Today we turn to one of two introductory cases where promisers who entered into seemingly valid contracts attempt to avoid liability for not following through on their promises. Today's case Bolin Farms versus American Cotton Shippers Association involves a futures contract through the sale of cotton. In the first few months of 1973, 11 cotton farmers in western Louisiana among them Bolin Farms signed contracts with American Cotton Shippers to sell cotton grown on their farms at harvest time that year. Those contracts locked in prices of between 29 and 41 cents per pound. While the market price of cotton at that time ranged between 28 and 32 cents per pound. But commodity markets can change quite rapidly. By the time the farmers were harvesting their cotton in September, cotton prices had more than doubled to around 80 cents per pound. The deals they had gotten before of up to 41 cents per pound, no longer seemed so good and so the farmers sued for "A declaration that the contracts are null and void." So that they could sell for a better price they bargained for. The suit came before the Federal District Court for the Western District of Louisiana. The court had to decide whether future contracts remain valid even when the market price becomes very different from the contract price. Common law court opinions have changed over time about whether change circumstances can affect the parties obligations under a contract. The old rule is that 'pacta sunt servanda' agreements are to be honored. Most famously the English Court of Kings bench said in Paradine v. Jane in 1647 that, "When the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provoked against it by his contract." That is; no matter how circumstances have changed since the contract was signed, if a party cannot fulfill her promise she must compensate the other party to the contract. The rules have become somewhat more lenient over time. One typical approach is found in Section 2-615 of the Uniform Commercial Code, which says, "Non-delivery by a seller is not a breach of his duty under a contract for sale if performance is agreed has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made." If the parties made their agreement based on an assumption about the world that turns out to be false, that could relieve a party of the responsibility to follow through on the promise. But possible changes in the world that parties were aware of when they formed the contract will not invalidate the contract. Note that the Uniform Commercial Code itself does not apply in this case Louisiana as one of the state, is the one state that has not adopted Article II of the UCC. Generally, Louisiana laws are often different from that of other states because it retains elements of the French Civil Code law from when it was a French colony before the Louisiana purchase of 1803. In the case of Bolin Farms, Judge Hunter found it quite easy to determine that the contract is valid. The entire purpose of a futures contract is to hedge against possible future changes in the price of the underlying good or commodity. The farmers entered into the contract knowing that if the price of cotton fell they would make money on the contract because they could sell at the agreed-upon future price instead of the market price. They also knew that if the price of cotton rose they would miss out on a higher market price or spot price at harvest time. In signing the contract they locked in a particular future price forgoing both the possible future gains and future losses. They cannot now abrogate their agreement simply because it turns out to be less favorable than selling at the higher spot market price. They would not have wanted the American Cotton Shippers Association to do that if the prices had fallen. I've included this case to show you that not all contract disputes are difficult. The result in Bolin Farm accords with most people's common sense. So here's a quiz. Suppose that instead of rising to 80 cents per pound, the price of cotton had fallen to 10 cents per pound. Now the American Cotton Shippers Association wants to have the contract declared void so they can buy cheaper cotton elsewhere. How will the court rule? Well, just as the farmer could not evade their obligation to sell their cotton at the agreed upon price when the market price rose, the American Cotton Shippers Association cannot evade its obligation to buy the farmers cotton at the agreed upon price when the market price falls. So the contract will be held to be valid. The parties are mutually bound to this reciprocal bargain. But this kind of price mutuality is not a mandatory part of all contracts. Option contracts explicitly give the option holder price protection but the option of trading at a more favorable spot price. Thus, the farmers might have merely purchased put options to sell their cotton at particular forward prices but they would have had to pay for that asymmetric option. From Bolin Farms, we have learned about the impact change circumstances can have on a contract. We'll come back to this when we study and practice impracticability again. The general rule remains the same as it's been for centuries. Parties to contract are responsible for filling their promises or compensating the other side if they breach. We saw that this has been loosened somewhat by the UCC Section 2-615, which allows parties to evade their promises if fundamental assumptions underlying the contract turn out to be impracticable. However, since losing money on a futures contract as happens in Bolin Farms is certainly not the kind of thing that is enough to invalidate the farmer's obligation. By the way the farmers also raised a question about whether they were somehow victims of buyer insider information, superior information. The court rejected the allegation as a factual matter cotton buyers don't have much opportunity to learn about whether or the boll weevil infestations ahead of time, but will be returning to the question of whether buyers or sellers have a duty to disclose superior information later in the course. Especially when we discuss the Supreme Court's decision in Laidlaw.
