ContractsProf Blog

From Sid DeLong, Something About Nothing

Much Ado About Nothing:
Haaning’s Empty Canvases and Forbearance Contracts

Sidney W. DeLong

The reader may be familiar with the story of Danish performance artist Jens Haaning, who was commissioned by a museum to produce artwork incorporating $70,000 in Danish currency that it advanced to him for incorporation into the work. Instead, he delivered two blank canvases titled Take the Money and Run.  The Museum accepted the canvases and displayed them but sued Haaning for return of the currency, which he retained. The story is discussed in an earlier post, The Art of the Steal.

A few weeks ago, a court awarded the Museum a judgment of about $70,000 in restitution and awarded Haaning a fee of $6,000 and expenses, presumably for having performed his contract. 

The award of the fee implied that Haaning had substantially performed the contract despite having held back the currency. My earlier post explored Haaning’s theory that the contract required him to produce artwork and that his tendering of “Take the Money and Run,” was a piece of performance art. He contended that his flagrant breach of contract paradoxically satisfied his contractual obligation to the Museum by artistically dramatizing his resistance to capitalistic exploitation of workers (such as himself). The Museum sportingly agreed with his artistic message and exhibited the empty canvases, along with Haaning’s explanation. To that extent, it apparently ratified his performance as having earned his fee. But it also demanded that he return the cash he had wrongfully retained.

In suing Haaning and recovering the money, the Museum can be understood as having actually collaborated in his performance. Like the breach, the ensuing lawsuit was an essential part of the performance of exploitation and resistance. Haaning was fulfilling his role as revolutionary employee and the Museum was fulfilling its role as an oppressive employer. To have forgiven him, to have condoned his behavior and permitted him to retain the money would have robbed his breach of its artistic and moral significance. So both parties collaborated in the lawsuit as the final act in the artistic performance.

Oddly enough, Haaning’s theory that his empty canvases were the artworks for which he was being paid reminded me of my early life on a small Kentucky farm, as much seems to do these days. My father was a farmer in the years after World War II during which, in order to prop up commodity prices, the Government Soil Bank program paid farmers not to grow certain crops that were being over-produced. The following kind of exchange soon became a common bit of farm humor:

“You in the Soil Bank this year Sid?

“Sure am.

“What are you not growing this year?

“This year I’m being paid not to grow corn. How about you? What are you not growing?

“Tobacco, Sid. There’s a lot more money in not growing tobacco. You ought to try it next year.”

As they gazed out over their fallow fields, farmers in the Soil Bank probably felt thankful for the valuable crops not-growing there. Little could they guess, however, that they had also been vouchsafed an early glimpse of what was to be a signal philosophical idea of the French deconstructionist movement: the absence of a presence.

By Nigel Chadwick, CC BY-SA 2.0

Had Jacques Derrida (below, left) been a Kentucky farmer instead of a French philosopher, he might have had his “Aha” moment decades earlier. I’m just as certain that, pondering his absent crop, my father would have understood Derrida “The trace is not a presence but is rather the simulacrum of a presence . . . it is the mark of the absence of a presence, an always-already absent present." Derrida was as much taken with absent presences as Soil Bank farmers were. And so was Haaning. Reflecting on my father’s empty fields prepared me to appreciate the value and meaning of Haaning’s empty canvases.

Sometimes an absence is not just nothing: it is the absence of a specific something. The Danish and Kentucky examples employed particular absent presences, and were not mere nothings. Derrida would have said that Jens Haaning’s empty canvases bore the trace of an absent presence, i.e., a specific $70,000 worth of Danish currency. The particularity of that absence made them unique as works of art, completely distinct from all other blank canvases.

Absences often imply presences. Consider the array of the contents of a murder victim’s pockets that Columbo examines for “something that isn’t there that ought to be there.” (Hint: it’s always the victim’s keys). Haaning’s title for the empty canvases named the very specific presence that ought to have been there but wasn’t. Just as my father’s empty fields lacked a very specific crop for which he sought payment.

The aesthetic implication is that despite appearances, no two empty canvases are necessarily identical. The question in every case of empty canvases is: “Are the empty canvases the absence of a particular presence (as the artist maintains) or simply the absence of any presence at all (as a skeptic maintains)?” An accurate description of any empty canvas must describe its absence as well as its presence.

By now it may be obvious what this discussion is doing in a contracts blog post.  Although some contracts call for active performance, doing something specific, forbearance contracts call for doing nothing, not just any nothing but a specific nothing.

Consider an imaginary conversation inspired by the canonical Contracts case, Hamer v Sidway, 27 N.E. 256 (N.Y. 1891). His grandfather had promised William Story 2d. $5,000 if he refrained from using tobacco, swearing, drinking, and playing cards or billiards for money until he was 21. Suppose he had a conversation with a college classmate, Frank, who told him that his grandfather made him a similar promise. Each student affirmed that he was hard at work earning the promised reward.

“So what are you not doing tonight Frank?

“As you can see, I’m not blaspheming, breaking the Sabbath, or bearing false witness. What are you not doing tonight Willie?

“As you can see, I’m not smoking, drinking, swearing, or playing billiards or cards, Frank. There’s a lot more money in not doing those things than in not blaspheming, breaking the Sabbath, or bearing false witness.

“Yeah, but they are a lot harder not to do, Willie. You are earning your money.”

As we contemplate the two young men assiduously performing their respective contracts, we should remember that doing a specific nothing might be the performance of more commonplace commercial agreements. Nondisclosure agreements for example are often “performed” by doing a very specific nothing, by not disclosing particular facts or secrets. Noncompete clauses are also performed by doing a very specific nothing, engaging in the prohibited business in the relevant geographical area.

But now a new problem arises. When a contract requires you to do nothing, and you do it, how can a judge tell whether you’re doing it intentionally? Suppose that a departing employee signs a contract providing for annual payments of $1,000 in return for a non-competition agreement preventing the employee from engaging in a competing business or trade within a geographic area for a period of five years. But the employee does not read the document he signed and is unaware of the noncompete clause. Nevertheless, for five years, he does nothing that competes with his ex-employer. If a dispute with his employer over payment arises, has he earned the money? Has he performed his contract or has he ignored it?

And what exactly counts as performing a contract to do nothing? Suppose that a departing employee agrees to a non-disclosure agreement that stipulates that he will be paid $1,000 per week for so long as he refrains from disclosing certain of the employer’s business-related secrets. The employer mails the checks to a bank account where they are automatically deposited. The employee meanwhile has a spiritual revelation and departs for an isolated monastery in Tibet.

After a year, the employee dies but no one is aware of it. Because the business secrets remain undisclosed, the checks keep coming and deposited to the employee’s account. When the employer learns of the employee’s death, can it recover the payments made after his death?  Or did the employee perform his contract from the grave? After all, was not the NDA binding on the estate of the employee?

John Quincy Adams and Contracts Cases in SCOTUS

Sid DeLong shared news that John Qunicy Adams's handwritten notes from his first oral arguments before the U.S. Supreme Court have gone on sale for $75,000.  The picture at right shows him about eight years before the oral argument.

Why is the price so high for a lawyer's scribbling?  No doubt because they provide insights into the state of contracts doctrine in the Early Republic.  The case, Head & Amory v. Providence Insurance Co., dates from 1804 and was argued before the Court of Chief Justice John Marshall.  

The case was about a merchant vessel that was seized as a prize of war in 1800 during the Napoleonic Wars.  The owners of the ship tried to recover from their insurer, but the insurer claimed that the policy had been canceled.  There was no signed writing evidencing the cancellation.  Rather the evidence of cancellation came in the form of correspondence between the parties.  While the trial jury was led astray by expert testimony suggesting a completed agreement, Justice Marshall found that the exchange of letters constituted only preliminary negotiations that could not bind the parties. Moreover, John Quincy Adams successfully persuaded the Court that a corporation could not be bound by an agreement absent seal or signature.  

John Quincy Adams gave his handwritten notes for the case to William Cranch, who was both Abigail Adams's nephew and John Quincy's classmate at Harvard.  Mr. Cranch served as the reporter for the Court until 1815. 

Gigi Tewari on Incorporating Narrative Justice into Teaching Contracts & Commercial Law

Contracts and business law professor Gigi Tewari of Widener University Delaware Law School spoke at the Roger Williams School of Law's Integrating Doctrine & Diversity Speaker Series.  Professor Tewari discussed  different ways diversity, equity, and inclusion pedagogy can be incorporated into business and contract law classes.

Here's a video of the session, with Professor Tewari starting just under 7 minutes in.  Contracts Profs might be especially interested in her take on Lucy v. Zehmer, but lots of great contributions here throughout.

Weekend Frivolity: Students Can Do Stuff!

Christine Farley shared with us the movie poster at right.  You may be thinking, "Wait a tick, I don't remember that movie poster.  Nor do I remember that movie!"  Or you may be thinking, "I don't even remember that case."  Well, I didn't know the case either, but after seeing the poster, I really wanted to see the movie,  I then learned that the poster was just something Professor Farley's students created and not an actual movie.  I decided that reading the case would be the next best thing.

It seems that it is a more up-to-date and same-sex version of Marvin v. Marvin and Hewitt v. Hewitt,  We once called these "palimony" cases, but I don't know what they are called now.  In Mitchell v. Moore, Mitchell moved from South Carolina to Pennsylvania to be with Moore.  He also worked on Moore's farm.  Moore made various representations relating to compensation for labor, devise of property, and return of contributions to an antique business and a property on Amelia Island Florida.  After thirteen years, the relationship ended, and Mitchell sought to enforce Moore's pledges.  

A jury found for Mitchell based on unjust enrichment and awarded $130,000.  As in Marvin, the court found that the benefits that Mitchell derived from his ability to live rent-free on Moore's property more than compensated for the lack of wages paid.  Moreover, Moore's promise to leave his property to Mitchell was a gratuitous statement of future intentions.  The court does not address the antique business or the Florida property.  Perhaps a sub-plot in the movie?

Duncan Kennedy on Williams v. Walker-Thomas Furniture

I'm am always happy to have an opportunity to look at a familiar case with fresh eyes, and Duncan Kennedy's eyes are especially good when it comes to scanning a horizon and bringing objects near and far into focus.  In The Bitter Ironies of Williams v. Walker-Thomas Furniture Co. in the First Year Law School Curriculum, newly published in the Buffalo Law Review, he sets out his aims clearly and directly.  

The article is, Professor Kennedy tells us, part of a larger project which. . .

defends the range of legal initiatives that legal services lawyers and clinicians, with progressive lawyers and academic allies, have undertaken on behalf of poor Black neighborhoods against the perennial neoliberal accusation that they "hurt the people they are supposed to help.”

It does so while contributing to critical race theory, the Black capitalism critical approach, and the critical legal studies literature on law’s distributive role in economic and social life.  This essay focuses on the teaching of Williams v. Walker-Thomas in first-year courses.  First-year students who read Williams (and most do) get a large dose of the argument that progressives who challenged the cross-collateralization clause at issue in Williams actually make it harder for poor people to buy furniture.  Professor Kennedy shows that litigating cases like Williams actually helps the residents of poor Black neighborhoods.

The article laments that progressives have not responded more robustly to the neo-classical law and economics critique of Williams.  The argument is familiar to those of us who have been teaching Williams, and many casebooks incorporate it, at least in the notes.  Walker-Thomas's cross-collateralization clause made it economically feasible for the store to provide goods to low-income populations lacking credit.   If we allow activist judges like Skelly-Wright to deem such clauses unconscionable, the result will be that people without credit could only buy furniture at very high rates of interest or with other extremely onerous terms.

Professor Kennedy then provides the missing robust response to the neo-classical approach and argues that the litigation strategy and liberal judicial interventions from 1965-1980 were effective in improving living conditions in poor Black neighborhoods.  He takes on the economics and law approach in its own terms, explaining that Walker-Thomas operated in an oligopolist market with a captive consumer group unable to shop for alternatives.  Once one understands the economics of that particular market, one can argue based on economic principles was that the main effect of litigation like Williams is that businesses like Walker-Thomas will become a bit less profitable than they otherwise would be.  The difference would not be significant enough to alter their basic business model.

The piece is filled with nuggets from the case that help flesh out the socio-economic setting in which Ms. Williams bought furnishings from Walker Thomas.  Much of this information is gleaned from prior scholarship on the case, but Professor Kennedy reorganizes the material and repurposes it for deployment in his argument that poor neighborhoods benefit from litigation like Williams v. Walker Thomas.  The effect of eliminating the cross-collateralization clause would be that poor consumers would have to pay a slightly higher price for their goods.  However, Professor Kennedy concludes, "[T]he consequences of reducing the rate of blanket repossession, with its obvious material and psychological cost to the family affected, is I would say obviously worth the tiny price increase and the lost monopoly profits on the seller’s side of the bargain." 

While eliminating the cross-collateralization clause might have hurt some small businesses, Walker-Thomas was not one of them.  It had annual sales of $4 million, and it was exploiting its position in the oligopoly to make such high profits that it could easily absorb the cost of profits lost through the elimination of the clause.

But the cross-collaterization clause was just one component of a multi-pronged strategy that various businesses devised to extract surplus capital on exploitative terms from poor neighborhoods.  The advocacy that resulted in the Williams decision led to legislative reforms that prohibited many of these predatory practices.  But such practices arise in new forms all the time, and the argument that progressive advocacy "hurts the people it is trying to help" stifles attempts to address those new forms.  Professor Kennedy capably deploys the methods of conventional neo-classical economics to show that progressive advocacy helps the people it is trying to help and only hurts the businesses that serve those people by reducing their profits but allowing them to continue to operate.

Careful readers might have noted that Professor Kennedy cites to Deborah Zelesne's guest post on the blog!

Teaching Assistants: Victor Goldberg on Victoria Laundry

This is the tenth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the eighth chapter of RLCD, in which Professor Goldberg reviews the English case, Victoria Laundry v. Newman Industries.  This is another take on the "tacit assumption" test for consequential damages, a topic that Professor Goldberg previously addressed in Chapter 8-10 of RCL, reviewed here.

The issue is the extent to which the breaching party must be aware of the possibility of consequential damages flowing from the breach in order to be made liable for them.  Between the decision in Hadley v. Baxandale (1854) and Victoria Laundry (1949), courts in the UK would assess consequential damages if the likelihood of such damages were a "tacit assumption" between the parties.  In Victoria Laundry, UK courts abandoned that test, but according to Professor Goldberg, it did so based on three errors

Lord Cyril Asquith, who wrote the opinion in Victoria Laundry believed that Hadley's true meaning had been obscured by a misleading headnote.  The headnote indicated that the defendant delivery service had been given notice that the mill was shut down due to the broken shaft.  Lord Asquith was of the view that the defendant knew only that the mill had requested a replacement shaft.  Professor Goldberg argues persuasively that the headnote was correct (RLCD, 166).

Site of Hadley v. Baxandale

Lord Asquith then makes a second error, according to Professor Goldberg, in thinking that the misleading headnote matters.  That is, if the facts were as the headnote suggests, the case should come out differently, according to Lord Asquith.  If the footnote is correct, the delivery service in Hadley knew that the shaft was urgently needed and that the mill was stopped.  But mere knowledge was not sufficient.  What is required is an understanding (a tacit assumption) that the breaching party will be responsible for damages consequential to breach (RLCD, 167)

According to Professor Goldberg, in order to arrive at an award of damages in Victoria Laundry, Lord Asquith had to make yet a third error, this time by misconstruing the facts.  Regardless of the version of the test, the availability of consequential damages turns on what the parties knew at the time of contracting.  In Victoria Laundry, the contract was formed on February 20th, but buyer gave no notice of the urgency of its need for the boiler at issue in the contract until April 26th.  Given the knowledge of the parties at the time the contract was formed, Lord Asquith should not have awarded any consequential damages (RLCD, 168-69).  But he awarded partial damages for consequential losses that were "on the cards" at the time he treated the contract as having been formed (RLCD, 165).

Despite its flaws, Victoria Laundry remains a celebrated decision to this day and is treated as faithful to Hadley.  In The Achilleas, Lord Hoffman and Lord Hope proposed a return to the focus on the intentions of the parties that had informed the "tacit assumption" approach. Professor Goldberg thinks that such an approach is more consistent with Hadley and so he is mystified by continued treatment of Victoria Laundry as authoritative.  

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction
Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset
Teaching Assistants: Victor Goldberg on The Golden Victory
Teaching Assistants: Victor Goldberg on Lost (Volume) in America
Teaching Assistants: Victor Goldberg on Lost Volume in the UK
Teaching Assistants: Victor Goldberg on Mitigation
Teaching Assistants: Victor Goldberg on the Middleman's Damages
Teaching Assistants: Victor Goldberg on Sub-Sales in the UK
Teaching Assistants: Victor Goldberg on Jacob and Youngs v. Kent

Teaching Assistants: Victor Goldberg on Jacob and Youngs v. Kent

This is the ninth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the eighth chapter of RLCD, which revisits scholarly takes on Judge Cardozo's opinion in Jacob & Youngs v. Kent, a case about which we have previously posted here, here, and here.

I admit it, I was worried about this chapter.  It is possible for me to listen to people criticize Judge Cardozo and still part friends, but only because I "will not visit venial faults with oppressive retribution."  Fortunately, Professor Goldberg has come not to bury Judge Cardozo but to praise him.  Despite some commentaries going back to 2003 criticizing Judge Cardozo's opinion in Jacob and Youngs for "material misrepresentations of fact and law," Professor Goldberg thinks that Judge Cardozo's result was correct at the time and still today (RLCD, 142).  Whew. 

As most readers of this blog know, the case involved a contract for the construction of a mansion in New York State. The contract called for Reading pipes, but the contractor installed a lot of comparable pipes manufactured by other companies.  Judge Cardozo found the mistake to be inadvertent and ruled that the builders had substantially performed.  They were entitled to full payment, less the difference in value between the house contracted for and the house as built.  Because the pipes installed were of the same quality as Reading pipe, that difference was effectively zero.

The difference between the four judges, including Judge Cardozo (right), who found that Jacob and Youngs had substantially performed and the three who disagreed was really about facts, not law.  The dissenting judges thought the mistake could not be the product of mere inadvertence.  The trial court record provided few facts, because the trial court did not let in Kent's evidence, so it seems that, given the differing views of the facts, a remand would have been appropriate.  But as Professor Goldberg notes, there had been a previous trial at which the facts were presented to the jury.  The jury found for Jacob and Youngs, but the trial court set that verdict aside.  After a second trial and appeal, Kent had stipulated that, if the Court of Appeals upheld the Appellate Division's ruling, it should render judgment absolute in favor of the plaintiff.  Judge Cardozo just did what Kent asked him to do (RLCD, 143-44).  

Another interesting point that Professor Goldberg mentions is that the contract in fact allowed for substitutions of materials contingent on approval of the architect.  That being so, the breach was not the substitution of pipes but failure of notice to the architect.  That provision in the contract would seem to make the case easier, as the damages for failure of notice would be nominal (RLCD 144-45).

Professor Goldberg thinks that most contracts professors assume that Jacob and Youngs owes its prominence to legal innovation (RLCD, 145).  I can't speak for other contracts professors, but thanks to NYU Law's outstanding lawyering program, I had an assignment as a 1L about substantial performance, and so I knew that Judge Cardozo had a lot of precedent to work with when he wrote Jacob and Youngs.  Professor Goldberg summarizes this material (RLCD, 146-49).  

But I must take issue with Professor Goldberg on one point.  He complains that "Cardozo's rationale was phrased in rather flowery language that somewhat obscured the reasoning"  (RLCD, 157).  The language in question is as follows:

Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable.  If something else is in view, it must not be left to implication.  There will be no assumption of a purpose to visit venial faults with oppressive retribution.

Flowery?  Obscure?  I would say that Judge Cardozo wrote in the manner to which we should all inspire -- his writing invites and rewards re-reading -- and once one has appreciated his meaning, a satisfying feat, easily obtained, one can also appreciate why he expressed himself as he did.  His meaning is clear enough, and its manner of expression is unmatched among American jurists.  I have always assumed that his opinions owe their prominence to Judge Cardozo's reputation, which in my view, at least in the realm of contracts law, derives from his peerless prose style rather than from unique innovations in the law.  Professor Goldberg provides his translation of Judge Cardozo's language quoted above (RLCD157-58).  He has captured the meaning precisely but in considerably more space and without the glory.  Why listen to Salieri (left) when you can hear Mozart (right)?  I intend no slight to Professor Goldberg.  No American legal authority writes on a par with Cardozo.  He is honor alone; the rest of us must make do with the punctilio of an honor most sensitive.

You disagree?  Read the mug (right).  Sidebar, I actually would be interested to see comments on the subject: what unique innovations did Judge Cardozo introduce (or further) in contracts law?

Professor Goldberg proceeds methodically, eliminating the mysteries underlying the case. He reviews New York precedent for leniency regarding architects' refusals to award certificates where the work was completed in good faith and the diminution in value or cost of completion was relatively small (RLCD, 150-52).  There too, Jacob and Youngs did not depart from prior caselaw, but Professor Goldberg also addresses the question of whether the issuance of an architect's certificate was a condition precedent to Kent's obligation to make a final payment in this case.  The parties had taken that issue off the table. By the time the case reached the Court of Appeals, the sole issue was whether Jacob and Youngs had substantially performed (RLCD, 154-55). 

Judge Cardozo notes that the options for recovery are either costs of completion or diminution in value, but Kent was not seeking to recover cost of completion in his appeal.  Why not?  He had originally counterclaimed for $10,000, perhaps a rough estimate of what it would have cost to rip out and replace the non-Reading pipes.  He dropped that counterclaim, likely because the contract did not provide for that remedy.  Rather, Kent could refuse the final progress payment.  He could recover the costs of completion if he were actually going to pay somebody to do the work, but he chose not to do so. (RLCD, 156-57).  I find that fact significant.  Perhaps Kent didn't really care that much about Reading pipes but did care about having a reason to refuse to make the final payment.

Judge Cardozo's results are consistent with industry standards to this day.  Professor Goldberg reviews contemporary construction contracts and finds that they generally encourage outcomes akin to what Judge Cardozo laid out in Jacob and Youngs.  There are some nuances.  Whereas Judge Cardozo treated willfulness as a bar to substantial performance, the modern standard seems to treat it as a factor to be weighed.  Professor Goldberg thinks Judge Cardozo would have been fine with that (RLCD, 159).  I concur.  I think he stressed Jacob and Youngs' lack of willfulness in response to determined opposition from his dissenting brethren.  In most situations, standard contracts provide for cost of completion as the standard remedy if such costs are actually incurred or were not incurred for good reason.  Where costs of completion significantly exceed the benefits, diminution in value is the contractually pre-determined measure of damages (RLCD 159-60).   Standard contracts now direct disputes as to an architect's good faith refusal to issue a certificate to mediation or arbitration.  Such disputes now seldom result in litigation (RLCD, 160-61).  

The trick here is to find the right balance.  If we treat the contract right as akin to a property right and order specific performance, it gives the owner too much leverage over the contractor.  If a liability rule provides too little protection to the property owner, a moral hazard arises, and unscrupulous contractors will get away with as much deviation as the substantial performance doctrine will allow.  A great deal turns on the willfulness/inadvertence analysis, and modern contracts draw the line pretty much as Judge Cardozo did (RLCD, 161-63).  

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction
Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset
Teaching Assistants: Victor Goldberg on The Golden Victory
Teaching Assistants: Victor Goldberg on Lost (Volume) in America
Teaching Assistants: Victor Goldberg on Lost Volume in the UK
Teaching Assistants: Victor Goldberg on Mitigation
Teaching Assistants: Victor Goldberg on the Middleman's Damages
Teaching Assistants: Victor Goldberg on Sub-Sales in the UK

Teaching Assistants: Victor Goldberg on the Middleman's Damages

This is the seventh in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the sixth chapter of RLCD, which is about the correct measure of damages when there is a middleman, "B," and goods are sold from A to B in one contract, and then from B to C in a second contract. 

The chapter in some way typifies Professor Goldberg's approach.  There is a basic problem with a straightforward solution.  The middleman's damages should be the difference between the price of the breached contract and the market price.  The cases discussed often get it wrong, and scholarship, following the cases, justifies the mistaken approach to damages.  The interesting part is trying to figure out where the courts go wrong.

But the chapter is unusual, if not unique, in that the key problem with the case law and scholarship is doctrinal.  Economic principles and the logic of the transaction play a role, but the key mistake that Professor Goldberg identifies is that the cases and the scholarship lose track of the basic principle of privity of contract.  As a result, they fail to distinguish between cases where the middleman acts as a broker and those in which there are two independent contracts, both involving the middleman and no contract at all between A and C. 

Were the middleman a broker, a breach would deprive it only of its brokerage fee and perhaps some incidental damages.  But the cases handled in this chapter involve situations where the transaction between A and B and that between B and C are clearly distinct.  B has exposure to market risks on both ends.  For example, imagine that A agrees to sell 1 million units to B at a rate of 100,000 units per year over ten years.  B also buys units from other sources. In year three of its contract with A, B enters into a five-year contract with C to supply it with 50,000 units per year.  B has other contracts with other buyers.  The two contracts are completely independent, and the damages if A breaches can be determined without any need to consider the contract with C.  Similarly, if C breaches, B’s damages are not affected by its obligation to buy units from A.

When courts get the damages calculation wrong, they often fear giving the middleman a “windfall.”  In part, they fear windfalls because of a problem of statutory interpretation.  Some scholars think that the general provision in UCC § 1-305 limits recovery to putting the aggrieved party in as good a position as they would have been in had the counterparty performed. Because they perceive these middleman transactions as involving brokers, they think it is a windfall if the broker recovers more than its expected brokerage fee.  But these are not brokerage agreements.  As a result, there is no windfall and no problem with damages in excess of what § 1-305 permits.

In Professor Goldberg's view, where the middleman (B) is exposed to market risk if the seller (A) breaches, allowing the difference between contract and market under § 2-713 is the appropriate remedy.  If the buyer (C) breaches in a situation where the middleman is exposed to market risk, the appropriate remedy is similarly provided in § 2-708. The courts sometimes reach that conclusion based on the canon of construction that specific terms trump general terms.  They reason that § 2-708 or 2-713 is more specific than § 1-305.  But from Professor Goldberg's perspective, there is no tension between the provisions, because §§ 2-708 and 2-713 merely grant the non-breaching party its expectation.

Cases discussed in the chapter include:

• Allied Canners & Packers v. Victor Packing Co.
• Tongish v. Thomas
• TexPar Energy v. Murphy Oil)
• KGM Harvesting v. Fresh Network
• H-W-H Cattle v. Schroeder
• NHF Hog Marketing v. Pork-Martin
• Cargill, Inc. v. Fickbohm
• Unlimited Equipment Lines v. Graphic Arts Centre
• Nobs Chemical U.S.A. v. Koppers Co.
• Union Carbide Corp. v. Consumers Power
• Diversified Energy v. Tennessee Valley Authority
• Purina Mills v. Less
• Westlake Petrochemicals v. United Polychem

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

Teaching Assistants: Victor Goldberg on Mitigation

Teaching Assistants: Victor Goldberg on Mitigation

What does it mean to mitigate damages?  Victor Goldberg provides an answer in the fifth chapter of his  second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD), and we recap it here in our sixth post on that book. Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  

The chapter discusses two UK cases, British Westinghouse Electric & Manufacturing v. Underground Electric Railways, and The New Flamenco.  In British Westinghouse, the plaintiff, British Westinghouse (BW) provided steam turbines used in the London Underground (UER) in 1902.  The turbines did not work properly, and UER incurred excess annual costs of £10,000, mostly for coal purchases.  After five years, UER replaced the BW turbines with Parsons turbines, which cost less than one third of what the BW turbines costed and saved UER £20,000 in annual fuel costs.  At the time, advances in steam engines were occurring at the rate of advances in computer technology today.  Although the turbines had a twenty-year lifespan, they were obsolete within five, with or without the defects. 

When BW sued on an unpaid balance of £85,398, UER counterclaimed for excess coal costs (either the £40,000 already incurred or the £240,000 that would be incurred over the life of the turbines).  In the alternative, BW maintained that it was entitled to the cost of the Parsons turbines, as that was the cost of UER's mitigation efforts (RLCD, 88-89).  The arbitrator awarded UER the mitigation damages it sought.  The High Court and the Court of Appeals upheld the award.  The House of Lords reversed (RLCD, 90).  UER would have replaced the obsolete BW turbines in any case (RLCD, 91).

In The New Flamenco, an owner and a charterer fell out while negotiating an extension of the charter period, and the charterer insisted on returning the ship at the expiration of the original charter term.  The owner claimed damages in the form of the €7,558375 it would have earned had the charter been extended by two years.  Two sets of facts intervened.  First, just after the charterer repudiated, the owner sold the vessel for €23,765,000.  Second, during what would have been the charter term, Lehman Brothers failed and the market for ships collapsed.  The ship's value was now only €7,000,000.

The charterer argued that the owner was better off for the breach, which induced the sale before the market collapsed (RCLD, 94).  Those familiar with Professor Goldberg's work will know that this is faulty reasoning, but both the arbitrator and, after reversal in the High Court, the Court of Appeal accepted that argument.  The Supreme Court reversed again.

The proper measure of damages is the change in the value of he contract at the time of breach.  If there were an available market for the re-charter of the vessel, the owner could mitigate.  The parties, it appears, did not put forward evidence of that market, thinking that the sale of the vessel rendered the availability of the charter market irrelevant.  However, Professor Goldberg points out, what we really need to know is whether the sale price of the vessel, which had somewhere between five and fifteen years of useful live ahead of it, reflected a new charter covering the next two years or assumed that the vessel would go unused for a time.  The sale itself is not mitigation; it is only a datapoint that helps us pinpoint the value of contract at the time of the breach (RLCD, 97-98).

In conclusion, Professor Goldberg comments on the confusion that ensues in both cases when courts treat either the purchase of new turbines or the sale of the New Flamenco as mitigation.  The turbines were obsolete, so there was no way to mitigate the damages done by their sub-optimal performance, nor would there be costs to be calculated going forward, because the turbines would have been replaced in any case.  The sale of the vessel only gives us data about the value of the contract at the time of the breach.  Its value after the 2009 collapse provides no information relevant to that question (RLCD, 99).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

This is the fifth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the fourth chapter of RLCD, which is about the lost volume problem as handled in courts in the United Kingdom.

This short chapter does not really break new ground in terms of Professor Goldberg's larger arguments.  He merely provides more examples of the outrageous results that proceed from courts in two separate jurisdictions making what he regards as the same mistake.  Paraphrasing Lord Hoffman in The Achilleas, Professor Goldberg posits that damages in contracts cases ought not yield absurd results.  Requiring parties to pay damages well in excess what they would have paid for the option to breach, as lost volume profits often do, renders the resulting contract absurd (RLCD, 69-70).  For this reason, sophisticated parties frequently contract around the lost volume remedy (RLCD, 70).

Professor Goldberg discusses three cases involving car sales.  The basic rule, as discussed in the cases and the treatises, is that a dealer can collect lost profits when it had adequate inventory to meet demand.  In such cases, the courts reason, but for the breach, the dealer would have sold one more car and so it is entitled to its lost profits.  It recovers nothing when it had just enough cars to meet demand such that the breach made no difference.  In Professor Goldberg's view, "The lost volume seller framing gets it backward. It sets the option price high the the market is slack and low (or zero) when the market is tight" (RLCD 71-72)  This is so because in a tight market, the dealer would not be able to get cars from the manufacturer and so could not recover lost profits.  In the end, in this context the lost volume remedy sets an option price that is unknown to the buyer, almost certainly too high and "perverse" because backwards.  The alternative would be to make the option  price explicit by asking the buyer to pay a non-refundable deposit (RLCD, 77).

In B2B cases, lost profits are harder to calculate -- they should be the difference between the contract price and the but-for costs.  Lost volume damages can result in ridiculous amounts of damages.   In a research-intensive business, lost profits could exceed 50% of the contract price.   Imagine that a software developer offers a just-completed product for sale for $100,000.  The buyer reneges, and the software developer finds a new buyer.  If the product is delivered electronically, but-for costs approach zero, and lost volume damages would be $100,000, more or less.  Again, this is an absurd result (RLCD, 69-70).  But it is the result ordered in a number of English cases.  In In re Vic Mill, and Hill & Sons v. Edwin Showell & Sons, Lim., cases from the World War I era, courts awarded lost volume profits so long as seller had the capacity to meet all demand (RLCD, 78-80).  

English courts also applied the lost volume doctrine in the equipment rental context.  Both cases involved liquidated damages provisions.  In one case, the damages provision was set aside as a penalty, but on appeal, the court imposed lost profits damages calculated as the liquidated damages adjusted for depreciation and other costs.  In the second case, the court upheld a liquidated damages provision set at 50% of the contract price because it was not excessive in relation to damages based on a lost-volume theory (RLCD, 81-84).  Professor Goldberg would have struck the latter liquidated damages clause because it was in a consumer lease, and it seems unlikely that the defendant was on notice of the clause.  I'm surprised that Professor Goldberg does not delve into potential conceptual problems in applying the lost volume sales concept in the context of leases.  

Finally, in Sony Computer Entertainment UK Ltd. v. Cinram Logistics , UK, Ltd, there was no breach.  Rather, defendant was responsible for warehousing and distributing memory cards for Sony's Playstation.  It conceded liability for allowing the memory cards to be diverted.  The question was whether damages should be the cost to Sony of the lost cards (£56,246) or or the lost profits Sony could have gotten had it been able to sell not only these cards but other cards that it had in inventory sufficient to meet demand (£187,989).  Professor Goldberg argues that the lost volume analysis make no more sense in this context than it does its "natural habitat".  The smaller figure is the only one that makes any sense (RLCD, 84-86).

Concluding his section on lost volume profits, Professor Goldberg pleads to put this wayward doctrine out of its misery.  His argument for why it is wrong may also explain its longevity: courts impose lost profits damages because they think that the breaching party ought to pay for the harm that they caused.  This is the wrong way to approach contracts damages.  Rather, courts can and should ask what a buyer would pay for the option to breach.  Parties sometimes provide an easy answer to that question through liquidated damages clauses or through non-refundable deposits.  But courts, enamored of lost profits, too often ignore such devices, resulting in penalties that can be far harsher than the ones they routinely strike down (RLCD 86-87).

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

This is the fourth in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the third chapter of RLCD, which is about the lost volume seller under the UCC's § 2-708(2).

Lost volume profits permit a seller to recover damages when, because it has sufficient inventory to meet demand, it cannot effectively mitigate.  But for buyer's breach, the logic goes, seller would have had two sales instead of one.  According to the estimable White and Summers, this is the remedy on which "all right-minded people would agree."  Not so, says Professor Goldberg.  The remedy should be the price that buyer would pay for an option to terminate/cancel.  Where there is no deposit paid and market conditions have not changed, the default rule should be zero damages, absent progress payments, which Professor Goldberg would treat as a series of nested options (RLCD 47).  

Rather than thinking in terms of lost volume, Professor Goldberg asks what a buyer would pay for an option to purchase.  The hotter the market for the goods, the more expensive the option should be, but lost volume profits create the opposite effect.  If it is easy for the seller to fill its inventory, presumably because the market for the goods is slack, the buyer has to pay a high price for breach.  But if no substitute goods are available, perhaps because the goods are much sought after and hard for the seller to obtain, the price for the option is low.  Lost volume recovery sets the price for the option that is not just wrong; it is backwards (RLCD 51). 

In some cases, the parties set their option price through a non-refundable deposit.  But courts have set aside such negotiated liquidated damages in favor of the lost volume remedy (RLCD 51-52).  The lost profits calculation also might also be wildly and arbitrarily different, depending on whether the seller is vertically integrated with the manufacturer (RLCD 52).

Overall, Professor Goldberg uses case law to illustrate three general themes.

(1) Lost volume recovery sets an excessive implied option price for breach.  In Teradyne Inc. v. Teledyne Indus., Inc., for example, the court treated buyer as paying $76,000 for the option to buy a test system for an additional $22,000 (RLCD 53).  In Empire Gas Corp. v. American Bakeries Co., the court ordered American Bakeries to pay 38% of the contract price for conversion units when there was a competitive market for the goods, and the reasonable option price would have been zero (RCLD 67).

(2) Courts ignore explicit option prices.  In Trienco Inc. v. Applied Theory, Inc., the court did not have an explicit option price to work with, but seller had demanded a 20% deposit on previous, similar deals and 10% on the transaction at issue.  The court awarded lost volume recovery in an amount closer to 50% of the contract price (RLCD 55).   In R.E. David Chemical Corp. v. Diasonics, Inc., the court would have invalidated as a penalty a $300,000 liquidated damages clause, but it imposed $450,000 in lost volume damages (RLCD 56).  An even more outlandish result was avoided in Rodriguez v. Learjet, Inc. only because Learjet was only interested in recovering its $250,000 in liquidated damages, rather than the $1.8 million in lost volume profits that the court was poised to award (RLCD 56-57).

(3) Courts sometimes grant lost profits even when seller has an adequate remedy.   In an unpublished California case, Lam Research Corp. v. Dallas Semiconductor Corp., the court treated the seller of specially-manufactured goods as a lost volume seller, even though it could not re-sell after buyer repudiated and seller had to cannibalize the goods for use in other products.   An action for the price under §2-709 would have provided an adequate remedy (RLCD 59-61).   In Nederlandse Draadindustrie NDI V.V. v. Grand Pre-Stressed Corp., the court granted lost volume recovery when simple contract vs. market damages would have been appropriate.  The result was an award of damages amounting to 35% of the contract price instead of 6-10% (RLCD 61-62).  Jewish Federation of Greater Des Moines v. Cedar Forest Products Co. is another case where a court awarded lost profits for a specialty item, notwithstanding seller's ability to reuse the components of the specialty item on other products.  The result was to allow seller to keep a $53,000 deposit on a $214,000 product.   The trial court had limited the remedy to $13,000 in incidental damages (RLCD 62-63).  The Montana Supreme Court upheld a $2 million jury verdict in Bitterroot Int'l Sys., Ltd. v. Western Star Trucks,Inc.  The jury was asked whether the repudiation of a five year freight-hauling and logistics service agreement implicated the lost-volume doctrine, and it concluded that it did.  On what basis the jury so concluded is hard to reconstruct from the opinion (RLCD 63-64).

Professor Goldberg proposes various fixes. Courts have generally made sense of UCC § 2-708(2) by ignoring its final clause.  Professor Goldberg thinks the better approach is to follow the statute and read it to apply only when the buyer breaches after the seller has begun production, leaving the seller with partially completed goods.  Moreover, here as elsewhere, Professor Goldberg favors allowing parties to specify their own remedies, with the UCC remedies provisions proving only defaults.  Buyers could then protect themselves against lost volume damages, which can function as a penalty for breach, with express language disclaiming liability for any lost profits.  But a couple of the cases discussed in the chapter involve large commercial transactions to which the parties committed themselves without a written agreement.  In such circumstances, it is important to have default rules that make sense.   

Professor Goldberg concedes that his approach, conceptualizing damages as a remedy for the exercise of an option to terminate or cancel a contract, does not work in every situation.  He does think it provides a better mechanism for calculating damages in the lost volume context. (RLCD 68)

If case anyone is vaguely interested in the joke inserted in my title, here's the trailer to the 1985 comedy in question

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

OCU Contracts Course Ghost Tour of Oklahoma City!

This year, for the first time, I taught the famous haunted house case, Stambovsky v. Ackley, as part of my unit on duties of disclosure.  The case annoys me, but perhaps it has some value.  I find it hard to respect a court that found that an "as is" clause is inapplicable because it applies only to physical matters and not to "paranormal phenomena."  I find it equally implausible to hold that the seller failed to deliver "the premises 'vacant' in accordance with her obligation under the provisions of the contract rider," because the house was "haunted."  As the dissent wisely cautioned, "The existence of a poltergeist is no more binding upon the defendants than it is upon this court."

My student Ariana Quirino disagreed with me on the materiality of ghosts.  Indeed, she has personal experiences of ghosts in the Law School itself!  In order to get beyond this friendly disagreement, we decided to undertake a joint venture, a ghost tour of Oklahoma City, led by local expert Jeff Provine.  The results are memorialized below:

We actually had a better turnout than the picture reflects, but some of us had to leave early, as the tour started pretty late.  I was among the early casualties, but somehow my being continued to haunt the students.

Blog Editor Emeritus Frank Snyder and the Commemoration of Priday's Mill

in 1850, a mill was established for the Hadley brothers.  Three years later, their crankshaft broke, and they sent the broken shaft off to serve as a model for a replacement.  So contracts history was made.  One hundred and fifty years later, the International Conference on Contracts was born and that first iteration of the conference included a visit to the site of the Hadley brothers' mill, known as the City Flour Mills but also as Priday's Mill.  

The site was being converted into a block of flats, but inspired by the conference, the city of Gloucester erected a commemorative plaque:

Frank Snyder, this blog's founding editor, was also part of the crew that organized that first conference, and he was invited back to Gloucester for the unveiling of the plaque.  Next year, KCON XVII will return to England for the first time since that inaugural conference, and Frank will no doubt continue his central organizational role.

What great unveilings await us as KCON enters its third decade of existence?

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(A): Response to Ethan Leib

Mel Eisenberg on Ethan Leib

Ethan Leib has had a long and fruitful career – almost sixty articles! – and it’s gratifying to learn that I contributed to his approach to thinking about the academic pursuit in some small measure. Ethan and I disagree about relational contracts, but my strong guess is that we would agree on almost everything else in the law of contracts.  But to our disagreement:

 Ethan’s strong and lucid critique of my article, and later my chapter in Foundational Principles of Contract Law, on relational contracts, has not led me to change my position in a fundamental way, but has led me to expand and clarify my position, which I do here.

To begin with, I believe I’m less rigid about rules than Ethan thinks I am. At the center of my thinking about the common law is that the common law is rule-based and that legal standards and legal principles are legal rules. The dictionary defines a rule as an authoritative prescribed direction for conduct. Expanding that definition a bit, a legal rule is an authoritative prescribed direction that can be applied to determine whether conduct, like nonperformance of a contract, was right or wrong, and whether activity, such as a contract or a will, was legally enabled. Narrow garden-variety legal rules, legal principles, and legal standards are all legal rules, because they can all be applied to determine whether conduct was legally right or wrong and whether activity was legally enabled.

So, for example, the principle of expectation damages, that a promisor who breaches a bargain contract is required to pay the promisee the amount required to put her in the position she would have been in if the promisor had performed that can be and is applied to measure a promisee’s damages. Typically, that principle is expressed in more specific formulas that apply to different contexts – seller’s breach of a contract for the sale of goods, buyer’s breach of a contract for the sale of goods, and so forth -- but these formulas are merely instantiations of the principle, and in any event the principle can be applied directly rather than through a formula, as in the famous case of Hawkins v. McGee. Similarly, the standard of due care is typically expressed in the form of the more specific rule that a negligent actor is liable to a person he injures, but the standard can also be applied directly, as when it is said that a defendant did not exercise due care.

Ethan points out that I reject an approach to contract law rules that involve a spectrum running from discrete contracts to relational contracts. Such an approach requires definitions of the two ends of the spectrum. Ian Macneil, who created relational contract theory as a school of thought about contract law, characterized a discrete contract as having less of certain characteristics – for example, less duration, less personal interaction, and less future cooperative burdens – and a relational contract as having more of those characteristics. The problem is – there are few or no discrete contracts, because almost every contract has relational elements. For example, even buying a car usually involves protracted interactions with a salesman and a sales manager, perhaps more than one visit to the showroom, and repeated cooperative burdens to make repairs in the seller’s shop. 

A Viking and a Saxon
Image created by DALL-E

Indeed, trying to imagine a discrete contract Macneil was driven to a fantastic extreme: “[A]t noon two strangers come into town from opposite directions, one walking and one riding a horse. The walker offers to buy the horse, and after brief dickering a deal is struck under which the horse is to be delivered at sundown upon the handing over of $10. The two strangers expect to have nothing to do with each other between now and sundown, they expect never to see each other thereafter, and each has as much feeling for each other as a Viking trading with a Saxon.” OMG! There are no spectrums in contract law to speak of, because a spectrum has to have two end points, and since discrete contracts are imaginary creatures there are no end points for a spectrums running from discrete contracts to relational contracts.

Ethan thinks I would not accept multi-factor rules as rules. I would. A rule that has three, four, five or more factors is a rule. A court must go through the factors and conclude that a party is liable or not, or that the law did or did not enable certain activity, like whether a contract Is enforceable or a will is valid.

Ethan reads me to be skeptical of the acknowledgement that many  many real-world contracts involve dynamic and that relationships could do more than inform economics and sociology. Uh-uh. I regard contracts as dynamic. Tbey have a past, in the form of course of dealing, and a future, in the form of course of performance. Moreover, they are frequently modified, and under modern contract law modifications are enforceable if . . . . And the fact that parties have enjoyed a mutually advantageous business over the course of decades, as in Eastern Airlines, certainly may be relevant to interpreting their obligations. But that does not require a law that applies to, and only to, parties in a relationship that has lasted decades. The fact that parties have enjoyed a mutually advantageous relationship can be relevant to interpreting their contractual obligations even if that relationship has only lasted months. Again, my point is not that there are no relational contracts – my point is that there are no rules of contract law that apply to, and only to, relational contracts. Similarly, I don’t deny, as Ethan believes I do, that some rules can only be applied through a multi-factor test. First, such a rule is a legal rule, and second, such a rule can be applied to determine what category a relationship falls into even if the parties entered into their relationship two weeks or two days ago.

Finally, Ethan believes I am skeptical about spectrum approaches in the law. But I’m not.

So hip-hip hurray for relational contracts, but not for the proposition that there are rules of contract law that apply to relational contracts and no other contracts.

Previous posts in the Symposium:

Virtual Symposium: Mel Eisenberg and Contracts Law Scholarship

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part I: Shawn Bayern

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part II: Douglas Baird

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part III: Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IV: Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VI: Mark Gergen

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VII: Jennifer Martin

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VIII: Harris Hartz

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IX: Hila Keren

Subsequent posts in the series:

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(B): Response to Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(C): Response to Sid DeLong

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IX: Hila Keren

Finding Morality in Contract Law
Hila Keren

When I was a (much) younger post-doctorate fellow at the Center of Law and Society in Berkeley, I was lucky to experience some of what Ethan Leib shared in his contribution to this symposium: Mel Eisenberg’s warmth and generosity. We shared a lovely lunch, for which I believe he paid, but that’s not my evidence of the previous point. Although we had so little in common in terms of stardom (I had none!), gender, age, or even country of origin, Mel learned about my Ph.D. thesis (a feminist one) and announced that we share something unique. I guess my jaw dropped because he hurried to explain that “nowadays” (read: almost two decades ago), only a few scholars are truly passionate about the good old law of contracts and sincerely focused on the role it plays in our lives. Until today, those words inspire my work. More importantly, they illuminate Mel’s lifetime insistence that morality is integral to contract law and moral behavior is expected from contractual parties who seek to enforce their agreements. To me, this theoretical vision is tightly linked to Mel’s interpersonal kindheartedness.

Frequent readers of contract law scholarship are usually exposed to variations of the argument that this field of law has, and should have, little to do with morality. As early as the end of the nineteenth century, Oliver Wendell Holmes made a strong claim against the integration of contract law and morality. In his Harvard Law Review article, The Path of the Law, Holmes wrote that “[n]owhere is the confusion between legal and moral ideas more manifest than in the law of contract.” He also cautioned that it would be “a gain if every word of moral significance could be banished from the law altogether.”

Fast-forward to 2008, Richard Posner echoed the message from the bench when he stated in Classic Cheesecake v JPMorgan Chase Bank: “it is a strength rather than a weakness of contract law that it generally eschews a moral conception of transactions.” Like Holmes, Posner added a normative warning. In his view, not without followers among contract theorists, it is better to discuss real contractual issues rather than “[r]uminating on the meaning of ‘unjust’ and ‘unconscionable.’” 

Much of the modern resistance to any incorporation of morality in contract law focused on the doctrine of unconscionability, perhaps because its very name reflects an aspiration to such integration. Commentators, many of whom leaders or followers of the law and economics approach, criticized the doctrine’s application in the watershed 1965 case of Williams v. Walker-Thomas Furniture Company. They argued that market actors should be left free and never be expected, as Posner put it in another decision, to be their “brother’s keeper.” Or, as Frank Easterbrook explained in Wilkow v. Forbes, Inc., “an allegation of greed is not defamatory” because “sedulous pursuit of self-interest is the engine that propels a market economy.” Moreover, many in this camp and outside of it also labeled the doctrine of unconscionability “paternalistic.” Many, including most famously Richard Epstein, added caution that excusing exploited promisees due to contracts’ unconscionability would end up harming the victims instead of offering them relief.

Given this dominant opposition, one is left puzzled: How should the law respond to exploitative market behaviors that yield predatory contracts? By and large, our legal system delegates the problem to the judiciary. Then, admittedly, many greed-born contracts slip under the legal radar because the exploited parties simply lack the means, monetary and otherwise, to seek legal help. Those who do manage to access courts request release from their promise, mainly in the name of unconscionability. On the other hand, exploiting parties frequently use their abundant means to turn to the law and demand enforcement of their contracts. Therefore, any time litigation ensues, courts must choose, respectively, between greed and conscience, exploiters and exploited, and enforcement and unconscionability. So, what should courts do? I think they should follow Mel’s analysis.

In the face of the loud attacks on morality in contract law in general and the use of unconscionability in particular, Mel has developed and shared with the world the opposite approach. He has brilliantly analyzed, demonstrated, and compellingly argued that insisting on moral behavior by contractual parties is an integral part of contract law and for all the right reasons. Nowhere is this approach more evident than in his celebration of unconscionability in his phenomenal book Foundational Principles of Contract Law, in which the third part is dedicated to “Moral Elements in Contract Law.” Opening this part is chapter seven, titled “The Unconscionability Principle,” thereby elevating the concept from a doctrine to a leading principle, claiming its centrality to the contractual legal system, and challenging its marginalization by others. To remove any possible doubt about this feature, the chapter starts by unapologetically crowning the principle as “one of the most important developments in modern contract law.”  Morality, Mel explains, is at the heart of this “fundamental principle,” reminding readers that “the term unconscionable suggests a significant degree of moral fault.” The beauty of the principle, he further illuminates, is its ability to connect rather than separate contract law and social morality (the latter eloquently defined as the “moral standards that are rooted in aspirations for the community as a whole”). As our social norms evolve, Mel writes, unconscionability “continues to unfold,” ensuring our law reflects and supports those norms.        

In a set of hypotheticals with lovely titles, the chapter illustrates how essential is the expectation of morality to the appropriate operation of contract law. For example, The Desperate Traveler hypo raises the problem of “immoral exploitation of [a] promisor’s distress.” Similarly, The Desperate Patient story focuses on a medical provider acting “in a morally improper way” when demanding an excessive price for a life-saving procedure that others cannot perform. Further, The Artless Heir example shows how exploiting an unsophisticated counterparty’s lack of understanding of a transaction sometimes “violates social morality” even if basic legal capacity exists. In the same vein, as if predicting COVID-19, Mel states that “price gouging is immoral” because “it is morally improper to significantly raise prices to exploit important needs resulting from a temporary disaster.” This is also his view of cases of sellers’ exploitation of price ignorance on the side of consumers and some door-to-door sales. Those and other compelling examples more generally show how unconscionability is the voice of conscience and morality within our contractual system. Or, in Mel’s words, “Whether a contract is unconscionable normally turns in significant part on whether the promisor engaged in morally improper conduct.”

Significantly, the chapter offers a forceful response to the loud outcry of “paternalism!” This part (which I had the privilege of reading in earlier drafts of the book) truly inspired much of how I think about the role of contract law, so please allow me to consume some more virtual space by presenting the entire idea. Mel writes: “It is not paternalistic to refuse to enforce a contract obtained through morally improper conduct.” He then emphasizes that even if some paternalism is involved, it is “a very diluted form of paternalism.” Why? Because in applying the unconscionability principle: “the government forbids nothing and commands nothing. It simply says to the promisee, ‘If you can accomplish your ends without our assistance, fine. But don’t ask us to help you recover a pound of flesh.’”

Touché! And also, how beautiful it is that Mel’s phrasing echoes not only Shakespeare’s The Merchant of  Venice but also Judge Story’s insistence that Courts of Equity “ought to interfere” because unconscionable contracts “shock the conscience.”

But what I find most thought-provoking in this forceful statement is that it can be read as going far beyond successfully replying to allegations of paternalism. Hidden here, but not too far from the surface, is a precious gem: a robust conceptualization of how a moral contract law should work. In Mel’s reply, I find not only a justification for the judicial invalidation of exploitative contracts but also a broader obligation of the state. Because courts support the contractual system by providing market actors with valuable enforcement services, they must be careful about how they do so. Accordingly, when market actors utilize contractual powers in an immoral manner, the judiciary should refrain from supporting their abuse of the system. As a matter of duty, the state ought to operate the foundational principle of unconscionability to prevent the enforcement of agreements that transgress society’s moral norms.

Recognizing the state’s ability and obligation to discourage the immoral use of contracts via the unconscionability principle is invaluable. Elsewhere, I explained why the way courts operate the principle is critical to how people choose to behave. As scientists have shown, “rightness and wrongness…are things we feel,” and moral emotions like guilt are designed to guide us to avoid what we believe is immoral. What courts say and do when facing the puzzle of contracts blemished by immoral conduct has a significant impact on this human process. Given the immense expressive power of the law, judicial decisions and their dissemination via the media shape what people consider a faulty behavior that should be avoided. For example, when the law defines the exploitation of distressed people as improper, it can induce in market actors the anticipation of guilt feelings if they so misbehave. In response, some actors may decide to escape this foreseeable unpleasant emotion by taking the course of more self-restraint. By contrast, the conventional insistence that contract law should focus merely on economic incentives and avert questions of morality suppresses this emotional incentive to refrain from exploitation.

And there is more. Fully understanding the power of the unconscionability principle carries an even broader meaning. It suggests that contract law’s principles should reflect and support the idea that contracts—as powerful private tools trusted in human hands—should be morally used. For instance, as I have recently written, much like unconscionability, the foundational principle of good faith should be operationalized to discourage market providers from humiliating their counterparties. On this view, employers act in bad faith (and not only discriminate as decided in Bostock v Clayton County) when they terminate contracts with LGBTQ+ employees after learning about their sexual orientation or gender identity. Likewise, MacDonald’s performs its contract with a Black diner in bad faith when its manager responds with horrible racial slurs to an ordinary request to replace cold fries with fresh ones.

Once more, it all goes back to Mel’s argument that the state should not accept and reward immoral abuses of the contractual system. Following this guidance, I would add that the state should secure market citizenship for all its members whenever its judiciary applies the law of contracts. That means that the foundational principles of contract law must be used to prevent those profiting from contracts from damaging the contractual experiences of others. Note that this broader point is again a matter of morality: free and equal citizens must respect each other, and the state ought to refuse to support their contractual endeavors when they intentionally and severely harm the human dignity of their counterparties. Because exploitation and humiliation both have this injurious effect, such behaviors should be handled via foundational principles like unconscionability and good faith.

Mel Receiving the KCON Award in 2012

All told, read as embedding morality in contract law’s leading principles, Mel’s chapter on unconscionability, and his entire notable body of work, inspires a deeper conversation regarding contracts, the people who use them, and the role of contract law. It invites us to imagine a world in which contracts are not battlefields wherein the winner takes it all but rather an essential type of relationship between humans. Those humans are not only rational and selfish but also equipped with good amounts of social and emotional intelligence. As such, they are much more amenable than the infamous homo economicus to moral cues, including those expressed by the law. Furthermore, under this view, contract law is not only a quintessential strain of private law designed to support the free market. Instead, it is also a unique social institution that can (and should) foster morally healthy relationships between market actors. So, in conclusion, I hope you can see how such a generous outlook on contracts, humans, and the law not only arises from Mel’s remarkable work but also ties in with the generosity and care he exhibited in that lovely lunch many years ago.

Previous posts in the Symposium:

Virtual Symposium: Mel Eisenberg and Contracts Law Scholarship

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part I: Shawn Bayern

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part II: Douglas Baird

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part III: Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IV: Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VI: Mark Gergen

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VII: Jennifer Martin

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VIII: Harris Hartz

Subsequent posts in the series:

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(A): Response to Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(B): Response to Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(C): Response to Sid DeLong

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part III: Ethan Leib

My Relationship with Mel Eisenberg About Relational Contracts
Ethan J Leib

When I was a fresh-faced contracts professor in San Francisco, I was lucky enough to be invited to Mel Eisenberg’s class to defend a paper I was then publishing about relational contract theory.  It felt exciting to be welcomed to the big leagues by a leading light in the field – but also daunting to be subjected to scrutiny by someone I was criticizing and by someone who knew a lot more contract law than I would ever know.  The class was deeply stimulating and the students especially probing and thoughtful.  I met a future co-author in that class, an intellectual partnership that continues to inform my scholarship. 

But what I remember most – and the thing that shaped me most from that encounter – was Mel’s graciousness in engaging a young punk with sympathy and care.  Experiencing someone who knows it all dealing with a know-it-all in a workshop setting provided a model for how I come to workshops today: Is there something I can learn here?  Mel showed me how it is done, and I can still remember him asking me seriously rather than facetiously, “Do you think I am making a mistake, and am too rigidly interested in rules rather than standards in my approach to relational contract theory?”  He saw intellectual exchange as a way to see his own thinking from others’ standpoints – and more than any specific paper of Mel’s, this is the most important mode of thinking he added to my life back when I was still impressionable.

I’ll admit I came to Chapter 54 of his Foundational Principles of Contract Law hoping to see him convinced by our dialogue.  I had tried to impress upon him all those years ago that searching for a “relational contract law” that would apply only to “relational contracts” with specialized rules was not really the objective of a thoroughgoing relational contract theory.  Although he was always happy to concede that many contracts do not fit the paradigm of contracts between strangers that occur in a single moment in time in a perfect market, as classical contract law often seemed to assume, he remained skeptical that the acknowledgement that many real-world contracts involve dynamic and ongoing relationships could do more than inform our economics and sociology.  In short, he always felt that until one could really successfully define in a legally operationalizable way “relational contracts” there could be no “relational contract law.”  In his recent book, he sticks to his guns, highlighting why using duration or incompleteness won’t do the trick in dividing the world between relational and discrete contracts.

I’m sticking to my guns, too.  There is nothing legally impossible about a spectrum approach if one is comfortable with loose standards and judicial discretion.  Here is what Mel says about that: “Under this approach a contract is characterized as lying at the discrete end of the spectrum if it has less of certain characteristics—for example, less duration, less personal interaction, less future cooperative burdens, and less in the way of units of exchange that are difficult to measure—and as lying at the relational end of the spectrum if it has more.”  (735)  Mel doubles-down here to say that the spectrum approach works if you are doing economics or sociology but not law: “the enterprise of contract law entails the formulation of rules and a spectrum approach is inadequate to that enterprise because it cannot be operationalized . . . Rules whose applicability depends on how many relational indicia a contract has . . . would be rules in name only.”  (735) 

By my lights, the law routinely uses a set of indicia to make legal categorizations.  Contract and tax lawyers will easily be able to think of the employee/independent contractor distinction as an example (even if they aren’t sure whether it is a 9-factor test, a 20-factor test, or a 3-factor test).  Notwithstanding that some want bright-line rules rather than multi-factor analysis, it would be hard not to acknowledge that these efforts to classify workers are legal rather than merely economic or sociological.

Thus it seems to me still, all these years later, that Mel continues to prefer not to adopt the spectrum approach largely because it feels too messy to him and isn’t “rule-like” enough to his taste.  There is nothing wrong with that sensibility, of course, but it doesn’t prove that relationalists are unable to advocate for a spectrum approach in the law.  I also don’t think the spectrum approach ultimately requires a legal system to proliferate regimes that toggle between different types of contracts necessarily; one could have one law and one “good faith” requirement – and then implement it differentially depending on relational dimensions.  What counts as good faith for two companies in a multi-decade relationship may be different from what it requires for two companies in a new venture dealing far at arms’ length. 

That seems like a relationalist contract law even Mel could live with – and it doesn’t seem to require a singular technical definition of a relational contract.  I always like to point out the first line of Eastern Air Lines, Inc. v. Gulf Oil Corporation to my students: “Eastern Air Lines, Inc. and Gulf Oil Corporation, have enjoyed a mutually advantageous business relationship involving the sale and purchase of aviation fuel for several decades.”  Isn’t this just a judge setting the stage for his decision-making by telling us that relationships matter in the application of contract law?  Isn’t that enough to help remind us that there is such a thing as relationalist contract law, after all?

Related posts from the Mel Eisenberg Symposium:

Virtual Symposium: Mel Eisenberg and Contracts Law Scholarship

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part I: Shawn Bayern

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part II: Douglas Baird

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IV: Nancy Kim

Posts from the second week:

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VI: Mark Gergen

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VII: Jennifer Martin

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VIII: Harris Hartz

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IX: Hila Keren

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(A): Response to Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(B): Response to Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(C): Response to Sid DeLong

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part II: Douglas Baird

Unscrambling Excuse
Douglas Baird

The domain of classical contract law has discrete boundaries and hard edges. Legally enforceable promises are limited to bargained-for exchanges. There must be an offer and an acceptance. A contract exists, or it does not. You receive expectation damages or nothing. Such rigid traditionalism, however, no longer captures what contract law is about, if it ever did. Mel Eisenberg’s corpus, in particular his exemplary work on excuse, makes this manifest.  See Melvin A. Eisenberg, Impossibility, Impracticability, and Frustration, 1 J. Legal Analysis 207 (2009).

Boundedly rational parties do not always precisely spell out their contracts to account for the unexpected, and hence promises that appear unqualified on their face should not be understood literally. If a bargain rests upon assumptions about future states of the world, the deal is sensibly called off if those assumptions for unexpected reasons do not hold. You agree to rent my theater for an evening and, through no fault of mine, it burns down. In this event, we each should go our separate ways. Similarly, if I have an apartment that overlooks the King’s coronation, and you are eager to see it, it is too bad for both of us if the event is called off. I lose the handsome sum from letting out my apartment for a day, and you lose the chance to entertain your friends with a spectacular view of the pageant.

Frustration and excuse are heavily fact dependent. The doctrine in the first instance is merely a default term. Dickered contracts contain elaborate force majeure clauses. We can spill ink over what counts as excuse or frustration, but Mel Eisenberg shows that this is not what is conceptually hard. The problem comes from what happens next. Money may have changed hands, and both parties might have spent money in reliance on the contract. Unexpected events typically bring with them a loss, and someone must bear it. This makes it fruitless to reduce excuse and frustration to a simple yes/no, on/off affair. Any coherent account of excuse and frustration must couple the finding of excuse or frustration with the appropriate relief. The egg must be unscrambled.

It is well accepted that restitution operates in this environment. If one party pays the other in advance, that party should be able to get its money back. But beyond this, much hard thinking needs to be done. It might seem that reliance damages should have no role to play. Both parties to a contract spend money in anticipation of the performance, and it makes little sense for each party to hold the other liable for her expenses. But the two parties do not necessarily stand in symmetrical positions. Often it is too simple to say that no one was responsible. The theater owner, while not at fault, controlled the theater and had some capacity to reduce the chance of fire. Even when excuse applies, some parties may be more at fault or better positioned than another.

Mel Eisenberg (right) draws on a series of old Massachusetts cases to shed light on the problem. A general contractor’s contract to build a hospital was cancelled and awarded to another bidder instead. The general contractor then faced its own subcontractors, and the doctrine of excuse applied. The general contractor could not be sued for expectation damages. The cancelation of the main contract called off the contract between the general contractor and the subcontractor. ­At the same time, however, the general contractor was, at least to some extent, responsible for the contract being voided. The subcontractor should be able to recover some of its reliance expenditures. See Albre Marble and Tile Co., Inc. v. John Bowen Co., 338 Mass 394 (1959).

What remains a mystery is how far this idea extends. The testing excuse case is one in which the unexpected event keeps both parties from performing and money passes from one to the other. Consider two singers. They agree to perform together at a specific time and specific venue and then split the gate. One singer faces $100 in expenses that the other does not. To ensure that they come out even in the end, the second singer gives $50 to the first. An unforeseeable act of God renders the venue unusable and the joint performance is cancelled. What happens now? If the first singer had been spent none of the $100 she received from the second, the second singer should have a restitution action for $50. But what if the $100 has been spent? Does the second singer still get her $50 back? It might seem that the two singers invested in a joint enterprise and should share the losses equally.

Assume that your intuition suggests that the losses should be shared in this case, and the second singer is not entitled to recover the $50 she gave to the first. How much does one have to change the facts to alter your intuition and for you to find that one party can recover what she has given the other notwithstanding the expenses the other has incurred? Consider, instead of two singers, there is a couple that engages a restaurant for their wedding reception and pays in advance. Power is lost halfway through the event. It is not the fault of either party, and the contract explicitly lists a power failure as an event of excuse. The unhappy wedding couple can obtain restitution of the money they gave to the venue less any benefit they received before the power failed. Facto v. Pantagis, 915 A.2d 59 (N.J. App. 2007). But does it make sense that the venue bears the entire loss for the food that is uneaten and has to be thrown out?

I suspect that many share my intuition that the couple should have an easier time recovering the money they have paid notwithstanding the substantial loss the restaurant faces, but how is the restaurant different from the first singer? English law allows some account to be taken for the out-of-pocket reliance costs as an offset against restitution in excuse cases. See Gamerco SA v. ICM/Fair Warning (Agency) Ltd., [1995] E.M.L.R. 263 (High Court, Queen’s Bench). But when exactly should this happen?

The genius of Mel Eisenberg’s work here, as elsewhere, shows how best to cope with such questions. He does not confront this problem in particular, but his work does suggest, perhaps, that regardless of where one draws the line, the wedding couple has a better chance of recovery than the first singer. To be sure, the restaurant is not at fault for the power failure. If it were, there would be no excuse. Nevertheless, it is possible to lay some responsibility at its doorstep, and it is not something that rigid formalism should require us to ignore. Again, the law of excuse, like the law of contract, need not be a rigid, yes/no, on/off affair.

Related posts from the Mel Eisenberg Symposium:

Virtual Symposium: Mel Eisenberg and Contracts Law Scholarship

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part I: Shawn Bayern

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part III: Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IV: Nancy Kim

Posts from the second week:

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VI: Mark Gergen

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VII: Jennifer Martin

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VIII: Harris Hartz

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IX: Hila Keren

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(A): Response to Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(B): Response to Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(C): Response to Sid DeLong

Teaching Assistants: Victor Goldberg on The Golden Victory

This is the third in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the second chapter of RLCD.

In his chapter on The Golden Victory [2007] UKHL 12; [2007] 2 WLR 691, Professor Goldberg again illustrates why the best way calculate damages for breach of a long-term commercial contract is to determine the value of the contract as an asset at the time of the breach (or the time repudiation is accepted by the non-breaching party).  The Golden Victory involved a seven-year time charter of a shipping vessel, which began in 1998 and was to terminate in 2005.  The charterer repudiated in 2001.  An arbitrator determined that there had been breach in 2002.  The award was not calculated until late 2004, and in the interim the second Persian Gulf War broke out, which would have triggered a clause in the time charter that permitted termination in case of war or hostilities between named states, including the United States and Iraq (RLCD 36-37). 

The House of Lords, in a 3-2 decision, determined that damages must take into account the fact that the United States' invasion of Iraq in March, 2003 would have triggered a right of termination regardless of the breach, and therefore reasoned that granting damages beyond that point would result in a windfall to the owner.  This seems obviously daft.  If damages were determined in 2002, they would have compensated the owner for the full term of the time charter, but they also would have taken into account that the allocation of risk between the parties meant that the value of the time charter might be something less than the most advantageous recovery sought by the owner.  That allocation of risk would include the chance of war or hostilities but also the chance of numerous other contingencies that the parties anticipated might have occurred but did not occur.  The amount of damages should not turn on what the adjudicator knows at the time of the award; it should turn on what can can be known about the value of the contract at the time of the breach (RLCD 37-39).

Professor Goldberg discusses, Flame v. Glory Wealth, which seems to take the mistake of The Golden Victory one step further.  In Flame a charterer repudiated a contract based on its belief that the owner, due to its deteriorated financial position, would not be able to provide the vessels it required.  The owner's position had deteriorated because the collapse of Lehman Brothers had resulted in a 75% decline in the market for freight.  Here we have a dispute involving a fact in control for the non-breaching party (RLCD 39). 

The court determined that Glory Wealth suffered no loss because it indeed could not have supplied the vessels.  Professor Goldberg argues that, having taken a short position in vessel market, its position was not as dire as the court assumed, and granting it recovery that reflected the discounted market value of contract at the time of the repudiation would not have resulted in a windfall to Glory Wealth (RLCD, 40).  There would be no injustice if the repudiating party paid for its breach.  Its "decision to breach is evidence of its contemporaneous belief in the owner's ability to perform" RLCD 41).

In The Golden Victory, the court awarded lessened damages because of an event that it knew had taken place but that seemed unlikely at the time of the breach.  In Bunge SA v. Nidera BV, the court similarly bungled the damages award in a case in which both parties knew that a bargained for right of termination was likely to be triggered.  In that case, a decision by the Russian government to place an embargo on wheat exports triggered a right of cancellation.  Under the contract, a delivery of wheat was to be made at the end of August.  Buyer, citing the Russian legislation, cancelled the contract on August 9th, and this repudiation was accepted on August 11th (RLCD, 41).

Here again, the UK Supreme Court followed The Golden Victory and awarded nominal damages of $5.   It did so notwithstanding the parties' "damages clause" which specified that damages should be the contract-market differential at the time of the breach (RLCD, 42).  The court just could not accept that the clause could apply in these circumstances. 

The case thus illustrates two of Professor Goldberg's themes.  First, courts err in associating the value of the contract with the value of the goods at issue at the time of the award rather than considering the value of the contract as an asset at the time of the breach.  In so doing, they should not consider subsequent events.  Second, courts err in refusing to respect the allocation of risk to which sophisticated parties have agreed.  Courts apply the default damages rules that they have devised, even if those rules are daft and even when the parties have chosen to depart from those daft default rules.  "Properly understood, the compensatory principle would compensate the promisee for the change in value of the contract at the time of the breach."  

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Guest Post by Otto Stockmeyer on Wood v. Boynton and Murph the Surf

Otto Stockmeyer (left) has taught at the WMU-Cooley Law faculty since 1977. He has also taught as a visiting professor at California Western School of Law and Mercer University Law School, and in the "Down Under" Foreign Study Program.  He has taught Contracts, Criminal Law, Equity/Remedies, Legal Writing, and Research & Writing

A three-time recipient of the Stanley E. Beattie Teaching Award, Professor Stockmeyer was named national Outstanding Professor in 1985 by Delta Theta Phi Law Fraternity. He has also received the Socrates Award from the Hellenic Bar Association and the Student Bar Association's first Barrister Award.

Professor Stockmeyer is the editor and co-author of the book Michigan Law of Damages (1989) and is the author of articles in a wide variety of professional journals and newsletters. He is a past president of Scribes — the American Society of Legal Writers. In 2009, he was named to the ABA Communication Skills Committee. You can find his recent publications on SSRN.

A former president of the Michigan State Bar Foundation, Professor Stockmeyer has also served on the State Bar Board of Commissioners and in the ABA House of Delegates. He is a Life Fellow of the Michigan and American Bar Foundations and was named Professional of the Year by the Michigan Association of the Professions.

The Lansing State Journal recognized Professor Stockmeyer in 1988 as one of mid-Michigan's "88 Greats" for his service to the community and the legal profession. He was profiled in Michigan Lawyers Weekly as one of Michigan's "Leaders in the Law" in 2005.

Professor Stockmeyer's post follows:

I haven’t taught Wood v. Boynton in a decade. But I remain intrigued by its dramatic backstory. So I was excited to learn that MGM+ is streaming a four-part series on the life of Jack Roland Murphy: “Murf the Surf: Jewels, Jesus and Mayhem in the USA.”

Episode 1, “The Heist,” covers Jack’s sensational 1964 theft of world-renown gems. His haul included the “Eagle Diamond” (left), the mystery stone at issue in Wood’s case. Presumably upcoming episodes will detail Jack’s subsequent major life events: a double-murder conviction, self-proclaimed prison conversion, parole, ministry, and recent death.

I prefer the less-dramatic 1992 American Justice documentary “Murph the Surf” (Season 1, Episode 3). It’s narrated by lawyer-commentator Bill Kurtis. A 1975 movie (“Live a Little, Steal a Lot: The True Story of ‘Murph the Surf’”) is also based on his exploits. Whether “Murf” or “Murph,” Jack Murphy led a cinematic life, for sure.

My blog post “The Adventure of the One-Dollar Diamond“ includes links to more information on Wood’s aftermath. I should have included Jack’s slim autobiography “Jewels for the Journey” (1989).

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Last week, we resumed our series of posts on Victor Goldberg's collected writings on contracts. Links to previous posts on  Rethinking Contract Law and Contract Design (RCL) can be found here.  Last week's post was the first in a new series of posts on the second volume, Rethinking the Law of Contract Damages (RLCD).   Today's post covers the first chapter of RLCD.

Expectation damages are the standard measure of contracts damages, and they put a party in as good a position as they would have been had the promise been performed.  But how does one measure expectation?  Professor Goldberg proposes that the best way to do so is to value the contract as an asset and seek to restore to the non-breaching party the value of the asset at the time of the breach.  He illustrates this approach in connection with concepts of cover, lost profits, and mitigation.

As to cover costs, Professor Goldberg begins with a discussion of the controversy over UCC sections 2-706 and 2-708, which seem to give the non-breaching seller the option of choosing between contract price and market price at the time of the breach or contract price and market price at the time of sale.  It seems like using the latter could result in a windfall to the seller if the price rises after sale.  Courts seem to allow it, and this has always annoyed me.  For Professor Goldberg, the issue is simple.  Give the seller the value of the contract at the time of the breach.  If the price has dropped, seller may choose to recover the certainty of expectation damages, and Professor Goldberg notes that a seller that recovers expectation damages from a breaching buyer under § 2-708(1) retains the goods.  If the seller then sells those goods at a price above the contract price, the result is the same as if the seller had waited and recovered the difference between contract price and re-sale price under § 2-706.  E.g., a seller may have a contract to sell goods for $100,000.  When the buyer breaches, the market price is $70,000.  Seller can recover $30,000 in expectation damages, but he might then re-sells the goods six months later for $120,000.  The outcome is the same if we take the difference between re-sale price and contract price.  In both cases seller gets $120,000 for the goods (RLCD, 4-9).  No windfall; no tension between the sections.  Eureka!

Professor Goldberg also notes in passing the reason why buyers' remedies are more limited than sellers.  The court in Peace River Seed Co-operative explained the difference in terms of the conjunctions used in Article 2.  "The issue was not grammar," Professor Goldberg observes, "it was economics" (RLCD, 7-8).

As to anticipatory repudiation where the court decision comes after all performance was due, Professor Goldberg argues that damages should be reckoned from the time the repudiation was accepted (or deemed accepted) (RLCD, 10).  This accords with the general approach of awarding damages that treat the contract as an asset.  In cases of repudiation, the cover price is often good evidence of that value (RLCD, 15), but is not the only evidence, and so we ought not to become overly enamored of cover.  Yet Professor Goldberg concedes that calculation of damages in this context can be challenging, especially in thin markets (Id.).

The challenge becomes more daunting when a party repudiates a twenty-year contract in year three.  To make matters worse, the contract might not be for a fixed quantity and the price might be variously indexed.  Courts attempt to value the goods at the time of the repudiation, but that is a mistake.  What they need to do is value the contract at the time of the repudiation (RLCD, 16).  Judge Richard Posner (left) took this approach in NIPSCO v. Carbon County Coal (RLCD, 17).  Courts struggle to fit such contracts into the boxes provided in UCC damage provisions. 

"Take-or-pay" contracts, in which parties commit to buying a certain quantity or, in the alternative, to pay for a percentage of the contract quantity at a certain price, pose special challenges.  Here too, courts err in trying to figure out the price of the underlying commodities rather than trying to value the contracts as assets, taking all of their components into account (RLCD, 17-23). 

On the whole, the UCC's damages provisions work well enough when the problem is shortfalls in installment contracts.  But courts struggle with repudiations of long-term contracts, because the UCC's damages provisions do not address fluctuating quantities, and it ignores relevant contractual provisions, like termination rights and price re-determination rights.  And overall, the model is incorrect to the extent that it focuses on the valuation of the goods rather than the valuation of the contract as an asset (RLCD 24-25).

Professor Goldberg's approach to minimum quantity contracts, such as that at issue in Lake River Corp. v. Carborundum, another Posner decision previously discussed in Chapter 7 of RCL, is essentially the same:

The damages should be the change in the value of the contract at the moment of repudiation -- the present value of the difference in expected cash flows.  That would be based on the projected market-contract price differential or the lost profits, depending on whether the seller could do something else with the goods in the remaining years (RLCD, 30).

Professor Goldberg entertains the possibility of alternatives.  Courts could order specific performance, although Judge Posner gave good reasons why doing so was less than ideal in NIPSCO.  But an order of specific performance can be a good way to foster settlement, and Professor Goldberg thinks the parties might do a better job valuing the contract as an asset than the courts do (RLCD, 31-32). 

While Professor Goldberg suggests that damages should be measured at the time of breach, because the value of the contract will fluctuate, the parties could pick any time to measure damages.  All that matters is that they set the time for measuring damages before the dispute arises.  While cover that occurs immediately after breach is highly useful evidence of the value of a contract, cover becomes less relevant in long-term contracts, where the court is going to have to determine damages before cover is possible (RLCD, 32).  

Professor Goldberg concludes the chapter by returning to his acknowledgement of the uncertainties involved in calculating damages for repudiation of long-term contracts.  He ruminates on the wide variation in valuation reports presented before the Chancery Court and proposes ways to return us from "the outer margins of plausibility" where these expert reports too often reside (RLCD, 33-34).