. - A number of jurisdictions still abide by this. Therefore, you would have to argue UCC by analogy. - Even in jurisdictions where you dont have the right to seek assurances, but you do anyway and your contracting partner responds poorly (misleading answer) o If you try to seek just regular repudiation this stuff works in your favor. o Therefore, you should consider seeking assurances regardless of jurisdiction. - Both cases go through what courts want to know regarding assurances: o Use framework from 2-609 This section IS NOT the right to seek assurances. You are getting the right to seek assurances and treat the failure as anticipatory repudiation.
ELEMENTS OF 2-609 A: reasonable grounds for insecurity and you must be insecure o Both are questions of fact o This can come from outside the K itself. (e.g. feeling insecure about K2 because of K1) o You must begin the anticipatory repudiation They can retract and whether repudiation becomes breach, and whether we should award damages. B: demand for assurances is made [in writing] many courts waive this requirement or take it to mean substance over form (long conversation with the right person and the other party is not claiming they didnt get the message) C: If commercially reasonable, you can SUSPEND YOUR PERFORMANCE, until you get assurances. o Note: you cannot suspend until you get the performance you want. You can suspend until you receive the assurance. o You can suspend your performance right away as long as it is commercially reasonable. nd 2 Restatement 251 is more of the authors hope rather than something endorsed by a lot of courts. What happens if they make an assurance that turned out to be false (good faith and bad faith)? o This will probably relieve you of your duty to mitigate in the meantime. o
DAMAGES/REMEDIES - opening thoughts o This is the section of the course most replete for law and economics based analysis. o We have talked about quantity to determine size of breach, but now we can . - Keep one thing in mind: o Legal understanding of damages: Courts start from the following position: damages are not punishment. When you make a promise under contract you make a binary promise. Your promise is to either perform or to pay. In the eyes of the law these two outcomes are theoretically equal. What is more, in the eyes of the law we dont necessarily prefer performance to breaching and paying. That does not mean that we as individuals cant believe these promises hold moral weight, etc. Courts are looking for efficient breach
If I am better off if I breach and you are better off if I breach then the world is better off if I breach. There is actually a discussion in the essay about good faith breaching. Good-faith vs. bad-faith breaching still matters. You cannot ask for punishment money for breaching the contract. The party that is losing in the contract should be indifferent between performing and paying damages, however this is never the case. Damages will never include all the small costs included. There are always side things that cant be measured or are not measured. Additionally, America has the rule that you pay your own litigation costs. Therefore, at a minimum you get damages minus what you had to pay to defend your case in court. There is always subjective value where what you really want is performance not the money.
American Standard, Inc. v. Schectman - FACTS: schectman promised to remove equipment from his land (including railtracks). By removing the equipment he got to keep it. However, he was supposed to clean it out for resale. He did not do this. How much is the grading left to be done worth to American Standard? $90,000. It would take that much money to complete the contract. What is another way of calculating the cost of grating? Difference between market price had grading been completed and the value of the land as is. $3000. Which of these damages is appropriate given that the K was to clear the land? o Court says that it would be $90,000. o What would be economically wasteful about this? It is wasteful to perform $90,000 worth of work to get $3,000 worth of value. Is that what has to happen? Just handing over the $90,000 does not require the wasteful act to take place. American Standard could just take the $90,000 and run. - What is AS contracting for? Are they contracting for graded land or the value of graded land? o Was the outcome of the case appropriate? Was one of the parties acting in bad faith? Schectman just stopped performance in the middle without any reason. Their claim is not that something has changed. This is the concept - If you object to the mistake, then dont take the work. - If I set up a contract TO MY FOLLY and you agree to it, you cant later breach and use the economicly wasteful argument. o If I contract to have a big squirrel monument put on my lawn and that would decrease the value of my land, the contractor cant just breach and say there are no damages.
HYPO: o There are other types of pipe, equally good, that would not change the house. When they put the wrong pipes in his house they sue for cost of replacement. To him, what he wants is a house w/ Redding pipe. Cost of doing this: high (cut down walls, etc.) o Seeking specific performance. This looks like economic waste. o Would it matter whether the person wanting the pipe was Mr. J.R. Redding. If you can prove that it is central to the K or not incidental to the K then the court might, then we might have weight that the economic waste argument should not be applied.
PEEVYHOUSE v. GARLAND COAL & MINING CO. - FACTS: We have private owners of the land. They have profit sharing. There are rules in the contract that they put it ba - What has Peevyhouse lost when the grand is not graded? Esthetics o They might think it wont look as nice. - Peevyhouse did not have a huge tract of land. They lost some use: o Cost of completion: cost of filling up the holes, etc. o Other way: difference between present value of the farm and the difference if performance were done. o Jury splits the baby and Peevyhouse makes the mistake of appealing. - Lets say value of house is <$5000 - What is the appropriate calculation? o Seems like the $300 is appropriate. However, they refused o $25,000 seems like a windfall to the people who own the farm. - What did the Peevys contract for? Purpose was to recover the coal that was in the ground. Without remediation, there would not have been a contract. Therefore, remediation was central to the contract. o Good faith vs. bad faith. There is potentially an argument that the coal company thought they could get away with doing this. Garland was going around, including the remediating clauses in their contracts where necessary, and then just not doing it because of economic waste. If you were the judge, what would you award? Why not specific performance? You only get this in rare circumstances. - This court takes a different approach than the last case. DAMAGES/REMEDIES - if you begin work on a construction project, the cost of completion of doing the work is the appropriate conception of expectation damages. This would be the starting, default rule. What the Redding Pipe case says is that there are times where
the cost of completion looks wildly inefficient and is therefore inappropriate. Removing all of the infrastructure needed. No court is actually going to say that you have to do the wasteful activity. On the other hand, as discussed, if the default rule were cost of completion we could expect some economic waste because it would interfere with efficient breach. In SChectman, there was a decrease in value of the land of about $3000 and cost of completion would be about $90,000. This court admits that default rule is Cost of completion. They add that attempting to complete in good faith is part of the test and asking whether completion would be economically wasteful and looking to see if there is a gross disparity in the values. Finally, the court asks whether the harm is trivial. The court is not putting much value on someone wanting Redding pipe. Peevyhouse goes through the same test. Here the court looks solely at money. Peevyhouse court asks whether giving cost of completion would give a windfall to the plaintiff? Boardman: does not think Peevyhouse would have been a windfall. And in Schectman, where the person is going to turn around and sell it, Boardman thinks the default should be decrease in value. E.g. what is the damage remedy in construction realm? Cost of completion. Boardman thinks the default rule for reselling of property should be decrease in market value. Were they a developer?
Sedmak v. Charlies Chevrolet, Inc. - asdf - Should Sedmak get specific performance? Erin Becker says yes. There might be some kind of time window that was affected. Lets say the Sedmaks get the cars and Sedmaks offer to sell the car to another aficionado and the next day breach and say they cant depart with the car. - Corvette Aficionados - Went to a dealer to try to get Specific Performance Klein v. Pepsico - FACTS: Klein wants to buy a jet. He goes back and forth w/ Pepsi about the sale of the jet. At the last minute, Pepsi pulls out. District court grants specific performance. Klein was going to turn around and sell it. What are the arguments for specific performance? They could have awarded damages. Why didnt they do this. Why does Klein want specific performance? He thinks it is unique. If this guy just buys jets and resells them, there is nothing real unique about these jets. Since the jet was just of monetary value to him, damages would be adequate. - You could also make the case that damages would be hard to calculate b/c he might have someone lined up for this particular jet on which he would make a big profit.
Why would a party seek specific performance? Especially when you are just planning on reselling it. Probably because Klein believes he will make a larger profit reselling than he will in expectation damages. - What are his claims for why specific performance is required? 1. Unique; not really though; 2. Unable to cover (he couldnt get any other jet of this type to buy)this is another uniqueness argument; however, the question is whether they were unable to cover in a way that would not be remedied if we provided expectation damages, the default rule. In this case, the answer is no. 3. unique expanded rare, hard to get; o We should read other circumstances in the proper circumstances as where expectation damages will not make the party whole. o No chance that Pepsi will go bankrupt. o No question of subjective value. o Perhaps hes the one guy who knows a guy willing to pay a lot more for it. - Classically you could get specific performance for unique things like: o Land o Art o Antiques - Part of the reason for this is that the expectation damages are very subjective and can be very difficult to measure. - Courts have been expanding their understanding of unique and being more willing to give specific performance. - In most states, only the judge can grant specific performance. The jury does not decide this in most states. o Courts fear making subjective decisions which is part of the reason they sometimes like specific performance. o Specific performance - is like injunctive relief meaning it is equitable. Money is not changing hands, you are requiring parties to do (or not do in the case of injunction) something. That gives the court a lot of discretion. There is not much value in appealing because these types of subjective discretion questions - You must come to the court with clean hands if you want an equitable relief. In Sedmak, court is determining whether Chevrolet is acting responsibly. The fact that Chevrolet is acting in bad faith, it plays into the courts decision. - The basic specific performance test is as follows: o Are expectation damages inadequate? One way they can be inadequate is if they are unique. If what you are doing is taking a unique object and flipping it, this is a much weaker argument. Main other way they will be inadequate is if they are uncertain. The courts guess as to expectations will be a stab in the dark. Courts prefer to under compensate than overcompensate.
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Money cant buy the substitute. Controlling shares of stock. How do you calculate damages for something like that? Same thing for patents. Land. You might still win on land if you can claim it is unique. However, us Damages cant be collected because the other party is solvent. B: does this make sense? Specific performance for service requests almost never happens. You cant require someone to go in and sing.
Expectation damages are the default It is a small subset in which you get specific performance. The real fight is usually between expectation damages, reliance damages and restitution. What we want to know, given that expectation damages are the default, when will court ever grant reliance damages over expectation damages, and when would P or D request reliance damages over expectation damages. Expectation damages put you into the position you would have been in if the contract had been completed. Reliance damages, you usually only get back to the starting point. If you are getting into the K to make a profit, then expectation damages will almost always be greater than reliance damages. The legal rule is that you cant get more than the expectation damages. Legal maximum = value of expectation damages D prefers reliance damages b/c they are less. If expectation damages were always > reliance damages, it would be hard to know why P is interested in having expectation damages. o P wants it when expectation damages < reliance damages. o P will do this when they think they will get less from the court for expectation damages than they think. If expectation damages are very unclear, P may just want reliance to make sure they get something.
Sullivan v. OConnor - FACTS: asdf - She gets a bum nose job. What are damages? o N0 initial nose o N1 new nose o Ne expected nose o OPTION 1: Expectation damages: Ne-N1 o OPTION 2: Reliance damages: N0-N1 o OPTION 3: let her have an operation to go back to N0 - Note: you very rarely get pain and suffering. She gets it here and this is unusual.
If we put you into the expectation realm o She expected to pay for the first thing and she expected to have some additional pain and suffering. o Value of the new nose was negative. What should we give her? o Reliance. Expectation damages would be too difficult. o Even though reliance is undercompensating her, we would have absolutely no idea what to give her for expectation damages. o She got some pain and suffering damages which is pretty unusual. Opinion basically says that there shouldnt be expectation damages. However, the court is being pretty sympathetic to her in the way the opinion is written. MOST OF THE TIME PEOPLE ARE UNDERCOMPENSATED because they use reliance damages. Courts prefer to err on the side of under compensating. They dont like to have a subjective decision for what the value should be. We are aiming for a result that could be repeatable and replicable by other courts. Reliance damages are repeatable and replicable. TAKEAWAY: it is difficult and sometimes inappropriate to allocate expectation damages when you dont know what they should be. (e.g. you just cant put a dollar value on the outcome) MARKET VALUE: we can come up with the market value of the item by seeing how much people will pay for it. However, for an actress the value of a good or bad nose is completely different than the cost. The true value of the contract was subjective value of the individual. In these situations, courts will say that they dont know how to calculate it. There are cases, like Sullivan, where if we are unsure about expectation damages we may also be unsure about the reliance damages. o There are things that go into reliance that we really can calculate. ANALYSIS: difficult to assess dollar value of plastic surgery.
Kizas v. Webster (FBI case) - FACTS: Theory B is reliance damages. Theory A is expectation damages. When you want B, you dont make it their second argument. Therefore, why do they make the expectation argument (A) first? o Theory A. expectation damages would be tied towards the salary of an FBI agent. You could probably do this in some way. If you want reliance damages, you might be trying to show that expectation damages are really difficult to calculate, etc. Your real reason would be if reliance damages are more (this isnt usually the case). o Reliance damages are not supposed to be awarded above expectation damages. o THEORY B: lost job opportunities. Travel to place of employment. FBI says the value of your expectation claim is zero because it is an at-will contract where they can fire you at any time. Therefore, since reliance damage cannot exceed expectation damages, FBI argues they cant recover anything. o DAMAGE CALCULATION
Are you more or less likely to get damages if P is a class of people? NOTE: FBI is correct in arguing that you cannot give reliance damages in excess of expectation damages. o Expectation damages being unknowable is not the same as expectation damages being zero.
THREE DAMAGE MEASURES - Expectation - Reliance - Specific Performance. - NOTE: these all are considered contract remedies. - Restitution is a damages option that is off contract. It is not in reference to a contract. This doesnt mean that it never references the contract or that the contract is not involved in the analysis. However, the starting principle is that restitution is a remedy not a damage measure. RESTITUTION - Think of reliance as putting P in the state he would be in if they had never entered the K. What they have lost and gained equal zero. - Expectation is about giving them the benefit of the bargain. - Restitution is about equaling out the parties for the party that has benefited which may or may not be the breacher. o Restitution focuses on the party that has benefited. o What we want to do is say like unjust enrichment (quantum meruit), we want to take away from the party that has benefited and give back to person who was not enriched. o Restitution can be given to P, D, etc. UNITED STATES v. ZARA CONTRACTING CO. - FACTS: Ps are Susi Contracting Co. and Dagostino & Cuccio. Ps subcontract with another company to do work on an airport for the United States government. Who is the primary contractor? Zara Contracting Co. Who breaches? Zara breaches getting fed up with the nonperformance of the subcontractor and take over to do it themselves. They rent Susis equipment. You could argue that Susi was the breacher because they werent getting the work done on time. Susi happens to be the non-breacher. - DAMAGES o What would the expectation damages be here? Has Susi been paid the contract price? Yes. By the time Susi sues, if you take the contract rate times the amount of work they did, they got paid. Even if they hadnt already been paid, the most expectation damages they could have received would be based on the K itself. o K Remedy: They expect a certain price and they expected to expend a certain amount of money. The K told them explicitly that if they had to expend more than their contract price, then too bad. Per the K, the most they could get for expectation or reliance is the K price.
o So why sue in restitution? Because they can potentially get the increased costs of the clay and the fair rental use of their equipment. Are there any grounds for denying them the fair rental of their equipment? Because restitution is off contract, it can be combined with remedies from other contracts. You can ask for expectation damages and restitution. They could sue in expectation damages for the K price and they could sue in restitution for the fair rental use. Increase costs due to the clay? Should we give them these costs in restitution? Hesitation would be the clause from the K. In this jurisdiction, this is allowed even though Boardman says it is sketchy. ANALYSIS: no court is going to let you intentionally breach, go off contract, and then get more than you would otherwise be entitled to. In this case, the court finds that Zara breaches which is why it allows Susi to get away with this.
4/5/05 - MORE POINTS ON ZARA - Three theories of restitution in Zara (p1009) o 1st Theory: excavating was extra work not covered by the K figures and therefore separately compensable. Susi argues that they had to do extra work that was not covered by the K figures. Should they have extra compensation? o 2nd Theory: subcontract made the provisions of the main K applicable to its subparties (e.g. main K b/w US & Zara should prevail). The US paid Zara b/c there was nothing in their K saying that the US would not pay for extra compensation. Is Zara getting unjustly enriched? If Zara is unjustly enriched, is there a restitution claim for Susi? This would require that Zara be unjustly enriched at the expense of the other person. In restitution, the goal is to bring the party that has been enriched back to level zero. To the extent that you may have money that a court might provide to me, there is a sense in which you have it at my expense. That cant be all that we mean by what we are looking for for the purposes of restitution. Lets accept that there is unjust enrichment for the work being done. Would you require Zara to give Susi money regardless of whether the US paid Zara? This can be integral to deciding if there is a restitution claim. - Ask two questions when looking at restitution that differ from other damage remedies o 1. Who is the breacher? Calculation for restitution changes based on this The party who has breached has created the calculation difficulties. Therefore, at the margin we will calculate against that person. Person causing breach is person causing difficulty. Therefore,
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If you breach as the plaintiff, we will ordinarily give you the less of the two (usually cost of conferring the benefit or cost on open market) Pretend that Susi is the breacher. If we allow Susi to breach and then sue for the larger of the two restitution calculations, this would create bad incentives. You are supposed to breach if it is efficient not if you are gaming the system. Default rule: you can recover as P even if you are the breacher, in part performance, for the value of your part performance but only up to the value conferred. Assumes benefit conferred will be less than the cost put in in situations of part performance. Default rule: you can recover as P when you are not the breacher NOTE: if there is something about this timeline that allows the breaching P to get more from the benefit conferred, the court will flip it. As D breacher, you might go below zero. o 2. How do we calculate restitution? Four ways to calculate enrichment 1. What is the value of the benefit to the D? What is the value in the way in which they have been enriched? 2. What is the value of the benefit to an objective third party? Its market value to a third party? 3. What is the cost of having conferred the benefit? 4. What would the cost of procuring this work from someone similar to P on the open market be? RESTITUTION is also different from other damage remedies because it can be added to expectation and reliance damages. Common law right to breach and pay.
Britton v. Turner - FACTS: P and D enter into a K where P would do a years worth of work. P breaches (stops working) and D is the boss. What was he to be paid under the K? $120. He was supposed to get it at the end of the K. There is a sense he is getting $10 a month during that time. He is also getting some other benefits (ability to stay on the land, etc.) What could D have sued for? The difference in labor costs over the next three months. Is D likely to sue? No. He has already gotten 9 months of labor for free. In this case, he is not the breacher, he is the injured party but he is not going to sue. The only chance for P to get to court is if he can sue. Therefore, this case stands for the idea that a breaching P can still sue. This didnt used to be the case. - ANALYSIS: o Is any money going to P on K or off K? On K, probably not. Off K, probably.
o Traditional old rule. o Bargaining power, etc. may also come into this. o DEPARTURE FROM PRIOR RULE THAT P COULD NOT SUE WHEN IT BREACHES. o Gives breacher right to sue. Summation on Restitution - When would a party seek restitution? o 1. When K is unenforceable or does not exist. (e.g. unenforceable under the statute of frauds). Therefore, restitution is way off contract o 2. You breach but the other party doesnt sue. If you are the breacher and you arent claiming that they are also breaching, you cant sue in damages because you are not the injured party. Damages are only available to the injured party. Most of the time youll argue that you didnt breach or that the other party tortiously interfered with your ability to perform. o 3. If harm to P is unknown but gain to D is really easy to measure. E.g. Tort example party improperly uses another companys trademark. The company that uses the trademark gains something (perhaps it is very easy to measure the increased sales). However, this is very difficult to identify how much D has suffered as a result. o 4. K ends by some form of mistake or impossibility. Carroll v. Bowersock Carroll builds the new floor of the warehouse. Court wants to know how much the floor was valued prior to the building burning down. Court was looking at this in a restitution way. 4/11/05 PUNITIVE DAMAGES Hibschman Pontiac, Inc. v. Batchelor - FACTS: - If dealer had simply refused to service the car, could Batchelor get punitive damages? Probably not. o They are trying to punish the dealership for being a bad dealership w/ poor customer service. o Punishment for broad application (public good) but Doesnt seem like they are going to take this - What is the default rule for punitive damages in K? Default rule is that punitive damages are not an option. Specific performance, expectation, reliance damages. Off-contract damages like restitution. Punitive damages are different.they are not considered appropriate. - Judge uses the mingle test mingled up in the K were elements of tort. Stringing a person along ups your chances of getting dealt punitive damages.
o HYPO: if they are doing this b/c they dont like Batchelor o punitive damages may be awarded in addition to compensatory damages whenever the elements of fraud, malice, gross negligence or oppression mingle in the controversy. Most individual claims in K are just individual claims. It is possible you would get more punitive damages in class actions. Malice question o How willful did we think this was? Rather than looking at cost to P, why not look at benefit to D? o They should internalize the costs. Benefits have nothing to do with this. First Blush test - this is an awful test b/c this is the point where you are least informed. MINORITY OPINION: you can still get punitive damages in K if the tort elements are mingled in the K breach.
Miller Brewing Co. v. Best Beers of Bloomington, Inc. - FACTS: - In Indiana, it is illegal to label one company as your primary dealer. However, if you start with multiple and rough up all but one, then - Are punitive damages appropriate here? o Not as much o Getting punitive damages b/w commercial entities is much more difficult than b/w an individual and a corporation. - This was not for a good business reason. Why are there no punitive damages? o The court says there has to be an independent tort. If P1 can prove a tort and P2 who has a tort and K. o As opposed to Contract/Tort mixture. - Commercial Entities - Public Interest argument works better for individuals than commercial entities. Drews Company, Inc. v. Ledwith-Wolfe Associates, Inc. - FACTS o Owner gets - 22k for rework and 14k for lost profits 22k is probably expectation 14k is probably expectation lost profits are almost always expectation o Contractor gets 18k payment for work This is probably expectation. It could be restitution if we wanted to go off K and 18k were more than the price of the original K. o The New Business Rule is going to the wayside. Now, instead of a complete bar it is an evidentiary rule that requires a good deal of evidence before you can get consequential damages.
Standard for lost profit: o What kind of evidence works? P1036 economic and financial data, etc. Yardstick measure of performance. Similar businesses owned by P himself. o Harder sell if you are switching your business interest. However, if you know what you are doing the court is more likely to award. Starbucks may get lost profits but a new Asian restaurant in Clarendon might not If we are uncertain about the amount, even though we might say that another business is really, really similar, if it is just too many moving parts the court might rule that the profits are too uncertain and not give you anything. RULE: DETERMINING WHETHER OR NOT YOU GET LOST PROFITS o 1. Profits must have been prevented or lost as a natural consequence of the breach of the K. o 2. Foreseeability lost profits that were a probable result of the K that o 3. Established w/ reasonable certainty (both existence and amount) actual facts could include market and industry knowledge, how other similar restaurants have done, etc. There are other ways in which uncertainty can limit damages o E.g. Nose job.
Hadley v. Baxendale - Just telling someone to hurry tells the other party that time matters and there may be damages. However, it doesnt tell the other party how much time matters and therefore, there is no way to judge the amount and no opportunity for the other party to hedge this risk by increasing the price of the K. - Part of foreseeability is that you must explain the special circumstance to the other party. However, this is not enough. They also have to take on the additional risk. - ANALYSIS: if Baxendale argues that loss of profit were possible but not certain and that they could have gotten a new shaft in the interim, they didnt cover, etc. how should we respond to these arguments? What if it was possible that Hadley could have kept the mill running but it was probable that if he didnt there would be lost profits. Is possibility enough rather than just profitability. When you ask the certainty and foreseeability questions, that is not the end of the game. Damages you should have mitigated you wont be able to get if you had a duty to mitigate and failed. o TEST for Foreseeability: Close to 2nd Rest. 351 P119 where two parties have made a K which one party has broken, rising naturally according to the usual course of things from the breachor such as may have reasonably been in the minds of the parties at the time they made the K.
1. Damaages were a Natural Result Or 1. there were special circumstances that must be communicated to the other party. Damages are limited to what they could reasonably foresee based off of their information. Fed Ex example special circumstances, no need for consent, and yet still we dont grant damages because we dont think either party believes that is want the K is about. 2. What is in the minds of the parties at the time they made the K.
4/18/2005 More on Foreseeability - Spay? o FACTS: deliver steel by a particular date for a bridge to be completed. o You should know the damages the other party will experience upon breach. Okay, but when do you need to know that? o Can you explain your special circumstances to UPS and have them be liable for the consequential damages? Probably not. o When do you have to know? Before signing K? Before breach? Day of breach? After breach? o Keep two things separate? 1. Is it foreseeable? 2. Have you agreed? Haxendale you dont need explicit agreement to take on liability of consequential damages. o What if I have a clause in the K that disclaims consequential damages? This is active disagreement. Sometimes you can do this. However, sometimes this pushes into unconscionability o They update what is foreseeable by providing more informationAt some point, as you keep pushing that further into the future, - If they are aware after entering into the K but before breach - p1041 & 1042 explains the rule well o READ THIS PART OF THE CASE Crickett Alley - FACTS: straightforward. Cricket Alley needs cash register to work from home computer. They buy but it never works. They have to buy a bunch of other cash registers. What are the direct damages? o 1. Replacing whatever you have that doesnt work (e.g. buying from someone else, paying someone else to finish the work, etc.) - What are the consequential damages? o 1. o 2. o Work trying to get them to work. o 2. Work done by hand.
o 3. DIRECT DAMAGES generally foreseeable damages that would affect everyone. CONSEQUENTIAL DAMAGES damages that are not general but are special to you. Hadley v. Baxendale only applies to consequential damages. Direct damages you always get. Therefore, you have to find out which of these damages are foreseesable. p1045 for any loss from general or particular requirements in which the seller at the point of contracting had the reason to know. Difference between general and specific is that for general, you dont have to specifically be told in order to have reason to know. For consequential damages, one thing to note incidental and consequential damages. o In law, these two things are basically the same thing. Consequential is the traditional way of distinguishing between direct damages and those that require foreseeability. o 715. If you try to take the position of the side that has breached, consequential damages can really start to add up.
Duty to Mitigate - Not really a duty. - I breach, and you want damages. What the law says is that you, as the injured party, have a duty to mitigate the extent of those laws. Do you have an affirmative duty such that failing to meet it I can sue you? No. It just means that we might limit damages to the natural amount the breach should have caused. - How do you figure out what a reasonable amount of time is before you begin to mitigate? o I would think the benefit of the doubt would typically rest on the party that has not breached. o This is a typical jury question to determine what a reasonable businessman will do. o Note: If you try to mitigate and you fail you have still satisfied the duty. Liquidated Damages - You might want to give someone an incentive not to breach. If the court gets the sense that what you are doing is trying to lock in the other party, it makes courts nervous. - In general liquidated damages clauses are hard to get enforced because courts think they are harsh. - Courts think that overcompensation will not lead to efficient breaches. - Courts think liquidated damages clause ends up with more litigation because it creates incentive to claim breach when it hasnt happened REVIEW Statute of Frauds
the K is exactly one year but it was created on 3/15explanations aside, it is not the length that is crucial but the making of the K and the time of performance YES, this is accurate. o 1-yr provision not to be performed within 1-yr of the making of the K. Even to be performed within means whether it is performable within 1-yr of entering into the K. at-will employment is considered to be for an indefinite term. From a logical perspective, you can argue this both waysCourts typically say that this is performable within 1-yr. Courts typically agree that this will not trigger the Statute of Frauds. o Mercer manager had to build up the local office. This would have to take multiple years. o It is possible to have an employment K that is not performable in a year.
If it falls within the statute of frauds it means that you have to satisfy the statute b/c the statute applies. (e.g. UCC good>; 1-yr) you can satisfy the statute of frauds by showing that there is a signed writing sufficient for showing there was a K. - exceptions to signed writing o 1. part performance Question: K entered into on July 1st and has to be done by October. - Courts are willing to not be constrained by SOF even if it is incredibly unlikely. Courts are trying to make it so that SOF does not apply. - Many ordinary people are unaware of SOF so courts are wary of applying it. Question: lifetime performance. - performable within a year because the party could die. Equitable estoppel requires person to be using SOF for - look at McIntosh and Schwedes for this. Mistake doctrines - how do you determine who bears the risk. Once you determine, how much affect does this have over the enforcement of the doctrine? o Bearing of the risk: how does bearing the risk traditionally work for those types of transactions? Explicitly take the risk. Implicitly through other obligations in the K. Ct can say if the parties talked about shifting risk and didnt might be evidence. If excuse doctrines are appropriate, go through all of them!! Why doesnt Boardman like the outcome of the 2nd ALCOA case? - p860 One of the dangerous things this class does is it talks about frustration. It finds commercial impracticability and frustration and blends them together. - If you can show frustration, you dont have to show commercial impracticability. If you have CI, it is unlikely you have F. - This Ct. decides risk was not born when Boardman thinks it was.
Frustration of purpose - must be frustration of both parties purpose, not just one or the other. - NOTE: it is hard to find the parties joint purpose. Mutual mistake - What constitutes a basic assumption in the context of mutual mistake? o Basic assumption upon which the K is based means that w/o that assumption parties might not have entered into K or might have been radically different. - It might be a basic assumption that I can sell cars. It might also be foreseeable that this basic assumption may be unlikely to be feasible b/c of factors like war, etc. ANTICIPATORY REPUDIATION - what is a signal of acceptance of the repudiation? o Say you want to do this to cancel their ability to retract. How can you accept this repudiation? You can orally say: I accept your repudiation. o Changing your position materially is also acceptance of the repudiation o 2-611 in the UCC REPUDIATION AND DAMAGES - sue before time of performance. Cosden and Roye Realty. In Cosden Oil, we were introduced to many moving parts of the UCC. A lot of the analysis came down to interpreting the time of the learn of the breach. This could be at time of breach, time from which they repudiate, or time from repudiation + commercially reasonable time. Understand ways to understand the phrase learned of the breach. Understand the difficulty of thinking about Roye Realty tells us what to do in situations
Anticipatory breach and breach - what is the difference? o If you start out with something that looks like anticipatory repudiation + acceptance, that turns into anticipatory breach. o There is a difference between that and breach. o Both anticipatory breach and breach are final in a way that anticipatory repudiation is not (until you cut off retraction). Could you draw out the differences b/w seeking assurances? - Under traditional common law, you could not seek assurances. Your uncertainty was your own burden. It is harder in common law to convince a court that you had reasonable grounds for insecurity and therefore had a right to request assurances.
Therefore, UCC makes it easier to seek assurances (except that imperfect, sporadic behavior is taken less seriously under UCC) e.g. Under the UCC, we have a small liberal approach to King. We want to find a K when it is borderline. We dont want to find breach if we dont have to.
NFO you are allowed to say please assure us. Please assure us that you are going to perform. Please assure us and we wont perform until you perform. PAROLE EVIDENCE - patchwork. - What type of evidence can be admitted? o All kinds except negotiation evidence. o Two stage process: 1. is there the required level of clarity. 2. is it reasonable acceptable to some other interpretation. Is the language itself ambiguous. o OLDER VIEW: you cant bring in evidence at this point. o LIBERAL MODERN VIEW: Pacific Gas allows you to bring in negotiation evidence to show ambiguity but probably not to contradict clear language or add a term that isnt there. Damages - How would you handle a damages question? -
Philip Larson
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Contracts II: Class Notes: 8/9/2004 Revision 0.1 Author: Philip Larson 703.798.5244 (Tel)

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Contracts II: Class Notes

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Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

Contracts II: Case Briefs

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