Contracts Class Notes 8/27/03


Last Friday, we were talking about the handout problems and we went through the first five.


The amendments to Article 2 of the UCC mentioned in the green book were recently adopted by the ALI.  The sponsoring organization will put out a final version of the new language for states to consider by the end of the calendar year.  It will be 8 or 10 years before the new UCC is enacted in all 50 states.  We may occasionally make reference to changes that are upcoming.


When you look at statutory changes, new things are underlined and old things we’re getting rid of are struck out.  The new Article 2 of the UCC is not revolutionary.


Article 1 of the UCC


The new Article 1 has only been passed in Virginia and Texas.  Legislatures aren’t enormously interested in the new UCC because, again, it’s not that exciting or new.


When we talk common law, we’ll make reference frequently to the Restatement (Second) of Contracts.  This is in the green book too.  You’ll find the “black letter law” in bold type.  You’ll see some of the comments in the green book, but not all of them.  There are more comments in the complete three volume version that you can find in the library.  These comments sometimes include hypotheticals you can use to help you understand the statutes.


Problem 6


This problem is very much like what we studied in Acme Mills.  In 1909, the case was governed by common law, but today, the same situation would be governed by the UCC.  However, by and large, the UCC matches up with common law because it has its roots in common law.


In the first case, the Dealer can’t recover.


§1-106 says to read the UCC liberally with an eye toward making the plaintiff as well off as he would be if the contract had been performed.


§2-711 gives the buyer some options for when the seller repudiates the deal.


Under §2-713, the buyer can get as damages the different between the market price when the buyer learned of the breach and the contract price.


Damages = Market Price    Contract Price[1]


Under this calculation, you actually get a negative number for the damages in this factual pattern.  You only get nominal damages.


We’re dealing here with a fungible good.  Wheat is wheat is wheat.  If we were dealing in some sort of unique good that isn’t readily replaceable on the market, the case would come out differently.


Now, let’s change the facts.  What if the market price on the delivery/repudiation date had been higher than the contract price?  Then the buyer could recover the difference.  By the equation above, you would now have a positive amount of damages.  Instead of getting my wheat for $30,000, I have to go out and buy it for $35,000.  I deserve $5,000 in damages in order to get into the financial position that performance would have done.


Now let’s change the facts again.  Say we had the original market price on the delivery date, but the buyer had put $5,000 down some time before.  We need to disgorge unjust enrichment.  The seller has $5,000 and hasn’t done squiddley-squat[2] to earn it.  Phooey on him!  No soup for you!


What does Article 2 have to say about this?  In §2-711, they pass along the common law requirement of restitution damages without really explaining it.


So this is how Article 2 works.  It usually leads to the same results as common law does, but it’s simpler and more uniform across the states than common law.  So yay UCC!


Louise Caroline Nursing Home, Inc. v. Dix Constr. Corp.


The builders quit building the nursing home in the middle of construction for no good reason.  The builders are in breach.


How will we measure the damages the owner suffers?


One measure of damages is reasonable cost of completion minus the unpaid contract price.  This is what the auditor came up with, and it was upheld by the Supreme Judicial Court of Massachusetts.


The owner (the nursing home) was trying to get the market value of the building as promised minus what it was worth at the time it was abandoned (half-baked) and also minus the unpaid portion of the contract price.


Let’s consider this with some numbers.  Say the contract price was $500,000 of which $200,000 has already been paid.  Say also the value of the half-baked building is $250,000 and the market value of the building as promised was $600,000.  Let’s also say it would cost $275,000 to complete the building.


So the nursing home owner would want $600K minus $250K minus $300K.  The court instead rules that the nursing home has $250K of value in the pocket and they’ve only paid $200K for it, so there’s no loss.  Or in other words, there was $300K unpaid and it would have cost $275K to finish the building properly, no there’s no damages.


Our goal is to put the aggrieved party in the same position performance would have done and no more than this.


Or in other words, be careful to do no more than compensate.


There is no proof given by the owner that there was a cost for delay.  Therefore, you won’t recover on the delay.  It either got done or could have been accomplished within the original time promised.


The principle of substitution says that replacement cost puts a ceiling on loss.


Louise says that they should have their $100K benefit of the bargain, but the court says they can’t have it because they can finish their $600K nursing home for less than the original $500K.


Illinois Central R.R. v. Crail


Here we have a carrier versus a shipper.  The railroad promised to deliver a certain amount of coal, but the railroad messed up and lost some of the coal.  They promised to deliver 88,000 pounds, but they were 5,500 short.  The thing is that coal is fungible, and you can replace it at market price.


However, there are two markets for coal.  This case says that when you use market price to determine replacement cost, you use the price that’s relevant for the loss.  For example, who was the aggrieved party in Illinois Central?  It was the dealer.  Where does Crail buy coal?  He buys from the wholesale market.  Therefore, you use the wholesale market price.


Say you’re a homeowner.  Then you probably use the retail market because that’s what’s available to you.  We measure your loss by that price.


Why would anyone litigate all the way to the Supreme Court over such small amounts of money?  Why is this rule important?


Is this something that happens repeatedly?  Sure.  This happens to the railroad all the time.  The railroad will benefit from this ruling every day.


Crail was actually the representative for a trade association of shippers.


A lot of people think this case was wrongly decided: they say it makes it harder to settle these matters than if the Court had reached the opposite result.  The rule the shippers wanted was that the damages would be the exact cost to replace the goods in the market at precisely the time and place the goods were supposed to be delivered.


We have a deep opposition in our legal system to giving more than the actual loss.  We will go to considerable effort to make sure we’re giving compensation and no more.


Tomorrow, we’ll look at Watt, Rockingham County, and Parker.


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[1] On the date of delivery