Requirements and Output
Contracts
Contracts – Professor Merges
Jan. 25, 2011
Eastern Air Lines v. Gulf
• Procedural History
Eastern Air Lines
• Key Facts
What was the impetus for this
lawsuit?
What was the impetus for this
lawsuit?
• Gulf demanded a price increase
• Why?
– The price of crude oil to Gulf had
increased dramatically
How much was Gulf losing?
• Was Gulf refining its own (domestic)
crude oil, or buying crude oil on the
open market?
• Opportunity cost vs. actual, out-ofpocket cost of crude oil . . .
Eastern’s response; Gulf’s reply
• What is Eastern’s basic argument?
• What is Gulf’s position?
– And how does it relate to the topic of
consideration?
What is “the Deal”?
The Deal
Aviation Fuel
Gulf
Eastern
Air Lines
$$ for ??
Quantity of
Fuel
Benefits to both parties
• Eastern
– Reliable supply
– Cost savings: reduced base prices
• Gulf
– Guaranteed customer for large volume of new fuel
from new refinery
– Better price increase pass-through
• [They thought]
What risks were the parties
taking?
• Eastern: tied to Gulf
– Also: price increases that would be passed
through
• Gulf: tied to Eastern
– Also: Lower base price, lower profits
– Price escalation clause would misfire
– Production problems would mean breach
or expensive “cover”
Price Escalator Clause
• How did it work?
– Tied to (1) “posted price” of (2) “West
Texas Sour”
Why did the escalator clause
“break down”?
• Government price controls
• “Platt’s Oil Gram”
– Dod not post the actual market price for
“new and released oil”
– Outdated price postings
Gulf’s arguments
• Why is Eastern not bound under the K?
– Is there a stated minimum in the K?
– What if Eastern never ordered any fuel at
all – breach?
Uniform Commercial Code
• What is it?
Uniform Commercial Code
• What is it?
• What is “F.S. 672.306” ? – p. 81, top
§ 2-306. Output, Requirements and Exclusive
Dealings.
(1) A term which measures the quantity by
the output of the seller or the requirements
of the buyer means such actual output or
requirements as may occur in good faith,
except that no quantity unreasonably
disproportionate to any stated estimate or in
the absence of a stated estimate to any
normal or otherwise comparable prior output
or requirements may be tendered or
demanded.
The party who will determine quantity is
required to operate his plant or conduct
her business in good faith and
according to commercial standards of
fair dealing in the trade so that his or
her output or requirements will
approximate a reasonably foreseeable
figure.
Note the remedy
• Why?
Drafting solutions?
Drafting solutions?
• Use more than 1 price indicator?
• Clause covering when posted price
fails to keep up with actual market
price?
• Quantity estimate? Quantity ceiling?
Wood v. Lucy, Lady Duff-Gordon
The Life of Lucy
She was first married, at age 18, to James Stuart Wallace
by whom she had a child. They were divorced in 1888
and she was left virtually penniless. In order to make
some money to support herself and her child she set up
a dressmaking business. 'Maison Lucile' was a success
and the 'personality' dresses of 'Lucile' were immediately
popular. Each design was unique which enhanced their
appeal. In 1897 new, larger premises were purchased at
17 Hanover Square. By 1900 the firm had become one
of the great couture houses of London under the name
'The Maison Lucile.' Her clientele included Margot
Asquith and the Duchess of York (later Queen Mary). In
1910 she opened a branch of Lucile Ltd. in New York. A
further salon was established in Paris in 1912, and in
1915 a branch in Chicago expanded the empire.
New York Times
LADY DUFF GORDON SUES
Friday 14 April 1911
Lady Duff Gordon, who, under the name of Lucile, Ltd.,
of London and Paris, sells feminine apparel of her own
design, is suing for $600 in the City Court Philip Van
Valkenberg, husband of the former Mrs. Chapman, the
"million-dollar widow," much sought after by titled
Europeans.
Lady Gordon enumerates articles bought by Mrs. Van
Valkenberg in June, 1910---a blue lisle Elsie Elaine
coat and gown, $225; a lace hat, $25; a gray lily Elsie
gown, $150, and a purple evening gown, $200. Mr. Van
Valkenberg declares the goods were not necessities,
and were ordered by his wife contrary to his desire
and express order.
The Times
The Titanic Inquiry: Lady Duff Gordon's Evidence
Tuesday 21 May 1912
The inquiry into the loss of the Titanic was resumed yesterday by
Lord Mersey and his Assessors. Among those present were
Prince Albert of Schleswig-Holstein, Lady St. Helier, Lady
Midleton, Mrs. Asquith, Captain Godfrey-Faussett and Mr.
Sheldon Crosley, Third Secretary to the American Embassy.
Sir Cosmo Duff Gordon did not add much that was material to
the evidence which he gave last Friday. As he was examined by
Mr. Harbinson, counsel for the third class passengers, in
regard to his actions when the cries of the drowning were
heard, some of the ladies in the gallery expressed sympathy for
him by clapping their hands.
Afterwards Lady Duff Gordon was called. The President had
previously expressed the hope that her evidence might not be
necessary but her counsel, Mr. Duke, M.P., urged that the
insinuations made against her were of such a character that
she thought it essential that she should be called. Lady Duff
Gordon was accordingly sworn and denied that she heard any
of the cries of the drowning, or that she said it would be
dangerous to go back to them.
Justice Benjamin Nathan
Cardozo
Wood v. Lucy, Lady Duff-Gordon
• Procedural history
Wood v. Lucy, Lady Duff-Gordon
• Procedural history
• Trial: for π
• App. Div. Sup. Ct.: reversed (for Δ)
• Here: App. Div. rev’d – π wins!
What is defendant’s argument?
What is defendant’s argument?
• Why no consideration for
her promise?
§ 2-306. Output, Requirements and Exclusive
Dealings.
(1) A term which measures the quantity by the output of
the seller or the requirements of the buyer means such
actual output or requirements as may occur in good faith,
except that no quantity unreasonably disproportionate to
any stated estimate or in the absence of a stated
estimate to any normal or otherwise comparable prior
output or requirements may be tendered or demanded.
(2) A lawful agreement by either the seller or the
buyer for exclusive dealing in the kind of goods
concerned imposes unless otherwise agreed an
obligation by the seller to use best efforts to supply
the goods and by the buyer to use best efforts to
promote their sale.
The exclusive agent is required, although
no express commitment has been
made, to use reasonable effort and due
diligence in the expansion of the
market or the promotion of the product,
as the case may be. The principal is
expected under such a contract to
refrain from supplying any other dealer
or agent within the exclusive territory.
Judge Richard Posner
“The defendant styles herself . . .”
“things . . . Have a new value in the
public mind . . .”
“turn this vogue into money . . .”
Bulking up the pro-Contract
slant of the agreement
“It is true that he does not promise in so
many words . . . . We think, however,
that such a promise is fairly to be
implied. The law has outgrown its
primitive stage of formalism . . .”
-- p. 84
“The implication is that . . .”
But the terms of the Δ’s compensation
are even more significant.
But the K does not stop there. The π
goes on to promise . . .
For this conclusion the authorities are
ample . . .
“ ‘instinct with an obligation,’ imperfectly
expressed”
HALVORSEN
v.
SHEIVE
. . . The oft-cited words of Justice
Cardozo, "Though a promise in words
[may be] lacking, the whole transaction
... [may be] instinct with an obligation
imperfectly expressed." Sinclair v.
Purdy, 235 N.Y. at 254, 139 N.E. 255
(internal quotation omitted).
-- 2004 WL 627939 (W.D.N.Y. 2004), at p.
6.
Around 1915, Lucy conceived of the idea
of making wholesale fashions for the
masses. She raised money for this
venture and entered into an agreement
with Sears to sell her designs in the
Sears Roebuck catalogue. Here
agreement with Sears was the motive
for denying that her exclusive
marketing agreement with Wood was
enforceable. The Sears project was a
financial failure.
Efficient Breach?
• What would be the appropriate
remedy?
• Would the Sears deal be impossible if
the court issued an injunction?
Consideration wrapup
• Rationale 1: Evidentiary: evidence of a
deal
• Rationale 2: “cautionary”: make sure
people have thought things through
• Substitutes: (1) Seal; (2) “economic
activity” test – Dan Farber & John
Matheson