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

1 George Mason School of Law Contracts II Anticipatory Repudiation F.H. Buckley fbuckley@gmu.edu

Next day  Contractual Measure of Damages Scott 103-08, 846-56  Specific Performance Scott 108-15, 857-65  Reliance Damages Scott 86577 2

A Review: When is performance due?  When can the seller sue for the price?  When can the buyer sue for the goods? 3

Mutual Conditions  When can the seller sue for the price? UCC § 2-507: Tender of delivery is a condition of the buyer’s duty to pay  When can the buyer sue for the goods? UCC § 2-511; Tender of payment is a condition of the seller’s duty to tender 4

But what if the parties negotiate at a distance?  When can the seller sue for the price? UCC § 2-507: Tender of delivery is a condition of the buyer’s duty to pay  When can the buyer sue for the goods? UCC § 2-511; Tender of payment is a condition of the seller’s duty to tender 5

Buyer’s 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.* 6 *There is no time-value of money here

Buyer’s 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 can’t use the machine. Advise buyer. 7

Buyer’s Problem  After two months, buyer decides he does not want the machine. Advise buyer.  If buyer sticks to the contract he’ll pay $2M for a worthless machine. 8

Buyer’s Problem  After two months, buyer decides he does not want the machine. Advise buyer.  If buyer sticks to the contract he’ll pay $2M for a worthless machine.  If seller sticks to the contract he’ll spend $1.2M for the right to sue for $2M 9

A Coasian Solution  If buyer sticks to the contract he’ll pay $2M for a worthless machine.  If seller sticks to the contract he’ll spend $1.2M to be able to sue for $2M  So there’s a bargaining surplus if they terminate: and what would they be willing to spend to do so? 10

A Coasian Solution  If buyer sticks to the contract he’ll pay $2M for a worthless machine.  If seller sticks to the contract he’ll spend $1.2M to be able to sue for $2M  Seller will require at least ($2M – $1.2M =) $800K to terminate 11

A Coasian Solution  If buyer sticks to the contract he’ll pay $2M for a worthless machine.  If seller sticks to the contract he’ll spend $1.2M to make $2M  Buyer will pay up to $2M to terminate 12

A Coasian Solution  If buyer sticks to the contract he’ll pay $2M for a worthless machine.  If seller sticks to the contract he’ll spend $1.2M to make $2M  The parties will terminate for a price between $800K and $2M 13

Unilateral Repudiation?  What if we gave the buyer the unilateral right to terminate the contract? 14

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? 15

Unilateral Repudiation?  What if we gave the seller the unilateral right to terminate the contract? In that case, could buyer rely on seller for the machine? 16

Advance Notice?  Suppose that the buyer tells the seller he can’t use the machine and will not take delivery, but will offer seller $800K in damages. 17

Advance Notice?  Suppose that the buyer tells the seller he can’t 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 (which would give him a profit of $800K)? 18

Mitigation?  Suppose that the buyer tells the seller he can’t 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) 19

Mitigation?  Restatement § 350(1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation. 20

Mitigation as an information forcing rule  Cf. other information-forcing rules, such as Warranty of Fitness, Unilateral Mistake 21

Summing up  The parties should not be permitted to terminate their contract 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 thereafter 22

Anticipatory Repudiation  Five problems:  Can the parties have a fresh start thereafter?  When can the innocent party sue?  What constitutes a repudiation?  May the repudiating party change his mind?  Insecurity 23

Anticipatory Repudiation  When can the parties have a fresh start? 24

A Fresh Start  Restatement 253(2) Where performances are to be exchanged under an exchange of promises, one party’s repudiation of a duty to render performance discharges the other party’s remaining duties to render performance. 25

When can a suit be brought?  May seller sue immediately or must he wait till the expiry of the 12 month period? 26

When can a suit be brought?  Restatement 253(1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach. 27

Hochster v. De la Tour 779 Lord Campbell

Hochster v. De la Tour  When were Πs duties to begin? 29

Hochster v. De la Tour  When were Πs duties to begin? June 1, 1852  When did Δ send his letter of repudiation? 30

Hochster v. De la Tour  When were Πs duties to begin? June 1  When did Δ send his letter? May 11  When was the action brought? 31

Hochster v. De la Tour  When were Πs duties to begin? June 1  When did Δ send his letter?  When was action brought? May 22  When did Π enter into his contract with Lord Ashburton? 32

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? Before June 1. So had the Π acted inconsistently with his duties under the contract? 33

Hochster v. De la Tour  A Fresh Start? Could Π bring his action and enter into a contract with Lord Ashburton prior to June 1? 34

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? 35

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. 800 36

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? An implicit promise not to do anything inconsistent with the principal obligation 37

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? Why is this “much more rational” so far as the other party is concerned? 38

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? Why is this “much more rational” so far as the other party is concerned?  The Liberty Interest: the injured party is at liberty to go elsewhere 39

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? Why is this “much more rational” so far as the other party is concerned?  Efficiency: Instead of remaining idle and laying out money wastefully 40

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? Why is this “much more rational” so far as the other party is concerned?  Estoppel and unfairness: It seems strange that the party in breach should object that faith is given to his assertion 41

The Restatement  What constitutes a repudiation? 42

What constitutes a repudiation?  Restatement § 250  A statement that the obligor will commit a breach that would give a claim for damages for total breach  A voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach 43

The Restatement  So when does one have damages for total breach: Restatement § 243 Only if the breach discharges the injured party’s remaining duties to render such performance 44

The Restatement  So when does one have damages for total breach: Restatement § 243 Only if the breach discharges the injured party’s remaining duties to render such performance Restatement 237: performance discharged if an uncured material breach Materiality: Restatement 241 45

Repudiation under the UCC UCC § 2-610  When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may (a) for a commercially reasonable time await performance by the repudiating party; or  (b) resort to any remedy for breach (Section 2-703 or Section 2-711), even though he has notified the repudiating party that he would await the latter's performance and has urged retraction; and  (c) in either case suspend his own performance or proceed in accordance with the provisions of this Article on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods (Section 2-704). 46

UCC § 2-610: Innocent Party’s Election  When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may (a) for a commercially reasonable time await performance by the repudiating party; or  (b) resort to any remedy for breach (Section 2-703 or Section 2-711), even though he has notified the repudiating party that he would await the latter's performance and has urged retraction; and  (c) in either case suspend his own performance or proceed in accordance with the provisions of this Article on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods (Section 2-704). 47

UCC § 2-610: Innocent Party’s Election  So what’s the best option for the innocent party: wait or immediately declare the contract terminated? 50

Retraction of repudiation: UCC § 2-611  (1) Until the repudiating party's next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final.  (3) Retraction reinstates the repudiating party's rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation. 51

Retraction of repudiation: UCC § 2-611  (2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this Article (Section 2-609) 52

Insecurity and assurance of performance: UCC § 2-609(1)  A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return. 53

Assurance of performance: Restatement § 251  The obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance … until he receives such assurance 54

Communication of Acceptance?  What if the innocent party doesn’t communicate his acceptance of the repudiation? 55

What if the innocent party doesn’t communicate acceptance?  UCC § 2-611(1) Until the repudiating party's next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final. 56

Communication of Acceptance  Anticipatory repudiation as an offer of termination, which the innocent party can accept and thereby bring the contract to an end (reserving a right to damages) 57

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? How is acceptance to be effected? 58

A bit of contract review  The rules of offer and acceptance: It’s not just that the parties mutually assent, but they should both know that the other has assented. 59

A bit of contract review  What is the logic behind the requirement of mutual assent? 60

A bit of contract review  What is the logic behind the requirement of mutual assent? Need for commercial certainty  The possibility of a false start 61

A bit of contract review  What is the logic behind the requirement of mutual assent? Presumption against options 62

A bit of contract review  The presumption against options The option is valuable and one should not presume that it is given away for free 63

Now: Anticipatory repudiation  The same issues arise when the contract is over Where there is some uncertainty about whether it’s over 64

Now: Anticipatory repudiation  Where there is some uncertainty about whether it’s over Is one party getting an option?  The market price falls: Can a repudiating seller change his mind, since the contract now looks like a better deal? 65

Now: Anticipatory repudiation  The market price falls: Can a repudiating seller change his mind, since the contract now looks like a better deal?  Cf. UCC § 2-611: he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final. 66

Now: Anticipatory repudiation  The market price rises: Can an innocent buyer decide that he doesn’t accept the repudiation? 67

Now: Anticipatory repudiation  The market price rises: Can an innocent buyer decide later that he doesn’t accept the repudiation? UCC 2-610(a): the aggrieved party may for a commercially reasonable time await performance by the repudiating party 68

Now: Anticipatory repudiation  How much certainty would a court require to find: That there has been a repudiation? That it has been accepted so as to cut off the ability of the repudiating party to retract? 69

Flatt v. Schupt 781 70

Flatt v. Schupt  Δ agrees to sell land to Π at $160K, closing June 30 Contingent on Π obtaining zoning for an asphalt plant 71

Flatt v. Schupt  Π’s 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 72

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 73

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 74

Flatt v. Schupt  Letter of May 21: “we decided to withdraw the request for rezoning”  Qu. Did Πs repudiate the contract on May 21? 75

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” Must be clear and unequivocal 76

Flatt v. Schupt  Qu. Did Πs repudiate the contract on May 21? Why might this be the right result? 77

Flatt v. Schupt  How does Restatement § 251 help?  Where reasonable grounds arise to believe that the obligor will commit a breach by non ‐ performance that would of itself give the obligee a claim for damages for total breach under § 243, the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance. 78

Flatt v. Schupt  Why didn’t the parties ask for clarity, do you think? 79

Flatt v. Schupt  Do we want to chill efficient renegotiations? 80

Flatt v. Schupt  If the courts didn’t require an explicit repudiation, might this give rise to strategic behavior Party in breach uses the ambiguity to get an option 81

Flatt v. Schupt  If there had been a repudiation, did the Πs retract it in time? 82

Flatt v. Schupt: Retraction  Restatement 256: The effect of a statement as constituting a repudiation under § 250 or the basis for a repudiation under § 251 is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final. 83

Flatt v. Schupt  If there had been a repudiation, did the Πs retract it in time? If no reliance claim, innocent party must communicate acceptance of repudiation to cut off right of retraction 84

Mitigation and Anticipatory Repudiation  Even as the rules of offer and acceptance seek to let both parties know when the contract has been formed, the rules of anticipatory breach seek to let both parties know when the contract has been terminated 85

An informational problem  The problem is an informational one, and the solution at law is to give each party an incentive to share private information 86

An informational problem  The party in breach has an incentive to disclose promptly his intention to breach because failure to do so will increase damages by delaying the innocent party’s mitigation requirements 87

An informational problem  The innocent party has an incentive to disclose promptly to cut off the retraction rights of the party in breach  He also is deemed to have accepted the breach after an unreasonable delay 88

But it gets complicated  We see an example of all of this in Taylor v. Johnson at 788 89

Taylor v Johnson at 788 90

Was there a clearly implied threat of nonperformance in Decker at 790?  We’ll get right on it… but was 45 days within the contemplation of the parties?  Could both parties have done something differently? 91

What about Bonebrake at 790?  The pressure of time 92

Insolvency  Presumptive grounds for repudiation under Restatement § 252 if reasonable grounds to expect a breach 93

Insolvency  Presumptive grounds for repudiation under Restatement § 252 if reasonable grounds to expect a breach But see Keppelon at 815: Insolvency by itself doesn’t do it 94

Executory Contracts in Bankruptcy  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. 95

Insolvency  Seller’s absolute right to refuse delivery in UCC § 2-702(1) Where the seller discovers the buyer to be insolvent he may refuse delivery except for cash including payment for all goods theretofore delivered under the contract, and stop delivery under this Article (Section 2-705). 96

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

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