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1 George Mason School of Law Contracts II Anticipatory Breach F.H. Buckley

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1 1 George Mason School of Law Contracts II Anticipatory Breach F.H. Buckley

2 When is performance due? When can the seller sue for the price? When can the buyer sue for the goods? 2

3 Mutual Conditions When can the seller sue for the price? UCC § 2-507: Tender of delivery is a condition of the buyers duty to pay When can the buyer sue for the goods? UCC § 2-511; Tender of payment is a condition to the sellers duty to tender 3

4 Buyers Problem Buyer agrees to pay seller $2M for custom-made machinery which can only be used by buyer This will take a year to make and the cost of production is $100K per month.* 4 *There is no time-value of money here

5 Buyers Problem Buyer agrees to pay seller $2M for custom-made machinery which can only be used by buyer This will take a year to make and the cost of production is $100K per month. After a few days, buyer decides he cant use the machine. Advise buyer. 5

6 Buyers Problem After two months, buyer decides he does not want the machine. Advise buyer. If buyer sticks to the contract hell pay $2M for a worthless machine. 6

7 Buyers Problem After two months, buyer decides he does not want the machine. Advise buyer. If buyer sticks to the contract hell pay $2M for a worthless machine. If seller sticks to the contract hell spend $1.2M to make $2M, for a profit of 800K 7

8 A Coasian Solution After two months, buyer decides he does not want the machine. Advise buyer. If buyer sticks to the contract hell pay $2M for a worthless machine. If seller sticks to the contract hell make 800K So theres a bargaining surplus if seller stops production 8

9 A Coasian Solution After two months, buyer decides he does not want the machine. Advise buyer. If buyer sticks to the contract hell pay $2M for a worthless machine. If seller sticks to the contract hell make 800K Seller will require at least $800K to terminate 9

10 A Coasian Solution After two months, buyer decides he does not want the machine. Advise buyer. If buyer sticks to the contract hell pay $2M for a worthless machine. If seller sticks to the contract hell make 800K Buyer will pay up to $2M to terminate 10

11 A Coasian Solution After two months, buyer decides he does not want the machine. Advise buyer. If buyer sticks to the contract hell pay $2M for a worthless machine. If seller sticks to the contract hell make 800K The parties will terminate for a price between $800K and $2M 11

12 Unilateral Repudiation? What if we gave the buyer the unilateral right to terminate the contract? 12

13 Unilateral Repudiation? What if we gave the buyer the unilateral right to terminate the contract? In that case, could the seller ever begin performance without an assurance of payment? 13

14 Mitigation? Suppose that the buyer immediately tells the seller he cant use the machine and will not take delivery, but will offer seller $800K in damages. 14

15 Mitigation? Suppose that the buyer immediately tells the seller he cant use the machine and will not take delivery, but will offer seller $800K in damages. What if seller nevertheless produces the machine and on tender demands payment of $2M? 15

16 Mitigation? Suppose that the buyer immediately tells the seller he cant use the machine and will not take delivery, but will offer seller $800K in damages. What if seller nevertheless produces the machine and on tender demands payment of $2M? The principle of mitigation: Restatement § 350(1) See Illustration 1 16

17 Summing up Buyer should not be permitted to terminate unilaterally However, a bilateral termination agreement may be efficient If Buyer repudiates the agreement, the principle of mitigation will prevent the seller from inefficiently running up the tab 17

18 So why do we need Anticipatory Repudiation? Suppose Buyer repudiates the agreement, and ten months later insists on full performance by the seller? 18

19 So why do we need Anticipatory Repudiation? Suppose Buyer repudiates the agreement, and ten months later insists on full performance by the seller? Restatement § 251: seller may suspend performance on repudiation 19

20 Hochster v. De la Tour 799 Lord Campbell

21 Hochster v. De la Tour If a man promises to marry a woman in December and marries another woman in May, when is he liable for breach of promise? 21

22 Hochster v. De la Tour If a man promises to marry a woman in December and marries another woman in May, when is he liable for breach of promise? Short v. Stone, p

23 Hochster v. De la Tour When were Πs duties to begin? 23

24 Hochster v. De la Tour When were Πs duties to begin? When did Δ send his letter of repudiation? 24

25 Hochster v. De la Tour When were Πs duties to begin? When did Δ send his letter? When was the action brought? 25

26 Hochster v. De la Tour When were Πs duties to begin? When did Δ send his letter? When was action brought? When did Π enter into his contract with Lord Ashburton? 26

27 Hochster v. De la Tour When were Πs duties to begin? When did Δ send his letter? When was action brought? When did Π enter into his contract with Lord Ashburton? Could Π bring his action prior to the date when his duties with Δ were to begin? 27

28 Hochster v. De la Tour The much more rational standard Suppose that Π had been required to wait to June 1 before terminating the contract What if Π had been offered alternative employment on May 22 Could he accept this without breaching his contract with Δ? 28

29 Hochster v. De la Tour The much more rational standard Suppose that Π had been required to wait to June 1 before terminating the contract What if Π had been offered alternative employment on May 22 Suppose that he could take the position with Lord Ashburton without breaching his contract with Δ? Does it follow that he can sue before June 1? 29

30 Hochster v. De la Tour The much more rational standard Suppose that Π had been required to wait to June 1 before terminating the contract What if Π had been offered alternative employment on May 22 Suppose that he could take the position with Lord Ashburton without breaching his contract with Δ? So why wait? De la Tour was about to travel. 30

31 Hochster v. De la Tour The much more rational standard Suppose that Π had been required to wait to June 1 before terminating the contract What if Π had been offered alternative employment on May 22 Suppose that he could take the position with Lord Ashburton without breaching his contract with Δ? Why permit him to sue before June 1? UCC § 2-610(b) 31

32 Hochster v. De la Tour The much more rational standard Suppose that Π had been required to wait to June 1 before terminating the contract What if Π had been offered alternative employment on May 22 Could Hochester have turned down the Ashburton offer and sued De la Tour for full damages? UCC § 2-610(a) 32

33 Hochster v. De la Tour The much more rational standard Must the innocent party communicate his acceptance of the repudiation? 33

34 Hochster v. De la Tour The much more rational standard Must the innocent party communicate his acceptance of the repudiation? Restatement

35 A bit of contract review Is an offeror bound before his offer is accepted? Can the offeror revoke his offer at any time prior to acceptance? 35

36 A bit of contract review Is an offeror bound before his offer is accepted? Can the offeror revoke his offer at any time prior to acceptance? What is the logic behind the requirement of mutual assent? 36

37 A bit of contract review What is the logic behind the requirement of mutual assent? Its not just that the parties mutually assent, but they must both know that the other has assented. 37

38 A bit of contract review What is the logic behind the requirement of mutual assent? Otherwise a possibility of a false start 38

39 A bit of contract review Its not just that the parties mutually assent, but they must both know that the other has assented. Need to communicate revocation of acceptance Objective test of assent 39

40 A bit of contract review The need for commercial certainty Full communication to the other party tends to eliminate misunderstandings 40

41 A bit of contract review The need for commercial certainty Full communication to the other party tends to eliminate misunderstandings Commercial certainty and anticipatory repudiation When is the seller to mitigate? 41

42 A bit of contract review The need for commercial certainty Full communication to the other party tends to eliminate misunderstandings The presumption against options 42

43 A bit of contract review The presumption against options You give me an option to buy 100 oz of gold at $900/oz on August 1 next. If the price of gold is less than $900 at that time the option is valueless. If the price of gold is above $900 at that time, the option is in the money and is worth 100*(Price August 1 - $900) 43

44 A bit of contract review The presumption against options You give me an option to buy 100 oz of gold at $900/oz on August 1 next The option is valuable and one should not presume that it is given away for free 44

45 A bit of contract review Options and anticipatory repudiation When the market is volatile, can an innocent buyer get an option? Assume that: Contract price is 100 Price on sellers repudiation is 100 Price on date for delivery is 150 Buyer assets that he did not accept repudiation when price was 100 and claims damages of 50 45

46 A bit of contract review Options and anticipatory repudiation When the market is volatile, can an innocent buyer get an option? Buyer assets that he did not accept repudiation when price was 100 and claims damages of 50 UCC § 2-610(a): a commercially reasonable time 46

47 UCC § Is this in any way qualified by 2-609? 47

48 Flatt v. Schupt 802 Δ agrees to sell land to Π at $160K, closing June 30 Contingent on buyer obtaining zoning for an asphalt plant 48

49 Flatt v. Schupt Letter of May 21: we decided to withdraw the request for rezoning In an effort to keep the thing moving, an offer to purchase at $142.5K 49

50 Flatt v. Schupt Letter of May 21: we decided to withdraw the request for rezoning In an effort to keep the thing moving, an offer to purchase at $142.5K Δ rejects the offer of $142.5K on June 9 50

51 Flatt v. Schupt Letter of May 21: we decided to withdraw the request for rezoning Δ rejects the offer of $142.5K on June 9 Π purports to proceed with the purchase at $160K on June 14 51

52 Flatt v. Schupt Letter of May 21: we decided to withdraw the request for rezoning Qu. Did Πs repudiate the contract on May 21? 52

53 Flatt v. Schupt Letter of May 21: we decided to withdraw the request for rezoning Qu. Did Πs repudiate the contract on May 21? Not a clearly implied threat of nonperformance 53

54 Flatt v. Schupt Letter of May 21: we decided to withdraw the request for rezoning Qu. Did Πs repudiate the contract on May 21? Aliter chill efficient renegotiations? 54

55 Flatt v. Schupt Letter of May 21: we decided to withdraw the request for rezoning Qu. Did Πs repudiate the contract on May 21? Restatement §§ Should the Δs have cured the problem? 55

56 Flatt v. Schupt If a fuzzy repudiation is permitted, the innocent party is given an opportunity to chisel the innocent party 56

57 Flatt v. Schupt If a fuzzy repudiation is permitted, the party in breach is also given an opportunity to chisel the innocent party 57

58 Flatt v. Schupt If there had been a repudiation, did the Πs retract it in time? 58

59 Flatt v. Schupt If there had been a repudiation, did the Πs retract it in time? Restatement § 256(1) Revocation of repudiation is effective if communicated before the injured party materially changes his position 59

60 What about Lak?

61 What about Lak? 812 The seller offered to close as is The seller had acted reasonably and had left open the possibility of further negotiations regarding the ambiguity Whats the difference between a standard of reasonable behavior and a good faith standard? Cf. United Artists at

62 Was there a clearly implied threat of nonperformance in Decker at 811? 62

63 Was there a clearly implied threat of nonperformance in Decker at 811? Well get right on it… Could both parties have done something differently? 63

64 What about Bonebrake at 812? Were the buyers acting reasonably? Would a different result create a problem of opportunism? 64

65 What if you think your supplier is Insolvent? 65

66 Insolvency Presumptive grounds for repudiation under Restatement § 252 Right to assurance of performance. Restatement § 251. Sellers Remedy in UCC §

67 Executory Contracts in Bankruptcy Presumptive grounds for repudiation under restatement § 252 Right to assurance of performance. UCC § Sellers Remedy in UCC § Bankruptcy Code Sec. 365 (a) The trustee, subject to the court's approval, may assume or reject any executory contract or unexpired lease of the debtor. 67

68 68 George Mason School of Law Contracts II Remedies F.H. Buckley


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