Contracts II: Notes

Week 1, K2, September 6, 2006




PAROL EVIDENCE RULE

Parol doesn’t mean oral – it means informal.

The PER is what we call a Rule of Exclusion.

Example: Written agreement containing the terms AB&C. But maybe they are talking about D but D never finds its way into the contract, although it was something they agreed to prior to the contract. Eventually a dispute arises because one side says, you didn’t do D. The other side says I don’t have to D was not in the contract.

The dispute that arises is whether or not D is actually a part of the contract.

The PER tells us when the court will and when it won’t allow a party to introduce evidence.

The PER is an evidence rule. Even if a judge allows evidence to be admitted, it doesn’t mean that it becomes part of the contract. It is still ultimately up to a trier of fact. It doesn’t tell us what’s going to be part of a contract, it tells us what evidence is going to be allowed by one party as a demonstration of what they believe to be in the contract.


The PER is also a rule of exclusion. If the PER applies, then the evidence doesn’t come in. The jury can’t hear the evidence.

Kent: The Parol Evidence Exclusion would be a better term. If the rule doesn’t apply, then the evidence is admissible.

Integration: If the writing is intended by the parties to be the final statement of the agreement, then we can say there’s been an integration or the writing has been integrated. It’s not a draft – it’s a final executed agreement that bears the signatures of the parties.

Extrinsic Evidence: Meaning outside.

Interpretation: It’s what A,B,C or D means. Landscaping example: We might have a disagreement about what an “edge” means. I would have to introduce evidence of what it means to me.





TWO TYPES OF INTEGRATION:

1. Total Integration: The writing is final, AND is the complete written expression of the parties’ agreement. No extrinsic evidence. Even if D comes in nicely and doesn’t contradict – still not admitted.
Consequence: The writing not only may not be contradicted by extrinsic evidence, it may not even be supplemented by consistent, additional terms (paragraph 5 p. 420)

2. Partial Integration: The writing is final but it is NOT the complete written expression of the parties. D can come in to supplement but it can’t come in to contradict.
Consequence: If D (ABC) contradicts, then it can’t come in. You may supplement the writing by extrinsic evidence, oral or written as long as it doesn’t contradict the writing. The policy is that people are encouraged to put their agreements in writing.

Last form of writing:

3. Unintegrated Writing: Not intended to be the final agreement of the parties. In this case, the PER does not apply.

Public Policy Reason Behind PER: People are encouraged to memorialize the terms of the agreement. If there’s a disagreement, it’s a place to look to see what the agreement was. It’s so that people can put things into the writing that should naturally be there.

The PER is a question of law for the court (not for the jury). The court has discretion.

B. Of handout

1. Four-Corners Rule: Not used very often. See handout.

2. Collateral Contract Concept: See handout. Key word: ordinarily (would have included in the writing)

3. Williston’s View: First question: Is there a merger or integration clause? If there a merger clause under Williston’s View, then if such a clause exists under Williston’s View, we presume that the integration is total unless the merger clause itself was obtained by some sort of fraud, duress or mistake. If it would have been natural in the writing, then it’s going to be a totally integrated writing. If not, then we have a partially integrated writing. Key word: naturally (have included in the writing).

4. Undercuts the PER, gives the judge discretion. It creates a trial within a trial.

5. UCC handles integration. 2-202. Assumes that a writing is partially integrated. More liberal. More likely to get evidence in. Key word: certainly (would have included in the writing.)

6. PER does not apply, the court allows it to come into evidence.

C. Of handout

To first determine if the PER will apply:

Problem 105, Page 413

It would have been natural for them to include it in the writing. Does the PER take the evidence out? We are looking at a totally integrated writing. The PER would bar the introduction of evidence of the oral agreement that they could back out at any time.

Problem 106

We have a writing and we have extrinsic evidence that occurred subsequent to the written contract. The PER is not going to apply. In other words Jane is going to be permitted to introduce evidence that Hiram told her that she could use galvanized nails.

Mitchill v. Lath


They used the Collateral Contract Concept. Whether or not parties ordinarily would have included the removal of the ice house in the writing. The majority says yes, that’s something that ordinarily would be in the writing.

The Dissent page 420: The removal of the ice house was loosely bound.

The moral of the story: If it is something significant, don’t rely on side agreements.

Luria v. Pielet

UCC. Pielet wanted to introduce evidence that it didn’t have to supply the Luria brothers if it didn’t get the scrap metal from a certain supplier. This was a conversation and not in the original agreement.

NATURE OF THE CASE: This was a dispute over a contract to delivery scrap steel.

FACTS: Luria (P) made a contract with Pielet (D) for D to delivery scrap steel. D did not perform and during trial wanted to enter parol evidence regarding the fact that the written contract was conditioned upon obtaining the scrap steel from a particular supplier. The trial court refused to allow the testimony under parol evidence (UCC 2-202). D appealed.

ISSUE: Does the presence of an oral condition precedent to a contract calling for the unconditional sale of goods contradict written contract terms?

RULE OF LAW: The presence of an oral condition precedent to a contract calling for the unconditional sale of goods contradicts written contract terms.

HOLDING AND DECISION: (Fairchild, C.J.) Does the presence of an oral condition precedent to a contract calling for the unconditional sale of goods contradict written contract terms? Yes. D argues that the offered testimony does not contradict the writing but instead explains or supplements the writing. This court accepts the definition of inconsistency as the absence of reasonable harmony in terms of the language and respective conditions of the parties. When writings intended by the parties to be a final expression of their agreement call for an unconditional sale of goods, parol evidence that the seller's obligations are conditioned upon receiving the goods from a particular supplied is inconsistent and must be excluded. Had there been some additional reference such as per the conversation on the written confirmation indicating that oral agreements were meant to be incorporated into the writing, the result might have been different. Affirmed.

LEGAL ANALYSIS: This is a strict interpretation of the parol rule.

Pielet made the argument of an Oral Condition Precedent. A Condition Precedent is an act or event that triggers a duty.

Ex.: I will pay you $500 if it rains tomorrow. My duty to pay you is activated if it rains tomorrow. I don’t have a duty to you yet, but if it rains tomorrow it’s activated. The rain is a condition precedent.

A Condition Subsequent is an act or event that doesn’t activate but discharges the duty.

Ex.: Condition Subsequent. I will pay you $500 unless it rains tomorrow. The duty to pay is already established but there is something that could happen to discharge it. If it rains tomorrow, I don’t have to pay.

In this case Pielet was arguing that the conversation he had was an oral condition precedent. So his duty to provide this scrap metal – his contractual duty to do that never arose because the condition precedent was never met – he was never able to get the scrap metal from his supplier.

The conversation about the supplier of scrap metal – whether or not that comes into evidence is the issue in this case. We know we have a partially integrated writing. Evidence can’t come in to contradict it but can come in to supplement. The court said that the nature of the conversation that allegedly tool place contradicts the essence of the agreement. They looked at two cases Hunt and Snyder.

Hunt case said if the writing is silent, an oral condition does not contradict the writing. The court didn’t go in that direction.

Snyder case said the absence of reasonable harmony in terms of the language and respective obligations of the parties creates the inconsistency. The oral condition created an obligation that wasn’t in the written contract – it wasn’t in harmony. The court chose to go with this approach and determined that the evidence was barred by the parol evidence rule because it contradicted the writing.

The court also looked at Comment 3 UCC 2-202 Page 435. It directs us to ask the question in UCC cases of whether this extrinsic evidence is something that certainly would have been included by the parties and this court said yes, this is something that certainly would have been included in a writing.

Be mindful of the words that the UCC uses – “certainly.” It is a higher standard

Lee v. Joseph Seagram

Williston’s View


FACTS: Lee (P) had a 37-year record of service with Seagram (D) and had even been one of its officers. P acquired a half ownership in a wholesale liquor distributorship and agreed to sell the distributorship to D. D orally promised to set up P's sons in a new distributorship in a location acceptable to P. The written contract did not refer to the oral agreement. D performed the contract according to the written terms but refused to perform the contemporary oral contract. P sued D. At trial, the court ruled that the contract was not completely integrated and allowed parol evidence about the contract because it did not contradict or alter the written contract. D did not refute the oral agreement. P was awarded damages and D appealed. D claimed that parol evidence should not have been admitted to prove the existence of the oral agreement.

ISSUE: May parol evidence be admitted to establish the existence of a contemporary oral agreement if that agreement neither alters nor contradicts the terms of the written contract?

RULE OF LAW: Evidence of a collateral oral agreement that does not contradict or cover the terms of a contemporary written agreement may be admitted if the written agreement is completely integrated.

We have a writing. We have extrinsic evidence that is sought to become part of the agreement. The question being asked is would it ordinarily be part of the writing? This was a sale of a business and typically you wouldn’t find an agreement of this nature. The court also looked to see if there was a merger and the close personal relationship that the distributor had. There didn’t appear to be anything that would contradict the writing. The evidence here did not contradict the writing so it was not excluded.












Pym v. Campbell

This case deals with one of the exceptions of the PER. The evidence Pym is seeking to admit is evidence on whether or not a condition to formation to contract was met. We didn’t have a K unless Abernathie approved.

The exception is that extrinsic evidence of a condition to contract formation is not going to be barred by the PER.

INTERPRETATION

Three approaches on back of yellow handout. The parties disagree about something already in the agreement. There are three approaches.

NEED TO KNOW THE TWO STEP APPROACH
1. Four Corners Approach: What the judge reads is it. If the judge can ascertain just by looking at the document without having to look at anything outside the document. Example: Dictionary definitions, taking testimony. The four corners approach will not look at those things.

2. Two-Step Approach: First step is to show the judge that there is an ambiguity. The second step is that if the judge agrees there is an ambiguity, evidence can be introduced to explain the ambiguity. This is the most popular view.

3. UCC: Terms cannot be contradicting.

Sometimes it is necessary for the court to look outside the contract and are driven by common sense.

Eichengreen v. Rollins

The homeowner was attempting to demonstrate that it was his intention that the security system be of a certain quality. The court is not going to add another term about which the agreement is silent. Under the four corners approach, what you intended is immaterial. What the judge is looking at is the document itself. What they are struggling with is the definition of a security system. The court has to take a fully integrated writing – no extrinsic evidence admitted and term what something means. Cannot admit outside evidence for the party’s intent.

Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co.
NATURE OF THE CASE: Drayage (D) appealed from a judgment holding that an indemnity clause covered damages to all property, regardless of ownership, in Pacific's (P) action to recover damages to property under the indemnity clause.

Two-step approach was applied, ambiguity was found to exist, the court made the determination that the clause was reasonably susceptible to different interpretations and from there it goes on to state the lower court erred for not allowing evidence for the meaning of the clause.

WEEK 2


Assume that we already have a contract.

BASIC CONCEPTS

Conditions are all over the place in contracts. Sometimes they are marked with magic words – “if”, “so long as”, “in the event that.” Generally speaking conditions are something that is going to trigger a duty on one party’s part. It’s an event, circumstance or some happening that acts as a trigger.

If this thing happens, then your duty to perform under the contract arises.

Example: I promise to take you to the Rose Bowl if Michigan wins the Big 10 Title.

There’s a condition in there. My duty to take you to the Rose Bowl is not triggered unless Michigan wins the Big 10 Title. I’m not simply promising to take you there if an event or circumstance happens.




EXPRESS CONDITIONS

Express Conditions are conditions that are specifically included in the party’s contract.

I will take you to the Rose Bowl if Michigan wins the Big 10 Title. The express condition is Michigan winning the Big 10 Title. That’s our agreement.

There are also conditions don’t necessarily appear in the writing – they haven’t been expressed by the parties. These are called Constructive Conditions. These are usually conditions that are read into a contract by a court that is charged with interpreting the contract.

Remember: the law favors the making of contracts and courts will do what they can to save contracts.

Example: I agree to sell you my car for $500. There aren’t any conditions expressed in that agreement. What we haven’t said is who goes first. Do I give you the $500 first or do you deliver the car first? When the court steps into this dispute it doesn’t want to throw our contract away so it might impose a constructive condition. And that constructive condition might be my duty to pay you doesn’t arise until the car is delivered.

We never said that in our agreement but in order to save the contract, the court might impose that constructive condition on the agreement.

Excuse of a Condition: Doctrines that may excuse a fact or event from occurring.

Anticipatory Repudiation: One party being ready, willing and able to perform and the other side not following thru with their duties under the agreement.




GENERAL RULES

If the condition is an express one (it’s right in the agreement) – the parties have written it down (not always necessary for it to be written) but they’ve agreed to this condition, then it has to be fulfilled literally.

If the condition is, I’ll pay you $500 if there’s a thunderstorm tomorrow night, and it rains but there is no thunder – that no good. Close enough does not work. It has to be a thunderstorm.

A constructive condition is satisfied by substantial performance.





Promise: A contractual undertaking, breach of which leads to liability for damages or equitable relief.

Condition: A fact, the occurrence or non occurrence of which determines when and if a party must perform.

Promissory Condition: A combination of both a promise and a condition. It’s first a promise that a fact or event will occur tied to a condition.

Example: You retain me to paint your portrait. As the artist I tell you, you don’t have pay me unless you’re satisfied with the result and I promise you will be satisfied.
I’ve done two things:

1. I’ve conditioned you having to pay me on being satisfied (we have a condition).

2. I’ve also made a promise to you and that promise is that you’ll be satisfied.

Example 2: A soccer club wants to enlist a trainer. The trainer might say to the group, “I’ll give your group soccer training if I get certified and I promise to get certified.”

His duty to provide training to the group is triggered upon the event of being certified. We have a condition that exists for his duty to provide training. As part of the same agreement he has also promised that he will in fact receive the training – a promissory condition.

Consequences: If a promise isn’t fulfilled, then the breacher can be sued for damages or some form of relief. If a condition is not fulfilled it’s not going to give rise to liability.

Example: If Michigan doesn’t win the Big 10, I can’t be sued for that. I simply tied my duty to take you to the Rose bowl to their winning the Big 10.

The failure of the condition relieves me of my duty to perform under the contract.

Promissory Condition: If a promissory condition is not fulfilled you may sue for damages and your duty does not arise.

Back to the portrait example: I promise to paint your portrait and you only have to pay me if you are satisfied and I promise you’ll be satisfied. You’re not satisfied. The condition of being satisfied is never fulfilled. I promised that you would be – you can sue me for that breach. In addition to being able to sue me for that breach, because you never became satisfied, your duty to pay is never triggered.

Courts do not like forfeitures (throwing the contract out). Courts would rather save it and if that means imposing a constructive condition to do it, that might very well happen.
CONDITION PRECEDENT

Condition Precedent: A fact or event that activates a duty.

Example: I will pay you $5 if it rains tomorrow. The raining tomorrow activates my duty to pay. That’s a condition precedent.

Condition Subsequent: A fact or event that discharges a duty.

Example: I promise to take you to Michigan’s bowl game unless they finish in the bottom half of the Big 10. My duty to take you to the game is set. I have to do it. There’s a fact or event that could get me off the hook – that could discharge my obligation and that’s them finishing in the bottom half of the Big 10.

A condition subsequent is often marked by words like “unless.” I will do this unless this happens. Where we have a conditions precedent they are marked by words such as “if”. I will do this “if.”

A caveat about conditions: The fact or event has to be something other than something that is certain to occur.

Example: I promise to take you to the rose bowl if the sun comes up tomorrow. That is not a valid condition under the law because it is certain to happen.






Concurrent conditions exist when parties have made promises to one another but they haven’t said who goes first – they haven’t ordered performance. Don’t confuse this with constructive condition!

Example: I’ll sell you my car for $500, we agree to that – these are concurrent conditions. In essence I’m agreeing to sell you my car if you pay me $500 and you’re agreeing to pay $500 to buy my car.

Example 2: Said another way with the magic words, I’ll sell you my car if you pay me $500.

There are conditions for both of us – I’m not going to give you the car unless I get the money and you’re not going to give me the money unless you get the car.

The general rule is that parties who have to perform over time (building something for someone, delivering something for someone) usually are made to go first if it’s not otherwise expressed in the contract. The court will impose that constructive condition. The party who has to perform over time goes first that triggers the other party’s duty to pay.

EXPRESS CONDITIONS

Problem 136 page 651

This is condition precedent. The giving of the notice activates the duty to pay. When that fact or event activates the duty of the insurance company to pay, that’s a condition precedent. So no, the person who didn’t give the proper notice doesn’t prevail here. If there was a fact or event that had to happen before the insurance company’s duty to pay was triggered – it never happened so that duty never arose. Part 2: This is the failure of a condition not the failure of a promise. So no, they can’t sue the insured for failing to give

notice. It’s the difference between a condition and a promise. Had the insured promised to give notice, we might be looking at a different situation.

Problem 137

The court might come in and impose a constructive condition. If payment of the agreed upon amount is not made periodically, work may cease. What if that periodic payment is $1000 and they’re $2 short? We know that express conditions have to be fulfilled strictly. It becomes substantial performance and if it is, the contractor has to keep working. He can still sue for breach if the payments are short but the bigger question is can he stop working. Is the duty of performance triggered by payment that is $2 short?
If the court imposes a constructive condition, then do you continue working if you are receiving the periodic payments, that $50 (book example) might not be a breach. Only being $50 short may amount to substantial performance.

This is how we have to analyze conditions. First of all what is a condition and what is a promise? There’s a promise specifically made to make these payments. Anything that comes up short, we can sue hands down.

Relieving Hanging Gardens of it’s obligation to perform under the contract is a little bit different question. And that may turn on whether or not there’s a constructive condition and whether that constructive condition has been met. Whether there’s been substantial performance of the duty to pay the periodic payment.

But also read it closely to see whether or not you feel the court might impose a constructive condition. If the parties have left something out, the ordering of performance – look at it. Might a court say, Hanging Gardens, you have to perform if payment is made. You guys didn’t say it but that’s the way it’s going to be.

Sometimes you have to look at a problem and analyze it as if you are the judge. Has one party substantially performed so as to trigger the other party’s obligation? Don’t always jump to constructive conditions though. If the parties have said, the contractor reserves the right to quit work if any periodic payment is a penny short – that’s all you need to know if Hanging Gardens can stop work. The court does not need to impose a constructive condition in that situation.

Problem 138

The condition here is payment of $400 upon completion. What are Portia’s remedies if any? This is a condition precedent. Her duty to pay is triggered by completion of the briefcase but the briefcase wasn’t completed (condition). The leather craftsman made a promise to make the briefcase. The condition would have activated her duty to pay. Be he did breach a promise so he can be held liable for damages. She had to pay more for a briefcase so she could hold him responsible for the difference. Watch for these traps. He did promise to do something. All the condition had to do with was the timing of payment. She didn’t have to pay until the briefcase was done. That doesn’t relieve him of his promise.
Burden of Proof
Condition Precedent
Plaintiff (demonstrate the condition occurred)
Condition Subsequent
Defendant (why my duty was discharged)

Howard v. Federal Crop Insurance Corp
North Carolina, 1976

Defendant’s argument: Viewed as a condition. Their duty to pay for the loss is not triggered unless they’re given the proper inspection. They are trying to avoid the triggering of their duty altogether by having this provision construed as a condition to their duty to pay.

The court viewed this contractual provision as a promise rather than a condition:

1. Rules of Interpretation: Ambiguities are construed against the person responsible for drafting the contract – Federal Crop Ins. in this case.

2. The company knew how to craft a condition precedent. They actually used the words, it shall be a condition precedent – language that they didn’t use referring to the inspection provision.










Jones Associates v. Eastside Properties
Washington, 1985


Page 658: The issue is whether the trial court erred in dismissing Jones Associates’ action against Eastside Properties. Eastside claims that the following contract provision creates a condition precedent to payment: “Engineer shall be responsible for obtaining King County approval for all platting as set forth above.”

Eastside wanted Jones to get King County approval. Eastside wants the provision to be construed as a condition. They don’t want to pay Jones.

Jones views this as a promise. The court concluded that it was a promise. They didn’t use any magic words. They didn’t use any of these types of phrases that we normally see that accompany conditions – if, on condition that, as soon as – words that might demonstrate that a duty is linked to some event happening.

The court also looked to the circumstances surrounding the making of the contract and tried to ascertain what their intent was. The intent of the parties is to be ascertained from a fair and reasonable construction of the language used in light of the surrounding circumstances.

The court also looked at it by viewing the contract as a whole, the subject matter and the objective of the contract, all the circumstances surrounding the making of a contract, the subsequent acts and conduct of the parties to the contract and the reasonableness of the respective interpretations advocated by the parties.

The court is looking at a number of different things trying to determine what their intent was and if this is really a promise or a condition.



Bright v. Ganas
Maryland, 1937

The testamentary promise being made is $20,000 after the colonel’s death if Ganas served faithfully and continuously until that time. We have the magic word if. That lends to the conclusion that it is a condition. But what if it’s looked at as a promise from Ganas to Col. Darden? That’s viewed a promise here.

RULE OF LAW: A breach of an implied condition in a contract between master and servant may, as a matter of law, justify voiding a contract.

This principal has carried over into employment law. If someone is fired from their job for a reason the law says is illegal (civil rights, whistle blowing, etc) a person is entitled to damages that flow from that wrongful discharge.

After required evidence rule (we don’t need to know it). An employer can defend its damages if it finds out the employee committed resume fraud, embezzlement, etc.













Gray v. Gardner
Massachusetts, 1821
This is a condition subsequent. There was an agreement to pay a sum of money which amounted to $5000 if there was a certain amount of whale oil prior to October 1.

Example: I’ll pay $5000 unless there’s more oil than expected on the date we agreed to.

The defendant promised to pay unless more oil arrived by midnight of October 1. The reason that the parties are making arguments about whether or not this is a condition precedent or a condition subsequent is because it’s going to matter when it comes to who has the burden of showing that the ship was anchored at the time it was supposed to be.

The defendant has the burden of demonstrating that the event that would have gotten them off the hook from paying $5000 occurred.

The point of the case: How you word a contract really does matter. The way this contract was worded places the burden on the defendant.

RULE OF LAW: If a party to a contract can avoid his duties under the contract on the happening of a certain event, that party has the burden of proof as to the happening of that event.

WEEK 3

Week 3, K II, September 20, 2006
Express conditions have to be satisfied literally.

Constructive conditions have to be satisfied by substantial performance.

Chodos v. West Publishing

This is an example of a Satisfaction Clause.

Satisfaction Clause: West was saying that if the manuscript is acceptable as to form and content, we will publish it. That’s one way of saying, if we’re satisfied with it, we will publish it.

The circumstances were that the manuscript had to be acceptable to West as to form and content. West exercised its right to deny the manuscript but its reasons were impermissible under the contract. While it’s true that a condition existed here that West could deny the manuscript if it was unacceptable as to form and content – those reasons according to the findings were not the reasons that West decided to not publish the manuscript. The decision really was based upon the market and the timing of the manuscript, how well they anticipated it would do in the market at that time.

If the publisher wanted to avoid this problem in the future and reserve itself the discretion to deny a publication for market conditions they could include it as one of the conditions for publication – make it an express condition so long as the manuscript is acceptable as to form and content and appropriate for the given market conditions, then we will publish it.

The court said you can’t just make up any reason you want to deny publication. If the condition says form and content, then it has to be something to do with form and content.

There was an argument made by the publisher that the contract was illusory. Illusory means that the choice of alternative performances is reserved by one side – they are not really binding themselves to anything. The court addressed this by stating that in all contracts there is an implied covenant of good faith. Not all jurisdictions are going to recognize an implied covenant of good faith in all contracts but the point the court was making was that West cannot act completely and arbitrarily in refusing to accept the manuscript. It must act in good faith. It wasn’t an illusory contract because that obligation always exists. You are bound by the parameters of good faith in all contracts.
CONCISE RULE OF LAW: A publisher does not retain the right to reject an author's manuscript written pursuant to a standard industry contract if the manuscript is of a quality contemplated by both parties.
QUANTUM MERUIT — Usually isn’t given to one party where there’s been full performance. A payment by one to the other for the value of the services that have been rendered. It is usually a remedy that is reserved for when one side has breached and the other side has part performed and not fully performed. Equitable doctrine allowing recovery for labor and materials provided by one party, even though no contract was entered into, in order to avoid unjust enrichment by the benefited party.

SATISFACTION CLAUSES

Satisfaction Clauses are looked at as two types of contracts – objective and subjective.

1. Commercial = Objective Standard

If the subject matter of the contract is commercial in nature – if it’s the sale of goods and capable of an objective evaluation:

Example: I say that I’ll send you 300 and I only send you 200. Anyone looking at that is going to know that my obligation has not been satisfied.

If the subject matter of the contract is commercial in nature and capable of objective evaluation, we use an objective standard to determine if the party is satisfied. Would a reasonable person in the shoes of the non-breacher be satisfied?

Commercial contracts = objective evaluation. We’re looking to see if that imaginary reasonable person would be satisfied with the performance of the other side.

2. Personal = Subjective Standard

If the subject matter of the contract is personal in nature - hiring someone to do something. We look at those subjectively:

Example: If I hire an artist to paint my portrait, hire someone to do tile work that is very detailed, a hairdresser just before a wedding – things that may be more personal in nature.

We have satisfaction clauses in those types of contracts. We’re looking at them with a subjective standard. Was this person in good faith satisfied or dissatisfied? We are asking ourselves about the party in the case – were they or were they not satisfied. They have to act in good faith.

Example:

If you paint my portrait for me and I say, I’ll pay you if I’m satisfied with the outcome. That’s a personal contract. There’s a satisfaction clause involved. I’m saying to you that I’m only going to pay you if I’m satisfied – and I don’t pay. You sue me for breach, we go to court. You as a plaintiff have to prove that I was satisfied. Not that a reasonable person would have been satisfied but you actually have to prove that I was satisfied. And that’s not an easy thing to do.

You’ll have to take depositions and exchange documents. You’ll have to demonstrate how the person treated the painting after it was delivered. Did they make comments to anyone on how glorious it was? Did they admit that they liked it?

Problem 139

Caveat of contracts of a personal matter, they have to act in good faith.

a) Wilde does not have to pay, Whistler has burden of proof.
b) She can refuse as this is viewed as a personal matter. If the seller were a corporation then there wouldn’t be an emotional/personal attachment. We would look at it as a commercial transaction from an objective point of view. Would this buyer be satisfactory to the reasonable person?

c) Provisions where there is a satisfaction clause requiring the architect’s approval before payment are generally viewed as subjective in nature. Most courts that have looked at this issue have concluded that requiring architect approval has more to do with the personal tastes and preferences of the builder than it does with whether or not the right pipe or insulation was used. Sometimes with architect certificates we’re talking about things beyond brick and mortar. There’s artistic integrity and the design of the home. In this situation the dissatisfaction of the architect if it is in good faith may be grounds to avoid the obligations of the builder.


When a company or an individual undertakes to build something, the person doing the building often hires a general contractor to oversee everything. Sometimes a general contractor will have contracts with subcontractors. A general might say to the sub:

I can’t pay you until I get paid;
I’m not going to pay you unless I get paid;
I’ll pay you if I get paid.

Sometimes a promise might sound like a condition but it’s really not. It simply relates to the timing of when the sub gets paid. If the general says to the sub, I’ll pay you when I get paid – they’re not conditioning their duty to pay on some fact or event happening. They’re simply promising to pay but setting a timing mechanism for it.

An express condition will relate to the actual duty to pay.

Example: The general contractor’s duty to pay the sub is expressly conditional on the general contractor first being paid by the owner.


Why would any sub contractor ever agree to something like that? It seems very harsh. California has made it a prohibition of public policy for a general contractor to condition its duty to pay the sub on whether he gets paid by the owner.

The first thing you want to examine is the surrounding circumstances and the intent. Courts want to honor the intention of the parties who enter into a contract. That intention sometimes is clear from their words – Example: payment is expressly conditional from the owner. We can tell from the words what that intention is so long as when – the timing of the payment rather than the actual duty to pay. You want to decipher the language of the contract to determine whether or not we have here is a condition of payment to the sub or a promise with some caveat having to do with timing of when they get paid.
Gulf Construction Co. v. Self
TX, 1984

Gulf wanted this clause to be construed as a condition. The use of the word until led the court to the conclusion that this wasn’t a clause that was triggering Gulf’s duty to pay or not to pay, this was actually a promise. Gulf had to pay, it was promising to pay but they were simply saying that they weren’t going to pay until it had payment from the owner.
CONCISE RULE OF LAW: It is a rule of construction that a forfeiture, by failing a condition precedent, is to be avoided whenever possible under another reasonable reading of the contract.

1. The policy that the court is looking to here is this general contractor is undertaking some risk. It’s in the contractual relationship with the owner and it always has that risk present of not getting paid. What the courts don’t want to see happening is the general shifting that risk to its subs. So it’s looking at the circumstances and the language of the agreement to see if there’s an attempt by the general to alleviate himself of this risk and shift it to the subs.

2. The risk can be shifted if there is a clear and unequivocal express agreement by the parties to do so. If there’s an express condition between the general and the sub to shift that risk then it’s ok to do it (risky for sub). 3. Intention of the parties. Was it really both of their intentions to shift the risk of non-payment to the subs? The court looks at if they were really intending to do that. 4. The ninth paragraph of the subcontracts between the parties does not clearly, unequivocally and expressly shift the risk of non-payment by the owner from the contractor (Gulf) to the subcontractors (Self). Practice Tip: If you actually do want to condition a party’s duty to pay the sub, then be very, very clear about it. The attempt to shift that risk of non-payment is going to be looked upon in disfavor. But in most cases it is acceptable to do it and say to the sub, you are only going to get paid by me on the condition that I get paid by the general. If it is ambiguous in any way the likelihood is that this is going to be viewed as a promise with some element of timing of payment as opposed to a condition to the duty to pay.
Problem 140

Yes, he must pay. He wasn’t conditioning his duty to pay on her arriving but he was only saying he would pay when she arrived. He still made the promise to pay. He didn’t say I’m only going to pay you back if she arrives. He said I will pay you back when she arrives. He’s promising to pay back the debt and he is linking it by timing not by duty by her returning. The fact that she never arrives doesn’t get him off the hook. He must also make good on that note in a reasonable amount of time.

Problem 141

1. He does not have an obligation to try to find financing. It is not a condition to the formation of the contract and he never promised to obtain financing.

2. She could procure it for him but does he have to take it? He may have to take the financing or he may not. It would depend on whether or not that financing was satisfactory to him in an objective sense. He doesn’t have a personal attachment.




Constructive Conditions are those imposed by the court. They’re not expressly spelled out by the parties in the contract. They usually arise in situations where the parties have exchanged promises but they’ve left something out. They forgot to put something in that is important to carrying out the contract. Often the ordering of performances – who goes first.

Example: If a builder promises to build a homeowner a house, the homeowner promises to pay the builder to build the house, how do we know who goes first?

The court in that situation would come in and impose a constructive condition and order the parties performances – your duty to pay for this house is conditioned upon it being built.

When we are looking at these conditions of exchange, conditions of performance – who goes first, we want to ask ourselves, are the promises being made between the parties independent or are they dependent promises?

Kingston v. Preston

Constructive Conditions

Before this case, promises were viewed as independent. I promise to deliver the car, you promise to buy it. We weren’t conditioning our duty on what the other person did. You still had to follow thru with the promise and sue for breach.

RULE OF LAW: If a condition's performance depends on the prior performance of another, the first condition will be considered as an implied condition precedent to the duty to perform the second condition. The performance of one covenant might be dependent on prior performance of another, although the contract contains no express condition to that effect.

The casebook actually discusses Lord Mansfield giving a lesson in conditions; mutual, dependent, and independent. This case merely shows the construction of mutual and dependent covenants. Here the contract did not call for who goes first so the court must interpret the contract and construct by common sense the orders of performance. This case was very easy to decide. The amount of time to do both conditions, turn over the ownership and provide security are the same but it was easy to determine that D would suffer greatly if required to perform before there was security to guarantee P's performance of the payment for the company. This begs another rule of law related to constructive conditions in that the condition taking longer to perform will be performed first while the condition taking the shorter period of time will generally be implied to occur last. Here, the conditions could be performed at the same time so common sense tells you which should proceed first. Constructing the conditions and their order of performance is based on common sense and efficiency. It would be unwise to require D to turn over the company unless he had the guarantee of payment in place. Modernly, the mutual condition is commonly referred to as a concurrent condition.

Shaw v. Mobil
OR, 1975

1. Constructive Condition Precedent; and
2. Dependent Promise

Shaw and Mobil haven’t decided who goes first. There’s an agreement to pay the rent on Shaw’s part. The exchange promise that Mobil is making to Shaw is that in exchange for rent, Shaw is going to produce a certain number of gallons of gasoline. There’s an exchange of promises here. The question is who goes first? The amount of gas promised to be supplied by Mobil wasn’t supplied. Nevertheless they demanded payment from Shaw. Shaw’s position was no, in order for us to pay $470 for the rent, you first had to give us 33,572 gallons of gasoline.

So the court steps in and orders performance and says, the duty of Shaw to pay rent is triggered by the delivering of at least 33,572 gallons of gas, until that time the duty to pay the $470 does not arise. The court is stepping in an imposing a Condition Precedent to Shaw’s duty to pay rent. That condition is that the gas be delivered as promised.

The court also addressed the question of whether or not Shaw could sue Mobil for damages for not supplying the amount of gas that was promised. The court said no, Shaw cannot sue Mobil in this situation because of the doctrine of impossibility – an excuse doctrine we’ll cover later. While it’s true, Shaw’s duty to pay rent has not been triggered; it can’t turn around and sue Mobil for its lost profits as a result of Mobil’s failure to deliver the promised amount of gasoline because of the oil embargo and the impossibility of Mobil to even deliver that amount of oil under those conditions.

Constructive Condition Precedent. Constructive in the sense that the court is stepping in and imposing the condition – Shaw’s duty to pay is linked to the gas being delivered. It is constructive and not expressed. The supplying of the gas is the act or event that activates a duty not discharges one.


RESTATEMENT (SECOND) OF CONTRACTS

§ 234 – Order of Performances:

1. 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 to the contrary.

Kent: Where it is possible for two parties to perform simultaneously, then that’s how their performances need to be carried out.

Ordering Performances of Goods:

UCC 2-507: The seller’s tender of delivery of the goods is a condition to the buyer’s duty to accept and pay. In other words if the seller says, Here are these shoes that you ordered, delivers them, tenders delivery to the buyer – then the buyer’s duty to pay has been triggered.

UCC 2-511: The buyer’s duty to pay is a condition to the seller’s duty to tender the goods.

If we read those two together there seems to be a conflict. The UCC is not telling us with some certainty of who goes first. What they are telling us in 2-507 and 2-511 is if the buyer pays the seller has a duty to tender the goods. And what it’s also telling us is if the seller tenders the goods, then the buyer has a duty to pay.

These two sections contain three magic words: “Unless otherwise agreed.” Parties are always free to make their own arrangements about how to order performance. The positions in the UCC are really default positions in the event the parties are silent on who goes first.

Problem 142

UCC 2-309: This section calls for a reasonable time for performance. If goods are tendered, the buyer has a reasonable time to make payments. If payment is made the seller has a reasonable time to deliver the goods. In this problem, neither side is attempting to perform so we don’t have one side tendering goods and we don’t have one side making payment. Technically neither side is in breach because neither one’s duty has arisen. Since neither one of them showed up it never triggered the other party’s obligation to perform.

Problem 143

Meyer does not have an obligation to tender payment for the boat. His payment was dependent upon the delivery of the boat and his duty was never triggered. There was no “unless otherwise agreed” language either.

Problem 144

UCC 2-307: In order for the duty to pay to be triggered – circumstances matter (sometimes you have to look at the course of dealing, usage of trade or course of performance to really see what the intention of the parties is). 2-307, in the absence of some contrary intent requires the whole lot* to be delivered In other words, to tender delivery in such a manner that would trigger the others obligation to pay would mean not just half or three quarters but the entire order.

The UCC has a little exception to this “all in one lot” rule – if it’s commercially infeasible to deliver everything that the party bought in one shipment (reasons of transportation, size or other logistics), then it’s not required for all to be delivered in a single lot. The duty to pay could be triggered by delivering a portion of the lot as long as the seller is able to demonstrate that there was some commercial infeasibility to deliver the whole lot.

*“Lot” means a parcel or a single article which is the subject matter of a separate sale or delivery, whether or not it is sufficient to perform the contract)

Problem 145

This is governed by the Common Law. In this situation Bill is going to be in breach and not entitled to damages. Not finishing an entire half of the musical is likely going to be considered to be a material breach. The person who has to perform over time, needs to go first. That material breach is going to completely relieve the producer of his obligation to pay. Bill had to go first, he didn’t.



Jacob & Youngs Inc. v. Kent
NY, 1921 J. Cardozo

This is a very famous/important case. This case set forth the rule that substantial performance is going to be the test for determining whether or not a constructive condition has been satisfied.

Constructive Condition

Material Breach OR Substantial Performance

Kent: One thing to sink in – If we have an express condition to use Reading pipe, you need to use Reading pipe, period.

If you were to see an EXAM question or a fact somewhere, don’t apply the substantial performance test to express conditions. Constructive conditions are the ones tested with substantial performance.

There wasn’t an express condition in this contract to use Reading pipe. The clause in question said, “All wrought-iron pipe must be well galvanized, lap welded pipe of the grade known as “standard pipe” of Reading manufacture.”

It’s a representation. It’s a promise being made in the agreement of what’s going to be used. It’s not conditioning one side’s duty to pay on the use of Reading pipe, but it is a promise.

Did the builder substantially perform? The builder used Cohoes pipe and not Reading pipe. The question is was the substitution that the builder decided to use close enough? Did he substantially perform what he was required to do under the contract?

When you have a constructive condition, we are going to have two outcomes:

1. Either the party has substantially performed the condition which is going to trigger the other party’s duty; or

2. They have not substantially performed and that’s going to be a material breach.

You’re not going to have both a material breach and substantial performance. You’ll have one or the other.

Example: If this builder had left the shingles off the house, then it’s a material breach. If he forgot to put in the electrical sockets, then it’s material breach. It’s not always going to be that obvious. But the court gave us some factors to look at in determining whether or not the substitution was a material breach (Material breach vs. Substantial performance). Page 692:

1. Weigh the purpose to be served. What was the purpose of requiring Reading pipe? Was it superior? Why was it that, that pipe was specified? To give someone the business?

2. The desire to be gratified. Why did the owner want Reading pipe? Was he the president or Reading? Look at the owner’s personal desire to be gratified. What were his specific reasons to him?

3. The excuse for deviation from the letter. Why did they go with Cohoes pipe? What’s their reason for it?

4. Cruelty of forced adherence. How cruel would it be to force the builder to rip out the Cohoes and putting in the Reading? The ripping out of pipe is very significant.

5. Good faith. The willful transgressor must accept the penalty of his transgression. This trumps all else. If the builder purposely used the wrong pipe for no good reason at all, then he’s going to lose.

Problem 146

There is no reason to deviate from the specifications. He is a willful transgressor – no excuse, no reason. In that situation, he is going to be held to be in material breach. A willful breach is a material breach (the TA said the Kents like to test on this) and the willful transgressor will loose.

/End/

For next week:

TA SESSION
Use Professor Cox’s exams for testing practice. He has a book of every possible combination of multiple choice questions you could ask in contracts for sale. For essays, use the Kent’s exams.
Professors love to test on Evidence to show that a condition to formation of K exists.
A condition to formation of K is: If it rains tomorrow, we have a K, if it does not rain tomorrow, we don’t have a K.
Partial integration is probably what you’ll get tested on. Partial Integration means evidence allowed to supplement the K, but not to contradict it.

To determine whether the writing is partially integrated or totally integrated, use the UCC for sale of goods or Williston’s view for common law.
In an essay question something either happened or it did not happen – Reading pipe case.
To make an express condition the duty to pay or whatever has to be linked to your condition.

WEEK 4

Week 4, K II, September 27, 2006
Problem 148

(a) Tracthouses should stop building and mitigate damages. Tracthouses could sue NewTown for all 10 houses because that’s what the contract was for. At the end of the day TracHouses would be able to demonstrate that each house would have cost $___ to build and we have $___ lost profit in each house.


(b) The issue is whether or not Tracthouses has substantially performed. We are not dealing with a condition here. Substantial performance is questionable. Tracthouses would be in material breach. They promised 10 and they only did 9.5. If Tracthouses is deemed to be in material breach, they are not going to be able to recover on the contract however, they are going to be entitled to quantum meruit – the reasonable value of the services rendered, not their lost profits.

You either substantially perform or you are in material breach. If you are in material breach and the other side decides they don’t want to pay you, you may be able to sue but not on the contract – only in quasi contract to recover the benefit that you conferred on the other side, not lost profits.

O.W. Grun Roofing & Construction Co. v. Cope
Texas, 1975




The agreement from the roofing company to put on “russet glow” shingles was viewed as a promise and not an express condition to payment. A constructive condition usually comes in when there’s some issue about the ordering of performance. The promise was to install russet glow shingles. Payment wasn’t made expressly conditional on the use of it but nonetheless, we still have to look at whether or not the roofing company substantially performed its obligation. What the court is doing is going thru an analysis of whether or not the roofing company substantially performed its obligation to use russet glow shingles. The roofing company might say, they’re not russet glow, they’re red glow and they look exactly the same.

The evidence in this case was that she was going to have to rip the roof off completely because of the way it looked, the appearance it gave to the home and under those circumstances we can’t say the roofing company substantially performed their obligation to use the proper type of shingle.

The court also addressed the issue of quantum meruit. There’s no question that the roofing company did something. They expended energy, materials and labor. The question is whether or not what they did actually conferred a benefit onto the homeowner. If the roofing company were to say ok, maybe you’re right about the fact that we didn’t substantially perform so we’re not entitled to return performance under the contract. But at least we are entitled to recover quantum meruit – the benefit of the value of the services that we rendered to the homeowner. The court said that there was not benefit to her. In fact it may cost her more in the long run to rip off the roof.

When we are looking at quantum meruit situations and whether one party was in material breach might and be able to sue for quantum meruit don’t just ask yourself the question, did they do work. You’ve got to go that one step further and say, did they actually render a benefit onto this other person. That really is the key question.

Carter v. Sherburne Corp.
VT, 1974
The plaintiff is going to do some work for the defendant. Four contracts were entered into between plaintiff and defendant wherein plaintiff was to perform construction work and be paid in weekly progress payments with 10 percent being held back until 10 days after acceptance. Eventually defendant terminated the work by plaintiff. The plaintiff failed to abide by the completion schedule that they had set up. For that reason the defendant didn’t want to pay. The defendant pointed to language in the contract to try to avoid its obligation to pay the plaintiff.

The question is whether this “time is of the essence” provision is one in which if plaintiff doesn’t complete on time the defendant doesn’t have to pay at all or whether or not it’s more of a constructive condition where as long as the plaintiff substantially performs and satisfies this requirement that time is of the essence then defendant’s obligation is not going to be discharged. That’s where the parties differ in this case. The defendant says this is an express condition – if you don’t finish when you’re supposed to finish then you don’t get paid. The plaintiff says no. Yes we agreed that time is of the essence but it’s not an express condition to payment – it’s a constructive condition.

Ultimately the court sided with the plaintiff and set out some general rules about construction contracts. Time is of the essence clauses in construction contracts are generally going to be construed as constructive conditions. The court cited a secondary authority (Corbin, Contracts) to support that:

Page 704: Construction contracts are subject to many delays for innumerable reasons, the blame for which may be difficult to asses. The structure becomes part of the land and adds to the wealth of its owner. Delays are generally foreseen as probable; and the risks thereof are discounted. The complexities of the work, the difficulties commonly encountered, the custom of men in such cases, all these lead to the result that performance at the agreed time by the contractor is not the essence.

What the court is trying to avoid is a time is of the essence clause acting to entirely discharge a defendant or land owner who is having something built from paying under the contract – that’s not the result they want to have happen.

The court does say however that time is of the essence clauses can be made into express conditions but they have to be very, very clear and specific. There can’t be any ambiguity at all. If the parties really want to make payment conditional by completion on a date they can do it but the court is going to look very carefully at the language they use and make sure that is what was intended.

The rule of construing time is of the essence clauses in the majority of cases as a constructive condition allows for some flexibility for substantially performing under the agreement.

A penalty clause shows that time is really not of the essence. There may be time is of the essence language in the contract but the existence of a penalty clause has the effect of cutting against that. It’s a demonstration that there is some contemplation by the parties that there might be some delay in the work. We’re going to plan for that eventuality by instituting a penalty – $500 a day for example.






PERFECT TENDER RULE


UCC 2-601 is giving us three exceptions (or the rule is subject to these things) to its own rule.

1. 2-508: Even if there are goods delivered that fail to conform in some respect there are rights that the seller has to fix the problem.

2. 2-612: There are special rules for situations when the parties are agreeing to receive the contracted for goods in installments – periodic shipments.

Example: If I ordered 12 shipments of logo golf balls in installments (one shipment per month) and I get the first shipment with the wrong logo on them, they are nonconforming. I have some rights under the contract in 2-612 as to what I can do with this particular shipment. The provisions under the PTR (2-601) really don’t permit me to cancel the entire contract for the entire year. The remedies I have are in 2-612.

3. Unless otherwise agreed is the language in a lot of UCC provisions. Parties can agree to come to any agreement that they want. If the parties have agreed to handle shipments that are nonconforming then that agreement is going to take precedence and not the provisions of the UCC. But if the parties are silent as to how the shipment of nonconforming goods is going to be handled, then we’re going to have to look at the provisions of the UCC.

If I get a shipment of nonconforming goods, I can do three things as the buyer under UCC 2-601:

1. I can reject the whole shipment;

2. I can accept the whole shipment; or

3. I can accept any commercial unit(s) and reject the rest.


The term acceptance is used in the UCC and there is actually a whole provision dealing with acceptance – 2-606. When we talk about acceptance under the UCC, we’re not talking about the same kind of acceptance that we talked about in Contracts I – acceptance of an offer.

For the EXAM: You don’t need to recite code sections. If you want to discuss the PTR on an exam, you can call it the PTR, you don’t have to call it 2-601.

UCC 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): They buyer may reject any installment which is nonconforming if the nonconformity substantially impairs the value of that installment and cannot be cured or if the nonconformity is a defect in the required documents; but if the nonconformity does not fall within subsection (3) and the seller gives adequate assurance of its cure they buyer must accept that installment.

Paragraph (2) lays out when you can reject an installment. That is subject to the right to cure.

Note that this is different from the PTR. 2-601 allows you to reject a nonconforming shipment for any reason. Under 2-612 you can only reject the installment if it substantially impairs the value of that installment.

(3): Whenever nonconformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a nonconforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

Paragraph (3) lays out when you can cancel the entire contract because of a nonconforming shipment.

Example: If you get a shipment that substantially impairs the value of the whole contract, then you can repudiate the entire contract. If OCC is building a chopper and they get the wrong handlebars in from a supplier, they can’t build the chopper they need to build without that particular item. OCC may be in a position to say, cancel everything then.





Problem 150

The shipment is short three rails. Because this is an installment contract, does the nonconformity actually impair the value of that installment? Maybe. The last three may be what they need to finish the job but we don’t have that information. With being just short three we are not going to have a shipment that is substantially impairing the value of the installment and if it doesn’t, they don’t have the right to reject the installment. That doesn’t mean that they have to pay for 500 though.

The rails arrived two days late. This is essentially the same analysis. Substantial impairment by two days late? Probably not. We don’t have enough facts to tell us one way or the other. Does the two day delay create a substantial impairment of the value of this installment? Probably not. What’s important is you know what question to ask – is there substantial impairment?

Lincoln Railroad really has a right to demand some assurances. When there have been some irregularities and non-conformities. LR is within its right to say to DT, we need to demand some adequate assurances from you that future shipments are going to be conforming. If the seller does give these adequate assurances the buyer is I a position to have to accept the nonconforming goods but the UCC tells us that the seller has to provide these assurances before the buyer can reject the installment. The way that LR should handle it is to accept the shipments, pay for them and then demand the assurances.

What I want you to take from problem 150 is first identify a contract as an installment contract. If you see something like this on an exam I want you to be able to tell me what an installment contract is as it’s defined by subsection 2-612 then do an analysis as to whether the particular installment that is nonconforming is substantially impairing either the value of that shipment or the value of the entire contract. And then from there you will be able to tell me what options are available to the buyer who is in receipt of these goods. It’s a multi-tiered approach to these UCC problems.

The right to cure is sometimes read in conjunction with 2-609. That is the rule that would have been invoked in Problem 150 by the buyer.

2-609(1): A contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

2-609 is telling us what LR should be doing here. Does it have reasonable grounds for insecurity? They’ve had one shipment that was short, one shipment that was late and there’s only 12 shipments – probably yes. They have some reasonable grounds for insecurity and can invoke the provisions of 2-609 and until the get the assurances that they require, they can suspend their own performance under the contract.




Printing Center of Texas, Inc. v. Supermind
TX, 1984
1. A clear statement of the Perfect Tender Rule;
2. Buyer can reject the nonconforming goods – Minority Rule: Must be good faith. Majority Rule: Reject for any reason.

Supermind wants a book printed. It puts down a deposit and gets back the copies. There were all kinds of problems with the printing. They were definitely nonconforming books.

ISSUE: Whether or not the court is dealing with goods or services.

The court concluded that it needed to apply the UCC although it was predominantly a services contract. The plaintiff’s attorney never contested the jury instructions of the lower court that this wasn’t the right body of law. The court had to stick with the analysis that was done in the lower court and treat this contract as one governed by the UCC.

The UCC rule that was invoked in this case was the Perfect Tender Rule. The PTR tells us that a requirement of the goods is they need to conform in every respect. There is no substantial performance here, these were books weren’t what was ordered – the cover art was off center, the pages were crooked, etc.

If the goods do not conform in every respect, the buyer has options – he can reject or accept, reject some or accept some.

Page 708: “There is no room in commercial contracts for the doctrine of substantial performance.”

Under 2-601 the tender must be perfect only in the sense that the proffered goods must conform to the contract in every respect. Conformity does not mean substantial performance – it means complete performance.

Motivation: Minority View: The buyer must act in good faith. Majority View: The motivation for rejecting nonconforming goods is of no consequence at all. My rights under the UCC to accept or reject a nonconforming good are not affected by what I’m subjectively feeling about whether I still want the good or not. If the goods do not conform, your motivation for sending them back does not matter

Capitol Dodge Sales v. Northern Concrete Pipe, Inc.
MI, 1983
1. Must allow a reasonable time to inspect for verification; and
2. Can reject for nonconformity.

RULE OF LAW: Under the UCC, possession during the time necessary for the reasonable opportunity to inspect is contemplated prior to acceptance.

The salesman told defendant that the truck was overheating because of the way the snowplow was positioned on the truck. The defendant took the truck under that belief.

This case is dealing with what constitutes the acceptance of goods. They wrote the check, delivered the check, they took position of the vehicle.

UCC 2-606(1): Acceptance of goods occurs when the buyer:
(a) after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their nonconformity; or
(b) fails to make an effective rejection (subsection (1) of Section 2-602), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or
(c) does any act inconsistent with the seller’s ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.

A “reasonable time to inspect” under the UCC must allow an opportunity to put the product to its intended use, or for testing to verify its capability to perform as intended.

The buyer never says that he is going to accept this truck in spite of the defect. The court said that the defendant had the absolute right to reject the truck for nonconformity within a reasonable time, and to seasonably notify the plaintiff thereof.

If the buyer subsequently discovers a major defect with the goods
Colonial Dodge, Inc. v. Miller
MI, 1984
FACTS: Miller (D) ordered a 1976 Dodge Monaco station wagon from Colonial Dodge (P) which included a heavy duty trailer package with extra wide tires. Shortly after taking delivery D noticed that the car did not have a spare tire. D informed P that he wanted the tire and P stated that no spare tire were available. D then informed P he would stop payment on his checks and that they could come get the car in front of his home. The car sat there until it was towed by the police back to the dealership. P sued D for the purchase price and the trial court found that D wrongfully revoked acceptance of the vehicle. The court of appeals decided that D never accepted the car and reversed and on rehearing affirmed the trial court's ruling that there was not a substantial impairment in the value sufficient to revoke acceptance of the auto. D appealed.

RULE OF LAW: A buyer may revoke his acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to him.

We are dealing with the revocation of a previous acceptance.

UCC 2-608(1): The buyer may revoke his acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to him if he has accepted it.

In this case the subjective test is really what is important. We have a person who doesn’t want to be stranded. The existence of a spare tire was something that was contemplated from the beginning as an important safety of the vehicle. Its absence substantially impaired the value to him. It’s not a question of would a reasonable person feel that way.

The buyer actually accepted in this case – he took the car home. We’re not dealing with rejection of acceptance; we’re dealing with revocation of acceptance. This is when acceptance has already occurred but you can take back that acceptance.

The difference between revocation and rejection is revocation is to revoke an acceptance that’s already been made. There has to be some demonstration of subjective substantial impairment to the buyer.

Rejecting is easier to show than revoking.
Remember: The PTR can seem to be harsh on sellers. We have other provisions in the UCC that can soften it up a bit – we have installment contract which is an exception to the PTR, and parties can enter into their own agreements. We also have 2-508, the Right to Cure.

2-508(1): Where any tender or delivery by the seller is rejected because nonconforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.

Example: If my logo golf balls are scheduled to be delivered by October 1st and I get them on September 1st a month early and they’re all screwed up. I tell seller about the nonconformity and he can attempt to fix the problem. If the seller provides those assurances of his intention to cure, he then may within the contract time make a conforming delivery. There is still an opportunity for the seller to save the contract.

(2): Where the buyer rejects a nonconforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.

This provision is meant to address situations where the seller has a good reason to believe that what he is shipping conforms to what was agreed to under the contract. If the buyer rejects it the seller is still going to have a reasonable time to substitute a conforming tender. It’s designed to give some flexibility where there might be a disagreement.

He has some rights under the PTR. He could take it, he could not take it. In this situation, he agrees to take it. Merely taking possession does not equate to acceptance all of the time – you need a reasonable time to inspect. He knows of the nonconformity and takes the car but the dieseling and the airbags going off are things he discovered later. If he chose to take the car back right now and say, I reject accepting this vehicle, he would be well within his right to do that.

But even if he has accepted the car he still has an out. Under 2-608 he can revoke his acceptance but he will have to demonstrate a substantial impairment of the value of the car to him and that it would have been a nonconformity that was difficult to discover upon reasonable inspection.

WEEK 5

Week 5, K II, October 4, 2006
In weeks past we’ve talked about express conditions and conditions precedent. We’ve talked about express conditions – the parties agreeing that for duties to be triggered there have to be some fact or event that occurs. Constructive conditions – imposed by the courts that only need to be satisfied by substantial performance

Today we will talk about when a court might step in and say, you know I’m going to excuse this condition. The judge may say, yes there is a condition here but I’m going to excuse it. It doesn’t have to be met for the duties to be triggered.

Prevention and Cooperation: If I agree to sell you my car and you agree to pay $500. You come to my house, you tender the money and I don’t give you the keys or block the door so you can’t take possession. A court might come in that situation and say a constructive condition to payment is possession of the car. We have this ordering of performance that the courts sometimes have to decide who goes first and they impose constructive conditions. You have to pay when the money is delivered to you. Someone can’t obstruct or prevent another from carrying out their contractual duties. If we have a contract and I prevent you from carrying out your obligations under the contract if I prevent you from doing that then I can’t discharge my own obligations. Sullivan v. Bullock

We’ll talk about forfeiture – how sometimes conditions might be excusable Burger King v. Family Dining and how conditions might be excused if holding a party strictly to the condition is going to result in extreme forfeiture. In the Burger King case we had a situation where there was a time line for new franchises and one side agreed to have a certain number of franchises established over a certain period of time and if they didn’t then they would lose a 90 year exclusive rights contract and they came close but didn’t quite get the number of franchises established under the contract. The issue was well, can Burger King say you no longer have the 90 year exclusivity rights? Would it really be fair to the franchisee in that situation to strip them of something so valuable because of the failure of the condition of establishing the new franchises?

We’ll talk about how extreme forfeiture may rise to the level of causing the condition to be excused.

Waiver, estoppel and election. They do mean different things and are used interchangeably when they shouldn’t be.

Sullivan v. Bullock
ID, 1993


The rule of law that came out of this case has been adopted by most states including Michigan. Excerpt from Michigan case which somewhat mirrors Sullivan:

Where a party to a contract hinders another’s ability to comply with a Condition Precedent, thereby making it difficult if not impossible for that party to satisfy its obligations under the contract, the obstructing party may not rely on the Condition Precedent to defeat its liability.

If two parties have contracted and there is an express condition in the contract, if I do something that hinders that express condition from occurring, I’m interfering with the occurrence of that condition. I can’t avoid my contractual obligations by saying; well the condition was never satisfied (because I’m responsible for hindering/preventing it from being satisfied).

Promise Constructed and Condition Precedent Substantial Performance. Is Condition excused?






Express or Constructive
We have a repair person agreeing to do the work and there’s a promise that’s made with respect to the work being completed in a good and workman like matter.

Promises often lead to constructive conditions precedent.

Sullivan’s obligation: Pay for the work.
Bullock’s obligation: Complete the work in a good and workman like manner.

Courts will impose sometimes impose a constructive condition in situations where the ordering of performances hasn’t been agreed to by the parties. The rule that we learned was that the party that performs over time goes first. We have a constructed condition – her duty to pay is going to be triggered by a fact or event, that event being completion of the work.

The first thing is to identify the condition and we’ve done that – it’s a constructive condition precedent. It’s precedent because it triggers a duty, it doesn’t discharge a duty.

Now that we know we have an exchange of promises that have led to a constructive condition, what do we know about how one party satisfies a constructive condition? Substantial performance.

Bullock didn’t substantially perform. Ordinarily if a party doesn’t substantially perform we have one of two things:

1. Substantial Performance OR
2. Material Breach

She prevented him from completing the work by locking him out. His argument is that her hindering or preventing him from substantially performing is going to excuse the condition. In other words her ability to pay which was dependent upon satisfaction of a condition is no longer linked to that – the condition is excused. She is still going to have an obligation to pay.

This raises the question: If she promised to pay $25,000 for these repairs, does she have to pay $25,000? The answer is yes but maybe she can take a set off. If he didn’t do the work in a good and workman like manner, she can’t avoid the contractual obligations but she can still take a set off of the value of the work that was done. She could either counter sue for the set off or include it as a defense.

The point really is that he’s going to be able to sue on the contract because the condition is going to be excused. It’s going to be excused because she prevented a condition from occurring. Page 721 the court said: True, an employee did enter Mrs. Sullivan’s home when he was not supposed to. However, when Mrs. Sullivan denied any further access to the home she acted in a manner that was outside the contemplation of the contract or the parties when they executed the contract.

What the court is saying is no one expected or contemplated this type of behavior from her and there was absolutely no way that the work could be performed and therefore the condition satisfied due to her actions alone.
So look at it like this:

1. Identify the promise.

2. Identify any conditions that are present – express or constructive.

3. Determine how condition must be satisfied – strictly or substantial performance.

4. But then also go that next step: Is there something here that would indicate that this condition should be excused? Is there one party preventing the condition from occurring?

Problem 151

This is a clear case of Sanagzure being responsible by failing to make the promised progress payments to Poindexter, them being responsible for causing the insolvency. The fact that they caused the insolvency can be looked at as cooperation. We are talking about the parties cooperating here not being responsible themselves for conditions failing. And the condition that Poindexter remain solvent, was one that the parties agreed upon. But Sanagzure can’t create the insolvency and then try and take advantage of the solvency. The condition that Poindexter remain solvent failed. It failed because Sangazure caused it to fail. We’re not going to permit Sanagzure to benefit from that.

Problem 152

Employment at will is the default status for most states including Michigan. Unless you have a contract that sets forth the reasons for which you can be terminated or unless there is something in the employer’s handbook that creates a situation where you may only be terminated for just cause or for cause. Unless there’s something present of that nature, you’re going to be determined an at will employee. An at will employee is one who is free to quit his job at any time without an obligation to his employer and by the same token an employer can fire a person at any time for any reason. The only caveat to that is statutory law that lays out reasons that cannot motivate a person’s termination. They cannot motivate a person’s demotion or disciplinary action – something adverse. These are classified as civil rights laws. They protect people because of their status not because of their conduct or behavior. Conduct can be closely tied to status, i.e. wearing a Yarmulke

If an employer can establish a bona fide occupational qualification for someone to be a certain height or weight then that acts as a defense. It is harder to persuade a court that I had to have a man or a woman for the job but Hooters does not have to hire men to be waitresses. When the central mission of an employer’s business is a business like Hooters, then they can make decisions like that, i.e. strip clubs.

Cratchit is going to lose.

Another excuse doctrine: When the failure of a condition would result in extreme or disproportionate forfeiture. All failures of a condition result in a forfeiture but we are looking for those rare situations where the forfeiture is so great and heavy on one side that it would shock the conscience.

Burger King Corp. v. Family Dining, Inc.
PA, 1977


This was a condition subsequent. The courts said what we have first and foremost is the promise by McLamore to give Ferris the exclusive right for 90 years. McLamore’s duty was to provide this 90 year exclusivity. His duty could be discharged if family dining didn’t establish the requisite number of franchises in the time table set forth. So we have a duty that already exists to provide the 90 year exclusivity right. We don’t have anything triggered by an act occurring but we do have act, fact or event that can discharge that obligation so, we have a condition subsequent.

Remember your burdens – conditions precedent and conditions subsequent. The biggest thing that differentiates the two is, who has the burden of proof when you go into court? Here we have Family Dining and Burger King. The right and the duty has already been established, the promise has been made. If Burger King wants to show that they are discharged now from having to provide 90 years of territorial exclusivity, who has the burden of demonstrating whether or not the franchise timetable was met or not met? Burger King. Burger King has to go in and say, our duty is discharged because they failed to set up the number of franchises according to the timetable that we laid out. If this was a condition precedent and he would get the 90 year exclusivity rights if he established the franchises then Family Dining would have to go in and say, I established them. Their duty is triggered to provide me now with the exclusivity rights.

The court determined that this would result in extreme disproportionate forfeiture for two reasons:

1. McLamore continued to waive the restriction that he had to have a certain number of restaurants after a certain number of years. He built up these expectations with Ferris and Family Dining that perhaps this isn’t as significant, important or central to the agreement between them as it appeared to have at the beginning. They were building new restaurants they were a little off schedule but they were catching up. McLamore seemed to understand that and excuse those conditions from having to occur to keep the exclusivity.

2. The sheer value and the magnitude of what they would be losing – a 90 year territorial exclusivity right has enormous value to Ferris. You want to look at what would be lost if the court would have deemed the contract forfeited for the failure of a condition to occur.

A court may excuse the nonoccurrence of a condition. The first and second Restatement have different views as to when a court may excuse a nonoccurrence of a condition.

R I

According to the first Restatement, the court may excuse the nonoccurrence of a condition if to impose the condition would result in extreme forfeiture and the condition is not an essential part of the contract.
R II

The court may excuse the nonoccurrence of a condition if the imposition of the condition would cause a disproportionate forfeiture and the condition was not a material part of the contract.

Problem 153

We look at the restatements. What we have at the beginning is a condition. A condition to their ability to renew is giving notice by May 31 so we can start there by identifying the condition. It’s an express condition and it has to be satisfied. We then ask ourselves, is there an excuse doctrine here? Is there a way for an argument to be made that imposing this condition would cause disproportionate forfeiture (R II) or extreme forfeiture (R I)? Is the condition an essential or material part of the lease agreement? There still may be a way for the tenants to avoid the imposition if they can demonstrate (determining which Restatement to apply) if they can satisfy a judge or a fact finder that there would be an extreme (R I) or disproportionate (R II) forfeiture by not allowing them to live there.

They’ve been there for 10 years, this was their home and where they intended to stay. We have to look at what harm it would cause them to leave. What importance does this clause serve? Does being late by a day, does that really hinder what is centrally important to the lease agreement? It’s a tough call to make. You could put facts into it that really make you sympathetic toward the landlord if he was relying on this to build a parking lot. But would it have been advisable for him to give notice that he was going to strictly impose this condition?

What about excuse? Had he allowed them to be late in the past? That might be an indicator of how important, material or central this really was to the lease agreement. It really all depends on the nature of the relationship between the parties and circumstances involved.


Sometimes a condition may be excused if it is against public policy. Sometimes a court just looks at something like a condition in a contract and says, this condition that you’ve agreed to that is going to activate or discharge a duty is something that is so inconsistent, at odds or in contravention of policy – what we deem to be good policy. These are things that we want to encourage among our population. This has come up in the field of arbitration. More and more employers are asking their employees to do certain things. Normally is someone feels aggrieved because of something that has happened to them at work, they have certain rights and remedies

What employers try and do sometimes is put in their handbook or have you sign something that requires you to waive that right and instead agree to reduce my SOL to six months, waive the right to file in a court of law which means a lot. You waive a jury of your piers, a judge, an appeal, discovery processes – you’re giving up a lot. You’ll have courts that will say no, that is so in contravention of how we expect employers to behave. We’re not going to impose that condition on employees. But the majority of the courts that have looked at these questions are finding more and more favor with the employers.

Inman v. Clyde Hall Drilling Co.
AK, 1962


Inman felt that he was wrongfully terminated. He normally had a longer SOL to file but he signed an agreement with this employer. The agreement he had with this company required him within 30 days after he was terminated to provide the company with notice of his claim.
Notice
Day 1-----------------------------Day 30
6 months

His argument was, yes I agreed to it but the court should excuse this condition as this is in violation of public policy. It’s so contrary to what our law expects and provides and I shouldn’t be held to this condition.
The court said no. The court is balancing two interests. First, in the interest of public policy maybe this isn’t exactly the amount of time a person should have. Secondly, balance that against the freedom of people to enter into agreements. We encourage people to enter into agreements. The court looked at these competing policies and the court favored the employer.

Example: A daycare that tries to waive all liability is so contrary to public policy that its contract may not be enforceable.


These terms are sometimes used interchangeably and there are times when they shouldn’t be. When you think of estoppel, think of stop – the person is stopped or precluded from asserting a right.

Example: Pillsbury was estopped from strict enforcement of a condition. They were precluded from a right they had to pull the exclusivity contract due to the failure of a condition. The way you might use the term is, they are estopped from asserting that right. They are estopped from strict enforcement of that condition. They are estopped from that right because over time they had waived or relinquished their right based upon representations that they made to strictly enforce the condition on Family Dining.

With waiver, parties can waive voluntarily a relinquished right. If Burger King doesn’t want to hold Family Dining to the conditions for setting up franchises for a number of years, they can waive that. They can voluntarily relinquish their right to have that occur. Only immaterial conditions may be waived. Material conditions may not be waived.

Material: Necessary, essential, important.

Immaterial: Not necessary or essential to the central purpose of the contract.

A material fact is one which "might affect the outcome of the suit under the governing law."

Examples of: Material Conditions:

Real estate: One of the conditions of the sale is that I have clear marketable title. I can’t sell to you something that I don’t own. A condition of my sale that you impose on me is that I have clear and marketable title – that’s a material condition. You can’t waive that condition. That is so important, necessary and essential to the contract that it cannot be voluntarily relinquished.

Insurance contract: You can recover from an event and the condition is that something caused it – fire, theft, flood, etc.; things that are detailed in the contract. These are material conditions. I have insurance that covers me in the event of a flood. A condition of my recovery is that the damage that I suffered is caused by a flood – not by fire, wind, etc. The condition that the damage has to be caused by flood can’t be waived or relinquished. That’s a material condition. That is so central, essential and necessary to the contract that it can’t be voluntarily relinquished.

Examples of Immaterial Conditions:

Giving notice within a particular time: If the flood insurance policy requires me to give 30 days notice of an insured against an event, that notice would probably be considered immaterial. Don’t confuse that with unimportant. It’s immaterial in the sense that it is not essential or necessary to the central purpose of the contract. It’s something that the insurance company may waive if it chooses. If I call on day 31 and they say, look, it’s been just one day, we’ll let you file a claim. They can do that. They can voluntarily relinquish their right to receive 30 days notice.

Payment within a particular time: If I owe you $500 and need to pay by November 1. You can say, pay me on November 2. It’s a right that you have to receive money that you may voluntarily relinquish.





Problem 154

UCC 2-208. Taking the late payments for the period of time that they did, could possibly constitute a waiver of the requirement that they receive the money at a certain time.

a) They may not be waiving their rights in this situation because they continue to assert them. But what they may be doing by failing to carry out their threats time and time again is they may put themselves in a position where they are estopped in their rights because the America’s may start to rely on this inaction. This is a fact question and the circumstances are going to dictate.

b) Constant non-adherence to an anti-waiver clause may act as a waiver as well or may estopp one side from asserting legal rights even though the clause exists. Constant non-adherence to it may have the same effect of continually accepting the late payments time after time.

c) UCC 2-209(5). A person in Swank’s position may want to have one of his attorney’s send a letter stating that there may have been a waiver but they are reinstating their right to strict enforcement of their time is of the essence clause and if it is not complied with, they will repossess.

Moe v. John Deere Co
SD, 1994
Moe promises to make the payments and after the installment payments are made sufficiently, John Deere’s obligation is to turn over title. Moe’s payment on time activates the duty by John Deere to turn over ownership (title). If Moe doesn’t pay on time, that means John Deere repossesses.

The court agrees with the fact that Moe was not making timely payments. But there’s an argument that Moe makes that these time provisions have been waived by John Deere.

John Deere points to an anti-waiver clause in the contract. We are not waiving our rights even though we accept late payments.
Ultimately this case was remanded to the lower court on a fact issue of whether or not Moe was in default and whether Deere waived the time provision.

Out of this opinion came a couple of rules (Majority Rule and a Minority Rule). In a situation where there is a non-waiver or anti-waiver clause:

Majority Rule: There must be notice given that the person waiving his rights is now adhering to the contract. If there is a waiver and you are going to start abiding by the contract strictly, you have to provide notice to the other side that you are going to start doing that.

Minority Rule: The waiver clause stands even though they accepted the late payments.

This court went with the Majority Rule. John Deere was estopped from asserting its right.

Page 744: See note 2


ELECTION

Election is almost the same thing as waiver. Waiver is the relinquishment of a right. Election relates to the timing of the waiver – when it occurs. There is a distinction but it just has to do with time.

Example: I’ll sell you my car if you deliver to me $500 by November 1. If prior to November 1 I say, that’s ok you can get it to me by November 5. I’m waiving my right to receive payment by November 1. I’m making that waiver prior to November 1. In that situation we call it a waiver.

If I say after November 1, where’s my money and you say I need a couple of days and I say, alright that’s fine just get it to me by November 5. I’m still relinquishing a right but I’m doing it after the time has passed. I’m doing it after November 1. In that situation I’m doing the same thing but it’s called election. An election occurs after the condition has failed. Waiver after the condition fails is called an election.

Problem 155

It’s likely that there is an election. One of the facts that points to that is the call back that occurred a couple of weeks after she attempted to give notice. Also there was an issue of written notice vs. oral notice. We might also be dealing with a situation of waiver. Did they waive the requirement of written notice because the insurance company seemed to accept the oral notice that was given on the phone the day after the husband died. We have both waiver and election at play here.

Waiver in terms of the written vs. the oral notice and election in terms of the timing.
Problem 156

Ms. Pipes is not in breach for failure to rehearse because it was impossible, she had pneumonia. Her condition to go to rehearsals is going to be excused. The pneumonia was an unexpected or unforeseeable event.

What happens to the producer? That is going to depend. If the condition to rehearse was material to the contract and she couldn’t rehearse then the producer is not going to face liability for not allowing her back. Being able to prepare was material to being able to perform in the opera. Because her failure to rehearse was material and if failure was excused, he was not obligated to bring her back.

Problem 157

He can’t be sued for not coming to rehearsal because that aspect of his obligations under the contract is going to be excused because of impossibility. But here does the management have to let him back? In this case rehearsal is probably not a material part of the agreement. He already knows the songs, the season doesn’t open for six weeks, etc. There are a lot of facts in this situation that point in favor of Luciano.

Impossibility may excuse one party’s performance while at the same time not excusing the other party’s obligation. You have to look at the materiality of the condition to the contract.

WEEK 6

Week 6, K II, October 11, 2006
ANTICIPATORY REPUDIATION

We have parties in a contract, one party decides they are not going to go thru with it. Law Day – the day performance is due. Often we have parties in a contract and one side says to the other, I can’t go thru with it. And this is after the contract is formed. If that happens prior to law day, that breach is called anticipatory repudiation. It’s the anticipated breach.

As similar term is perspective inability to perform. Perspective inability to perform is not when a party tells the other that they’re not going to perform or they can’t perform, but they give some reason to doubt whether they’ll perform. So they don’t know for sure but one party is doing or saying things that are causing the other party some grounds for insecurity and some reasons to believe that they might not be able to perform.

Example:

A person says they will not or cannot perform - anticipatory repudiation.

If a party says, I might not go thru with this contract but performance is still possible – perspective inability to perform.
The fundamental characteristic about anticipatory repudiation is the non-breacher’s ability to sue before law day. Normally a person can’t sue or seek a legal remedy for breach until there’s been a breach and usually that doesn’t occur until the time for performance has come and gone and a party hasn’t performed. With the doctrine of anticipatory repudiation it is giving the non-breaching party the option of suing even before the time for performance has arrived.

Both anticipatory repudiation and perspective inability to perform will excuse the condition of being ready, willing and able to perform.

If I’m a non-breacher and we have a contract and you tell me, I’m not/can’t going to perform, that’s an anticipatory repudiation and that’s going to excuse my performance. I don’t have to perform under those circumstances.

Example: If I hire you to wash the windows in my house on a Tuesday to come out on Friday and we have a signed agreement. On Wednesday you call me and say, I’m not going to wash your windows – that’s an anticipatory repudiation. You're telling me that you're not going to follow thru with the contract. My right to sue you exists right then. I’m excused from my obligations. I no longer have to be ready, willing and able to perform.

These are dependent contracts. If I communicate to you that I’m not carrying out my performance under this contract, I have repudiated the contract. In that situation the non-breacher doesn’t have to stand ready, willing and able to perform any more. They are also excused from their performance.

With anticipatory repudiation, the non-breacher doesn’t have to sue right away but may.

But with perspective inability to perform where there are just doubts about whether performance is going to occur or not, the non-breacher cannot sue right away. The non-breacher has to wait until the time for performance has come and gone. Once the time for performance has passed, and there’s been a breach then the non-breacher may sue.
Questions to think about with these concepts:

1. May a party withdraw his or her repudiation? Yes.

Example: If you tell me on Wednesday, I’m not going to be there on Friday to wash your windows – you repudiate. The question is can you call me on Thursday and say, I think I’ll show up after all.

A party may withdraw his or her repudiation provided that they other party doesn’t rely on the other’s withdrawal. If I’ve already hired someone else, you cannot withdraw that repudiation.

2. May a person ignore or waive an anticipatory repudiation? Yes. As the non-breacher I don’t have to do anything.

Example: Let’s say you call me on Wednesday and say you're not coming but you show up anyway on Friday. If I’ve ignored the anticipatory repudiation or somehow waived it – I haven’t given you any indication that I’m relying on it by either suing you or seeking an alternate performance, then I might be deemed to have ignored or waived the anticipatory repudiation.

3. Does the non-breacher have an obligation to mitigate damages where there’s been an anticipatory repudiation? Yes.

The mitigation principal is pretty universal throughout all breach of contract scenarios. A non-breacher is always responsible for mitigating his or her loss – taking reasonable measures to seek alternate performance to lessen the degree of damage.

4. May the other party not anticipatorily repudiating (non-breacher) provide a time to repent? Yes. The non-breacher might say, I’ll give you a few days. If it’s an issue of coming to my house on Friday and there is some intervening cause on why you can’t come Friday, I can say, come over Tuesday. Our agreement was for Friday but the non-breacher is allowing the repudiating party to repent and come on another day.

This can also come up when there is a longer gap in time. You’re scheduled to wash my windows in a month and you call me the first week and say, I’m not going to do it. The non-breacher can also say, I’m going to give you a few days to think about it – you might change your mind. Repenting can be in that form where the non-breacher is giving the repudiating party some extra time to decide whether or not they’re going to perform under the contract.

5. Does the doctrine of anticipatory repudiation really apply where all that is left to be done is the payment of money? No. Where all that’s left to be done is the payment of money, the party cannot sue prior to the time the money comes due.

Example in case.

6. Is insolvency an anticipatory repudiation, a perspective inability to perform or neither? Insolvency is always going to be considered perspective inability to perform.

Example: If you have a contract with someone who’s become insolvent and you think that because of the insolvency it’s going to be impossible for them to perform because they don’t have the money or resources to do it, you can’t treat that party’s insolvency as a repudiation. It is always going to be considered a perspective inability to perform.

7. May you demand assurances for anticipatory repudiation or perspective inability to perform? Yes. In either situation the non-breaching party may demand assurances. There are some differences between the UCC and Common Law on how a party makes that demand for assurances. UCC 2-609 says that the demand for assurances must be in writing and you must wait 30 days after the demand to sue. You must give the other side 30 days to provide adequate assurances. Under the Common Law there is no 30 day limitation just a reasonable time and the demand for assurances does not have to be in writing.

Problem 159 page 747

Law Day (Year) here is 2020. NASA can sue now. This is definitely a repudiation of the contract. NASA is being told by Venture’s Vehicles that they will unable to fulfill the contract by the agreed upon date. When we have an anticipatory repudiation we know that the non-breaching party does not have to wait until law day, they can sue now in 2016. If they sue they will recover $24 billion in damages. Assuming that their cover was reasonable, NASA had to pay $24 billion more than they would have. This is a policy driven doctrine. NASA cannot wait four years to see if they perform. It’s more efficient to encourage them to do something like seeking a remedy. We don’t want to encourage non-breachers to sit on their hands. NASA doesn’t have to sue, they can wait for Law Day to pass and sue within the SOL. Sometimes it’s easier to evaluate your losses if it’s in the past then to speculate what they might be in the future. Parties that sue early might have a more difficult time proving what they are going to lose in the future opposed to what they have already lost. Nonetheless, the law does give them the option of going to court now and moving on.

Hochster v. De La Tour
UK, 1853


FACT SUMMARY: De La Tour (D), who had engaged Hochster (P) for a three-month period of employment beginning on a future date, renounced the contract prior to the date employment was to begin.

CONCISE RULE OF LAW: A plaintiff may bring suit for breach of contract prior to the time for performance of the contract if the defendant has repudiated the contract.

The agreement here between the plaintiff and the defendant was that plaintiff was to start work on June 1. Before law day (June 1), the employer pulls the plug on him. The issue becomes can the plaintiff sue prior to law day? This is the seminal case on this issue.

The consequence to the plaintiff if he waits until June 1 to sue is he may lose out on opportunities for work. That’s one thing the court wanted to discourage. The court also talked about mitigation. The issue of whether or not he can mitigate is separate of whether or not he can sue. If he goes out and finds a job making $5 less per hour, certainly he can hold defendant responsible for the difference. He does have an obligation to mitigate and find reasonable and comparable employment. But there seems to be some commingling of these issues in the case that I think was a little bit confusing. I want you to keep separate the mitigation issue and the ability to sue.

With an anticipatory repudiation, which we have in this case, he may sue before law day but he is also going to have the responsibility to mitigate. The question has come up whether or not a windfall could occur in the plaintiff’s favor.

Example: Plaintiff goes out and finds a job making the same amount of money and sues. The likelihood is that whatever he is making is going to offset his damages. If he was going to make $20,000 over the summer and he finds a job after the contract is repudiated making $20,000, he might have the best case in the world as far as breach goes, but it won’t be worth filing because he has fully mitigated his damages.

There may be some consequential loss. Maybe had to spend money on gas, resumes, etc. Those consequential damages certainly will be recoverable as well.

What you want to take from this case is that a non-breacher may sue if there’s been a repudiation of contract before law day. It’s the case that set the rule.

Page 748 – Regarding the policy behind anticipatory repudiation the court said:

“But it is surely much more rational, and more for the benefit for both parties, that, after the renunciation of the agreement by the defendant, the plaintiff should be at liberty to consider himself absolved from any future performance of it, retaining his right to sue for any damage he as suffered from the breach of it.”

The court wants to make clear that once this repudiation happens, he doesn’t have to sit idle and wait to see if he’s called back for work on June 1. The non-breacher’s performance is going to be excused by that repudiation.


Problem 160

NASA is not being told that Venture’s is not going to perform but Venture’s is telling NASA that there are some problems and creating doubt as to whether or not they can perform. There’s some equivocation here. It’s not clear as to whether or not they can do it. In that situation we have a perspective inability to perform. NASA cannot mitigate damages yet. They can’t go out and find substitute performance yet. You mitigate after breach. They’re still in a contract, they’re still not excused from their performance if Venture’s comes around and performs but what they can do is send a notice under 2-609.
UCC 2-609:

(1) A contract for sale imposes an obligation on each party that the other’s expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance or either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.

What paragraph one is saying is that NASA can write Venture’s a letter explaining why they are concerned telling them that they are demanding adequate assurances under UCC 2-609. They have to make that demand in writing and they have to give Venture’s 30 days to respond to it.

The question becomes, which of those options is the best? If Venture’s merely says, we’re sorry, things seem to be going ok now and we will deliver as agreed. With a $32 billion contract I don’t think that’s going to fly. The adequacy of these assurances depends on the circumstances. You need to take a lot of things in consideration. Has the party that’s potentially unable to perform done this before? Or do they have a good record? What’s the scope of the contract? Look at the whole range of facts to determine whether or not the assurances given are adequate

(a) Probably not going to satisfy NASA.

(b) Now we are getting somewhere. NASA can send in its own people to verify with their own eyes and ears if everything is on schedule. How are they back on track and why?

(c) That’s pretty good. You almost have a guarantor of performance.

Within those 30 days, NASA can suspend its performance until it gets the adequate assurances. When Venture’s tells NASA these things that give rise to the insecurities and NASA writes the letter, NASA can suspend its performance.

Hope’s Architectural Products v. Lundy’s Construction
KS, 1991

1. If there is a repudiation, it doesn’t have an effect unless it’s acted upon;

2. A party who is in breach cannot demand assurances; and

3. Even if a party can demand assurances they cannot demand unreasonable assurances.

FACT SUMMARY: When Hope's (P) was late in delivering windows to Lundy's (D), Lundy's (D) threatened to withhold partial payment as damages, prompting Hope's (P) to demand payment in full before delivery.

CONCISE RULE OF LAW: A party who has breached the contract may not demand assurances from the other party before suspending performance.

The judge scolds both parties in the first paragraph. Somebody is going to win and somebody is going to lose. This isn’t a situation where you are both going to come out winners. Hope’s wanted to invoke its right to demand assurances after it breached the contract which was pretty bold on their part. Not only did they want to demand assurances, they wanted to ask for more than they were entitled to under the contract between the parties. Did Hope’s get assurances from Lundy? No. Lundy’s wasn’t under any obligation to provide Hope’s with assurances. Hope’s had until October 24 to deliver the windows; they shipped them October 28 with a delivery date of November 4. Hope’s is in breach. They are not delivering in the time required by the contract. Lundy’s threatens a back charge and Hope’s suspends delivery. When they suspend delivery, they want an assurance from Lundy’s that there’s not going to be a back charge. We’re late, we breached but we don’t want you to back charge us.

What Hope’s is trying to do is invoke 2-609 and make a demand for assurances on Lundy’s after they are already in breach. Did Hope’s properly demand assurances? No. One of the rules you want to take from this case is that Hope’s is not entitled to demand assurances where they are already in breach. A party already in breach cannot demand assurances. Even if they could the assurances they demanded were not reasonable.

Not delivering on time – breach. But what the court also considered a breach on Hope’s part was their demand of unreasonable assurances. We have a party in breach making a demand for unreasonable assurances. Either one of those things taken by itself would give rise to breach. Here we just happen to have both. What Hope’s was doing was essentially asking for prepayment before payment was due. That was essentially the nature of what they were demanding.
The last thing you should take from this case is that if you have an anticipatory repudiation, there’s no effect of that unless it’s acted upon. Unless someone relies on the repudiation or sues due to the repudiation or demands assurances, anticipatory repudiation might occur but it might be meaningless unless the non-breacher has done something.

In this case is just so happens that Hope’s problems were far greater than that. They breached by failing to deliver on time and they demanded unreasonable assurances.

The court also talked about quantum meruit and whether or not Hope’s was entitled to recover for the value of services rendered to Lundy’s. The court said Hope’s doesn’t get anything. There was no benefit conferred to Lundy’s at all.

Problem 161

This is a perspective inability to perform because of the insolvency. Venture’s hasn’t told them that they are not going to perform, they just have become insolvent. It doesn’t give NASA the right to sue immediately but it does give them the right to demand adequate assurances. This will trigger 2-609.

What a lot of parties consider doing in NASA’s position is if they don’t get adequate assurances the perspective inability to perform gets converted into a repudiation.

2-609(4):

After receipt of a justified demand, failure to provide within a reasonable time, not exceeding thirty days, such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.

We can have a situation where insolvency leads to anticipatory repudiation but what has to happen first is that the non-breaching party has to demand the adequate assurances, and wait thirty days (or a reasonable time under Common Law). If they don’t get those assurances, then the perspective inability to perform gets converted into a repudiation and their right to sue vests immediately.

Problem 163

This is anticipatory repudiation arising not out of what one party tells another about its intentions to not perform but something that it does. We have Alexander going out and selling the horse to somebody else. That is an action that is indicative of his inability or unwillingness to perform under the contract. We don’t have the words expressing that performance will not occur but we have his actions which are just as good. In that situation we treat it as a repudiation and Phillip may sue immediately.





Problem 164

Part 1: If Meyer (buyer) can show that Travis (seller) never formally tendered the houseboat, it is not going to be a defense. There is no reason to tender after the contract has been repudiated.

Part 2: No for the same reason. It’s after the repudiation.

Parte 3: Meyer breached so what’s the advice to Travis? Travis wants to go thru with the deal. If he goes into court for the repudiation, in order to prevail he’s going to have to demonstrate that he was ready, willing and able to perform. If one party tells you that they are not going to be able to perform, they’ve repudiated the contract and you can sue. We’re not going to make it a matter of proof that you go into court and demonstrate yourself that you were ready, willing and able to perform. Don’t get too caught up in that. In some jurisdictions it is important for the courts to feel as though the non-breacher stood ready to go thru with the contract. They don’t want a situation where they weren’t going to do it anyway – no harm, no foul. They want some demonstration of the non-breacher’s readiness, willingness and ability to go thru with the contract.

Greguhn v. Mutual of Omaha Insurance Co.
UT, 1969

1. When all that’s left under the contract as far as performance goes is the payment of money, you have to wait until the date of breach to sue.

FACT SUMMARY: Greguhn (P), a disabled worker who sought to collect benefits under policies with Mutual of Omaha (D) and with another insurer after these insurers discontinued the benefits, was awarded by the trial court future benefits as well as past payments.

CONCISE RULE OF LAW: The doctrine of anticipatory breach does not extend to unilateral contracts.
The issue here was the jury’s award of future damages. What the plaintiff attempted to show at the trial court was this repudiation from the insurance company saying they weren’t going to pay his benefits anymore. What the jury did in the trial court was award the plaintiff damages for payments that weren’t due yet. That is where the court of appeals said that there was an error.

The dissent sets out why this is bad policy. The rule here that the majority sets out is that, yes we have an anticipatory repudiation and yes, you can sue but when all that’s left under the contract as far as performance goes is the payment of money, you have to wait until the date of breach – Law Day to sue. The rule of anticipatory repudiation that you can sue now doesn’t apply when all that’s left is the payment of money.

One reason why the court thought this was good policy was it allows the breacher to make good. Another reason is that it’s difficult sometimes to determine future damages. We don’t really know how long this injured worker is going to be entitled to these disability benefits so it may be difficult to compute future damages.

Another reason why it’s bad policy according to the dissent is that it encourages multiple lawsuits. If every time the insurance company doesn’t send a payment and someone files a lawsuit that is going to get pretty onerous and expensive.

The dissent also said that since the insurance company already denied coverage it is very unlikely that they are going to change their minds on that issue.

One Really Really, Really, Really big issue with anticipatory repudiation: A party cannot sue for anticipatory repudiation if they have performed. That issue is on bar exams year after year and it is one that most students miss over and over again and again.


Know when we’re just dealing with promises as opposed to a condition – some fact or event that’s going to trigger a party’s duty.

Example:

I agree to pay $500 to buy your car – that’s a promise.

I agree to pay $500 to buy your car if you paint it green – that’s a condition. My duty to buy your car for $500 is linked to some fact or event occurring (painting it green).

Be able to distinguish between a pure promise and a condition. Know when we’re dealing with an express condition or a constructive condition. A constructive condition isn’t something you’re always going to see from the language. Constructive conditions are typically conditions that are imposed on the parties because they have failed to designate some order of performance.

With express conditions we want to look at what was stated and envisioned by the parties. Look at their language, said or wrote. Were these parties intending to link one side’s duty to something happening or some fact being in existence? Look at their intention. Look for the words, “if”, “so long as” – things of that nature that would indicate to you that the parties intend to link some duty to something happening.

Express conditions have to be satisfied strictly and literally.

Example:

If I say I promise to pay you $500 to buy your car if you paint it forest green. If you paint it light green then you haven’t strictly complied with the condition and my duty is not going to be triggered.

Constructive conditions on the other hand only have to be satisfied thru substantial performance. If one side cannot demonstrate that they’ve substantially performed under the contract, they only other option is material breach. Either the party substantially performs or the party is in material breach.

If an express condition is not satisfied we refer to that as forfeiture. The duties of the parties don’t arise under the contract.

A condition precedent is an act, fact or event that triggers a duty as opposed to a condition subsequent which is a fact or event that discharges a duty.

Example:

I’ll buy your car for $500 if you paint it green – condition precedent. Your painting it green will trigger my duty.

I promise to buy your car for $500 unless you break 100,000 miles next week. I’m establishing my duty to buy your car – my duty is already set. What’s going to relieve me of that duty is the fact that you go over 100,000 miles.

The activation of a duty vs. the discharge of a duty. The other significant difference between the two is the burden of proof. With a condition precedent the plaintiff has the burden of proof. With a condition subsequent the defendant has the burden of proof.

Example:

I promise to buy your car for $500 if you paint it green. You paint it green and I don’t buy it. You sue me. As the plaintiff you have the burden of demonstrating that you painted the car green. You have the burden of establishing that the condition existed that would trigger my duty.

I promise to pay you $500 for your car unless you go over 100,000 miles. You don’t exceed 100,000 miles and nonetheless I don’t buy the car. You sue me. I’m the defendant now. My duty already exists. I have to show as the defendant that the duty was discharged. I have to show that you went over 100,000 miles.
A concurrent condition is simply a bilateral contract where the parties have failed to decide who is performing first. This isn’t dealing with the occurrence of a fact or event. It’s a bilateral contract where the parties haven’t declared the order of performances.

How you might attack a conditions problem:


Express conditions: Identify the pertinent language of the contract as a condition or a promise. To determine whether it’s an express promise look at the party’s intent, the words they use and the circumstances under which they enter into an agreement. See if they’re linking the duty to some occurrence.

If the express condition fails, then we have a forfeiture, however; we may be able to avoid forfeiture if there is some excuse doctrine that might apply, Burger King v. Family Dining. In the Burger King case there was an excuse permitted to be used by the franchisee for not setting up the proper amount of restaurants over the 10 year period. The excuse was that to hold Family Dining to that condition would result in disproportionate and extreme forfeiture. That is one of the excuse doctrines. Don’t just stop after forfeiture. Ask yourself that next question, is there some reason why this condition may be excused?

Sullivan v. Bullock The woman locking out the contractor case. That is another excuse doctrine. The condition of her paying was linked to their completing the work in a workman like manner, which she prevented thus the excuse doctrine of prevention and cooperation might come in to excuse the condition of the performance of this work.

Constructive conditions: Promises made by parties to a contract that do not create an express condition. You might have two sides arguing about who goes first. I don’t have to pay you because you haven’t delivered. I don’t have to deliver because you haven’t paid. We may have the promises to pay the money, wash the windows, etc., but what we don’t know is who has to go first. These are dependent promises. In most cases the parties expect return performance. The parties expect that I’m only going to pay this money if you wash the windows. I’m only going to wash the windows if you pay the money. The parties believe the promises are linked, that one shouldn’t have to happen without the other. In that situation the court might step in and say, I’m going to order performances here and tell you who goes first. The party that typically has to perform over time is going to have to go first and as a constructive condition to the other parties having to pay, that party has to perform under the contract. They have to substantially perform in order for the triggering of the duty – usually of payment, from the other side.

Substantial performance satisfies the constructive condition. If there hasn’t been substantial performance, then we have material breach and forfeiture. But we also always look for the excuse doctrines. Is there some reason why we should excuse the condition in this case? The condition would trigger their duty but is there some reason why we should hold them to their duty anyway and excuse that condition?

We use substantial performance to satisfy constructive conditions. That is common law and would never need to talk about it if you identify a problem dealing in the sale of goods where the UCC applies.
If the UCC applies and it appears to you that there’s been some breach – the wrong goods delivered, the wrong amount delivered, etc. We are not talking about whether these goods are substantial enough or whether the seller substantially performed by shipping 15 out of 20.

DO NOT TALK ABOUT SUBSTANTIAL PERFORMANCE IF IT IS AUCC PROBLEM – USE THE PERFECT TENDER RULE.
The Perfect Tender Rule is what you want to use when you’re dealing with a transaction in the sale of goods – where there appears to be some failure of a condition. In other words the condition to pay is linked to the tender of the goods.


Restatement (Second) § 234 – Order of Performances. What the Restatement tells us in a Common Law case is that:

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 to the contrary.
The Restatement provision really doesn’t do much for us; it doesn’t really solve a lot of problems. The Restatement tells us if performances can be exchanged at the same time then they should be if not then the parties are going to have to agree on how to order their performances.

UCC gets a little deeper into it. The problems dealing with the issues that were talking about now are 142-144 in the book.

UCC 2-507:

(1) Tender of delivery is a condition to the buyer’s duty to accept the goods and, unless otherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of the goods and to payment according the contract.

They buyer’s duty to pay isn’t triggered until the seller tenders delivery. The seller’s tender of delivery is a condition to the buyer’s duty to accept and pay for the goods. The seller has to demonstrate this unconditional offer to perform or actually has to deliver the goods in order for the duty for the buyer to pay to be triggered.

These code previsions have this “unless otherwise agreed” language attached to it. They are in a lot of ways a default position because parties usually do agree on how the things are going to be done but in the event they don’t the UCC steps in.

The UCC goes on in 2-511 to say:

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

They are flipping it and the UCC is saying, if the buyer comes forward and says, here’s the money, then that triggers the seller’s duty to tender and complete any delivery. We’ve got a couple of ways the UCC will trigger buyer’s and seller’s duties to perform and they have to do with tender and a demonstration of performance or an unconditional offer to perform together with the ability to carry it out.

2-307 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.

This tells us where there are goods ordered as part of a contract. They all have to be delivered at the same time in a single lot unless the parties agree otherwise and unless the circumstances give either party the right to demand delivery in lots. When someone orders 144 golf balls, I’ve got to send them 144 golf balls in my shipment. I can’t decide on my own if I haven’t otherwise agreed with the buyer to send 10 now, 10 later, etc. When a certain amount is ordered they have to be shipped and that is what is going to trigger the duty to pay. There may be circumstances that one side could point to that makes shipping everything at once impracticable or unrealistic but absent those circumstances the goods have to all be delivered in one lot.

Installment contracts are not covered by the Perfect Tender Rule. They are an exception to the PTR.

2-601. The Perfect Tender Rule. We know that the PTR is softened to a certain degree by giving the seller the right to cure. We also know that the parties could make an agreement otherwise. The parties can make an agreement that is in contravention of the requirements of the PTR. Maybe we agree that it’s ok that the paint is a little smeared on the golf balls. Maybe they don’t have to be perfect or conform in every respect.

2-612 governs installment contracts.

On an EXAM you need to continue your analysis when you are doing conditions – is it an express or constructive condition? You don’t want to stop at, well the parties have substantially performed and therefore the duty to pay is triggered or no, there’s been a material breach or no, the express condition hasn’t been satisfied therefore forfeiture. You want to take it that one step further. Is there a reason that it’s ok to excuse the non-occurrence of the condition.

Prevention and Cooperation: Sullivan v. Bullock (P’s behavior prevented substantial performance).

Forfeiture: Burger King v. Family Dining (R I – extreme forfeiture, R II – disproportionate forfeiture).

Public Policy: Inman v. Clyde Hall Drilling Co. (We encourage people to enter into agreements).

Waiver and Estoppel: Moe v. John Deere (Must give notice if going to strictly enforce a waived right).

Election: (Waiver after the condition fails is called an election).

Impossibility: (An unexpected or unseen event may excuse a condition)

One of the things you want to be mindful of when talking about impossibility is the materiality of the condition.

Opera singer example: She’s excused from not coming to rehearsal on the grounds of impossibility. If the condition of rehearsal was material to her contract then she would not be hired back. If the condition of rehearsal was immaterial (she already knew the songs for example) then it’s not going to relieve the other parties of not hiring her back after she recuperated.

This really boils down to timing. A party may excuse a condition from occurring. A party might have their duty linked to some fact or event but they say, that’s ok and they waive that. A party can waive a condition as long as it’s an immaterial condition.

Example:

I’ll buy your car for $500 if you paint it green and we set Friday as the date to make the exchange. Before Friday I call you and say, don’t paint it just leave it the way it is. I’m waiving that condition prior to the date of performance.

If I show up Friday and you haven’t painted it and I say, you were supposed to paint the car green. I return on Saturday and say, you know, it’s ok I’ll take it anyway. I’m making an election. An election is like a waiver but it’s something that is done after time for performance has come and gone. I’m electing to waive the condition.

Q & A with Professor Kent

Constructive condition: Imposed by the courts on the promises.

Concurrent condition: Promises in a bilateral contract where the sides haven’t ordered performance. The condition imposed by the court is that your duty to pay is going to be triggered to them performing because you guys haven’t said this in your agreement but I’m going to tell you as the judge that your duty to pay is going to arise after they have performed under the contract. That’s a judge imposing the condition on their promises. Concurrent conditions are just promises in a bilateral contract where the sides haven’t ordered performance at all. They’re two dependent promises standing out there alone. We call them concurrent conditions because the parties really have an understanding that their performance is conditional upon the other’s but they haven’t done enough to indicate who performs first and second.

TA

Express Promise/Dependent
Constructive Condition
Cardozo Rules 4+1 (Reading Pipe case)

Your first step – are the promises dependent or independent? 99% of the time they’re dependent. I promise to do this if you promise to do this. Mention that they are dependent promises if you want the points.

The next thing is the court is going to impose a condition. All you have to think about is the Reading Pipe case. If it had been an express condition that it had to be Reading Pipe, they would have had to of torn down the whole house. The court probably construed it to be a promise even if it had been expressly conditional. It would have needed to be very clear and in bold print otherwise it would have been a harsh treatment.

How did he substantially perform? Do your Cardozo rules (4+1). On an EXAM you would put, the court at this point will decide to impose a constructive condition. A constructive condition is…state your definition.

To determine whether the constructive condition was satisfied the court will impose substantial performance and see if the breacher has substantially performed. If he substantially performed did he breach? No. That’s your whole analysis – that’s it.

If he did not substantially perform, then is there a breach? Yes. That’s it.

LAST STEP: Did he willfully breach? Both of Prof. Mara Kent’s exams were willful breachers.

The TA guarantees there will be Third Party Beneficiary on one of the essays and there are three types Third Party Beneficiary analyses. The third one encompasses everything and they like to use that one.

From one of Mara Kent’s exams – a PTR essay about a fishing pole in a bait shop/mini mart. Condition analysis.

You’ll either have Conditions or Third Party Beneficiary as one of the possible essays or they’ll do the Perfect Tender Rule.

Kent said tonight that if you’re going to do a conditions analysis, don’t tell me anything about PTR. If you’re going to do PTR, don’t tell me anything about conditions because they don’t go together. They are like oil and water.

PTR is heavily tested on the Mastery Questions.

If you get a PTR on the exam use the word substantial a lot. For rejection or revocation it has to be substantial.

UCC: 2-508 – you’ve got to give them the right to Cure.

The buyer who wants to revoke an acceptance must make a stronger showing of non-conformity than the buyer who rejects. The revoker must show the non-conformity substantially impairs the value of the goods whereas the rejecter must merely show the goods failed to conform in any respect.

Fishing pole example: Cannot reject because too much time has passed but he may be able to revoke. Revocation still may be a possibility because it was wintertime and he didn’t get to use the poles and they would snap every time you used one. A fishing pole that snaps is substantial impairment to the value of the pole.

The pole maker was out of business and they can’t cure under 2-508.

Another exception 2-612

Love to test on anticipatory repudiation/PIP perspective inability to perform

If you see an express condition I guarantee you there will be an excuse that applies.

Most commonly tested concepts for mastery:

With AP you can sue now. With PIP you have to wait for Law Day.

WEEK 7

Week 7, K II, October 18, 2006
Third Party Beneficiary’s are when a third person has contractual rights that exist from the agreement that was entered into between the two parties.

Historically courts did not recognize third parties as having contract rights that flowed from agreements between two other parties. In England they created legal fictions to try to get this third party some legal rights by using agency principals or treating them more like the beneficiary of a trust that was entered into between two other parties. It took the Lawrence v. Fox case to firmly implant the Third Party Beneficiary doctrine into American Law.

When you see a set of facts and it appears there are multiple parties involved, ask yourself, could this be a third party benefit situation? You want start identifying people. Is there a primary contract that has been made? And who is it between? Who is making the promises? Is there a promisor and a promisee? Identify who those persons are. Is there someone else who is benefiting from this agreement – either intended to benefit or unintended to benefit?

We want to determine whether this third party that is benefiting is a Third Party Beneficiary and to determine that you must ask whether or not the promisee intended to benefit the third party.

TWO KINDS OF THIRD PARTIES:

1. Incidental
2 Intended

We can have a third party that is benefiting but the benefit is incidental to the contract. The promisee wasn’t intending to benefit the third party.

If this third party is an intended beneficiary we call them a Third Party Beneficiary.

Incidental beneficiaries do not have any rights whatsoever arising out of the primary contract.

The First Restatement uses the terms creditor, beneficiary and donee beneficiary.

The Second Restatement uses debt vs. gift beneficiaries. Most courts stick with the First Restatement’s terminology.

The next question we are going to ask is whether that person is a creditor, Third Party Beneficiary or a donee Third Party Beneficiary. We always want to ask, is this contract enforceable? We want to make sure before we can say that this Third Party Beneficiary has any rights under the contract, the contract itself has to be enforceable. It has to meet the requirements of a valid contract and be supported by consideration.

When to the Third Party Beneficiary’s vest? When to they come into being, when are they born?

Problem 166 Page 767

Identify the parties:

Judge Hardy – Promisor
Andy – Promisee
MGM – Potential Third Party Beneficiary

Judge Hardy is making a promise; he is agreeing to do something for Andy. We have a valid contract between the two – a valid unilateral contract supported by consideration.

To determine whether MGM is a Third Party Beneficiary as they’re claiming in this case, Andy has to intend to benefit MGM. There is nothing in the facts to indicate that Andy intends to benefit MGM. In this set of facts MGM is not going to be successful in claiming to be a third party beneficiary under the contract because even if Judge Hardy had bought the car MGM may have benefited from the agreement but it wasn’t because Andy intended them to. MGM is an incidental beneficiary. As an incidental beneficiary MGM would have no rights in a suit against Hardy. If in fact MGM could demonstrate that they were an intended beneficiary, the suit to enforce the promise would be against Hardy, the promisor.

Problem 167

MGM – Promisor
Hardy – Promisee
Andy – Potential Third Party Beneficiary

Now we have to ask whether or not Hardy’s intent was to benefit Andy because we need to determine whether he is merely an incidental beneficiary or a Third Party Beneficiary.

If Hardy intended him to benefit from this contract with MGM then Andy becomes a Third Party Beneficiary with rights under the contract. Here the promisee intended to benefit Andy. We have the intention to benefit. So because Hardy intended Andy to benefit from this contract, Andy is a Third Party Beneficiary. As a Third Party Beneficiary, Andy has the right to file suit against MGM for its failure to carry out its promise.

There is no evidence that the contract between Hardy and MGM is unenforceable. It appears that this transaction was supported by consideration was an exchange of promises made and it appears to be an enforceable contract.

Andy is a donee beneficiary. This is a gift to Andy. In order to determine whether someone is a donee beneficiary or a creditor beneficiary, we need to look at the relationship between the Promisee and the Third Party Beneficiary.

If there is an existing legal relationship between a promisee and a Third Party Beneficiary, a Third Party Beneficiary is going to be classified as a creditor beneficiary. Is there a contract between these two, is there a debt owed between these two?

The second part of the problem asks if your answer would be different if Hardy owed Andy $20,000. If Hardy owes Andy $20,000, and if that legal relationship is an existence of a debt owed to the Andy that turns this characterization from a donee to a creditor beneficiary. Instead of giving Andy a gift and let’s say he owed him $20,000, Andy is then at creditor Third Party Beneficiary.

If there is no legal relationship – no contract, no debt owed, then we’re going to have a donee beneficiary situation as we have in the problem here.

If there is an existing legal relationship between the promisee and the Third Party Beneficiary, we’re going to have a creditor Third Party Beneficiary. But always remember first before all of that, that the promisee has to intend for this person to have rights under the contract.

Andy as a donee beneficiary would have rights to file suit against the promisor for damages because we know that although Andy wasn’t a part of the contract we know that Hardy intended to benefit him. For that reason once the promisor breaches, Andy has rights under the contract to seek his remedies for that breach.

The biggest difference between debtor and creditor Third Party Beneficiary is that the debtor Third Party Beneficiary only has rights against the promisor. The donee Third Party Beneficiary only has rights as against the Promisor. The creditor Third Party Beneficiary has rights against both.

Lawrence v. Fox
NY, 1859

FACTS: One Holly owed Lawrence (P) $300. Holly loaned $300 to Fox (D) in consideration of Fox's (D) promise to pay the same amount to Lawrence (P), thereby erasing Holly's debts to Lawrence (P). Fox (D) did not pay Lawrence (P), and Lawrence (P) brought this action for breach of Fox's (D) promise to Holly.

CONCISE RULE OF LAW: A third party for whose benefit a contract is made may bring an action for its breach.

Holly owed money to Lawrence. Holly is saying to Fox, I’ll loan you $300, but I owe this other person so pay him. The promise Fox is making is to pay $300 to Lawrence. The objection was historically speaking, that Lawrence didn’t have anything to do with this transaction. Why should we let Lawrence in and sue Fox for breach?

This was a big change in the law. Someone who lacks privity in this agreement is going to step into it and sue for breach. It is manifestly just to allow Lawrence to go after Fox because we have a situation in which Holly the promisee is entering into an agreement with Fox intending to benefit Lawrence.

The court asked, what if we don’t allow Lawrence to sue Fox? The policy reason cited by the court was not allowing Lawrence to go directly after Fox would foster multiple lawsuits. It would be an inefficient way of dealing with the situation.

Lawrence is going to be a creditor Third Party Beneficiary. There is an existing legal relationship – a debt owed by Holly to Lawrence for $300. Technically Lawrence is going to have the ability to go after either of these two parties. He’s not going to be able to double recover but if he sues Holly there’s going to be a second lawsuit. And Holly is going to say the Fox didn’t make good on his promise to repay my obligation for me. Instead of that the court said it works much better if we simply allow an intended Third Party Beneficiaries to directly sue the promisor for the breach of the promise.

Seaver v. Ransom
NY, 1918
FACT SUMMARY: Berman made a promise to his wife for the benefit of their niece, Seaver (P), who then sued Berman's executor (D) for breach of that promise.

CONCISE RULE OF LAW: A niece for whose benefit a promise was made to her aunt may successfully bring an action for breach of that promise.

Third party rights are not going to be limited to creditor Third Party Beneficiaries but also to donee Third Party Beneficiaries. The promisor here was the Judge, the wife was the promisee and the niece was the potential Third Party Beneficiary. The niece was an intended Third Party Beneficiary of the promises between the Judge and the wife.

The Judge promised to leave enough money in his will for his niece. This was a gift being made to the niece. The consideration between the Judge and his wife was she agreed not to change the will – she gave up a legal right. We do have her forbearing from some legal right she had. Here we’re going to have the nieces as a donee third party beneficiary. She’ll have the right to enforce the promise that was made by the Judge.

Gift promises are not legally enforceable but that’s not what is really happening here. We’re simply enforcing the existing contract out of which the third party is benefiting and acquiring some rights.

The court identified other situations where courts had allowed third parties to enforce their rights such as: pecuniary obligation, creditor third party beneficiaries, promises made for a wife, fiancée or child, promises where the public would benefit as a third party, promises running directly to a third party beneficiary (if the Judge had looked at his niece while acknowledging the promise). This court added that donee Third Party Beneficiaries as the niece was in this case should also be permitted to seek redress of the breach of the promise in the underlying contract.

H.R Moch Co. v. Rensselaer Water Co.
NY, 1928, J. Cardozo

FACT SUMMARY: H.R. Moch Co. (P) contended that it was a third party beneficiary to a contract involving a municipality by virtue of its being a resident of that municipality. CONCISE RULE OF LAW: One cannot claim to be a third party beneficiary of a contract involving a municipality merely by virtue of being a resident of that municipality.

Generally speaking most states have a statute that prevents governmental entities from being sued in tort. An exception to this may be gross negligence. What was really happening here is perhaps Moch didn’t believe he had any real remedies against the municipality and the only creative avenue he had to find a remedy was to put in the context of a duty that was owed to him out of a third party contract between Rensselaer Water and the municipality.

The question for the court was whether the public was an incidental beneficiary or whether the city council intended to benefit Moch by entering into this contract with Rensselaer. They found in favor of Rensselaer Water. The court held that:

“There is no legal duty rests upon a city to supply its inhabitants with protection against fire.”

This may not be true today. Nonetheless in this case the council did not intend Moch to be a Third Party Beneficiary. The court stated for policy reasoning was

Kent’s Rule: Unless the public contract was clearly made for the benefit of private citizens, a Third Party Beneficiary contract will not be implied.

The public was not mentioned in the contract, therefore no intention to benefit any citizen. In this case we are still looking at the intent to benefit test. Did the promisee intend to benefit the third party?

Donee Third Party Beneficiary:

The donee Third Party Beneficiary can sue to enforce the promise or for remedies of the breach of the promise. But the donee Third Party Beneficiary can only sue the promisor. He doesn’t have any rights against the promisee – there is no legal obligation existing and there’s no promise that’s been made for the benefit of the Third Party Beneficiary.

Creditor Third Party Beneficiary:

The creditor Third Party Beneficiary may have rights against both. Their rights against one may be precluded by something called a novation.






Restatement (Second) Page 772:

Novation: A novation is a substituted contract that includes as a party one who was neither the obligor nor the obligee of the original duty.

In other words, you are substituting one party for the other.

Creditor TPB situation only: When a promisor makes a promise and there’s an intention to benefit a Third Party Beneficiary, normally that promisor’s promise doesn’t take the promisee of the hook from this obligation. They’re still on the hook if there’s a debt owed or a legal obligation of some sort. This promise doesn’t relive this promisee of this obligation.

A novation is where this party may be relieved. As a direct result of this promise, the promisee may be relieved from its obligation under the contract. Essentially the promisor is substituting itself in as the one who is obligated to the Third Party Beneficiary.
















Problem 168

There is an existing obligation between Holly and Lawrence. Holly makes the loan to Fox. Fox promises to pay the money back to Lawrence. Lawrence is a creditor Third Party Beneficiary. There was not a novation here. To have a novation, all parties have to agree to it. All parties have to agree that the only person that was now going to be obligated was Fox. Lawrence’s grunt doesn’t amount to an agreement. Because there is no novation in this situation, Lawrence may go after both. A novation is not likely presumed. There has to be some evidence that a third party agreed essentially to substitute one in for the other on the obligation.

Problem 169





George – Promisor
Martha – Promisee
Finance Co. – Third Party

Martha does intend for the finance company to benefit from the agreement that’s part of the divorce decree. The legal relationship between the finance company and Martha is called a creditor relationship. The finance company is a creditor Third Party Beneficiary.

The finance company was never a part of this agreement so there is no novation. The finance company is going to go after Martha. Martha is going to have to find George and sue him for breach if she wants reimbursement.

Problem 170

Steps:

1. Enforceability of the underlying contract;
2. Promisee’s intention to benefit the third party;
3. Characterizing the third party as donee or creditor; and
4. Whether or not there is a novation.

Podium and Chalk enter into an agreement. The promise made by Podium is to take over Chalk’s responsibility. The intended third party beneficiary in this case is the law school. Chalk intends the law school to benefit. Because of the existing legal relationship between Chalk and the law school, the law school would be considered creditor Third Party Beneficiary. It appears in this case there is a novation.

The school agreed that Podium would be the one to substitute in for Chalk. That agreement would have the effect of relieving Chalk of his obligations under the contract. If Podium doesn’t show up, Chalk is not going to be sued for expenses.


Page 783

THE RESTATEMENT (SECOND) CHANGES
LIENS

Lien: A property interest given to creditors in the debtor’s property to protect a credit extension.

The concept of Liens: Liens are something that is statutory by nature. A lien is having a right in property such as a mechanic’s lien (actually called an artisan’s lien. Mechanic’s liens are for those who work or supply materials for a construction project). If I don’t pay the repair bill the car can be seized and sold to recover the amount that’s due. Different professions by statute have liens. When there is a house being built, sometimes the subcontractors will take liens on the property to guarantee that they’re paid so if they are not paid they have some interest in the realty itself that can be liquidated and the sub can be paid out of the proceeds.

Problem 171

Jefferson is the promisor.
Adams is the promisee.
Washington Brick is a donee Third Party Beneficiary to the surety contract.

A surety promises to pay the subcontractors in the event the general contractor breaches. This promise would benefit some contractors in the event Hogan doesn’t pay.

There is no existing legal relationship between Adams and Washington Brick. The existing legal relationship was one between the general (Hogan) and Washington Brick. This isn’t a creditor relationship because of the non-existence of a legal relationship between Adams and Washington Brick.

The Restatement Second uses incidental and intended beneficiary but the Restatement First’s language has persisted.

This problem just shows us that it’s awkward in some situations to call the subcontractors donee Third Party Beneficiaries. The Restatement Second tried to clear that up. What’s important to me is you stick with the first restatement.

THE EXPANDING USE OF THE THIRD PARTY BENEFICIARIES CONCEPTS

Blair v. Anderson
DE, 1974

FACT SUMMARY: An ex-prisoner (P) sued the state of Delaware (D) for injuries he sustained in prison from an attack by another prisoner. CONCISE RULES OF LAW: (1) State sovereign immunity is not a defense to a contract claim. (2) A federal convict in a state prison is a third-party creditor beneficiary of the federal-state contract which provides for his incarceration.

This case really tried to push the bounds of the third party doctrine. Simply because the court recognized that the prisoner had pleaded properly in a cause of action of which he could recover doesn’t necessarily mean that a jury is going to find in his favor.

What we have here is the promise between the State of Delaware and the United States. The government can waive being sued.

The promisor is the State of Delaware. The promisee is the United States and the prisoner is the Third Party Beneficiary.

Delaware was paid by the United States to keep the prisoners. It’s essentially a business relationship between the state and federal government. Was the prisoner someone that the United States intended to benefit as a result of this agreement it had with the State of Delaware? The court said that it was.

1. The Bureau of Prisons is required to provide, inter alia, for the “safekeeping, care, and subsistence” of a prisoner and for his “protection.” 18 U.S.C. §4042

The court held that the prisoner was a creditor Third Party Beneficiary by the legal relationship to keep the prisoner safe. As a creditor he can sue both but remember he cannot double recover.

On an EXAM you will come to the conclusion that someone is one of three beneficiaries:

1. Donee Third Party Beneficiary;
2. Creditor Third Party Beneficiary; or a
3. Incidental Third Party Beneficiary.

Bain v. Gillispie
IA, 1984

FACT SUMMARY: In Bain's (P) action against Gillispie (D) for injunctive relief, actual and punitive damages, Gillispie (D) contended, in his counterclaim, that Bain's (P) conduct as a referee in officiating a basketball game between the University of Iowa and Purdue University was below the standard of competence required of a professional referee and constituted malpractice which entitled Gillispie (D) to $175,000 plus exemplary damages as a beneficiary under Bain's (P) contract with the Big 10.

CONCISE RULE OF LAW: The real test as to whether a party is a beneficiary under a contract is whether the contracting parties intended that a third person should receive a benefit which might be enforced in the courts.

This is pushing the bounds of creative lawyering. Bain is under contract to call the game to the best of his ability. Gillispie claims to be a Third Party Beneficiary of Bain’s promise to call a good game.

At the end of the day the intent to benefit test is not found to be in favor of Gillispie. The Big 10 and Bain had no intention whatsoever of benefiting Gillispie.

WEEK 8

Week 8, K II, October 25, 2006

ASSIGNMENT DELEGATION THIRD PARTY BENEF

Obligor Person owed duty Promisor
Obligee Delegator Promisee
Assignor Delegatee TPB
Assignee


Problem 172

A referee let a fight go on too long and one of the boxers was killed as a result. The harm to the third party is so serious as a result of the promisor’s breach and the promisor here is the referee. That promise according to the boxer is one intending to benefit the boxer. Typically this isn’t a situation in which a third party could easily claim to be a beneficiary of this contract but because the consequences are so dyer there may be a possibility that a court looking at this may grant that boxer status as a beneficiary. More likely than not the boxer will not be a Third Party Beneficiary.

Problem 173

a) The reason behind that is that I’m not an intended third party beneficiary. We ask that first then we start answering questions about their status as creditor or donee beneficiary but in most jurisdictions we’re are going to find that an injured party in not intended to be a Third Party Beneficiary of an insurance company.

b) It depends on the language of the merger.

c) The bus driver was not an intended Third Party Beneficiary but the students were had they been injured.

d) The court held that the intention of the bookstore and the security company was to protect property and not people.

e) Family law and varies state to state but the child won.

VESTING OF THE BENEFICIARY’S RIGHTS

Rights are assigned, Duties are delegated.

Vesting: When something comes into being, when it is born, when the rights become real.

The promisor and promisee are the two contracting parties. They are always free to change their contract at anytime. They can do away with it, change the terms, etc. But if the Third Party Beneficiaries rights have vested, they can’t change the contract without consent of the Third Party Beneficiary. That’s why it’s important to know when the rights vest of the third party.

They only time that becomes relevant is when the promisor and promisee try to change the contract.

R I (Pure)

A creditor beneficiary’s rights vest on reliance and can’t be changed.
A donee beneficiary’s rights vest immediately upon the execution of the underlying contract.

Most courts do not use the test from R I

R II

Vesting is the same for all intended beneficiaries. Material reliance could be one way a third party’s rights vest or bringing suit or assenting to the agreement at the request of the promisor or promisee. Any one of those three things under the Second Restatement would be sufficient for either a donee or creditor beneficiary’s rights to vest. There is no distinction made between a gift beneficiary and a debt or creditor beneficiary.

Know the hybrid test:





The hybrid test treats the creditor beneficiaries and donee beneficiaries differently.

A creditor beneficiary’s rights vest on reliance.

A donee beneficiary’s rights vest when the beneficiary knows or assents to the contract.

DEFENSES


What we are typically going to see is the lawsuit against the promisor by the Third Party Beneficiary. If this is a creditor Third Party Beneficiary, he has rights against both. But we’re more likely to see the promisor being sued for failing to follow thru on the promise it made for the benefit of the third party.


The defenses for the promisor can be broken down into three categories:

1. Promisor has the same defenses he would have against the promisee.
2. Ones the promisor already has against a third party can be used as well.
3. The promisor has the same defenses as promisee has against the third party beneficiary.



If the promisor can demonstrate that he already paid the amount that is being claimed is owed, that’s a defense. That defense is directly against the third party and not the promisee

The biggest difference between category 1 defenses and category 2 defenses is the promisor’s ability to bring in defenses it might have in other transactions, in other contracts and use those as a defense against a third party so as long as those other contracts are with the third party and not the promisee.

The reasoning is pretty clear. In a category 1 defense, yes the promisor may use against the third party defenses it has against the promisee as long as they arise out of this contract. It wouldn’t be real fair to allow the promisor to defend against a third party claim with defenses that the third party didn’t have anything to do with.

With category 2 defenses we have related contracts that exist outside of this one between promisor and Third Party Beneficiary. We are going to permit the promisor to carry these defenses over and use them against the third party.


Problem 174

This is an example of a category 1 defense.

First label the parties. The promise being made for the benefit of the third party is a promise by the insurance company. The promisor is promising to pay benefits upon the death of Wanda. That promise is directly benefiting the Cable Company. The Cable Company is the intended Third Party Beneficiary of the policy.

The Cable Company is a creditor Third Party Beneficiary. There is a legal relationship between Wanda and the Cable Company – the life insurance contract. The insurance company can use the defense that Wand didn’t pay the premium. The promisor is using a defense that it would have against a promissee, against a Third Party Beneficiary. If Wanda ever challenged the validity of the policy while she was still alive, the insurance company could say it’s invalid, it’s lapsed, you didn’t pay the premiums. It would have that defense against Wanda. It has the same defense against the Cable Company. The defense arises directly out of the contract. In this case the Cable Company is out of luck.

Problem 175


The promisor is Nathan. The Promisee is Nicely. Sky is the creditor Third Party Beneficiary, she’s owed $500 by Nicely. Gambling in this instance is illegal. Contracts made to further that enterprise are going to be void for illegality. If Nicely had sued Nathan for that, he wouldn’t get it. Nathan is attempting to use that defense against Nicely against Sky.



Board of Education v. Hoffman Estates
IL, 1984

FACT SUMMARY: The Village (D) entered into annexation agreements with a group of developers whereby the developers would pay the Village (D) an amount of money to be held in escrow for five years during which the parties would try to have the area annexed included in School District 15, but if this effort were unsuccessful, the money would be paid to District 220(P). Prior to the expiration of the five-year period, the parties amended their agreement to extend the period to nine years, and District 220(P), sued for the escrowed funds. CONCISE RULE OF LAW: A third party beneficiary does not have a vested right under a contract until that party has been specifically identified as the beneficiary.

This is a vesting case that’s really not a vesting case. There can be times when a promise is made that will benefit a Third Party but at the time of the contract it is yet undetermined.

Example: If I have an insurance policy that names as beneficiaries as grandchildren – that’s valid even though they are not born yet. They don’t have to be identifiable the time the contract is made but they have to be capable of being identified at the time the payment has to be made. If I were to die either I have grandchildren or I don’t. It can be ascertained who the Third Parties are.

The promisor and promisee are free to change their agreement. There wasn’t a Third Party Beneficiary identified as part of the agreement. The agreement was simply to use best efforts to get into District 15 and if that didn’t happen after 5 years then the money would be paid to District 220 but that promise didn’t contain an intent to benefit 220. They’re free to say at any time prior to that 5 years, well let’s extend this a few more years and make more effort to try to get into District 15.

District 220 claimed they were a Third Party Beneficiary to that initial agreement between the Village and Property Owners. This court held that:

Although two entities are named in the contract, it could not be ascertained until certain events occurred which would be the Third Party Beneficiary. The Third Party Beneficiary could not be identified until the time for performance arose.

Here, District 220(P) was merely a potential beneficiary of the promise to pay certain sums for the benefit of education. At the time the Owners and the Village (D) modified their contract, the actual beneficiary had not been identified, as it could have been either
District 220(P) or District 15. Since neither School District was identified as the beneficiary, neither has a vested right under the contract. Therefore, the owners and the village (D) were free to modify said contract. Reversed.

If you can’t identify who the third party beneficiary is, that party doesn’t have any rights until such time for performance.

Problem 176

Vesting Problem

a) Lawrence is a creditor Third Party Beneficiary. When does creditor Third Party Beneficiaries’ interests vests? Reliance. You can’t rely if you don’t know about the first promise.

b) Same result.

c) Under the hybrid test he is vested as he changed his behavior.

d) Probably not.

Problem 177

BAR EXAM PROBLEM


Work is the one making the promise for the benefit of ABC. There is no legal relationship between ABC and Good. ABC is a donee Third Party Beneficiary. A donee Third Party Beneficiary’s rights vest when they know or assent. ABC did know of or assent to this agreement. As odd as it might sound, Work and Good cannot change their agreement. ABC’s rights have vested and they cannot change to the detriment of ABC.

MORTGAGES AND TPB’S



Mortgage: Consensual liens on real property.

The most important papers to be signed are promissory note, and the mortgage. A mortgage is the security interest in the property. Property owner is the mortgagor and the bank is the mortgagee.

Most mortgages have a due on sale clause meaning: If I sell my house I have to pay off my lender what’s due when I sell it. I have to pay off the balance. There are other ways for transactions to occur.

Two alternative ways:

1. A buyer can assume the mortgage or
2. Take the property subject to mortgage

The original contract is between the original owner and the bank. The new owner says he’ll pay the bank. They are creating a Third Party relationship – the bank.

The bank is a creditor Third Party Beneficiary which means in the event that it doesn’t get paid by the promisor, it has rights in the event of non-payment against the new owner and the original owner.

The original owner is still on the hook for payment.

If the new owner takes the property subject to the mortgage this means that the new owner acknowledges that there is mortgage out there but assumes no personal obligation to pay off the mortgage. The new owner is not promising to pay off the mortgage; he’s simply buying the property with the knowledge subject to the mortgage. It’s risky for the new owner. If the original owner doesn’t pay the mortgage, the bank could take the property that the new owner is living in. The original owner is the only one liable to the bank. In this situation the bank does not become a Third Party Beneficiary between the original owner and the new owner.

If the bank has to sell the property it takes what it is owed and gives the balance (if any) to the new owner. If the sale price is less than the mortgage payoff then the bank takes it all and sues the original owner for the difference.


Who is obligated to the bank? Does that subject to in the middle make any difference with respect to new owner 3’s obligation to the bank?

The majority view is further assumptions are valid. The majority view is that the bank can sue new owner 3. That break in assumptions doesn’t affect the bank’s ability to go after new owner 3.

The minority view is that further assumptions are invalid. Any assumptions that occur after a subject to transaction, those persons assuming are not going to be obligated to the bank. The argument for the minority view is how can new owner 2 allow new owner 3 to assume an obligation that he himself doesn’t even have?

Problem 178

a) Yes, because she was the original mortgagor. Scarlett could avoid her obligation to the bank by getting the parties to agree to a novation.

b) The bank is a creditor Third Party Beneficiary who can sue either Vivien or Scarlett. Lawrence v. Fox.












Problem 179

a) Scarlett still owes the bank. She most likely will be able to sue Vivien for breach.

b) No because Vivien took the property subject to and therefore did not create a Third Party Beneficiary contract in favor of the bank. She is taking money because there is more risk involved. Scarlett is still primarily responsible to the bank.

c) She wants to avoid personal obligation to the lender.

Problem 180

Clark will be liable in the majority of jurisdictions and not liable in the minority. Vivien is just trying to protect herself.




A contract has rights and duties. With Assignment and Delegation we’re usually talking about an executory (performance due sometime in the future) bilateral contract.

We have a bilateral contract – promise for promise but it’s executory, it hasn’t been carried out yet by either side.

Every delegation of duties creates a Third Party Beneficiary contract.

From Blue Handout:

PURE ASSIGNMENT


Paint house example: I can assign the right for the money I would make to a third party. Likewise I can delegate the duty to paint the house to someone else.

Rights are freely assignable. Kent wants to see those words on an exam. Assigning rights is easier than delegating duties and there are exceptions if the right to be assigned is too personal (massage example).

Once there has been notice, B, the obligor can’t satisfy this obligation by paying A. The obligor has to pay C.

Until notice is given B can satisfy his payment obligation by paying either A or C.

If prior to notice B pays A, C is going to have to sue B and A to collect. B is not going to be obligated to pay twice if the payment was made before notice was given.

The assignment is made and notice is given. At that point B must pay C to satisfy this obligation. If B pays A, C can still sue B and recover the $1000. The result is that B could end up paying twice. B wants to make sure that if he is given notice of the assignment that he makes the payment to the proper person.

C always wants to give notice as quickly as possible to make sure the payment comes directly to them and B wants to make sure they are paying the right person after notice is given.
Refer to Blue Handout…

Example of a non-delegable duty: If I hire a well know painter to paint my portrait, he cannot delegate that duty to someone else. It’s personal and esthetic in nature and cannot be measured objectively.

Non-performance by the delegatee is a breach by the Delegator. If A wants someone to do the work for him be better make sure he is going to do it. He’s entrusting C to do what he’s legally obligated to do and if C doesn’t, he’s still on the hook unless there is a novation.


Assignment of the contract = the assignment of rights and delegation of duties. When one party assigns “the contract”, they are carrying out both.

C is doing the work and getting paid for it. It does not mean that A is released from liability if the work isn’t done unless there is a novation.

WEEK 9

Week 9, K II, November 1, 2006
Problem 181

Assignment of rights

We have three parties:

1. Joseph Armstrong: Obligor – he’s obligated to pay.
2. WonderSpa: Assignor – they’re the one assigning their rights to NightFlyer
3. NightFlyer: Assignee

NightFlyer should notify Armstrong immediately of the assignment. Once NightFlyer gives notice to Armstrong that this assignment has occurred Armstrong may not make the payments to WonderSpa. If he does so he could put himself at risk for having to make that payment twice. For the purposes of this problem we are dealing with the assignment of rights only.
Problem 182

Delegation of duty

WonderSpa has a duty to Armstrong to provide services. WonderSpa is delegating that duty to provide services to a new owner.

Armstrong is owed the duty. WonderSpa is the Delegator. Every effective delegation creates a third party beneficiary relationship. That also has its won labels. We have a promisor, a promisee and a Third Party Beneficiary. These duties are delegable because they are commercial in nature.

Macke Co. v. Pizza of Gaithersburg, Inc.
MD, 1970
FACT SUMMARY: In 1967, Pizza (D) entered into a contract under which Virginia Coffee Service, Inc. was to install and maintain cold drink vending machines in their pizza shops. Shortly thereafter, Macke Co. (P) bought Virginia Coffee, and Virginia Coffee assigned the contract to Macke (P).

CONCISE RULE OF LAW: Where there is no contrary provision, rights and duties under an executory bilateral contract may be assigned or delegated except that duties under a personal service contract may not be assigned nor rights delegated where performance by the delegatee would vary substantially from the performance of the original party.

Analysis Step 1: Common Law or UCC?

This is a Common law transaction because it is services. They are leasing the vending machines.

Analysis Step 2: What were they assigning?

Virginia Coffee was assigning the contract. They were doing two things:

1. The assignment of the contracts (payment from Pizza Shops); and

2. The delegation of the duties (provide Pizza Shops with the machines).

Important: Separate those two things out!

When you see an assignment of the contract, an assignment of a contract is an assignment of rights and a delegation of duties.

The assignment and delegation was challenged by Pizza Shops and ultimately the court held that rights are freely assignable. Duties may be delegated in the absence of some agreement not to assign a right or not to delegate a duty on the part of the parties which we don’t have here so we have free assignability of rights, concept and the delegability of duties that are not too personal in nature. The court upheld this assignment and delegation holding that the nature of leasing vending machines is commercial in nature.

If Macke doesn’t perform to provide the vending machines to the Pizza Store, is Virginia Coffee still liable? Does a delegation get a Delegator off the hook? A novation would get the Delegator off the hook.

P2 Examples:

1. It would not be fair to the obligor who had no part whatsoever in the assignment;

2. If the assignment is to a person who is not creditworthy, is geographically far making the delivery of rights more costly or has to buy more insurance, etc; and

3. Making it difficult to receive return performance.

P3 Examples

¶3. This is only a UCC rule.

¶4. The assignment of the contract is two things – assignment of rights and delegation of duties. Where the delegatee accepts assignment of the contract, that’s taken as a promise to perform those duties for the benefit of the person owed the duty.

¶5. “The other party may treat any assignment” means when there is an assignment of the contract there is a delegation of duties. If you have a delegation of duties, the person that’s owed the duty may demand assurances from the Delegator and all subsequent delegatees. This is the UCC’s version of protecting the person owed the duty.

Problem 183

Step 1: Is there an anti-assignment clause? No.

Step 2: Is it too personal? No.

Step 3: UCC 2-210(2)

i. will it materially change duty of obligor? This is a requirements K, what if the amount of mufflers changed?

ii. will it materially increase the burden or risk of obligor? Freight charges, distance, insurance, etc.

iii. will it materially impair the chance of return performance for the obligor? Financial ability.

UCC 2-306: Estimates given in requirements contracts. If Gerald had given Jay an estimate that he needed 50 mufflers per month but then Texas Auto says they are going to need 200 per month, Jay could point to 2-306 and hold Texas Auto to that estimate. It doesn’t have to be on the mark every month but it cannot be disproportionate.

UCC 2-609: Right to Adequate Assurance or Performance. It is an opportunity for an obligor or a person owed a duty if reasonable grounds for an insecurity exist to demand adequate assurances.

Problem 184

Joe is in trouble. Notice was given. The effect of that notice is Joe is to pay NightFlyer. He cannot pay the Spa. UCC 9-406(a) forbids Joe to pay the assignor and he is still going to owe the assignee NightFlyer.

Herzog v. Irace
ME, 1991


The attorney is the obligor, the one obligated to pay Jones. Jones assigns the right to the doctor on lien.

R II § 317: Assignment of a Right. It’s very similar to UCC 2-210. The difference is § 317 asks if the assignment reduces the value of the return performance to the obligor.

The court had to look at whether this was a right that could be assigned to be a valid assignment. The court first said that rights are freely assignable but there may be some situations where it might not be. Is there an anti-assignment clause? Is it too personal? This assignment was deemed to be valid.

Once he validly assigned his rights to the money to the doctor, the client no longer had any interest in the money.

Herzog v. Irace 2


This case could also be viewed as a Third Party Beneficiary situation. We have to look at whether or not the doctor’s rights were vested. Creditor Third Party Beneficiary’s rights are vested when there has been reliance. The doctor relied by performing surgery. They can’t change the contract to the detriment of the doctor.

















GIFT ASSIGNMENTS

R II § 332: Revocability of Gratuitous Assignments.

These Four Horsemen tell us when a gift assignment is irrevocable (cannot be taken back). Notice the “ors”. If any one of these things occurs, the gratuitous assignment cannot be taken back – it’s irrevocable.

The Four Horsemen:

1. A gift assignment is irrevocable if the writing is either signed or under seal, delivered by assignor or the assignment is accompanied by delivery of a writing of a type customarily accepted as a symbol or as evidence of the right assigned. A check book receipt.
OR

2. A gift assignment is irrevocable if the assignee obtains payment of satisfaction of the obligation. Irrevocable if the assignee has already received the right due.

OR

3. A gift assignment is irrevocable if is the assignee obtains judgment against the obligor. If there’s a right due to the assignee from the obligor and the assignee has gone thru the trouble of suing because that right was never delivered and takes a judgment, at that point this assignment is irrevocable.

OR

4. A gift assignment is irrevocable if the assignee obtains a new contract of the obligor by novation. If the assignee and obligor enter into their own agreement that the obligor will carry out or will deliver this right then it becomes irrevocable.
(2) Deals with when gifts are revocable.

(5) Tells us what a gratuitous assignment is.

Other than those four situations, gift assignments are revocable but the rights under then can terminate in certain situations. They can terminate if the assignor dies or there is a subsequent assignment (giving the money to someone else) by the assignor or there’s notification of termination of the rights given by the assignor to the assignee or by the obligor to the assignee (they call it off).

Problem 185

Gratuitous assignment

We have a relationship between Lynn and the Bank. The bank is the obligor and Lynn assigning gratuitously the right to receive that money from the bank to Polly. We must first look to see if this is irrevocable. When the assignor dies it has the effect of revoking the gratuitous assignment. This is similar to death revoking an offer.

ASSIGNMENTS FOR CONSIDERATION

An assignment can be made orally or can be written. If it is something governed by the statute of frauds it must be in writing.

Article 9 does not apply to the creation of interests in realty, wages, bank accounts, insurance or certain other collateral described in 9-109(d). These matters are regulated by common law. This is an important concept for anti-assignment clauses.





Problem 186


R II § 326: Partial Assignments.

Sammy has an obligation to provide 4000 carloads of bananas to Betty. Betty wants to assign her right to receive these bananas but not all of them – only ½ to Stateside. The Restatement applies to common law transactions.

Whether this is a valid assignment steps:

1. Is there an anti-assignment clause? No

2. UCC 2-210: Whether or not the assignment material changes the obligor’s duty, materially increases risk, or materially impairs chance of return performance? We may have to look at payment or return performance for Sammy and see if he’s going to be disadvantaged because of this assignment. Maybe but probably not – not enough facts.
Partial assignments are permitted under both common law and the UCC. Even with partial assignments you still have to check if there is an anti-assignment clause and are the rights too personal by looking at the factors in 2-210 and the Restatement to determine whether or not the assignment is valid.

SUCCESSIVE ASSIGNMENTS FOR CONSIDERATION

Not covered in book. This is a situation where we have the original contract between the obligor and the assignor. The assignor wants to assign his rights under it and in some instances this is going to be a crooked assignor where he’s trying to assign his rights for consideration. An assignor assigns his rights to multiple assignees.

Example: I’m due $100. I’ll give you $50 and I’ll assign my rights to receive this $100 and he does that with 30 people.

When we have an assignor attempting to assign his rights to multiple assignees we have rules for determining who is going to be the assignee entitled to rights. The rule is: First in Time, First in Right.


First in time is first in right, UNLESS:

1. If the second assignee is a bona fide purchaser who doesn’t know about the previous assignment and he is giving consideration (paying) for the rights without notice of the prior assignment;

AND

2. One of the Four Horsemen is satisfied then that subsequent assignee is going to have the assigned rights.

ANTI-ASSIGNMENT CLAUSES

Not all anti-assignment clauses are going to be valid. We are dealing with three bodies of law – Article 2, Article 9 and Common Law.

If the parties state in their contract that rights cannot be assigned, the first thing we have to determine is:

Is the anti-assignment clause dealing with money rights or non money rights?
When dealing with non-money rights the anti-assignment clause is always going to be enforceable with one exception (Cheney case). Some AAC’s have a provision in them that requires the assignor to get the consent of the obligor before the assignment is made. In the Cheney case, the consent that is required before the assignment can be made cannot be withheld in bad faith. There has to be some legitimate reason for the obligor to say to the assignor that he doesn’t consent to the assignment.

You cannot assign rights with an effective AAC.

Cheney v. Jemmett
ID, 1984
FACT SUMMARY: After Jemmett (D) agreed when buying real estate from Cheney (P) that he would not assign the purchase agreement without Cheney's (P) consent, Cheney (P) withheld such consent when Jemmett (D) proposed to resell the property. CONCISE RULE OF LAW: When a contract for sale of property grants the purchaser the right to assign it conditioned upon the seller's consent, the seller must act reasonably and in good faith in withholding his consent to the proposed assignment.








Cheney didn’t consent to the assignment by Jemmett and after learning about it contested it under the AAC arguing that Jemmett needed Cheney’s permission to make the assignment. This is a non-money right assignment. Normally the AAC is going to be valid but in circumstances where consent is required and it’s withheld in bad faith, the AAC is not going to be valid and the assignment is going to be upheld.

MONEY RIGHTS

If money rights are the subject of the assignment, the anti-assignment clause may or may not be enforceable.

First question to ask is what law governs? Second, depending on the law it’s going to tell us whether the AAC is valid or invalid. In order to determine what law governs we have to look at the transaction – in other words, what is the source of the money rights?



If it is money rights from the sale of goods – use Article 2. Article 9 also has a provision in it dealing with money rights from goods sold or leased or from services rendered. We have two Articles that theoretically could cover the same transaction.

If the source of the money rights is from anything else – land, realty, bank accounts, insurance policies, etc., we are going to use Common Law.

Once you know the source, you know which law will govern the transaction.


ARTICLE 2

There’s a distinction that Article 2 makes to tell us whether or not the AAC is valid. Article 2 wants us to determine whether or not the money rights are earned or un-earned.

Earned or un-earned: All that is left in the contract is the payment by the obligor. The goods have already been tendered or delivered by the assignor and all that’s left to do is pay money – that’s when money rights are earned – he earned the money by delivery, tender, etc.

When the money rights are earned, the anti-assignment clause is invalid despite the existence of an AAC. The reasoning is, why should anyone care about whom the money is being delivered to?

When the money rights are un-earned, the anti-assignment clause is effective meaning the money rights cannot be assigned.





ARTICLE 9


Article 9 does not have an earned, un-earned distinction. Article 9 AAC is ineffective, period. If you see money rights being assigned and the source of those money rights is for services that were rendered and you see an AAC, it is no good – those money rights may be assigned.

Example: If the source of the money right is from the sale of goods both A9 and A2 cover that situation. A2 is telling us, when source of the money right is goods the AAC is not valid. But if the un-earned money right is from the sale of goods A2 is telling is it is a valid AAC.

Let’s say the source of the money right is goods that haven’t been delivered yet. That means the money rights are un-earned. Under A9 which does cover goods, the AAC is invalid and the assignment can be made. The exact same situation under A2 says the assignment clause is good.
For an EXAM, always assume that money rights from the sale of goods have been earned. If you assume that it means you are not going to have a conflict and the AAC will be invalid. But an A+ exam is going to have some explanation of this conflict.

When dealing with money rights, AAC’s are rarely going to be effective. When we are dealing with non-money rights, AAC’s are going to be effective.

Wages are statutory.

Problem 187


What is being assigned? Money rights.
What is the source of the money rights? Goods – bananas.
What law governs? A2 and A9

Under A2, whether the AAC will be effective is going to depend on whether or not the money right from the bananas has been earned or un-earned. The AAC will be effective if those money rights from the bananas are un-earned and the AAC is not going to be effective if those money rights are earned. Let’s assume the money rights are earned.

Looking at it under A2 or A9, this assignment can be made

TA: Are there still bananas that need to be shipped in the future? If yes then money rights have not been earned.

Problem 188

What is being assigned? Money rights.
Source? Services rendered.
Law? A9

The AAC is never effective under A9 which means that the money rights may be assigned.

WEEK 10

Week 10, K II, November 8, 2006

Assignments of Setoff and Recoupment are defenses that the obligor has against suits brought by the assignee.

Recoupment: A defense arising out of this contract between the obligor and assignor – the contract that was assigned in other words the rights of this contract were assigned. Defenses that arise out of that contract are called recoupment. This defense is a valid defense against the assignee See Problem 191.

Setoff: A defense not arising out of the assigned contract. There may be other defenses the obligor has against the assignee – defenses that might come from outside this contract. In certain circumstances those defenses may be used against the assignee. This can be used as a defense as long as the defense accrued before the assignee gave notice of the assignment. Need to know the date the claim accrued and need to know the date of notice.
One of the categories of defenses in a Third Party Beneficiary situation was a situation where the promisor and the third party had a contract outside of this one. We talked about the ability to use defenses from an outside contract to come in and defend in the current lawsuit. Saying that this is a defense doesn’t really describe it. It is a defense to the amount owed. If one of the defenses is that the SOL has expired, you can’t pull the SOL defense over into an entirely different lawsuit.

Maybe I owe you 600 over here but you owe me $300 over here. It’s really a defense to the amount owed. This is referred to by the author of the book as setoff.

It’s not arising out of the contract. The obligor may use the defense from the other transaction. Setoff can be used as a defense as long as. The obligor may use this as a defense in this lawsuit.

Problem 191

Joseph Armstrong signed the usual contract with Wonder Spa. It contained the required FTC legend preserving his ability to assert defenses against assignees. The spa assigned his contract to Nightflyer Finance Company, which notified Armstrong that in the future he should make payment directly to it. Two weeks later one of the instructors at the spa negligently dropped a barbell on Armstrong's foot. May he subtract the doctor's bills from the payment to Nightflyer? What if the sole owner of the spa was driving around town in the spa's car and accidentally ran over Armstrong's dog? May Armstrong subtract the value of the dog from the payments due to Nightflyer? Does your answer to this last question change if the dog were already dead before Armstrong learned of the assignment of his contract to the finance company? To answer these questions, see UCC 9-404.

a) Joe is obligated to pay Nightflyer because they have been assigned this contract. What Joe wants to know whether or not he can subtract the doctor’s bills as a result of Wonder Spa’s negligence? Joe is asserting a recoupment defense.

b) If notice was given you cannot use setoff as a defense to what he owes.

Seattle First v. Oregon Pacific
OR, 1972

Setoff case NATURE OF CASE: Action to collect a debt. FACT SUMMARY: Oregon Pacific (D) owed money to Centralia Plywood, which assigned its invoice to the Bank (P). When Bank (P) filed suit, Oregon Pacific (D) attempted to set off claims it had against Centralia. CONCISE RULE OF LAW: An assignee of a right to collect money is not subject to claims of the obligor arising out of other transactions with the assignor unless those claims came into being before notice of the assignment was given.

Centralia has money rights and they assigned those money rights to Seattle First.

As this is going on there are two other contracts similar in nature. Centralia never delivers the wood to Oregon Pacific. Oregon Pacific’s argument is that Centralia breached two contracts with us. Seattle first comes after Oregon Pacific for the money. Oregon Pacific says I’m going to setoff what we owe you (Seattle First) by what we lost due to the breach of the other contracts we had with Centralia.

The question here is, can they do that? This is a setoff because the defense doesn’t arise out of the assigned contract. The defense that Oregon Pacific is using is one based upon other contracts that it has with Centralia. Next we have to see whether notice was given before or after accrual of the claim. The accrual date was the date Centralia breached those other agreements. That is that date that would give rise to a cause of action on the part of Oregon Pacific – January 3, 1969 after notice of the assignment was given to Oregon Pacific.

“If an obligor could not assert any of the defenses or setoffs against an assignee which he could have asserted against his creditor, the assignor, the obligor would be extremely prejudiced by an assignment. On the other hand, if the obligation assigned could be obliterated or diminished by events happening after the assignment and notice of assignment to the obligor, the assignment would be precarious collateral.”











DEFENSES OF THE OBLIGOR

A. Waiver of Defense Clauses

Bind the obligor to a promise that he will not use any defenses against he has against the assignor against the assignee. If there’s an assignment, obligor waives his entitlement to pursue any defenses he has against the assignee that he may have against the assignor. If there’s some attempt made like that it’s going to be deemed invalid – a waiver of defense clause.

The policy reason is you don’t want to put someone in the position of waiving a defense that it doesn’t even know it exists at the time of contract. It’s a prospective waiver that you are making in ignorance.

Under UCC 9-405(a) the obligor and assignor can change their contract even after the assignment as long as it is done in good faith. The assignee’s rights with be from the contract as modified. All that matters is good faith.

9-405 is on 14 in handout.

Problem 192

Prester John made maps for a living and sold them to National Auto Club. It was agreed that he would receive $5,000 for each map he produced under the contract. Needing money, Prester John went to Medieval National Bank and borrowed $30,000, assigning to the bank the payments due to him from National Auto Club. The quality of his maps was not as good as the parties had originally contemplated, and National Auto Club threatened to cancel and sue. Prester John agreed to accept $4,000 for each map, but Medieval National Bank protested this change. Is the bank bound by the modification in the contract? See UCC 9-405.

Walk thru:

1. What is being assigned? Money rights
2. Is the right to money assignable? Yes. Is it too personal? No
3. Is there an AAC? There is not one here.
a) If there was an AAC we ask what is the source of the money rights?
i. Services
ii. Goods

A9 tells us that an AAC is no good meaning the assignment is ok – the money rights may be assigned.

The question here is whether Prester and the Auto Club can change their contract and the answer is yes as long as they are acting in good faith.

If you represent the bank, what right might you have? You could sue Prester for breach of the assignment contract but as far as what the bank would be due from the auto club is still just $4000. That’s not to say that the Auto Club has a breach of the assignment contract against Prester.

WARRANTIES OF AN ASSIGNOR

A warranty is a guarantee or an implied promise that is not expressly stated that implies protection to another party. The assignor has certain implied promises that he is making to the assignee.

Three warranties the assignor makes to the assignee from the Restatement Section 333:

These aren’t things that are written in the assignment contract. These are things that the law says are naturally applied in an assignment situation. These are implied promises made by the assignor to the assignee.

1. The assignor will do nothing to impede or impair the value of the assignment and has no knowledge of any fact which would do so. Needs to be in good faith.

2. The right to assign actually exists and is subject to no limitations or defenses good against the assignor other than those stated or apparent at the time of the assignment.

3. If there is some evidence that a writing of the rights being assigned are exhibited it is deemed genuine.


If the assignor wants to assign some right but has information about the obligor – not about solvency but something that would give someone pause to agree to the assignment. Plans to leave the country, etc. - something that would impair the right to being assigned, you need to share that with the assignor.

If the assignor knows that the contract between the obligor and the assignor is replete with problems, i.e. statute of fraud problems – the obligor is going to have defenses, the assignor needs to tell the assignee that. He can’t just disregard those defenses or problems that exist to induce the assignee to enter into some assignment. That right has to exist. He can’t assign a right he doesn’t have. If the assignor comes to the assignee and says, does that he’s warranting. If the assignor fails in any of these three areas, the assignee doesn’t have a suit for breach of contract but rather a breach of warranty.

DELEGATION OF DUTIES

Every proper delegation of duties creates a Third Party Beneficiary contract. To check to see for an attempted delegation of duties, check to see if there is there an anti-delegation clause. Anti-delegation clauses are always effective. Anti-delegation clauses aren’t bound by the same rules as an anti-assignment clause. If there isn’t a clause, look at are the duties too personal to be delegated.

Langel v. Betz
NY, 1928

1. A duty for a land transaction will not be enforced

NATURE OF CASE: Action for specific performance.

FACT SUMMARY: Langel (P) made a contract with Betz's (D) assignor for the sale of certain land. The assignment contract contained no delegation to Betz (D) as assignee of the performance of the assignor's duties. Betz (D) refused to perform on the contract with Langel (P).

CONCISE RULE OF LAW: A promise of the assignee to assume the assignor's duties is not to be inferred from the assignee's acceptance of an assignment of a bilateral contract, in the absence of circumstances surrounding the assignment which indicate a contrary intention.




There are multiple assignments of the contracts. One of the issues was when the contract was assigned whether or not the rights were being assigned and the duties were being delegated. Here the court said that’s not what was happening. Langel was arguing that as the person owed a duty he is the one who has the property.

….the reason is that it’s dealing with a land contract. Exept for land. If you accept the assignment of a contract that requires you to carry out some duties, theres an assumption that you will carry out those duties.

Section 328

The obligor of the assigned rights. Caveat. The institute. This court carves out an exception regarding Third Party Beneficiary contracts. When a contract is assigned those duties are delegated and the …hs to carry out those duties however when it is to carry out a land transaction, it’s not going to be enforced. The special nature of the land the extraordinary remedy it’s unlikely the…

Problem 193



No anti-delegation clause. Rights are personal but the dance company gave their permission to Carla to dance. Delegate that duty…creates a Third Party Beneficiary contract. She never shows up. Who may the dance company go after? Carla. Vera is off the hook

If vera never showed up they certainly could sue her.





AVOIDANCE DOCTRINES

AVOIDANCE OF THE CONTRACT

We have one party trying to avoid even the existence of the contract. Some contracts like illegal contracts are unenforceable – void for illegality.

There may be a situation a theory by which it may be avoided.

MISTAKE

Mutual:

Unilateral: one party suffering from some misunderstanding


Policy: Assent. There can’t be a meeting of the minds to something central to the contract.

Each must be innocent of the mistake. We can’t have…


The theory behind allowing it to be voidable – mutual assent. There can’t be a meeting of the minds.

II. Court Allotted Risk

A. The parties are under the same as to the subject matter. Example: I have a garage that has four blue cars in it. All are for sale and buyer agrees to buy the blue car. If we’re not talking about the same blue car, there’s not contract. Talking about the same car.

B. If I’m digging around in back yard and find an old artifact and take it to collector and sell it for $200, gets appraised worth $20,000 out of luck. We didn’t have some certainty. Where parties are mistaken about the value of the subject matter not going to set aside contract. Assume the risk. The court is not…because of bad deal

C. Bar exam question. Someone in the construction industry goes to buy a crane. They both believe that a number 3 crane is going to do the job. If the parties were genuinely mistaken, the courts will not set aside a contract under those circumstances.

UNILATERAL MISTAKE


1. the off is under some mistake as to who the offeree is may get relief. No relief for error in judgment. If the non-mistaken party should have known about the error,


Example: pour concrete for $25. Should they have known, off the hook. We don’t allow non-mistaken parties to jump…


A mistake made by one party. to allow to void the contract the mistake has to be about some material fact. Factors to consider: enforcement…

1.
2.
3.
4.
5. Prompt notice: just sit on it?

Raffles v. Wichelhaus
Eng., 1864

Mutual mistake

FACT SUMMARY: Raffles (P) contracted to sell cotton to Wichelhaus (D) to be delivered from Bombay at Liverpool on the ship "Peerless." Unknown to the parties was the existence of two different ships carrying cotton, each named "Peerless" arriving at Liverpool from Bombay, but at different times.

CONCISE RULE OF LAW: Where neither party knows or has reason to know of the ambiguity or where both know or have reason to know, the ambiguity is given the meaning that each party intended it to have.

Two ships two months apart. The buyer of the cotton…The actual ship that the seller intended came in later. Ready, willing and able. They’re both under a mutual mistake. Equally innocent, they just believe cotton came in on different ships.

The true story: The price of cotton dropped. The buyer says, get me out of this contract.



Problem 107

They mean different ships.

Restatement

Problem 108

He knew what he meant. The buyer knows what the seller meant. No mistake made by anyone. The contract is for the sale of the cow.


Sherwood v. Walker
MI, 1887

FACT SUMMARY: The Walkers (D), having sold a cow to Sherwood (P) in the mistaken belief that it was barren, refused to deliver it.

CONCISE RULE OF LAW: Where the parties to a contract for the sale of personal property are mutually mistaken as to a material fact which affects the substance of the whole consideration, the contract is unenforceable.

A belief held by both Sherwood and Walker. Rose as a non-barren cow never existed. They were mistaken when they contracted for a non-barren cow. We don’t have a situation here…we have a situation where they are both. The dissent eludes to that there may have been information if

DISSENT: (Sherwood, J.) There was no "mutual" mistake here since Sherwood (P) believed the cow would breed. Regardless, no conditions were attached to the sale by either party.


“For students of law must still atone for the shame of Rose of Aberlone.”

Wood v. Boynton
WI, 1885

FACT SUMMARY: Boynton (D) purchased an uncut stone from Wood (D) for $1. Neither party realized the stone was a diamond worth $700.

CONCISE RULE OF LAW: In the absence of evidence of fraud on the part of the vendee, a mutual mistake as to the nature and value of a thing sold will not afford a basis for rescission of the contract of sale.

The difference is the value of it vs. the nature of it. A basic material mistake as to the subject matter in the cow case. Here neither side really knew what they were dealing with. Both say, we don’t know what it is.

Cow case

If you don’t know what it is you’re going to have some uncertainty as to the value. Not dealing with fraud as the jeweler let her go the first time. When there is concuos uncertainty as to the value, the court is not going to set aside the contract based upon risk assumption. If the seller really wants to ascertain the value, he can do that. If the buyer doesn’t want to buy, he doesn’t have to buy.

Williams v. Glash
TX, 1990

FACT SUMMARY: Although the accident settlement check which Williams (P) accepted for her damaged auto included a release of all claims, Williams (P) sought to recover damages for injuries which she discovered after accepting the check.

CONCISE RULE OF LAW: The doctrine of mutual mistake, which allows for the avoidance of contracts where the parties are mistaken about a material assumption of the contract, applies to releases.

ISSUE: Is a release effective where the parties are both mistaken about a material assumption basic to the contract?

HOLDING AND DECISION: (Doggett, J.) No. A release is ineffective if both parties are mistaken about a material assumption basic to the contract. An unknown injury not contemplated at the time of the release is a material fact basic to the contract. However, parties may intentionally assume the risk of unknown injuries in a release. Consideration of the conduct of the parties is necessary to determine whether this risk was assumed. Although the language of the release signed by Williams (P) was evidence that the risk of unknown injuries was assumed by Williams (P), the settlement of personal injury claims was never discussed or bargained, and the settlement check equaled the amount of car damage exactly. Therefore, there is enough evidence to show that the parties were both mistaken about material facts basic to the release. The issue should be determined by a jury, and the summary judgment motion should have been denied. Reversed and remanded.

DISSENT: (Spears, J.) Policy considerations favoring the orderly settlement of disputes override the interest in compensating accident victims. The invalidation of releases poses unreasonable problems for insurers.

EDITOR'S ANALYSIS: This decision is in accord with the Restatement (Second) of Contracts § 152. This section allows for avoidance of the contract "where a mistake of both parties at the time the contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances." A comment to § 152 expressly refers to the conduct of parties to a personal injury release.


A woman in a car accident. At the time of the accident. In satisfaction of the claim…asked to sign all claims in the future for bodily injuries. TMJ as a result of the accident. She filed suit for the injury. The defense was suit should be dismissed. Is that contract voidable based upon mutual mistake.

She would have never signed a release if she had known she had injuries. Texas law:

Subject to avoidance. Pursuant to…

Both the injured party and the insurance company believed there was no injury.

The court is saying there is an issue of fact. The facts of what these parties intended needs to be put in front of a jury.

Both assumed she was not injured. Contracts where there has been a mutual misunderstanding may be voided.

Page 495:

What good is the release if a person cannot be held to it? Maybe that’s the standard language but they didn’t really intend to release her.

Bailey v. Ewing
ID, 1983

NATURE OF CASE: Appeal from decision to quiet title in plaintiff.

FACT SUMMARY: Bailey (P) brought suit to eject Ewing (D) from a disputed piece of land between their properties. Ewing (D) filed a counterclaim against Bailey (P) and third party Erhardt, personal representative of the estate, to reform the deeds. The trial court found for Bailey (P) and Erhardt. Ewing (D) appealed.

CONCISE RULE OF LAW: Parol evidence is admissible to prove that, by reason of mutual mistake, the parties' true intent was not expressed by the written instrument.

ISSUE: Did the trial court err in ruling that any mistake concerning the location of the boundary line was a unilateral mistake by Ewing?

HOLDING AND DECISION: (Swanstrom, J.) Yes. Erhardt clearly intended to sell the whole house on Lot 5 and believed the boundary line was somewhere east of its subsequently determined "true" location. Ewing (D) shared this belief. Thus, Ewing (D) and Ernhardt made a mutual mistake as to the boundary of lot 5. Where there is mutual mistake, parol evidence is admissible to show what the true intent was; in this case to deed the whole house on lot 5 to Ewing (D). However, Ewing's deed can only be reformed if such relief will not prejudice the rights of Bailey (P), if Bailey is a bona fide and innocent purchaser. Judgment reversed and remanded for proceedings consistent with this opinion.

EDITOR'S ANALYSIS: Despite the fact that the court found mutual mistake in the deeding of lot 5, a reformation of the deed cannot occur without taking into account the rights of the owner of lot 6. If lot 6 had not been sold, the deed to lot 5 could be reformed as only the rights of the Estate and Ewing would be affected.






Giving a tour to perspective buyers. The line is somewhere around the lilac bushes. Bailey makes the purchase as a bona fide purchaser.

The court held that Ewing assumed the risk that the line was not at the lilacs. But he didn’t assume the risk that the lot line ran right by the foundation of his house. This case was ultimately remanded to see of Bailey in lot 6 knew of the dispute. We have a situation here where. Neither believed that the line was so close to the house.

WEEK 11

Week 11, K II, November 15, 2006
FRAUD





UNDUE DURESS

Mistake as to operation of a subject. Crane example. A mistake as to the fundamental operation. Both parties innocently mistaken but mistaken, the contract may be set aside. That would create a voidable situation.

UNILATERAL MISTAKE

Bid situations, clerical errors or mistakes in mathematics. That unilateral mistake could give rise to the setting aside of the contract.

Should the contractor know or does…did they seek to cure the problem.

First Baptist Church v. Barber Contracting Co.
GA, 1989

FACT SUMMARY: Barber (D) submitted a construction bid to First Baptist (P) which contained a miscalculation, causing Barber (D) to withdraw the bid.

CONCISE RULE OF LAW: A contract may be rescinded when one party has entered into the contract based upon an unintentional mistake.
If we enforce this are they going to lose money or file for bankruptcy? The amount of money paid clearly relates to the consideration.

1. The mistake is of such consequence that enforcing would be unconscionable;
2. The mistake must relate to the substance of the consideration;
3. The mistake must have occurred regardless of the exercise of ordinary care;
4. It must be possible to place the other party in status quo. It is generally required that the bidder give prompt notification of the mistake and his intention to withdraw.

The court can rescind this contract, then that’s something that the court looks at as well.

Problem 113

Cannot snap up a bid. School board knew or should have known that the bid was likely the result of a mistake.

Always balance this mistake policy with the ability of people to enter into agreements.

Problem 114

We’re talking about a company that is taking a gamble. It’s far different from a clerical mistake. It’s a calculated business decision. It’s not an appropriate situation for a court to grant rescission.

Problem 115

Mistake can give rise to voidable contract but they are not always void.

Problem 116

Failure to take down the sign was more than a mistake. The ad didn’t specify which tournament.

FRAUD (MISREPRESENTATION)


Wide range, how one side might use them defensively.

Veterinary Pathologist Example: Cause of action grounded in fraud.

Mistake: involves a belief that is not in accord with the facts.

Fraud: An assertion that is not in accord with the facts.

Fraud in factum (rare): One duping another as opposed to inducement. He doesn’t know what he is doing.

Example: a document in front of a blind person but it’s an I.O.U. It will be void. He’s not be induced to act, he’s just signing something.

Fraud in the inducement: The actor understands what he or she is doing but is doing it because he was induced by assertions that were made that were not in accord with the faces. He does know what he or she is doing.

Two kinds:


Elements:

1. rolling back an odometer
2.
3. reliance
4.


Element 2

Either misrepresentation or fraudulent.

Ask: Would this misrepresentation cause this person to enter into the contract

If you can answer yes, the element is met.

Element 4 RPOP

Was the reliance justified? You can’t claim that if a reasonable person…


Fraud in Inducement

Elements:
1
2
3
4
Material misrepresentation Fraudulent misrepresentation

Element 2: A reckless disregard of the truth

Example: This car will run for 450,000 miles.

Element 4: A subjective test

The reliance aspect: objective perspective

Fraudulent aspect: subjective perspective

OPINION

If an opinion is made by one with superior knowledge, it may justify reliance. A statement of opinion can be viewed as an assertion of fact.






Beynon Building Corp. v. National Guardian Life
IL, 1983

FACT SUMMARY: National Guardian (D) discovered that when Beynon (P) proferred a final payment on a mortgage and note the monthly payment amount reflected on the original note had been miscalculated.

CONCISE RULE OF LAW: A written agreement which does not conform with the true intentions of the parties, and as to which there is strong, clear, and convincing evidence of mutual mistake of fact, will be reformed in equity.

Vokes v. Arthur Murray, Inc.
FL, 1968


FACT SUMMARY: Vokes (P) was continually cajoled into purchasing thousands of hours of dancing lessons at Arthur Murray (D).

CONCISE RULE OF LAW: Where one party has superior knowledge, statements made within the area of such knowledge may be treated as statements of fact.

Fraud in the inducement. She knew what she was doing but was doing it under misrepresentations. Do opinions qualify as false assertions? A misrepresentation must be a misrepresentation of fact. Or where the parties do not

A statement of opinion may be viewed as an assertion of fact.

Motion for summary judgment was granted. Reversed and remanded. Just because these things were couched as opinions…


Cousineau v. Walker
AK, 1980


FACT SUMMARY: Walker (D) made certain misrepresentations regarding his property, the accuracy of which buyer Cousineau (P) did not investigate.

CONCISE RULE OF LAW: A purchaser of land is not obligated to ascertain whether representations made by the vendor are true.

Issue whether they relied and were material to the negotiations. The misrepresentation were not material…


The court of appeals conclude that a purchaser of land and is not obligated. The buyer of land is barred from recovery.

Even in transactions in land, buyers can get relief. Caveat emptor is not going to…a person who is guilty cannot hide behind caveat emptor.

Sometimes this is referred to the doctrine of unclean hands. Those who seek equity…don’t come to me…

Walker has induced cousineau in a land transaction.

Even in land they buyer is entitled to equitable relief

DURESS


Can be used as an avoidance doctrine. They can seek rescission in those circumstances. The most basic concept is the meeting of the minds. Wrongful act

Free will: judge it by a subjective test. They cant avoid by saying, I wasn’t under duress but a reasonable person would have been

Economic duress: seeking to rescind under an objective reasonable person standard.

Totem Marine v. Alyeska
AK, 1978


FACT SUMMARY: Totem (P) claimed that Alyeska (D) had used economic duress to get Totem (P) to sign a binding release of all claims it had against Alyeska (D) after Alyeska (D) terminated a contract with Totem (P).

CONCISE RULE OF LAW: A contract can be voided if it was entered into as the result of economic duress.

There were wrongful threats. Economic duress they put them into a position to take what they offered. Totem would have liked to bring its own breach of contract. Alyeska makes them an offer significantly less.

Page 542: Courts have not attempted to define exactly what constitutes a wrongful act…

When a wrongful act that one party claims in duress, they have to show that the breach was made in bad faith.

Economic duress does not exist…victim must have hardship. Party must also show he had no reasonable alternative.

Could make a colorful argument that…

UNDUE INFLUENCE


We can see these weakness occur from age,

Some relationship that has been established…confidential relationships. Attorney/client relationship. The client may be vulnerable.

Kase v. French
SD, 1982




FACT SUMMARY: Mr. & Mrs. French (D) delivered groceries and developed a close relationship with Kase's (P) testator, Mrs. McWilliams, who sold the Frenches (D) her home at a very low price.

CONCISE RULE OF LAW: A confidential relationship requires the dominant party to act in good faith towards, and to no advantage at the expense of, the confiding party.

Odorizzi v. Bloomfield School District
CA, 1964


FACT SUMMARY: Odorizzi (P) was arrested on homosexual charges. Immediately after his release the School District (D) convinced him to resign. CONCISE RULE OF LAW: When a party's will has been overborne, so that in effect his actions are not his own, a charge of undue influence may be sustained.

His consent to sign was…Undue influence

558:

560: Seven Factors

Close case. The threat of making something public is not against the law. That might elevate the wrongfulness.

Look at the environment as well. Was it unduly and an environment

WEEK 12

Week 12, K II, November 22, 2006
20 T & F 4 pt each
Essay question 2 parts
40 Multiple Choice

ILLEGALITY AND INCAPACITY

Violation of a regulatory slide:

Requiring someone to do something…

We may have a contract that in some way violative of public policy. Look beyond, is the nature requiring someone to do something illegal. When the contract is requesting exchanges of performances that is designed to regulate conduct, it is more likely the contract will be set aside for illegality.

Look to see if there’s a statute. What’s the purpose of this scheme? Is it to…

Four other types:

1. Wagers and gaming contracts. If gambling is illegal then bookmaking will not be enforced.

2. Contracts tending to result in corruption are going to be void. Lobbying contracts – contingency fees if they do certain things.

3. Contracts facilitating an illegal purpose


4. Affecting the administration of justice. We don’t want people entering into agreements that would impair or impede law enforcement to carry out its work.


The competing policy is that people are free to make agreements as they wish. We look at these avoidance as exceptions.

When someone violates the law, the contract is void. Sometimes when the contract calls for the violation of a statute that’s central purpose is for the public, the contract will be voidable. Even tough the contract calls for the violation of a statute, some fine will be imposed upon the party.

Courts may allow the contract to be executed subject to punishing the parties.



Bennett v. Hayes
CA, 1975

Slide:

FACT SUMMARY: Hayes (D) brought his automobile to Bennett's (P) shop for repairs, but Bennett (P) performed work without providing written or oral price estimates as required by statute.

CONCISE RULE OF LAW: A contract for services will be rendered unenforceable on grounds of illegality if a party violates a statute during the performance of it.

The parties in the court’s view are not equally culpable and they are not equally innocent.

It was proper for the court to set aside the contract.

Problem 121

The public thru a public policy is that attorneys be licensed. In order for them to provide sound legal advice. Will not be able to collect on the contract.

Problem 122

The license is to raise money and not to regulate conduct. The contract is not going to be void. There may be a penalty but the customers will not be excused from their obligation.

Carnes v. Sheldon
MI, 1981

Slide:

FACT SUMMARY: Carnes (P) co-habited with Sheldon (D), who allegedly promised to marry her once her divorce was final, but after Sheldon (D) ended the relationship short of marriage, Carnes (P) sued for half of Sheldon's (D) property.

CONCISE RULE OF LAW: Courts will not find implied-in-fact contracts for the accumulation or division of property between co-habitants when the underlying circumstances reveal a meretricious relationship.

Michigan had abolished common law marriage. The state would not enforce a meretricious relationship.

Public policy as a vehicle.

Contracts in restraint slide:

We have many laws both state and federal level to insure that the free market…we have laws that regulate anti. Generally contracts that restraint trade are illegal. Void for illegality.

Exceptions:

Non-compete agreements: restrictive covenants asking the employee not to engage geographic. Governed by statute in many cases. When they are valid and invalid. What’s the need for the protection being sought? Second, is the clause reasonable? What’s the person being restricted from doing? We don’t want to prevent people from working. A restraint of trade is also preventing someone from carrying out their craft. They can as long as there is reasonableness in the area and time.

BDO Seidman v. Hirshberg
NY, 1999

FACT SUMMARY: BDO Seidman (P) sued a former employee (D) under a reimbursement clause in his employment agreement. Following discovery, both parties moved for summary judgment. The Supreme Court granted summary judgment to the employee (D), concluding the reimbursement clause was too broad. The appellate division agreed, holding the entire agreement invalid. BDO Seidman (P) appealed.

it was a liquidated damages clause – if you do it, this is what you have to pay us. Hirshberg has a right to work and earn a living. What it wants to avoid is for an accountant to come in, use resources and leave taking things with him and opening shop. The company has some interestst to protect.

Three Part Test:

1. Is no greater than is required for the protection of the legitimate interest of the employer;

2. Does not impose undue hardship on the employee; and

3. Is not injurious to the public.


The part that was remanded to the trial court was the liquidated damages clause. It would be reasonable if the damages were difficult to calculate. It must be a reasonable estimate. The court felt that these two areas were factual questions that needed more flushing out.

INCAPACITY

Slide:

There are times when parties to a contract may be deemed…situations that we are concerned with here are

Minors slide:

A minor may not disaffirm a contract for disaffirm.

If there is a contract between a minor and an adult only the minor may disaffirm the contract.
FACT SUMMARY: Valencia (P), a minor engaged in a business, disaffirmed a contract from which he had been conferred certain benefits. CONCISE RULE OF LAW: A minor who disaffirms a contract may be held liable for nonnecessary benefits, even if the benefits cannot be returned in kind.

The court had to wrestle with the fact if was going to enforce. Giving compensation in quasi contract. In the majority of jurisdictions he is going to get back. A person under the age of majority…

Minority: minor has had a benefit conferred upon him but in quasi

Majority: no contract. Even in quantum meruit.

Problem 123


MENTAL INFIRMITY

Slide:

3. did they know or should have known the other party was infirm?

4.

Problem 124

Look at the factors:

1. How necessary?
2. How fair is the K? Agreeing to that amount is not a fair contract.
3. Should have known?
4. Hardship? Hard to tell. Probably this is a situation where they are not damaged.


Prblem 125

The court proceeding is a rebuttable presumption and point to the situation. The other side is going to come in and in all likelihood it would be overcome.

Problem 126

Courts are reluctant to recognize a self created incapacity.

WEEK 13

Week 13, K II, November 29, 2006
Final Exam:

405 Points total

200 Multiple Choice 50 @ 4 points each
80 T/F 20 @ 4 pts each
125 point essay


UNCONSCIONABILITY

Slide:

Start with:

UCC 2-302

Restatement II Section 208


Options or three choices:


Is it a question for the judge or jury? It’s a legal question so it’s a question for the court.

Is the hearing mandatory?

Two types of unconscionability

Prof. Leff slide:


Procedural: look more to the bargaining power of the respective parties. How fair? These have to do with the process.

Substantive: How harsh are the actual terms of the contract?

The policies fly directly in the face of the more…people are free to make deals. We are not going to rescind a contract solely because someone is getting a bad deal.

Except when it is weighted on one side. Then we have to recognize that perhaps it’s not in societies best interest.

Williams v. Walker Thomas Furniture
DC, 1965

FACT SUMMARY: Williams (D) made a series of purchases, on credit, from
Walker-Thomas (P), but defaulted on her payments.

CONCISE RULE OF LAW: Where, in light of the general commercial background of a particular case, it appears that gross inequality of bargaining power between the parties has led to the formation of a contract on terms to which one party has had no meaningful choice, a court should refuse to enforce such a contract on the ground that it is unconscionable.

It was in the interest of the furniture store to keep running balances. The court didn’t use the UCC because it wasn’t enacted yet.

Page 600: Unconscionability…

Page 601

The court didn’t really make a decision…they remanded the case. Page 601

Page 600:

What to take from this case: If a contract be unreasonable…

Maxwell v. Fidelity Financial Services
AZ, 1995

NATURE OF CASE: Review of summary judgment for defendant in an action seeking a declaratory judgment of unconscionability.

FACT SUMMARY: Maxwell (P) sought a declaration that a contract to purchase a solar water heater which was never installed properly and never worked properly was unenforceable on the grounds that it was unconscionable.

CONCISE RULE OF LAW: A claim of unconscionability can be established with a showing of substantive unconscionability alone.

Problem 127

Wong is not going to be permitted to do that. The absence of meaningful choice. Wong is not going to be entitled to relief. 2-302 also protects merchants but the courts are going to be less sympathetic. There’s a presumption that merchants…

Weaver v. American Oil Co.
IN, 1971

Slide:

NATURE OF CASE: Review of summary judgment for defendant in an action seeking a declaratory judgment of unconscionability.

FACT SUMMARY: Maxwell (P) sought a declaration that a contract to purchase a solar water heater which was never installed properly and never worked properly was unenforceable on the grounds that it was unconscionable.

CONCISE RULE OF LAW: A claim of unconscionability can be established with a showing of substantive unconscionability alone.

Part of the lease agreement that Weaver signed contained an exculpatory

Exculpatory Clause: Excuses a party from liability by freeing it of any duty.

Indemnity Clause: A promise to defend and hold harmless for injuries.

Signing these agreements is complete foolishness. The court pointed out even if you strike the exculpatory clause…

The UCC did not apply in this case. The truck was delivering gas. This court did look to the UCC as guidance.

Page 612:

J. Frankfurter:

The court shouldn’t sit back and let this happen.

When a party can show that the contract, …

Procedural unconscionability. This court decided this case foremost on procedural unconscionability

Problem 128

The restaurant is trying to exculpate itself with the use of the sign “Not Responsible for Lost Items.” These types of exculpatory clauses are generally not going to be enforceable. They are not contracts. They are providing some service that would give rise to a duty.

Substantive unconscionability.

IMPOSSIBILITY AND FRUSTRATION OF PURPOSE

Slide:

After contract is formed.

Except slide:

1) Not looking for petty annoyances…something unexpected and unforeseen happens after the contract is formed that makes impossible, may be set aside.

Example: Car blows up, it is essential to something in the contract. I certainly cannot sell you something that does not exist.

Taylor v. Caldwell
Queen’s Bench, 1863

Slide:

NATURE OF CASE: Action for damages for breach of a contract for letting of premises.

FACT SUMMARY: Taylor (P) contracted to let Caldwell's (D) hall and gardens for four fetes and concerts, for four days, for ~100 per day. Taylor (P) expended money in preparation and for advertising, but Caldwell (D) could not perform when the hall burned down without his fault.

CONCISE RULE OF LAW: In contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.

Checklist:

Where a specific:

1. Thing essential to the contract;

2. known by the parties;

3. performance will be excused by the unforeseen, unexpected event;

4. unless risk is assumed by one.

Has to result in either destruction of the subject matter or some other circumstance…

Problem 129

(a) They will have to start over. Behemoth is going to be insured against this kind of loss. They may be excused from timetables.

(b) They are doing work on an existing building. The destruction of the building makes it impossible… Can recover in quasi contract – quantum meruit. As far as the contract itself – no damages. The city is not going to have to pay any contract damages.

Nissho-Iwai Co. v. Occidental Crude Sales
5th Circuit, 1984

NATURE OF CASE: Appeal from award of damages for breach of contract and
fraud.

FACT SUMMARY: Occidental (D), an oil producer, failed to supply oil drilled in Libya to Nissho (P), a Japanese oil distributor, for eight months due to a Libyan embargo on oil exports and a pipeline breakdown.

CONCISE RULE OF LAW: A party relying on a force majeure clause to excuse nonperformance under a contract must prove it did not exercise reasonable control over the excusing event.

The biggest issue was who’s fault was it? Occidental’s position was the embargo. We’re excused from conditions…but the court didn’t buy that. The court believed that they could have avoided it. They had reasonable control over the pipline.

What to take:

A party can’t avoid a contract if that party is responsible for the alleged impossibility.

FRUSTRATION OF PURPOSE

Krell v. Henry
King’s Bench, 1903

Slide:

NATURE OF CASE: Action for damages for breach of a contract for a license for use.

FACT SUMMARY: Henry (D) paid a deposit of ~25 to Krell (P) for the use of his apartment in Pall Mall, London, for the purpose of a viewing sight for King Edward VII's coronation procession. The King became ill, causing a delay of the coronation upon which Henry (D) refused to pay a ~50 balance for which Krell (P) sued.

CONCISE RULE OF LAW: Where the object of one of the parties is the basis upon which both parties contract, the duties of performance are constructively conditioned upon the attainment of that object.

She can still rent the apartment. This isn’t the type of contract that the court is going to set aside. It can still be done.

The purpose is undermined. The court doesn’t use the term “frustration”. Both parties knew at the time.

This is a theory that is in disfavor with a lot of courts. You don’t always let someone out of their obligation to perform but nonetheless it is possible.

REFORMATION

Make it acceptable to the parties or cure the mistake. We don’t always want to set aside a contract. It is more fair and more just to save it and fix it. It might be a detriment to one of the parties but it might be the fair thing to do.

Beynon Building Corp. v. National Guardian Life
IL, 1983


NATURE OF CASE: Appeal from dismissal of complaint for release from mortgage and for reformation.

FACT SUMMARY: National Guardian (D) discovered that when Beynon (P) proferred a final payment on a mortgage and note the monthly payment amount reflected on the original note had been miscalculated.

CONCISE RULE OF LAW: A written agreement which does not conform with the true intentions of the parties, and as to which there is strong, clear, and convincing evidence of mutual mistake of fact, will be reformed in equity.

$649.60 vs. 694.60 per month. They paid that for 178 months. The defendant would not discharge the obligation.

They reformed the contract in way that required the borrowers to make good on the. Reformation in some cases is just and equitable.










TA

CONDITION

1. Is the language expressly conditional? If yes – Express Condition

- Look to see of the duty to pay is conditioned on some part of the express statement.

- Definition: A condition is a fact or event that will either activate a duty OR discharge a duty.

2. Did the condition fail or was it satisfied?

- If it failed is there an excuse?

1. Waiver
2. Estoppel
3. Impossibility
4. Public Policy

PROMISE

1. Is the language expressly conditional? If no – Promise

- Definition: A promise is a contractual undertaking the breach of which gives rise to damages or equitable relief.

- Are promises Dependent or Independent” Kingston case.

2. If dependent then the court will impose a Constructive Condition

- Order performance if not started.

3. Last – Is the Constructive Condition Satisfied? Simply state the question and then apply Cardozo 4+1 Rule:

1. Purpose to be served;
2. Desire to be gratified;
3. Excuse from the deviation; and
4. Cruelty of enforcement.
+ Willful Breach – then they have to pay.




THIRD PARTY BENEFICIARIES

Pr---------------------Pee



TPB


>Third Party Beneficiary formed when parties are making a contract.

>Novations apply

>Creditor Third Party Beneficiaries can sue Promisor or Promisee absent Novation

>Follow Chart (Kent)

ASSIGNMENTS

Obligor--------------------Assignor


Assignee

>Rights are freely assignable (generally) UNLESS

- Anti Assignment Clause “Effective”
- Too personal? R II 317, Common Law
UCC 2-210, Goods

>Remember once the obligee notifies the obligor of assignment, the obligor can’t pay assignor.

DELEGATION OF DUTY

Person Owed Duty-------------------------Delegator


Delegatee

May delegate IF duty:

Is commercial and performance
Is capable of objective evaluation

>Watch for painting/plant growers
Note: No way for Delegator to get off hook absent agreement with Person Owed Duty to do so.

Remember: AAC for assigning the contract. Can assign rights but not duties.

Mara Kent Hilary 06

Label assignment:

___------------____


____

Tell who the parties are.

- Check for AAC - Ex

- Are the rights assignable?

- Notice:

- What do the parties have to do right now
B A
Issue: Delegation POD-----------------Delegator


C
Delegatee
Rule:

What does B do?
What does A do? A is responsible to C
What does C do? He has to paint the house


Issue TPB

C becomes Promisor
A becomes Promisee
B becomes TPB

Rule: Creditor or Donee?

END