problem 21

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Problem 21: A farmer and his

wheat

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Facts� Wheat farmer contracted to sell wheat to broker

in Chicago

± Duration of Delivery: 15-30 Sept

± Price: $2/unit

� 1 July:

± Market price: $1.50/unit

± Broker: Anticipatory breach

� 15 July:

± Market price: $1.25/unit

± Farmer found new buyer

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Facts

� 1 Aug:

± Market price: $1 /unit

� 15 Sept:± Market price: $2.75 /unit

� 16 Sept: Farmer¶s dilemma

± Honour contract at $1.25 /unit

± Breach contract and sell at $2.75 /unit

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UCC

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Farmer¶s Rights and Obligations

Claim against Broker

� Damages

± Incidental damages

± Consequentialdamages

� Lost-volume recovery

± Subject to mitigation?

± Foreseeability?

Liability to new buyer

� Contractualperformance

Or

� Breach

± Consequential

damages, s 2-715(2)UCC

± Incidental damages

± Other damages

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Farmer¶s Dilemma

� Claim against broker for incidentaldamages from 1st contract

Compare

� Honour 2nd contract: More lost-volumerecovery (from 1st contract) + Lesser salvage price (2nd contract)

� Breach 2nd contract: Lesser lost-volumerecovery (from 1st contract) + Moresalvage price (2nd contract) + Seller¶sliability in damages for non-delivery of

goods (2nd

contract)

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Seller¶s Remedies in general

s2-703(2)U

CC� (2) If the buyer is in breach of contract the seller, to the extent provided for by this Actor other law, may:

� (a) withhold delivery of such goods;

� (b) stop delivery of the goods under Section 2-705;

� (c) proceed under Section 2-704 with respect to goods unidentified to the contract or

unfinished;� (d) reclaim the goods under Section 2-507(2) or 2-702(2);

� (e) require payment directly from the buyer under Section 2-325(c);

� (f) cancel;

� (g) resell and recover damages under Section 2-706 (includes: any incidentaldamages allowed under the provisions of this Article (Section 2-710));

� (h) recover damages for non-acceptance or repudiation under (Section 2-708(1)or in a proper case the price (Section 2-709);

� (j) recover the price under Section 2-709;

� (k) obtain specific performance under Section 2-716;

� (l) recover liquidated damages under Section 2-718;

� (m) in other cases, recover damages in any manner that is reasonable under the

circumstances.

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(Broker) Lost-Volume Recovery

� s 2-708(2) UCC: Seller¶s Damages for Non-acceptance or Repudiation

If the measure of damages provided in subsection (1)is inadequate to put the seller in as good a position asperformance would have done then the measure of damages is the profit (including reasonable overhead)which the seller would have made from full

performance by the buyer, together with anyincidental damages provided in this Article (Section 2-710), due allowance for costs reasonably incurredand due credit for payments or proceeds of resale.

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(Broker) Lost-Volume Recovery

� Theory: But for the Buyer¶s breach, the Seller could have had 2 sales

± One to the breaching buyer

± and another to a second buyer

� Assumption: Continuous supply and demand

� Purpose: Sub silentio way to providecompensation to a non-breaching party whenthe strict application of other rules would notprovide the Seller with a measurable recovery

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Computation of lost profits

� Applicable if s 2-708(1) insufficient:Amount of loss profits

± Contract price ± Market price at time and

place of tender ± Contract price ± Market price at time of

breach (s 2-713 UCC)

± $2 ± $1.50

± $0.50 (insufficient)� Applicable if s 2-709 does not apply

± In this case, the farmer cannot claim for thecontract price because the broker did not

receive the goods

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Computation of lost profits

� Not recovery of price

� Duty to mitigate± Restatements Sec 350: Describes as damages that

could have been avoided without undue risk, burdenor humiliation.

± Satisfied: As seller sold quickly to new buyer within$0.25 drop in market price within a falling market

� Price of goods ± Cost of manufacturing goods(Allocative portion of general overhead +Administrative costs) ± Salvage value± Effect: To put the seller in µas good a position as

performance would have done¶

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Who can claim under s2-708(2)U

CC?� UCC makes no distinction

� Academics¶ suggestions:

± Remedy available to all sellers± Remedy available to some but not all sellers

when contract-market formula is insufficient toput Seller in as good a position as performance

� So, likely that farmer, as a seller, can claimunder s 2-708(2) UCC

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Pre-conditions to sue for lost-

volume� Consequential damages for seller is not definedin UCC± Only consequential damages for buyer is defined ± s

2-715(2) UCC

� Certainty of damages� Foreseeability of damages

± Common law rule of foreseeability� Had ley v Bax endale

� The Achilleas± Test: Whether breach was reasonably contemplated

was reasonably contemplated as a foreseeable risk of damages from breach under the Had ley test?

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Conditions to sue for profits on

transaction� E l P aso Refinery LP [1996]: Two necessary inquiries

� Inquiry 1: Seller must show that that it could have madea 2nd sale± Show capacity of the seller

± Probable to make 2 profitable sales� Official Comment 2: Don¶t need to prove history of profitability

� Inquiry 2: 2nd sale could have been made even if therewas no repudiation by the 1st buyer ± 2nd sale was not a replacement sale (ie. breach of original sale

did not provide the opportunity to make the resale)± Looking at the 2nd buyer¶s needs, whether the 2nd buyer would

have bought from the seller even if the original buyer had notbreached

± Characteristics of goods in involved in breach as morespecialized item is more likely to be a replacement sale

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Examples of lost-volume seller

� Inquiry 1: Capacity to sell

� Vanderwerff Implement Inc v McCance

[1997]:Although there was no specific proof that theSeller (Vanderwerff) would sell a disc toMcCance and a 3P, but the court held that thefact that Vanderwerff sold the returned disc toa 3P was strong evidence for the lost-volumeargument

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Farmer is a lost-volume seller

� Inquiry 1 satisfied: Farmer has shown that that he couldhave made a 2nd sale of the wheat± Contracted to sell wheat to a new buyer at the market price then

� Inquiry 2: Likely that 2nd sale could have been madeeven if there was no repudiation by the broker ± Unlikely that 2nd sale was a replacement sale± So, seller has the ability to provide the product to both the

breaching buyer and the resale buyer � Because, wheat is not a specialised item, so it is not presumed to

be a replacement sale� Assume that the farmer has or can produce sufficient wheat to fulfill

both contractual obligations under the 1st and 2nd contractssimultaneously� Since the 2nd buyer and the 1st buyer are distinct entities, it is likely

that the 2nd buyer would have bought from the seller even if theoriginal buyer had not breached

� So, farmer is a lost-volume seller

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Claim against Broker for incidental

damages� Seller can claim for incidental damages ± s 2-710(3) UCC:± In a consumer contract, a seller may not recover

consequential damages from a consumer.± But, broker is not a consumer, so seller may recover incidental damages

� Condition of claim ± s 2-710(2) UCC:

± Consequential damages resulting from the buyer'sbreach include any loss resulting from general or particular requirements and needs of which the buyer at the time of contracting had reason to know andwhich could not reasonably be prevented by resale or

otherwise. Foreseeability

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Claim against Broker for incidental

damages� Scope for claim ± s 2-710(1) UCC:

± Incidental damages to an aggrieved seller include any commercially reasonablecharges, expenses or commissions incurredin stopping delivery, in the transportation, care

and custody of goods after the buyer'sbreach, in connection with return or resale of the goods or otherwise resulting from thebreach.

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2nd contract

� If farmer breaches contract with 2nd buyer

� S 2-713(1)(a):

Market price at time of tender ± Contract price+ Incidental damages

= Market price at time of breach (s 2-713(2)UCC) ± Contract price + incidental damages

= $2.75 - $1.25 + incidental damages

= $1.50

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Farmer¶s options

Honour contract

� More lost-volume recovery

Profits ± salvage price + (incidental price ± productioncosts)

= $2 ± $1.25 ± cost of production

= $0.75 ± Cost of production (Claim from Broker)

� Lesser salvage price = $1.25

� Total = ($0.75 ± Production costs) + $1.25

=$2 ± Cost of production

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Farmer¶s optionsBreach contract� Lesser lost-volume recovery

Profits + (incidental price ± production costs) ±salvage price

= 2 ± 2.75 ± cost of production< 0 (No lost-volume recovery from broker)

� More salvage price = $2.75

� Seller¶s liability in damages for non-delivery of goods = $1.50± Subject to new buyer¶s extent of mitigation,

foreseeability and certainty of damages requirements

� Total = $2.75 ± $1.50 = $1.25

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Sale of Goods

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What are his respective rights andobligations with respect to the 1st

breaching buyer?� Issue 1: Whether farmer can sue the first broker?

� Can sue for price under s 49(2): where property has notpassed, and the price is payable on a day certain

-no evidence that the price is to be paid on aµday certain¶

� Can sue for damages under s 50(1)

S 50(1): Where the buyer wrongfully refuses to accept the

goods, the seller may maintain an action against him for non-acceptance

-under this limb: buyer has a duty to mitigate

Ans: Yes

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What are his respective rights andobligations with respect to the breaching

buyer?� Issue 2: What is the measure of damages (MOD) ?

-s 50(2): the estimated loss directly and naturally resulting inthe ordinary course of events from the buyer¶s breach

-s 50(3): where there is an available market for the goods inquestion

- MOD is prima facie to be ascertained by the differencebetween the contract price and the market or currentprice of the goods

� at the time or times when they ought to have beenaccepted

� or (if no time was fixed for acceptance) at the time of therefusal to accept (second limb)

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-s 50(3): where there is an available market for the goods inquestion

- MOD is prima facie to be ascertained by the differencebetween the contract price and the market or currentprice of the goods

-at the time or times when they ought to have beenaccepted

� Applied:

-Prima facie, the MOD = Market price of goods when theyshould have been accepted ± contract price

= $2.75- $2

= 0.75

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-Atiyah: rule under s50(3) only a prima facie method of calculating the damages if it would lead to an obviously

incorrect assessment of the loss directly and naturallyresulting from breach> must be discarded

-Actual Loss from buyer¶s breach

= Contract price ± contract price of second contract= $2.00- $1.25

= $0.75

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buyer?� Issue 3: Market price at what date?

-where the buyer¶s refusal to take the goods occurs at the time whenthey should have been accepted ,the provisions of s. 50(3) areexactly in point: seller recovers the difference between the contract

price and the market price at that time-Atiyah: rule should not be too rigidly applied

-Where there is no time stated:

-If the seller does not accept the repudiation> his duty to mitigatemeans that he should resell at once in a falling market, and if he fails

to do this he cannot hold the buyer liable for a greater amount thanthe difference between the contract price and at the date of repudiation (Roth v Tayson)

-BUT: there has been justifiable skepticism that the innocent seller should be able to identify a falling market before it has fallen

(Lusograin)

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buyer?� Issue 3: Market price at what date?

-If we accept Roth v Tyson applies,

Damages claimed = Contract price ± Contract price at time of anticipatory breach

= $2 - $1.50= $0.50

-But Roth v Tyson unlikely to be accepted, since the overall wheatmarket seems volatile, and it would not be unreasonable for farmer to wait for the market price to rise.

-i.e the farmer reasonably mitigated his losses

Conclusion

-Farmer likely to claim $0.75 from original broker being the actual loss of buyer¶s breach

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� Buyer has an action for non-delivery, if farmer fails todeliver

� Damages for non-delivery51.²(1) Where the seller wrongfully neglects or refuses to deliver the goodsto the buyer, the buyer may maintain an action against the seller for damages for non-delivery.

What are the farmer¶s respective rightsand obligations with respect to the

current buyer?

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Issue: What is the measure of damages?

S 51 (2) The measure of damages is the estimated loss directly and naturallyresulting, in the ordinary course of events, from the seller¶s breach of

contract.� (3) Where there is an available market for the goods in question, the

measure of damages is prima facie to be ascertained by the differencebetween the contract price and the market or current price of the goodsat the time or times when they ought to have been delivered or (if no timewas fixed) at the time of the refusal to deliver.

� Prima Facie MOD= $2.75-$1.25

� = $1.50

What are the farmer¶s respective rightsand obligations with respect to the

current buyer?

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CISG

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Article 74 (Expectation Interest)

� ³ Damages for breach of contract by one party consist of asum equal to the loss, including loss of profit, sufferedby the other party as a consequence of the breach.´

� Gotanda:

-Goal of this provision is to place the claimant in thesame economic position they would have been inif the breach had not occurred.

-i.e: expectation interest

-i.e: the benefit of the bargain

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Article 74(Forseeability/Remoteness)

� Damages may not exceed the loss which� the party in breach foresaw or ought to have

foreseen

� at the time of the conclusion of the contract,

� in the light of the facts and matters of which hethen knew or ought to have known,

� as a possible consequence of the breach of

contract.

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Article 75: Calculation of Damagesbased on substitute transaction

� If buyer has resold the goods and buyer bought goods inreplacement

� In a reasonable time and reasonable manner

� Can claim: the difference between the contract price andthe price in the substitute transaction

-Purpose of µreasonability¶ requirement: to prevent theunfairness of having a party pay for loss which the other partycaused through hasty or malicious conduct (Gotanda)

� + any other damages in Article 74

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Article 76: Calculation of Damagesbased on current price

� If party has not made resale under Article 75

� -party may recover the difference between the price fixed by thecontract and the current price

� If, however, the party claiming damages has avoided the contract

after taking over the goods, the current price at the time of suchtaking over shall be applied instead of the current price at the time of avoidance

What is the current prince:

(2) the current price is the price prevailing at the place where

delivery of the goods should have been made

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Article 77: reasonable mitigation

� A party who relies on a breach of contract

-must take such measures as are reasonable in the circumstances tomitigate the loss, including loss of profit, resulting from the breach.

-If he fails to take such measures, the party in breach may claim a

reduction in the damages in the amount by which the loss shouldhave been mitigated.

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Farmer¶s Rights and Obligation

against 1

st

buyer � 1. What is the expectation interest?(Article 74)

-Expectation interest was the benefit of thecontract >to receive $2 for the wheat to bedelivered on 15-30th September

� 2. Were the damages ³foreseeable´ or tooremote? (Article 74)

-Damages were µforrseeable¶/not tooremote

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Farmer¶s Rights and Obligation against 1st

buyer 3. How are the damages to be calculated?-Article 75 applies: seller has resold the goods

-Seller may claim between contract price and substitution transaction IF replacement contract was carried out at a reasonable time andreasonable manner

Issue: Whether 2nd contract was carried out at a reasonable time andin a reasonable manner?

-Knapp: Reasonable manner means a manner as would be likely tobring the highest price on resale reasonably possible in the

circumstances-courts will look at trade practice etc.

-Arguably 14 days is a reasonable time for the farmer to find the bestprice. Farmer may also be waiting for the price to rise.

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Farmer¶s Rights and Obligation against 1st

buyer 3. How are the damages to be calculated?-Article 75 applies

Conclusion

Damages under Article 75 = Contract price ± Substitute Contract price

= $2 -$1.25

=$0.75

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Farmer¶s Obligations towards

2

nd

buyer � 1. Expectations of the 2nd buyer:

-to received wheat from 15-30 September

for $1.252. Assuming 2nd Buyer contracts a substitute

contract> Article 75 will apply

-Damages = Substitute contract price-Contract price

= ($2.75 (but may vary))- $1.25

= $1.50 but may vary

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armer s gat ons towar s

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armer s gat ons towar s2nd buyer and Rights towards 1st

buyer � Issue: If farmer breaches 2nd contract, canhe claim the damages paid to 2nd Buyer from the 1st buyer

-Issue of foreseeability involved

-maximum limit still $0.75 (expectationinterest from1st contract)

Documents

problem 21