Comparative Law and
Economics of Contracts
Cases slides Topic 5: Breach and
specific performance
Fernando Gomez
Universitat Pompeu Fabra, Barcelona
NYU School of Law
NYU School of Law, Fall term
Thain v. Anniesland Trade Centre
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Facts:
– Plaintiff, a consumer, buys from defendant, a trader of
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used cars, an automatic Renault 19 of 5-6 years, with over
80,000 miles for a price of £ 2,995. Car had been tested
and tried prior to purchase
Plaintiff declined to obtain (at extra cost) a warranty for 3
months
After 2 weeks of use, buyer notices a droning sound in car
Expert examines car and determines the cause was a
failing differential in the automatic gearbox
Buyer brings the car back to seller, cost of repair was too
high for value of car. Buyer and seller do not agree on
another car to replace
Problem continues and buyer needs to put the car off
Buyer sues
Thain v. Anniesland Trade Centre
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Issues:
– Whether the car delivered complied with the implied term
of satisfactory quality
– Fitness and durability that buyer may expect under the
contract when the good is used
Outcome:
– The Sheriff and the Sheriff Court (on Appeal) find for
defendant
Grounds:
– When the car was tested there was no defect, since it
would have been observed: fitness test was satisfied
– The failure was of the type that could happen any moment
for a car that age
– Given the observable and known characteristics of car,
and the price, an expectation about durability could not
reasonably be formed: the buyer assumed the risk of
failure and expensive repair
– Durability was a question of luck, not a contractual duty
of the seller
Thain v. Anniesland Trade Centre
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Analysis:
– What is the benchmark to assess whether the good is
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conforming to the contract, i. e., the buyer has not
received what she was entitled to under the contract?
What factors should be taken into account? Is price one of
these factors?
What is the basis to make an implicit allocation of risk of
unwanted and unforeseen contingency?
Should the average quality or property be used to
determine reasonable expectation about fitness or
durability?
How would the case had been resolved under current
European Law? (EU Consumer Sales Directive)
Thain v. Anniesland Trade Centre
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Article 5 EU Consumer Sales Directive: Time limits
– 1. The seller shall be held liable under Article 3 where the lack of
conformity becomes apparent within two years as from delivery of
the goods. If, under national legislation, the rights laid down in
Article 3(2) are subject to a limitation period, that period shall not
expire within a period of two years from the time of delivery
– 3. Unless proved otherwise, any lack of conformity which becomes
apparent within six months of delivery of the goods shall be
presumed to have existed at the time of delivery unless this
presumption is incompatible with the nature of the goods or the
nature of the lack of conformity
Thain v. Anniesland Trade Centre
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Article 7: Binding nature
– 1. Any contractual terms or agreements concluded with the seller
before the lack of conformity is brought to the seller's attention
which directly or indirectly waive or restrict the rights resulting
from this Directive shall, as provided for by national law, not be
binding on the consumer. Member States may provide that, in the
case of second-hand goods, the seller and consumer may agree
contractual terms or agreements which have a shorter time period
for the liability of the seller than that set down in Article 5(1).
Such period may not be less than one year
Justice Benjamin Cardozo
Jacob & Youngs v. Kent
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Facts:
– Plaintiff is hired by defendant to build a country house
– The contract specified that plumbing should be of
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“standard pipe of Reading manufacture”
Construction is finished and defendant occupies house
Several months later it is discovered that a large part of
the plumbing (of 2,000-2,500 feet installed, only 1,000 at
most are of Reading manufacture) does not conform with
contract
The nonconformity was not intentional, but a mistake of a
subcontractor
Installed pipe appears to be the same in quality, cost,
performance and value
Architect instructs plaintiff to re-install non conforming
pipe
Repair would imply demolition of large part of
construction, and plaintiff refuses
Plaintiff sues for unpaid portion of contract price
Jacob & Youngs v. Kent
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Issues:
– What is a breach and whether “substantial performance”
that is not “perfect performance” amounts to breach
– Test to determine what is due under contract
– Proportionality test between breach and remedy
– Cost of repair vs. diminution in value as adequate
remedies
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Outcome:
– Trial court directs verdict for defendant
– NY Court of appeals reverses, but with a vocal dissenting
opinion
Jacob & Youngs v. Kent
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Grounds:
– Breach was insignificant and involuntary
– Subjecting plaintiff to repair or cost of repair would be
disproportionate
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to the breach and the fault
to the benefit from awarding such a remedy
– Dissenting opinion argues that however trivial or minor an
agreed term may be, departure from it is a breach opening
full remedies for aggrieved parties and courts should not
interfere passing judgment on the importance and reasons
underlying the specified characteristics of foreseen
performance
Jacob & Youngs v. Kent
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Analysis
– What criteria should courts use to determine whether a
departure from agreement is breach of contract?
– Should customized and standardized transactions be
analyzed differently?
– Is the perspective of the debtor to be used as to what
should be literally performed and what should be “as good
as in the contract”?
– Should the perspective of what is more reasonable and
likely in the circumstances be used?
– Should an ex ante or an ex post perspective be used?
Jacob & Youngs v. Kent
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Analysis:
– Should
a proportionality test be used? Should
consequences of breach be proportional to breach and
fault?
– May courts police the reasons and preferences underlying
the idiosyncratic terms chosen by parties?
– Was there a risk of economic waste in the position by
defendant (the owner of building)?
– Was there the possibility of a windfall gain for house
owner?
– Should an ex post windfall for one party play a role in
finding breach or in providing some limit to the available
remedies?
BGH case on defective windows
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Facts:
– Plaintiff hires defendant to build and install aluminium
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windows and doors for the house
Plaintiff asked for maximum heat conservation, and
defendant suggests heat loss of 2.4-2.6, and plaintiff
agrees
Windows are delivered and installed, and received without
complaint
Later on, it is verified that heat loss is 3.8
Plaintiff sues defendant seeking specific performance: to
replace all windows and doors with others complying with
the agreed quality as to calorific insulation
Issues:
– Proportionality test in specific performance
– Difference –if any- between repairing defective performance
and performing again
BGH case on defective windows
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Outcome:
– Lower courts and BGH find for the plaintiff
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Grounds:
– The distinction between repairing and performing anew is
one of scope, not of nature
– Priority must be given to preserving the interest of the
buyer in obtaining what was due under the contract
– In fact, the bigger the amount of repair, the more at stake
is the interest of the buyer
– Only necessary action to correct defect and repair
nonconformity is required→ if complete new performance
is necessary, it is an adequate remedy
BGH case on defective windows
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Analysis:
– Was it technologically feasible to produce the intended and
agreed result? What if it had not been possible at the time
of contracting?
– Were there alternative remedies to specific performance?
Would some of them had been adequate substitutes of
specific performance? Was uncertainty as to them a
factor? Should it be considered as a relevant factor?
– Is the cost of repair to be weighed against other factors to
determine if it is proportional?
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Prospect or likelihood of eliminating defect
Benefits to the aggrieved party
Peevyhouse v. Garland
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Facts:
– Plaintiffs (the Peevyhouses) own a farm in Oklahoma
containing coal deposits and contract with the defendant
(Garland, a mining company) for mining operations in the
farm
– The contract provides for:
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A 5 years lease for strip-mining (surface) operations
A royalty for lessor based on coal produced
Remedial work on farm after the expiration of lease to
eliminate residue and restore farm to original condition
– After the lease expires, defendant refuses to perform
restoration
work,
alleging
that
disproportionate to the outcome
– According to expert evidence
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the
costs
Cost of restoration= $29,000
Total value of farm after restoration≈ $3,300
Diminution in value of farm without restoration= $300
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– Plaintiffs sue for damages for cost of (failed) performance
to the amount of $25,000
Peevyhouse v. Garland
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Issues:
– Proportionality test in specific performance
– Reasonability limit as to remedy for breach
– Cost of performance vs. diminution in value
– Tailoring remedies to variation in costs of performance
– Wilful breach as a factor in determining remedy
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Outcome:
– Jury at trial, directed by Judge to consider all evidence,
returns a verdict for $5,000
– Supreme Court of Oklahoma grants appeal and reduces
damages to $300
– Vocal dissenting opinion at the Supreme Court of
Oklahoma reverses and reduces
Peevyhouse v. Garland
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Grounds:
– Case should be distinguished from precedents, since it is
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not a construction, or an excavation contract
Performance of obligation is disproportionate to the benefit
thereof
In determining remedy, “relative economic benefit”
considerations should be used
Remedies should not be excessive and grossly oppressive
Dissenting opinion considers that full cost of performance
should have been granted, and specific performance as
well, if it had been requested
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Breach was wilful
Risk of high cost had been considered and accepted by
defendants
Denying requested remedy is rewriting the contract, and
Courts should refrain from doing that
Peevyhouse v. Garland
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Analysis:
– Why did the Peevyhouses did not request specific
performance?
– What are the positive and negative features of specific
performance as a remedy for breach?
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Positive side:
– Low informational requirements to apply remedy
– Contract party appears to be satisfied in its promissory
expectation
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Negative side:
– Performance may, in certain circumstances, be more costly than
the value for promissee: performance may be ex post inefficient
– Requires a court order and takes time: it is not realistic when
aggrieved party needs prompt performance
– For complex performances requires costly and difficult
supervision by court
– Performance by a party forced to comply with contract may be
perfunctory at best
Peevyhouse v. Garland
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Analysis:
– Are the dangers for effective negative consequences of
specific performance equal in all contract types?
– Is there an important difference between
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Contracts for the future transfer of existing goods
Contracts for the future production of goods or future
provision of services
– Is there a difference between mass marketed and unique
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goods?
Is there a difference between B2C and B2B?
What is the role of renegotiation?
What factors may affect the success of renegotiation by the
parties (party in default and aggrieved party) post breach
under the shadow of specific performance as a remedy?
Is asymmetric information relevant for ex post
renegotiation ?
Peevyhouse v. Garland
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Analysis:
– Is the proportionality test for specific performance related
to the diminution of value or actual damages limitation on
cost of completion damages (as in Jacob & Young Inc. v.
Kent)?
– Should we take into account symmetrically the risk of cost
increase and cost diminution?
– What is a wilful breach?
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Vountary breach
Malicious breach
Reckless breach
– Should we treat wilful breach differently from
unintentional breach?
– Should courts honor and enforce contract clauses
mandating specific performance as a remedy?
Spanish Mining Case
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Facts:
– Plaintiff owns a property and contracts with defendant so
that the latter will extract gravel and sand in exchange for
a price
– Contract contains a clause stipulating that after mining
operations end and the property is returned to owner,
defendant should “replace a layer of topsoil 30 centimeters
thick over the two hectares of the property, so as to ready
it for farming”
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Cost of such action, according to expert evidence, would be
higher than the price paid in the contract, and to the market
value of the property
– Defendant refuses to perform this obligation
– Plaintiff sues seeking specific performance plus additional
damages
Spanish Mining Case
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Issues:
– Proportionality test in remedies for breach
– Interpreting the contract:
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Not to produce obligations that are ex-post inefficient
According to what is customary
Outcome:
– First instance court, Appeals Court and Supreme Court
find for defendant
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Grounds:
– There was no breach, because the defendant was not
under the obligation to place arable soil over the entire
surface of the property
– It was customary not to place fresh soil, but simply spread
leftover and then plant poplars, not to farm the plot
– Cost of performance would have made the contract
uneconomic for the defendant and would have exceeded
the value of the property
Spanish Mining Case
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Analysis:
– Should we interpret the contracts as not producing ex-post
inefficient outcomes?
– Did the plaintiff truly wanted that refreshing the soil would
be carried out?
– Is the fact that the contract becomes uneconomic for one
of the parties a reason to excuse a given performance? Is it
a reason to transform specific performance into damages?
Some provisions on specific performance
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Article 106 CESL: Overview of buyer’s remedies
– 1. In the case of non-performance of an obligation by the seller,
the buyer may do any of the following:
 (a) require performance, which includes specific performance,
repair or replacement of the goods or digital content, under
Section 3 of this Chapter;
Some provisions on specific performance
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Article 110 CESL:Requiring performance of seller’s
obligations
– 1. The buyer is entitled to require performance of the seller’s
obligations.
– 2. The performance which may be required includes the
remedying free of charge of a performance which is not in
conformity with the contract.
– 3. Performance cannot be required where:
 (a) performance would be impossible or has become unlawful;
or
 (b) the burden or expense of performance would be
disproportionate to the benefit that the buyer would obtain.
Some provisions on specific performance
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III. – 3:301 DCFR: Enforcement of monetary obligations
– (1) The creditor is entitled to recover money payment of which is
due.
– (2) Where the creditor has not yet performed the reciprocal
obligation for which payment will be due and it is clear that the
debtor in the monetary obligation will be unwilling to receive
performance, the creditor may nonetheless proceed with
performance and may recover payment unless:
 (a) the creditor could have made a reasonable substitute
transaction without significant effort or expense; or
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(b) performance would be unreasonable in the circumstances.
Some provisions on specific performance
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III. – 3:302 DCFR: Enforcement of non-monetary obligations
– (1) The creditor is entitled to enforce specific performance of an
obligation other than one to pay money.
– (2) Specific performance includes the remedying free of charge of a
performance which is not in conformity with the terms regulating
the obligation.
– (3) Specific performance cannot, however, be enforced where:
 (a) performance would be unlawful or impossible;
 (b) performance would be unreasonably burdensome or
expensive; or
 (c) performance would be of such a personal character that it
would be unreasonable to enforce it.
– (4) The creditor loses the right to enforce specific performance if
performance is not requested within a reasonable time after the
creditor has become, or could reasonably be expected to have
become, aware of the non-performance.
– (5) The creditor cannot recover damages for loss or a stipulated
payment for non-performance to the extent that the creditor has
increased the loss or the amount of the payment by insisting
unreasonably on specific performance in circumstances where the
creditor could have made a reasonable substitute transaction
without significant effort or expense
Some provisions on specific performance
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Section 275 BGB: Exclusion of the duty of performance
– (1)A claim for performance is excluded to the extent that
performance is impossible for the obligor or for any other person.
– (2)The obligor may refuse performance to the extent that
performance requires expense and effort which, taking into
account the subject matter of the obligation and the requirements
of good faith, is grossly disproportionate to the interest in
performance of the obligee. When it is determined what efforts
may reasonably be required of the obligor, it must also be taken
into account whether he is responsible for the obstacle to
performance.
– (3)In addition, the obligor may refuse performance if he is to
render the performance in person and, when the obstacle to the
performance of the obligor is weighed against the interest of the
obligee in performance, performance cannot be reasonably
required of the obligor.
– (4)The rights of the obligee are governed by sections 280, 283 to
285, 311a and 326.
Some provisions on specific performance
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The Restatement (Second) of Contract doe s not generally
consider specific performance as a readily available remedy
It does, however, deal with the related problem of diminution
in value vs. cost of completion
§ 348 Restatement (Second) of Contract: Alternatives to
Loss in Value of Performance
– (1) If a breach delays the use of property and the loss in value to
the injured party is not proved with reasonable certainty, he may
recover damages based on the rental value of the property or on
interest on the value of the property.
– (2) If a breach results in defective or unfinished construction and
the loss in value to the injured party is not proved with sufficient
certainty, he may recover damages based on
 (a) the diminution in the market price of the property caused
by the breach, or
 (b) the reasonable cost of completing performance or of
remedying the defects if that cost is not clearly
disproportionate to the probable loss in value to him.