23. Why does the UCC provide the alternative for the repudiating party to retract his repudiation, as well as allowing the aggrieved party to wait a commercially reasonable time before resorting to an action for breach?
In keeping with one of the primary regulatory goals of the UCC, the flexibility afforded by these options allow parties faced with repudiation the margin they need to give the consideration a chance to evolve and contain the transaction rather than breaking. If all repudiations were treated as final, and all aggrieved parties were required to bring an action for damages immediately, then repudiations would be catastrophic to the consideration. Since the best meaning of the parties’ consideration can be found when they reach it on their own, the UCC provides a powerful regulatory framework that allows contract law to survive the pressures of the not uncommon commercial obstacle of repudiation.
24. Exactly why might a retail auto dealer be allowed to retain a reasonable portion of a down payment on a car when the buyer decides to breach his sales contract and return the car which is subsequently sold to another buyer?
A retail auto dealer may retain the down payment to the extent that an objective view of the contract’s consideration allows it. The nature of retail car sales is such that when a sale is repudiated, the dealer loses more than just his time and effort; he loses a sale. The amount of return he gets on his investment of resources is directly related to the volume of sales he can generate. The risk
s associated with generating sales volume are those that he attempts to redistribute though his sales contracts. One way that the car dealer manages that risk is to provide for irrevocable down payments on the car. To the extent that this down payment is in keeping with commercially reasonable lost profits and incidental damages, the dealer may keep it as liquidated damages, even though the actual car is resold.
25. During negotiations for a building construction installment contract a general contractor demands that a clause requiring immediate acceleration of all future installment payments be included as liquidated damages in case of the client’s breach. What is the trouble with this clause? Why might the client be inclined to leave it in the contract anyway?
The general contractor is attempting to create a liquidated damages clause that seems to be clearly outside of an objective view of the parties’ consideration. If this term were to be given effect, the client would have to pay the full contract price for each installment, even though the work would not be done. To the extent that this exceeded the cost of the materials and labor that the contractor had expended to date, these damages might constitute a windfall to the general contractor. Even if the general contractor was a “paper” contractor, and could be viewed as a lost volume party, anything in excess of his anticipated profit would surely represent a windfall. However, since this clause is such a large power grab, and seems to be outside the parties’ objectively understood consideration, it is unlikely that a court would ever enforce it. In fact, if the client eventually wanted to bail, it could be used as evidence of bad faith on the part of the general contractor which might operate to reduce the liability of the client even further. Additionally, since it is likely to be inoperative anyway, the client might choose not to fight it during negotiations in order to gain a more advantageous position on other terms. Of course, the client always runs the risk that this strategy will blow up in his face.
26. Why is a life insurance contract not assignable to another beneficiary?
This can be answered directly by looking at the risks distributed by a life insurance contract. The contract between the testator and the life insurance company distributes the risks associated with the testator’s decision to benefit a particular person. The identity of the beneficiary is the sole reason for the contract. His identity is part of the consideration. Thus, it would break the consideration of the contract between the testator and the beneficiary for the beneficiary to be able to assign those rights to another person.
27. How might unregulated assignment of contractual rights violate the consideration doctrine?
Objectively, a buyer or seller in an ordinary commercial setting can not be said to care whether he performs for the original party or for someone else, as long as it does not increase his risks beyond the parties’ consideration. If an assignor who had not completed performance were allowed to assign his contractual interests to assignee who was unable to perform, that would shift the remaining contractual risks to the other party, and the consideration would break. By disallowing assignments that increase the corpus of risk, contract law can promote alienability of contract rights, while still being faithful to the consideration doctrine.
28. Why is it imperative that rights for damages upon breach of a contract for the sale of goods always be assignable if the assignor has completed his performance?
If the assignor has completed his performance, then there can be no increase in the corpus of risk by assignment, because the assignee has no remaining obligation to perform. Thus, the contract rights at this stage are equivalent to money, because the non-breaching party is entitled have the breaching party bear his risks monetarily as damages. Since the health of a free market economy is directly tied to the alienability of its money, so then is the law of contract which serves that free-market economy dependent on the alienability of contract rights.
29. Explain how a life insurance beneficiary’s contractual interest in the contract between the testator and the life insurance company is restitutionary in nature.
The consideration of a contract between the testator and the life insurance company involves the distribution of the risk that the testator could better have provided for the inheritance of the beneficiary by spending his money on some other means other than this life insurance company. The testator’s obligation is to pay the life insurance company money. The life insurance company’s obligation is to pay the benefit of the policy to the beneficiary upon the testator’s death. Thus, money paid to the life insurance company which is not used for the purpose of ensuring the payment of the benefit to the beneficiary represents an unjust enrichment of the life insurance company at the beneficiary’s expense, even though the beneficiary did not pay the policy premiums.
Reprinted with permission by Roger Martin, Student, Univ. of San Diego School of Law, 2nd semester Contracts 1995.