Specific performance and agreed remedies

Jefferson County, Missouri, nineteen seventy. A gas utility and an oil company agree that, until natural gas mains reach the county's new subdivisions, the oil company will supply propane to any development the utility designates and the oil company accepts, at its posted price plus four cents a gallon. Seventeen subdivisions come under the agreement. The utility may cancel on thirty days' notice at each anniversary. The oil company has no right to cancel at all.
In the winter of nineteen seventy two a propane shortage hits. The oil company cuts every customer to eighty per cent. In April nineteen seventy three it raises its price three cents. The utility objects. The oil company answers by declaring the agreement terminated for lack of mutuality. The utility asks a court not for damages but for an order that the oil company keep supplying.
So here is the question. For three lectures the remedy has been money. The utility wants the propane itself. When does a court order a party to do what he promised, instead of paying for not doing it? Think about it before I go on, because the answer is narrower than justice might suggest, and the reasons are practical.
And now the question I keep asking. What exactly did these people promise each other? Propane for years, at a formula price, with one side able to leave and the other not. Today two topics. First, when the court will compel performance. Second, when the parties may fix the remedy themselves, in a liquidated damages clause, and when a court will strike it as a penalty.
Here is the first line for the board. Specific performance will not be ordered when the party claiming breach of contract has an adequate remedy at law. The test is not physical uniqueness but the uncertainty of valuing what was promised. What matters, in measuring money damages, is the volume, refinement, and reliability of the available information about substitutes for the subject matter of the breached contract. Land is presumed unique. Goods are not, unless in the proper circumstances.
Second line. Even where damages are inadequate, equity may refuse the order where the contract is too indefinite to enforce, where enforcement would require constant and long-continued court supervision, or where the burden on the defendant would be disproportionate to the benefit to the plaintiff. And personal services are never compelled.
Third line. Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty. A clause that gives the same large sum for every breach, large or small, is the classic penalty.
Now the case. Laclede Gas against Amoco Oil, Eighth Circuit, nineteen seventy five, Judge Ross. First the contract. A bilateral contract is not rendered invalid and unenforceable merely because one party has the right to cancellation while the other does not. The utility's right was limited, one year first, anniversaries only, thirty days' notice, and the agreement was a requirements contract, which courts routinely enforce. There was a contract, and the oil company had broken it.
Then the remedy. Specific performance is discretionary, but when certain equitable rules have been met and the contract is fair and plain, specific performance goes as a matter of right. The oil company raised four objections. No mutuality of remedy. Too much supervision. Indefiniteness. And an adequate remedy at law. The first three, the court said, have little or no merit and do not detain us for long. There is no requirement that both parties be entitled to specific performance.
The public interest in propane to homes outweighed any supervision. The price term could be construed.
The fourth was the real question, and the court's answer is why the case is taught. The utility had propane available under other contracts, and propane was readily available on the open market. But this analysis ignores the fact that the contract involved in this lawsuit is for a long-term supply of propane to these subdivisions. The other contracts would expire.
There was uncontradicted expert testimony that Laclede probably could not find another supplier of propane willing to enter into a long-term contract such as the Amoco agreement, given the uncertain future of worldwide energy supplies.
And the standard. A remedy at law adequate to defeat the grant of specific performance must be as certain, prompt, complete, and efficient to attain the ends of justice as a decree of specific performance. Even if the utility could find propane, it would still face considerable expense and trouble which cannot be estimated in advance in making arrangements for its distribution to the subdivisions. Specific performance is the proper remedy in this situation.
Now the other answer, and the word unique. Manhattan, nineteen eighty one. An advertising company leases the east wall of a building on Thirty Sixth Street for a billboard facing the Midtown Tunnel exit, for three years plus options to ten. It builds an illuminated sign and sublets it. The building is sold. The buyer, who plans to demolish the block for a development, cancels the lease under a clause it reads as allowing a purchaser to cancel.
The trial court finds the clause did not allow that, that the wall is unique as to location for the particular advertising purpose intended, and still refuses specific performance.
The Court of Appeals, in Van Wagner Advertising against S and M Enterprises, nineteen eighty six, Judge Kaye, agreed. The word uniqueness is not, however, a magic door to specific performance. A distinction must be drawn between physical difference and economic interchangeability. The trial court found that the leased property is physically unique, but so is every parcel of real property and so are many consumer goods.
The court took its test from an economist. The point at which breach of a contract will be redressable by specific performance thus must lie not in any inherent physical uniqueness of the property but instead in the uncertainty of valuing it.
In asserting that the subject matter of a particular contract is unique and has no established market value, a court is really saying that it cannot obtain, at reasonable cost, enough information about substitutes to permit it to calculate an award of money damages without imposing an unacceptably high risk of undercompensation on the injured promisee.
Here the value could be fixed. The company had a sublease that priced the sign for three years, and it had more than four hundred other leases to compare. The value of commercial billboard space can be readily determined by comparisons with similar uses. And the court added the hardship ground.
Specific performance would be inequitable in that its effect would be disproportionate in its harm to defendant and its assistance to plaintiff, because the buyer had bought the block for several million dollars to redevelop it. Damages for the whole remaining term, through nineteen ninety two, instead.
One sentence from the case to keep. S and M having successfully resisted specific performance on the ground that there is an adequate remedy at law, cannot at the same time be heard to contend that damages beyond sixty days must be denied because they are conjectural. A defendant who says damages are adequate has conceded they can be measured. He does not get to argue both.
Now agreed remedies, and a penalty from Judge Posner. Illinois, nineteen seventy nine. A warehouse agrees to bag an abrasive powder for a manufacturer and ship it to customers. The manufacturer insists on a new bagging system, costing eighty nine thousand dollars. The warehouse insists on a minimum quantity, twenty two thousand five hundred tons over three years, and a clause.
If the minimum is not shipped, the warehouse will invoice the manufacturer at the prevailing rates for the difference between the quantity bagged and the minimum guaranteed. Full price, whether or not the work is done.
The steel industry collapses. The manufacturer ships twelve thousand tons and pays for them. Under the formula it owes two hundred and forty one thousand dollars more. The warehouse seizes five hundred tons of bagged product as a lien and sues. The Seventh Circuit, in Lake River against Carborundum, nineteen eighty five, held the lien invalid and the clause a penalty.
Posner first said what he thought of the rule. Deep as the hostility to penalty clauses runs in the common law, we still might be inclined to question, if we thought ourselves free to do so, whether a modern court should refuse to enforce a penalty clause where the signator is a substantial corporation, well able to avoid improvident commitments. Penalty clauses provide an earnest of performance. On this view the refusal to enforce penalty clauses is at best paternalistic.
But Illinois, like every other state, continues steadfastly to insist on the distinction between penalties and liquidated damages, and a federal court applies it.
Then the test. To be valid under Illinois law a liquidation of damages must be a reasonable estimate at the time of contracting of the likely damages from breach, and the need for estimation at that time must be shown by reference to the likely difficulty of measuring the actual damages from a breach of contract after the breach occurs.
If damages would be easy to determine then, or if the estimate greatly exceeds a reasonable upper estimate of what the damages are likely to be, it is a penalty.
And the flaw. The formula, full contract price minus the amount already invoiced, is invariant to the gravity of the breach. Posner ran the numbers. A breach the day after the bagging system was bought would give the warehouse four hundred and forty four thousand dollars for an eighty nine thousand dollar outlay, more than four times the profit of one hundred and seven thousand it expected from the whole contract.
Because most of the costs to Lake River of performing the contract are saved if the contract is broken, and this saving is not reflected in the damage formula, the clause always gives more than actual loss. A penalty. The warehouse got its common law damages, the unpaid price less the costs it saved.
Now a clause that survived. Milwaukee, nineteen seventy seven. A hotel hires a general manager for three years. His contract says that should this contract be terminated by the Towne Hotel prior to its expiration date, the Towne Hotel will be responsible for fulfilling the entire financial obligation as set forth within this agreement for the full period of three years. The hotel fires him after fifteen months. He is out of work for two and a half months, then finds another hotel job.
He sues for the twenty one months' salary, twenty four thousand six hundred and forty dollars.
The Supreme Court of Wisconsin, in Wassenaar against Panos, nineteen eighty three, Justice Abrahamson, upheld the clause. The overall single test of validity is whether the clause is reasonable under the totality of circumstances. The court set out the factors. Did the parties intend to provide for damages or for a penalty? Is the injury caused by the breach one that is difficult or incapable of accurate estimation at the time of contract?
And are the stipulated damages a reasonable forecast of the harm caused by the breach? The first, subjective intent, has been generally discarded. The other two are intertwined.
Why was full salary reasonable when the standard measure deducts substitute earnings? Because the standard measure undercounts. In addition to the damages reflected in the black-letter formulation, an employee may suffer consequential damages, including permanent injury to professional reputation, loss of career development opportunities, and emotional stress. Courts rarely award those. The parties may. The usual arguments against allowing recovery for consequential damages fail when the parties foresee the possibility of such harm and agree on an estimated amount.
And the burden was on the hotel. The employer, the party challenging the contract, carries the burden of proving that the stipulated amount of damages is grossly disproportionate to the actual harm and thus unreasonable. The hotel had offered no evidence of what the manager earned afterwards. And since the clause was valid, mitigation dropped out. Where the stipulated damages clause is a valid provision for liquidated damages, the doctrine of mitigation of damages is not applicable to determine the damages awarded the nonbreaching party.
Put the four cases side by side. Laclede, a long-term supply with no substitute, performance ordered. Van Wagner, a physically unique wall whose value the market could price, damages instead. Lake River, a formula that paid the full price for any shortfall, a penalty. Wassenaar, full salary for the unexpired term, a reasonable forecast of hard-to-measure harm, enforced. Two questions run through all four. Can the loss be measured in money, and did the parties try honestly to measure it in advance?
Now let's change one fact. The utility in Missouri had been able to buy propane on long-term contracts from three other suppliers at the same price, with distribution facilities already in place. Choose an answer before I go on.
Then damages are adequate and specific performance is refused. The Eighth Circuit ordered performance because the contract was long-term, the alternatives were short-term, and the cost of switching could not be estimated in advance. Give the utility a certain, prompt, complete substitute and the reason vanishes. It would recover the difference between the contract price and what the substitutes cost, if anything, and the propane would flow from someone else.
Change one fact again. The warehouse clause had said that on any shortfall the manufacturer would pay the warehouse's unrecovered cost of the bagging system plus its lost profit on the unshipped tonnage, each calculated at the time of breach. Choose.
Now the clause tracks the loss, and it is almost certainly valid. Posner's objection was that the formula was invariant to the gravity of the breach and ignored the costs the warehouse saved. A clause that measures the unamortised equipment and the lost margin on the tons not bagged is exactly the reasonable estimate the law asks for, on a loss that would be genuinely hard to prove. Whether the parties call it liquidated damages does not matter. What matters is that it is one.
Change one fact a third time. The hotel manager had been rehired the next day, at a higher salary, by a hotel across the street, and the hotel proved it. Choose.
Now the Wisconsin court's own qualification bites. It said that if the nonbreaching party suffers no damage the stipulated damages clause is a penalty, and it distinguished an earlier case, decided when the record established that the nonbreaching party suffered no harm. The court upheld the clause because the hotel had offered no evidence of his later earnings and he had been out of work for months.
Prove that he lost nothing and the twenty one months of salary becomes grossly disproportionate to the actual harm, and the clause falls.
Here is what people get wrong here, and why it is tempting. The first mistake is treating uniqueness as the test for specific performance. It is a proxy. The test is whether damages can be measured with confidence, and a unique wall with four hundred comparables fails it. The second mistake is thinking that calling a clause liquidated damages saves it. The label has some evidentiary value, but it is not conclusive.
The third mistake is drafting a single sum for every breach. A clause invariant to the gravity of the breach is the signature of a penalty, and the drafter who wants his clause to survive should make it move with the loss.
Here is the rule, in one breath. A court orders specific performance where damages are an inadequate remedy because the promised performance cannot be valued with confidence, and refuses it where the contract is too indefinite, supervision would be constant, the burden on the defendant would be disproportionate, or the promise is of personal service.
The parties may fix damages in advance at an amount that was a reasonable forecast of harm difficult to estimate, judged at contracting and at breach, but a sum unreasonably large, or the same for every breach regardless of gravity, is void as a penalty. Now, five questions.