Notes - Missouri Furnace Co. v. Cochran | Kessler, Gilmore & Kronman | September 27, 2012


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1. At any given moment in the market for a particular commodity (coal, wheat, pork bellies, etc.) there are likely to be two different prices — one, the "spot" price, being the price for immediate delivery, and the other, the "future" price, the price for delivery at some later date. (Actually, there will be many future prices, depending on the date of delivery specified in the contract of sale.) The difference between the spot and future prices is explained by the fact that a promise to deliver in the future is subject to various contingencies (good or bad weather, fluctuations in supply from foreign sources, etc.), and immediate delivery is not. A promise to deliver in the future is always riskier than immediate delivery (which is not to say that the supply of goods will necessarily contract or the demand for them become more intense: the opposite may happen, in which case the spot price of the goods will decline). A contract for future delivery is therefore always more of a gamble than a spot sale, and the difference between the future and spot prices of a good will reflect the predictions (or "bets") of buyers concerning the various future events they expect to have some bearing on the market for the good in question.

With this in mind, do you think a buyer in the position of the Missouri Furnace Company generally would prefer to make a single substitute future contract or a series of contracts at the spot price? Would a breaching seller generally prefer that his buyer pursue one course of action rather than the other? Remember, this choice must be made at the time of breach and hence without the benefit of hindsight concerning subsequent developments in the relevant market. Do you think the court in the Missouri Furnace case was influenced by the fact that the price of coke fell precipitously after the buyer made its future contract? Should it have been influenced?

2. In an excellent law review article, "Anticipatory Repudiation" and the Temporal Element of Contract Law: An Economic Inquiry into Contract Damages in Cases of Prospective Nonperformance, 31 Stan. L. Rev. 69 (1978), Professor Jackson writes:

If there were no contractual obligations affecting the rights and remedies of plaintiff and defendant which antedated the event of repudiation, there would be no compelling reason to require a transaction to be made either earlier, at a forward price, or later, at the spot price. Assuming that the forward cover price is the market's best guess of the future price — an assumption justified in the case of many commodities by an impressive body of data on rational market behavior — there is no ex ante reason to expect that a plaintiff or a defendant should prefer one to the other before the fact. Presumably the market's aggregate perception of risk (and that market's aggregate risk averseness) is a factor reflected in that forward market price. Put another way, the forward market price reflects a state of aggregate market indifference between buying and selling today, at the forward price, or waiting until later. Since there is no compelling reason to expect that either buyer or seller can outguess the market's perception of future price, there would likewise be no compelling reason to suspect, ex ante, that either of them would prefer that the transaction be made on the date of repudiation at the forward price for the date of performance, or on the date of performance at the spot price.

An example may help to demonstrate this likely indifference in the absence of preexisting contractual obligations. On April 1, a buyer decides it will need a delivery of coal on December 31. Assume that on April 1 the forward price of coal for delivery on December 31 is $500 (the spot price on April 1 being, at $550, slightly higher). Can we predict, on the basis of this information, whether this hypothetical buyer will enter into a contract on April 1 for delivery of the coal on December 31, or will wait and purchase on the spot market on December 31? The answer would seem to be no, at least if we also assume that the market for coal is efficient. This buyer knows that if it waits, any contract it would be able to make below $500 would leave it better off than if it entered the market immediately, whereas any contract it might make above $500 would have the opposite effect. But there is no reason to expect that this buyer should be able to outguess the market. While the buyer, of course, does not know what the actual December 31 spot price will be, it does know that the market's present estimate of that price, adjusted for the market's aggregate risk averseness, is $500, and that in an efficient market, the forward price is the best guess of the future spot price. Therefore, our hypothetical buyer should use that $500 figure as the probable spot price on December 31. The actual figure used, of course, would vary with the buyer's perceptions of its own risk averseness, as well as with whatever individual views of the market or the future that it may have. But we have no reason in advance for concluding that this buyer's individual characteristics will be systematically biased on one side or the other of the market. We would be unable to conclude, on the basis of this information, which our buyer would prefer: to buy today, on a forward basis, or to wait to buy later, on a spot basis. There accordingly would be no compelling ex ante reason to prefer one to the other in the formulation of a legal rule.

This conclusion, however, no longer holds true if we assume a preexisting contractual relationship between a buyer and a seller. . . .

31 Stan. L. Rev. at 83-86.

What does the last sentence in the passage from Professor Jackson's article mean? Consider this question in light of Oloffson v. Coomer, infra p. 1308.


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