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

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 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 3

4. 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.* 4 *There is no time-value of money here

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.  After a few days, buyer decides he can’t use the machine. Advise buyer. 5

6. 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. 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.  If seller sticks to the contract he’ll spend $1.2M to make $2M 7

8. A Coasian Solution  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 to make $2M  So there’s a bargaining surplus if they terminate 8

9. A Coasian Solution  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 to make $2M  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 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 10

11. A Coasian Solution  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 to make $2M  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 tells the seller he can’t use the machine and will not take delivery, but will offer seller $800K in damages. 14

15. 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? 15

16. 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) 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. Anticipatory Repudiation  Suppose Buyer repudiates the agreement, and ten months later insists on full performance by the seller? 18

19. 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. 20 George Mason School of Law Contracts II Anticipatory Repudiation F.H. Buckley fbuckley@gmu.edu

21. Hochster v. De la Tour Lord Campbell: Whig MP, follower of Lord Brougham

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? 22

23. 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 23

24. Hochster v. De la Tour  When were Πs duties to begin? 24

25. Hochster v. De la Tour  When were Πs duties to begin?  When did Δ send his letter? 25

26. Hochster v. De la Tour  When were Πs duties to begin?  When did Δ send his letter?  When was the action brought? 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? 27

28. 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? 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  Could he accept this without breaching his contract with Δ? 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? Does it follow that he can sue before June 1? 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? So why wait? De la Tour was about to travel. 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  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) 32

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

34. 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? 34

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?  What is the logic behind the requirement of mutual assent? 35

36. A bit of contract review  What is the logic behind the requirement of mutual assent?  It’s not just that the parties mutually assent, but they must both know that the other has assented. 36

37. A bit of contract review  What is the logic behind the requirement of mutual assent?  Otherwise a possibility of a false start 37

38. A bit of contract review  It’s 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 38

39. A bit of contract review  The need for commercial certainty Full communication to the other party tends to eliminate misunderstandings 39

40. 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? 40

41. A bit of contract review  The need for commercial certainty Full communication to the other party tends to eliminate misunderstandings  The presumption against options 41

42. 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) 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 The option is valuable and one should not presume that it is given away for free 43

44. 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 seller’s 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 44

45. 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 45

46. 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 seller’s repudiation is 150 Price on date for delivery is 100 Buyer assets that he accepted repudiation when price was 150 and claims damages of 50 46

47. Flatt v. Schupt  Δ agrees to sell land to Π at $160K, closing June 30 Contingent on buyer obtaining zoning for an asphalt plant 47

48. 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 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  Δ rejects the offer of $142.5K on June 9 49

50. 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 50

51. Flatt v. Schupt  Letter of May 21: “we decided to withdraw the request for rezoning”  Qu. Did Πs repudiate the contract on May 21? 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? Not “a clearly implied threat of nonperformance” 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? Aliter chill efficient renegotiations? 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? Restatement §§ 250-51  Should the Δs have cured the problem? 54

55. Flatt v. Schupt  If a fuzzy repudiation is permitted, the party in breach gets an option Suppose the contract concerns commodities in volatile markets 55

56. Flatt v. Schupt  If a fuzzy repudiation is permitted, the party in breach is also given an opportunity to chisel the innocent party At a time when a seller is in the middle of completion, the buyer might assert that he repudiated months before and accuse the seller of failing to mitigate. 56

57. Flatt v. Schupt  If there had been a repudiation, did the Πs retract it in time? 57

58. 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” 58

59. 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? 59

60. What about Bonebrake at 812?  Were the buyers acting reasonably?  Would a different result create a problem of opportunism? 60

61. What about Lak at 812?  The seller offered to close “as is” So why was that a problem? Who took the risk as to the number of units? 61

62. What about Lak?  The seller offered to close “as is” The buyer had acted reasonably and had left open the possibility of further negotiations regarding the ambiguity What’s the difference between a standard of reasonable behavior and a good faith standard? 62

63. UCC § 2-610  Is this in any way qualified by 2-609? 63

64. Insolvency  Presumptive grounds for repudiation under Restatement § 252  Right to assurance of performance. Restatement § 251.  Seller’s Remedy in UCC § 2-702 64

65. 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. 65

66. 66 George Mason School of Law Contracts II Remedies F.H. Buckley fbuckley@gmu.edu