Contracts Quiz 2nd Semester 1995

20. Why might there not be an “increment of risk” created when a debtor repudiates in a unilateral contract such as a simple debt?

In a unilateral contract such as a simple debt, one side (the creditor) has already completely performed. Thus, the consideration centers on the due date of the debt. The risk that has been distributed is whether the debt will be repaid on time. If the debtor repudiates, there is not an alteration of the risk, because non-payment on the due date is the very risk that the contract has distributed to the creditor. Additionally, the liquidity of money makes it easy to obtain elsewhere in order to meet any commitments the creditor may have had on the due date. Thus, there would be no increment of risk associated with the debtor’s repudiation and no requirement to accelerate the due date.

21. Describe how the consideration doctrine requires that a party who is faced with anticipatory repudiation may wait no longer than a commercially reasonable time before bringing an action for damages.

When the repudiating party has made his repudiation final, the aggrieved party may treat the contract as being breached and immediately resort to any remedy allowed by the consideration. The repudiating party would then have the increment of risk brought about by changed market conditions assigned to him. However, the longer the aggrieved party waits before bringing an action, the more the incremental risks continue to add up. If the aggrieved party were allowed to wait longer than a commercially reasonable time, and simply stand on his supposed contractual “right” to performance, then he would be able to shift or assign more risk to the other side than the consideration of the contract would allow. That is to say that the contract’s consideration will not allow an aggrieved party to sit back and wait for the market to become more favorable while the repudiating party bears all the risk that the market might actually become less favorable. If an aggrieved party attempts to trade off his profits against the repudiating party’s damages in this way, then the consideration doctrine requires that the risk of market changes necessarily be shifted to the aggrieved party.

22. Give an example of how an aggrieved party might actually minimize his losses by continuing to perform after the other party has already made his repudiation final? Could an award of specific performance be useful in this type of case?

In some cases, the contract’s consideration may provide for the continuation of performance by the aggrieved party even though the other party has made his repudiation final. This is best exemplified by a service contract where the service provider’s completed performance would generate new business for the service provider that could not be generated by partial performance. For instance, a painter would miss an opportunity to get new clients if the art gallery who commissioned a painting from him were allowed to repudiate their obligation to buy and display the painting. In such a case, an objective reading of the contract might be said to include the risk of generating new business as central to the contract, especially if the contract price seemed low compared to the market. Thus, if the painter were not allowed to finish the painting, his damages would include any lost profits from clients who would have hired him if they had seen the finished work. An award of specific performance would probably be applicable to this case because the painter would probably be unable to sustain the burden of proof as to lost profits and mere reliance damages would be insufficient because they would only cover the cost of materials. Specific performance would allow the painter to reduce his losses, as well as keep the parties at the negotiating table to continue to negotiate in good faith and allow their consideration to evolve.

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