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Chapter 5: Ascertaining, Interpreting and Supplementing the Agreement, p.365 What was agreed to by the parties-what rights and obligations were created?

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Presentation on theme: "Chapter 5: Ascertaining, Interpreting and Supplementing the Agreement, p.365 What was agreed to by the parties-what rights and obligations were created?"— Presentation transcript:

1 Chapter 5: Ascertaining, Interpreting and Supplementing the Agreement, p.365 What was agreed to by the parties-what rights and obligations were created? Those questions are the business of interpretation and construction. However, before considering what a Kx may mean, it must first be decided what terms are included in it. That is the business of the Parole Evidence Rule: to what extent may evidence be introduced that the parties had agreed to terms that did not find their way into the agreement in its final written form?

2 Parole Evidence Rule Gianni v. Russell, p.368 RussellGianni Oral promise that Gianni would have exclusive right to sell soda Oral promise not to sell tobacco (1) (2) RussellGianni Lease Kx (promise to pay rent for promise of possession) Written prom is lease not to sell tobacco

3 Parole Evidence Rule The question, of course, is whether the term, exclusive right to sell soda, is part of the Kx, though it did not appear in the final writing (the Lease Kx) of the parties? Note, this is not an evidentiary question about whether the oral promise of the exclusive right was actually made; rather, the question is whether the oral term should be part of the Kx though it did not find its way into the written Kx.

4 (Gianni v. Russell) Note where the Kx Analysis is effected: – Kx Formation – Enforcement – Performance and Breach Gianni alleges breach by Defendant, Russell, allowed others to sell soda which you had promised me the exclusive right to sell If the exclusive selling privilege is part of the Kx, Russell has no response to breach. If the oral promise of the exclusive right is not included, Russells response to Plaintiffs allegation of breach is, No Breach, Compliance: I was under no duty to provide you the exclusive right to sell soda

5 (Gianni v. Russell) Parole Evidence Rule – What does the Rule do? The PER excludes parole or extrinsic evidence (extrinsic to the final written agreement of the parties). Under the rule, parole (extrinsic) evidence cannot be introduced to prove a term in addition to those in the writing or that conflicts with the terms in the writing, where such term was made prior to, or contemporaneously with, the final written agreement. Effectively, the PER rules out transactional history, viz, preliminary and contemporaneous negotiations.

6 (Gianni v. Russell) Parole Evidence Rule – What is the object of the PER? To give effect to the intentions of the parties as evidenced in their final agreement, rather than negotiations Give finality to avoid endless rounds of debate over terms that were considered and negotiated away.

7 (Gianni v. Russell) Parole Evidence Rule: 2 Steps First, Does the PER apply? (1)There must be a final written agreement of the parties; that is, the PER has no application to oral Kxs (2)As noted above, the PER applies only to exclude evidence of events that occurred preliminary to or contemporaneous with the execution of the final written Kx. That is, Rule does not relate to evidence regarding events after the final written agreement is executed. (3)Does the parole evidence sought to be introduced add to or contradict the final written Kx? The rule does no apply to exclude evidence that would clarify the Kx or resolve ambiguities

8 (Gianni v. Russell Parole Evidence Rule) Parole Evidence Rule Next, is the evidence excluded by the PER? (4) Is the Kx Entire (Fully Integrated) or only partially integrated? (I.e., Is the final written Kx complete as to the subject matter covered?) If the Kx is not fully integrated, the evidence is not excluded under the Rule.

9 (Gianni v. Russell) Returning, then, to the case, does the PER apply and, if so, does it preclude Giannis introducing evidence of Russells oral promise to grant Gianni the exclusive right to sell soft drinks? Does the Rule Apply? (1)There was a final written agreement between the parties (the Lease Kx) (2)The term Plaintiff wanted to prove-up through parole evidence was ex ante of the final written Kx/Lease (Gianni alleges the oral promise occurred in the course of negotiations prior to the final written Kx of the parties) (3) The term (exclusive right to sell soda) was an additional term that did not appear in the final writing.

10 (Gianni v. Russell) The PER applies. Next, is the evidence of the term granting Gianni the exclusive right to sell soda precluded by the PER? (4) Was the Kx fully integrated/Entire, or only partially integrated? This is the crux of the matter in the casewhether the Lease Kx was entire, such that Giannis evidence of the oral promise of the exclusive right to sell soda was excluded and not part of the Kx

11 (Gianni v. Russell) A Kx is entire if the subject matter of the parole evidence is covered in the writing. Of course, whether a subject is covered depends in large part on how broadly one defines the subject. In the case, what did the court say was the subject of the parol evidence Gianni wished to introduce? – The court said the lease covered the use of the leased space, and the sale of soda was a matter within that subject

12 (Gianni v. Russell) What is the next part of the courts analysis? See paragraph 5, p.369 – The next step in the analysis focuses on whether the parol agreement comes within the field embraced by the written one (Is the term in the writing on the same subject and the term sought to be proved by parol evidence so closely related that the parties would naturally have included the parol term in the agreement?). – What is the rationale for this test?

13 (Gianni v. Russell) Rationale: if the parol and written terms covering the same subject are so closely related that it would have been natural for the parties to include the terms in the writing, than the fact that they did not suggests they intended to exclude it. How does the test and rationale apply here? The discussion of exclusive rights within the leased area would naturally have been included in the written lease along with the discussion of limitations on use (no tobacco). The absence of reference to selling soda indicates the parties had negotiated the point away.

14 Masterson v. Sine, p.371 The Mastersons conveyed his ranch to his sister and brother in law, the Sines, reserving an express option in the deed to repurchase the property at the same price as the initial sale. In the course of negotiations, the Mastersons orally indicated that the option was to be personal to Masterson and not assignable to third parties. The limitation was calculated to keep the ranch in the Masterson family. Masterson is now in bankruptcy, such that the bankruptcy trustee wishes to exercise the option to bring the property into the bankruptcy estate to be liquidated and the funds distributed to Mastersons creditors.

15 (Masterson v. Sine) To keep the ranch out of the bankruptcy estate, it is argued that the option was personal to the grantor (Masterson) although the limitation did not appear in the written agreement (the deed). On its face, the option was freely alienable. What evidence do the Sines wish to introduce? Does the PER apply to that evidence?

16 (Masterson v. Sine) The Sines wish to introduce oral (parol) evidence that the option was to be personal to Masterson and not assignable. As such, it would be out of the reach of the bankruptcy trustee. How does the analysis under the PER proceed? – Does the PER apply There was a final writing of the parties in which an agreement was reached (i.e., not just a draft or written embodiment of negotiations), namely, the deed containing the repurchase option. The parol evidence to be introducedthe oral limitation on assignability--regards an event arising before or at the same time the writing was executed. The parol evidence would either add to (Majority) or contradict (Dissent) the terms of the written agreement (the deed

17 (Masterson v. Sine) Given that the PER applies, is the evidence the Sines wish to introduce precluded by the Rule? On its face, the agreement/deed appears to be fully integrated; that is, the subject of the repurchase option is covered. Recall from Gianni, if the Rule applies, parol evidence is excluded where the writing is Entire (fully integrated), whether the term to be proved up is an addition to the writing or contradicts it. Recall the test under Gianni to decide whether a writing is Entire? – Was the subject matter to which the parol evidence refers covered in the writing; and, if so, would the parties naturally have included the term in the written agreement

18 (Masterson v. Sine) Under the Gianni expression of the test for full versus partial integration, would the deed in Masterson be fully or partially integrated? – The question would be, Would it have been natural for the parties to include any limitations on assignment of the repurchase option in the writing containing the option?

19 (Masterson v. Sine) It would seem the writing was fully integrated using the Gianni test. Does the Masterson court find the deed to be fully integrated? How does test expressed by the Masterson differ from the test for full integration used in Gianni? – The difference is subtle, but significant. Under Masterson, the inquiry is: might the term naturally have been part of a separate agreement, or certainly included in the final writing?

20 (Masterson v. Sine) To bring the distinction between the Gianni and Masterson versions to bold relief... – Gianni: would it have been natural to include the term to be proved-up by parol evidence in the writing? Or, would it have been unnatural to include it in the writing? – Masterson: would the term to be proved-up have certainly been included in the final writing? Would it have been unnatural to deal with it separately? Which expression of the test for full integration would most often admit parol evidence?

21 (Masterson v. Sine) The oral evidence of the limitation on assignability of the option in the Masterson deed would likely have been excluded under Gianni on the basis that the writing, the deed, was fully integrated. On the more liberal test in Masterson, the writing was not fully integrated. What facts moved the Majority to find partial integrationrecall the writing was in the form of a deed.

22 (Masterson v. Sine) Because the writing in Masterson v. Sine was found to be partially integrated, the case presents another layer of analysis that does not exist in the Gianni case where it was found that the writing was Entire. Read Restatement Sections 215 and 216. Those provisions, with which Masterson v. Sine is consistent, is represented graphically in the next slide.

23 (Masterson v. Sine) Where the final writing of the parties is partially integrated, evidence of additional or supplementary terms may be introduced. However, evidence of contradictory parol terms may NOT be introduced. Final Written Expression Partially Integrated Evidence of Additional or Contradictory Terms Excluded Fully Integrated Additional terms OK Contradictory Terms Excluded

24 (Masterson v. Sine) The Majority concludes the writing is partially integrated regarding the assignability of the repurchase option. What is the second issue to be resolved? – The question is whether the matter of assignability of the repurchase option was an additional term that would supplement the writing or a contradictory term.

25 (Masterson v. Sine) The Majority says the subject of limitation on assignability is separate from the subject of the existence of the repurchase option. The latter was covered in the writing, the former was not. Since assignability was not treated in the writing the limitation on assignment was an additional term, not a contradictory one. Given that the term was additional, and given that the written agreement was partially integrated, parol evidence of the limitation was admissible.

26 (Masterson v. Sine) The Dissent asserts that even if the written deed is partially integrated, the oral limitation on assignment of the repurchase option is not an additional term, but a contradictory term. The writing makes no mention of assignability of the option. How, then, according to the Dissent, does the limitation on assignability contradict the writing? – Kx law presumes purchase options to be assignable unless the agreement creating them expressly states otherwise. Thus, introducing a limitation on assignment is to contradict an express option which is absolute on its face.

27 Note (3)Merger Clauses A merger clause (e.g., This writing represents the final agreement of the parties or like language) is powerful evidence that the parties intended the writing to be fully integrated. The general rule is that such clauses are conclusive of the issue; however, there is a recent trend to find merger clauses are only probative, but not conclusive, of the parties intent. The trend is likely in response to the unconscionable use of merger clauses in form Kxs, especially in consumer transactions.

28 Bollinger v. Central Pa. Quarry, p.377 The Bollingers sue to reform the Kx with Central to include a paragraph obligating Central to remove topsoil placed on their property. According to the Bollingers, the clause had been agreed to orally, but, by mutual mistake, did not appear in the written agreement between the parties. Central essentially avers it is in compliance with the Kx which, in its final written form, contained no clause regarding removal of the topsoil. On Centrals argument, the oral agreement regarding removal would be precluded by the PER.

29 (Bollinger v. Central Pa. Quarry) Does the court conclude that the PER applies but that the evidence is not precluded by the PER? No. The court relies on an exception to the PER, namely, the PER does not apply in the case of mutual mistake or fraud. What facts were relevant in the courts determination that the parties had inadvertently omitted the clause in the writing? – See paragraph 3, p.378.

30 Objective Interpretation And Its Limits, §5, p.421 Raffles v. Wichelhaus Raffles (Buyer) Wichelhaus (Seller) Promise to sell cotton Promise to buy cotton To arrive Peerless

31 (Raffles v. Wichelhaus) 2. Kx Formation Most of the case consists of the pleadings of the partiesonly the first few lines of the per curiam opinion indicates what the court seems to be holding. Defendant, Buyer, meant the October Peerless, while Plaintiff, Seller, meant the December Peerless. The case demonstrates the subjective theory of Kx in operation. Did the court find a Kx formed? Nono meeting of the minds

32 (Raffles v. Wichelhaus) 2. Kx Formation With the demise of the subjective theory, would there be Kx? Recall, what is requiredan Offer, ala §24, and an Acceptance, ala §50. On the modern view, then, we would find Kx. That said, there is an ambiguity in the Kx in Raffles. There are two varieties of ambiguity: latent and patent. Patent Ambiguity: where the ambiguity is apparent on the face of the writing. For example, assume a writing that states, The attorney told his client he needs more information. Who needs more informationthe attorney or his client? Latent Ambiguity: where the ambiguity is not apparent from the face of the writing, but becomes apparent in consideration of information outside the writing (*Note-parol evidence is always admissible to prove a term in a written Kx is ambigous: i.e., the PER does not apply).

33 (Raffles v. Wichelhaus) (Example of latent ambiguity) The term, Peerless is an example of a latent ambiguity. On its face, there is nothing ambiguous about the term. It becomes ambiguous, however, on introduction of evidence that there are two such shipsone sailing in October, one in December.

34 (Raffles v. Wichelhaus) 2. Kx Formation: If the Kx contains an ambiguous term, latent or patent, the ambiguity must be resolved to determine the obligations of the parties under the Kx. Assuming Kx, then, where in the analysis does the matter of the ambiguity arise? 3. Enforcement (no bars to enforcement) 4. Performance and Breach

35 (Raffles v. Wichelhaus) 4. Performance and Breach Allegation of Breach: Plaintiff (Seller) alleges: Breach by Defendant, Buyer, did not take and pay for cotton Response: by Defendant (Buyer): No Breach, compliance. I agreed to take an pay for cotton delivered aboard the October Peerless To determine if the Buyer is in breach or can successfully respond he was in compliance, it is necessary to resolve the ambiguity, to interpret the term, Peerless.

36 (Raffles v. Wichelhaus) (4. Performance and Breach) Here, the objective theory resurfaces. Recall Lucy v. Zehmer: there the question was whether the Zehmers had made a serious offer to sell their farm to Lucy, or whether they were joking. The court found that, objectively viewed, the offer was serious: the undisclosed subjective intent of the parties (the Zehmers) was irrelevant. A reasonable person would have concluded, serious offer. If we bring the objective theory, in its strong form, to bear in deciding what the term, Peerless, meant, how would the analysis proceed, and what would be the result?

37 (Raffles v. Wichelhaus) Deploying the Objective Theory to resolve ambiguity The objective theory would assign meaning to the term with reference to what a reasonable person would conclude, matching it to the meaning assigned to the term by one of the parties. For instance, if objectively it was determined that the term, Peerless, meant the October Peerless, that determination would align with the buyers meaning in the case, and the buyers meaning would prevail (no breach, compliance). How does the Restatement handle ambiguous terms? See §20. We will take up the matter of Kx interpretation again later in the course in the context of Mistake.

38 Chapter 6 Limits on the Bargain and its Performance, p. 453 With the material in this chapter, we resume part 4 of the analysis, Enforcement, with the exception of the first three cases. Recall from the introductory materials on policing, three categories emerged: policing based on status of the parties (e.g., minority); policing based on behavior (e.g., duress); and policing based on substance. The latter suggests policing of individual transactions as to the substance of the Kx itself for fairness. The latter notion, of course, runs counter to fundamental principles of Kx law concerning substance, which is to leave the matter of what is or is not a good deal to the parties. That principle is at work in the basic rule that courts will not inquire into the value of considerationthere is consideration for there is Kx or there is not.

39 (Chapter 6 Limits on the Bargain and its Performance) While courts will not inquire into the relative value of consideration in determining whether a Kx has been formed. Similarly, neither will a court declare a Kx unenforceable solely on the grounds that the consideration received by one party is far more or less valuable than that received by the other. That said, there are occasions where, using conventional controls (something short of evaluating consideration and declaring a Kx unenforceable where one party got too good a deal) courts may avoid a Kx which is substantively unfair. Section 1. of the materials deals with such cases.

40 Chapter 6, Section 1. Unfairness, p.454 McKinnon v. Benedict The agreement: – McKinnon loaned $5,000 to the Benedicts (which they used to purchase the summer camp) and promised to help get business for the endeavor. In exchanged, the Benedicts agreed not to cut trees between the camp and McKinnons vacation property, and not to make improvements closer than extant buildings, for twenty five years.

41 (McKinnon v. Benedict) McKinnon is seeking an injunction equitable relief. In general, a basic presumption regarding Kx remedies is that money damages will make a Kxing party whole. Equitable relief, e.g., injunction, specific performance) is considered extraordinary. Kx Formation-no problem No bars to enforcement

42 (McKinnon v. Benedict) Performance in Breach – McKinnon alleges: Breach by Benedicts, made improvements in violation of the covenant – Benedicts Response: no response to the allegation of breach

43 (McKinnon v. Benedict) We know that courts will not evaluate the substance of a bargain, the relative value of consideration received on each side, in deciding whether a Kx was formed. There is consideration for Kx or there is not, and there is no additional requirement that consideration be adequate or sufficient. Does the McKinnon court depart from that basic principle, declare that the consideration the Benedicts received was inadequate for Kx formation?

44 (McKinnon v. Benedict) No. There is Kx. What, then, justifies the courts commenting on the adequacy of consideration? Look to the remedy McKinnon seeks: specific performance and injunction. Equitable relief, again, is extraordinary. The party seeking it must demonstrate why money damages arent sufficient to make the party whole. In deciding whether to grant specific performance and injunction for the Benedicts breach, what did the court take into account?

45 (McKinnon v. Benedict) The court considered what the Benedicts received under the agreement: a loan of $5,000 (which they repaid), and a promise of help in getting their business going (which proved to be sporadic and largely inconsequential). The court also considered the benefit to McKinnon of specifically enforcing the Kx as against the hardship to the Benedicts.

46 (McKinnon v. Benedict) In deciding whether to grant specific performance or injunction, the court will balance the benefits to the party seeking the remedy and the cost to the party against whom the equitable relief will be enforced, all in light of the consideration received. See second full paragraph, p.456. If adequacy of consideration is irrelevant to the question of Kx formation, it may be relevant where the complaining party seeks extraordinary reliefgross inadequacy of consideration may, indeed, become relevant at other points (e.g., Remedy) in the Kx Analysis.

47 (McKinnon v. Benedict) Final Note: McKinnon did, indeed, state a cause of action for breach of Kx: Kx formed, no bars to enforcement, breach with no response. All that remains is to decide on the remedy for breach. Couldnt McKinnon have plead for money damages? Why didnt he? What would be his recovery?

48 Tuckwiller v. Tuckwiller, p.458 Tuckwiller promised to take care of her ill and aging aunt (Morrison) for life, in exchange for her aunts promise to will her farm to Tuckerwiller. Three days later, Morrison became ill and, except for four days during which Tuckwiller cared for her as agreed, was hospitalized until she died a few weeks later. Morrison had not changed her will. Tuckwiller sued Morrisons executor for specific performance. Kx Formation? No problems Enforcement – Does the SF apply to this transaction? What is satisfied?

49 (Tuckwiller v. Tuckwiller) Performance and Breach Breach by defendant, Morrison, did not will the farm to Tuckwiller Response: None Remedy: Tuckwiller seeks specific performance, an equitable remedy, on the basis that money damages will not adequately compensate her. Indeed, real property is regarded to be unique, such that money damages are presumed inadequate as a remedy. That said, recall from McKinnon v. Benedict, that a plaintiff will be denied equitable relief where the Kx is unfairas where the consideration is grossly inadequateand where the costs of granting that relief outweigh the benefits. Mrs. Tuckwiller cared for Morrison for a few days only, while the Morrisons farm was valued at about $34,000. Wasnt the consideration for Morrisons promise to convey her farm trivial in comparison, i.e., grossly inadequate, such that Tuckwiller should be denied specific performance as a remedy? What does the court hold, and what is the rule of the case?

50 Black Industries, Inc. v. Bush, p.460 The argument that the middleman, Bush, was cheating the U.S. Government failed. Apart from that, what is Black Industries arguing? BI seems to be arguing that the compensation for Bushfees, essentially, for brokering the Kx with the U.S.was excessive.

51 Black Industries, Inc. v. Bush, p.460 Does BIs argument go to Kx formation or enforceability? BI is arguing that the Kx is unenforceable because the consideration-the fees-to be received by Bush was excessive. Why does BIs argument fail?

52 (Black Industries, Inc. v. Bush) The court recites the familiar, fundamental rule regarding adequacy of consideration: courts will not inquire into the relative value of consideration. Thats the case both with respect to Kx formation (theres consideration or there isnt) and with regard to enforcement, as well: the fact that one party receives consideration in excess of what might appear to be fair does not render a Kx unenforceable. How does this case differ from Tuckwiller and McKinnon, in both of which the relative value of consideration was the subject of scrutiny by the courts in both cases?

53 (Black Industries, Inc. v. Bush) In both cases, the plaintiff sought equitable reliefinjunction and specific performance. In deciding whether to award those remedies, a court will take into account the substance of the bargain, viz, the relative value of consideration exchanged. Black Industries v. Bush thus demonstrates the principle that evaluating the bargain struck for fairness of consideration has no place in the Kx analysis. The invitation to weigh consideration in the prior two cases arose only because of the remedy sought. Finally, what was the policy concern the court expressed which, in part, motivated its holding: what evil might befall us if courts policed for substantive unfairness, second-guessing the parties concerning who got a good deal and who did not, and refusing to enforce Kxs where it is perceived one party got too good a deal? See Note (1), p.462.

54 Section 2: Standardized (Form) Adhesion Kxs, p.465 (Introductory Material) What is a standardized Kx? – These are mass-produced, as opposed to individualized, Kxs on printed forms. Are they necessarily evil? What positive functions do they serve? – Simplify judicial interpretation: efficient – Reduce uncertainty and reduce risk – Save time, reduce cost What risks do they entail? See also, Note (1).

55 (Section 2: Adhesion Kxs) The risk is standard form Kxs may operate as Adhesion Kxs Standardized Kxs are not, by definition, Kxs of adhesion, but may be so deployed where one party imposes its will on another in the course of Kx formation. What are the three ways in which one Kxing party may impose its will on another through an adhesion Kx? – first, where one party enjoys considerably more bargaining power than the other; – second, where one party has no real power or opportunity to bargain over terms; – and, third, one party may lack sophistication to understand the unfamiliar terms stamped in small print on the back or a standardized form. Was the lease Kx in OCallaghan a Kx of adhesion?

56 (OCallaghan v. Waller & Beckwith Realty) The exculpatory clause appeared as boilerplate (printed language on a standard form Ks) in the lease agreement. The court finds, first, that the exculpatory clause did not violate public policy (see first full paragraph, p.469. (We will consider unenforceability of Kxs that violate public policy independently). Rather, the lease under consideration was strictly a private transaction, a matter of private concern. See last paragraph, p.469) Given that the clause did not violate public policy, the plaintiff seems to argue alternatively that the Kx was essentially a Kx of adhesion and unconscionable (barring enforcement based on unconscionably is the subject of Williams v. Walker in following materials).

57 (OCallaghan v. Waller & Beckwith Realty) What are the bases of the plaintiffs argument that the lease was a Kx of adhesion? – Housing shortage – Disparity in bargaining power The court, nevertheless, determines the Kx not to be an adhesion Kx. What factors does it consider on the way to that conclusion? That is to say, what conditions render a standard form Kx an adhesion Kx which, according to the court, do not obtain in the case before it? – Plaintiff didnt complain about the clause – Competition among landlords – Majority recites policy concerning freedom of Kx – Exculpatory clause may benefit both parties What does the Dissent say about the Majoritys assessment?

58 Unconscionability When a court or legislature protects a class, e.g., minors, it protects the entire class, such that all members (for instance, emancipated, married minors, whatever) can disaffirm their Kxs. But a court or legislature may narrow the approach to protect a contracting party on a transaction by transaction basis. For instance, we have seen that where there is fraud or duress, a court may refuse to enforce the particular Kx under scrutiny. This section of the materials presents another example of ad hoc protection of individual contracting parties: refusal to enforce a Kx or Kx term which is unconscionable.

59 Williams v. Walker, p. 1957There afterApril 62May 62 Buys furniture, etc. Additional Purchases Buys Stereo Buys tables, lamps, etc.. Default

60 (Williams v. Walker) Walker Furniture had an Article 9 security interest in everything Williams bought: Furniture, etc. on Credit Promise to pay Article 9 SI Williams Walker Furniture Store All goods purchased from Walker

61 UCC Article 9 Security Interest Article 9 of the UCC governs the creation of security interests in personal property, tangible and intangible. The basic idea is that an obligation owed (usually, an obligation to pay or repay $) is secured by an interest in property of the party owing the obligation. The secured creditor is better off (in the sense of increased likelihood of getting the obligation satisfied than the unsecured creditor. Security thus decreases the risk of default.

62 Secured versus Unsecured Transaction Unsecured Furniture, etc. on Credit Promise to pay Williams Walker Furniture Store The creditors only right is to sue on the promise

63 Secured versus Unsecured Transaction – However, winning a judgment just establishes that the Bank/Creditor has a right to be paid: the judgment confers no property interest or right to take any property of the Borrower/Debtor to satisfy the claim. In short, theres no guarantee that Bank can actually collect the judgment. – The judgment will entitle the Bank using its state law creditors remedies to attempt to acquire an interest in Borrower/Debtors property that Bank might seize and sell to satisfy the claim (e.g., garnish wages or bank accounts, seize personal property, real property, etc.) – But theres no assurance the Borrower/Judgment Debtor has anything of value to seize (cant get blood from a turnip). Moreover, under the law of every state, much property belonging to individual (as opposed to entity debtors) is exempt and out of the reach of creditors. Moreover, the collection process is costly.

64 UCC Article 9 Security Interest – To ameliorate the issues associated with the unsecured obligation, a creditor may arrange for the obligation to be secured ex ante of default. That is, Bank, in the example, might acquire an interest in Borrowers property at the time of the loan which would allow Bank to seize that property in the event Borrower defaults on the obligation. – Where the property in which such an interest is created (the collateral) is real estate, the interest created in favor of the creditor allowing creditor to take and sell the collateral is referred to as a mortgage. On default, the creditor forecloses, the property is sold, and the proceeds remitted to the creditor in satisfaction of the claim. The creation of real estate mortgages is the subject of a states property law, usually statutes. – Where the collateral in personal property, UCC Article 9 governs the creation of the interest.

65 UCC Article 9 Security Interest In Article 9 parlance, the Bank in the example would be the Secured Party; the Borrower would be the Debtor, and the collateral some item of personal property agreed to between the parties. Promise to pay Borrower (A9 Debtor) Bank (A9 Secured Party) $5,0000 loan Security Interest in... Collateral An interest in personal property of the Debtor that entitles the Secured Creditor to repossess and sell the collateral Personal Property subject to the A9 Security Interest

66 Purchase Money Security Interest A Purchase Money Security Interest (or, PMSI) is a security interest in which $ is loaned or credit extended to purchase what will be the collateral securing the repayment obligation. Heres the classis, prototypical case: Promise to pay $35K Buyer (A9 Debtor) Car Dealership (A9 Secured Party) Car on Credit $35K PMSI Collateral: Car being purchased The credit from Dealership/SP is being used to buy the collateral, the car. The security interest is thus a PMSI (equivalent of a loan to Debtor to buy the car)

67 (Williams v. Walker) And one last thing: The after acquired property clause and all obligations clause After Acquired Property Clause: provides that property acquired by the A9 Debtor after the original security agreement granting the SI is created becomes collateral securing the obligation. All Obligations Clause: provides that all obligations of the A9 Debtor, whenever arising, are secured. In combination, the All Obligations and After Acquired Property clauses render all property falling within the description of the collateral in the A9 Security Agreement, whenever acquired, subject to the security interest as to all obligations owed the Secured Party by the Debtor. The Security Agreement in Williams v. Walker contained both clauses.

68 (Williams v. Walker) Given the all obligations and after-acquired clauses, everything purchased by Williams from Walker became collateral securing all obligations owed by Williams for all purchases. Furniture, etc. on Credit Promise to pay Article 9 SI Williams Walker Furniture Store All goods purchased from Walker All items purchased secure all obligations owed for all other items

69 Williams v. Walker, p. 1957There afterApril 62May 62 Buys furniture, etc. Additional Purchases Buys Stereo Buys tables, lamps, etc.. Default Under the all obligations and after-acquired clauses, the furniture bought in 57 is collateral securing not only the price of that furniture, but also the promise to pay for the stereo purchased in April 62, the lamp, etc. bought in May secures the obligation to pay for the lamp, stereo, furniture bought in 57, and so forth

70 (Williams v. Walker) The fine print in the standard form Kx also provided that the buyer/renters payments would be applied to the balance due for items purchased pro rata. For instance, assume the following purchases: – 1/1/01: buyer purchases a refrigerator for $500 – 1/1/02: buyer purchases a washing machine for $500 – 1/1/03: buyer purchases a TV for $500 Total purchases=$1,500 Assume that buyer is obligated to pay $150 per month on the account (forget about interest)

71 $50 applied to TV $50 applied to Refrigerator $50 applied to Washing Machine (Williams v. Walker) If the payments are applied pro rata, the $150 is distributed as follows: $150 payment Thus, under this application, no item is paid off until all are paid off

72 (Williams v. Walker) Given that Walker Furniture had a security interest in all items to secure the amount owed on every other item, in the event of default on a payment, the store could take all the items purchased for the default on any item. Thus, if Williams missed a payment on the stereo, the store could repossess and sell the furniture she purchased in 57.

73 (Williams v. Walker) The Analysis Scope-no geographic scope issue. Note that since this is a Kx for the sale of goods, UCC Article 2 applies Kx Formation: no issue Enforcement SF-no issue Capacity-no issue Duress-no issue Misrepresentation-no issue Unconscionability: was the Kx unenforceable because it was unconscionable?

74 (Williams v. Walker) The operative provision under Article 2 is §2-302: the section directs the court to consider whether a Kx or clause is unconscionable. But, the provision does not define the term; rather, the definition is left to the common law of Kx outside the Code. How does the court in Williams define the term? A Kx or Kx clause is unconscionable where (1)there is an absence of meaningful choice + (2) Kx term or terms unreasonably favorable to the other party.

75 (Williams v. Walker) (1) Absence of meaningful choicea determination made on a case by case basis, but this element is satisfied where either, (a) there is a gross inequality of bargaining power, OR (b) there is some equality of bargaining power AND the other party had little or no knowledge or understandingof the Kx term (e.g., Kx in English, and party speaks only Spanish). *Other factors might include: deceptive sales practices, term buried in a maze of fine print, no time or opportunity to read the agreement, party unfamiliar with technical language (2) Kx Term(s) unreasonably favorable to other party. Even where there is no meaningful choice, a Kx is still no unconscionable unless the excessive bargaining power is actually exercised.

76 (Williams v. Walker) [(2) Kx term unreasonably favorable] Excess bargaining power not deployed to the advantage of the party possessing it does not render a Kx or Kx term unenforceableno harm, no foul. When is a Kx term unreasonably favorable to one party? This can only be answered in context considering the surrounding facts and circumstances. For instance, a markup of 300% may be typical practice in a highly fashionable shopping district (fancy boots versus food).

77 (Williams v. Walker) Applying the test-absence of meaningful choice and Kx term unreasonably favorable to the party with excessive bargaining power-to Williams v. Walker, what facts in this case seemed to influence the court along the way to finding the Kx unconscionable? The sales person knew Williams had a very modest income and a family to support, but sold her a $500+ stereo Williams could not shop elsewhere given she had no transportation

78 (Williams v. Walker) Was there an absence of meaningful choice? Gross inequality of bargaining power? An inequality of bargaining power plus Williams had little knowledge or understanding of the terms in the printed form?

79 (Williams v. Walker) Was the Kx unreasonably favorable to Walker Furniture? Which terms? The security interest which captured all items purchased to secure the price of all other items, together with the pro rata payment arrangement enabled Walker Furniture to hold all items purchased by Williams hostage. She owed 3 cents on the lamp, and 25 cents on a table. This creates the so-called ugly prince phenomenon.

80 (Williams v. Walker) The Dissent Does the Dissent approve of Walker Furnitures tactics, or the Kx terms Williams agreed to? If not, what was the Dissents concern? The Dissent seems concerned with paternalism. Should a salesperson decide whether Williams should buy a stereo or washing machine?

81 (Williams v. Walker) (The Dissent) Given that Walker Furniture could no longer deploy the dragnet clause in its security agreement, nor apply payments pro rata, what would it likely do to offset the risk of non-payment? The store would likely charge more for the items it sells and/or raise the interest rate it charged for credit purchases. If, ex ante of the default and lawsuit, the sales person would have asked Williams whether she would rather pay more for the items she bought and, perhaps, more interest, or agree to the security interest with its dragnet clause and the pro rata payment arrangement, which do you suppose she would have chosen?

82 (Williams v. Walker) (The Dissent) Given that Walker Furniture could no longer deploy the dragnet clause in its security agreement, nor apply payments pro rata, what would it likely do to offset the risk of non-payment? The store would likely charge more for the items it sells and/or raise the interest rate it charged for credit purchases. If, ex ante of the default and lawsuit, the sales person would have asked Williams whether she would rather pay more for the items she bought and, perhaps, more interest, or agree to the security interest with its dragnet clause and the pro rata payment arrangement, which do you suppose she would have chosen?

83 Price Unconscionability: Jones v. Star Credit Corp., p.503 Can a Kx be unenforceable owing to unconscionability based on the price? Essentially, Your Shop at Home Service sold a $300 freezer to the Jones for $900, then added more than $300 in interest charges. How does this case come out under the Williams v. Walker analysis for unconscionability?

84 Price Unconscionability: Jones v. Star Credit Corp., p.503 Under Williams, a Kx or Kx term is unconscionable where there is (1) an absence of meaningful choice, and (2) a Kx term(s) unreasonably favorable to the other party. Applied in the present case: Absence of meaningful choice on the part of Jones? – Here, there was a gross inequality in bargaining power in light of the financial resources and lack of sophistication of Jones. Kx term unreasonably favorable to the store? – The item had a retail value of $300 which was exceeded by the interest charges alone.

85 Price Unconscionability: Jones v. Star Credit Corp., p.503 How did the court decide the price was unconscionably high? Did it offer a calculus? – The court seemed to say the price was exorbitant on its face. Other courts have used the phrase, shocks the conscience. There is no calculus. Does this mean a markup is never justified? What about high credit charges? See second paragraph, p What remedy/damages does Jones win? How did the court arrive at the damage figure?

86 Price Unconscionability: Jones v. Star Credit Corp., p.503 Note that Jones is using unconscionability as a cause of action. Compare with Williams, where the credit arm of the furniture store was suing her and she responded that the Kx was unenforceable by virtue of its unconscionable terms.

87 Section 5: Public Policy Some Kxs are held to be unenforceable in an endeavor to protect a group by virtue of its status (e.g., minors), or to protect one party against overreaching by the other, (e.g., duress). Where a Kx is unenforceable because it violates public policy, the concern is the public at large and protecting it against imposition by, perhaps, both parties to Kx.

88 Section 5: Public Policy Kxs which violate specific statutory provisions, such as criminal statutes, are illegal Kxs, offend the public, and therefore violate public policy. A Kx which is not illegali.e., does not directly violate a specific statute, may still violate public policy as determined by a court and so be unenforceable.

89 Kxs That Violate Public Policy: Illegal Kxs Bovard v. American Horse Enterprises, p.546 A Kx violates public policy where the subject matter of the Kx is illegal. For instance, if A promises to pay B if B kills C, the subject matter of the Kx is illegal and so violates public policy. If B kills C and A refuses to pay, the Kx will not be enforced. Kx, yes, enforceable, no. Consider the Kx between Bovard and James Ralph...

90 (Bovard v. American Horse Enterprises) The Kx is one of sale of a business and its assets, in which Bovard agreed to sell AHE and Ralph agreed to buy it, with his promise to pay embodied in promissory notes. Bovard (Seller) James Ralph (Now AHE, Inc.) (Buyer) Promise to Sell AHE Promise to pay

91 (Bovard v. American Horse Enterprises) American Horse Enterprises, Inc.

92 (Bovard v. American Horse Enterprises) The sale of AHE included all inventory and equipment used in the business...

93 (Bovard v. American Horse Enterprises) Certainly, the sale of marijuana was illegal under California law. But the Kx was for the sale of the inventory and equipment, not marijuana. Was the sale of paraphernalia that made up AHEs inventory illegal at the time of the Kx? The sale of paraphernalia was not illegal until after the Kx between Bovard and James Ralph.

94 (Bovard v. American Horse Enterprises) Nevertheless, the court finds the Kx for the sale of AHE in violation of public policy. The court relies on the Re.2 nd §178 which calls for a balancing of interests in deciding whether a Kx should be unenforceable as against public policy. How does the court apply that provision? See third full paragraph, p.547. What does the court hold? – The court holds that the policy against manufacture of paraphernalia was implicit in the California statute that prohibited use. Thus, the subject matter of the Kx violated public policy.

95 X.L.O. Concrete v. Rivergate Corp., p.549 Rivergate Manhattan Sub Kx for concrete work Construction Kx

96 (X.L.O. Concrete v. Rivergate Corp) Kx between plaintiff (XLO) and Defendant (Rivergate) legal on its face Did not call for illegal conduct in performance XLO acquired sub Kx in violation of anti trust laws Defendant knew how Plaintiff acquired sub Kx

97 (X.L.O. Concrete v. Rivergate Corp) Does the court hold anything here? Seems to say a Kx not illegal on its face and not calling for illegality in performance will not be held unenforceable unless it is integral with the illegality: the question seems to be whether enforcing the Kx sued on would promote or condone the illegal conduct sought to be avoided. Take note of the considerations the trial court is directed to take into account on remand.

98 Illegality in the procurement and Illegality in Performance Sirkin v. Fourteenth Street Store, p.553 Promise to pay bonus (bribe) This Kx is illegal on its face: illegality in the subject matter Sirkin Buying Agent for Store Promise to buy from Sirkin

99 Illegality in the procurement and Illegality in Performance (Sirkin v. Fourteenth Street Store) Promise to Sell goods This Kx is NOT illegal on its facejust a Kx for the sale of goods Sirkin Buying Agent for Store Promise to buy and pay for goods This is the Kx sued on

100 (Sirkin v. Fourteenth Street Store) Sirkin delivers the goods as promised, but Store refuses to pay. Sirkin sues, and Store repsonds that the Kx was unenforceable due to illegality. What then, is the issue here? – Whether the Kx for the sale of goods between Sirkin and Fourteenth Store which was legal on its face and as to its subject matter was nonetheless unenforceable because it was procured by Sirkin by bribing the Stores purchasing agent?

101 (Sirkin v. Fourteenth Street Store) Rule? – A Kx is unenforceable where, though legal on its face and not illegal as to its subject matter, is procured illegally. What then, is the issue here? – Whether a Kx, legal on its face and legal as to its subject matter, is nonetheless unenforceable where it was procured illegally?

102 (Sirkin v. Fourteenth Street Store) What is the rationale behind the rule? – Refusing to enforce the Kx illegally procured discourages bribes to acquire Kxs. Recall that, where no action is available for breach of Kx, or where a Kx is unenforceable due to, for instance, the statute of frauds, the complaining party might still recover in a Restitution (Quasi-Kx) action. Wasnt Fourteenth Store unjustly enriched? Shouldnt Sirkin at least be able to recover the value of the benefit (the goods) conferred?

103 (Sirkin v. Fourteenth Street Store) Restitution is generally not available where a Kx is unenforceable due to illegality, whether in the subject matter or in the procurement. What is the rationale for denying restitution? – Were the party who procures a Kx illegally able to recover in restitution, there would be little disincentive to enter into illegal Kxs. Rather, there would be incentive to enter into an illegal Kx, or procure a Kx illegally, as in the Sirkin case, knowing the worst outcome would be the return of the benefit conferred.

104 Illegality in the procurement and Illegality in Performance McConnell v. Commonwealth Pictures, p.553 Was the Kx between McConnell and Commonwealth Pictures illegal in its subject matter (on its face)? Was the Kx procured illegally? Promise to pay $10K plus % Commonwealth Pictures McConnell Promise to get distribution rights No

105 Illegality in the procurement and Illegality in Performance (McConnell v. Commonwealth Pictures) The court refuses to enforce the Kx due to illegality where did the illegality occur? – The illegality is in the performance. The illegality is after Kx formation. Doesnt this open the door to the avoidance of Kx liability and, perhaps, unjust enrichment if a Kx legal on its face and not procured illegally is unenforceable where there is any illegality in the performance?

106 Illegality in the procurement and Illegality in Performance (McConnell v. Commonwealth Pictures) Consider this hypo: A agrees to deliver a package to B in exchange for Bs promise to pay $50. In delivering the package, B exceeds the speed limit and gets a ticket. Should the Kx be found unenforceable on the grounds that there was illegality after formation, i.e., illegality in the performance? See the opinion at p.554. – The court in McConnell qualifies the rule: the illegality in performance must be major (not minor or trivial) and must be directly connected to the obligation sued upon.

107 Mitigating Doctrines: Recovery in Restitution The general rule, as noted, is that Restitution is not available as an alternative to a Kx action where the Kx is unenforceable owing to Illegality. There are, however, exceptions: (1) Where the illegality is in the performance (ala McConnell) and is collateral, i.e., not directly related to performance of the Kx (e.g., getting a speeding ticket while performing (in some jurisdictions, this likely wont even bar recovery in Kx)

108 Mitigating Doctrines: Recovery in Restitution Exceptions: (2) In Pari Delicto Doctrine: Where the parties are not equally at fault (are not in pari delicto), the party less guilty can recover in Restitution (again, not on the Kx) from the more guilty party. For instance, where a party engages in an illegal gambling Kx and is cheated by the other, the party cheated can recover his losses in Restitution. Courts will not apply the doctrine to permit Restitution where the party seeking it has engaged in serious misconduct.

109 Mitigating Doctrines: Recovery in Restitution Exceptions: (3) Repentence: If a party to an illegal Kx withdraws within the time for repentance, he may recover in Restitution for the other for the value of any benefit conferred. For instance, a contestant who paid to fix a contest so she would win a prize may recover what she paid on repenting. The party need not literally repent; rather, a claim for Restitution constitutes the point of repentance.

110 Mitigating Doctrines: Recovery in Restitution Requirements for the Repentance Doctrine – The illegal purpose must not have been accomplished and can be avoided by allowing the plaintiff recovery in Restitution. – The illegality must not have been so serious and turpitudinous in itself that the court regards the very formation of the Kx in the first place as a substantial offense.

111 (B) Judicially Created Public Policy: Hopper v. All Pet Animal Clinic, p.557 Promise to pay for work as vet HopperClinic Promise to Work Promise (covenant) not to compete Terms of the covenant: No small animal practice Three years Within 5 miles of Laramie

112 (Hopper v. All Pet Animal Clinic) Hopper is terminated and opens vet practice that competes with Clinic in violation of the covenant not to compete. Clinic sues for Br/Kx, seeking damages and an injunction. The trial court granted the injunction, but found the damages claim too speculative. Both parties appealed. Hopper argued that no-compete clause violated public policy.

113 (Hopper v. All Pet Animal Clinic) What, according to the court, is the general view with regard to covenants not to compete? – The are generally disfavored because they interfere with the right to work and suppress competition which operates to the disadvantage of the public. Since such covenants are looked on with disfavor, what does that mean as a practical matter for the party seeking to enforce it? – The burden is on the employer to show the covenant is reasonable and is necessary to protect the employers business interests.

114 (Hopper v. All Pet Animal Clinic) Whether a covenant not to compete is enforceable thus entails a balancing of the legitimate business interests of the employer and the interests of the employee. The court cites Re 2 nd §188 which restates the majority approach, the so-called Rule of Reason. What are the three factors considered under that rule? See first full paragraph, p.558.

115 (Hopper v. All Pet Animal Clinic) What are the special interests of the Clinic in need of protection identified by the court? See last paragraph, p.558. The employees (Hoppers) interest must be considered against the employers interests: specifically, the covenant cannot work an undue hardship. Undue hardship would result where a covenant, unreasonable as to scope, duration, or geography, effectively prevents an employee from working. For instance, had the covenant in the case at hand restricted Hoppers ability to practice for 50 years, she would have effectively been foreclosed from small animal practice in the area for what would likely be regarded an unreasonable period.

116 (Hopper v. All Pet Animal Clinic) The court concludes the covenant was reasonable in its geographic limitsno small animal practice within five mile of Laramie city limits. In concluding that the five- mile limitation was reasonable, the court distinguishes Cukjati v. Burkett (p.559), wherein the Texas court held a twelve mile geographic limitation was excessive. How did the court decide five miles was reasonable? Apart from the reasonableness of the geographic limitation, what other fact about the location of the parties suggested no undue hardship was worked on Hopper by prohibiting small animal practice within five miles of Laramie?

117 (Hopper v. All Pet Animal Clinic) What about the duration of the covenantthree years? The court held that was too long: too long in what regard? – Three years was excessive in that it was unnecessary to protect the Clinics interest. One year was enough to accomplish that: why? See last paragraph, p.559. The third factor to be considered in determining whether a no-compete clause violates public policy (in addition to the interests of the employer and employee) is the impact on the public. The court summarily determines the public would not be injured (in the form of detrimental reduction of competition) by the clause.

118 (Hopper v. All Pet Animal Clinic) In sum, a covenant not to compete is enforceable to the extent it is reasonable in scope, duration, and geographic limits. The covenant must impose only such limitations as are necessary to protect the employers legitimate business interests. After that, the covenant will still be unenforceable if it works an undue hardship on the employee or injures the public.

119 Chapter 8: Performance and Breach, p.691 Section 1. Conditions In bilateral Kx, parties exchange promises, one being consideration for the other, but each enters into Kx expecting, at some point, performance of the thing promised. Rules relating to performance are aimed at protecting that expectation. First, expectations are protected by affording a claim for damages to the disappointed party when performance is not forthcoming, but also by allowing that party to suspend its own performance where the other fails to perform.

120 (Chapter 8: Performance and Breach) Section 1. Conditions Courts have relied on the concept of conditions in developing the rules relating to performance. A condition is an event that must occur before performance of a thing promised is due. For instance, in a Kx for insurance, the insurer is not obligated to perform until the loss contingency occurs(e.g., house burns down, etc.). Condition is defined in Re 2 nd §224.

121 (Chapter 8: Performance and Breach) A condition may be beyond the control of the Kxing parties; that is, the condition could be an external event: I promise to play tennis with you tomorrow if the sun is shining. Here, the sun shining is an external event beyond the control of the parties. That event is a condition precedent to the duty to play tennis as promised. NOTE: that does NOT mean no Kx is formedit means there is no duty to perform what was promised unless and until the condition precedent is met.

122 (Chapter 8: Performance and Breach) The condition may be a Promissory condition and within the control of the parties: I promise to pay you $50 if you promise to wash my Jeep. The duty to pay $50 (perform the thing promised) is subject to a promissory condition precedent your promising to wash my Jeep. Conditions, whether an external event or promissory, are of three types: Precedent, Subsequent, or Concurrent.

123 (Chapter 8: Performance and Breach) Condition Precedent: an contingency that must occur before there is a duty to perform the thing promised. Conditions Precedent are thus duty-creating: I promise to mow your grass tomorrow if its sunny and warm. If the tomorrow it proves to be sunny and warm, the condition precedent to my promised performance, mowing, has been met and the duty to mow arises. Condition Subsequent: terminates a duty to perform: I promise to mow your grass tomorrow unless it rains. There is no condition precedent to my having to mow-it arises tomorrow without contingency. However, my extant duty to mow may be extinguished or terminated by a condition subsequentit rains tomorrow. Unless and until it rains, I had a duty to mow your grass.

124 (Chapter 8: Performance and Breach) Under the Restatement §224 et seq The Restatement, in defining condition, abandons the terms condition precedent and condition subsequent. The concepts remain, but the terminology is changed. Under the Restatement view, a condition refers to an event that must occur before the duty to perform arises (namely, a condition precedent), §224 The concept of condition subsequent is, in §230, a Duty Terminating Event (namely, a condition which, if it occurs, terminates a duty to perform). Strictly speaking, then, under the Restatement view, a condition subsequent is not really a conditionits a duty terminating event.

125 (Chapter 8: Performance and Breach) Under the Restatement §224 et seq Events certain to occur are not conditions: thus, the mere passage of time does not constitute a conditione.g., a promise to pay $50 at the end of 30 days is an unconditional promise. As the concepts of condition precedent and condition subsequent are very much alive and well in the Restatement under new names, we will continue to refer to conditions precedent and subsequent. We will discuss Concurrent Conditions in the materials on Constructive (Implied) Conditions.

126 (Chapter 8: Performance and Breach) Express Conditions: No Breach, Compliance Luttinger v. Rosen, p.692 The Seller endeavors to retain the Luttingers earnest money deposit: what are the Sellers arguments? – In effect, the Seller is stating that he is entitled to retain the deposit because the Luttingers had breached, that is, they had failed to close and pay for the house.

127 Express Conditions: No Breach, Compliance (Luttinger v. Rosen) Were the buyers in breach? Assume the shoe were on the other foot; that is, assume that seller had sued the buyers to force them to close or pay damages. What would the buyers response have been?

128 Express Conditions: No Breach, Compliance (Luttinger v. Rosen) 2. Kx Formation Kx for sale of house 3.EnforcementNo bars to Enforcement 4.Performance and Breach As plaintiff, seller would allege: Breach by defendant, buyers, did not take and pay for the property

129 Express Conditions: No Breach, Compliance 4. Performance and Breach Breach by defendant, buyers, did not take and pay for the property When there is an allegation of breach, the party against whom breach is alleged has the opportunity to respond. There are several responses to breach we will consider. The first is, No breach, compliance. With this response, the responding party is declaring they are fulfilling the terms of the Kx.

130 Express Conditions: No Breach, Compliance (Luttinger v. Rosen) In the case, buyers did not, in point of fact, close on the house (take and pay for it as agreed in the Kx for sale). The buyers response is they were in compliance owing to the express condition precedent to their having to perform, namely, their getting a 20 year mortgage at 8 ¼ %. Getting a mortgage from a bank on those terms was a condition precedent to their having to close on the property. That condition was not met, such that the buyers duty to perform never arose.

131 Express Conditions: No Breach, Compliance (Luttinger v. Rosen) What were the sellers replies to the Luttingers response that they were in compliance? 1.The mortgage contingency clause was not a condition precedent. How does the court deal with this first argument? The court dispenses with the argument by providing a definition for condition precedent: a fact or event which the parties intend must exist or take place before there is a right to performance.

132 Express Conditions: No Breach, Compliance (Luttinger v. Rosen) 2. The buyers didnt apply for loans at all the banks in the area that is, the buyers failed to use due diligence in securing a loan. The court disagrees: what facts convinced the court the buyers had used due diligence? 3. Even if the mortgage contingency clause was an express condition precedent, and even if the buyers used due diligence to secure a loan as described in the Kx for sale, the condition was satisfied (seller argues the trial court erred in finding the condition was not met). On what basis, according to the seller, was the condition precedent met? – Seller urges the condition was satisfied by sellers offer to effectively make up the difference in the interest by providing financing to the buyer at the 8 ½ %, an offer the buyers refused. Sounds pretty good. Why didnt the court buy it?

133 Express Conditions: No Breach, Compliance (Luttinger v. Rosen) – See the language in the opinion, last paragraph, p.693, beginning, In this case the language of the contract is unambiguous.... What does that suggest regarding the level of compliance with express conditions to which parties have agreed in a Kx? Why might not the offer to finance have been satisfactory to the Luttingers? See Note 3, p.694. Yeah, strict compliance.

134 (Luttinger v. Rosen) Effects of the failure of the condition: First, the Luttingers did not have to perform (close). Second, the condition having not been met, after a reasonable time their duty was discharged and they could treat the Kx as terminated. Note 2: By definition, conditions are events not certain to occur; thus, there is some risk they might not be met (e.g., the Luttingers couldnt get financing on the terms they wished even with due diligence). The condition allocated the risk that the Luttingers couldnt get financing to the seller.


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