1 George Mason School of Law Contracts II Anticipatory Repudiation F.H. Buckley [email protected]

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George Mason School of Law

Contracts II

Anticipatory Repudiation

F.H. Buckley

[email protected]

When is performance due?

When can the seller sue for the price?

When can the buyer sue for the goods?

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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

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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.*

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*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.

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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.

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Buyer’s Problem



If seller sticks to the contract he’ll spend $1.2M to make $2M

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A Coasian Solution




So there’s a bargaining surplus if they terminate

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A Coasian Solution




Seller will require at least $800K to terminate

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A Coasian Solution




Buyer will pay up to $2M to terminate

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A Coasian Solution




The parties will terminate for a price between $800K and $2M

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Unilateral Repudiation?

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

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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?

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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.

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Mitigation?


What if seller nevertheless produces the machine and on tender demands payment of $2M?

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Mitigation?


What if seller nevertheless produces the machine and on tender demands payment of $2M? The principle of mitigation: Restatement

§ 350(1)

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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

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Suppose Buyer repudiates the agreement, and ten months later insists on full performance by the seller?

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Suppose Buyer repudiates the agreement, and ten months later insists on full performance by the seller? Restatement § 251: seller may suspend

performance on repudiation

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Contracts II


F.H. Buckley

[email protected]

Hochster v. De la Tour

Lord Campbell:Whig MP, follower of Lord Brougham


If a man promises to marry a woman in December and marries another woman in May, when is he liable for breach of promise?

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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

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When were Πs duties to begin?

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When were Πs duties to begin? When did Δ send his letter?

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When were Πs duties to begin? When did Δ send his letter? When was the action brought?

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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?

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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?

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Hochster v. De la TourThe “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?

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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?

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with Lord Ashburton without breaching his contract with Δ? So why wait? De la Tour was about to travel.

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with Lord Ashburton without breaching his contract with Δ? Why permit him to sue before June 1? UCC § 2-610(b)

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Must the innocent party communicate his acceptance of the repudiation?

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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?

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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?

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It’s not just that the parties mutually assent, but they must both know that the other has assented.

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Otherwise a possibility of a false start

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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

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The need for commercial certainty Full communication to the other party

tends to eliminate misunderstandings

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Commercial certainty and anticipatory repudiation When is the seller to mitigate?

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The presumption against options

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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*(PriceAugust 1 - $900)

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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

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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

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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

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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

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Flatt v. Schupt

Δ agrees to sell land to Π at $160K, closing June 30 Contingent on buyer obtaining zoning

for an asphalt plant

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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

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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

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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

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Flatt v. Schupt


Qu. Did Πs repudiate the contract on May 21?

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Flatt v. Schupt


Qu. Did Πs repudiate the contract on May 21? Not “a clearly implied threat of

nonperformance”

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Flatt v. Schupt


Qu. Did Πs repudiate the contract on May 21? Aliter chill efficient renegotiations?

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Flatt v. Schupt


Qu. Did Πs repudiate the contract on May 21? Restatement §§ 250-51

Should the Δs have cured the problem?

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Flatt v. Schupt

If a fuzzy repudiation is permitted, the party in breach gets an option Suppose the contract concerns

commodities in volatile markets

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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.

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Flatt v. Schupt

If there had been a repudiation, did the Πs retract it in time?

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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”

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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?

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What about Bonebrake at 812?

Were the buyers acting reasonably?

Would a different result create a problem of opportunism?

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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?

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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?

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UCC § 2-610

Is this in any way qualified by 2-609?

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Insolvency

Presumptive grounds for repudiation under Restatement § 252

Right to assurance of performance. Restatement § 251.

Seller’s Remedy in UCC § 2-702

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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.

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Contracts II

Remedies

F.H. Buckley

[email protected]

Documents

1 George Mason School of Law Contracts II Anticipatory Repudiation F.H. Buckley [email protected]