Contracts Class Notes 9/3/03

Missouri Furnace made a substitute contract in the middle of the year to buy some coke from a third party. They are mad because on the date they made the replacement contract, coke was way more expensive. They don’t get everything they sue for.

Why did the trial court only give the plaintiff the difference between the contract price and the market price on the various dates of delivery? The plaintiff wanted the cost of “cover” minus the contract price.

Cover is an actual transaction when a buyer aggrieved by a breach goes out on the market and buys something to replace the thing they would have received under the contract.

Market price minus contract price is a pretty common calculation to use for damages. Why did it get overruled here?

The big question is: market price when? The price of coke spikes at a particular time and then goes back down. What market price is the plaintiff given to measure damages? It’s the market price on the dates of delivery. This would be a big ol’ tabulation of the 315 different installments over the course of the year. Some of the difference was pretty high; some of it was pretty modest.

Why did the court do that? Why didn’t they give him what he wanted: the difference between his cover and the contract price? The court suggests that the cover contract was speculative. It’s sort of a futures contract in a sense. This contract shifts the risk of the market. Why does the buyer make a contract today for delivery next year? The buyer wants to be able to plan his business according to being able to get the goods at that price. It makes its information clearer.

What about the seller? The seller will plan his business on the basis of the same contract price. Each one will go with that contract price and rely on it and have certainty, whereas the market is uncertain.

Contracts don’t have to be made that way. You could agree to buy 10 widgets per week at the current market price. In that contract, you would not shift the risk of the market.

What can we say about the broken contract? We can grant that yes, it was speculative, and so was the “cover” contract. The court thought that the plaintiff should have bought coke on the spot market at daily prices. But isn’t that speculative too? What if the price had continued to go up? Then the contract at a high price would have been favorable.

Note that this suit was brought on February 26^th.

When asked what the market will do, Calvin Coolidge answered: “It will fluctuate.” CORRECT!

The cover contract was speculative. So was the original contract. It would also have been speculative to buy coke daily.

Is that a good reason not to give Missouri Furnace damages? Are there other reasons given? They suggest that under common law, damages must be measured at the time of the performance of the contract.

It is also argued that there were no special damages to the plaintiff.

This is a situation where the plaintiff won, but appealed because they were disappointed with how much money they got.

This is sort of a “heads I win, tails you lose” situation. The court says that it won’t pay any attention to Missouri Furnace’s forward contract. One reason it gives is that Missouri Furnace didn’t need to make that forward contract.

An aside…what is coke?

Coke is to coal as charcoal is to wood. Coke is “cooked” coal. You cook the impurities out of it such that you can burn it at a very high temperature so that you can make steel. That’s probably what Missouri Furnace does.

What would cause Missouri Furnace the biggest possible loss? Not getting any coke! They wouldn’t be able to make any steel, and so they would have to shut down. What would happen? Missouri Furnace probably had a lot of other contracts that it would have to breach and pay damages on. Missouri Furnace would also forgo a lot of profits if it didn’t keep running. Would the company be able to recover these huge losses? No, because of mitigation and the availability of substitute coke. So we want Missouri Furnace to go out and buy that substitute coke.

In a sense, Missouri Furnace is “bound” to buy coke to avoid a shutdown. Its hand is not totally free by any means. It chose to buy on the forward market (the market of the broken contract), which was at a lower price than the spot market.

The court doesn’t seem to make any sense here?

To the extent you can avoid a loss (mitigate), that is a very smart thing to do from a self-interest standpoint. Think about the legal costs you save! Self-interested businesses aren’t that likely to go to court just for the satisfaction of screwing the other guy.

How would this case be decided today? Article 2 of the UCC controls.

What is Missouri Furnace’s argument today? If the seller repudiates, the buyer may cover. This means they can make any reasonable purchase or contract to purchase goods to substitute for the goods they would have received but for the breach.

The remedies in § 2-713 suggest that today, Missouri Furnace would get the whole $80,000.

To the extent the buyer has covered, you’re in § 2-712. When the buyer has not covered, you’re in § 2-713.

This makes things a lot clearer than they were.

What’s the best argument against Missouri Furnace getting the big bucks? Under the circumstances, was it reasonable?

Look at one of the comments on § 2-712: you’re supposed to judge the reasonableness of the buyer’s conduct at the time they did what they did rather than second-guess the buyer on the basis of hindsight.

Some people are incapable of following that instruction. Hindsight is always 20-20. We know in the present case that the market peaked in May and then fell off. It’s hard to think about things from the point of view of not knowing what’s going to happen.

The buyer’s right to cover is the equivalent of the seller’s right to resell.

Juries especially have a hard time of getting hindsight out of their head.

The cover purchase must be in substitution for the defaulted contract goods. For example, if a contract to buy a Chevy is broken and you go out and cover with a Cadillac, that’s no good (i.e. you won’t recover for it under § 2-712(2)), unless you really have no alternative.

Is Missouri Furnace out of luck if they don’t cover? No, they would proceed to § 2-713 and get alternative damages which are measured by the market price.

Cover can include a series of purchases, even on the spot market, as long as they are reasonable.

A buyer can have damages under § 2-712 or § 2-713 and still have extra damages from § 2-715: these are incidental and consequential damages. If the seller knew of your requirements and the consequences if they breach, the buyer can recover damages for any injuries that can’t reasonably be prevented by cover or otherwise. This is just a codification of the principle of mitigation/avoidable consequences.

Notice that in the comments for § 2-712 the buyer can always choose whether or not to cover. The comments for § 2-713 reassert that it is an alternative to covering and getting damages under § 2-712.

Reliance Cooperage Corp. v. Treat

Sophisticated Big City Buyer v. Hillbilly Semi-Illiterate Seller

Is Treat’s letter a repudiation? In Missouri Furnace, the repudiation was clear. Here, a forward contract at a fixed price was made by Treat, and he finds out it might not be advantageous. He starts to whine and cajole the buyer into raising the price.

How does the Restatement define “repudiation”?

“I won’t do it” is a repudiation. “I can’t do it” is a repudiation. “I can’t or won’t do it unless you raise the price” is a repudiation. However, what Treat said wasn’t a clear repudiation.

Reliance is in a bind. They don’t want to buy twice as many staves as they can use, and they want to know where they stand with Treat.

Reliance could demand specific performance. Under § 2-610, this obligation is given teeth. You have several options.

The UCC says that there is a way for Reliance to find out whether it has a repudiation or not. There is a similar provision in the Restatement § 251.

Let us assume that by use of § 2-609, Reliance finds out on October 1^st that it has a repudiation. What do we do about measuring Reliance’s damages? One easy way to do it would be to have Reliance go out and cover. What if they don’t? We’ll measure their loss by market price. But when? In Reliance, the court says we measure the contract price by the date of promised performance. When we go by Reliance, this means Reliance gets big damages and Treat has a big hole in his pocket.

The alternative is to say that the damages are measured by the market price on the date of repudiation. What happens differently under the UCC? The principle is that the repudiation ought not to help the repudiator.

The UCC says that the aggrieved party can wait for performance for a commercially reasonable time (this reverses Reliance v. Treat). What is a commercially reasonable time? It will vary from case to case.

Look at § 2-713: we’re told the damages will be the different between the contract price and the market price on the date the buyer learned of the breach. But when is that? It could mean the date the buyer learned of the repudiation, it could mean a commercially reasonable time after that, or the date of performance.

According to § 2-723, when the action comes to trial before the performance date, damages are determined by the date when the aggrieved party learned of the repudiation.

In the more usual case, when the case goes to trial after the date of performance, the damages are calculated on the date of performance.

We have a conflict in the UCC! How come? Clovis suggests drinking.

The courts worked their way through this as best they could. You’ll see on pp. 60-63 how they worked through it. They decide to stick with § 2-610 (a), and let you wait a commercially reasonable amount of time.

When we get the new version of Article 2, things are updated so that it says a “commercially reasonable amount of time” is OK.

Tomorrow, we’ll go over Neri, where the buyer is in breach. Look at the Article 2 provisions that deal with the seller’s remedies: § 2-706, § 2-708 (1), § 2-708 (2) (the star of the Neri case), § 2-709, and § 2-710.

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