Today, we learn about the mitigation rule, particularly in the context of anticipatory repudiation. We'll first examine the pre-UCC case of Reliance Cooperage versus Treat, an eighth circuit decision from 1952. We'll then learn about how the UCC treats mitigation and how the Reliance Cooperage case might be decided under the UCC. Mitigation is the principle that a party that has suffered a loss has to take reasonable action to minimize that loss, or at least, damages will be limited as if they had taken such action. For example, suppose Sarah contracts with a bakery to buy 100 cupcakes, but decides to back out of the contract at the last minute. The cupcakes have already been made. The mitigation rule suggests that the bakery should try to sell 100 cupcakes to someone else before they go bad, or at least that her damages will be limited to those damages that she would have incurred if she had sold them, or tried to sell them. So, the bakery wouldn't be entitled to damages for all the cupcakes, just the damages that it couldn't mitigate. In other words, the cupcakes, it couldn't sell. From an efficiency perspective, the mitigation role certainly makes sense. We want to create incentives for the aggrieved party to minimize damages and avoid waste. Plaintiff appellant, reliance cooperage and defendant appellee treat entered into a written contract, in this case, under which the defendant agreed to produce and deliver 300,000 white oak bourbon staves. The staves are the things that go into barrels that make up barrels and that these would be delivered by December 31st 1950 at a price of $450 per thousand staves. Subsequently, the defendant seller repudiated the contract by letter and phone. On October 6, 1950, plaintiff informed defendant that they would hold him to strict compliance of their promise. Defendant never replied or performed. At trial, plaintiff requested damages of the difference between the contract price and the market price on December 31st, the date of contractual performance was due. The trial judge refused instructing the jury that if they found that the defendant repudiated the contract, then the measure of damages should be the difference between the contract price and the lower market price plaintiff could have obtain upon learning of the repudiation. The jury awarded plaintiff $500 and the instant court reversed. The main issue in this case is whether the plaintiff was under an unconditional duty to mitigate damages upon learning of defendant's anticipatory repudiation. The court held for the plaintiff. There is no obligation to mitigate damages until there are damages to mitigate and there are no damages accrued in this case until the date of performance. It's possible for us to break down the court's reasoning into two inquiries. First, the court held that a buyer upon repudiation by the seller may sit and wait in a rising market until the date due for performance, and recover damages based upon the difference between the contract price and the market price at that date. Second, the court held that the buyer did not have a duty to mitigate damages by purchasing staves elsewhere on October six, earlier than called for in the original contract when the market price was lower. What's the rule under the UCC? Under Section 2-610, the non-breaching party is given the option to wait a commercially reasonable time after the repudiation, or to cancel, or/and seek damages. It is not clear what happens if the buyer waits for more than a commercially reasonable time and does not cancel. Also, under Section 2-713, a buyer is only awarded the difference between the market price at the time when the buyer learned of the breach and the contract price. The opinion in the Reliance Cooperage case said that the buyer had no duty to mitigate even if he accepted the anticipatory repudiation as an actionable breach of the contract. Is that consistent or inconsistent with the UCC? Well, it's probably inconsistent with the UCC. While in common law, the promisee can resist repudiation which, remember, is like an offer to cancel, which the promisee can reject. But under 2-713, the repudiation can only be resisted for a commercially reasonable time. After that time passes, the non-repudiating buyer's damages should not increase because the buyer failed to mitigate damages. In other words, the UCC is likely to deem that the buyer learned of the breach at the time a commercially reasonable time to wait performance had expired. Any waiting after that is done is that the buyer is at risk that the market price may turn against the buyer. After the buyer learns of the seller's breach, the buyer takes the risk of market fluctuations at his own peril. If the market price decreases after the date, the breach is known, the buyer's damages should not decrease. If the market price increases after the date the breach is known, the buyer will not get any enhancement in damages. Under the UCC, a buyer has another option for damages after breach in addition to 2-713. Under Section 2-712, there is the option of cover. This cover damages describes when a buyer procures a substitute for the promised performance. UCC Section 2-712 says that after a buyer covers, the damages he is owed is the difference between the cost of the substitute goods and the contract price. Let's go through an example to see how this would work. Remember that Reliance signed the contract with Treat for $450 per thousand staves. Now, suppose Reliance on September 1st, 1950 had cancelled the contract because of Treat's anticipatory breach and Reliance purchased 300,000 barrel staves at $525 per thousand from another producer. On December 31st, 1950, the market price had dropped back to $450 per thousand. What damages would result if the buyer had covered in this way? Well, if the conditions of the UCC 2-712 one are met, if the purchase was done in good faith and it was reasonable, then the damages should be the difference between the contract price of $450 and the cover price of $525. Without knowing more, it was probably reasonable for Reliance as a buyer to cover at the market price of $525 even though it turned out that it would have been cheaper to wait. Buyers usually don't have a crystal ball to know what will happen to the future market price. What damages would result if the buyer failed to cover? Well, then, damages would be determined by another UCC section, UCC Section 2-713. In other words, a court would evaluate what the market price was at the time of breach, and award the difference between the contract price and that market price. The bottom line is that regardless of whether the buyer actually covers, the buyer cannot profit from speculation. And in both cases, the remedies approximate what a reasonable cover would cost. Now, suppose that Reliance still cancel the contract for breach in September and purchase the staves at $525 per thousand. But now, instead, imagine that the market price instead of falling that the market price actually increased to $750 per thousand on December 31st, 1950. Instead of suing for damages under UCC Section 2-712, Reliance sues under Section 2-713 subparagraph one. What damages would result? Well, the buyer can only recover damages under UCC 2-712 under this kind of a hypothetical. Actual cover that satisfies UCC Section 2-712 precludes recovery under UCC Section 2-713. There was some ambiguity in this because section 2-712 is silent on this question, but a comment to section 2-713 clarifies the issue. And basically, if you pursue cover, and actually go out, and buy substitute goods, you're going to be limited to 2-712 damages. In summary, Reliance Cooperage held that there is no obligation to mitigate damages until the date of performance. The UCC takes a different position. The obligation to mitigate damages starts at the time the buyer learns of the breach. There are two ways to calculate damages. If the buyer covers and buys as a substitute good, then UCC section 2-712 governs, and damages is going to be the difference between the value of the contract and the value of the substitute goods. If the buyer doesn't cover, then UCC section 2-713 governs, and damages is the difference between the value of the contract and the market price of the goods at the time the buyer learned of the breach.
