Contracts Outline 7 - Professor Dawson | Study notes Contract Law

Contracts Fall 2003

Conditions

(pp. 920-962)

CONDITIONS:

• Intuitively easy to understand, but in some ways also like a mirage

R § 224: Condition = an event, not certain to occur, which must occur, unless its non-occurrence is

excused, before performance under a contract becomes due.

• Performance under contract is not due if the condition is not met. Non-occurrence of

condition excuses the contract.

• Conditions are a way of managing risks in a contract. May be relatively certain would get

the houses at auction, but not absolutely certain and don’t want to assume all the risk if it

doesn’t happen.

• P. 958: illustrations from R §229 – stems from Jacobs & Young but adds language “on

condition” – no longer promise that builder will use the Redding pipe, now reads as a

condition that Redding pipe be used.

o In the case, builder sued owner to recover payment of last $3500. Owner says no

you breached b/c used wrong pipe. Since you breached, I’m not obligated to pay

you. Q of who breached first.

o If read condition literally, and wrong pipe was used, then condition is not satisfied

and from strict standpoint, owner is discharged from contract. An outrageous

position and courts won’t support this (read comments to R)

o It depends if you treat statement as a promise or a condition.

• In case law, there are statements that if parties have articulated an express condition, the

condition is to be strictly construed, it must be met as it is articulated. This is different from

substantial performance.

• Satisfying conditions is much more strict than meeting substantial performance.

• P. 958 hypo – assume that when owner discovers wrong pipe was used, still owes $3500. If

payments is conditioned on pipe used, then builder doesn’t get the $. The same issue before

Cardozo – but by using substantial performance doctrine, he could not force forfeiture b/c it

was immaterial.

• Notion of strict construction of conditions, at odds with tendency to not want to force

parties to forfeit. Cases go back and forth – some argue express language, others say it

wasn’t a material condition to the contract, or view it more like a promise than a condition.

• First question: is it a condition or a promise?

HOWARD v FEDERAL CROP INSUANCE CORP

Involves an insurance contract for farmer losses. Provisions in insurance contracts are not

negotiated, bargain only on how much coverage and what the premium will be; conditions are

there. Most people don’t ever read or know about the conditions.

• 5(f) [dispute in this case]: “shall not be destroyed until the Corporation makes an

inspection”

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Conditions (pp. 920-962) CONDITIONS:

Intuitively easy to understand, but in some ways also like a mirage R § 224: Condition = an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.
- Performance under contract is not due if the condition is not met. Non-occurrence of condition excuses the contract.
- Conditions are a way of managing risks in a contract. May be relatively certain would get the houses at auction, but not absolutely certain and don’t want to assume all the risk if it doesn’t happen.
- P. 958: illustrations from R §229 – stems from Jacobs & Young but adds language “on condition” – no longer promise that builder will use the Redding pipe, now reads as a condition that Redding pipe be used. o In the case, builder sued owner to recover payment of last $3500. Owner says no you breached b/c used wrong pipe. Since you breached, I’m not obligated to pay you. Q of who breached first. o If read condition literally, and wrong pipe was used, then condition is not satisfied and from strict standpoint, owner is discharged from contract. An outrageous position and courts won’t support this (read comments to R) o It depends if you treat statement as a promise or a condition.
- In case law, there are statements that if parties have articulated an express condition, the condition is to be strictly construed, it must be met as it is articulated. This is different from substantial performance.
- Satisfying conditions is much more strict than meeting substantial performance.
- P. 958 hypo – assume that when owner discovers wrong pipe was used, still owes $3500. If payments is conditioned on pipe used, then builder doesn’t get the $. The same issue before Cardozo – but by using substantial performance doctrine, he could not force forfeiture b/c it was immaterial.
- Notion of strict construction of conditions, at odds with tendency to not want to force parties to forfeit. Cases go back and forth – some argue express language, others say it wasn’t a material condition to the contract, or view it more like a promise than a condition.
- First question: is it a condition or a promise? HOWARD v FEDERAL CROP INSUANCE CORP Involves an insurance contract for farmer losses. Provisions in insurance contracts are not negotiated, bargain only on how much coverage and what the premium will be; conditions are there. Most people don’t ever read or know about the conditions.
- 5(f) [dispute in this case]: “ shall not be destroyed until the Corporation makes an inspection”

Q: is that a condition? If it is and destroy the stalks before inspection, cannot recover b/c event specified by condition has not occurred. If it is merely a promise that land owner won’t destroy the stalks until inspection, then land-owner has breached BUT if use substantial performance doctrine, may be liable for damages but may also still collect on the insurance.
Court decides this doesn’t articulate a condition – language is not crystal clear. In 5(b), included “condition” language, but didn’t use that language in 5f. IF do read it as condition, the farmer suffers forfeiture. So, court looked for way to characterize language as promise and not a condition.
Q: is provision central to the contract? Why want to see the stalks? Want to make sure the damage really occurred. Is there some other way they could get the information – then can interpret it as a promise & not a condition. R § 227: Standards of Preference with Regard to Conditions (1) In resolving doubts as to whether an event is made a condition of an obligor’s duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee’s risk of forfeiture, unless the event is within the obligee’s control or the circumstances indicate that he has assumed the risk. (2) Unless the contract is of a type under which only one party generally undertakes duties, when it is doubtful whether (a) a duty is imposed on an oblige that an event occur, OR [interpret as a promise imposing a duty] (b) the event is made a condition of the obligor’s duty, OR (c) the event is … Conditions of Satisfaction
Most common example is hiring an artist to paint portrait and will pay if satisfies the purchaser. Problem is there is a great possibility of forfeiture, a big risk for the artist – but we allow it and treat it as a condition. R § 228: Satisfaction of the Obligor as a Condition When it is a condition of obligor’s duty that he be satisfied with respect to the obligee’s performance or with respect to something else, and it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied, an interpretation is preferred under which the condition occurs if such a reasonable person in the position of the obligor would be satisfied. MORIN BUILDING PRODUCTS CO v BAYSTONE CONSTRUCTION INC Contracts re building GM factory. Here condition is not an event (like Howard), but turns on satisfaction of one of the parties.
Court says it is a commercial building, not difficult to determine satisfaction based on what a “reasonable” person would have thought à an objective standard. If a reasonable person would have said it is okay, it is not enough to meet the condition.
But, courts are more likely to view it as subjective standard for personal items (like portrait), as long as dissatisfaction is in good faith. If honestly not satisfied, then not obliged to pay.

Breach, Anticipatory Repudiation (pp. 963 – 1015)

Relationship between Order of Breach and Order of Performance
Restatements provide rules re order of performance R § 230 - 234: Timing/order of performance § 235-249: Breach §232: When it is presumed that performances are to be exchanged under an exchange of promises §233: Performance at One Time or in Installments (1) If can do a performance at one time, have to do it all at the same time. Make the assumption it will all be done at once unless parties say otherwise (deliver all 10 widgets at same time, not in installments) (2) Have to have apportioned performance in response to performance provided; pay as the other party performs. (EX, if agree to pay $10 per widget, and only 2 widgets are provided only have to pay $20; don’t have to pay full contract price of $100 until get full performance of all 10 widgets.) EX: building contract. Takes a while for building to go up, performance and payment are not due at one time. Building is a process, not really installments. 233(2) doesn’t apply. 234(2) does. If building takes a long time, building has to go up before owner has to pay. R § 234: Order of Performance (1) Where all or part of the performances to be exchanged under an exchange of promises can be rendered
234(2) – for building/labor contracts. Puts the laborer at risk, means that these types of contracts should be negotiated more carefully. Court has some leeway b/c says “unless the language or the circumstances indicate the contrary” – gives a lot of interpretive wiggle room.
233 – if performance and payment due at same time, there is minimal risk for either party
unilateral contracts don’t follow these rules, because they by definition specify the order. Only way you can accept is by performance. Performance has to come first, pay second. Timing usually isn’t an issue in unilateral contracts.
§234 (1) – an expectation rule
§237, 238 – the most important rules! R § 237: Effect on Other Party’s Duties of a Failure to Render Performance

KANAVOS v HANCOCK BANK & TRUST CO.

This case is really addressed by § 238
If A doesn’t perform, can B recover from A even if B could not have performed?
Kanavos had option to purchase property, in exchange for giving up option Bank would pay $40K and gave right of first refusal.
R § 238: if you don’t have manifested present ability to carryout promise, can’t put the other party in breach.
Court says he might have been able to come up with the $, a triable issue and they remand it to trial.
Also treated as a burden of proof case – here, burden is on Kanavos. He’s the one who knows, and also has to prove his damages. Also, don’t ask the Δ to prove a negative – much harder to do (that he Didn’t have the money)
IF Kanavos were clearly destitute, Bank wouldn’t be liable for damages. B/c he can’t offer to perform if he doesn’t have present manifest ability to perform. So, won’t hold Bank liable.
Serves to limit the right to recover after breach – if couldn’t have performed, don’t recover even if other party breaches. (a question of fact for jury) K&G CONSTRUCTION CO v HARRIS
[more important case], bring us back to R §237 – condition of each parties to have no material failure
Subcontractor does damage to the house.
If parties hadn’t said anything, rule would have been that payment isn’t due until after the work is completed (the standard R rule)
Important Provisions in contract: progress payments will be made each month (alters the R rule); includes a 10% holdback – sub gets 90% payment for work done in previous month
Court concludes, ultimately, that Harris breached by not doing work in “workmanlike manner”
Harris believes the breach occurred when K&G didn’t make the payments. K&G says breach occurred when they damaged the house.
R§237: No uncured material failure by the other party to render any such performance due at any time. o Assuming there is a material failure, then K&G is off the hook and doesn’t have to pay. o If no material failure, then Harris is off the hook and is allowed to walk off o Critical to determine who breached! It determines who is off the hook – a timing question! o No doubt that BOTH have breached
Court decides Harris breached the first time when damaged the house, and then breached again when they walked off.
If he had paid to fix the damage to the house, it wouldn’t have been an “uncured” failure and wouldn’t count as breach.

through expense of preparing to travel and perform knowing you aren’t going? That is wasteful and silly.

Repudiation: not called breach, called repudiation. Can say “I will not perform,” but at that point is not a breach b/c still might change mind. BUT, that you can change your mind does not release you from consequences.
3 critical rules 250, 251, 253 – taken together they explain this case R §250: When a Statement or Act is a Repudiation (a) a statement by the obligor indicating that the obligor will commit a breach that would of itself give the oblige a claim for damages for total breach [a future statement] (b) a voluntary affirmative act … EX: promises to marry, in old times would have been enforced (no longer the case) – have done something that makes you unable to carry out performance (but other woman might die! Only lawyers could work out these hypos! Court says still unlikely, so a repudiation) R § 253: Effect of a Repudiation as a Breach and on Other Party’s Duties Repudiation alone gives rise to breach
where perf’s are to be exchanged,
à contract is treated as if it is breached, even though use technical word “repudiation” R § 251: When Failure to Give Assurance May be Treated as a Repudiation
parties usually make statements tentatively “not sure if I will be able to perform” – if you treat it as repudiation and you are wrong, you have breached.
… may demand adequate assurance of due performance and may suspend any performance until receive such assurance – if have reason to believe they are not going to perform, can ask them for assurance. Purpose is to fix the possibility of a breach.
Allow this b/c repudiation happens before performance is due – still possibility they will change mind – have time to make sure whether there would be a breach or not

Contracts Outline 7 - Professor Dawson, Study notes of Contract Law

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