Sunday, March 19, 2006

Why Limit Damages for Repudiation of One-Sided Contracts?

You can breach your contract with somebody simply by repudiating it. Suppose, for instance, that you have contracted with Ray for him to paint your house next week. But you tell Ray, "The deal is off. Contrary to my promise, I am not going to pay you to paint my house." You have just repudiated the contract per the definition in Restatement (2d) of Contracts § 250 (1981). Ray has a claim for damages now; he doesn't have to wait until next week. See R. (2d) of Contracts § 243(2): "Except as stated in Subsection (3), a breach by non-performance accompanied or followed by a repudiation gives rise to a claim for damages for total breach."

That rule constitutes good policy. We don't want to force Ray to wait until next week to sue, given that you have evidently made clear your intention to breach. Better that he should wrap up his dealings with you and get to work finding a substitute transaction.

The rules pertaining to damages for repudiation contain a loophole, however, that does not so clearly constitute good social policy. That subsection alluded to above—the subsection in R. (2d) of Contracts § 243(3)—provides:
Where at the time of the breach the only remaining duties of performance are those of the party in breach and are for the payment of money in installments not related to one another, his breach by non-performance as to less than the whole, whether or not accompanied or followed by a repudiation, does not give rise to a claim for damages for total breach.

How does the § 243(3) work? Suppose that you contract with Sally to take possession of her car now and pay for it over the next year, making monthly payments with interest. Six months into the deal, you say to Sally, "The deal is off. Contrary to my promise, I am not going to pay you anything more for the car." You have just repudiated the contract. Section 243(3) says, however, that Sally does not yet have a claim for damages equaling the remaining six months' of payments. Rather, she can sue you only for each month's payment as it comes due.

Note that we would have a different result if the contract were not one-sided. Suppose, for instance, that you contract with Mike to have him clean your pool once a month for the next year. You then repudiate your agreement after six months. Mike, in contrast to Sally, can bring suit now for all the remaining payments you have repudiated. See § 243(2).

Why that difference? I've poked around a bit and found no real explanation. Comment c to § 243 simply proclaims,

It is well established that if those duties of the party in breach at the time of the breach are simply to pay money in installments, not related to one another in some way, as by the requirement of the occurrence of a condition with respect to more than one of them, then a breach as to any number less than the whole of such installments gives rise to a claim merely for damages for partial breach.
Not too helpful, that. Nor did a search of the law reviews or ALR turn up anything more on-point. I found cases applying the rule "restated" in § 243(3), usually framing it as an example of a more general limitation on the availability of damages for repudiation of a bilateral contract, but without any explanation or policy justification.

The question about the reasons for the rule in R. (2d) of Contracts § 243(3) arose from one of my Contracts students, after our last class. He, I, and another student worked out a fair explanation: A party who has already suffered one repudiation should not have to continue performing for the breaching party. Sally, because she has already completed all the performances she owes you, does not face that problem. But Mike, who still owes you monthly performances, should not have to keep cleaning your pool in vain.

What do you think, dear readers? Does that justification of § 243(3) make sense to you? Or have you got a better explanation?


Glen Whitman said...

I think the issue may come down to the non-breaching party needing to establish that he is *not* simply allowing the contract to lapse, but in fact thinks he is owed something.

Take Mike's case: You repudiate your contract, saying you won't be paying him to clean your pool. Suppose Mike responds by no longer showing up to clean your pool. If he makes a claim in court 6 months later, you might say, "Hey, I said I wanted out of the contract, and Mike stopped showing up, so I thought everything was cool." So we need a legal rule that allows Mike to establish immediately that he's not just letting the agreement lapse, but in fact would have performed if he expected the payments to be forthcoming.

In Sally's case, however, there's no danger that Sally's non-performance will be taken as evidence of her willingness to let the contract lapse, because she has no further duties to perform. Now, it might seem strange to say that Sally has to sue you on a month-by-month basis, but actually I don't think that's what the rule requires. She can just wait 6 months and then sue for the whole thing. And given the cost of launching repeated lawsuits, that's probably what she'll do. Thus, the real difference between the default rule and the exception is that the default rule induces a single case *immediately* while the exception rule induces a single case *after the contract period expires*. And the justification (I hypothesize) is that immediacy is only necessary when one party needs to establish that he wasn't okay with letting the contract lapse.

Jeff Brown said...

Tom wrote, "... after our last class. He, I, and another student worked out a fair explanation: A party who has already suffered one repudiation should not have to continue performing for the breaching party."

Agreed. If the would-be plaintiff was required in the contract to continually perform, the rule treats them well. But the question is, why are other would-be plaintiffs treated so poorly? That is, if a would-be plaintiff's contract did not require continual performance, why should that plaintiff either sue multiple times or wait for the whole contract to expire before suing? If the contract was, say, a thirty-year thing, this rule would seem to drastically raise the expected cost of entering the contact (see "uncertainty" and "discount rate," below).

Glen wrote, regarding the hypothetical situation in which I buy a car from Sally and stop paying after six months, "She can just wait [for the remaining] 6 months and then sue for the whole thing."

I agree, it seems like she can do that. But what's ugly about this situation is what she can't do. Why not allow Sally to immediately file a single lawsuit which, were she to win, would award her the right to collect on a monthly basis, as she expected before the repudiation?

Imposing a delay raises the cost to her, by increasing the uncertainty about her future wealth. Also, if her psychological discount rate happens to be higher than the interest rate on the delayed payments, that's another cost. The longer the wait, the higher the likelihood that the second sort of cost is significant: Imagine how Sally would feel if I paid her when she's so old and sick that the value of money to Sally has fallen. As a young car-saleswoman she was able to blow $200 on strippers in Vegas and have a great time, but as a bedridden basket-case waiting to collect on old debts, there's not much she could do with the same $200.

If a legislator didn't realize that the court can award installment payment plans, and thought the result of any lawsuit had to be an immediate lump sum, the rule might have resulted from an inention to protect a poor car-buyer who can't afford to pay for the whole thing at once.

I think it's a stupid rule.

Tom W. Bell said...


I understand you to explain the rule in 243(3) this way: It promotes self-disclosure by a potential plaintiff. Mike can sue now, thus revealing he thinks he's suffered breach. Sally, however, will probably not disclosure her displeasure until the end of the contract term.

Hmm. Maybe. But Sally *can* sue now, even if she chooses to wait. Indeed, she may want to simply file now and then amend her claims each time you miss a payment. Or she may simply try to repossess the car.

I think that 243(3) speaks more to mitigation. We want Mike to mitigate by finding other work. But how can Sally mitigate? She has finished performing on the contract; she gave you possession of the car. She has no ability--and thus no "duty" (as the woefully titled doctrine has it)--to mitigate.

Tom W. Bell said...


You may find some consolation in the fact that Sally, like others facing the limits of 243(3), can include an acceleration clause in her contract, making all payments due in the event of breach. But, by way of counter-consolation, note that the law does not always enforce such acceleration clauses.

Andrew Oh-Willeke said...

The reason for the rule is the statute of limitations, and flows from situations involving promissory notes. Generally speaking, you want to have a rule most favorable to the non-breaching party. Typically, a note will provide that a note is not accellerated until the note holder elects to do so.

If repudiation is a total breach, then the statute starts running then, and a non-breaching party is disadvantaged by a short time to respond.

If a repudiation is not a total breach in this circumstance, then the laggard lender will have to foregoe only some of the installments that have slipped by the statute of limitations, while being able to recover the remaining ones.

Typically a case like this one comes up when a promissory note is transferred to a third party, who is not properly informed about the default status of the note, or when you have an intrafamily loan which an early stage dementia or unduly family member has failed to enforce.

Boilerplate almost always includes an accelleration clause, so the rule almost never harms the non-defaulting party in cases where the statute of limitations does not apply, even though it would appear to delay that party's ability to enforce the contract.

Tom W. Bell said...


You raise and interesting angle, and one I've wondered about, too. I take you to say that the rule in 243(3) protects a party suffering breach of a one-sided contract from the untoward effect of the statute of frauds. That promissee suffers a new breach each time the promisor misses a payment. The statute of frauds will thus not bar claims against relatively recent defaults.

I think that's right, or at least *should* be. It gives me pause that courts resist hard-and-fast rules with regard to application of the statute to on-going contracts. See Henglein v. Colt Indus., 260 F.3d 201, 213-14 (3rd Cir. 2001). But given the rule expressed in s. 243(3), considerations of equity and good public policy should convince a court to regard repeated refusals to make payments as a series of breaches, each with its own statute of frauds. Otherwise, as you observe, the assignee of a one-sided contract might suffer an unfairly unpleasant surprise.

Tom W. Bell said...

I meant "statute of limitations" rather than "statute of frauds," of course.