ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Monday, May 13, 2024

Teaching Assistants: Victor Goldberg on Consequential Damages in the UK

Rethinking This is the twelfth 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 eleventh chapter of RLCD, in which Professor Goldberg addresses consequential damages and exclusion clauses under UK law.

Immanuel Kant famously observed that two things fill the mind with ever-increasing wonder the more we contemplate them: the starry heavens above and the moral law within.  As far as I know, Kant never addressed consequential damages, but the more one contemplates them, the more the mind recoils in dread and confusion.

And so Professor Goldberg begins with a quotation from McGregor on Damages, in which the author reflects on court treatments of exclusions of consequential damages and concludes that the entire approach "is to be deprecated."  Professor Goldberg narrates the course of UK jurisprudence on consequential damages exclusion clauses.  That narrative seems to be heading back to the simplicity of McGregor's approach: the normal loss in contract is usually the contract-market differential; the rest is consequential damages. (RLCD, 199)

This material takes us back to themes we reviewed in our review of the Alien Vomit piece and in a discussion of a recent episode of the Unpacking Contract Law podcast.  As we noted in the latter post, the Australians have nicely summarized the UK approach exclusions: "the poms have got it wrong."

Like the podcast, Professor Goldberg speaks of Hadley v. Baxandale's two "limbs," the first of which is direct damages and the second consists of damages recoverable only because they were in the contemplation of the parties at the time of contracting.  It seems that courts have often read exclusion clauses as relating to categories of damages in the first limb (i.e. direct damages) when they really belonged  in the second limb (consequential). Courts have thus been reluctant to uphold such exclusions. (RLCD, 200-01) Professor Goldberg takes us through the history of court treatment of such exclusion clauses in three periods.

Early Cases

In Millar's Machinery v. David Way and Son, the court awarded direct damages and properly excluded consequential damages which had been contractually excluded. The case seems straightforward but is cited as authority for narrow readings of exclusions of consequential damages. (RCLD 201-02) In Saint Line Ltd. v. Richardsons, Westgarth, & Co., a case about a properly-rejected vessel, the court allowed the arbiter to determine damages, including lost profits when the vessel was not useable, expenses for wages, and superintendents' fees, notwithstanding a contractual exclusion of consequential damages. (RCLD 202-03) Finally, in Croudace Construction v. Cawoods Concrete Products, Croudace sued claiming various losses resulting from Cawoods' delayed delivery, notwithstanding an exclusion of consequential damages.  Both the trial and appellate court found, citing the Millar's case, that the damages sought were all direct and thus outside the scope of the exclusion. The courts explained this result, rather hard to square with parties' language or their reasonable expectations, based on the assumption that "commercial men" would not want to limit their liability. (RCLD, 203-05)

Turn of the Century Cases

Deepak Fertilisers v. Davy McKie involved the explosion of a methanol plant in India. Deepak sought ₤100 million in damages, including lost output, fixed costs, and overhead. There was a contractual exclusion of indirect or consequential damages. The trial court (per Judge Rix) excluded fixed costs and overhead, finding them indirect and thus excluded under the contractual provision.  The Court of Appeal reversed, finding the losses related to fixed costs and overhead to be "direct and natural," citing Croudace.  Lost profits were excluded because they were too remote. (RLCD, 205-06)

Victor GoldbergJudge Rix confronted the issue again in BHP Petroleum v. British Steel.  In that case, seller delivered ₤3 million of steel to a consortium of oil and gas companies for the construction of a pipeline.  When the pipeline failed, the consortium sued seller for ₤200 million, including lost profits. If Judge Rix could have just followed his instincts, he would have held that most of what was sought was unrecoverable due to a contractual exclusion of consequential damages.  Because the Court of Appeals' judgment in McKie foreclosed that correct application of the law, Judge Rix found that the matter turned on the parties' knowledge of the potential for special damages at the time the contract was formed.  The Court of Appeals approved of Judge Rix's disposition, while noting what a hardship it would be for seller if it had to assume the risk of liability so far exceeding the value of the contract. (RLCD 206-11) Indeed. That is why parties negotiate for exclusions of consequential damages.

In British Sugar Plc v. NEI Power Projects, British Sugar sought ₤5 million in damages that arose largely from production delays and lost profits caused by defects in  electric equipment that seller provided.  The court allowed the claim, notwithstanding a clause limiting recovery for consequential damages to the value of the contract.  The court found that the losses were direct, flowing naturally from the breach. (RLCD 211-12).  Hotel Services Ltd v. Hilton Int'l Hotels is similar.  The court allowed recovery of consequential damages, notwithstanding an exclusion, on the ground that "consequent loss of profit" was not consequential. (RLCD 212-13).

I wish I were making this up.

The Twenty-First Century

The first few cases that Professor Goldberg discusses seem pretty similar to the older cases. (RLCD 213-18) In two case, the courts opine that consequential damages must be recoverable.  Otherwise the non-breaching party would have no remedy for breach. Professor Goldberg shows why this is incorrect at least with respect to the first case. (RLCD 216-18)

Professor Goldberg next discusses a few cases that seem to come out right, but do not really address the confusion of direct and consequential damages. Both cases involved direct damages not subject to a contractual exclusion of consequential damages. (RLCD 218-20) The tide really begins to turn with Fujitsu Services v. IBM UK, in which the court gave effect to a contractual exclusion of consequential damages, including lost profits. (RLCD, 221-22)

But the more dramatic change comes with Transocean Drilling v. Providence Resources, in which the court rejected the "two limbs" approach to questions of exclusion of damages.  Rather the court distinguished between "loss of bargain damages" -- the contract/market differential, which are direct, and lost profits. (RLCD 222-24) Star Polis v. HHIC Phil then might go too far in the other direction.  A contract provided for an exclusive repair and replace remedy, and the court enforced that, but it neglected to consider that direct damages arise when a replacement is inferior to what was bargained for. (RLCD 224-25)

Professor Goldberg concludes with a short rumination on the fate of exclusion clauses in the U.S. and the UK (RLCD 225-27) It must be difficult for attorneys negotiating contracts involving UK and U.S. parties to draft the exclusion contracts. We are two legal traditions separated by a common language.

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 Victoria Laundry
Teaching Assistants: Victor Goldberg on Consequential Damages in the U.S.

May 13, 2024 in Books, Contract Profs, Famous Cases, Recent Scholarship | Permalink | Comments (0)

Thursday, May 2, 2024

Various Problems with Liquidated Damages

Posner_richard_08-2010I use Judge Posner's opinion in Lake River Corp. v. Carborundum Co. to teach liquidated damages and penalties.  It's a typical Judge Posner (left) opinion.  He provides policy arguments for and against the enforcement of liquidated damages provisions, even if they impose a penalty on the breaching party.  Judge Posner makes the compelling freedom of contract/anti-paternalist arguments in favor of enforcement of penalties, assuming relative sophistication and comparable bargaining power.  Against these arguments, he offers the theory that deterring opportunistic breach prevents efficient breaches that produce better outcomes for most of the parties involved and do not produce worse outcomes for any of them (assuming no transactions costs).  He then heaves a sigh, says, "Illinois, ya basic!" and applies the applicable state law prohibiting the enforcement of penalties. 

Some of my students wanted to outflank Judge Posner.  Yes, the liquidated damages clause in the contract was absurd, but why should a court come to the rescue of a well-resourced party that entered into a bad deal with eyes wide open?  Carborundum apparently valued access to Lake River's bagging and distribution capabilities so highly that it was willing to take on a high penalty for breach.  My students could have cited another Judge Posner case that I also teach, NIPSCO v. Carbon County Coal.  There, NIPSCO entered into a long-term contract to buy coal whether or not it needed the coal.  NIPSCO assumed that it would need the coal when it entered into the contract, but then it became significantly less expensive to get electricity from other sources. The state regulatory authority would not allow NIPSCO to pass on to its customers the costs it incurred through its lack of foresight, and so it sought to get out of its contractual obligations.  Judge Posner would not allow it to do so, even though the effect was quite similar to a penalty clause.  NIPSCO had to pay an inflated price for coal it didn't need.  Indeed, according to Judge Posner, nobody wanted the coal, which was why the mine shut down once NIPSCO stopped accepting shipments.  

So, Judge Posner would not force Carborundum to pay for bagging and distribution services it no longer needed, but he did force NIPSCO to pay for coal it didn't need.  The cases are reconcilable as a matter of legal doctrine.  In both cases, I find Judge Posner's legal reasoning entirely persuasive. And yet, their outcomes seem hard to square with both economic theory and the principles of freedom of contract.  Perhaps the solution is that Judge Posner, if unconstrained by the Erie doctrine or precedent, would simply allow the parties' terms, no matter how ill-conceived, to govern in both cases.

SepinuckProfessor Stephen Sepinuck (right), a keen-eyed scanner of the legal horizon, noticed another liquidated damages conundrum.  Ne. Ill. Reg'l Commuter R.R. Corp v. Judlau Contracting, Inc., involved a $17 million contract for construction work on Chicago's Metra line.  Judlau did not complete the project within the time specified in the contract, running over by 500 days.  Metra alleged a right to choose between enforcing the contract's liquidated damages provision and seeking actual damages.  District Judge Mary Rowland of the Northern District of Illinois, noted that Illinois law does not permit parties to choose between actual and liquidated damage, and she rejected Metra's attempt to distinguish between a right to collect liquidated damages an option to choose between liquidated and actual damages. 

Metra acknowledged the Illinois prohibition on clauses that permit a party to choose between liquidated and actual damages, citing Karimi v. 401 North Wabash Venture, LLC.  The Illinois rule struck Professor Sepinuck as unusual.  Learned commentary ensued.  Indeed, Colorado reached the opposite conclusion in Ravenstar, LLC v. One Ski Hill Place, LLC.  The Illinois rule seems to be motivated by a horror of penalty clauses.  Confronted with little or no actual damages, the non-breaching party can nonetheless profit from a liquidated damages clause.  Facing actual damages well in excess of liquidated damages, the party might choose to jettison the limits imposed by the liquidated damages clause.  It creates a win/win for the non-breaching party and also eliminates one of the primary advantages of a liquidated damages provision -- the ability to settle a claim quickly without the need to prove actual damages.

Which brings us back to Judge Posner's dilemma.  These option clauses seem ill-advised.  Why agree to a liquidated damages clause designed to  minimize litigation costs while also giving the other party the option to choose to impose litigation costs on you?  However, if sophisticated parties agreed to an ill-advised clause  why not allow them to be hoist by their own petard?  In Judlau, the court faced no such dilemma, Judge Rowland concluded that "the plain language of the contract here does not create an option between liquidated and actual damages."  Metra did not include an ill-advised option clause in its contract.  It just seems to have pursued an ill-advised litigation strategy that involved arguing without much of a textual basis that it had negotiated for an advantageous option which, it acknowledged, was foreclosed in any case by governing law.

May 2, 2024 in Commentary, Contract Profs, Famous Cases, Recent Cases, Teaching | Permalink | Comments (5)

Tuesday, April 9, 2024

New (to me) Contracts Podcast!

Mitu GulatiThanks to Mitu Gulati (right) for introducing me to Unpacking Contract Law, a UK-based, contracts-law podcast sponsored by Newcastle Law School.  I dipped in to episode 22, which is about one of our favorite old chestnuts of contract law and lore, Hadley v. Baxandale.  Three scholars, Timothy Dodsworth (Newcastle), Maggie Hemsworth (Exeter), and Séverine Saintier (Cardiff) dig right in.  American listeners be warned: over on the other side of the pond, they talk about "Hadley and Baxandale" instead of Hadley v. Baxandale.  I've heard they also drive on the wrong side of the street.

It is lovely to hear a UK-case discussed by actual UK legal scholars, who are able to give the case a concreteness that we Yanks tend to overlook.  Listen to the episode and you can learn, e.g., what caused the delay in delivery that sparked the lawsuit.  There is much interesting conversation about the role of comparative law in the opinion and a discussion of why our friends (they call us "American cousins"!) over in the UK have given up on juries when it comes to determining damages.  

Humpty_Dumpty_TennielProfessor Hemsworth discusses a standard divide in the holding of Hadley into "two limbs," one relating to imputed foresight/knowledge, which was the focus of the case, and one to actual foresight; that is, special knowledge of facts.   Professor Hemsworth notes that the court found no evidence in Hadley that the defendant was actually aware that the mill was shut down, and so the second limb was not an option in that case. 

Professor Hemsworth then discusses some scholarship from "one of our favorite American cousins" in which the notions of contractual exclusions and Hadley's limb 2.  The America cousin is unnamed, but I suspect that all roads lead to Mitu, as we know that he and his co-authors have been doing work on precisely this issue. In such cases, the thing excluded is variously described as "consequential," or "special" or "unusual" damages, but the language is confusing and seems unrelated to anything that might fall within Hadley's limb 1.  And yet, by the Hunpty-Dumpty logic of case law, in which words mean whatever you want them to mean, courts accept the conflation.

Australian courts recognize, Professor Hemsworth notes, that "the poms have got it wrong."  But I don't think it's just the poms.  Mitu's work suggests that American transactions similarly conflate exclusions of damages with consequential losses in ways that seem doctrinally confused.  I don't think Mitu's work has yet turned up evidence of confusion in American courts, but only because it seems that these exclusions do not lead to litigation.

We await the arrival of a bold court that can achieve the reverse solution to the Humpty Dumpty conundrum.  Rather than putting the pieces together again, they need to be disaggregated.

April 9, 2024 in Contract Profs, Famous Cases, Web/Tech | Permalink | Comments (0)

Friday, February 16, 2024

A New Take on Consequential Damages

Hadley MillI am always on the lookout for a fresh take on familiar material, and I must admit, it had never occurred to me that the rule from Hadley v. Baxandale might be either alien vomit or intelligent design, as I had come to understand those terms.  Tara Chowdhury, Faith Chudkowski, Amanda Dixon, Rishabh Sharma, Madison Sherrill, Hadar Tanne, Stephen J. Choi, and Mitu Gulati (the Authors) have made me rethink that position.  They suggest that we should re-imagine contractual limitations on consequential damages as either one or the other in Consequential Damages: Alien Vomit or Intelligent Design, available for download now on SSRN.

Hadley, of course, provides nothing but a default rule, around which the parties can freely contract.  The Authors reviewed over 1300 contracts and interviewed over 100 practitioners.  They discovered that negotiated consequential damages provisions "are often hopelessly ambiguous and that their inclusion in contracts is sometimes more habit than intention."  The Authors begin with a real classroom exercise.  Students were presented with a typical no consequential damages (NCD) clause from a contract negotiated between sophisticated parties.  The provision was in ALLCAPS, which shows you right off the bat that the parties aren't as sophisticated as they think they are.  The students quickly remarked that the provision was "incomprehensible gibberish."  And so a research project was launched.

At the heart of the matter is a puzzlement.  The Hadley default rule is that you cannot get consequential damages unless they were within the contemplation of the parties at the time the contract was formed.  If the default is no consequential damages, what is there to contract around?  Perhaps sophisticated parties want to specify the consequential damages that they do contemplate.  Nope.  Time constraints and inertia lead to the retention of boilerplate provisions that nobody pays attention to.  NCD clauses do not reflect any careful consideration or negotiation by the parties.  Once again, even the lawyers don't know what the contracts they draft and negotiate say.  Practitioners and scholars fall into two camps on NCD clauses.

The Alien Vomit Theory

Alien vomit
Image by DALL-E

A prominent practitioner, Glenn West, traced how NCD clauses found their way into M&A transactions.  He concluded that the clauses were borrowed from construction and supply contracts.  Hence, I suppose, alien vomit.  In the M&A context, they either protect against irrelevant risks or just create confusion by importing undefined language about "special," "indirect," "consequential," or "unnatural" damages.  The obscurity of these clauses introduces risk, as it is unclear to courts what they are intended to exclude.  

Alien vomit is especially dangerous to buyers in M&A transactions.  The categories of damages potentially excluded through NCD clauses represent precisely the value one is trying to achieve through an acquisition.  That is, the sale price of a business entity is linked to its potential to generate future profits.  If such profits are excluded from recovery, what is there left for buyers to recover?

I must admit that I am part of the problem.  The Authors identify terms that practitioners have found to be in need of definition.  I expect my students to know the difference between direct, incidental, and consequential damages.  Last year I used a casebook for Sales that had exercises in which students were supposed to name the category into which different types of damages fell.  The casebook authors' answers all made sense to me, and thus I was under the illusion that it was possible to distinguish among the categories. 

For example, it seems to me that future profits to be generated from the acquisition of a business entity are direct damages, not consequential.  They may be problematically speculative, but they would arise directly from a breach.  Experienced attorneys apparently think otherwise.  It would be nice if we had some evidence of how courts treat such NCD clauses, but it may just be that nobody gives much thought to alien vomit, because it, like much boilerplate, never generates disputes that result in litigation.  If the disputes arise in such transactions, the parties might agree to walk away from the deal, or the transactional attorneys can just iron our the wrinkles themselves rather than leaving things to the really scary aliens, litigators.  

Similarly, practitioners see no need to exclude "exemplary," "punitive," or "treble," damages, none of which would be recoverable for breach of contract in any case.  But that also doesn't seem right to me.  Why aren't these clauses useful to prevent, e.g., exemplary damages that would arise from a fraud claim or a breach of fiduciary duty claim in connection with a breach of contract, or statutory damages that might allow for punitive or treble damages?  When I taught Remedies, I learned that punitive damages are more often awarded on contracts claims than on torts claims because there are hundreds of statutes that provide for punitive damages for certain kinds of breach of contract.

Optimal Design

Penguins with Golden Egg
Image by DALL-E

Meanwhile, academics writing in the tradition of law and economics have argued that NCD clauses are the product of parties that have carefully considered the matter and negotiated the most efficient allocation of risk.  They have rejected Hadley in favor of an allocation of exposure to liability tailored to the needs of their clients in connection with this particular transaction.  The Authors' research calls this theory into question.  

An aside: I have devoted some time to working through Victor Goldberg's work on contracts damages (I need to get back to that project!).  He seems to have a foot in both camps.  He certainly sometimes speaks the language of optimal design theory, but he also notes how often fuzzy contract terms get the parties in trouble.  However, I think Professor Goldberg is inclined to blame courts for the confusion, at least in part.  At least sometimes, the parties have made very clear that they intend to contract around default rules, but the courts resist, often in a misguided effort to promote what they think are the efficiency and fairness goals best achieved through adherence to common-law defaults.

The Authors' review of NCD clauses in three categories of commercial contracts indicates that use is steady, even in the face of determined warnings from experienced M&A attorneys like Glenn West about their dangers.  They are less common in M&A for public deals, perhaps because of federal statutory regimes that make NCD clauses unnecessary.  However, given the Authors' thesis that NCD clauses are largely unnecessary, inertia seems the more likely explanation.  That is, for whatever reason, NCD clauses did not make their way into the standard boilerplate of these types of transactions.  Alien vomit has spread to 10%-20% of such transactions, but in most cases, either the aliens are vomiting elsewhere or some keen-eyed lawyers is saying, "Ew, that's alien vomit!  We've got plenty of our own vomit in this deal without borrowing language from a different transaction!"

The Authors break down the problematic clauses into three categories: deadly, redundant, and ambiguous.  While there are ups and downs over time, all three categories have enjoyed remarkable staying power since 2010.  That is, while their use fluctuates over time, and while some terms are more likely to appear in one category of transactions rather than another, there is no general trend of decline in use. 

When questioned on the meaning of consequential damages, one set of lawyers gave confident '"incorrect" answers.  Given that the Authors' argument seems to be that the term has no fixed meaning, this seems a tad unfair to the respondents. What is a correct answer? A second set consisting of junior lawyers mostly shamelessly admitted that they had no idea and that it didn't matter because NCD clauses are meaningless boilerplate that never get litigated.  A third set, consisting of more senior lawyers had more specific ideas about consequential damages, but nobody thought that NCD clauses achieve anything beyond Hadley.  

When M&A gurus are interviewed on the subject, they give very different answers.  It seems that the only reason NCD clauses get negotiated is that some gurus want them out, and when they ask for them to be taken out, out they go.  Nobody cares, because liability caps and insurance render them irrelevant anyway.  As it turns out, this too is incorrect.  If a buyer allows a limitation on lost profits to survive the negotiation, that buyer may not be able to recover anything, and insurance and liability caps won't even come into play, assuming, contrary to argument above that lost profits are not direct damages or have been expressly excluded.  In any case, careful attention to caselaw establishing the contractual default provisions is not a factor.  Transactional attorneys look at other transactions, not at case law, when deciding what language to include in the agreement.

This article is a delightful read and has given me a great deal to think about beyond its catchy title, so congratulations to the Authors!  It is very encouraging to see a project that begins in the classroom, goes out into the world of empirical legal scholarship and that can return to the classroom by giving contracts professors new insights into dealmaking.

February 16, 2024 in Famous Cases, Recent Scholarship | Permalink | Comments (1)

Thursday, February 15, 2024

Gigi Tewari: A TEDx Talk on Financial Independence & Lucy v. Zehmer

Widener University Law's Geeta (Gigi) Tewari presents her personal journey toward financial independence and links it to a favorite contracts case.

 

February 15, 2024 in Commentary, Contract Profs, Famous Cases | Permalink | Comments (0)

Wednesday, January 31, 2024

Do I Teach Too Many Old Cases?

In the past few years, I have received a few complaints in my student evaluations that I teach too many old cases.  This year, there were more such complaints than ever before.  There aren't that many; only a handful out of 75 students in my contracts courses, but the complaint is new and gaining steam.  One student helpfully defined "old" as cases from the "19th and 20th centuries."  It's official.  I'm old.

Vining Peerless
The good ship Peerless as imagined by my former student, Justin Vining

These comments led me to go back through my reader and have a look.  The oldest case I teach is Mills v. Wyman, from 1825.  I teach three cases decided in 2023.  I only teach ten cases (of fifty) from the 20th century, and the median case dates from 1968.  Fifty cases total is not a lot of cases.  I supplement my reader with an Brian Blum's Examples & Explanations book, so the students get a lot of hypotheticals that are generally in a contemporary setting.  One interesting phenomenon that I have noticed since I started supplementing cases with problems is that students have difficulty keeping straight which fact patters are real and which are hypothetical.  So, from my defensive crouch, I could argue that a supplement my two score and ten vintage cases with at least that many problems set in the 21st century.

My reader includes five cases from the 19th century: Mills v. WymanKirksey v. Kirksey (1845), Raffles v. Wichelhaus (1864), Hamer v. Sidway (1891), and Rickets v. Scothorn (1898).  I love these cases.  They all teach really well and lead to great class discussions.  There is rich literature and lore about all of them.  Is that reason enough to continue using them?  An additional argument in their favor is that they are all good law.  It would be hard for me to abandon these cases, even if I knew of more recent cases that covered the same ground, but I don't.  Perhaps that is because I have been complacent and haven't bothered to look, but it may be that these cases have come to occupy the field.  Rather than engaging in the kind of analysis that these cases engage in, modern courts simply cite to them or to equally musty old cases that lack their compelling facts or well-written opinions.

Cardozo Cup 3
Cardozo Cup Competition Entry by my former student, Jeff Miller

I may be on shakier ground with the next half-century.  I teach eleven cases published between 1901 and 1935.  Judge Cardozo accounts for four of them.  Paraphrasing Ben Jonson, I might confess, "My sin was too much hope of thee, lov'd Judge."  I could drop Lady Duff, as I pair that case with B.L. Lewis Productions.  v. Angelou, but the latter case spends so much time talking about Lady Duff, it seems a shame not to share the original with my students.  Is there a better case for charitable subscriptions that Allegheny College?  A better discussion of fatally incomplete contracts than Sun Printing?  Perhaps.

There is still a part of the course that serves to contrast the more formalist approach of the early 20th century to our more contextual approach since the adoption of the Uniform Commercial Code and the Restatement Second.  I suppose I could drop some of the material on formalism.  My fear is that there are still jurisdictions that retain a commitment to formalism.  There is also a formalist wind blowing through other regions of our jurisprudence.  Who is to say it will not invade the province of private law as well?  

Thumbs-up_1f44dI think the students who complain about the old cases do not appreciate how hard it is to find cases that teach well and state the law clearly.  As I said, I added three new cases from 2023 in my last version of Contracts I.  I don't know if any of them have staying power.  The emoji case stands the best shot, but it is a Canadian case and so has certain oddities about it.  Perhaps a red-blooded American case on emojis as acceptance/signatures will come along soon. 

When I teach Sales, I don't teach any cases that are older that Article 2 itself.  The cases I have selected are a motley crew.  Sometimes I teach against the cases, because I think the judges were simply incompetent in their understanding of either Article 2 or the transactions or both.  Electricity is not a good?  Nonsense!  At other times, the cases are well reasoned, in my view, but state only a majority view not accepted in all jurisdictions (love ya, 2-207 knock-out rule for different terms.!).  The old cases that have withstood the test of time are, at least sometimes, unavoidable in a common-law system based on precedent.  I wish there were more such definitive cases that governed Article 2.  

I will say this in favor of the old chestnuts.  I sometimes interact with alumni, and when I tell them I teach contracts, they sometimes claim no knowledge or memory of the course.  But when I remind them of some of my favorite cases, they become gleeful.  I am a communitarian, and so I love that lawyers across generations can bond over these old cases, even if just involves rolling our eyes about Pennoyer v. Neff.  In my past life as an intellectual historian, I participated in debates about canonical literary texts in which white male voices predominate.  I get that, and I am all for a more inclusive canon, but I also know how I have benefited from having experienced Columbia's core curriculum.  I went to college a midwestern yokel, the product of a decent public school but never having read or been exposed to much of the canon.  The eduction I received has facilitated connections and conversations that would never have otherwise been possible.  And non-canonical works routinely reference canonical works, permitting those familiar with the canon to appreciate the layers of meaning and the reworking of traditional material on a different level from those who just miss the references.  I want my students to get the jokes and appreciate the references.

That said, I just added a case to my syllabus for this coming semester that I discovered through work on the blog.  I hope it's a keeper!

January 31, 2024 in Famous Cases, Teaching | Permalink | Comments (2)

Wednesday, November 15, 2023

From Sid DeLong, Something About Nothing

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

Sidney W. DeLong

DelongThe 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.

Fallow_field_by_Coldharbour_Lane_-_geograph.org.uk_-_1309079
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.

DerridaSometimes 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.

Gamblers“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?

November 15, 2023 in Commentary, Current Affairs, Famous Cases | Permalink | Comments (1)

Wednesday, November 1, 2023

John Quincy Adams and Contracts Cases in SCOTUS

John Quincy Adams YoungSid 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. 

November 1, 2023 in Famous Cases, True Contracts | Permalink | Comments (0)

Wednesday, October 25, 2023

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.

October 25, 2023 in Famous Cases, Teaching | Permalink | Comments (0)

Friday, October 13, 2023

Weekend Frivolity: Students Can Do Stuff!

Screenshot 2023-10-08 at 6.59.44 AMChristine 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?

October 13, 2023 in Contract Profs, Famous Cases, Teaching | Permalink | Comments (0)

Wednesday, August 16, 2023

Duncan Kennedy on Williams v. Walker-Thomas Furniture

KennedyI'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.

Williams v. Walker-ThomasThe 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!

August 16, 2023 in Contract Profs, Famous Cases, Recent Scholarship, Teaching | Permalink | Comments (2)

Thursday, August 3, 2023

Teaching Assistants: Victor Goldberg on Victoria Laundry

Rethinking 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).

Hadley Mill
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

August 3, 2023 in Books, Contract Profs, Famous Cases, Recent Scholarship | Permalink | Comments (0)

Wednesday, June 28, 2023

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

Rethinking 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.

CardozoThe 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 Salieri Mozartsatisfying 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.

Screenshot 2023-06-26 at 7.55.38 AMYou 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

June 28, 2023 in Books, Contract Profs, Famous Cases, Recent Scholarship | Permalink | Comments (1)

Wednesday, June 14, 2023

Teaching Assistants: Victor Goldberg on the Middleman's Damages

Rethinking 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.

Victor GoldbergWhen 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:

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

June 14, 2023 in Books, Famous Cases, Recent Scholarship | Permalink | Comments (0)

Wednesday, June 7, 2023

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.  

UndergroundThe 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).

Rethinking 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

June 7, 2023 in Books, Famous Cases, Recent Scholarship | Permalink | Comments (0)

Monday, May 15, 2023

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

Rethinking 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

May 15, 2023 in Books, Famous Cases, Recent Scholarship | Permalink | Comments (0)

Tuesday, May 2, 2023

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

Rethinking 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).

Victor GoldbergOverall, 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

May 2, 2023 in Books, Contract Profs, Famous Cases | Permalink

Monday, April 24, 2023

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:

Screenshot 2023-04-20 at 2.38.44 PMWe 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.

April 24, 2023 in Famous Cases, Teaching | Permalink | Comments (0)

Thursday, April 13, 2023

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:

Screenshot 2023-04-11 at 6.50.11 PM

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?

April 13, 2023 in Conferences, Contract Profs, Famous Cases | Permalink | Comments (0)

Thursday, March 9, 2023

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

Mel Eisenberg on Ethan Leib

LeibEthan 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. 

Viking and Saxon
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

March 9, 2023 in Commentary, Famous Cases | Permalink | Comments (0)