Requirements and Output Contracts

1. Requirements and Output Contracts Contracts – Professor Merges Jan. 25, 2011

6. Eastern Air Lines v. Gulf • Procedural History

7. Eastern Air Lines • Key Facts

8. What was the impetus for this lawsuit?

9. What was the impetus for this lawsuit? • Gulf demanded a price increase • Why? • The price of crude oil to Gulf had increased dramatically

10. 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-of-pocket cost of crude oil . . .

11. 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?

12. What is “the Deal”?

13. The Deal Aviation Fuel Gulf Eastern Air Lines $$ for ?? Quantity of Fuel

14. 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]

15. 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”

16. Price Escalator Clause • How did it work? • Tied to (1) “posted price” of (2) “West Texas Sour”

17. 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 • Government price controls • “Platt’s Oil Gram” • Dod not post the actual market price for “new and released oil” • Outdated price postings

19. 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?

20. Uniform Commercial Code • What is it?

21. Uniform Commercial Code • What is it? • What is “F.S. 672.306” ? – p. 81, top

22. § 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.

23. 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.

24. Note the remedy • Why?

25. Drafting solutions?

26. 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?

27. Wood v. Lucy, Lady Duff-Gordon

28. 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.

32. 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.

35. 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.

36. Justice Benjamin Nathan Cardozo

37. Wood v. Lucy, Lady Duff-Gordon • Procedural history

38. 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!

39. What is defendant’s argument?

40. What is defendant’s argument? • Why no consideration for her promise?

41. § 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.

42. 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.

44. Judge Richard Posner

45. “The defendant styles herself . . .” “things . . . Have a new value in the public mind . . .” “turn this vogue into money . . .”

46. 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

47. “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 . . .

48. “ ‘instinct with an obligation,’ imperfectly expressed”

49. HALVORSENv.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.

50. 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.