A theory of self-help remedies in contract

Boston University Law Review

Volumn 89, Issue 5, 2009, Pages 1397-1450

  Gergen, Mark P ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

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EID: 74849083354     PISSN: 00068047     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (445)

1. Self-help remedies have been defined as legally permissible conduct that individuals undertake absent the compulsion of law and without the assistance of a government official in efforts to prevent or remedy a civil wrong." Douglas I. Brandon et al., Self-Help: Extrajudicial Rights, Privileges and Remedies in Contemporary American Society, 37 VAND. L. REV. 845, 850 (1984).
2. Brandon et al. include as instances of self-help remedies in commercial transactions liquidated damage terms, self-help repossession, and arbitration. Id. at 911-13.
3. This list illustrates some of the difficulties of defining the category. If liquidated damage terms are classified as self-help remedies, then so might any contract term that is designed to simplify litigation or to make the outcome more predictable. This might include, for example, merger provisions that exclude parol evidence. Readers interested in pursuing the topic of designing contracts in anticipation of litigation should look generally at Robert E. Scott & George G. Triantis, Anticipating Litigation in Contract Design, 115 YALE L. J. 814 (2006).
4. My principal focus is on self-help remedies that do not anticipate or require that a parry go to court to make the remedy effective. I will say a fair bit about the power to obtain substitute performance (or cover) and collect the cost and the power to complete performance and collect the contract price. These have been described as forms of self-help specific performance. The power to refuse future dealings with a defaulter has been described as a self-help remedy, as have reputational sanctions more generally. I will not explore these sanctions here. While reputational sanctions are important, they are largely unregulated by courts. The only article I know of that examines the rules on material breach and substantial performance under this heading is Celia R. Taylor, Self-Help in Contract: An Exploration and Proposal, 33 WAKE FOREST L. REV. 839 (1998).
5. There is, however, a substantial literature on many of the individual rules. I will refer to this literature when it is relevant, but I will not discuss the law on repossession. For an introduction to, and critical analysis of, this body of law, see Edward L. Rubin, The Code, the Consumer, and the Institutional Structure of the Common Law, 75 WASH. U. L. Q. 11, 36-41 (1997).
6. A fair amount has been written on the subject of self-help remedies in the area of property rights. Readers interested in pursuing this topic might start with Symposium, Property Rights on the Frontier: The Economics of Self-Help and Self Defense in Cyberspace, 1 J. L. ECON. & POL'Y 1 (2005).
7. The list includes rules on mitigation, material breach, substantial performance, conditions, voluntary payment, waiver, equitable estoppel, election of remedies, restitution as a remedy for breach, restitution to a defaulter, accord and satisfaction, good faith, and duress. To these can be added rules that apply in subfields of contract, such as sales law rules on rejection, revocation, and cure.
8. See infra Parts I, II. Parts of the argument parallel and support the argument in Melvin A. Eisenberg, Actual and Virtual Specific Performance, the Theory of Efficient Breach, and the Indifference Principle in Contract Law, 93 CAL. L. REV. 975 (2005).
9. In particular, Professor Eisenberg argues for a right to cover in "good faith" - meaning the choice of cover has "some basis in reason". Id. at 1043 (quoting Sam Wong & Son v. N. Y. Mercantile Exch., 735 F.2d 653, 655 (2d Cir. 1984) (Friendly, J.)).
10. He lauds cover as a form of self-help specific performance, arguing that the standard for permissible cover should be more generous than the standard for specific performance because of problems posed by the latter, "including the nature of the enforcement process and problems of mitigation, opportunism, and jury trial." Id. at 1042.
11. The same thing may be said for specific performance when equitable enforcement is a simple and effective way to put the plaintiff in the promised position. Courts routinely specifically enforce contracts to deliver property when the property is in the defendant's possession. See DOUGLAS LAYCOCK, THE DEATH OF THE IRREPARABLE INJURY RULE 100-01 (1991).
12. Economists have come around to the view that this is the best background rule for such cases. See Steven Shavell, Specific Performance Versus Damages for Breach of Contract: An Economic Analysis, 84 TEX. L. REV. 831, 831-32 (2006).
13. Misunderstanding of this point is pervasive. It ties into the widely held view that contract rights are weaker than property rights. So Carol Rose observes: "[I]n contract law, liability rules, not property rules, do indeed constitute the background default rule: The parties are supposed to perform, but except in particular circumstances (mostly real estate!) they have the option of defaulting and paying damages instead of performing." Carol M. Rose, The Shadow of The Cathedral, 106 YALE L. J. 2175, 2187 (1997).
14. Richard Brooks pithily summarizes the supposed differences between the two types of rules: "Property rules protect entitlements by using the state's police powers to prohibit nonconsensual appropriations, whereas liability rules use court-determined monetary compensation to discourage nonconsensual appropriations." Richard R. W. Brooks, The Efficient Performance Hypothesis, 116 YALE L. J. 568, 575 (2006).
15. It also ties into the widely held view that contract rights have a lower stature in American contract law than they do in civil law systems and in other common law systems. Ronald J. Scalise, Jr., Why No Efficient Breach in Civil Law? A Comparative Assessment of the Doctrine of Efficient Breach, 55 AM. J. COMP. L. 721, 763 (2007) (using the example of efficient breach to show that "the difference [in contract law) appears to be one between American common law and the law of the rest of the world").
16. See infra Part III.
17. Robert E. Scott, The Case for Formalism in Relational Contract, 94 NW. U. L. REV. 847 (2000)
18. [hereinafter Scott, Formalism], makes many of the key points. The article combines theoretical, empirical, and historical arguments to justify a formalist approach in contract law and criticize what is described as a contextualist approach. The theoretical argument is that courts are unlikely to do better than sophisticated actors in designing terms when relevant information is unknown or the design of terms involves difficult tradeoffs. Id. at 862-66.
19. The empirical argument is that the world is complex - in Scott's words, it is "a thick environment of many heterogeneous parties." Id. at 865.
20. These points lead to the conclusion that efficient terms are likely to be individualized, meaning they cannot be set by courts on a wholesale basis. The historical argument, which Scott calls the failure of Karl Llewellyn's project, is that courts have not derived individualized rules from trade norms, which might have been a solution to the problem of competence and heterogeneity. Id. at 866-69.
21. The upshot is that Scott touts the old-time virtues of remedial simplicity. He advocates literal interpretation of contracts without regard to context. Id. at 866.
22. This presumably means a return to the plain-meaning and four-comers rules and, perhaps, a return to the rule barring enforcement of indefinite terms. See id. at 860, 877 (suggesting some indecision on the last point).
23. He nods sympathetically to the "doctrines of perfect tender, mistake, and excuse [and] the sharply defined rules regarding expectation damages" that "assign risks on an all-or-nothing, binary basis." Id. at 852-53.
24. In Robert E. Scott, The Death of Contract Law, 54 U. TORONTO L. J. 369 (2004) [hereinafter Scott, Death], Scott argues that the shift of courts from a formalist to a contextualist approach is partly responsible for the flight from relying on the legal system to enforce contracts to relying on self-enforcement, particularly in contracts that require flexible commitments.
25. In using the term, I follow Melvin A. Eisenberg, The Theory of Contracts, in THE THEORY OF CONTRACT LAW 206, 223-35 (Peter Benson ed., 2001).
26. See, e.g., Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of Contract Law, 113 YALE L. J. 541, 618-19 (2003);
27. Alan Schwartz & Joel Watson, The Law and Economics of Costly Contracting, 20 J. L. ECON. & ORG. 2, 4-5 (2004);
28. Alan Schwartz, The Myth that Promisees Prefer Supracompensatory Remedies: An Analysis of Contracting for Damage Measures, 100 YALE L. J. 369, 406-07 (1990).
29. Robert E. Scott, A Theory of Self-Enforcing Indefinite Agreements, 103 COLUM. L. REV. 1641, 1692-93 (2003).
30. See, e.g., Scott, Death, supra note 6, at 370.
31. 474 P.2d 689 (Cal. 1970). As often happens to cases in the canon, Parker has been used to make a variety of points.
32. See Mary Joe Frug, Re-Reading Contracts: A Feminist Analysis of a Contracts Casebook, 34 AM. U. L. REV. 1065, 1114-25 (1985) (discussing feminist issues raised by the case);
33. Victor P. Goldberg, Bloomer Girl Revisited or How to Frame an Unmade Picture, 1998 WIS. L. REV. 1051, 1052-53 (explaining that the decision should have been rested on the ground that base price in the contract was paid by the studio to have an option on Parker's time);
34. William J. Woodward, Jr., Clearing the Underbrush for Real-Life Contracting, 24 LAW & Soc. INQUIRY 99, 105 (1999) (explaining that the case is a good vehicle for exploring the difference between book law and real life). I discuss Goldberg's account of the case in Part IV. See infra notes 159-74 and accompanying text.
35. 35F.2d301 (4thCir. 1929).
36. Parker, 474 P.2d at 692-93.
37. Luten Bridge, 35 F.2d at 307-08;
38. Parker, 474 P.2d at 693-94.
39. Parker, 474 P.2d at 690-91.
40. Id.
41. Id. at 691.
42. Id. at 692.
43. Id. at 693-94.
44. Id.
45. Id. Parker seems to be representative of employment cases more generally. A survey of recent contract and Title VII cases concludes that courts require that two positions be "virtually identical" before they will require a terminated employee to take another position to mitigate damages. Richard J. Gonzales, Satisfying the Duty to Mitigate in Employment Cases: A Survey and a Guide, 69 Miss. L. J. 749, 760-62 (1999).
46. The author adds that courts have been more willing to require an employee to relocate when his line of work and past behavior indicated he was not averse to relocating. Id. at 767-68.
47. In Title VII cases (but not breach of contract claims), an employee may be denied full back wages for an extended period of time on the theory that he should have taken less desirable and lower paying work to mitigate damages. Id. at 769-71.
48. Goldberg, supra note 11, at 1052. I take the facts not found in the opinion from Goldberg's excellent article. Goldberg argues that there was an alternative basis for decision because the contract had a "pay-or- play" provision that required the studio to pay MacLaine if it cancelled the project. Id. at 1053. Goldberg argues this was an easier basis. I think it was an easy mitigation case as well.
49. This also is true when courts determine whether damages are an adequate remedy to preclude an order of specific performance. Campbell Soup Co. v. Wentz, 172 F.2d 80, 83 (3d Cir. 1948), is a classic statement of the principle.
50. The caveat about subjective preferences is to acknowledge that courts sometimes apply an objective standard in assessing whether an action taken in response to breach is appropriate. Melvin Eisenberg makes a similar point when he argues that an objective standard should be used to evaluate a buyer's search for cover while a subjective good faith standard should be used to evaluate a buyer's choice of cover. Eisenberg, supra note 3, at 1042-49.
51. Professor Eisenberg finds mixed support in the case law on the use of a subjective standard to evaluate choice of cover. Id. at 1046-47.
52. In re Kellett Aircraft Corp., 186 F.2d 197, 199 (3d Cir. 1950).
53. Parker, 474 P.2d at 694.
54. DOUGLAS LAYCOCK, MODERN AMERICAN REMEDIES: CASES AND MATERIALS 97 (3d ed. 2002).
55. S. J. Groves & Sons Co. v. Warner Co., 576 F.2d 524, 530 (3d Cir. 1978).
56. 35 F.2d 301 (4th Cir. 1929).
57. See, e.g., RANDY E. BARNETT, CONTRACTS: CASES AND DOCTRINES 131, 142 (4th ed. 2008);
58. JOHN P. DAWSON ET AL., CONTRACTS: CASES AND COMMENTS 60, 66 (9th ed. 2008);
59. E. ALLAN FARNSWORTH ET AL., CONTRACTS: CASES AND MATERIALS 492, 500 (6th ed. 2001);
60. LON L. FULLER & MELVIN A. EISENBERG, BASIC CONTRACT LAW 167, 171 (8th ed. 2006).
61. Luten Bridge, 35 F.2d at 302-03.
62. Id. at 303.
63. Id.
64. Barak D. Richman, The King of Rockingham County and the Original Bridge to Nowhere, in CONTRACTS STORIES 304-34 (Douglas G. Baird ed., 2007), tells the story behind the case. Professor Richman notes that from the perspective of the parties and the courts, "the case only tangentially involved a dispute over contract law." Id. at 305.
65. Luten Bridge, 35 F.2d at 305-06.
66. Id. at 307-08.
67. Richman, supra note 33, at 328 ("[N]either party proffered an argument challenging the lower court's calculation of damages."). Richman suggests two possible explanations. One is that a supporter of the bridge had promised to indemnify Luten Bridge Company. Id. at 316.
68. The other is the company was advised to complete the bridge by its attorneys as the safest course given the uncertainty as to who spoke for the County. Id.
69. Denio 317 (N. Y. 1845).
70. Id317.
71. Id.
72. 40Id.
73. Idat 318.
74. Id.
75. For example, FARNSWORTH ET AL., supra note 29, at 494, presents it as unexceptional "that the injured party cannot recover for cost that could have been avoided by simply stopping performance" and poses as the difficult case where avoiding loss requires "taking affirmative steps." IAN AYRES & RICHARD SPIEDEL, STUDIES IN CONTRACT LAW 953 (7th ed. 2008), preface analysis of damages for breach of a construction contract with the statement "any performance by Contractor after the breach is normally out of the question (the work is being done on Owner's land) and, in any event, would probably run afoul of the mitigation principle." It is not clear that an owner's right to exclude trumps a contractor's right to complete work to avoid a loss. In Bomberger v.
76. McKelvey, 220 P.2d 729, 735-37 (Cal. 1950), the trial court permitted a contractor to go on an owner's land to demolish a building the contractor had been hired to demolish though the owner had countermanded the demolition order and asked the trial court to enjoin the entry.
77. The rule was not universally embraced even in the United States. John A. Roebling's Sons Co. v. Lock-Stitch Fence Co., 22 N. E. 518, 518 (Ill. 1889),
78. holds, to the contrary, that a contractor has a right to complete performance. In many cases that are cited as authority for the rule, the plaintiff did not complete performance and the rule is invoked to deflect the defendant's argument that the plaintiff has no right to damages because of the failure to complete. See, e.g., Davis v. Bronson, 50 N. W. 836, 839 (N. D. 1892) (criticizing a line of cases that would seem to hold that the contract-defaulter would be obliged to pay in full should the other side nonetheless fully perform, and concluding "the weight of reason and authority is against it").
79. English law is nominally more protective of the plaintiff in these cases because there is a right to complete performance and recover the contract price unless, perhaps, the plaintiff has no legitimate interest in performing the contract. See White & Carter (Councils) Ltd. v. McGregor, [1962] A. C. 413, 413 (H. L. 1961) (describing a case where defendants cancelled a contract to have plaintiffs place advertisements on its litterbins on the day the contract was made, plaintiffs went ahead and placed the advertisements for the three-year period of the contract, and plaintiffs were able to recover the contract price).
80. Andrew Burrows, REMEDIES FOR TORTS AND BREACH OF CONTRACT 317-22 (2d ed. 1994), surveys the inroads on the rule. Burrows concludes that continued performance is not allowed if it requires the cooperation of the other party or if it runs up damages a great deal and is unnecessary to protect the plaintiff's interests under the contract. This ends up being very close to the American position.
81. S. Cotton-Oil Co. v. Heflin, 99 F. 339, 347-48 (5th Cir. 1900) (holding that manufacturer of cotton seed who contracted to sell manufacturing by-products to defendant could continue production after stop order and recover difference between contract price and market price);
82. N. Helix Co. v. United States, 524 F.2d 707, 726 (Ct. Cl. 1975) (holding that manufacturer could continue to produce and deliver helium under long-term contract where production was interrelated with other operations, manufacturer had no storage facilities, and there were no other buyers);
83. O'Hare v. Peacock Dairies, Inc., 79 P.2d 433, 442 (Cal. 1938) (holding that a farmer could continue to produce and deliver milk to buyer under long-term contract on the reasoning that the farmer is not obliged to sell his herd to stop production);
84. Dougan Co. v. Klamath County, 193 P. 645, 657 (Or. 1920) (holding a contractor had a right to complete construction of courthouse after a stop order where work had to be completed for the contractor to collect from a special fund established for that purpose and the contractor otherwise would have had a claim only against general revenues of the county). Chief Justice Oliver Wendell Holmes, Jr. wrote in a case refusing to apply the rule: We assume that these decisions [citing Clark v. Marsiglia] are right in cases where the continuance of work by the plaintiff would be merely a useless enhancement of damages.... [But a clear repudiation] would not have ended the right of the plaintiffs to go on under the contract in a case like the present, where there was a common interest in the performance, and where what had been done and what remained to do probably were to a large extent interdependent. Martin v. Meles, 60 N. E. 397, 399 (Mass. 1901). "Common interest" appears to mean that the plaintiff has an interest in completing performance other than receiving the contract profit.
85. 220 P.2d 729 (Cal. 1950).
86. The relevant passage follows. I quote it at length because it is a good statement of the exceptions to the rule and the rationale for both the rule and the exceptions. The reason for this rule is twofold: Ordinarily a plaintiff is interested only in the profit he will make from his contract, and if he receives this he obtains the full benefit of his bargain; on the other hand, performance by the plaintiff might be useless to the defendant, although he would have to pay the entire contract price if the plaintiff were permitted to perform, and this would inflict damage on the defendant without benefit to the plaintiff.... If these reasons are not present, the rule is not applied. For example, where the plaintiff is not interested solely in profit from the agreement but must proceed with the work in order to fulfill contract obligations to others, or where refraining from performance might involve closing a factory, damages may be inadequate and the plaintiff may have a right to continue performance.... It has likewise been held that where a contractor has started work and has reached a point where it would be impracticable to attempt to make a reasonable estimate of damages, or where to complete the work will diminish damages or at least not enhance them, the contractor may go forward and complete performance.... The general rule is also subject to the jurisdiction of equity to order specific performance of the contract, and, apparently in recognition of this principle, it has been held that in cases where damages will not afford adequate compensation and where specific performance will lie, the plaintiff may continue to perform, in spite of a notice to stop, and thereafter recover on the basis of his continued performance.... Id. at 733-34.
87. Id. at 731.
88. Id.
89. Id.
90. Id. at 732.
91. In an interesting twist, McKelvey went to court and tried to get a preliminary injunction prohibiting Bomberger from demolishing the building, asserting its right as owner to exclude Bomberger from the property. The trial court denied the request. Id. at 729.
92. Id. at 732.
93. Id. at 736-37.
94. Id. at 732-33.
95. Clea Shipping Corp. v. Bulk Oil Int'l Ltd., [1984] 1 All E. R. 129, 136-37 (Q. B. 1983).
96. The occurrence of a material breach or a total breach triggers several possible legal responses. These include the power to suspend performance, the power to abandon a contract and make substitute arrangements (e.g., cover or resale), and the power to recover in restitution for the reasonable value of any performance rendered. The Restatement (Second) of Contracts distinguishes between material and total breach on the basis of whether the harm from the breach is curable. Under the Restatement, a material breach that is curable justifies suspending performance. See RESTATEMENT (SECOND) of CONTRACTS § 242 cmt. a (1981).
97. A total breach - meaning an incurable material breach - discharges the non-defaulting party, justifying his withdrawal from the contract. Id. §§ 236, 243 (1) - (2). It also justifies the optional restitution remedy.
98. Id, § 373. The concept of substantial performance is associated with a claim to be paid for defective work. State laws differ in some details. In most states, a party who substantially performs has a right to recover the contract price less damages caused by his breach (the contract remedy), while a party whose work falls short of substantial performance but whose work nevertheless confers an incontrovertible benefit on the defendant has a right to recover in restitution.
99. See, e.g., Reynolds v. Armstead, 443 P.2d 990, 992 (Colo. 1968) (holding that a contractor in material breach nonetheless could recover the value his work had added to the house);
100. Levan v. Richter, 504 N. E.2d 1373, 1381 (Ill. 1987) (ruling that a contractor who constructed an in-ground swimming pool so shoddily that it could not hold water was entitled to nothing as it had no value at all);
101. Plante v. Jacobs, 103 N. W.2d 296, 298-99 (Wis. 1960)
102. (holding that a builder who did not entirely complete construction of a house was entitled to contract price minus damages). In a few states, a party who substantially performs has a right to recover in restitution, while a party whose work falls short of this forfeits compensation. J. A. Sullivan Corp. v. Commonwealth, 494 N. E.2d 374, 378-79 (Mass. 1986)
103. (finding that a contractor who built a college gym was entitled to payment for the work he had completed, despite contract allowing payment only if every item finished). The New York rule on construction contracts is a variant. A contractor who substantially performs is paid on the contract (less damages) but there is no claim in restitution if the work falls short of this. Steel Storage & Elevator Constr. Co. v. Stock, 121 N. E. 786, 787 (N. Y. 1919)
104. (holding that an elevator fabricator failed to show cause for any award because the elevator had not met every essential requirement). New York law has softened outside the construction context. Hadden v. Consolidated Edison Co. of New York, 312 N. E.2d 445, 449 (N. Y. 1974),
105. states that willfulness of default is only one factor to consider in deciding if an employee substantially performed his job and holds that an employee who had taken bribes from contractors might not forfeit his pension. The New York Court of Appeals ultimately concluded forfeiture of the pension was appropriate on a technical ground. Hadden v. Consol. Edison Co. of N. Y., Inc. 382 N. E.2d 1136, 1139 (N. Y. 1978).
106. Robert A. Hillman, Keeping the Deal Together After Material Breach - Common Law Mitigation Rules, the UCC, and the Restatement (Second) of Contracts, 47 COLO. L. REV. 553 (1976), remains a good treatment of the topic.
107. Hillman challenges the many cases that state in categorical terms that there is no obligation to do further business with a defaulter. Id. The most famous of these cases is Canadian Industrial Alcohol Co. v. Dunabar Molasses Co., 179 N. E. 383 (N. Y. 1932).
108. It held that the plaintiff replied in substance that it had no longer any faith in the defendant's readiness or ability to live up to its engagements, and did not wish to add another contract to the one already broken. The law did not charge it with a duty to make such an experiment again. Id. at 385;
109. see also W-V Enters., Inc. v. Fed. Sav. & Loan Ins. Corp. 673 P.2d 1112, 1122 (Kan. 1983) ("[T]here is no obligation to mitigate damages if the mitigation involves dealing with the breaching party.").
110. For a discussion of excuse to avoid forfeiture, see E. ALLAN FARNS wORTH, CONTRACTS 595-600 (2d ed. 1990).
111. RESTATEMENT (SECOND) of CONTRACTS § 241 (1981).
112. The factors are: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of the benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
113. Id. Some cases offer a somewhat higher standard to justify termination, requiring "a material breach which destroys the entire purpose of entering into the contract." Ervin Constr. Co. v. Van Orden, 874 P.2d 506, 511 (Idaho 1993);
114. see also, e.g., Peters v. Blagden Homes Inc., 151 A.2d 183, 184 (D. C. 1959) (finding for a homebuilder whose guaranteed damp-proof basement flooded before it could be finished, prompting purchaser to breach before allowing the builder to finish all necessary work). Another version of the standard asks if "the contract would not have been made if default in that particular had been expected or contemplated." Huffman v. Saul Holdings Ltd. P'ship, 194 F.3d 1072, 1081 (8th Cir. 1999) (quoting Berland's, Inc. of Tulsa v. Northside Vill. Shopping Ctr., Inc., 378 P.2d 860, 865 (Okla. 1963)).
115. UNIDROIT PRINCIPLES OF INT'L COMMERCIAL CONTRACTS art. 7.3.1 (2) (2004) : In determining whether a failure to perform an obligation amounts to a fundamental non-performance regard shall be had, in particular, to whether: (a) the nonperformance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result; (b) strict compliance with the obligation which has not been performed is of essence under the contract; (c) the non-performance is intentional or reckless; (d) the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party's future performance; (e) the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated. The UNIDROIT Principles are a product of an effort to state global principles of commercial law incorporating both common law and civil law.
116. RESTATEMENT (SECOND) of CONTRACTS § 241 (a) - (b), (d) (1981);
117. UNIDROIT PRINCIPLES OF INT'L COMMERCIAL CONTRACTS art. 7.3.1 (2) (a) - (b), (d) (2004).
118. RESTATEMENT (SECOND) of CONTRACTS § 241 (c) (1981)
119. states the principle against forfeiture. UNIDROIT PRINCIPLES OF INT'L COMMERCIAL CONTRACTS art. 7.3.1 (2) (e) (2004) speaks of avoiding a "disproportionate loss" to the defaulter. These are much the same thing. The Restatement (Second) of Contracts defines forfeiture as "the denial of compensation that results when the obligee loses his right to the agreed exchange after he has relied substantially." RESTATEMENT (SECOND) of CONTRACTS § 227 cmt. b (1981).
120. The Restatement's definition of forfeiture suggests two baselines for measuring forfeiture. The references to "reliance" and "the denial of compensation" suggest a baseline of the defaulter's pre-contractual position. The reference to the defaulter's "right to the agreed exchange" suggests a baseline of the defaulter's position if the contract was fully performed by both sides. I think the latter view is more in accord with the law. Countless insurance cases invoke the principle opposing forfeiture to protect the right of an insured to collect on what is in effect a winning bet notwithstanding his default on a technical term of the bet using tools such as construction to protect reasonable expectation, interpretation, waiver, estoppel, and impracticability. See Clark v. West, 86 N. E. 1, 5 (N. Y. 1908)
121. ("The cases which present the most familiar phases of the doctrine of waiver are those which have arisen out of litigation over insurance policies where the defendants have claimed a forfeiture because of the breach of some condition in the contract...."). Aetna Casualty & Surety Co. v. Murphy, 538 A.2d 219, 221-22 (Conn. 1988),
122. is striking because the court dispensed with these tools and applied a rule requiring an insurer to show actual prejudice from an insured's failure to give timely notice of a claim, relying on RESTATEMENT (SECOND) of CONTRACTS § 229 (1981). Sales cases that prevent a buyer from rejecting goods because of a minor defect to get out of a losing bargain are similar.
123. See JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE 355-57 (3d ed. 1988)
124. (concluding that "relatively little is left" of the UCC perfect tender rule, U. C. C. §2-601, because courts have used a variety of devices to prevent sellers from rejecting goods in bad faith to escape a disadvantageous bargain).
125. RESTATEMENT (SECOND) of CONTRACTS § 241 (e) (1981);
126. UNIDROIT PRINCIPLES OF INT'L COMMERCIAL CONTRACTS art. 7.3.1 (2) (c) (2004). I will come back to this element in the next Part, for it may be invoked to excuse a refusal to perform when the obligation to perform is uncertain. A related rule in the law of substantial performance and in the law of restitution denies a contractor who knowingly deviates from a contract any recovery for the value of the work done. Many cases state the rule though there seem to be few occasions to apply it. Tolstoy Constr. Co. v. Minter, 143 Cal. Rptr. 570, 573 (Ct. App. 1978);
127. Moore's Builder & Contractor, Inc. v. Hoffman, 409 N. W.2d 191, 195 (Iowa Ct. App. 1987);
128. Peabody N. E., Inc. v. Town of Marshfield, 689 N. E.2d 774, 779-80 (Mass. 1998);
129. Sear-Brown Assocs., P. C. v. Blackwatch Dev. Corp., 492 N. Y. S.2d 266, 266 (App. Div. 1985) (applying the rule to deny recovery due to intentional deviation);
130. Merrill Iron & Steel, Inc. v. Minn-Dak Seeds, Ltd., 334 N. W.2d 652, 656-57 (N. D. 1983);
131. Ahlers Bldg. Supply, Inc. v. Larsen, 535 N. W.2d 431, 435 (S. D. 1995);
132. Uhlir v. Golden Triangle Dev. Corp., 763 S. W.2d 512, 514, 516-17 (Tex. Civ. App. 1988) (referencing the rule but not finding it applicable in that case).
133. There have been some inroads on this rule. Hayeck Building & Realty Co. v. Turcotte, 282 N. E.2d 907, 910 (Mass. 1972), requires only that a contractor act in good faith and countenances a switch to less costly method of doing work.
134. Mathis v. Thunderbird Village, 389 P.2d 343, 351 (Or. 1964), which is the basis for RESTATEMENT (SECOND) of CONTRACTS § 241 illus. 7 (1981), excuses a builder's intentional failure to complete work in a minor respect because it was prompted by the owner's failure to pay.
135. Vincenzi v. Cerro, 442 A.2d 1352, 1354 (Conn. 1982), excuses allegedly willful failure to complete work in a timely fashion because the failure was minimal. A parallel rule holds that in a case in which a contractor willfully deviates from contract specifications, a plaintiff is entitled to recover remedial cost, no matter how disproportionate this amount may be to the apparent loss.
136. Kangas v. Trust, 441 N. E.2d 1271, 1276 (Ill. 1982);
137. Roudis v. Hubbard, 574 N. Y. S.2d 95, 96 (App. Div. 1991);
138. Fid. & Deposit Co. v. Stool, 607 S. W.2d 17, 20-21 (Tex. Civ. App. 1980).
139. Contra Grossman Holdings, Ltd. v. Hourihan, 414 So. 2d 1037, 1039-40 (Fla. 1982) (denying remedial cost though contractor built house facing in wrong direction over repeated protests of owner). A plausible explanation for the traditional rules is that they discourage a party from unilaterally modifying a contract by denying him compensation for-a knowing deviation.
140. See Andrew Kull, Restitution's Outlaws, 78 CHI.-KENT L. REV. 17, 18 (2003) (making the general point that restitution punishes wrongdoers by withholding a claim that it would otherwise allow to prevent unjust enrichment). The Restatement (Third) of Restitution and Unjust Enrichment concurs by stating that restitution to the builder who knowingly deviates from plans should be qualified or denied in order to avoid subjecting the owner to a forced exchange. RESTATEMENT (THIRD) of RESTITUTION AND UNJUST ENRICHMENT § 36 (b) (Council Draft No. 5, Nov. 24, 2003);
141. id. cmt. b. This analogizes the builder who deviates from plans to the knowing trespasser who builds an improvement.
142. Id. Even property rights can give way if an infringement is minor and enjoining the infringement would inflict an undue hardship on the infringer. Mannillo v. Gorski, 255 A.2d 258, 264 (N. J. 1969) (innocent encroacher is only made to pay the market value of what he has taken). Typically, the doctrine of undue hardship protects only innocent infringers.
143. Ariola v. Nigro, 156 N. E.2d 536, 543 (111. 1959) (relying on rule that an intentional encroachment will always be enjoined). There are some situations in which it is well established that intentional breach will not bar recovery for the value of part performance. One is where a defaulter renders part performance and then abandons a contract.
144. Two staples of the Contracts course, Britton v. Turner, 6 N. H. 481 (1834),
145. and Vines v. Orchard Hills, Inc., 435 A.2d 1022 (Conn. 1980), are in this mold. In Britton, a worker abandoned a contract for a year's employment after working nine and one-half months.
146. Britton, 6 N. H. at 482. In Vines, a condominium buyer backed out of the contract after paying a hefty deposit.
147. Vines, 435 A.2d at 1025. Both cases allow the defaulter to recover for the value of his part performance less whatever holdback is necessary to put the other party in the promised position. Construction contracts are no different. A builder who abandons a job may recover the contract price less the other party's cost of completing the work. RESTATEMENT (SECOND) of CONTRACTS § 348 illus. 2 (1981).
148. This is true even in New York, which usually is stern towards a builder who knowingly deviates from a contract. Mirisis v. Renda, 441 N. Y. S.2d 138, 139 (App. Div. 1981).
149. That the aggrieved party is generally indifferent to who completes performance so long as he pays no more than the contract price for what he buys or receives no less than the contract price for what he sells might explain why forfeiture is unjustified in these situation. In these cases, default does not expose the aggrieved party to risk of uncompensated loss.
150. RESTATEMENT (SECOND) of CONTRACTS § 241 cmt. (a) (1981) ("This Section therefore states circumstances, not rules, which are to be considered in determining whether a particular failure is material.");
151. id. § 241 cmt. b ("[N]o simple rule based on the ratio of the one to the other can be laid down, and here, as elsewhere under this Section, all relevant circumstances must be considered.").
152. See supra Part I.
153. U. C. C. § 2-601 (2002) (stating the "perfect tender" rule).
154. Id. § 2-608 (1). The United Nations Convention on Contracts for the International Sale of Goods ("CISG") has a fundamental default standard. United Nations Convention on Contracts for the International Sale of Goods art. 25, Apr. 11, 1980, S. TREATY DOC. NO. 98-9 (1988), 1489 U. N. T. S. 3.
155. John A. Sebert, Jr., Rejection, Revocation, and Cure Under Article 2 of the Uniform Commercial Code: Some Modest Proposals, 84 NW. U. L. REV. 375, 399-08 (1990);
156. see also Donald W. Garland, Determining Whether a Nonconformity Substantially Impairs the Value of Goods: Some Guidelines, 26 UCC L. J. 129, 143 (1993).
157. 362 N. W.2d 704 (Mich. 1984).
158. Id. at 705.
159. Id.
160. The dealer and the manufacturer thought Miller was returning the car on a pretext and that he knew it came without a spare. Id. at 706. The case took place in Detroit where local newspapers and television had reported that dealers were delivering new cars without spares because of the auto workers' strike. STEWART MACCAULEY, JOHN KIDWELL & WILLIAM WHITFORD, CONTRACTS LAW IN ACTION: THE CONCISE COURSE 130-31 (2d ed. 2003).
161. 103 N. W.2d 296 (Wis. 1960).
162. Id. at 297.
163. Id. at 299.
164. Id. at 298-99.
165. Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okla. 1962), is a famous and troublesome illustration of an application of the second rule. Garland failed to fulfill its promise to restore seven acres of farmland that it had strip-mined.
166. Id. at 111. The Peevyhouses were left with a large water-filled pit that barred access to other land they owned and leased. The estimated cost of restoring the land was $29, 000 while the diminution in market value of the seven acres was only $300.
167. Id. at 111-12. The jury awarded the Peevyhouses $5000.
168. Id. at 111. The Oklahoma Supreme Court reduced the award to $300, reasoning that damages were limited to the loss in market value when the remedial cost was grossly disproportionate. Id. at 114.
169. Peevyhouse often is paired with Groves v. John Wunder Co., 286 N. W. 235 (Minn. 1939), which holds that a defendant who willfully fails to perform must pay the remedial cost though it is far in excess of loss in market value.
170. Id. at 236. Decisions such as Peevyhouse and Groves are further testament to the value placed on remedial simplicity in American law. Often in these cases, the loss to the plaintiff, if converted to dollars, would be an amount between the remedial cost and the loss in market value. The rule requires choosing one or the other objective measure of damages though we are confident one over-compensates and the other under-compensates. The plaintiff is entitled to submit evidence that he has abnormal interests or preferences that justify an award of remedial costs. The rule only requires choosing one of two objective measures of damages, which makes it possible for the court to resolve the issue. See, e.g., Peevyhouse, 382 P.2d at 111 (articulating the question on appeal as whether the plaintiff will receive the cost to obtain performance of the work or the diminution in value of the property caused by the incomplete work);
171. cf. Ruxley Elecs. & Constr. Ltd. v. Forsyth, [1996] A. C. 344, 361 (H. L.) (appeal taken from Eng.) (U. K.) (adopting a middle-ground award of damages "for loss of amenity" where cost was great and affect on market value was zero of deepening swimming pool to unusual depth specified by tall buyer in contract). This middle-ground is possible because there is no jury trial in civil litigation in the United Kingdom. See, e.g., id.
172. Carol Chomsky, Of Spoil Pits and Swimming Pools: Reconsidering the Measure of Damages for Construction Contracts, 75 MINN. L. REV. 1445, 1451-60 (1991), reviews many similar cases and argues that the primary focus of the courts is avoiding economic waste. Professor Chomsky favors a rule that would permit the owner to recover remedial cost if a court was persuaded the owner was likely to do the remedial work. Id. at 1497-98.
173. See, e.g., RESTATEMENT (SECOND) of CONTRACTS § 348 cmt. c (1981) ("It is sometimes said that the award would involve 'economic waste,' but this is a misleading expression since an injured party will not, even if awarded an excessive amount of damages, usually pay to have the defects remedied if to do so will cost him more than the resulting increase in value to him.");
174. FARNSWORTH, supra note 59, at 619 ("[T]he concept of substantial, as opposed to strict, performance evolved in response to the risk of forfeiture...."). Hancock v. Northcutt, 808 P.2d 251, 256 (Alaska 1991), follows this reasoning to the logical conclusion that if the jury finds that the claimant will make the repair, it must award cost of repair regardless of the loss in market value.
175. See Plante, 103 N. W.2d at 299.
176. My impression is that few Contracts teachers are aware of this rule. The treatment of Jacobs & Young v. Kent, 129 N. E. 889, 891 (N. Y. 1921) (refusing to award the cost of replacing piping from an incorrect factory because the defect was insubstantial and the cost of replacing the piping would have been great), by RICHARD DANZIG & GEOFFREY R. WATSON, THE CAPABILITY PROBLEM OF CONTRACT LAW 95-118 (2d ed. 2004), and by Schwartz &
177. Scott, supra note 8, at 614-16, is indicative. Schwartz and Scott argue that courts should tolerate a risk of forfeiture when a final payment is withheld after an architect refuses to certify a builder's performance. This enables parties to use the mechanisms of payment holdback and third-party certification to solve the problem of the unverifiability of the adequacy of the builder's performance. Id. Danzig and Watson delve into the background of the case and make the counter-argument that Judge Cardozo's opinion was correct on the facts because it was clear that the purpose of the condition had been served and that the owner was not harmed by the substitution of the pipe. DANZIG & WATSON, supra, at 95-118. Neither treatment of the topic mentions the owner's right to repair the defect and withhold or collect the cost. While the existence of such a right is not decisive, it is worth mentioning; it buttresses the Danzig-Watson position and somewhat undercuts the Schwartz-Scott position. An owner's right to repair uncertified work and withhold or collect the cost provides the owner some protection from unverifiable defects or observable defects that cause unverifiable harm. If an owner does not exercise the right, then this is some evidence that the defect did not harm him.
178. See, e.g., R. K. Cooper Builders, Inc. v. Free-Lock Ceilings, Inc., 219 So. 2d 87, 88-89 (Fla. Dist. Ct. App. 1969) (allowing owner to recover $5681 completion cost, despite the trial court's finding that the work could have been done for $2500, reasoning that any expenditures made in good faith should be recovered);
179. Kirkpatrick v. Temme, 654 P.2d 1011, 1013 (Nev. 1982) (awarding $84, 333.73 spent to complete construction where contract price was $175, 000 despite defaulter's testimony that the work was 80% complete and that he could have finished for $39, 200 where the owner and the architect testified that the original plans and specifications were followed). If the owner does additional work, then only the amount that the owner would have paid for the original work is recoverable. Temple Beth Sholom & Jewish Ctr., Inc. v. Thyne Constr. Corp., 399 So. 2d 525, 526 (Fla. Dist. Ct. App. 1981);
180. St. Joseph Hosp. v. Corbetta Constr. Co., 316 N. E.2d 51, 62 (Ill. App. Ct. 1974);
181. Bachman v. Parkin, 471 N. E.2d 759, 760 (Mass. App. Ct. 1984);
182. Martin v. Phillips, 440 A.2d 1124, 1125 (N. H. 1982). Alternatively, the enhanced value may be subtracted. State Prop. & Bldg. Comm'n v. H. W. Miller Constr. Co., 385 S. W.2d 211, 215 (Ky. 1964).
183. Hi-Valley Constructors, Inc. v. Heyser, 428 P.2d 354, 357 (Colo. 1967) (awarding cost of repainting exterior of house);
184. Carlin v. Comstock, 450 A.2d 875, 876 (Conn. Super. Ct. 1982) (awarding approximately $2000 to repair porch though only $143 was due on the original contract).
185. Together, the rule and the exception give an aggrieved party an incentive to repair a defect to avoid being under-compensated for a subjective loss. For example, the rules would give the Jacobses an incentive to spend $4000 to move the wall, though they place only a $1000 value on having the wall moved, because they bear the $1000 loss if the wall is not moved while Plante bears the $4000 cost of moving the wall. To some extent the law tempers the incentive to make wasteful repairs by allowing the Jacobses to keep the balance due on the contract or recover remedial cost as damages if they can establish the value of moving the wall is sufficiently great to them. For example, if the Jacobses had personal reasons to move the wall that would justify them spending a sum as substantial as $1000, then they might think they have a fair chance of keeping the $5000 balance due if they do not make the repairs and present their reasons for wanting the wall moved as compelling enough to retain the balance. Your guess is as good as mine as to how people actually respond to these rules. Personally, I would pay to move the wall only if the value to me was a large fraction of the cost and I had the money in hand as a holdback of the contractor's payment.
186. Parker v. Twentieth Century-Fox Film Corp., 474 P.2d 689, 693-94 (Cal. 1970).
187. Bomberger v. McKelvey, 220 P.2d 729, 734 (Cal. 1950).
188. See supra notes 82-84.
189. Granite Construction Co. v. United States, 962 F.2d 998 (Fed. Cir. 1992), is a contract case that does not fit the pattern. A contractor redid work at a cost of $3.8 million to comply with specifications for a water stop on a dam under pressure from the government.
190. Id. at 1000. The court held the contractor was entitled to recover the cost because it was unreasonable for the government to insist upon strict compliance with the specifications. Id. at 1007-08.
191. There are numerous recent cases limiting damages to loss in market value when the plaintiff does not repair the property at greater cost but may have good reason to do so. E.g., Poffenbarger v. Merit Energy Co., 972 So. 2d 792 (Ala. 2007) (involving environmental contamination);
192. Millers Mut. Fire Ins. Co. v. Wildish Constr. Co., 758 P.2d 836 (Or. 1988) (involving destruction of home);
193. Primrose Operating Co. v. Senn, 161 S. W.3d 258 (Tex. App. 2005) (involving environmental contamination from oil and gas operations);
194. see also DAN B. DOBBS, HANDBOOK ON THE LAW OF REMEDIES § 5.2 (1973).
195. Many cases pay lip service to the rule. See, e.g., Sprinkle v. N. C. Wildlife Res. Comm'n, 600 S. E.2d 473, 477 (N. C. 2004) ("North Carolina is committed to the general rule that the measure of damages for injury to personal property is the difference between the market value of the damaged property immediately before and immediately after the injury.").
196. Thompson v. King Feed & Nutrition Serv., Inc., 105 P.3d 378, 383 (Wash. 2005) (holding that the "lesser than" rule does not apply when the improvement is a component of larger property that is destroyed).
197. See In re September 11th Litig., 590 F. Supp. 2d 535, 541 (S. D. N. Y. 2008) ("New York courts follow the 'lesser of two' rule: a plaintiff whose property has been injured may recover the lesser of the diminution of the property's market value or its replacement cost.").
198. United States v. Fifty Acres of Land, 469 U. S. 24, 35 (1984).
199. A generally recognized exception covers property that is an integral part of a business on the taken property and the adjacent property. See United States v. Ebinger, 386 F.2d 557, 560-61 (2d Cir. 1967).
200. Another less generally accepted exception covers "special purpose property" owned by a public or non-profit entity. See Newton Girl Scout Council, Inc. v. Mass. Tpk. Auth., 138 N. E.2d 769, 774 (Mass. 1956).
201. O'Brien Bros., Inc. v. The Helen B. Moran, 160 F.2d 502 (2d Cir. 1947), is a well known example. A United States government vessel collided with and sunk the plaintiffs barge valued at $16, 000, which was the purchase price less depreciation.
202. Id. at 503. The plaintiff spent $7000 to raise the barge and $43, 000 to repair it, which may have been reasonable because it was wartime and no barges could be purchased at any price.
203. Id. at 504. The trial court awarded repair cost. Id. at 503. The court of appeals reversed, ruling that damages were limited to the value of the barge plus the cost of raising the barge (which was required to clear the waterway).
204. Id. at 506. Given there was no market for barges, and thus no market value, it seems value was measured either by cost less depreciation or discounted cash flow.
205. Id. at 505;
206. see also Warren v. Heartland Auto ServS., Inc., 144 P.3d 73, 76 (Kan. Ct. App. 2006) (limiting damages to the market value of the used automobile where plaintiff repaired the used automobile and rented a replacement);
207. Fisher v. Qualico Contracting Corp., 779 N. E.2d 178, 182 (N. Y. 2002) (assuming that home owners who spent $1, 330, 000 to replace a home destroyed by a fire could recover only the $480, 000 diminution in market value of the home resulting from the fire).
208. The law of takings may be sui generis for the remedy is understood to be noncompensatory. Under federal law still and at one time under the law of most states, consequential damages were not available for a taking. See, e.g., Yuba Natural Res., Inc. v. United States, 904 F.2d 1577, 1581 (Fed. Cir. 1990);
209. Emerson G. Spies & John C. McCoid, II, Recovery of Consequential Damages in Eminent Domain, 48 VA. L. REV. 437, 441 (1962).
210. As for why eminent domain is sui generis, that is more difficult to say. If you assume the purpose of eminent domain is compensation, or internalizing to the government the full private cost of a taking, then it is difficult to make a case that public takings are categorically different from private conduct harming property when the conduct is of a type that is not thought to merit punishment.
211. Am. Serv. Ctr. Assocs. v. Helton, 867 A.2d 235, 243, 240 n. 4 (D. C. 2005) (allowing damages for cost of repairing an automobile plus damages for residual loss of market value, while noting that the "lesser than" rule is unprecedented in any of the court's rulings).
212. Many of these cases implicate environmental concerns. See, e.g., Osborne v. Herst, 947 P.2d 1356, 1360 (Alaska 1997);
213. Felton Oil Co. v. Gee, 182 S. W.3d 72, 80 (Ark. 2004);
214. Leavitt v. Cont'l Tel. Co., 559 A.2d 786, 788 (Me. 1989);
215. Sunburst Sch. Dist. No. 2 v. Texaco, Inc., 165 P.3d 1079, 1088 (Mont. 2007);
216. Keitges v. VanDermeulen, 483 N. W.2d 137, 143 (Neb. 1992);
217. Vaught v. A. O. Hardee & Sons, 623 S. E.2d 373, 378 (S. C. 2005).
218. See DOBBS, supra note 89, § 5.2 (1), (2);
219. LAYCOCK, supra note 26, at 23-26.
220. When there is an objective basis for the intermediate measure, the solution is to use a measure of damages between replacement or repair cost and loss of market value. For example, when a plaintiff replaces used property with new, damages can be measured by replacement cost of the new less a factor to account for depreciation of the old. See, e.g., Penn. Dep't of Gen. Servs. v. U. S. Mineral Prods. Co., 898 A.2d 590, 598 (Pa. 2006).
221. Lack of consideration is the argument eventually adopted in Hackley v. Headley, 14 N. W. 693, 693-95 (Mich. 1883), to excuse a creditor from a release extracted by the debtor by a threat to withhold money that was not in dispute.
222. For a similar, more recent case, see Wickman v. Kane, 766 A.2d 241, 249 (Md. Ct. Spec. App. 2001), which found no valid accord and satisfaction where an undisputed sum was paid to obtain release of a disputed claim on grounds of lack of consideration.
223. The weight of authority holds that refusal to pay money, even in bad faith, is not economic duress. E.g., Selmer Co. v. Blakeslee-Midwest Co., 704 F.2d 924, 927 (7th Cir. 1983) (asserting that finding otherwise would "make an inference of duress inescapable in any negotiation where one party makes an offer from which it refuses to budge").
224. For an unusual case to the contrary, see Capps v. Georgia Pacific Corp., 453 P.2d 935, 938-39 (Or. 1969), which adopted a rule allowing statements of a duress defense to be tried on its facts.
225. LEE R. RUSS & THOMAS F. SEGALLA, COUCH ON INSURANCE 3d § 232:43 (2005);
226. see also Williams v. Mut. Benefit Health & Accident Ass'n, 100 F.2d 264, 264-65 (5th Cir. 1938) ("When one who is obligated by contract to make money payments to another, absolutely repudiates and abandons the obligation without just excuse, the obligee is 'entitled to maintain his action in damages at once for the entire breach....'" (quoting Pollack v. Pollack, 39 S. W.2d 853, 855 (Tex. App. 1931)));
227. Needham v. Am. Nat. Ins. Co, 97 S. W.2d 1016, 1021 (Tex. App. 1936).
228. See supra note 57 and accompanying text.
229. See Peter Kiewit Sons' Co. v. Summit Constr. Co., 422 F.2d 242, 257 (8th Cir. 1969);
230. Pac. Coast Eng'g Co. v. Merritt-Chapman & Scott Corp, 411 F.2d 889, 896 (9th Cir. 1969) (holding that the persistent assertion of a position that the party had previously been told by third parties was unjustified constitutes a repudiation). Good faith assertion of a claim or position is not normally a breach of contract even though the claim or position is invalid. See Reiss v. Murchison, 503 F.2d 999, 1007-08 (9th Cir. 1974) (holding that the filing of a claim of total breach does not give the party against whom the claim is asserted the right to halt performance);
231. In re Chateaugay Corp, 104 B. R. 637, 643 (Bankr. S. D. N. Y. 1989);
232. Dixie Roof Decks, Inc. v. Borggren/Dickson Constr, Inc., 395 S. E.2d 19, 20 (Ga. Ct. App. 1990) ("Borggren/Dickson could not commit an anticipatory breach... because the duty to pay didn't arise until Dixie Roof Decks was to have produced the requisite documentation. ");
233. Oak Ridge Const. Co. v. Tolley, 504 A.2d 1343, 1347-48 (Pa. Super. Ct. 1985) (asserting that where one party's communication did not constitute a "definite and unconditional repudiation" or breach of the contract, the other party's failure to perform constitutes a breach). Similarly, it is not a breach of contract or a tort to use the legal process to resolve a dispute or to protect one's position pending resolution of a dispute even if the use of the legal process harms the other party, so long as the process is used in good faith. Wachter v. Gratech Co., 608 N. W.2d 279, 288-89 (N. D. 2000) (holding that it is not abuse of process to file a mechanic's lien that turned out to be grossly excessive in amount if the filing was done in good faith).
234. Around half the states allow the claim. See Erie Ins. Co. v. Hickman by Smith, 622 N. E.2d 515, 519 n. 1 (Ind. 1993).
235. Comunale v. Traders & General Insurance Co., 328 P.2d 198, 202 (Cal. 1958), is an early case. In states in which a tort action is available for bad faith breach, the action generally is limited to nonpayment of insurance, and in many of these states, it is further limited to nonpayment of first party insurance.
236. E.g., Gruenberg v. Aetna Ins. Co., 510 P.2d 1032, 1039 (Cal. 1973) ("Obviously, the non-insurer defendants were not parties to the agreements for insurance; therefore, they are not, as such, subject to an implied duty of good faith and fair dealing."). Often when a breach of contract is egregious, a plaintiff will be able to make out a claim for some other tort for which punitive damages are available, such as fraud. Empirical studies show that punitive damages are levied much more often in business tort cases than personal injury cases. For a summary of the studies, see generally Michael L. Rustad, Unraveling Punitive Damages: Current Data and Further Inquiry, 1998 WIS. L. REV. 15.
237. For the most doctrinally granulated data, see ERIK MOLLER, NICHOLAS M. PACE & STEPHEN J. CARROLL, PUNITIVE DAMAGES IN FINANCIAL INJURY JURY VERDICTS 20 (1997), which compiles data from jury verdict reports from six states for the period 1985 to 1994.
238. They report that half of the cases in which punitive damages were levied involved financial injury and that punitive damages were levied in fourteen percent of financial injury verdicts and twenty-two percent of the verdicts in which the plaintiff won.
239. Id. Their breakdown of the data barely makes it possible to discern the nature of the legal claim on which punitive damages were levied. In non-employment cases, fraud is the most common basis, followed by insurance bad faith (broadly defined by the authors to include both claims for wrongful failure to pay "first party" claims by an insured and claims for failure to settle "third party" liability claims against an insured), breach of fiduciary duty, and interference with contractual relations. Id.
240. See William T. Barker, Evidentiary Insufficiency in Insurance Bad Faith Suits, 6 CONN. INS. L. J. 81, 110 (1999) (exploring the problem in the context of insurance bad faith). In practice, the key problem is defining the quantum of doubt about an obligation that justifies dismissing a bad faith claim on a motion for summary judgment. See id. at 99-100.
241. Barker concludes that an insurer has the privilege to test an objectively questionable claim in court no matter how hard the decision to fight may be on the insured and no matter how small the claim. Id. at 110.
242. RESTATEMENT (THIRD) of RESTITUTION AND UNJUST ENRICHMENT § 6 cmt. e, illus. 18 (Tentative Draft No. 1, 2001) (stating and providing authority that the voluntary payment rule will bar recovery of payment of a disputed claim).
243. Randazzo v. Harris Bank Palatine, N. A., 262 F.3d 663, 668 (7th Cir. 2001).
244. The history of Uniform Commercial Code section 1-207 attests to the strength of this practice. The statute allows a party to reserve his rights while accepting performance offered by the other party. U. C. C. § 1-207 (1990).
245. Though the statute made no exception, many courts held this provision did not apply to an accord and satisfaction. Courts had split on whether the statute changed the common law doctrine of accord and satisfaction. Air Van Lines, Inc. v. Buster, 673 P.2d 774, 779 (Alaska 1984), is a leading case holding that the statute did not alter the common law rule.
246. For a contrary case mat reviews the arguments and authority on both sides, see Horn Waterproofing Corp. v. Brunswick Iron & Steel Co., 488 N. E.2d 56, 57-58 (N. Y. 1985).
247. An explicit exception was added in 1990. U. C. C. § 1-207 (1).
248. JAMES WHITE & ROBERT S. SUMMERS, HANDBOOK OF THE LAW UNDER THE UNIFORM COMMERCIAL CODE 544 (2d ed. 1980).
249. This sentiment is echoed in Horn Waterproofing, 488 N. E.2d at 59.
250. An often litigated question involves the effectiveness of a release given by a creditor to settle a disputed debt when, in exchange for the release, the debtor pays a sum that was not in dispute. The weight of the authority is that a release is valid in these circumstances if there is a single debt or if the debts are closely related. E.g., Kilander v. Blickle Co., 571 P.2d 503, 505 (Or. 1977).
251. However, there is authority that "circumstances of unfair pressure or economic coercion" cut in the other direction. Flagel v. Sw. Clinical Physiatrists, P. C., 755 P.2d 1184, 1190 (Ariz. Ct. App. 1988).
252. Clear statements that a reservation of rights does not avoid the voluntary payment doctrine may be found in Rowe v. Union Central Life Insurance Co., 12 So. 2d 431, 433-34 (Miss. 1943),
253. and Comment Note, Relaxation of Common-Law Rule Regarding Recovery of Voluntary Payment, 75 A. L. R. 658, 658 (1931),
254. which states that a payment may not be recovered "though the payer makes the payment with an express reservation of his right to litigate the claim." The rule is codified in Georgia. GA. CODE ANN. § 13-1-13 (1982).
255. *7 (D. D. C. April 13, 1992) ("The voluntary payment doctrine does not generally apply, however, when a party has expressly reserved a right to take some legal action or when the party has paid under protest.");
256. Cmty. Convalescent Ctr., Inc., v. First Interstate Mortgage Co., 537 N. E.2d 1162, 1164 (Ill. App. Ct. 1989) ("[S]ince plaintiff paid the 30 days' interest 'under protest,' plaintiff is not barred from recovery under the voluntarypayment doctrine."). A few other cases state in dicta that a debtor could have reserved his rights. Randazzo, 262 F.3d at 671 (admitting that Illinois recognizes protest as particularly good evidence of duress, but that the appellee's protest here was not an assertion of a legal right but an appeal to the appellant's business judgment);
257. Prenalta Corp. v. Colo. Interstate Gas Co., 944 F.2d 677, 685-86 (10th Cir. 1991); City of Miami v. Keton, 115 So. 2d 547, 551 (Fla. 1959);
258. Putnam v. Time Warner Cable, 663 N. W.2d 254, 263 (Wis. Ct. App. 2001) ("[E]ven if the late fees were improper - either unreasonable in amount or unlawful, in full, under state or federal regulations - the customers paid without protest, and Time Warner relied on those payments."). The older cases tend to treat a protest as evidence of duress. See Getto v. City of Chicago, 426 N. E.2d 844, 850 (Ill. 1981).
259. This comes from framing the issue as a problem in restitution. If the issue is framed as a problem in contract, then the question is what it takes to establish an agreement by the payee that the payment is conditional upon the validity of his claim. There is no doubt that an agreement that a payment is not final avoids the bar of the voluntary payment doctrine. RESTATEMENT OF RESTITUTION § 45 cmt. e (1937) ("The rule stated in this Section does not apply if the parties have agreed that the payment is conditional upon the validity of the transferee's claim."). Approaching the problem from the perspective of contract law places pressure on the rule that a payor cannot unilaterally reserve the right to recover a payment by noting on the payment that this right is reserved. Under the general principle that the offeror is master of the offer, the payee assents to this reservation when he takes the payment. E.g., Prenalta Corp., 944 F.2d at 685-86.
260. 170 P. 1135 (Cal. 1918).
261. Id. at 1138. I will return at the end of this Part to how the principle in Parts I and II interacts with the principle about to be explained if damages are not an adequate remedy.
262. See infra notes 129-32 and accompanying text.
263. Henrici, 170 P. at 1136.
264. Id. at 1138.
265. 1.7 Id. at 1136.
266. 1.8 Id. ("By paying the excessive price without conceding its correctness, he could have saved his trees, vines, and crops, and reduced his damage to a comparatively trifling sum.").
267. Id.
268. This assumes the voluntary payment doctrine does not preclude the claim, a point the court did not address. The typical explanation why the voluntary payment doctrine would not prohibit the claim is that Henrici's payment is not considered voluntary. What makes a payment involuntary is not developed in the cases. If the test is similar to that for duress, then arguably South Feather did nothing improper in demanding a payment thought to be within its rights and that Henrici had other options that would have adequately protected his interests. A stronger basis for the restitution claim can be found in RESTATEMENT (THIRD) of RESTITUTION AND UNJUST ENRICHMENT § 35 cmt. b (Council Draft No. 5, 2003).
269. The rule addresses the case where a party renders performance he disputes he owes and later brings a restitution claim to recover its value. Id. The rule allows the restitution claim but only if nonperformance by either party would impose consequential harms.
270. *, at 729.
271. See supra notes 100-04 and accompanying text. A breach is not material if damages adequately protect the promisee's interest in performance, particularly if withholding performance would impose a significant harm on the defaulter and the breach is in good faith.
272. RESTATEMENT (SECOND) of CONTRACTS § 350 cmt. e (1981) ("If the party in breach offers to perform the contract for a different price, this may amount to a suitable alternative. But this is not the case if the offer is conditioned on surrender by the injured party of his claim for breach.");
273. id. at illus. 15 (describing Gilson v. F. S. Royster Guano Co., 1 F.2d 82 (3d Cir. 1924));
274. see also ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS § 1043 (West Publishing Co. 1964) (1951) (stating that there is no duty to take substitute performance from the defaulting party if it would involve a surrender of rights, compromise, or accord and satisfaction).
275. U. C. C. § 1-308 (2005) (former version at U. C. C § 1-207 (1999)).
276. There is little case law on the respective fields of this rule and the rule on accord and satisfaction. Air Van Lines, Inc. v. Busters, 673 P.2d 774, 779 (Alaska 1984), takes the position that section 1-308 (1) applies when there is a continuing dispute on an executory contract. Under this view, Henrici could not have accepted a one-time delivery of water tendered on the condition that he agree to South Feather's price by accepting with a reservation of rights.
277. RESTATEMENT (SECOND) of CONTRACTS § 176 (2) (a) (1981) (defining a threat as improper "if the resulting exchange is not on fair terms" and "the threatened act would harm the recipient and would not significantly benefit the party making the threat").
278. Silsbee v. Webber, 50 N. E. 555, 555-56 (Mass. 1898),
279. which concerns a threat by the employer directed at the employee's mother to tell employee's ill father of employee's theft if mother did not pay off the loss, is an example in the nature of blackmail. John Dawson, Economic Duress - An Essay in Perspective, 45 MICH. L. REV. 253, 258-59 (1947),
280. proposes disproportionality as an organizing principle. A threat to cut off water to a farm that has no alternative source of supply to gain leverage in a dispute over pennies certainly is disproportionate. The Restatement misfires by suggesting the concern is with malice or vindictiveness rather than with coercion. RESTATEMENT (SECOND) of CONTRACTS § 176 cmt. f (1981).
281. Illustration 12 gives an example reminiscent of Silsbee in which an employer threatens to prevent an employee from working elsewhere if the employee does not release a claim. Id. at illus. 12.
282. The employer makes the threat for his own gain and not out of malice. If he carries out the threat, he probably does it to retain his credibility. On the other hand, that rescission on grounds of duress may not be possible in this situation, is suggested by cases that state categorically that "it is not duress for a party to insist upon what he believes to be his legal rights." Jacobs v. Atlantco Ltd. P'ship No. 1, 373 A.2d 1255, 1261 (Md. Ct. Spec. App. 1977).
283. Subha Narasimhan, Modification: The Self-Help Specific Performance Remedy, 97 YALE L. J. 61, 77 (1987),
284. recognizes the deceptive nature of agreeing to a modification and then disavowing it by claiming duress. The article comes to the remarkable conclusion that courts should not permit such deception because it undercuts efficient breach unless the circumstances are such that a court would have ordered specific performance. Id. at 82.
285. For a critical response, see Robert A. Hillman, Contract Modification and "Self-Help Specific Performance": A Reaction to Professor Narasimhan, 75 CORNELL L. REV. 62 (1989). A basic fallacy in the argument is the assumption that the limitations on court-ordered specific performance should apply to self-help specific performance.
286. See supra notes 100-04 and accompanying text. A breach is not material if damages adequately protect the promisee's interest in performance, particularly if withholding performance would impose a significant harm on the defaulter and the breach is in good faith.
287. RESTATEMENT (SECOND) of CONTRACTS § 250 cmt. d (1981) might be read to cast the loss on Henrici in this situation. It states that "[g]enerally, a party acts at his peril if, insisting on what he mistakenly believes to be his rights, he refuses to perform his duty." Id.
288. The argument would be that Henrici's act is a repudiation, which would justify withholding delivery. Corbin argues the contrary point: "Disputes often arise as to what performance the contract requires; and the plaintiffs breach is not willful if he performs in accordance with his own honest interpretation, even though he knows that the other party holds a different one." CORBIN, supra note 122, § 1122.
289. Each proposition is true to a point. The apparent contradiction largely disappears once you realize they are speaking of different responses to breach. The Restatement speaks to whether a defaulter's belief that he performed his obligation saves him from liability to the other for damages. The answer generally is no. Corbin speaks to whether a defaulter's belief that he performed his obligation is relevant to deciding whether his breach was material, giving the other the power to exit. The answer is yes, but it is only one factor among several. Corbin does not cite case authority for his point, which is the pertinent point in this context. For cases discussing this point, see Walker v. Shasta Minerals & Chemical Co., 352 F.2d 634, 638 (10th Cir. 1965);
290. Golf Carts, Inc. v. Mid-Pacific Country Club, 493 P.2d 1338, 1340 (Haw. 1972);
291. Hanson v. Duffy, 435 N. E.2d 1373, 1378 (Ill. App. Ct. 1982);
292. Berke & Co. v. Griffin, Inc., 367 A.2d 583, 586-87 (N. H. 1976);
293. Kiriakides v. United Artists Communications, Inc., 440 S. E.2d 364, 367 (S. C. 1994).
294. New York Life Insurance Co. v. Viglas, 297 U. S. 672 (1936), is a leading case holding that an insured cannot accelerate payments due under an insurance policy when the insurer fails to make a payment in the honest belief it is not due. Justice Cardozo explained: Repudiation there was none as the term is known to the law. Petitioner did not disclaim the intention or the duty to shape its conduct in accordance with the provisions of the contract.
295. Far from repudiating those provisions, it appealed to their authority and endeavored to apply them.... If it made a mistake, there was a breach of a provision of the policy with liability for any damages appropriate thereto. We do not pause at the moment to fix the proper measure. Enough in this connection that at that stage of the transaction there had been no renunciation or abandonment of the contract as a whole. Id. at 676-77.
296. There is a similar confusion of the different issues in Woodar Investment Development Ltd. v. Wimpey Construction U. K. Ltd., [1980] 1 W. L. R. 277, 283.
297. Lord Wilberforce echoes the proposition just above: [I]t would be a regrettable development of the law of contract to hold that a party who bona fide relies on an express stipulation in a contract in order to rescind or terminate a contract should, by that fact alone, be treated as having repudiated his contractual obligations if he turns out to be mistaken as to his rights. Id.
298. Lord Salmon, quoting Lord Denning from an earlier case, echoes the Restatement: "I have yet to learn that a party who breaks his contract can excuse himself by saying that he did it on advice of his lawyers; or that he was under an honest misapprehension. Nor can he excuse himself on those grounds from the consequences of a repudiation." Id. at 287.
299. For an illustration of this point, see K&G Construction Co. v. Harris, 164 A.2d 451 (Md. 1960).
300. Harris had a contract with K&G to excavate and move dirt in K&G's multihouse construction project. Id. at 453.
301. Harris's bulldozer damaged a house and Harris and his insurer denied liability. In response, K&G withheld progress payments totaling less than the amount of its claim. Harris in turn stopped work and K&G hired another company to finish the job. Both parties suffered a loss. K&G paid the substitute more than it would have paid Harris; Harris lost the profit he would have made completing the job.
302. Id. If the Court thought K&G acted inappropriately in withholding progress payments, then it could find this was a material breach. Harris would then have been in the right in leaving the job and would recover his lost profits. Instead, the Court concluded that Harris materially breached the contract when it withdrew from the job.
303. Id. at 456.
304. K&G recovered the additional cost of the substitute. Id. at 456-57.
305. For an argument that courts should apply an "interim-efficiency rule" in passing on a motion for preliminary injunction, see Richard R. W. Brooks & Warren F. Schwartz, Legal Uncertainty, Economic Efficiency, and the Preliminary Injunction Doctrine, 58 STAN. L. REV. 381, 409 (2005).
306. A duty to cooperate is similar to the interim efficiency rule; both are designed to encourage the parties to perform in whatever manner is in their joint interest in the face of legal uncertainty. The authors note their proposal is "a radically different perspective than that articulated in judicial opinions and prior legal scholarship". Id. at 382.
307. 474 p 2d 689 (Cal. 1970);
308. see also supra notes 15-27 and accompanying text.
309. See Hope's Architectural Prods. Inc. v. Lundy's Constr., Inc., 781 F. Supp. 711, 714-17 (D. Kan. 1991).
310. This case involves specially manufactured windows and a dispute over the parties' respective rights and obligations when the windows were delivered later than the buyer expected. Id. at 712.
311. The decision casts the loss on the seller after thoughtfully working through who was in the right in the underlying disputes. Id. at 717.
312. A prologue to the opinion observes: This case presents a familiar situation in the field of construction contracts. Two parties, who disagreed over the meaning of their contract, held their positions to the brink, with litigation and loss the predictable result of the dispute. What is rarely predictable, however, (and what leads to a compromise resolution of many construction disputes when cool heads hold sway) is which party will ultimately prevail. The stakes become winner-take-all. Id. at 711-12.
313. The principle of construction in Jacobs & Young v. Kent, 129 N. E. 889, 891 (N. Y. 1921), also is a warning: "Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable. If something else is in view, it must not be left to implication. There will be no assumption of a purpose to visit venial faults with oppressive retribution. "
314. Eisenberg, supra note 7, at 223-40.
315. See CHARLES FRIED, CONTRACT AS PROMISE 8 (1981).
316. See Randy E. Barnett, A Consent Theory of Contracts, 86 COLUM. L. REV. 269, 270 (1986);
317. Randy E. Barnett, The Sound of Silence: Default Rules and Contractual Consent, 78 VA. L. REV. 821, 827-28 (1992).
318. See P. S. ATIYAH, ESSAYS ON CONTRACT 42-43, 80-82 (1988).
319. See STEPHEN A. SMITH, CONTRACT THEORY 42-49 (2004) (observing that this sort of typology conflates the analytical question of what is the legal basis (or causative event) of contractual obligation - e.g., promise, reliance, transfer, etc. - and the normative question of the justification for imposing an obligation upon the relevant causative event and embracing a rights-based theory);
320. Peter Benson, Contract, in A COMPANION TO PHILOSOPHY OF LAW AND LEGAL THEORY 24, 33-43 (Dennis Patterson ed., 1996);
321. Peter Benson, The Unity of Contract Law, in THE THEORY OF CONTRACT LAW 118, 163 (Peter Benson ed., 2001).
322. A libertarian theory of contract grounds legal obligation on an actor's manifested consent to be under a legal obligation. For a theory along these lines, see Barnett, supra note 135, at 270.
323. Self-described natural law theories of contract include JAMES GORDLEY, THE PHILOSOPHICAL ORIGINS OF MODERN CONTRACT DOCTRINE (1991) and HENRY MATHER, CONTRACT LAW AND MORALITY (1999).
324. See, e.g., Curtis Bridgeman, Reconciling Strict Liability with Corrective Justice in Contract Law, 75 FORDHAM L. REV. 3013, 3022 (2007).
325. Bridgeman argues a corrective justice theory of contract is immune from the problem that besets a corrective justice theory of torts, which is explaining the grounds for making an actor responsible for harm the actor causes, because "[b]inding contracts create entitlements in the promisee, and any loss of those entitlements becomes the promisor's responsibility to repair." Id.
326. As for why this is so, Bridgeman leaves it at "the widely held intuition that individuals are generally free to assume obligations if they so desire." Id.
327. Eisenberg, supra note 7, at 223.
328. The obvious alternatives to "autonomy theories" are "non-economic theories" or "moral theories." Both names cede too much ground to economic theories. "Non-economic theories" defines the group by what they are not. A prescriptive economic theory is a moral theory.
329. VICTOR GOLDBERG, FRAMING CONTRACT LAW 1 (2006).
330. For example, two of Fuller's three functions of contract formalities - the cautionary and channeling functions - emphasize the ability of formal rules to empower individuals to determine their legal obligations. Lon L. Fuller, Consideration and Form, 41 COLUM. L. REV. 799, 800, 801 (1941)
331. (describing the cautionary function as a mechanism for "inducing the circumspective frame of mind appropriate in one pledging his future" and the channeling function as a "simple and external test of enforceability"). This could be a species of a liberal consequential theory that has the goal of designing contract law rules to best enable individuals to live fulfilling lives. Professor Smith classifies all consequentialist theories as utilitarian "in the broad sense" he uses the term. See SMITH, supra note 137, at 46-47.
332. While American readers will find this use of the term "utilitarian" jarring, it does emphasize the tension in a rights-based theory of having courts self-consciously decide rights-claims before them with an eye on how a decision will affect future behavior.
333. SMITH, supra note 137, at 54 helpfully characterizes many such theories of contract as addressing the "analytic question" of the nature of contract law, meaning the distinctive features of contract as a species of obligation. Smith groups these theories into three categories - promissory theories, reliance theories, and transfer theories. Smith correctly distinguishes such theories from theories that try to justify contractual obligation.
334. For an argument that the theory is descriptively inaccurate for other reasons, see Daniel Friedmann, The Efficient Breach Fallacy, 18 J. LEGAL STUD. 1, 18-23 (1989).
335. The classic statement of the view is by Holmes: "The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it, - and nothing else." Oliver Wendell Holmes, The Path of the Law, 10 HARV. L. REV. 457, 462 (1897).
336. Holmes said this in a lecture to beginning law students to "dispel a confusion between morality and law." Id. at 459.
337. Holmes understood that his audience (like most people) thought breach of contract was immoral. He was telling them to try to put their views on the immorality of breach aside in learning contract rules defining the legal consequences of breach. Id.
338. When contemporaries interpreted Holmes as asserting a right to breach a contract so long as one paid the price (some call this the "option theory of contract"), he chided them for misunderstanding his point and responded that he considered breach of contract a wrong on par with a tort. Joseph M. Perillo, Misreading Oliver Wendell Holmes on Efficient Breach and Tortious Interference, 68 FORDHAM L. REV. 1085, 1086-90 (2000).
339. See supra note 4.
340. Richard Craswell, Precontractual Investigation as an Optimal Precaution Problem, 17 J. LEGAL STUD. 401, 412 (1988);
341. David J. Friedman, An Economic Analysis of Alternative Damage Rules for Breach of Contract, 32 J. L. & ECON. 281, 284 (1989).
342. William P. Rogerson, Efficient Reliance and Damage Measures for Breach of Contract, 15 RAND J. ECON. 39, 47 (1984).
343. Douglas Laycock summarizes the state of the debate at the turn of the century as it looked to a non-economist: Scholars on all sides of the controversy have mostly recognized that if there were no transaction costs, the parties would always transfer the carrots to the party with the most valuable use. Thus, the economic wisdom was to select the rule with the lowest transaction costs, and much of the literature turned on ever-more-detailed speculative analyses of the likely transaction costs of each remedy. LAYCOCK, supra note 26, at 390.
344. Professors Scott and Triantis, focusing on two-party situations, make a similar point with a different twist: "The premise that parties can often renegotiate to efficient ex post outcomes is sufficiently well accepted that contract theorists have largely set aside the concern with efficient breach to focus on the hold-up problems caused by renegotiation". Robert E. Scott & George G. Triantis, Embedded Options and the Case Against Compensation in Contract Law, 104 COLUM. L. REV. 1428, 1451 (2004).
345. Schwartz, supra note 8, at 383-87.
346. See Schwartz & Scott, supra note 8, at 614-16.
347. 129 N. E. 889, 891 (N. Y. 1921) (refusing to award the cost of replacing piping from an incorrect factory because the defect was insubstantial and the cost of replacing the piping would have been great).
348. See Schwartz & Scott, supra note 8, at 614-16.
349. See id.
350. See Scott & Triantis, supra note 150, at 1429.
351. See, e.g., Brooks, supra note 4, at 579 ("The efficient breach hypothesis is premised on the Holmesian option theory of contract obligation....").
352. See Scott & Triantis, supra note 150, at 1491.
353. See GOLDBERG, supra note 142, at 233-42 (using the classic case of Neri v. Retail Marine Corp., 285 N. E.2d 311 (N. Y. 1972), to demonstrate the economic implications of compensatory damages for breach of contract when dealing with lost-volume retail sellers).
354. See id. at 225-32 (using Allied Canners & Packers, Inc. v. Victor Packing Co., 209 Cal. Rptr. 60 (1984),
355. and Tongish v. Thomas, 840 P.2d 471 (Kan. 1992), to illustrate the sometimes over-compensatory effect of damages in the case of middle-men).
356. Professors Scott and Triantis argue for a background rule of contract-market damages in thick markets in non-consumer contracts. See Scott & Triantis, supra note 150, at 1479-80.
357. They favor a background rule of no damages in a case of repudiation by a consumer of a purchase agreement with a merchant. They would allow a merchant to collect a nonrefundable deposit to recover the merchant's cost of giving a consumer a purchase option. See id. at 1488-90;
358. accord GOLDBERG, supra note 142, at 237-38. In thin markets in commercial contract, Professors Scott and Triantis propose a background rule of specific performance around which people could contract.
359. Scott & Triantis, supra note 150, at 1486-88.
360. See Scott & Triantis, supra note 150, at 1436-47. This rings true to me.
361. 474 P.2d 689, 694 (Cal. 1970).
362. 362 N. W.2d 704, 707 (Mich. 1984).
363. An example is when an over-booked airline charges a passenger a cancellation fee. While the cancellation fee would seem to be a windfall to the airline (which was overbooked), the fee might well be the price the passenger pays for an option of a seat on the flight, which bears no relation to the airline's loss if the passenger cancels. Indeed, the more likely a flight will be over-booked, the more valuable the option to the passenger.
364. See Scott & Triantis, supra note 150, at 1468-70.
365. Id. at 1433 ("Courts are not well suited to set default contract damages either.").
366. They endorse a specific performance default for commercial contracts in thin markets because of the simplicity of the rule and because it will force parties to bargain for alternative termination terms.
367. See id. at 1479-86.
368. In raising these questions about the expectation principle, Professors Scott and Triantis are extraordinarily provocative. That lawyers and legal theorists make too much of principle, or abstract legal maxims, is hardly news. Jack Dawson's observations about the principle opposing unjust enrichment come to mind. He warned the principle "had the peculiar faculty of inducing quite sober citizens to jump right off the dock" and attributed this to its "strong appeal to the sense of equal justice [combined with] the delusive appearance of mathematical simplicity." JOHN P. DAWSON, UNJUST ENRICHMENT 8 (1951).
369. The expectation principle has an even stronger pull. The idea that the remedy for a wrong is to place the wronged person in the position she would have been in had the wrong not been committed seems self-evidently correct. The idea unifies the fields of remedies and causation and transcends contract and tort. It is the organizing principle of the leading remedies casebook. LAYCOCK, supra note 26. Scott and Triantis may well be right in arguing that we have taken the principle too far. Lawyers, particularly academic lawyers, are prone to a "hardening of the categories."
370. 474 P.2d 689 (Cal. 1970).
371. See Goldberg, supra note 11, at 1052-53.
372. Id.
373. See GOLDBERG, supra note 142, at 284-86.
374. See id. at 286.
375. Scott & Triantis, supra note 150, at 1429-30.
376. See GOLDBERG, supra note 142, at 286 (reporting statements of the trial court in Parker);
377. id. at 292-94 (reporting a case with a similar holding);
378. id. at 298 (reporting that the Director's Guild union contract provides for the offset of additional earning against the guaranteed payment);
379. id. at 302-03 (offering a tendentious explanation of the offset as damages for violating an implicit covenant not to compete during the option period).
380. See Scott, Formalism, supra note 6, at 875-76;
381. Scott, Death, supra note 6, at 389-90.
382. GRANT GILMORE, THE DEATH OF CONTRACT 15 (2d ed. 1995) (1974).
383. There has been movement to weaken or eliminate formal requirements for contract. The Uniform Commercial Code directs courts to try to enforce indefinite agreements if the parties appeared to intend to make a contract.
384. See U. C. C. § 2-204 (3) (1977) ("Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy."). The Code also weakens the statute of frauds by requiring little in the way of a writing to satisfy the statute.
385. See id. § 2-201 (1) & cmt. 1. Additionally, the U. C. C. abolishes the strict form of the mirror image rule; an apparent acceptance still will not create a contract if the acceptance states that it is conditional on assent to its terms.
386. See id. § 2-207 (1).
387. Formal requirements for contract also are subject to qualifications that limit an actor's power to dishonor an agreement with impunity once the other party performs, and in some jurisdictions, once the other party relies. For example, if an agreement is unenforceable on grounds of indefiniteness, then a party may recover the reasonable cost of performance rendered on a restitution claim. RESTATEMENT (THIRD) of RESTITUTION AND UNJUST ENRICHMENT § 31 (2004).
388. And in some jurisdictions, a promissory estoppel claim is available to recover expenses made in reliance on an indefinite agreement if the indefiniteness does not preclude a finding of breach.
389. See, e.g., Wheeler v. White, 398 S. W. 2d 93, 97 (Tex. 1965).
390. The limited holding of Hoffman v. Red Owl Stores, Inc., 133 N. W.2d 267, 275 (Wis. 1965), is that a promissory estoppel claim is available to recover expenses made by the claimant in anticipation of receiving a franchise though there was no agreement on essential terms of the franchise.
391. See Scott, supra note 9, at 1645. Professor Scott begins with a descriptive claim based on his review of five years of cases in which the issue of indefiniteness is addressed. He finds that courts more often than not decline to enforce contracts with material uncertain terms.
392. Id. at 1644. Of eighty-nine cases found by Scott in which the issue is genuinely joined, courts decline to enforce the contract in fifty-five cases while they enforce the contract in thirty-four others.
393. Id. at 1652-53. Digging into the cases, Professor Scott finds an interesting pattern. Typically, when courts enforce an indefinite agreement, the parties have a good reason to leave a material term unspecified. These are complex transactions in which "[t]he parties wrote as complete an agreement as they could under the circumstances."
394. Id. at 1656. Courts do not enforce indefinite agreements if the parties leave a material term unresolved by oversight (which is rare) or if the parties deliberately chose an indefinite agreement over a "more explicit and verifiable alternative."
395. Id. at 1657.
396. See id. at 1688.
397. See id. ("In short, any enforcement rule (or standard) that conditions on unverifiable factors (such as high quality) will produce an [economically] inferior outcome to a nonenforcement rule that leaves the parties' room for reciprocity.").
398. Id. at 1661-63 (considering reciprocal fairness as a means of self-enforcement).
399. See id.
400. See id. at 1662 ("In particular, the social preferences for reciprocity and equality of treatment are the strongest candidates for developing a theory that expands the range of selfenforcing contracts to include isolated interactions between relative strangers.").
401. See id. at 1645.
402. See id. at 1687-88 (explaining how a policy of enforcing intentionally incomplete agreements may lead parties not to use an intentionally incomplete contract though it is preferable to the alternative fully specified contract).
403. See id. at 1690 ("The explicit, ex-ante nature of legal sanctions may... undermine the instinct to reciprocate.").
404. See GILMORE, supra note 177, at 15 (commenting on the expanding function of courts in contract disputes).
405. Many formal requirements for contract have the effect of making unenforceable agreements infected with particular types of uncertainty. For example, the statute of frauds, by requiring reliable written evidence of the existence of a contract, makes unenforceable an oral agreement of disputed existence.
406. See RESTATEMENT (SECOND) of CONTRACTS § 110 (1981). And the mirror image rule, by treating an apparent acceptance with new or different terms as a counter-offer, makes unenforceable an agreement that has uncertain terms because of discrepant communications.
407. See id. § 59.
408. See, e.g., Pac. Gas & Elec. Co v. G. W. Thomas Drayage & Rigging Co., 442 P.2d 641, 646 (Cal. 1968);
409. Hoffman v. Red Owl Stores, 133 N. W.2d 267, 274-77 (Wis. 1965).
410. See Scott, supra note 9, at 1692-93.
411. Some forms of autonomy theories do not disagree on the point. A germane counterexample is the liberal/libertarian forward-looking argument for formal rules that enable people to determine their contractual obligations.
412. See supra note 143 (explaining certain aspects of Fuller's autonomy-based contract theory that are forward-looking rather than backward-looking).
413. See, e.g., William C. Whitford, Relational Contracts and the New Formalism, 2004 WIS. L. REV. 631, 641-42.
414. See Robert E. Scott, Hoffman v. Red Owl Stores and the Myth of Precontractual Reliance, in CONTRACTS STORIES, supra note 33, at 87.
415. 133 N. W.2d 267, 275 (Wis. 1965).
416. Schwartz & Scott, supra note 8, at 544-45 (narrowing claim that contract law should do no more, and no less, than "facilitate the efforts of contracting parties to maximize the joint gains" to "economic entities that can be expected to understand how to make business contracts").
417. See supra notes 106-10 and accompanying text.
418. A commonplace example is an agreement retaining a professional to accomplish a general task, such as hiring a lawyer to defend a legal claim or hiring a doctor to treat an ailment. Successful contracts of this sort have three general characteristics: (1) the parties cannot specify the precise terms of performance ex ante, often because this depends on future events that are impossible or costly to predict; (2) the factors determning the desirable level of performance, and the actual quality of performance, are observable ex post by a court, which is likely to make accurate decisions; and (3) the court can accurately assess damages from inadequate performance.
419. See supra notes 106-10 and accompanying text.
420. See Robert D. Cooter & Daniel L. Rubinfeld, Economic Analysis of Legal Disputes and Their Resolution, 27 J. ECON. LITERATURE 1067, 1075-77 (1989).
421. See RESTATEMENT OF RESTITUTION § 45 cmt. e (1937) ("The rule stated in this Section does not apply if the parties have agreed that the payment is conditional upon the validity of the transferee's claim.").
422. See, e.g., Builders Contract Interiors, Inc. v. Hi-Lo Indus., Inc., 134 P.3d 795, 799 (N. M. Ct. App. 2006).
423. See supra notes 129-32 and accompanying text.
424. Hope's Architectural Prods., Inc. v. Lundy's Const., Inc., 781 F. Supp. 711, 714-17 (D. Kan. 1991) (explaining that stakes become winner-takes-all when parties in a contract dispute hold their positions to the brink).
425. 51 F.3d 76 (7th Cir. 1995).
426. Id. at 77.
427. Id. at 78.
428. Coalfield argued that it could have put men back to work immediately. See id. at 80. The court inferred that the stoppage entailed at least an eight-day delay based on a Coalfield fax.
429. See id.
430. It is not clear from the opinion how strongly Coalfield insisted upon this. On this potentially crucial point, the opinion says: "[H]e appeared to condition this promise [to pay the invoice] on Coalfield's signing an 'acceptance letter' that Maddox enclosed."
431. Id. at 78.
432. See id.
433. See id. at 78-79.
434. A few of the specific factual arguments for the decision are questionable. The opinion concludes "that the most plausible interpretation of Maddox's action is that it was seeking excuses for not paying Coalfield anything."
435. Id. at 80. Maddox's failure to sign and return the contract hardly suggests this. Given Maddox's acquiescence in Coalfield starting, no one could reasonably question that there was some sort of contract under which Maddox would pay for the work that was done. Nor does the letter "demanding" that Coalfield agree to pay liquidated damages support the conclusion. Maddox offered to pay for the work done less ten percent of the contract price.
436. Id. at 78. Liquidated damages were only $1000 per day.
437. Id. Had the job taken the eight weeks predicted by Coalfield, liquidated damages would have been $28, 000 on a $230, 000 contract.
438. See id. at 81-82.
439. Id. at 80.
440. See id. at 80-81 ("The principle of section 2-609['s]... applicability here is straightforward.");
441. U. C. C. § 2-609 (1977).
442. C. L. Maddox, 51 F.3d at 78.
443. See id. at 79.
444. Id.
445. See supra notes 185-96 and accompanying text (discussing the doctrine of indefiniteness).