Tuesday, January 18, 2022
Teaching Assistants: Victor Goldberg on the Time for Assessing Damages
This is the Third in a series of posts on Victor Goldberg's work. Today's post is about Chapter 3 of his book, Rethinking Contract Law and Contract Design (RCL).
A post on Chapter 2 is here.
The introductory post is here.
The standard measure of damages in a case of breach or anticipatory repudiation is the difference between the market price and the contract price. However, courts have taken different approaches when determining the market price – is it the market price at the time of breach, at the time when performance was due, or when the decision is rendered (RCL 22)? Professor Goldberg’s analysis focuses on four cases.
In Cosden Oil & Chemical Co v. Karl O. Helm Aktiengesellschaft, an anticipatory repudiation case, the court got things right in Professor Goldberg’s view. It effectively recognized that the cover price is not best understood as the value of the goods to be exchanged on date X, where X is a reasonable time after notice of repudiation, but the value of the goods on date X to be delivered on date Y. This is especially true in a case such as this one, where the non-breaching party was a trader rather than an end-user of the goods (RCL, 23-24).
The same issue arose in the case of The Golden Victory, about which Professor Goldberg wrote at greater length here. There, the Law Lords were confused by a clause that permitted a charterer to terminate a shipping contract in the event of war. The U.S. invaded Iraq between the time of repudiation and the time of the decision, and so the Law Lords recognized that the breaching party could have canceled the contract from the onset of the U.S. invasion of Iraq and calculated damages accordingly. But given that war is always a possibility, the proper measure of harm is the value of the contract, taking the risk of war into account, at the time of notice of breach (RCL, 25-28).
Professor Goldberg next discusses a case involving Pepsico and a jet. No, not that one. Klein v. Pepsico. In Klein, the trial court awarded specific performance as the remedy for Pepsico’s failure to deliver a G-II airplane to Klein. Very few such planes were available, and Klein had covered by purchasing a G-III. The Court of Appeals appropriately reversed. As Klein intended to resell the plane, the proper measure of Klein’s damages was the difference between market price and contract price at the time of breach. Klein sought specific performance because the value of the plane had increased in the intervening period, but the Court of Appeals refused to award an extraordinary remedy when money damages were sufficient (RCL 28-30).
In Israel, specific performance is not an extraordinary remedy, but Adras Building Material v. Harlow & Jones GMBH, was Klein in reverse. The court granted damages (disgorgement) because the value of specific performance had declined in the interval between breach and judgment. Israeli law provided for a calculation of damages from the time of the contract’s “termination.” From an American perspective, the case is rendered ridiculous by the court’s finding that the contract, despite breach, had never terminated, although Harlow failed to deliver 2000 tons of the 7000 tons of steel it was contractually obligated to provide. The contract dated from 1973; the breach from 1974. The Israeli Supreme Court rendered its final decision in 1988. From Professor Goldberg’s perspective, the various opinions in the case omit the crucial date when performance was due. If that fact were provided, then it would be a simple matter of calculating the market price of steel due for delivery at the time of the breach. The court, in granting a restitution remedy, effectively made that calculation. It held that Harlow had been unjustly enriched by the amount by which the price at which it sold the steel exceeded the contract price. Restitution damages in this case were the same as expectation damages (RCL, 30-32).
The reasoning in Adras seems to give the non-breaching party a valuable option. Under Israeli law, if the price of steel rose, it could have sought specific performance at any time prior to contract “termination.” Because the price of steel dropped, it sought expectation damages styled as a disgorgement remedy. However, Professor Goldberg notes, if the contract is not terminated, shouldn’t both sides have the same option. Why couldn’t Harlow simply deliver steel at any point before the final decision in 1988 and claim full contractual performance (RCL 33-34)?
It is clear, in Professor Goldberg’s view, that in anticipatory repudiation cases, a court should not take post-breach occurrences into account in calculating damages. In the other cases (the ones not involving anticipatory repudiation), it is striking how untethered discussions of damages were from legal or economic justification. In Klein, the trial court ordered specific performance when the good at issue was not unique and money damages were sufficient. In Adras, the court did not seem to understand the nature of the remedy it provided.