11 George Mason School of Law Contracts II Conditions This file may be downloaded only by registered...

George Mason School of Law

Contracts II

Conditions

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fbuckley@gmu.edu

Next Day

Warranties PLUS Cure

Kinds of Terms

Consider: I promise to help you on your journey, the good Lord willin’ and the crick don’t rise.

I’m going to drown

Kinds of terms

Consider: I promise to help you on your journey provided the crick don’t rise. If the crick rises, am I in breach?

Kinds of terms

Now consider: I promise to help you on your journey provided the crick don’t rise. So this is not a promise: let’s call it a non-

promissory condition If the event in question occurs, I am excused

from performance

Kinds of terms

Now consider: I promise the crick won’t rise. If the crick rises, am I in breach?

Kinds of conditions

Now consider: I promise the crick won’t rise. Is there a problem about promising the

occurrence of an event over which I have no control?

Kinds of conditions

Now consider: I promise the crick won’t rise. Is there a problem about promising the

occurrence of an event over which I have no control? Ever hear of earthquake insurance?

Different kinds of terms

Some are obligations, some not

Promises

Other terms: definitions,

recitals, non-promissory

conditions, etc.

Express non-promissory conditions: force majeur clauses

A party is not liable for failure to perform the party's obligations if such failure is as a result of Acts of God (including fire, flood, earthquake, storm, hurricane or other natural disaster), war, invasion, act of foreign enemies, hostilities (regardless of whether war is declared), civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, terrorist activities, nationalization, government sanction, blockage, embargo, labor dispute, strike, lockout or interruption or failure of electricity or telephone service.

When will a court to imply a condition, absent express language?

What kind of gap-filling will the court do?

When will a court to imply a condition, absent express language?

Paradine v. Jane at 77

12Prince Rupert

How willing is a court to imply a condition, in the absence of express language?

Paradine v. Jane at 77 “If a lessee covenant to repair a house,

though it be burnt by lightning, or thrown down by enemies, yet he ought to repair it.”

But “If a house be destoyed by tempest, or by enemies, the lessee is excused” (?!?)

Does it matter that the leasehold interest had passed?

Stees p.74

What are the possible legal outcomes here?

Third and Minnesota, St Paul

What are the possible legal outcomes here? Builder assumes risk and is liable Owner assumes risk and is liable No one is liable

What are the possible legal outcomes here? Builder assumes risk and is liable in

damages for non-completion

What are the possible legal outcomes here? Builder assumes risk and is liable in

damages for non-completion If this seems hard, what might the builder do?

What are the possible legal outcomes here? Owner assumes risk

And is liable for seller’s damages

What are the possible legal outcomes here? Owner assumes risk

Cf. Restatement § 89 (Modification), Illustration 1: By a written contract A agrees to excavate a cellar for B for a stated price. Solid rock is unexpectedly encountered and A so notifies B. A and B then orally agree that A will remove the rock at a unit price which is reasonable but nine times that used in computing the original price, and A completes the job. B is bound to pay the increased amount.

What are the possible legal outcomes here? No one is liable

The quicksand puts an end to the contract

What are the possible legal outcomes here?

Can you tell which from the language of the contract?

What doctrines might a court invoke to put an end to all obligations under the contracts?

What doctrines might a court invoke to put an end to all obligations under the contracts? Mistake Frustration/Impracticability Condition

Mistake Restatement § 152(1) Where a mistake of both

parties at the time of contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake ….

Mistake No mistake if Assumption of risk Restatement § 154 A party bears the risk of mistake when

the risk is allocated to him by agreement of the parties, or he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

Frustration or Impracticability Restatement § 261 Where, after a contract is

made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

(Non-promissory) Condition Restatement § 224 A condition is an event, not

certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.

(Non-promissory) Condition Restatement § 224 A condition is an event, not

certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.

Restatement § 225(3) Non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur

What did the court decide?

What did the court decide? The contractor must perform his

engagement, unless prevented by the act of God, the law, or the other party

A presumption against non-promissory conditions that excuse performance

What did the court decide? He must perform his engagement, unless

prevented by the act of God, the law, or the other party

If the parties had bargained for an excuse, the courts would honor this. What if we thought we knew how they would have bargained had they put their minds to it?

What did the court decide? He must perform his engagement, unless

prevent by the act of God, the law, or the other party

If the parties had bargained for an excuse, the courts would honor this. What if we thought we knew how they would have bargained had they put their minds to it?

And just how do you think they would have bargained?

What did the court decide? Quicksand as an informational problem

Who was in the best position to discover or know of the problem?

What if one party is contractually bound to perform according to specifications that are defective? U.S. v. Spearin at 78

If contractors are liable for breach of promise, what remedies might be available to plaintiff homeowners?

If contractors are liable for breach of promise, what remedies might be available to plaintiff-homeowners? Damages for breach (give plaintiff the

benefit of the bargain less the contract price)

If contractors are liable for breach of promise, what remedies might be available to plaintiff-homeowners? Damages for breach (give plaintiff the

benefit of the bargain less the contract price)

Set aside (rescind) the contract (absolve plaintiff from paying the price)

Set aside the contract (absolve plaintiff from paying the price)

Confusingly, this remedy is available when the promise in question is a condition

Now it gets confusing

So the term condition can mean two entirely different things That wasn’t very smart, was it?

Two kinds of conditions

Non-promissory conditions are not promises and excuse performance by either party on their occurrence

Two kinds of conditions

Promissory Conditions are promises (for which the innocent

party may receive consequential damages on breach)

and conditions (which excuse performance by the innocent party)

Different kinds of conditions

Some are obligations, some not

Promissory Conditions

Non-promissory Conditions

Promissory conditions:The example at 615

I agree to sell you my dog for $400, delivery at your house on Thursday.

I come to your house with my dog on Thursday. You tell me you want it but that you can’t pay me till Saturday

Do I have to deliver the dog on Thursday?

Promissory conditions

UCC § 2-511(1). Unless otherwise agreed, tender of payment is a condition to the seller's duty to tender and complete any delivery.

This is a promissory condition (i.e., you are in breach if you don’t pay)

Promissory conditionsTurn this around

I agree to buy your dog for $400 at your house on Thursday.

I come to your house with $400 on Thursday, but you tell me you won’t give me the dog till Saturday

Do I have to pay you on Thursday?

UCC § 2-507(1). Tender of delivery is a condition to the buyer's duty to accept the goods

What does “condition” mean here?

Not every promise is a promissory condition, but only those promises which must be performed as a condition of the other party’s duty of performance Tender or delivery and payment as

mutual conditions Both parties to stand “ready, willing and

able” to perform

Promissory and non-promissory conditions

In what respect do promissory and non-promissory conditions resemble each other?

In what respect do promissory and non-promissory conditions resemble each other? The non-breaching party is excused from

performance of a promissory condition, and both parties are excused on the occurrence of a non-promissory condition

In what respect do promissory and non-promissory conditions NOT resemble each other?

In what respect do promissory and non-promissory conditions NOT resemble each other? The breaching party is liable for damages

on breach of a promissory condition, but not on the occurrence of a non-promissory condition

What about non-sale of goods

When does a promise amount to a promissory condition?

§ 234(1). Order of Performances--Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary.

§ 234(1). Order of Performances Where all or part of the performances to be exchanged under an exchange of promises can be rendered simultaneously, they are to that extent due simultaneously, unless the language or the circumstances indicate the contrary.

I.e., a presumption of conditions

§ 234(2) Except to the extent stated in Subsection (1), where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary.

§ 234(2) Except to the extent stated in Subsection (1), where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary. So he has to do everything before the

other party has to perform

§ 234(2) Except to the extent stated in Subsection (1), where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary.

“Work before pay”

When I agree to build you a house, when do you have to pay?

Work before Pay Stewart v. Newbury at 619

What did the contract say about progress payments?

Work before Pay Stewart v. Newbury at 619

What did the contract say about progress payments? The presumption: If you want progress

payments, you have to bargain for them

The duty to be ready, willing and ableBell v. Elder at 616

Bell v. Elder

What were the obligations of the parties as to performance?

Seller to provide the water, power and roads

Buyer to pay a hook-up fee and apply for a building permit

Bell v. Elder

Elders land Bell

The remedy sought: Purchaser Bell sues to recover deposit because Elders failed to supply water

Bell v. Elder

Was the buyer acting opportunistically?

Bell v. Elder

Here there was no order as to when each party should do their work and “work before pay” applied to both parties

Presumption of simultaneous performances

Divisibility

Can a party in breach of a promissory condition resist forfeiture by asserting that conditions are divisible?

Divisibility

Suppose that a builder contracts to build seven motels in seven different cities. Separate payment and completion

schedule for each motel. Builder defaults on last motel. Could buyer rescind on all?

Divisibility

Restatement § 240. If the performances to be exchanged under an exchange of promises can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents, a party’s performance of his part of such a pair has the same effect on the other’s duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised.

Divisibility

Restatement § 240. If the performances to be exchanged under an exchange of promises can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents, a party’s performance of his part of such a pair has the same effect on the other’s duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised.

Divisibility

Same case, but now: All motels built to the same

specifications Builder to be paid $7M for the seven

motels.

Divisibility

Same case, but now: All motels built to the same

specifications Builder to be paid $7M for the seven

motels

Restatement § 240, illustration 5

John. v. United Advertising 620

Are highway signs different?

75 Englewood CO

John v. United Advertsing

Are highway signs different? Is this like losing your GPS signal at a

crucial point? “Take the first available U-Turn”

What are the options for the court?

What are the options for the court? Set aside the entire contract Set aside the severable parts of it

A “material failure” of the entire contract?

Restatement § 237. Except as stated in § 240, it is a condition of each party’s remaining duties to render performances to be exchanged under an exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time.

Was it that?

A “material failure” of the entire contract?

Materiality defined in Restatement 241: will damages suffice? Is cure possible? Unjust forfeiture?

A severable contract Sever the breaches and enforce as to the

rest? Suppose the contract had been for a

lump sum payment?

Divisibility in the UCC

UCC § 2-307 Delivery in Single Lot or Several Lots. Unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned may be demanded for each lot. A presumption of non-divisibility

Divisibility in the UCC

UCC § 2-307 Delivery in Single Lot or Several Lots. Unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned may be demanded for each lot. But this might be rebutted if separate

deliveries contemplated

UCC § 2-612: Installment Contracts

§ 2-612(1) An "installment contract" is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause "each delivery is a separate contract" or its equivalent

§ 2-612(2) The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents

§ 2-612(3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole.

Promises vs. Conditions

Bare promises

Three different kinds of terms

Non-promissory conditions On its occurrence both parties excused

Promissory conditions On its breach, innocent party may

rescind or sue for damages Bare promises

On its breach, innocent party can sue for damages, but not rescind

Howard at 625

Howard

What are the farmer’s remedies if he did not comply with clause 5(b)?

Howard

Could he be sued for failure to comply with it?

Howard

Could he be sued for failure to comply with it?

So a non-promissory condition

Howard

And for non-compliance with Clause 5(f)?

Howard

Qu. Clause 5(f) If this is not met, Can Howard recover? If this is not met, is Howard liable in

damages?

Howard

What are the options?

Howard

What are the options? Bare promise: Not a condition precedent, but a

promise that the event will happen, breach of which gives FCIC a damages remedy at best

Promissory condition: A promise that the event will happen plus non-occurrence excuses the other party from performance

Condition precedent: No promise that event will happen, but non-performance excuses both parties

Howard

What are the options? Held a Bare promise

What are the presumptions in the Restatement? Restatement § 227(1) In resolving doubts as to

whether an event is made a condition of an obligor's duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee's risk of forfeiture, unless the event is within the obligee's control or the circumstances indicate that he has assumed the risk.

What are the presumptions in the Restatement? Restatement § 227(1) In resolving doubts as to

whether an event is made a condition of an obligor's duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee's risk of forfeiture, unless the event is within the obligee's control or the circumstances indicate that he has assumed the risk. So a presumption against promissory and

non-promissory conditions

What are the presumptions in the Restatement? Restatement § 227(2) Unless the contract is of

a type under which only one party generally undertakes duties, when it is doubtful whether (a) a duty is imposed on an obligee that an event occur, or (b) the event is made a condition of the obligor's duty, or (c) the event is made a condition of the obligor's duty and a duty is imposed on the obligee that the event occur, (a) = bare promise by obligee (b) = non-promissory condition (c) = promissory condition by obligee

What are the presumptions in the Restatement? Restatement § 227(2) Unless the contract is of

a type under which only one party generally undertakes duties, when it is doubtful whether (a) a duty is imposed on an obligee that an event occur, or (b) the event is made a condition of the obligor's duty, or (c) the event is made a condition of the obligor's duty and a duty is imposed on the obligee that the event occur, the first interpretation is preferred if the event is within the obligee's control. I.e., bare promise

Recall the different kind of terms in Howard

Bare promises

Restatement § 224 A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.

Restatement § 225(3) Non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur

Promises and ConditionsConditions

Conditions Precedent Promissory No liability if non-occurrence Liability if non-

occurrenceRestatement § 224 Restatement § 225(3)

Promises and ConditionsPromises

Conditions Bare Promises(Warranties)

Promises and ConditionsPromises

Conditions Warranties Election

Forfeiture Damages Damages only

Conditions precedent and subsequent

What’s the difference?

Defining Conditions

Conditions precedent: The obligations of the parties will not arise if x has occurred.

Conditions subsequent: The obligations of the parties are suspended if x occurs.

Conditions precedent Restatement § 224 A condition is an event,

not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.

Conditions subsequent Restatement § 230 “the occurrence of an

event is to terminate an obligor’s duty” Cf. Restatement § 224 cmt e

Conditions subsequent Restatement § 230 “the occurrence of an

event is to terminate an obligor’s duty” But not under 230(2) if the obligor is in

breach of duties of good faith and fair dealing or no undue hardship to obligor

What are the presumptions in the Restatement?

Restatement § 227(3) An interpretation is preferred under which an event is a condition of an obligor’s duty is preferred over an interpretation under which the non-occurrence of the event is a ground for discharge of that duty after it becomes a duty to perform That is, a presumption of a condition

precedent over a condition subsequent

Gray v. Gardner at 633

Gray v. Gardner Parties bargain for a price by providing

that the contract is void if a greater amount of sperm oil arrive than in the same period of the prior year Buyer to pay a premium if a shortage

that the contract is void if a greater amount of sperm oil arrive than in the same period of the prior year If a condition precedent the contract did not

arise, as the plaintiff must show the condition happened

that the contract is void if a greater amount of sperm oil arrive than in the same period of the prior year If a condition subsequent the contract did

arise, and the onus is on the defendant to show the condition happened

that the contract is void if a greater amount of sperm oil arrive than in the same period of the prior year Held a condition subsequent: onus on

defendant

Drafting CP and CS clauses

Draft the Gray v. Gardner promise as a CP as a CS

Attorney-approval clauses at 635

I agree “subject to my lawyer’s approval.” Gaglia v. Kirchner

If a buyer has an attorney approval clause, and the attorney wants changes, can the seller back out?

Modification, Waiver, Estoppel: Clark v. West at 636

The dirty little secret of textbook publishing revealed

Modification, Waiver, Estoppel

Distinguish Modifications, waiver, estoppel

Modifications are bilateral agreements to vary obligations under a contract Promises are modified

Modifications are bilateral agreements to vary obligations under a contract

Waivers are unilateral acts by one party to excuse another’s performance of an obligation Conditions are waived

Modifications are bilateral agreements to vary obligations under a contract

Waivers are unilateral acts by one party to excuse another’s performance of an obligation

(Promissory) Estoppel bars a promisor from enforcing a right where he knows that a promisee has detrimentally relied on him.

Agreement Required?

Reliance required?

Modification

Waiver

Estoppel

Modification, Waiver, Estoppel at common law

Agreement Required?

Reliance required?

Modification yes no

Waiver

Estoppel

Agreement Required?

Reliance required?

Modification yes no

Waiver no no

Estoppel

Agreement Required?

Reliance required?

Modification yes no

Waiver no no

Estoppel no yes

Clark v. West

What was the promise? Now you know why textbooks are so

Clark v. West

What was the promise? Now you know why textbooks are so

Facts alleged on 636 Would this be enough for an estoppel? A waiver?

(1) An agreement modifying a contract within this Article needs no consideration to be binding.(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.(3) The requirements of the statute of frauds section of this Article (Section 2-201) must be satisfied if the contract as modified is within its provisions.(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

UCC § 2-209. Modification, Rescission and Waiver

Wisconsin Knife Works at 639

What was the contract?

Wisconsin Knife Works at 639

What was the contract?

Spade Bits

Metal Crafters

Wisconsin

Black & Decker

Spade bit

Spade bit blank

Wisconsin Knife Works

What was the contract? Wisconsin orders 280,000 blanks from

Metal Crafters in Aug-Sept 1981 for delivery in Oct-Nov

New purchase orders in July 1982 Seller not able to deliver until December

1982—13 months late Jan 1983—144,000 blanks produced but

Wisconsin rescinds

What was the evidence of modification and what are the problems under the UCC?

2-209(1) An agreement modifying a contract within this Article needs no consideration to be binding.

Posner: Replaced by good faith§ 1-304. Obligation of Good Faith.

Every contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement.

The UCC: Consideration is out

A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.

What was the problem with UCC 2-209(2)?

Was there a signed modification here?

Why would Wisconsin have wanted a “no modification” clause and why are they standard?

What was the problem with UCC 2-209(2)?

Does this refer to the agreement or to the modification?

What does the proviso do?

What does this mean?

UCC 1-201(37): “Signed” includes any symbol executed or adopted with present intention to adopt or execute a writing

I.e., consumer must sign

How did Posner decide on modifications?

Posner on modifications

How did Posner decide on waiver?

Posner on waiver

2-209(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.

Note how this supplements the bias against forfeiture

How did Posner decide on Waiver?

When does something which fails as a modification succeed as a waiver in 2-209(4)? “can operate as a waiver”

Does something which fails as a modification always succeed as a waiver in 2-209(4)?

When does something which fails as a modification succeed as a waiver in 2-209(4)? Posner: so as not to render 2-209(2)

otiose, let’s add a reliance requirement to 2-209(4)

When does something which fails as a modification succeed as a waiver in 2-209(4)? Posner: so as not to render 2-209(2)

otiose, let’s add a reliance requirement to 2-209(4)

But is 2-209(5) then otiose?

But is 2-209(5) then otiose? 2-209(5) A party who has made a waiver

affecting an executory portion of the contract may retract the waiver by reasonable notification received by the other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.

How to reconcile the provisions: If there is a no modification clause, the

waiver doesn’t work without reliance If there isn’t a no modification clause,

then no reliance needed, but under 2-209(5), one who waives can’t retract if the other party relies

Why does Easterbrook dissent?

Why does Easterbrook dissent? Waiver has never required reliance

UCC § 1-107. Waiver or Renunciation of Claim or Right After Breach. Any claim or right arising out of an alleged breach can be discharged in whole or in part without consideration by a written waiver or renunciation signed and delivered by the aggrieved party.

How to reconcile the provisions Waiver in 2-209(4) might encompass

either past or future performance Estoppel in 2-209(5) refers only to future

(executory) performance

So how would Easterbrook prevent 2-209(2) from being otiose?

So how would Easterbrook prevent 2-209(2) from being otiose? A stricter standard of proof as to

intention?

Agreement Required?

Reliance required?

Modification yes no

Waiver no no

Estoppel no yes

Avoiding forfeiture: Common Law

Agreement Required?

Reliance required?

Modification no consideration needed 2-209(1)

Good Faith in § 1-304

But no modification clause enforced 2-209(2)

Waiver

Estoppel

Avoiding forfeiture: UCC

Agreement Required?

Reliance required?

Modification

Waiver No Yes: Posner

No: Easterbrook

Estoppel

Agreement Required?

Reliance required?

Modification

Waiver

Estoppel No Executory only 2-209(5)

Why no waiver in Suzuki at 646?

Did Suzuki waive Kummer’s failure to order Suzuki parts?

The onus of proof to satisfy 2-209(4) unequivocal and unambiguous actions

needed for a waiver

Why no waiver in Suzuki?

Termination clauses and agency costs Wisconsin Fair Dealership Law, 1974

135.03 Cancellation and alteration of dealerships. No grantor, directly or through any officer, agent or employee, may terminate, cancel, fail to renew or substantially change the competitive circumstances of a dealership agreement without good cause. The burden of proving good cause is on the grantor.

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