Notes - Gainsford v. Carroll | rauvinj | September 26, 2012


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Original Creator: Kessler, Gilmore & Kronman Current Version: rauvinj



1. As Gainsford v. Carroll suggests, the contract and market rule had its origins in a series of late eighteenth-century cases that involved speculative transactions in shares (or "stock") on the London stock exchange. It would be helpful to know more about the operation of the exchange than we do, but it goes without saying that a "stock exchange," in the eighteenth century or today, is a market phenomenon of a most unusual kind. This is institutionalized gambling in a high velocity market where, it is assumed, every offer to sell is matched by a corresponding offer to buy and where prices fluctuate rapidly, unpredictably and over a wide range. In such a market (and only there) it is true that the disappointed seller (or buyer) can — and, perhaps should — immediately enter into a substitute contract "at the market." Any sort of "lost profits" formula in such a context would be idle folly; not even the devil has ever been able to predict what the "market" was going to do next. Reliance expenses in the customary transaction were, nor doubt, minimal or nothing and could be disregarded. In the peculiar situation that gave rise to the rule, contract and market like most rules of law, made very good sense.


2. The process of generalizing the contract and market formula from a rule applicable to transactions on the stock exchange to a rule applicable to all contracts for the sale of all sorts of goods, whether for immediate or future delivery, whether for cash or on credit, seems to have been almost mindless. Gainsford v. Carroll is typical of the absence of thought the problem received. Putting aside the special situation of the stock (or commodity) exchange, it is simply not true that the disappointed seller (or buyer) invariably has a "market" available in which he can immediately enter into a substitute contract that will liquidate damages "at the market." Nor do the prices of most goods fluctuate, day by day, in a wild and erratic course; absent such fluctuation, the contract and market formula will produce no damages at all. Of course the fact that no sanction for breach is provided by way of damages may be taken to mean that no interest worthy of protection has been invaded. On the other hand, there 'has long been evident in the literature, both judicial and academic, an uneasy feeling that there is something wrong with a damage rule that, over a wide range of factual situations, produces no damages and thus, so far as legal sanctions go, allows contracts to be breached with impunity. In general there is an inarticulate feeling that, Holmes to the contrary notwithstanding, there is something immoral about breaking a contract and that the wrongdoer should be, somehow, punished.


If, freed from the burden of history, we could take a fresh approach to the problem of providing a workable damage rule for breach of contracts for the sale of goods, it is by no means certain that anyone would come up with the contract and market rule as the (or even a) solution, Nevertheless, having once established itself in sales law, the contract and market rule has held on with astonishing tenacity. It should be pointed out, however, that even in sales law, contract and market has never been the whole truth, In addition to his damages remedy, the buyer of goods has (in certain circumstances at least) always had the right to compel specific performance of the contract or to replevy the goods from the seller (the buyer's so-called property remedies); the seller, likewise has under certain conditions always been entitled to sue for the full contract price. Furthermore, the contract and market rule was never applied to a buyer's action for breach of warranty with respect to goods accepted and kept. In that situation the basic damage rule was that buyer was entitled to the difference between the value of the goods as they were and the value they would have had if they had been as warranted. The warranty rule also opened automatically to allow the buyer to recover "special" or "consequential" damages for injury to person or property — as in the case of the exploding furnace, the mouse in the Coca-Cola bottle and so on. The domain of the contract and market formula, except as it was trenched upon by the "property" rules, which themselves tended to atrophy, was the seller's action with respect to goods which the buyer wrongfully refused to accept and the buyer's action with respect to goods which the seller wrongfully refused to deliver.


3. Contract and market was always stated as a two-way rule, as applicable to sellers on buyer's breach as to buyers on seller's breach. A moment's reflection suffices to make it clear that sellers and buyers are quite differently situated with respect to the losses that breach by the other party may cause. It is hard, if not impossible, to imagine a case in which a seller could, on any theory, claim to have been damaged in an amount exceeding his costs of acquisition or manufacture (which, in the case of a losing contract, might exceed the contract price) plus his anticipated profit (if the contract would have been a winning gamble). On the other hand, a buyer's possible claim, if he is allowed to escape from contract and market into the happy hunting ground of special or consequential damages, is limited only by the imagination of counsel. For want of a nail, we are told, the shoe was lost, for want of a shoe the horse was lost, and so on through the loss of the battle, the war, and the kingdom. Shall we, then, cast the seller, who ought to have supplied the nail, in civil damages for the loss of the kingdom?


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February 15, 2015 Notes - Gainsford v. Carroll Notes - Gainsford v. Carroll

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