To: Contracts Students
From: Thomas D. Russell
Date: 2 January 1994
Attached is a copy of the
Posner opinion upon which I based Question One and two student answers to
Question Two of the 1994 Mid-term. Note that the students' answers
have been scanned and may contain OCR errors as a consequence.
34 F.3d 462
24 UCC Rep.Serv.2d 485
(Cite as: 34 F.3d 462)
CHONISTER OIL COMPANY, Plaintiff-Appellant,
UNOCAL REFINING AND MARKETING (UNION OIL COMPANY OF CALIFORNIA),
Defendant-Appellee.
No. 93-3940.
United States Court of Appeals,
Seventh Circuit.
Argued May 20, 1994.
Decided Sept. 1, 1994.
Seller of 25,000 barrels of gasoline brought
action against buyer for
breach of contract. Buyer counterclaimed alleging breach by
seller. The
United States District Court for the Central District of Illinois, Charles
H.
Evans, United States Magistrate Judge, held that seller had broken
contract,
awarded damages to buyer, and seller appealed. The Court of Appeals,
Posner,
Chief Judge, held that buyer of 25,000 barrels of gasoline suffered no
damage
as result of seller's failure to perform where, due to declining prices,
buyer
could have bought covering gasoline at price lower than contract
price; it
made no difference that instead of buying gasoline on open market, buyer
took
it from inventory.
Affirmed in part, reversed in part.
[1] CONTRACTS k321(1)
95k32l(1)
Liability for breach of contract is normally strict liability.
[2] SALES kl52
343kl52
Uniform Commercial Code (UCC) provision on assurances of performance come
into
play only when one party suspects that other may break contract and when
other's performance comes due. Ill.Rev.Stat.1991, ch. 26, P 2-609
comment.
[2] SALES kl84
343kl84
Uniform Commercial Code (UCC) provision on assurances of performance come
into
play only when one party suspects that other may break contract and when
other's performance comes due. Ill.Rev.Stat.1991, ch. 26, P 2-609
comment.
[3] DAMAGES k95
115k95
Point of award of damages, whether for breach of contract or for tort, is,
so
far as possible, to put victim where he would have been had breach or tort
not
taken place.
[3] DAMAGES klO3
115klO3
Point of award of damages, whether for breach of contract or for tort, is,
so
far as possible, to put victim where he would have been had breach or tort
not
taken place.
[3] DAMAGES kll7
115kl17
Point of award of damages, whether for breach of contract or for tort, is,
80
far as possible, to put victim where he would have been had breach or tort
not
taken place.
[4] SALES k418(7)
343k418(7)
Buyer of 25,000 barrels of gasoline suffered no damage as result of
seller's
failure to perform where, due to declining prices, buyer could have bought
covering gasoline at price lower than contract price; it made no
difference
that instead of buying gasoline on open market, buyer took it from
inventory.
Ill.Rev.Stat.1991, ch. 26, P 2-712.
Gordon W. Gates (argued), Londrigan, Potter &
Randle, Springfield, IL,
for plaintiff-appellant.
Richard E. Stites (argued)
Thomas B. Borton, and Kevin W. Brennan,
Livingston, Barger, Brandt & Schroeder,
Bloomington, IL, for .
Before POSNER, Chief Judge, and EASTERBROOK and
ROVNER, Circuit Judges.
POSNER, Chief Judge.
Chronister Oil Company
brought this diversity suit for breach
of
contract against Union Oil Company (Unocal), to which Chronister had
agreed to
sell 25,000 barrels of gasoline. Unocal counterclaimed, charging
that it was
Chronister, not Unocal, that had broken their contract. The case is
governed
by the Uniform Commercial Code as interpreted by the Illinois
courts; and the
magistrate judge, to whom the case was assigned for trial by consent of
the
parties, held after a bench trial that Chronister had broken the contract,
and
he awarded damages of $26,000 to Unocal, precipitating this appeal.
The contract, made February 9, 1990, provided
that Chronister, an oil
trader, would deliver the 25,000 barrels to Colonial
Pipeline *463 (for
shipment to Unocal) on the "front seventh cycle," and fixed a
price of 60.4
cents a gallon. The term "front cycle" is pipeline for the
first half of what
is normally a ten-day period for shipping a particular grade of product in
a
petroleum pipeline. The cycles begin on January 1, so
the "front seventh
cycle" would be approximately the first five days of
March--apparently no
effort is made to pin down the dates of the cycles and half cycles more
precisely. To fulfill the contract, Chronister on March
1, 1990, made a
contract with another oil trader, Enron, which in turn made a contract
with a
supplier, Crown Petroleum, to deliver
the 25,000 barrels to Colonial
Pipeline's pipeline at Pasadena, Texas
for shipment east and north to
terminals from which Unocal would deliver the gasoline to its
dealers. Enron
decided to have the gasoline delivered to Colonial's pipeline on March
5. But
when the day arrived and Colonial tested the gasoline preparatory to
taking it
into its pipeline, it found that the gasoline contained too much water,
and
refused to take it. Unocal was informed on the morning of March
6 (which
apparently was still within the front seventh cycle) and immediately
called
Chronister, demanding (at least implicitly, as we'll explain) assurances
that
Chronister would comply with the contract. Chronister
got in touch with
Enron, which agreed to supply another 25,000 barrels, but for shipment on
the
back seventh cycle, that is, later in March, or on the eighth
cycle, later
still. Unocal wasn't interested, and within
hours, while Chronister was
trying to solve the problem, Unocal took the precaution of diverting
25,000
barrels of gasoline that it already owned and that were in the pipeline
in
transit to a storage facility to Baton Rouge to its distribution terminals
farther up the line--a measure Unocal describes as "provisional
covern--in
effect supplying the 25,000 barrel
deficit from inventory, but giving
Chronister until the following day (7) to come up with
conforming
product.
Yet later the same day (March 6), Chronister,
despite Unocal's adamant
refusal to accept anything but front seventh cycle gasoline, accepted
Enron's
offer of substitute performance on the back seventh cycle and again
offered
this to Unocal. Again Unocal insisted that it would take only front
seventh
cycle product--either the Crown Petroleum gasoline drained of its water or
other product that could be injected into the pipeline in time. With
Unocal
unwilling to accept the 25,000 barrels
on the back seventh cycle that
Chronister had perhaps precipitately agreed to take from Enron,
Chronister
sold this gasoline to another company, Aectra Refining,
at 55.3 cents a
gallon. Claiming that by refusing to accept the substitute performance
Unocal
had broken the contract, Chronister filed this suit for damages based on
the
difference between the contract price and the lower price at which it sold
the
25,000 barrels to Aectra. Unocal counterclaimed,
contending that it was
Chronister that had broken the contract and seeking damages equal to the
difference between the contract price and the average cost of its
inventory
(63.14 cents), from which it had made up the loss of the 25,000
barrels
promised by Chronister. The
district court agreed with Unocal that
Chronister, not Unocal, had broken the contract, and it awarded damages to
Unocal on its counterclaim.
[1] Chronister's appeal makes no reference to
Unocal's alleged breach or
to any damages sustained by Chronister as a result of that
breach; we may
assume that this claim has been abandoned and that all Chronister wants us
to
decide is that it did not break the contract or that if it
did, Unocal
sustained no damages. We agree with the second point but not the
first. The
contract specified delivery on the front seventh cycle and Chronister
could
not deliver then because of the water in the gasoline. It
argues that if
Unocal hadn't pulled the plug on it at 10:30 a.m. on March 6 it would have
found a way to meet its contractual obligations, whether by draining
the
excess water from Crown's gasoline, or by delivering gasoline to entry
points
to the pipeline closer to Unocal's terminals, or even by buying gasoline
from
Unocal! But Unocal informed Chronister that Unocal's action in
"covering" (as
Unocal calls it, erroneously as we shall see) its 1088 out of inventory
was
provisional until March 7 and would be rescinded if Chronister could
deliver
25,000 barrels of gasoline to the pipeline by then; and thus *464
forced to
put up or shut up, Chronister shut up. Because oil companies
that market
their product through retail dealers, like Unocal, try to minimize the
amount
of inventory that they must hold against possible supply interruptions yet
dare not find themselves unable to supply their dealers, a failure to
deliver
gasoline to such companies in timely fashion cannot be thought an
immaterial
breach. The fact that Chronister was not responsible for the
water in the
gasoline is of no significance. Liability for breach of contract is
normally
and here strict liability.
Chronister argues that if Unocal wanted
assurances of performance it had
to ask for them in writing, UCC s 2-609, and it did not. The only
assurances
sought were oral, and indeed implicit--Unocal informing
Chronister of the
failure of delivery and giving it a day to solve with the problem, with
the
clear implication that if Chronister could not solve it within that time
it
would be in breach and Unocal would terminate. This was
"demand" enough, but
section 2-609 states that a party
may in writing demand" assurances.
Although a number of cases, including Illinois cases and Seventh Circuit
cases
interpreting Illinois law, waive the requirement when the party on whom
the
demand is made knows that it has been made, e.g., Toppert v. Bunge Corp.,
60
Ill.App.3d 607, 18 Ill.Dec. 171, 377 N.E.2d 324, 328-29 (1978); AMF,
Inc. v.
McDonald's Corp., 536 F.2d 1167, 1170-71 (7th
Cir.1976) (applying Illinois
law); Diskmakers, Inc. v. DeWitt Equipment Corp., 555 F.2d 1177,
1179-80 (3d
Cir.1977), the most recent Illinois cases insist on strict compliance with
the
terms of the section. Bodine Sewer, Inc. v. Eastern Illinois Precast,
Inc.,
143 Ill.App.3d 920, 97 Ill.Dec. 898, 905, 493 N.E.2d 705, 712 (1986);
Canteen
Corp. v. Former Foods, Inc., 238 Ill.App.3d 167, 179 Ill.Dec. 342, 352,
606
N.E.2d 174, 184 (1992).
[2] But all this is irrelevant. The UCC's
provision on assurances comes
into play only when one party suspects that the other may break the
contract
when the other's performance comes due. See UCC s 2-609, official
comment 1;
Central Oil Co. v. M/V Lamma-Forest, 821 F.2d 48, 51 (1st Cir.1987);
James J.
White & Robert S. Summers, Uniform Commercial Code s 6-2, pp. 208-15
(2d ed.
1980). If back in February, well before Chronister was due under the
contract
to deliver the 25,000 barrels to Colonial Pipeline for shipment to Unocal,
Unocal had learned things that made it reasonably doubt that Chronister
would
fulfill its obligations under the contract, it could have demanded
adequate
assurances of timely performance and if it failed to receive them could
then
have taken appropriate measures of self-help, such as terminating the
contract
and obtaining substitute performance elsewhere. By 10:30 a.m. on
March 6, or
on the latest by the end of that day or the beginning of the next
(which
probably fell outside the front seventh cycle), Unocal knew that
Chronister
had broken the contract; and by then assurances were a moot
point because
Chronister had broken the contract, being utterly unable to make
delivery
before the back seventh cycle. This is not a case in
which, fearing an
imminent breach, a party terminates the
contract without satisfying the
requirements of the UCC's provision on assurances, and thus
prematurely. By
the time Unocal gave up on Chronister, on March 7, and made its
"provisional
cover" final, the contract had already been terminated by
Chronister's breach,
an accomplished rather than anticipated breach.
[3][4] We move to the issue of
damages. The point of an award of
damages, whether it is for a breach of contract or for a tort, is, so far
as
possible, to put the victim where he would have been had- the breach or
tort
not taken place. Nicolet Instrument Corp. v. Lindquist & Vennum,
34 F.3d 453,
457 (7th Cir.1994). Unocal had, back in February, promised to pay
Chronister
60.4 cents a gallon. By the first week of March the price of
gasoline for
delivery to the Colonial Pipeline had fallen. On March 6,
Chronister sold
25,000 barrels to Aectra at 55.3 cents a gallon, and it is not argued that
Chronister could have gotten a higher price. Uncontradicted evidence
revealed
that there had been a similar sale at a similar price on March 2.
Had Unocal
gone out in the market and covered by buying 25,000 barrels on March 6 or
7 it
would have paid somewhere in the neighborhood of 55 cents a gallon and
thus
would have saved 5 cents a gallon as a result of Chronister's
breach. It
makes no difference that instead *465 of buying the gasoline on the open
market it took it from inventory. a matter
of fact, because of an
impending change in pressure by Colonial Pipeline that would make Unocal's
inventory, stored mainly in a 300,000 barrel storage facility in Baton
Rouge,
shortly unshippable, Unocal had a
strong interest in drawing down its
inventory. The breach was a godsend. At argument Unocal's
counsel candidly
acknowledged that Unocal was made better off as a result of the breach and
that this was evident not only by the time of trial, and hence early
enough to
figure in the calculation of damages, Rea v. Ford Motor Co., 560 F.2d 554,
557
(3d Cir.1977), but within fifteen days after Chronister's breach.
Nevertheless, argues Unocal, it was entitled by
UCC s 2-712 to cover by
obtaining a substitute for the lost 25,000 barrels, even from itself, and
to
obtain as damages the difference between the cover price, which it deems
to be
63.14 cents a gallon, the average cost of the inventory from which it
obtained
the substitute supply of gasoline, and the contract price of 60.4
cents. This
is a misreading of section 2-712, as the only two Illinois cases pertinent
to
the issue hold. Draper v. Minneapolis-Moline, Inc., 100 Ill.App.2d
324, 241
N.E.2d 342, 345 (1968); Rash Ranco Corp. v. B.L.B. Inc., 762
F.Supp. 1339,
1341 (N.D.Ill.l991). Section 2-712 defines cover as purchasing
or making a
contract to purchase a substitute good. Unocal did not purchase any
gasoline
to take the place of the lost 25,000 barrels. It decided not
to purchase a
substitute good but instead to use a good that it already
owned. You can't
"purchase," whether in ordinary language or UCC speak (see s
1-201(32)), what
you already own. The purpose of the cover provision is not to allow
buyers to
obtain damages when they have not been hurt, but to provide a market
measure
of the hurt. Taking a good out of your inventory and selling
it is not a
purchase in a market. There is no purchase price to use as a ready
index of
the harm that the buyer incurred by the seller's breach.
Two cases from other jurisdictions have
shoehorned this kind of "self-
cover" into section 2-712. Cives Corp. v. Callier Steel
Pipe & Tube, Inc.,
482 A.2d 852, 858 (Me.1984); Dura-Wood
Treating Co. v. Century Forest
Industries, Inc., 675 F.2d 745, 753-54 (5th Cir.1982). They had no
need to do
this violence to the text. Section 2-712 is not the only buyer's
remedy that
the UCC authorizes. The very next section allows the buyer to obtain
damages
measured by the difference between market price and contract
price. If a
reasonable response for the buyer to the breach would be to make the
product
itself, then the difference between the market price of that product and
the
contract price would be an appropriate measure of the harm from the
breach.
Neibert v. Schwenn Agri-Production Corp., 219 Ill.App.3d
188, 161 Ill.Dec.
841, 845, 579 N.E.2d 389, 393 (1991); URSA Farmers Cooperative Co.
v. Trent,
58 Ill.App.3d 930, 16 Ill.Dec. 348, 350-51, 374 N.E.2d 1123, 1125-26
(1978).
That is what Cives and Dura-Wood hold; they merely cite the wrong
section.
Unocal's response in diverting
gasoline in transit to storage was
reasonable; the only question, upon which its damages if any turn,
is what
that cost it. What it had paid for the gasoline--even less, the average
price
that it had paid for all the gasoline that it had not yet sold (the
average
cost of its inventory, in other words)--was not the cost of
diverting the
gasoline from storage to sale. At least it was not cost in a sense
relative
to damages. The object of an award of damages, as we have already
noted, is
to put the victim in the same place that he would have been in had the
breach
or other wrong of which he complains not occurred. It is to
compensate him
for a loss that he would have avoided had the violation not
occurred. The
concept of loss that underlies the computation of legal damages thus
resembles
the economist's concept of "opportunity cost": the
opportunity one gives up
by engaging in some activity is the cost of that activity, Afram Export
Corp.
v. Metallurgiki Halyps, S.A., 772 F.2d 1358, 1369-70 (7th Cir.1985).
We must
ask what Unocal gave up as a consequence of the breach, and whether it was
something of value.
By diverting the gasoline
in order to protect itself against
Chronister's breach of contract, Unocal gave up the opportunity either
*466 to
sell the gasoline on the market (in order to lighten its inventory), which
we
know would have yielded it substantially less than the average cost of its
inventory because the market price was much lower than that cost, or to
have a
larger--an unnecessarily and, it would soon prove, unusably
larger--inventory.
Neither course of action would have yielded value equal to Unocal's
average
cost of inventory or equal to the contract price. The first point
shows that
the average cost of inventory was the wrong figure to use in
estimating
Unocal's damages, and the second point shows that it had no
damages. The
25,000 barrels it diverted to its dealers cost it less--was worth
less--than
the 25,000 barrels that Chronister failed to deliver to it as
promised.
Sellers usually break their contracts in a rising market, where they can
get
more for the product by selling to someone other than the buyer with whom
they
signed the contract. Here a seller in a declining market broke
a contract
that he desperately wanted to perform, conferring a windfall gain on
the
buyer--which the latter would like as it were to double with the help of
the
courts.
The judgment of the district court is affirmed
insofar as it determined
that Chronister broke its contract with Unocal. But it
is reversed with
respect to damages and remanded with directions to enter judgment for
Unocal
for nominal damages (to which for reasons we do not understand every
victim of
a breach of contract, unlike a tort victim, is entitled,
Stromberger v. 3M
Co., 990 F.2d 974, 976 (7th Cir.1993)) only.
AFFIRMED IN PART, REVERSED IN PART.
END OF DOCUMENT
Exam # 19 --
Question #2
This is (if it is at all) a contract for
services, so common law will be applied.
It must be determined if a legally enforceable
contract has been formed. This is a
contract between persons involved in an affair. This may be a purely
meretricious
relationship. If it is, the court will most likely not enforce it. This is
indeed a dismal
swamp, but the courts may feel compelled to enter it. If the
promise/contract was based
only on consideration of sex, the court will probably stay out of it
(Marvin v. Marvin).
Is the K w/in the statute of frauds. It is
(almost) certain that Apple's daughter cannot
graduate from college in a year. If she could, no writing is required.
However, if writing is
required, the taped phone call transcript will be insufficient There is no
signature and
Lincoln only said he would continue to send $. This is not certain
enough-there is not $
amt. specified nor a time limit for performance stated by either
party 131 restatement requires these for certainty.
The contract is unenforceable under the S of F.
Is the contract enforceable under
offer, acceptance, consideration. Lincoln's promise may be viewed as a
donative gift unless
consideration was given by both parties. No tangible benefit need move
promisor. The
most obvious consideration is 74 Apple's forbearance to file a claim
that she thought
would be determined valid. Even if she had no defensible claim, her belief
that it was valid
would be consideration However, the promise to pay may have been made not
in
consideration of Apple's forbearance. This is a question of fact to be
decided. The
offer/promise may have been made in consideration of daughter graduating
from college
or Apple furthering herself by finding a job. There's no evidence of this,
however, so this
promise appears to be only a donative gift.
In the situation that a contract is unenforceable
because of an insufficient writing or
incomplete formation, the courts may enforce it under 90 or
139 (promissory estoppel) if
Apple part performed in reliance of the contract. If the mother elected to
send daughter to
a more expensive school on reliance of the 4K/month this may make the
contract
enforceable. This is, again, a question of fact. If true, this would be
reasonable reliance
induced by Lincoln's promise. Apple's buying a new car and house would not
be
reasonable if the promise was made in consideration of daughter's college.
If the contract is thus deemed enforceable, what
remedies are available? Apple seeks
EI-$256,000 This is also specific performance The court may choose to
award this
because to not do so may require the daughter to change colleges, move
back home, etc
The mother has expected her daughter to be able
to graduate from this college
However the court may find that because there was no bargain it will only
award reliance
damages This would probably exclude 4 yrs tuition at college + room/board
+ college
expenses but may not include the amount that $256,000 exceeds this amount.
There is no evidence of value conferred on
Lincoln in reliance of K, so restitution will
not be awarded. The court will probably give reliance damages because the
K was made in
consideration (if consideration at all) of daughter going to school. If
consideration was
forbearance of filing a claim, EI may be awarded. These are (again) all
questions of fact to
be determined at trial.
Exam #137
Question #2
The contract must be decided under the common
law. The payments by Lincoln are
not in return for goods, but instead to compensate for either past
services or to prevent a
lawsuit primarily--Bonebreak.
The contract looks like it may be within the
statute of frauds because it is oral and will
take over a year to complete. However, it is not for a set term of years
and could
terminate w/in a year if Apple and her daughter die. Further it may be
that the taped
conversation is a writing It would serve to prevent perjury but would
likely not caution or
channel the parties b/c it was not known that it would be used as legally
binding or to
show enforceable commitment
Under ROC 71 bargain theory of contract there
would be a contract under Apple for
bearing a legal right to sue in return for payment (specifically outlined
in ROC 71). This is
however debated and written (phone) contract would only support promise to
send money
which lacks consideration This promise alone though may be able to attain
for Apple
reliance damages for money committed to daughter's education under ROC 90
Damages
for Apple's own sustenance would, however be reliant upon her reasonable
action in
advancement of finding a job
The court may be compelled to intervene under the
stranglehold policy w/daughter's
future (analogous to doctor kicked out of AMA) hanging in the balance.
But, if Ohio is
like Illinois, it may not wish to enforce the contract because it arose
out of a nonmarital
relationship w/sexual elements-Hewitt. This decision would be based upon
public policy
goal of aiding marriages as a preferred institution. However, this
contract appears to be
formed post break up in 1990 making the parties look more like autonomous
traders than
family contractors.
Apple will rely on the figure of $ 100,000
payment in 1st 3 years as establishing that
there was a contract under the objective theory The lower $ 17,000 figure
asserted by
Lincoln, if accurate, would be more indicative of there being only a
gratuity for which
there is no obligation to continue payments As in Kersey, Lincoln can
claim that his
intentions were only to provide the best he could for Apple and her
daughter will further
claiming that his emotional gratification was not consideration because it
was uncertain in
market valuation.
If Apple can establish the existence of a written
gift she can rely on ROC 332 to
establish that it is irrevocable. Otherwise, a contract is shown by the
existence of a price
term, offer and acceptance, reliance, and consideration.
Apple should seek under ROC 90 and alternatively
under ROC 139 partial
performance (acts and forbearance to take out of SOF) reliance damages for
her expenses
incurred due to security in payments to herself and for daughter's
education Further, Apple
may seek expectation amounting to totaling unpaid monthly payments and
future payment
($256,000) Even if Apple argues for reliance based damages there is a
possibility she may
receive expectation because limiting damages is only discretionary.
Restitution would be
unwise to seek b/c would have to give back all $'s and gave none to
Lincoln. Are no
liquidated damages. Reliance may also be more likely b/c courts tend to
award it in
personal/nonmerchant contracts.
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