1 professor of law loyola law school, los angeles chapter 1 introduction
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- CHASE PRECAST CORPORATION v. JOHN J. PAONESSA COMPANY, INC
- Notes, Questions and Problems
- CHAPTER 7 REMEDIES A. Under the UCC
Notes, Questions and Problems The court in this case suggests that some increase in the seller’s costs might justify excuse on the basis of impracticability. See also UCC § 2-615, comment 4. How much of an increase? Thirty percent? Forty percent? How much of a loss should the seller be expected to take? The court in Iowa Electric Light and Power Corp. v. Atlas Corp., 467 F. Supp. 129 (N.D. Iowa, 1978), refused to grant relief where the increase in seller’s costs was 52.2 % and the loss incurred by the seller was over $2.6 million. The court noted that cost increases of 50-58 percent are generally insufficient to grant relief. By comparison, relief was granted in Aluminum Company of America (ALCOA) v. Essex Group, 499 F. Supp. 53 (W.D. Pa. 1980) where the loss to the plaintiff would be $60,000,000 while the defendant would make a profit of the same amount. Many commentators have tried to make sense out of the impracticability cases. Judge Richard Posner suggests that the cases should be viewed from an economic perspective, with the question being which party is the cheapest insurer? Factored into this analysis is the question of which party can best measure the magnitude and likelihood of the loss and can take steps to reduce or eliminate the risk.36 Others suggest that many factors must be looked at to determine whether an adjustment should be made, perhaps including the forseeability of the risk, whether one party is profiteering over the other, and the loss that would be suffered by either party in the event that relief is either granted or not granted. Relational contracts theorists posit that parties in long-term contractual relationships should expect to make adjustments as time goes by and circumstances change; not being willing to make adjustments may be bad faith.37 Should the courts’ analysis in cases such as these be “all or nothing”? See comment 6 to § 2-615. Why do you think that courts actually prefer the “all or nothing” approach? Problem 75 - Buyer contracts to purchase Seller’s used, home computer. While the computer is still at Seller’s home and before the risk of loss passes to Buyer, the desk on which the computer is located collapses, damaging the computer but not completely destroying it. The Seller was not at fault in the incident. What are the rights of the parties? See UCC § 2-613. Problem 76 - Buyer contracts to purchase a specified model computer from Seller Computer Retailers, Inc. The computer will be shipped to Buyer. Before Seller was able to get a computer out of its warehouse and prepare it for shipment to Buyer (i.e. identify the good to the contract, § 2-501(1)(b)), Seller’s warehouse was destroyed by fire, including all of its inventory. The fire was not the fault of Seller. Does section 2-613 cover this situation or section 2-615? See UCC § 2-615, comment 5. If only half of the inventory was destroyed, can Seller pick and choose which of the contracts it wishes to fill? See UCC § 2-615(b) & (c) and § 2-616. Problem 77 - Assume a contract for the sale of a vine wax that is used to protect vines from drying out and becoming infected. The wax delivered by Seller to Buyer is defective. Seller argues that it obtained the wax from a supplier and that it was defective when so obtained. It was thus an impediment beyond Seller’s control that prevented Seller from being able to perform the contract, and therefore Seller should be excused from liability under CISG Article 79. Should this argument succeed? See Bundesgericht 24 March 1999, CLOUT abstract no. 271, http://www.cisg.law.pace.edu/cisg/wais/db/cases2/990324g1.html. CHASE PRECAST CORPORATION v. JOHN J. PAONESSA COMPANY, INC Supreme Judicial Court of Massachusetts 409 Mass. 371, 566 N.E.2d 603 (1991) This appeal raises the question whether the doctrine of frustration of purpose may be a defense in a breach of contract action in Massachusetts, and, if so, whether it excuses the defendant John J. Paonessa Company, Inc. (Paonessa), from performance. The claim of the plaintiff, Chase Precast Corporation (Chase), arises from the cancellation of its contracts with Paonessa to supply median barriers in a highway reconstruction project of the Commonwealth. Chase brought an action to recover its anticipated profit on the amount of median barriers called for by its supply contracts with Paonessa but not produced. After a jury-waived trial, a Superior Court judge ruled for Paonessa on the basis of impossibility of performance. The Appeals Court affirmed, noting that the doctrine of frustration of purpose more accurately described the basis of the trial judge's decision than the doctrine of impossibility. We agree. The pertinent facts are as follows. In 1982, the Commonwealth, through the Department of Public Works (department), entered into two contracts with Paonessa for resurfacing and improvements to two stretches of Route 128. Part of each contract called for replacing a grass median strip between the north and southbound lanes with concrete surfacing and precast concrete median barriers. Paonessa entered into two contracts with Chase under which Chase was to supply, in the aggregate, 25,800 linear feet of concrete median barriers according to the specifications of the department for highway construction. The quantity and type of barriers to be supplied were specified in two purchase orders prepared by Chase. The highway reconstruction began in the spring of 1983. By late May, the department was receiving protests from angry residents who objected to use of the concrete median barriers and removal of the grass median strip. Paonessa and Chase became aware of the protest around June 1. On June 6, a group of about 100 citizens filed an action in the Superior Court to stop installation of the concrete median barriers and other aspects of the work. On June 7, anticipating modification by the department, Paonessa notified Chase by letter to stop producing concrete barriers for the projects. Chase did so upon receipt of the letter the following day. On June 17, the department and the citizens' group entered into a settlement which provided, in part, that no additional concrete median barriers would be installed. On June 23, the department deleted the permanent concrete median barriers item from its contracts with Paonessa. Before stopping production on June 8, Chase had produced approximately one- half of the concrete median barriers called for by its contracts with Paonessa, and had delivered most of them to the construction sites. Paonessa paid Chase for all that it had produced, at the contract price. Chase suffered no out-of-pocket expense as a result of cancellation of the remaining portion of barriers. This court has long recognized and applied the doctrine of impossibility as a defense to an action for breach of contract. Under that doctrine, where from the nature of the contract it appears that the parties must from the beginning have contemplated the continued existence of some particular specified thing as the foundation of what was to be done, then, in the absence of any warranty that the thing shall exist the parties shall be excused when performance becomes impossible from the accidental perishing of the thing without the fault of either party. On the other hand, although we have referred to the doctrine of frustration of purpose in a few decisions, we have never clearly defined it. Other jurisdictions have explained the doctrine as follows: when an event neither anticipated nor caused by either party, the risk of which was not allocated by the contract, destroys the object or purpose of the contract, thus destroying the value of performance, the parties are excused from further performance. In Mishara Constr. Co., we called frustration of purpose a "companion rule" to the doctrine of impossibility. Both doctrines concern the effect of supervening circumstances upon the rights and duties of the parties. The difference lies in the effect of the supervening event. Under frustration, "[p]erformance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by [the] fortuitous event...." The principal question in both kinds of cases remains "whether an unanticipated circumstance, the risk of which should not fairly be thrown on the promisor, has made performance vitally different from what was reasonably to be expected..” Paonessa bore no responsibility for the department's elimination of the median barriers from the projects. Therefore, whether it can rely on the defense of frustration turns on whether elimination of the barriers was a risk allocated by the contracts to Paonessa. Mishara Const. Co articulates the relevant test: The question is, given the commercial circumstances in which the parties dealt: Was the contingency which developed one which the parties could reasonably be thought to have foreseen as a real possibility which could affect performance? Was it one of that variety of risks which the parties were tacitly assigning to the promisor by their failure to provide for it explicitly? If it was, performance will be required. If it could not be so considered, performance is excused. This is a question for the trier of fact. Paonessa's contracts with the department contained a standard provision allowing the department to eliminate items or portions of work found unnecessary. The purchase order agreements between Chase and Paonessa do not contain a similar provision. This difference in the contracts does not mandate the conclusion that Paonessa assumed the risk of reduction in the quantity of the barriers. It is implicit in the judge's findings that Chase knew the barriers were for department projects. The record supports the conclusion that Chase was aware of the department's power to decrease quantities of contract items. The judge found that Chase had been a supplier of median barriers to the department in the past. The provision giving the department the power to eliminate items or portions thereof was standard in its contracts. The judge found that Chase had furnished materials under and was familiar with the so-called "Unit Price Philosophy" in the construction industry, whereby contract items are paid for at the contract unit price for the quantity of work actually accepted.38 Finally, the judge's finding that "[a]ll parties were well aware that lost profits were not an element of damage in either of the public works projects in issue" further supports the conclusion that Chase was aware of the department's power to decrease quantities, since the term prohibiting claims for anticipated profit is part of the same sentence in the standard provision as that allowing the engineer to eliminate items or portions of work. In Mishara Constr. Co. we held that, although labor disputes in general cannot be considered extraordinary, whether the parties in a particular case intended performance to be carried out, even in the face of a labor difficulty, depends on the facts known to the parties at the time of contracting with respect to the history of and prospects for labor difficulties. In this case, even if the parties were aware generally of the department's power to eliminate contract items, the judge could reasonably have concluded that they did not contemplate the cancellation for a major portion of the project of such a widely used item as concrete median barriers, and did not allocate the risk of such cancellation. Judgment affirmed. Notes, Questions and Problems 1) If the seller had already spent money in reliance on the contract, do you think the court would have come to the same conclusion? What if Paonessa could have used the medians on a future project? Problem 78 - What kind of argument could be made under CISG Art. 79 for the same result? What is the “impediment”? Is Article 8 of any help, especially given the plaintiff’s knowledge of state contracting? CHAPTER 7 REMEDIES A. Under the UCC The policy of UCC remedies is reflected in section 1-106 [Revised UCC § 1-305], and that is that the injured party should be placed in as good a position as if the breaching party had performed. Section 1-106 [Revised § 1-305] also states “neither consequential nor penal damages may be had except as specifically provided in this Act or other rule of law.” Article 2 does not provide punitive damages for breach of a contract of sale, although in some cases it does permit consequential damages. The Code thus codifies the expectation principle of contract remedies and in not otherwise punishing the breaching party also reflects the “efficient breach” principle – that breach of contract is not a tort and that a breach is fine as long as the injured party is placed in the position that the party would have been in if the contract had been performed. 1. Buyer’s Remedies Section 2-711 provides a “menu” of buyer’s remedies in situations in which the seller fails to make delivery or the buyer rightfully rejects or justifiably revokes acceptance. In other words, these are situations in which the buyer does not obtain or retain possession of the goods. Section 2-714 provides the measure of damages for goods that are accepted. a. Goods Not Accepted Section 2-711 provides that in the event that the goods are not delivered or are rightfully rejected or where acceptance is rightfully revoked, the buyer is entitled to “cover,” meaning purchase substitute goods, or obtain the difference between the market price of the goods and the contract price. See UCC §§ 2-712 & 2-713. In the event that the buyer makes a proper cover, the buyer is entitled to recover the difference between what the buyer had to pay for the goods and the contract price. UCC § 2-712(2). If the buyer does not cover under section 2-712, the buyer recovers the difference between the contract price and the market price at the time the buyer learns of the breach. The remedies are in the alternative – if the buyer covers under section 2-712, the buyer may not use the contract/market formula even if it is more advantageous. Under both sections 2-712 and 2-713, consequential damages may also be available. The buyer is not required to cover, although failure to purchase substitute goods may limit the amount of consequential damages the buyer is permitted to recover. i. Cover MUELLER v. MCGILL Court of Appeals of Texas 870 S.W.2d 673 (1994) Appellant, Rick Mueller, brought an action for damages against appellees Don McGill, Don McGill, Inc., Don McGill Imports, Inc., and Greg Radford (collectively "McGill, Inc."), arising out of the breach an agreement for the purchase of a new automobile. The trial court directed a verdict in favor of McGill, Inc., and Mueller appeals. We reverse and remand. In December 1985, Rick Mueller decided to buy his dream car, a black 1985 Porsche 911 Targa. He located such an automobile at McGill, Inc., and negotiated the terms of a sale for several hours with a salesman, Steve Richter. Richter and Mueller finally agreed upon a sales price and a trade-in allowance for Mueller's Mazda RX-7, and signed a written contract memorializing the agreement. After the contract was signed, Richter suggested that Mueller talk to the finance manager about the possibility of financing the car through Chase Manhattan Bank. Although Mueller had already obtained financing for the vehicle, he agreed to talk to the finance manager because of the low interest rate offered by Chase Manhattan. When Richter directed Mueller to the finance department, he informed him that the car would be ready to be picked up the next morning. After filling out the loan application in the finance department, Mueller was informed for the first time that there was another contract on the car. Mueller had not been previously informed that he was negotiating a "back-up" contract. Mueller was told not to worry because the individual with the earlier contract was having trouble obtaining financing, and probably would not be approved. The next morning Mueller called the dealership to ask when he could pick up his car. After several attempts, he finally reached Richter and was told that the car had been sold to another customer. Mueller then spoke with Mike Reed, the sales manager, who told him that if McGill, Inc. could not deliver the car covered by the contract, they would find him another car. Reed signed and delivered to Mueller a document indicating that McGill, Inc. would find a replacement automobile and would allow Mueller the same $8,370 trade-in allowance that had been provided for in the original contract. Several weeks later, Seth Brown, a McGill, Inc. employee, called Mueller and informed him that the dealership had not yet found a replacement. In February 1986, Mueller received a call from Greg Radford, the new sales manager for the dealership. Mueller was informed that the dealership would no longer honor the $8,370 trade-in allowance that had been previously negotiated. Radford indicated that they could sell Mueller a 1986 Porsche, but they would have to renegotiate the terms. Mueller never received the car specified in the contract. The dealership apparently never found a 1985 vehicle like the car Mueller had contracted for. There is some testimony that it was difficult to find 1985 Porsche Targas so late in the year. Mueller himself called several dealerships in the Gulf Coast area in an effort to locate a 1985 Porsche. However, he was never able to find a satisfactory 1985 replacement. In April 1986, Mueller went to one of McGill, Inc.'s competitors, and sometime thereafter purchased a 1986 Porsche 911 Targa. He paid more for the 1986 model and received less for his trade-in allowance. There is testimony that the 1985 and 1986 models were virtually identical vehicles, but the cost of the 1986 was somewhat higher. At the conclusion of Mueller's case, the trial court, on its own motion, directed a verdict for McGill, Inc. In his sole point of error, Mueller contends that the trial court erred by doing so. In this case, the trial judge decided that Mueller had established a breach of contract as a matter of law, but concluded that Mueller had failed to prove that he suffered any damages. More specifically, the trial judge concluded that the correct measure of damages was the difference between the contract price and the market value at the time of the breach, and that because Mueller had failed to introduce any evidence as to the market price of the automobile, he was not entitled to recover. He further concluded that there was no evidence that the 1986 automobile was a reasonable replacement for the 1985 automobile, or that the cost of the next closest available replacement was a proper measure of damages. Mueller claims on appeal that he is entitled to recover damages representing the difference between the contract price on the 1985 Porsche and the price he was required to spend on the 1986 Porsche. A buyer's remedies upon a breach of a contract of sale by the seller are set forth in chapter two of the Texas Business and Commerce Code. Upon a seller's failure to deliver the goods, a buyer may either (1) "cover" by purchasing goods in substitution of those due from the seller, and recovering damages for the difference in the price of the contract and the "cover," or (2) recover the difference between the contract price and market price at the time he learned of the breach. UCC §§ 2-712, 2-713. If a buyer elects to "cover" he need not show the market price at the time of the breach. Therefore, the fact that Mueller failed to introduce evidence about the market price of the Porsche at the time he discovered the breach is not fatal to his case, if he can show that he properly "covered" under section 2-712. The issue this Court must decide is whether there were any questions of fact relating to the issue of proper "cover" that should have been presented to a jury. If such questions of fact exist, the trial court erred by ordering a directed verdict. A buyer may properly "cover" by "making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution of those due from the seller." UCC § 2-712. The issue of good faith in effecting "cover" is a question of fact to be resolved by the fact finder. In his findings of fact and conclusions of law, the trial judge found that the purchase of a 1986 Porsche was not a reasonably similar replacement for the 1985 Porsche described by the contract. Comment two to section 2-712 provides that the goods purchased as "cover" need not be identical to those provided in the contract, but must be commercially usable as reasonable substitutes. The evidence presented in the case showed that it was very difficult to obtain a 1985 Porsche so late during the year. The dealership tried to obtain a 1985 substitute, and Mueller himself attempted to locate a 1985. However, no acceptable 1985 was ever located. Whether a cover purchase is reasonable poses a "classic jury issue." We hold that the issue of whether the 1986 Porsche was a reasonable substitute for the 1985 Porsche should have been presented to the jury. Because the evidence presented by Mueller at trial was sufficient to raise fact questions regarding good faith and the reasonableness of his attempt to "cover," we hold that the trial court erred by granting a directed verdict in favor of McGill, Inc. Accordingly, we reverse the judgment and remand the cause for further proceedings. Question & Problem If the 1986 model had some different features on it that made it a more desirable car, should an adjustment be made on the amount of damages received to reflect the difference? Otherwise, is the buyer improperly being put in a better position than if the contract had been performed? Problem 79 – Contract for the sale of a used, model 2002 year car for $30,000. The car has 20,000 miles on it. The contract price is roughly the same as the market price. When the seller breaches, buyer is unable to find a similar 2002 model with comparable miles. Instead, buyer purchases a 2001 model of the same car with 40,000 miles for $25,000. The 2001 model is roughly the same as the 2002 model. Has the buyer suffered any damages? ii. Contract-Market Differential – Buyer Does Not Cover JON-T FARMS, INC. v. GOODPASTURE, INC. Texas Court of Civil Appeals 554 S.W.2d 743 (1977) Goodpasture, Inc. as plaintiff, instituted two consolidated breach of contract suits involving the purchase of grain from Jon-T Farms, Inc., the defendant. Judgment was rendered on a jury verdict favorable to the plaintiff. The first contract was dated January 17, 1973, and obligated Jon-T to sell Goodpasture 10,000,000 pounds of Number 2 yellow grain sorghum at $2.70 per hundredweight. Grades were to be ``official'' and the grain was to be shipped during October and November, 1973. In accordance with the contract terms, Jon-T began shipping the grain in October, 1973. By November 30 (the end of the stated delivery period), however, only 2,023,480 pounds of grain had been shipped. The evidence is undisputed that the price of grain began to rise subsequent to the execution of the first contract on January 17, 1973, and continued to rise until November of 1974, when it reached a price of $7.00 per hundredweight. On December 11 or 12, 1973, the market price was $4.48; in March of 1974, between $5.35 and $5.50; and in October or November, 1974, approximately $7.00 per hundredweight. This suit for breach of contract was instituted by Goodpasture on December 17, 1973. Goodpasture accepted and unloaded six (6) carloads of grain between December 10 and December 21. As of this last date, Jon-T had delivered 4,167,550 pounds of the 10,000,000 it had contracted to deliver. This case was tried to a jury in November, 1975. The jury found that Jon-T had breached and/or repudiated the contract, causing Goodpasture to sustain $121,179.84 in damages. Jon-T has appealed. We affirm. Jon-T asserts that Goodpasture pleaded and proved an incorrect measure of damages because it had effected the remedy of ``cover'' under UCC § 2-712 and that its basic recovery should be the difference between the cost of cover and the contract price. Jon-T further argues that Goodpasture submitted no evidence as to the cost of cover and thus was not entitled to recover damages. Goodpasture contends that it was entitled under the provision of UCC § 2-713 to recover the difference between the contract price and the market price at the time it learned of the breach. It is undisputed that Goodpasture submitted evidence as to market value as of the time Goodpasture learned of the alleged breach. Under § 2-712(3), upon seller's breach the buyer is not required to cover as a means of minimizing damages, and his failure to effect cover does not bar him from any other remedy. Thus, on seller's breach a buyer is free to choose between damages based upon the difference between the contract price and the cost of cover under § 2-712, and damages for non-delivery, consisting of the difference between the market price at the time when the buyer learns of the breach and the contract price under § 2-713 (1). Goodpasture pleaded and proved the measure of damages set forth in § 2-713. Jon-T has argued that testimony established that Goodpasture ``covered'' for the grain due from, but undelivered by, Jon-T. The testimony of the plaintiff's witnesses was that Goodpasture normally bought sufficient grain in order to meet its contracts for sale. The grain purchased is commingled with other grain. Although in the overall operation Goodpasture may have bought some grain to compensate for the undelivered Jon-T grain to insure an adequate supply to meet its commitments, there is no testimony that Goodpasture went out and bought specific grain to make up for the specific amount of grain undelivered by Jon-T. In view of the foregoing, it is our opinion that the pleadings and evidence show that Goodpasture opted to pursue its remedy for damages, as it had the right to do, pursuant to § 2-713. Accordingly, we hold that the proper measure of damages was applied in this case. Download 1.49 Mb. Share with your friends:
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