Contracts April 7 2016 Roadmap Section 1 Specific Performance for Breach of Contract Section 2 basis for calculation of the expectation interest problems in its measurement including fixed costs and lost volume alternatives to expectation in the context of the losing contract ID: 586615
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Slide1Slide2
Specific Performance
Contracts – April 7, 2016Slide3
Roadmap
Section 1 -- Specific Performance for Breach of Contract.
Section 2 -- basis for calculation of the expectation interest, problems in its measurement, including fixed costs and lost volume; alternatives to expectation, in the context of the losing contract.
Section 3 -- three major limitations on damages –requirements of
(1)
avoidability
,
(2) foreseeability, and
(3) certainty.
Section 4 -- stipulated damages -- enforceable “liquidated damages” or unenforceable “penalties.” Slide4
Topics
Personal service K’s
Klein v.
Pepsico
Walgreen v. Sara CreekSlide5
Lumley v. Wagner
“The case of the prima donna diva”Slide6
Royal Italian OperaSlide7
Why not a direct or “affirmative” injunction?
What’s wrong with saying to Johanna Wagner, “You – sing for Lumley”?Slide8
Why not a direct or “affirmative” injunction?
What’s wrong with saying to Johanna Wagner, “You – sing for Lumley”?
Difficult to assess quality of performance?
Forced continuation of personal employment relations
“involuntary servitude”Slide9
Injunctions: the “negative prohibition” issue
Lumley v. Wagner:
what form did the injunction take?Slide10
Injunctions: the “negative prohibition” issue
Lumley v. Wagner:
what form did the injunction take?
Why might this “possibly cause her to fulfill her engagement”?Slide11
Applies to opera singers – what about bakers, oil change mechanics, etc.?Slide12
Applies to opera singers – what about bakers, oil change mechanics, etc.?
Must be “no adequate remedy at law” to merit specific performance
In employment, means employee must have “unique or special talents”
entertainers, athletes, etc., most common; but
look at entire situationSlide13
CAMPBELL SOUP CO. V. WENTZ (p. 618).
Campbell Soup Company contracted to have the Wentz brothers deliver all the
Chantenay
red carrots they were to grow on 15 acres of their farm during the 1947 season for $23 to $30 per ton.
Eventually, the market price for the carrots went from roughly $30 to $90 per ton, at which point Wentz refused to deliver more “contract carrots” to Campbell. Slide14
Campbell
Still, Campbell
suspectedtha
t it was buying its ‘‘contract carrots,’’ from another seller (
Lojeski
) and “refused to purchase any more, and instituted these suits against the Wentz brothers and
Lojeski
to enjoin further sale of the contract carrots to others, and to compel specific performance of the contract.” Slide15
Adequacy rule
if Campbell was correct in its belief that it was in fact getting “contract carrots” from
Lojeski
, why were money damages not a sufficient remedy?
A court will often deny an award of specific performance even where money is inadequate (e.g., if performance involves a service that is personal in nature) and will sometimes grant specific performance even where money would be an adequate remedy (e.g., breaches of real estate transactions can often be adequately remedied with money damages even though that is not the norm). Slide16
two alternative ways in which money damages are often understood to be inadequate
(1) money is incommensurate with the lost performance
(2) the monetary estimate of the lost performance is too speculative and uncertainSlide17
Klein v. Pepsico, Inc.Slide18
Klein v. Pepsico
Let’s treat the contract as one between PepsiCo and Klein.
When PepsiCo refused to deliver (perhaps because of fear that it would be liable if the cracks in the engine blades resulted in disaster) Klein wanted the G-II (“Gulfstream”) jet, not just damages.
The trial judge agreed and granted specific performance, but on appeal this was held “an abuse of discretion.”
The Fourth Circuit applied the traditional adequacy test under UCC § 2-716 and concluded that in spite of price rises “money damages would clearly be adequate in this case.”
The G-II jet was not “unique” under the Code since there were three others that were “roughly comparable.” Slide19
Specific performance
Who was seeking it?
Why?Slide20
Specific performance
Who was seeking it?
Why?
What time frame would be used for calculating damages – may be a hint …Slide21
“Uniqueness”
What is Klein’s argument?Slide22
“Uniqueness”
What is Klein’s argument?
What is Pepsico’s argument?Slide23
Court opinion
What does the court decide?Slide24
Court opinion
What does the court decide?
Why?
Evidence of an active market for G-II’s
Evidence that Klein wanted to resell plane
Evidence that Klein had gotten into the “plane broker” business himselfSlide25
The 1940s car cases and uniqueness
1948 Ford SedanSlide26
2-716. Specific Performance; Buyer's Right To Replevin
(1) Specific performance may be decreed
if the goods are unique or in other proper circumstances
. In a contract other than a consumer contract, specific performance may be decreed if the parties have agreed to that remedy. However, even if the parties agree to specific performance, specific performance may not be decreed if the breaching party's sole remaining contractual obligation is the payment of money.Slide27
2-716, cont’d
(2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just.
(3) The buyer has a right of replevin or similar remedy for
goods identified to the contract
if after reasonable effort the buyer is
unable to effect cover for such goods
or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.Slide28
What is “cover”?
Recall
Austin Instrument v. Loral Corp.Slide29
What is “cover”?
Recall
Austin Instrument v. Loral Corp.
Purchase of
substitute goods
on the open or “spot” market
Damages: Slide30
§ 2-712. "Cover"; Buyer's Procurement of Substitute Goods.
(1) After a breach within the preceding section the buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.Slide31
(2)
The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (Section 2-715), but less expenses saved in consequence of the seller's breach.
(3)
Failure of the buyer to effect cover within this section does not bar him from any other remedy.Slide32
2-716, Comment 2
Uniqueness should be determined in light of the total circumstances surrounding the contract and is not limited to goods identified when the contract is formed.
The typical specific performance situation today involves an output or requirements contract rather than a contract for the sale of an heirloom or priceless work of art
. A buyer's inability to cover is evidence of "other proper circumstances."Slide33
Walgreen v. Sara Creek Property Corp.
Facts
HistorySlide34Slide35
Posner’s analysis
Posner first makes a bow to “efficient breach”: This might be such a breach if “the value of Phar–
Mor's
occupancy of the anchor premises” exceeds “the cost to Walgreen of facing increased competition.”
In that case, “society will be better off if Walgreen is paid its damages, equal to that cost, and Phar–
Mor
is allowed to move.”
This is the basis of the adequacy test, used to deny injunctions. Slide36
Walgreen’s costs
An injunction may have two benefits.
“First, it shifts the burden of determining the cost of the defendant's conduct from the court to the parties,” which substitutes “for the costly processes of forensic fact determination the less costly processes of private negotiation.
Second, ... prices and costs are more accurately determined by the market than by government.”
A battle of experts is less reliable than negotiations in determining Walgreen’s costs. Slide37
Cost side to an injunction
An injunction may “require continuing supervision by the court, and that is costly.” (See Northern Delaware.)
An injunction may also impose costs on third parties or create a "’bilateral monopoly,’ in which two parties can deal only with each other,” creating a bargaining range, and “the costs of negotiating to a point within that range may be high.”
Weighing these costs and benefits in a situation in which the lease had ten years to run, the court affirms the granting of an injunction. Slide38
Walgreen
What is Sara Creek’s argument?Slide39
Walgreen
What is
Sara Creek’s
argument?
Efficient breachSlide40
According to Sara Creek . . .
Damages are the standard remedy
They can readily be calculated here
If so, Walgreen can be fully compensated
without need of an injunctionSlide41
How to measure Walgreen’s damages?Slide42
How to measure Walgreen’s damages?
Either
: present value of lost future profits,
or
Diminution of value of leaseholdSlide43
What is Sara Creek’s argument IISlide44
What is Sara Creek’s argument II
Efficient breach in action!
Benefits, according to Posner
“Society will be better off . . .”Slide45
Efficient breach story here
Under what circumstances would Sara Creek’s breach be “efficient”?Slide46
Efficient breach story here
Under what circumstances would Sara Creek’s breach be “efficient”?
“It’s a win-win (or at least, win-no lose) deal!”Slide47
What is the other side of the story? Pro-SP Argument
“shifts the burden of determining the cost of defendant’s conduct onto the parties”
“the price of dissolving the injunction”
Bargaining over entitlementsSlide48
Pro-SP II
“battle of experts” (in court), VS.
Direct negotiations
Less costly, againSlide49
Arguments in favor of specific performanceSlide50
Transaction costs
Insiders set prices faster and cheaper
More accurate – “market” vs. government price-settingSlide51
Downside of injunctions
High bargaining costs
Bilateral monopoly
Negotiations can dissipate the gains from making a dealSlide52
Walgreen will sell for anything over $1M
Sara Creek will buy for anything under $2MSlide53Slide54
Sara Creek
holding
Process of determining damages over the next 10 years would have been “fraught with uncertainty”
So: no adequate legal remedy; injunction (SP) upheld here