Specific Performance

Prof. Merges

Contracts – April 4, 2011

Topics

• Personal service K’s

• Klein v. Pepsico

• Walgreen v. Sara Creek

Lumley v. Wagner

• “The case of the prima donna diva”

Royal Italian Opera

Why not a direct or “affirmative” injunction?

• What’s wrong with saying to Johanna Wagner, “You – sing for Lumley”?

Why not a direct or “affirmative” injunction?

• What’s wrong with saying to Johanna Wagner, “You – sing for Lumley”?

Difficult to assess quality of performance?

Forced continuation of personal employment relations

“involuntary servitude”

Injunctions: the “negative prohibition” issue

• Lumley v. Wagner: what form did the injunction take?

Injunctions: the “negative prohibition” issue

• Lumley v. Wagner: what form did the injunction take?

• Why might this “possibly cause her to fulfill her engagement”?

Applies to opera singers – what about bakers, oil change

mechanics, etc.?

Applies to opera singers – what about bakers, oil change

mechanics, etc.?

• Must be “no adequate remedy at law” to merit specific performance

• In employment, means employee must have “unique or special talents”

entertainers, athletes, etc., most common; but look at entire situation

Klein v. Pepsico, Inc.

Klein v. Pepsico

• Facts

• Procedural history

Klein

• What was “the deal”?

Klein

• What was “the deal”?

• Where do UJS/Janas figure in this deal?

UJS/Janas

Klein

K Formation issue: review

• What was Pepsico’s argument?

• What did the disctrict court find?

Why?

Specific performance

• Who was seeking it?

• Why?

Specific performance

• Who was seeking it?

• Why?

• What time frame would be used for calculating damages – may be a hint …

“Uniqueness”

• What is Klein’s argument?

“Uniqueness”

• What is Klein’s argument?

• What is Pepsico’s argument?

Court opinion

• What does the court decide?

Court opinion

• What does the court decide?

• Why?

Evidence of an active market for G-II’sEvidence that Klein wanted to resell planeEvidence that Klein had gotten into the

“plane broker” business himself

The 1940s car cases and uniqueness

1948 Ford Sedan

2-716. Specific Performance; Buyer's Right To Replevin

(1) Specific performance may be decreed if the goods are unique or in other proper circumstances. In a contract other than a consumer contract, specific performance may be decreed if the parties have agreed to that remedy. However, even if the parties agree to specific performance, specific performance may not be decreed if the breaching party's sole remaining contractual obligation is the payment of money.

2-716, cont’d(2) The decree for specific performance may

include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just.

(3) The buyer has a right of replevin or similar remedy for goods identified to the contract if after reasonable effort the buyer is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing or if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered.

What is “cover”?

• Recall Austin Instrument v. Loral Corp.

What is “cover”?

• Recall Austin Instrument v. Loral Corp.

• Purchase of substitute goods on the open or “spot” market

Damages:

§ 2-712. "Cover"; Buyer's Procurement of Substitute

Goods.

(1) After a breach within the preceding section the buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

(2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (Section 2-715), but less expenses saved in consequence of the seller's breach.

(3) Failure of the buyer to effect cover within this section does not bar him from any other remedy.

2-716, Comment 2

• Uniqueness should be determined in light of the total circumstances surrounding the contract and is not limited to goods identified when the contract is formed. The typical specific performance situation today involves an output or requirements contract rather than a contract for the sale of an heirloom or priceless work of art. A buyer's inability to cover is evidence of "other proper circumstances."

Walgreen v. Sara Creek Property Corp.

• Facts

• History

Trial court holding

Trial court holding

• Issued an injunction in favor of Walgreen

• Terms?

Walgreen

• What is Sara Creek’s argument?

Walgreen

•What is Sara Creek’s argument?

Efficient breach

According to Sara Creek . . .

• Damages are the standard remedy

• They can readily be calculated here

• If so, Walgreen can be fully compensated without need of an injunction

How to measure Walgreen’s damages?

How to measure Walgreen’s damages?

• Either: present value of lost future profits, or

• Diminution of value of leasehold

What is Sara Creek’s argument II

What is Sara Creek’s argument II

• Efficient breach in action!

• Benefits, according to Posner

• P. 603: “Society will be better off . . .”

Efficient breach story here

• Under what circumstances would Sara Creek’s breach be “efficient”?

PARETO, Vilfredo Federigo Samaso 1848-1923

Efficient breach story here

• Under what circumstances would Sara Creek’s breach be “efficient”?

“It’s a win-win (or at least, win-no lose) deal!”

What is the other side of the story? Pro-SP Argument

• P. 603: “shifts the burden of determining the cost of defendant’s conduct onto the parties”

• “the price of dissolving the injunction”

• Bargaining over entitlements

Pro-SP II

• “battle of experts” (in court), VS.

• Direct negotiations

• Less costly, again

Arguments in favor of specific performance

Saul Levmore, U of Chicago

Transaction costs

• Insiders set prices faster and cheaper

• More accurate – “market” vs. government price-setting

Why IP rights are property rights

Merges, “Of Coase, Property Rules, and Intellectual

Property Rights,” 94 Col. L. Rev. 2655 (1994)

Downside of injunctions

• High bargaining costs

• Bilateral monopoly

• Negotiations can dissipate the gains from making a deal

Sara Creek holding

• Process of determining damages over the next 10 years would have been “fraught with uncertainty”

• So: no adequate legal remedy; injunction (SP) upheld here