Post on 26-Mar-2015
1
George Mason School of Law
Contracts II
Anticipatory Breach
F.H. Buckley
fbuckley@gmu.edu
When is performance due?
When can the seller sue for the price?
When can the buyer sue for the goods?
2
Mutual Conditions
When can the seller sue for the price? UCC § 2-507: Tender of delivery is a
condition of the buyer’s duty to pay
When can the buyer sue for the goods? UCC § 2-511; Tender of payment is a
condition to the seller’s duty to tender
3
Buyer’s Problem
Buyer agrees to pay seller $2M for custom-made machinery which can only be used by buyer
This will take a year to make and the cost of production is $100K per month.*
4
*There is no time-value of money here
Buyer’s Problem
Buyer agrees to pay seller $2M for custom-made machinery which can only be used by buyer
This will take a year to make and the cost of production is $100K per month.
After a few days, buyer decides he can’t use the machine. Advise buyer.
5
Buyer’s Problem
After two months, buyer decides he does not want the machine. Advise buyer.
If buyer sticks to the contract he’ll pay $2M for a worthless machine.
6
Buyer’s Problem
After two months, buyer decides he does not want the machine. Advise buyer.
If buyer sticks to the contract he’ll pay $2M for a worthless machine.
If seller sticks to the contract he’ll spend $1.2M to make $2M, for a profit of 800K
7
A Coasian Solution
After two months, buyer decides he does not want the machine. Advise buyer.
If buyer sticks to the contract he’ll pay $2M for a worthless machine.
If seller sticks to the contract he’ll make 800K
So there’s a bargaining surplus if seller stops production
8
A Coasian Solution
After two months, buyer decides he does not want the machine. Advise buyer.
If buyer sticks to the contract he’ll pay $2M for a worthless machine.
If seller sticks to the contract he’ll make 800K
Seller will require at least $800K to terminate
9
A Coasian Solution
After two months, buyer decides he does not want the machine. Advise buyer.
If buyer sticks to the contract he’ll pay $2M for a worthless machine.
If seller sticks to the contract he’ll make 800K
Buyer will pay up to $2M to terminate
10
A Coasian Solution
After two months, buyer decides he does not want the machine. Advise buyer.
If buyer sticks to the contract he’ll pay $2M for a worthless machine.
If seller sticks to the contract he’ll make 800K
The parties will terminate for a price between $800K and $2M
11
Unilateral Repudiation?
What if we gave the buyer the unilateral right to terminate the contract?
12
Unilateral Repudiation?
What if we gave the buyer the unilateral right to terminate the contract? In that case, could the seller ever
begin performance without an assurance of payment?
13
Mitigation?
Suppose that the buyer immediately tells the seller he can’t use the machine and will not take delivery, but will offer seller $800K in damages.
14
Mitigation?
Suppose that the buyer immediately tells the seller he can’t use the machine and will not take delivery, but will offer seller $800K in damages.
What if seller nevertheless produces the machine and on tender demands payment of $2M?
15
Mitigation?
Suppose that the buyer immediately tells the seller he can’t use the machine and will not take delivery, but will offer seller $800K in damages.
What if seller nevertheless produces the machine and on tender demands payment of $2M? The principle of mitigation:
Restatement § 350(1) See Illustration 1
16
Summing up
Buyer should not be permitted to terminate unilaterally
However, a bilateral termination agreement may be efficient
If Buyer repudiates the agreement, the principle of mitigation will prevent the seller from inefficiently running up the tab
17
So why do we need Anticipatory Repudiation?
Suppose Buyer repudiates the agreement, and ten months later insists on full performance by the seller?
18
So why do we need Anticipatory Repudiation?
Suppose Buyer repudiates the agreement, and ten months later insists on full performance by the seller? Restatement § 251: seller may suspend
performance on repudiation
19
Hochster v. De la Tour 799
Lord Campbell
Hochster v. De la Tour
If a man promises to marry a woman in December and marries another woman in May, when is he liable for breach of promise?
21
Hochster v. De la Tour
If a man promises to marry a woman in December and marries another woman in May, when is he liable for breach of promise? Short v. Stone, p. 800
22
Hochster v. De la Tour
When were Πs duties to begin?
23
Hochster v. De la Tour
When were Πs duties to begin? When did Δ send his letter of
repudiation?
24
Hochster v. De la Tour
When were Πs duties to begin? When did Δ send his letter? When was the action brought?
25
Hochster v. De la Tour
When were Πs duties to begin? When did Δ send his letter? When was action brought? When did Π enter into his contract
with Lord Ashburton?
26
Hochster v. De la Tour
When were Πs duties to begin? When did Δ send his letter? When was action brought? When did Π enter into his contract
with Lord Ashburton? Could Π bring his action prior to the date
when his duties with Δ were to begin?
27
Hochster v. De la TourThe “much more rational” standard
Suppose that Π had been required to wait to June 1 before terminating the contract What if Π had been offered alternative
employment on May 22 Could he accept this without breaching his
contract with Δ?
28
Hochster v. De la TourThe “much more rational” standard
Suppose that Π had been required to wait to June 1 before terminating the contract What if Π had been offered alternative
employment on May 22 Suppose that he could take the position
with Lord Ashburton without breaching his contract with Δ? Does it follow that he can sue before June 1?
29
Hochster v. De la TourThe “much more rational” standard
Suppose that Π had been required to wait to June 1 before terminating the contract What if Π had been offered alternative
employment on May 22 Suppose that he could take the position
with Lord Ashburton without breaching his contract with Δ? So why wait? De la Tour was about to travel.
30
Hochster v. De la TourThe “much more rational” standard
Suppose that Π had been required to wait to June 1 before terminating the contract What if Π had been offered alternative
employment on May 22 Suppose that he could take the position
with Lord Ashburton without breaching his contract with Δ? Why permit him to sue before June 1? UCC § 2-610(b)
31
Hochster v. De la TourThe “much more rational” standard
Suppose that Π had been required to wait to June 1 before terminating the contract What if Π had been offered alternative
employment on May 22 Could Hochester have turned down the
Ashburton offer and sued De la Tour for full damages? UCC § 2-610(a)
32
Hochster v. De la TourThe “much more rational” standard
Must the innocent party communicate his acceptance of the repudiation?
33
Hochster v. De la TourThe “much more rational” standard
Must the innocent party communicate his acceptance of the repudiation?Restatement 256
34
A bit of contract review
Is an offeror bound before his offer is accepted? Can the offeror revoke his offer at any
time prior to acceptance?
35
A bit of contract review
Is an offeror bound before his offer is accepted? Can the offeror revoke his offer at any
time prior to acceptance?
What is the logic behind the requirement of mutual assent?
36
A bit of contract review
What is the logic behind the requirement of mutual assent?
It’s not just that the parties mutually assent, but they must both know that the other has assented.
37
A bit of contract review
What is the logic behind the requirement of mutual assent?
Otherwise a possibility of a false start
38
A bit of contract review
It’s not just that the parties mutually assent, but they must both know that the other has assented. Need to communicate revocation of
acceptance Objective test of assent
39
A bit of contract review
The need for commercial certainty Full communication to the other party
tends to eliminate misunderstandings
40
A bit of contract review
The need for commercial certainty Full communication to the other party
tends to eliminate misunderstandings
Commercial certainty and anticipatory repudiation When is the seller to mitigate?
41
A bit of contract review
The need for commercial certainty Full communication to the other party
tends to eliminate misunderstandings
The presumption against options
42
A bit of contract review
The presumption against options You give me an option to buy 100 oz of
gold at $900/oz on August 1 next. If the price of gold is less than $900 at that
time the option is valueless. If the price of gold is above $900 at that
time, the option is “in the money” and is worth 100*(PriceAugust 1 - $900)
43
A bit of contract review
The presumption against options You give me an option to buy 100 oz of
gold at $900/oz on August 1 next The option is valuable and one should
not presume that it is given away for free
44
A bit of contract review
Options and anticipatory repudiation When the market is volatile, can an innocent
buyer get an option? Assume that:
Contract price is 100 Price on seller’s repudiation is 100 Price on date for delivery is 150 Buyer assets that he did not accept repudiation when
price was 100 and claims damages of 50
45
A bit of contract review
Options and anticipatory repudiation When the market is volatile, can an
innocent buyer get an option? Buyer assets that he did not accept repudiation
when price was 100 and claims damages of 50 UCC § 2-610(a): a commercially reasonable
time
46
UCC § 2-610
Is this in any way qualified by 2-609?
47
Flatt v. Schupt 802
Δ agrees to sell land to Π at $160K, closing June 30 Contingent on buyer obtaining zoning
for an asphalt plant
48
Flatt v. Schupt
Letter of May 21: “we decided to withdraw the request for rezoning” In an effort to keep the thing moving, an
offer to purchase at $142.5K
49
Flatt v. Schupt
Letter of May 21: “we decided to withdraw the request for rezoning” In an effort to keep the thing moving, an
offer to purchase at $142.5K
Δ rejects the offer of $142.5K on June 9
50
Flatt v. Schupt
Letter of May 21: “we decided to withdraw the request for rezoning”
Δ rejects the offer of $142.5K on June 9
Π purports to proceed with the purchase at $160K on June 14
51
Flatt v. Schupt
Letter of May 21: “we decided to withdraw the request for rezoning”
Qu. Did Πs repudiate the contract on May 21?
52
Flatt v. Schupt
Letter of May 21: “we decided to withdraw the request for rezoning”
Qu. Did Πs repudiate the contract on May 21? Not “a clearly implied threat of
nonperformance”
53
Flatt v. Schupt
Letter of May 21: “we decided to withdraw the request for rezoning”
Qu. Did Πs repudiate the contract on May 21? Aliter chill efficient renegotiations?
54
Flatt v. Schupt
Letter of May 21: “we decided to withdraw the request for rezoning”
Qu. Did Πs repudiate the contract on May 21? Restatement §§ 250-51
Should the Δs have cured the problem?
55
Flatt v. Schupt
If a fuzzy repudiation is permitted, the innocent party is given an opportunity to chisel the innocent party
56
Flatt v. Schupt
If a fuzzy repudiation is permitted, the party in breach is also given an opportunity to chisel the innocent party
57
Flatt v. Schupt
If there had been a repudiation, did the Πs retract it in time?
58
Flatt v. Schupt
If there had been a repudiation, did the Πs retract it in time? Restatement § 256(1) Revocation of
repudiation is effective if communicated “before the injured party materially changes his position”
59
What about Lak? 812
60
What about Lak? 812
The seller offered to close “as is” The seller had acted reasonably and had
left open the possibility of further negotiations regarding the ambiguity
What’s the difference between a standard of reasonable behavior and a good faith standard? Cf. United Artists at 813
61
Was there a clearly implied threat of nonperformance in Decker at 811?
62
Was there a clearly implied threat of nonperformance in Decker at 811?
We’ll get right on it…
Could both parties have done something differently?
63
What about Bonebrake at 812?
Were the buyers acting reasonably?
Would a different result create a problem of opportunism?
64
What if you think your supplier is Insolvent?
65
Insolvency
Presumptive grounds for repudiation under Restatement § 252
Right to assurance of performance. Restatement § 251.
Seller’s Remedy in UCC § 2-702
66
Executory Contracts in Bankruptcy
Presumptive grounds for repudiation under restatement § 252
Right to assurance of performance. UCC § 2-609
Seller’s Remedy in UCC § 2-702 Bankruptcy Code Sec. 365
(a) The trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor.
67
68
George Mason School of Law
Contracts II
Remedies
F.H. Buckley
fbuckley@gmu.edu