Specific Performance Contracts April 7 2016 Roadmap Section

Specific Performance Contracts – April 7, 2016

Roadmap Section 1 -- Specific Performance for Breach of Contract. Section 2 -- basis for calculation of the expectation interest, problems in its measurement, including fixed costs and lost volume; alternatives to expectation, in the context of the losing contract. Section 3 -- three major limitations on damages –requirements of (1) avoidability, (2) foreseeability, and (3) certainty. Section 4 -- stipulated damages -- enforceable “liquidated damages” or unenforceable “penalties. ”

Topics • Personal service K’s • Klein v. Pepsico • Walgreen v. Sara Creek

Lumley v. Wagner • “The case of the prima donna diva”

Royal Italian Opera

Why not a direct or “affirmative” injunction? • What’s wrong with saying to Johanna Wagner, “You – sing for Lumley”?

Why not a direct or “affirmative” injunction? • What’s wrong with saying to Johanna Wagner, “You – sing for Lumley”? Difficult to assess quality of performance? Forced continuation of personal employment relations “involuntary servitude”

Injunctions: the “negative prohibition” issue • Lumley v. Wagner: what form did the injunction take?

Injunctions: the “negative prohibition” issue • Lumley v. Wagner: what form did the injunction take? • Why might this “possibly cause her to fulfill her engagement”?

Applies to opera singers – what about bakers, oil change mechanics, etc. ?

Applies to opera singers – what about bakers, oil change mechanics, etc. ? • Must be “no adequate remedy at law” to merit specific performance • In employment, means employee must have “unique or special talents” entertainers, athletes, etc. , most common; but look at entire situation

CAMPBELL SOUP CO. V. WENTZ (p. 618). • Campbell Soup Company contracted to have the Wentz brothers deliver all the Chantenay red carrots they were to grow on 15 acres of their farm during the 1947 season for $23 to $30 per ton. • Eventually, the market price for the carrots went from roughly $30 to $90 per ton, at which point Wentz refused to deliver more “contract carrots” to Campbell.

Campbell Still, Campbell suspectedtha t it was buying its ‘‘contract carrots, ’’ from another seller (Lojeski) and “refused to purchase any more, and instituted these suits against the Wentz brothers and Lojeski to enjoin further sale of the contract carrots to others, and to compel specific performance of the contract. ”

Adequacy rule • if Campbell was correct in its belief that it was in fact getting “contract carrots” from Lojeski, why were money damages not a sufficient remedy? • A court will often deny an award of specific performance even where money is inadequate (e. g. , if performance involves a service that is personal in nature) and will sometimes grant specific performance even where money would be an adequate remedy (e. g. , breaches of real estate transactions can often be adequately remedied with money damages even though that is not the norm).

two alternative ways in which money damages are often understood to be inadequate • (1) money is incommensurate with the lost performance • (2) the monetary estimate of the lost performance is too speculative and uncertain

Klein v. Pepsico, Inc.

Klein v. Pepsico Let’s treat the contract as one between Pepsi. Co and Klein. • When Pepsi. Co refused to deliver (perhaps because of fear that it would be liable if the cracks in the engine blades resulted in disaster) Klein wanted the G-II (“Gulfstream”) jet, not just damages. • The trial judge agreed and granted specific performance, but on appeal this was held “an abuse of discretion. ” • The Fourth Circuit applied the traditional adequacy test under UCC § 2 -716 and concluded that in spite of price rises “money damages would clearly be adequate in this case. ” • The G-II jet was not “unique” under the Code since there were three others that were “roughly comparable. ”

Specific performance • Who was seeking it? • Why?

Specific performance • Who was seeking it? • Why? • What time frame would be used for calculating damages – may be a hint …

“Uniqueness” • What is Klein’s argument?

“Uniqueness” • What is Klein’s argument? • What is Pepsico’s argument?

Court opinion • What does the court decide?

Court opinion • What does the court decide? • Why? Evidence of an active market for G-II’s Evidence that Klein wanted to resell plane Evidence that Klein had gotten into the “plane broker” business himself

The 1940 s car cases and uniqueness 1948 Ford Sedan

2 -716. Specific Performance; Buyer's Right To Replevin (1) Specific performance may be decreed if the goods are unique or in other proper circumstances. In a contract other than a consumer contract, specific performance may be decreed if the parties have agreed to that remedy. However, even if the parties agree to specific performance, specific performance may not be decreed if the breaching party's sole remaining contractual obligation is the payment of money.

2 -716, cont’d (2) The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just. (3) The buyer has a right of replevin or similar remedy for goods identified to the contract if after reasonable effort the buyer is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.

What is “cover”? • Recall Austin Instrument v. Loral Corp.

What is “cover”? • Recall Austin Instrument v. Loral Corp. • Purchase of substitute goods on the open or “spot” market Damages:

§ 2 -712. "Cover"; Buyer's Procurement of Substitute Goods. (1) After a breach within the preceding section the buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

(2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (Section 2 -715), but less expenses saved in consequence of the seller's breach. (3) Failure of the buyer to effect cover within this section does not bar him from any other remedy.

2 -716, Comment 2 • Uniqueness should be determined in light of the total circumstances surrounding the contract and is not limited to goods identified when the contract is formed. The typical specific performance situation today involves an output or requirements contract rather than a contract for the sale of an heirloom or priceless work of art. A buyer's inability to cover is evidence of "other proper circumstances. "

Walgreen v. Sara Creek Property Corp. • Facts • History

Posner’s analysis • Posner first makes a bow to “efficient breach”: This might be such a breach if “the value of Phar–Mor's occupancy of the anchor premises” exceeds “the cost to Walgreen of facing increased competition. ” • In that case, “society will be better off if Walgreen is paid its damages, equal to that cost, and Phar–Mor is allowed to move. ” • This is the basis of the adequacy test, used to deny injunctions.

Walgreen’s costs • An injunction may have two benefits. • “First, it shifts the burden of determining the cost of the defendant's conduct from the court to the parties, ” which substitutes “for the costly processes of forensic fact determination the less costly processes of private negotiation. • Second, . . . prices and costs are more accurately determined by the market than by government. ” • A battle of experts is less reliable than negotiations in determining Walgreen’s costs.

Cost side to an injunction • An injunction may “require continuing supervision by the court, and that is costly. ” (See Northern Delaware. ) • An injunction may also impose costs on third parties or create a "’bilateral monopoly, ’ in which two parties can deal only with each other, ” creating a bargaining range, and “the costs of negotiating to a point within that range may be high. ” • Weighing these costs and benefits in a situation in which the lease had ten years to run, the court affirms the granting of an injunction.

Walgreen • What is Sara Creek’s argument?

Walgreen • What is Sara Creek’s argument? Efficient breach

According to Sara Creek. . . • Damages are the standard remedy • They can readily be calculated here • If so, Walgreen can be fully compensated without need of an injunction

How to measure Walgreen’s damages?

How to measure Walgreen’s damages? • Either: present value of lost future profits, or • Diminution of value of leasehold

What is Sara Creek’s argument II

What is Sara Creek’s argument II • Efficient breach in action! • Benefits, according to Posner • “Society will be better off. . . ”

Efficient breach story here • Under what circumstances would Sara Creek’s breach be “efficient”?

Efficient breach story here • Under what circumstances would Sara Creek’s breach be “efficient”? “It’s a win-win (or at least, winno lose) deal!”

What is the other side of the story? Pro-SP Argument • “shifts the burden of determining the cost of defendant’s conduct onto the parties” • “the price of dissolving the injunction” • Bargaining over entitlements

Pro-SP II • “battle of experts” (in court), VS. • Direct negotiations • Less costly, again

Arguments in favor of specific performance

Transaction costs • Insiders set prices faster and cheaper • More accurate – “market” vs. government price -setting

Downside of injunctions • High bargaining costs • Bilateral monopoly • Negotiations can dissipate the gains from making a deal

Walgreen will sell for anything over $1 M Sara Creek will buy for anything under $2 M

Sara Creek holding • Process of determining damages over the next 10 years would have been “fraught with uncertainty” • So: no adequate legal remedy; injunction (SP) upheld here