Academic journal article Washington and Lee Law Review

Reckoning Contract Damages: Valuation of the Contract as an Asset

Academic journal article Washington and Lee Law Review

Reckoning Contract Damages: Valuation of the Contract as an Asset

Article excerpt

Table of Contents

I. Introduction.................302

II. The Seller's Remedy for Breach..................307

III. Anticipatory Repudiation..................315

IV. Long-Term Contracts..................325

A. Take-or-Pay..................328

1. Manchester Pipeline Corp. v. Peoples Natural Gas Co.................329

2. Prenalta Corp. v. Colorado Interstate Gas Co. .................... 332

3. Roye Realty & Developing, Inc. v. Arkla, Inc..................334

4. Colorado Interstate Gas Co. v. Chemco, Inc..................336

5. Lost Volume..................337

6. Summing Up..................339

B. Tractebel..................341

C. Lake River Corp. v. Carborundum Co..................346

D. Take-or-Pay in England..................348

E. Summing Up..................349

F. Why Damages at Time of Breach?..................350

V. International Investment Arbitration..................352

VI. Concluding Remarks..................362

I. Introduction

When a contract is breached the law typically provides some version of the aphorism that the non-breaching party should be made whole. The Uniform Commercial Code (UCC) provides that "[t]he remedies provided by this Act shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed."1 The English version, going back to Robinson v Harman,2 is "that where a party sustains a loss by reason of breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed."3 Similarly, under Article 74 of the United Nations Convention on Contracts for the International Sale of Goods (CISG), "damages are based on the principle that damages should provide the injured party with the benefit of the bargain, including expectation and reliance damages."4 International arbitrations often cite the so-called Chorzów Factory5 rule: "reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed."6 However, application of the aphorism has proven more problematic. In this paper, I propose a general principle that should guide application-the contract is an asset and the problem is one of valuation of that asset at the time of the breach.7 This provides, I argue, a framework that will help clear up some conceptual problems in damage assessment. In particular, it will integrate three concepts-cover, lost profits, and mitigation- under the asset valuation umbrella.

Consider three patterns in which a contract might be breached. In the first, the breach occurs at the time of performance. That is the simplest case. The second is an anticipatory repudiation in which the breach occurs before the time for performance, and the litigation takes place after the date of performance. Finally, the third involves a breach of a long-term contract, the performance of which was to continue past the date the litigation would be resolved. At what point should damages be reckoned? I will argue that at the moment of breach or repudiation, the damages would be the change in the value of the contract (the asset). That implies that when assessing damages, to the extent possible, post-breach facts should be ignored.

Let us begin with the simple case. Suppose that Sam Smith agrees to sell 1,000 shares of Widgetco stock to Betsy Brown for delivery on June 1 at $10 per share. On June 1, the market price is $16 and Smith reneges. The case is decided on December 1 (hypothetical courts can work very fast) at which time the price has fallen to $9. Brown sues for $6,000, the contract-market differential at the date of breach. Smith counters, claiming that he had done Brown a favor and that there should be no damages; the $6,000 would be a windfall for Brown. …

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