10.2.6.2 Notes - Uniform Commercial Code §2-716 | Kessler, Gilmore & Kronman | October 31, 2012

H2O

10.2.6.2 Notes - Uniform Commercial Code §2-716

by Kessler, Gilmore & Kronman
1

NOTE

2

1. Kronman, Specific Performance, 45 U. Chi. L. Rev. 351, 358-362 (l978) (footnotes omitted):

3

In common discourse "unique" means without a substitute or equivalent. In the framework of conventional economic analysis, however, the concept of uniqueness is troublesome. Although it might seem reasonable to define the economic uniqueness of a good in terms of its attributes or properties, this is not the definition economists employ. Economists recognize this sort of uniqueness — they call it "technological" uniqueness — but they do not define the substitutability of goods in these terms. For the purposes of economics theory, the substitutability of a particular good is determined by observing consumer behavior, not by cataloguing the various properties of the good. If an alteration in the relative price of one good affects the demand for another, then these two goods are said to be economic substitutes. The degree of their substitutability is called the "cross-elasticity of demand."

On this view, every good has substitutes, even if only very poor ones. Because all goods compete for consumer attention, a substantial change in the relative price of any good always affects the consumption of other goods. Economists are interested in determining how great a change in the price of one good is required to effect a change of given magnitude in the consumption of certain other goods. But these are really questions of degree, resting on the underlying assumption — fundamental to economic theory — that all goods are ultimately commensurable. If this assumption is accepted, the idea of a unique good loses meaning.

This point may be illustrated by a case that under present law would almost certainly be held to involve a unique good. Suppose that A contracts with Sotheby's to purchase the handwritten manuscript of Hobbes's Leviathan. If Sotheby's refuses to perform — perhaps because it has a more attractive offer from someone else — A will undoubtedly be disappointed. Yet no matter how strong his affection for Hobbes, it is likely there are other things that would make A just as happy as getting the manuscript for the contract price. For example, A may be indifferent between purchasing the manuscript at the specified price and having twenty-five hours of violin lessons for the same amount. If so, then A will be fully compensated for the loss he suffers by Sotheby's breach upon receiving the difference between the cost of twenty-five hours worth of violin lessons and the contract price. However, despite the fact that the manuscript has an economic substitute, a court would be likely to order specific performance of the contract (assuming Sotheby's still had the manuscript in its possession) on the ground that the subject matter of the contract is unique.

Pursing the matter further, it is not difficult to see why A's money damages remedy is likely to be inadequate and on the basis of this insight to develop an economic justification for the uniqueness test. Under a money damages rule, a court must calculate the amount Sotheby's is required to pay A to give A the benefit of his bargain. The amount necessary to fully compensate A is equal to the amount he requires to obtain an appropriate substitute. So in fixing the amount Sotheby's must pay A, the court must first determine what things A would regard as substitutes and then how much of any particular substitute would be required to compensate him for his loss.

In the hypothetical case, however, it would be very difficult and expensive for a court to acquire the information necessary to make these determinations. Perhaps some information of this sort would be produced by the parties. For example, A could introduce evidence to establish a past pattern of consumption from which the court might draw an inference as to what would be a satisfactory substitute for the manuscript. Sotheby's could then attempt to rebut the evidence and establish some alternative theory of preferences and substitutes. But of course it would be time-consuming to produce information this way, and any inference a court might draw on the basis of such information would be most uncertain.

Moreover, this uncertainty cannot be avoided by simply looking to the selling price of other manuscripts or even the expected resale price of the Hobbes manuscript itself (unless, of course, A is a professional dealer). It would be risky to infer the value A places on the Hobbes manuscript from the value placed on it by others, and riskier still to infer it from the value others place on the manuscripts of, for example, Harrington's Oceana or Locke's Second Treatise. If a court attempts to calculate A's money damages on the basis of such information, there is a substantial probability that the award will miss the mark and be either under- or over-compensatory.

Of course, if a court could accurately identify a substitute for the manuscript, it could disregard the fact that A may value the manuscript in excess of the price that he, or anyone else, has agreed to pay for it. But where it is difficult to identify a satisfactory substitute (as I assume it is here), the goal of compensation requires that an effort be made to determine the value the promisee places on the promisor's performance, as distinct from what the promisee, or anyone else, has offered to pay for it.

Although it is true in a certain sense that all goods compete in the market — that every good has substitutes — this is an empty truth. What matters, in measuring money damages, is the volume, refinement, and reliability of the available information about substitutes for the subject matter of the breached contract. When the relevant information is thin and unreliable, there is a substantial risk that an award of money damages will either exceed or fall short of the promisee's actual loss. Of course this risk can always be reduced — but only at great cost when reliable information is difficult to obtain. Conversely, when there is a great deal of consumer behavior generating abundant and highly dependable information about substitutes, the risk of error in measuring the promisee's loss may be reduced at much smaller cost. In asserting that the subject matter of a particular contract is unique and has no established market value, a court is really saying that it cannot obtain, at reasonable cost, enough information about substitutes to permit it to calculate an award of money damages without imposing an unacceptably high risk of undercompensation on the injured promisee. Conceived in this way, the uniqueness test seems economically sound.

4

2. Why did the Campbell Soup Company insist on a contractual provision requiring the Wentzes to obtain the company's permission before selling "contract carrots" to a third party, even in situations where Campbell itself was excused from taking the carrots? Was the aim of this provision an illegitimate one? Do you think the Wentzes were compensated for the potential risks this clause involved?

5

3. The first footnote to Judge Goodrich's opinion indicates that Campbell Soup had already received the carrots, having bought them from Lojeski and the Wentzes for $90 a ton. If this is so, what is the dispute about? Normally, if Campbell sued for damages, it would be entitled to the difference between the contract price of the carrots ($30 a ton) and their market or "cover" price ($90 a ton). Under this formula, Campbell Soup would be entitled to the full amount paid into the registry of the District Court. Can it hope to gain more by suing for specific performance? What do you suppose will be the effect, in Campbell's subsequent suit for damages, of Paragraph 10 of its contract with the Wentzes? Isn't Campbell Soup's request for specific performance an effort to evade the unexpectedly disadvantageous effects of a liquidated damages provision that was originally drafted for the soup company's benefit?

6

4. Schwartz, The Case for Specific Performance, 89 Yale L.J. 271, 274-277 (1979) (footnotes omitted):

7

[C]urrent doctrine authorizes specific performance when courts cannot calculate compensatory damages with even a rough degree of accuracy. If the class of cases in which there are difficulties in computing damages corresponds closely to the class of cases in which specific performance is now granted, expanding the availability of specific performance is obviously unnecessary. Further, such an expansion would create opportunities for promisees to exploit promisors. The class of cases in which damage awards fail to compensate promisees adequately is, however, broader than the class of cases in which specific performance is now granted. Thus the compensation goal supports removing rather than retaining present restrictions on the availability of specific performance.

It is useful to begin by examining the paradigm case for granting specific performance under current law, the case of unique goods. When a promisor breaches and the promisee can make a transaction that substitutes for the performance the promisor failed to render, the promisee will be fully compensated if he receives the additional amount necessary to purchase the substitute plus the costs of making a second transaction. In some cases, however, such as those involving works of art, courts cannot identify which transactions the promisee would regard as substitutes because that information often is in the exclusive possession of the promisee. Moreover, it is difficult for a court to assess the accuracy of a promisee's claim. For example, if the promisor breaches a contract to sell a rare emerald, the promisee may claim that only the Hope Diamond will give him equal satisfaction, and thus may sue for the price difference between the emerald and the diamond. It would be difficult for a court to know whether this claim is true. If the court seeks to award money damages, it has three choices: granting the price differential, which may overcompensate the promisee; granting the dollar value of the promisee's foregone satisfaction as estimated by the court, which may overcompensate or undercompensate; or granting restitution of any sums paid, which undercompensates the promisee. The promisee is fully compensated without risk of overcompensation or undercompensation if the remedy of specific performance is available to him and its use encouraged by the doctrine that damages must be foreseeable and certain.

If specific performance is the appropriate remedy in such case, there are three reasons why it should be routinely available. The first reason is that in many cases damages actually are undercompensatory. Although promisees are entitled to incidental damages, such damages are difficult to monetize. They consist primarily of the costs of finding and making a second deal, which generally involve the expenditure of time rather than cash; attaching a dollar value to such opportunity costs is quite difficult. Breach can also cause frustration and anger, especially in a consumer context, but these costs also are not recoverable.

Substitution damages, the court's estimate of the amount the promisee needs to purchase an adequate substitute, also may be inaccurate in many cases less dramatic than the emerald hypothetical discussed above. This is largely because of product differentiation and early obsolescence. As product differentiation becomes more common, the supply of products that will substitute precisely for the promisor's performance is reduced. For example, even during the period when there is an abundant supply of new Datsuns for sale, two-door, two-tone Datsuns with mag wheels, stereo, and air conditioning may be scarce in some local markets. Moreover, early obsolescence gives the promisee a short time in which to make a substitute purchase. If the promisor breaches late in a model year, for example, it may be difficult for the promisee to buy the exact model he wanted. For these reasons, a damage award meant to enable a promisee to purchase "another car" could be undercompensatory.

In addition, problems of prediction often make it difficult to put a promisee in the position where he would have been had his promisor performed. If a breach by a contractor would significantly delay or prevent completion of a construction project and the project differs in important respects from other projects — for example, a department store in a different location than previous stores — courts may be reluctant to award "speculative" lost profits attributable to the breach.

Second, promisees have economic incentives sue for damages when damages are likely to be fully compensatory. A breaching promisor is reluctant to perform and may be hostile. This makes specific performance an unattractive remedy in cases in which the promisor's performance is complex, because the promisor is more likely to render a defective performance when that performance is coerced, and the defectiveness of complex performances is sometimes difficult to establish in court. Further, when the promisor's performance must be rendered over time, as in construction or requirements contracts, it is costly for the promisee to monitor a reluctant promisor's conduct. If the damage remedy is compensatory, the promisee would prefer it to incurring these monitoring costs. Finally, given the time necessary to resolve lawsuits, promisees would commonly prefer to make substitute transactions promptly and sue later for damages rather than hold their affairs in suspension while awaiting equitable relief. The very fact that a promisee requests specific performance thus implies that damages are an inadequate remedy.

The third reason why courts should permit promisees to elect routinely the remedy of specific performance is that promisees possess better information than courts as to both the adequacy of damages and the difficulties of coercing performance. Promisees know better than courts whether the damages a court is likely to award would be adequate because promisees are more familiar with the costs that breach imposes on them. In addition, promisees generally know more about their promisors than do courts; thus they are in a better position to predict whether specific performance decrees would induce their promisors to render satisfactory performances.

In sum, restrictions on the availability of specific performance cannot be justified on the basis that damage awards are usually compensatory. On the contrary, the compensation goal implies that specific performance should be routinely available. . . .

8

For a wide-ranging review from an economic perspective of the whole subject of specific performance, and a critical analysis of its relation to other remedies for breach, see Ulen, The Efficiency of Specific Performance: Toward a Unified Theory of Contract Remedies, 83 Mich. L. Rev. 341 (1984).

9

5. Under certain circumstances, a seller of goods may sue a breaching buyer for the full contract price, a remedy that is analogous to the buyer's right of specific performance. The seller's price action does not merely compensate him for the damages he has suffered — it gives him exactly what he bargained for. Since money is not a unique good, and since its payment (in contrast, say, to singing) is an uncomplicated task that does not require the exercise of skills that are difficult to monitor or evaluate, the seller's action for the price ought not to be (and in fact is not) subject to the same limitations as the buyer's right of specific performance. Nevertheless, the seller's price action is subject to some significant restrictions. Why should this be? Consult Uniform Commercial Code §2-709 and the accompanying Comment.

Close

Annotated Text Information

June 02, 2014

10.2.6.2 Notes - Uniform Commercial Code §2-716

10.2.6.2 Notes - Uniform Commercial Code §2-716

Author Stats

Kessler, Gilmore & Kronman

Expand
Leitura Garamond Futura Verdana Proxima Nova Dagny Web
small medium large extra-large