1. 1 George Mason School of Law Contracts II Anticipatory Repudiation This file may be downloaded only by registered students in my class, and may not be shared by them F.H. Buckley fbuckley@gmu.edu

2. Next week  The Contractual Measure of Damages Scott 93-107, 863-80 Rest. §§ 344, 346-48, 352-53 2

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

4. 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 to the seller’s duty to tender 4

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.* 5 *There is no time-value of money here

6. 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. 6

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. 7

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 8

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 make $2M  So there’s a bargaining surplus if they terminate: and what would they be willing spend to do so? 9

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 make $2M  Seller will require at least ($2M – $1.2M =) $800K to terminate 10

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 11

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 12

13. Unilateral Repudiation?  What if we gave the buyer the unilateral right to terminate the contract? 13

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? 14

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? 15

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. 16

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? 17

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), Illustration 1 18

19. Mitigation?  The principle of mitigation: Restatement § 350(1), Illustration 1  Note how this gives the buyer in breach the entire bargaining surplus 19

20. Mitigation?  If buyer didn’t get the entire bargaining surplus, would he have an incentive to notify the seller promptly? 20

21. Mitigation as an information forcing rule  If buyer didn’t get the entire bargaining surplus, would he have an incentive to notify the seller promptly?  Cf. eg Warranty of Fitness, Unilateral Mistake 21

22. 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 22

23. Anticipatory Repudiation  Two problems:  Is the repudiation binding, or may the repudiating party change his mind?  When can the innocent party sue? 23

24. Anticipatory Repudiation  Is the repudiation binding, or may the repudiating party change his mind?  Restatement § 253(2): seller may suspend performance on repudiation 24

25. Anticipatory Repudiation  Suppose Buyer promptly informs seller of his intention not to proceed with the contract. May seller sue immediately or must he wait till the expiry of the 12 month period? 25

26. Hochster v. De la Tour 799 Lord Campbell

27. Hochster v. De la Tour  When were Πs duties to begin? 27

28. Hochster v. De la Tour  When were Πs duties to begin?  When did Δ send his letter? 28

29. Hochster v. De la Tour  When were Πs duties to begin?  When did Δ send his letter?  When was the action brought? 29

30. 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? 30

31. 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? Had the Π acted inconsistently with his duties under the contract? 31

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? Could Π bring his action prior to the date when his duties with Δ were to begin? 32

33. 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? 33

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? Short v. Stone, p. 800 34

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? Why is this “much more rational”? 35

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? Why is this “much more rational”?  Impossibility?  Estoppel?  Fairness? 36

37. Hochster v. De la Tour  If a man promises to marry a woman in December and marries another woman in May, is she free to marry another man in June? 37

38. Hochster v. De la Tour  If a man promises to marry a woman in December and marries another woman in May, is she free to marry another man in June?  Lord Campbell’s rationale? 38

39. The Restatement  Does the party in breach have an incentive to communicate his intention to breach asap? Restatement § 350(1) 39

40. The Restatement  Is the innocent party free to take a conflicting position elsewhere immediately on repudiation? Restatement § 253(2) 40

41. The Restatement  Can the innocent party sue immediately on repudiation? Restatement § 253(1) 41

42. The Restatement  What constitutes a repudiation? Restatement § 250  Cf total breach at § 243 42

43. The UCC  The innocent party’s election in UCC § 2-610 Does “substantial impairment” conflict with perfect tender? 43

44. The UCC  Retraction of repudiation under UCC § 2-611 Notice the information-forcing incentive for the innocent party 44

45. Hochster v. De la Tour  Must the innocent party communicate his acceptance of the repudiation in a non-sales case? 45

46. 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? 46

47. 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. 47

48. A bit of contract review  What is the logic behind the requirement of mutual assent? 48

49. A bit of contract review  What is the logic behind the requirement of mutual assent? Otherwise a possibility of a false start  Need for commercial certainty 49

50. A bit of contract review  What is the logic behind the requirement of mutual assent? Presumption against options 50

51. 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) 51

52. 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 52

53. Now: Anticipatory repudiation  The same issues arise when the contract is over Where there is some uncertainty about whether it’s over 53

54. Now: Anticipatory repudiation  Where there is some uncertainty about whether it’s over Can the innocent party start over? Can the party in breach start over? 54

55. Now: Anticipatory repudiation  Where there is some uncertainty about whether it’s over Do mitigation requirements kick in? 55

56. Now: Anticipatory repudiation  Where there is some uncertainty about whether it’s over Is one party getting an option? 56

57. 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? 57

58. 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?  Cf. UCC § 2-611 58

59. Now: Anticipatory repudiation  Where there is some uncertainty about whether it’s over Is one party getting an option?  The market price rises: Can an innocent buyer decide later that he doesn’t accept the repudiation? UCC 2-610(a) 59

60. 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 60

61. 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 61

62. 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 62

63. 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 63

64. Flatt v. Schupt  Letter of May 21: “we decided to withdraw the request for rezoning”  Qu. Did Πs repudiate the contract on May 21? 64

65. 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” 65

66. Flatt v. Schupt  Letter of May 21: “we decided to withdraw the request for rezoning”  Qu. Did Πs repudiate the contract on May 21? Why might this be the right result? 66

67. Flatt v. Schupt  Letter of May 21: “we decided to withdraw the request for rezoning”  Qu. Did Πs repudiate the contract on May 21? How does Restatement § 251 help? 67

68. Flatt v. Schupt  Letter of May 21: “we decided to withdraw the request for rezoning”  Qu. Did Πs repudiate the contract on May 21?  Should the parties have cured the problem?  Were they simply thick? 68

69. Flatt v. Schupt  Letter of May 21: “we decided to withdraw the request for rezoning”  Qu. Did Πs repudiate the contract on May 21?  What is the best information forcing rule?  Do we want to chill efficient renegotiations? 69

70. Flatt v. Schupt  What is the best information forcing rule?  Are retraction rights inconsistent with information forcing? 70

71. Flatt v. Schupt  If there had been a repudiation, did the Πs retract it in time? 71

72. Flatt v. Schupt  If the courts require an explicit repudiation, does this give rise to the strategic behavior suggested at 816-17 Party in breach seeks to provoke a cover which he can treat as a repudiation Party in breach uses the ambiguity to get an option 72

73. Taylor v Johnson at 809 73

74. Taylor v Johnston at 809  Did Johnston repudiate? And did Taylor accept? 74

75. Was there a clearly implied threat of nonperformance in Decker at 811?  We’ll get right on it…  Could both parties have done something differently? 75

76. What about Bonebrake at 812?  Were the buyers acting reasonably?  Would a different result create a problem of opportunism? 76

77. What about Lak at 812?  What is the good faith issue? 77

78. UCC § 2-610  Is this in any way qualified by 2-609? 78

79. Insolvency  Presumptive grounds for repudiation under Restatement § 252  Right to assurance of performance. Restatement § 251.  Seller’s Remedy in UCC § 2-702  But see Koppelon at 815 79

80. Executory Contracts in Bankruptcy  Presumptive grounds for repudiation under restatement § 252  Right to assurance of performance. UCC § 2-609  Seller’s Remedy in UCC § 2-702  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. 80

81. 81 George Mason School of Law Contracts II Remedies F.H. Buckley fbuckley@gmu.edu