In our previous post, we revisited the case of Mattei v. Hopper. Today, let’s talk about dispute between Peter Cooper’s Glue Factory (manufacturer/seller) and the Oscar Schlegel Manufacturing Company (distributor/buyer), a leading case involving the validity of so-called requirements contracts. (In a requirements contract, the seller agrees to meet the buyer’s requirements.) According to the distributor/buyer, the manufacturer/seller promised to sell “Special BB” glue to the buyer at 9 cents per pound. The main piece of evidence in this case consists of the following letter that the manufacturer/seller sent to the distributor/buyer:
GENTLEMEN.— We are instructed by our Mr. Von Schuckmann to enter your contract for your requirements of ‘Special BB’ glue for the year 1916, price to be 9c per lb., terms 2% 20th to 30th of month following purchase. Deliveries, to be made to you as per your orders during the year and quality same as heretofore. Glue to be packed in 500 lb. or 350 lb. barrels and 100 lb. kegs, and your special Label to be carefully pasted on top, bottom and side of each barrel or keg. . . .
signed/ PETER COOPER’S GLUE FACTORY, W. D. DONALDSON, Sales Manager.
The president of the distributor firm received this letter, wrote the words “Accepted, Oscar Schlegel Manufacturing Company” on the bottom, and then returned it back to the seller. Later, towards the end of 1916, there was an unexpected and dramatic change in the price of glue on the market. The price shot up to 24 cents per pound, so the buyer ordered large quantities of the “Special BB” glue from the seller, hoping to make a huge profit by buying glue at the contract price (9 cents/lb.) and reselling it the higher price of (24 cents/lb.).
Soon enough, the seller decided to repudiate the contract and not take any more orders from the buyer, so the buyer sued the seller to enforce their agreement. It’s unclear from the record in this case what motivated the seller’s repudiation–whether it lacked the industrial capacity to fill the buyer’s large orders or whether the seller simply wanted to sell the glue directly to the distributor’s customers. That is, we don’t know the real reason why A wanted to get out of the contract–was it impossibility, or was it greed? (In any case (pun intended), should A’s reason for getting out of the contract matter?) This case went all the way up to New York’s highest court, and that court ruled that the “alleged contract” (in the words of the court) was invalid for lack of mutuality! As a result, not only was the seller not required to fill any new orders from the buyer; the seller did not owe the buyer any monetary damages for repudiating the contract (since the underlying agreement was legally invalid)!
Now, let’s discuss Victor Goldberg’s expert analysis of this case in Chapter 3 of his book “Framing Contract Law.” According to Professor Goldberg, the court got it wrong! The contract was either a valid bilateral agreement or a valid unilateral contract (p. 90). Either way, both parties would still have the freedom to repudiate their agreement at any time in the event of a dramatic change in the market price for glue. But what about damages for breach? Not to worry, argues Goldberg, because the non-breaching party would have the legal duty to mitigate its damages.
Again, we find ourselves in complete agreement with Professor Goldberg. Just imagine what would have happened if the price of glue in this case had fallen below 9 cents per pound and if it were the buyer, not the seller, who had repudiated the agreement to minimize his losses. One of the main purposes of commercial contracts is to hedge risks, and one risk in commercial contracts is “commodity price risk.” If the validity of a contract were to depend on the stability of the price of the goods being sold under the contract, commercial contracts would be worthless! Next, we will revisit Wood v. Lucy and thus conclude our review of Part I of “Framing Contract Law.”