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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.

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Presentation on theme: "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."— Presentation transcript:

1 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

2 Illegality in the procurement and Illegality in Performance (Sirkin v. Fourteenth Street Store) Promise to Sell goods This Kx is NOT illegal on its face—just 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

3 (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 Store’s purchasing agent?

4 (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?

5 (Sirkin v. Fourteenth Street Store) What is the rationale behind the rule? – Refusing to enforce the Kx illegally procured discourages bribes to acquire Kx’s. 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. Wasn’t Fourteenth Store unjustly enriched? Shouldn’t Sirkin at least be able to recover the value of the benefit (the goods) conferred?

6 (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 Kx’s. 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.

7 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

8 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. Doesn’t 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?

9 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 B’s 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.

10 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 won’t even bar recovery in Kx)

11 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.

12 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.

13 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.

14 (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

15 (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.

16 (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 employer’s business interests.

17 (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.

18 (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 employee’s (Hopper’s) interest must be considered against the employer’s 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 Hopper’s 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.

19 (Hopper v. All Pet Animal Clinic) The court concludes the covenant was reasonable in its geographic limits—no 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?

20 (Hopper v. All Pet Animal Clinic) What about the duration of the covenant—three 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 Clinic’s 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.

21 (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 employer’s legitimate business interests. After that, the covenant will still be unenforceable if it works an undue hardship on the employee or injures the public.

22 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.

23 (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.

24 (Chapter 8: Performance and Breach) A condition may be beyond the control of the Kx’ing 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 formed—it means there is no duty to perform what was promised unless and until the condition precedent is met.

25 (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.

26 (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 subsequent—it rains tomorrow. Unless and until it rains, I had a duty to mow your grass.

27 (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 condition—it’s a duty terminating event.

28 (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 condition—e.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.

29 (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 Seller’s 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.

30 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?

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

32 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.

33 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.

34 Express Conditions: “No Breach, Compliance” (Luttinger v. Rosen) What were the seller’s 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.

35 Express Conditions: “No Breach, Compliance” (Luttinger v. Rosen) 2. The buyers didn’t 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 seller’s 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 didn’t the court buy it?

36 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.

37 (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 couldn’t get financing on the terms they wished even with due diligence). The condition allocated the risk that the Luttingers couldn’t get financing to the seller.

38 Internatio-Rotterdan, Inc. v. River Brand Rice Mills, Inc., p.695 Let’s simplify: IR was a buyer exporter shipping rice to Japan. River Brand was a processor/seller who agreed to sell rice to IR. IR (buyer) was to ‘nominate’ (declare) the ships to carry the rice to Japan and notify River Brand (seller) after seller had allocated the rice totals between Houston and Lake Charles. The language of the Kx required shipment in December Buyer was to give seller two weeks notice of shipping instructions. In order for seller to comply with the term of the Kx that required delivery in December, buyer would have had to give notice by December 17 th ; otherwise, seller could not deliver in the month of December.

39 (Internatio-Rotterdan v. River Brand Rice) Buyer hit a snag with in the form of export restrictions and could not designate the delivery particulars for the rice allocated to Houston. Thus, the buyer could not notify seller of Houston delivery details by December 17 th. When it did not receive delivery instructions for Houston on the 17 th seller rescinded the Kx the next day. Meantime, the cost of rice, subject to radical fluctuation, had risen by 20%. Buyer sued seller for breach, not delivering the Houston rice.

40 (Internatio-Rotterdan v. River Brand Rice) *Interlude:(B) Problems of Interpretation— promissory duty versus promissory condition, p.700 Recall that conditions may be either events outside the control of the parties (e.g., I promise to play golf with you tomorrow if it reaches 85 degrees by ‘noon’), or events within the control of the parties, i.e., promissory conditions (e.g., “I promise to play golf with you tomorrow on condition that you buy lunch at the clubhouse first”. Internatio- Rotterdam v. River Brand Rice Mills involves an express promissory condition. Promissory Condition versus Promissory Duty – Consider the following: “I promise to play golf with you tomorrow if you promise to buy lunch before we play”. If you agree, the latter creates a promissory duty for you to buy lunch which, if you fail to perform, entitles me to damages for breach of Kx. Ignoring for the moment the matter of Constructive Conditions, your buying lunch is not a condition precedent to my performance, playing golf. Thus, your failure to buy lunch might entitle me to Kx damages, but it does not excuse my playing golf—it is not a condition precedent to my playing.

41 (Internatio-Rotterdan v. River Brand Rice) (Promissory Condition versus Promissory Duty) – Now assume this variation: “I promise to play golf with you tomorrow on condition that you buy lunch first”. Now, your buying lunch is not merely a duty; rather, it is an express condition precedent to my performance, playing. If you don’t buy lunch, my duty to play never arises. However, I am not entitled to damages as no promissory duty to buy lunch was created on that language. – Finally, I could make your buying lunch both a duty and a condition: “I promise to play golf with you tomorrow if you promise to buy lunch first, and your buying lunch is a condition of my playing”. On this language, there is a promissory duty to buy lunch, for the breach of which I might recover damages. In addition, your buying lunch is an express condition precedent to my having to play. If you don’t buy lunch, I am entitled to damages for the breach of duty and my performance, playing, never arises as the condition precedent to my having to play was not met.

42 (Internatio-Rotterdan v. River Brand Rice) Kx Formation: Kx for the sale of rice Enforcement: no bars to enforcement Performance and Breach: P (Buyer/IR) alleges: “Breach by D, Seller (River Brand Mills), did not deliver the Houston Rice”. D’s (Seller’s) Response: “No breach, Compliance: my performance was subject to an express condition precedent—your providing shipping/delivery instructions by December 17 th so that delivery could be completed within December as provided by the Kx”

43 (Internatio-Rotterdan v. River Brand Rice) What are Buyer’s two replies (responsive arguments) to Seller’s No breach, compliance response? 1.The promissory obligation to provide two weeks notice of delivery details was not a condition. Rather, it was promissory duty for the breach of which seller might be entitled to damages. But Seller still was required to perform. Does the court find the two-weeks notice requirement was a promissory condition or duty? On what basis? – The court finds the requirement to be a condition precedent to Seller’s performance, as the Seller could not possibly perform without the delivery instructions. See second full paragraph, p.696.

44 (Internatio-Rotterdan v. River Brand Rice) (What are Buyer’s two replies (responsive arguments) to Seller’s No breach, compliance response?) 2.If giving instructions two weeks in advance of delivery was a condition of Seller’s performance, the condition was satisfied. We (Buyers) gave two weeks notice. What is the Seller’s responsive argument? – Seller argues that the condition required Buyer to provide notice by December 17 th, such that Seller could deliver the Houston rice within the month of December as required by the Kx for sale.

45 (Internatio-Rotterdan v. River Brand Rice) Having found that the two-week notification requirement was an express, promissory condition of Seller’s performance (delivering the Houston rice), it remained for the court to interpret the condition: was Buyer required to give notice by December 17 th for December delivery, or could Buyer give two weeks notice with Seller then obligated to deliver after December?

46 (Internatio-Rotterdan v. River Brand Rice) The court concludes that the condition required not just two weeks notice, but that Buyer provide the deliver instructions by December 17 th such that Seller could deliver in the month of December. Notification to ship after the 17 th did not meet the condition, such that Seller’s duty to deliver the Houston rice under the Kx never arose. Moreover, as the condition could never be met after the 17 th, Seller could regard the Kx as terminated and rescind, as it did on the 18 th. Why did the court interpret the condition to require notification in time for delivery in December? See last paragraph, p

47 (Internatio-Rotterdan v. River Brand Rice) The court seems to regard the two week notification requirement as creating a duty as well, such that the buyer’s failure to satisfy the condition would give rise to an action on behalf of the sellers for breach. The sellers did not, however, pursue that action, doubtless because they had profited significantly from the rise in price and could show no damages resulting from seller’s breach. Note, p.71: Preference in Interpretation. The general rule is that in cases of doubt, courts prefer to find duty versus condition to avoid “harsh results”, i.e., where the condition is not met, one party is denied the other’s performance. See Note (2) Effect of Forfeiture, p. 706.

48 Peacock Construction Co. v. Modern Air Conditioning, Inc., p.701 The Kx between the general contractor and the sub provided that the general would not pay its subs until it had been paid by the owner. The owner did not pay and the general contractor did not pay its subs on the basis that the owner’s paying was an express condition precedent to its having to perform.

49 (Peacock Construction Co. v. Modern Air Conditioning, Inc.) The court says the clause is ambiguous: what is the ambiguity? That is, what are the two possible interpretations of the clause? – Payment by the owner could be interpreted as either a condition precedent to Peacock’s having to pay Modern Air Condition or as establishing the time for payment.

50 (Peacock Construction Co. v. Modern Air Conditioning, Inc.) According to the court, deciding which interpretation to assign the clause is a matter of deciding on the parties’ intent. The intent of the parties’ seems a question of fact—who should decide the question of what the parties intended? – Though the parties’ intent is a factual question, as it involves interpreting the Kx, it is a question of law for the court

51 (Peacock Construction Co. v. Modern Air Conditioning, Inc.) Kx interpretation, then, is a matter for the court, such that determining what the parties meant in the event of an ambiguity is a question of law. In the case, the court interpreted the payment clause as establishing a time for payment, not a condition precedent to payment. On what basis did the court arrive at that interpretation? See first two paragraphs at p.703.

52 Gibson v. Cranage, p.704 The pertinent clause in the Kx provided that the defendant did not have to take and pay for the portrait of his daughter unless he was completely satisfied. What, according to the court, did the clause create? – The clause created an express condition precedent to defendant’s having to pay. Satisfaction was to be based on defendant’s personal judgment, i.e., whether he personally (subjectively) was satisfied with the painting.

53 (Gibson v. Cranage) Wasn’t defendant’s promise to pay for the painting ‘if he liked it’ illusory, such that there was no Kx formed at all? – Implied in the promise to pay for the painting if it was personally satisfactory was a duty to make the determination in good faith. What if defendant had refused even to look at the painting? That would have constituted a breach of the duty of good faith.

54 (Gibson v. Cranage) Note (2) Effect of Forfeiture, p.706. We have seen that courts prefer to interpret promises as imposing a duty, rather than creating a condition, so as to avoid a forfeiture. Didn’t reading the satisfaction clause in the Gibson case work a forfeiture on the plaintiff, painter? After all, it’s not as though he can sell the portrait of the defendant’s daughter to someone else. What facts might have contributed to the court’s decision in holding the satisfaction clause to be some sort of promissory duty? Or, why didn’t the court find that the clause should be read to require reasonable satisfaction rather than personal satisfaction on the part of the defendant? – The satisfaction clause was likely a marketing ploy. Plaintiff perused the obits looking for clients then presented them with the no-risk satisfaction term. The plaintiff assumed the risk of dissatisfaction. – Express conditions are not found lightly, but where they are found, they are strictly read and applied.

55 Following Third Party Satisfaction: to reduce the risk of forfeiture associated with conditioning performance on a contracting party’s satisfaction, performance is frequently premised on the satisfaction of a third, independent party, such as an expert.

56 (C)Mitigating Doctrines, p.708 Courts have developed several doctrines in mitigation of the harsh results that sometimes follow from express conditions in the form of forfeiture. – Prevention: the No Breach, Compliance owing to an express condition precedent is not available to a party who prevents the event/condition from occurring. See example of real estate broker at p.709.

57 (C)Mitigating Doctrines Waiver, Estoppel and Election, p.710 Waiver and Estoppel: Contract parties may waive an express condition in their Kx. Note that if a condition has been waived, the party waiving it may retract the waiver provided the time for the condition’s occurrence has not passed. The waiver cannot be retracted, however, if the other party has relied on the retraction (estoppel). Waiver of a condition after the time for its occurrence has passed may not be retracted, whether or not there has been reliance on the retraction. Re.2 nd §84

58 (C)Mitigating Doctrines Waiver, Estoppel and Election Election: Where the time for the condition to occur has expired, the party whose performance depends on the condition being met may ‘elect’ to disregard the condition and proceed with performance.

59 McKenna v. Vernon, p.711 Kx Formation: Builder (McKenna)Owner (Vernon) Promise to build theater Promise to pay Begin paying Installments when 80% completed Final installment on completion

60 (McKenna v. Vernon) Enforcement: no bars Performance and Breach – Breach by Defendant, Vernon, did not pay final installment – Response: No Breach, compliance: my duty to pay was subject to an express condition—architect’s certificate Was the architect’s certificate a condition precedent to Vernon’s having to pay?

61 (McKenna v. Vernon) Yes. Nevertheless, McKenna prevails: Vernon was not in compliance. Why not? – By repeatedly paying Vernon as the work progressed without requiring the architect's certificate, Vernon waived the condition. A prototypical case of waiver. Could Vernon have ‘retracted’ the waiver? Yes, provided McKenna had not relied. For instance, had Vernon made several installment payments, he might have informed McKenna that no further payments would be forthcoming absent the certificate.

62 Hicks v. Bush, p.713 The Agreement: Shareholders of Bush Express condition precedent: if expansion funds available Hicks Promise to transfer shares to holding company Not in written agreement

63 Hicks v. Bush Performance and Breach – Hicks alleges: Breach by Defendant/Shareholders, did not transfer shares of Bush to holding company – Response: No breach, compliance: our performance, transferring the shares, was subject to a condition precedent, viz, availability of expansion funds. The condition was not met – Hicks’ reply: there is no such express condition in the agreement

64 Hicks v. Bush The condition, according to the defendants/shareholders, was oral and did not find its way into the final writing. Is there anything to prevent the introduction of evidence proving up the condition? The facts implicate the Parol Evidence Rule: a good time for review!

65 Hicks v. Bush Does the PER apply? – Yes: there was a final writing of the parties forming Kx If the Kx was fully integrated (or, “entire”) evidence of terms not in the writing, whether contradictory or supplementary, is precluded by the Rule. Was the Kx fully integrated? Yes. Nevertheless, the court allows parol evidence to prove-up the condition precedent. What does the court hold, and what is the rule of the case?

66 Hicks v. Bush Parol evidence is always allowed to prove an express condition, provided the condition does not contradict the terms of the writing. Put another way, the rule barring supplementary parol evidence when the agreement is fully integrated is subject to an exception in the case of a condition.

67 Section 2: Constructive Conditions (No Breach, Justification), p.716 No breach, Justification—the Breaching Plaintiff The response is, “Although I am not performing (not in compliance with the Kx terms), my non-performance is justified by your breach”. Thus, there is an admission of non-performance, though not breach, such that the plaintiff’s breach forecloses the Kx action.

68 Section 2: Constructive Conditions (No Breach, Justification Four Elements of Justification Response 1.Plaintiff was in breach 2.Defendant’s duty to perform was dependent on Plaintiff’s performance (i.e., Plaintiff’s performance was a condition of Defendant’s performance) 3.Plaintiff’s performance was a condition precedent to Defendant’s performance 4.Plaintiff’s breach was of sufficient magnitude to justify Defendant’s withholding its performance (i.e., Plaintiff’s performance, if any, was less than substantial performance)

69 Constructive Conditions: Kingston v. Preston,p.717 Preston was a silk merchant, Kingston, his apprentice. In the agreement between them, Preston agreed to retire after 15 months, selling the business to Kingston. Kingston was to pay for the business in monthly installments and provide security (essentially, offering collateral of some sort in the event Kingston defaulted) which he failed to supply. Preston refused to convey the business to Kingston, who sued for breach of Kx.

70 Constructive Conditions: Kingston v. Preston Preston responds, no breach, justification: my not conveying the business is justified by your breach, not providing security to assure the installments will be paid. What is Kingston’s argument in reply? – Kingston argues that the two obligations, his to provide security and Preston’s, to convey the business are independent. That is, while it might be that Kingston owed a duty to provide security and might be liable for damages for non-performance, his providing security was not a condition of Preston’s performance, conveying the business.

71 Constructive Conditions: Kingston v. Preston The court identifies three kinds of covenants (obligations arising from promises) – Independent covenants: performance by neither party is a condition of the other’s performance. This was Kingston’s argument – Dependent covenants: where performance of one party is a condition precedent to performance by the other – Mutually dependent covenants: where the performance of each party is dependent on the performance by the other, i.e., the performances are to be at the same time.

72 Constructive Conditions: Kingston v. Preston In the case, the court held that Kingston’s performance, providing security for the payments to Preston, was a constructive (implied) condition precedent of Preston’s performance, conveying the business. Since Kingston failed to perform, the condition was not met, and Preston had no duty to convey the business. Why did the court conclude Preston’s duty to convey was dependent on Kingston’s providing security? See final paragraph of the opinion, p.718

73 Time for Performance, p.718 The parties can expressly provide for the time for, and order of, performances in their Kx. Where the Kx is silent, the default rule is: where one party is to do something and the other pay or give something, the doer is to go first. E.g., “I promise to pay you $50 if you promise to mow my lawn”. Absent language to the contrary, the mowing is to be performed first and is a constructive condition precedent to paying.

74 Stewart v. Newbury, p.719 The agreement for excavation did not provide for progress payments. Plaintiff, Stewart, failed to prove-up that there had been an agreement on that score over the telephone. In any event, the trial court found as a matter of fact that there was no provision for progress payments. What was the trial court’s instruction to the jury to which Defendant, Newbury, objected?

75 Stewart v. Newbury, p.719 The trial court instructed the jury that if they found there was no provision for payments, then Stewart was entitled to payments at reasonable intervals. Why did the appellate court find that incorrect? It seems so... well, reasonable. The appellate court simply recites the basic default rule: where one party is to do something and the other pay, absent language to the contrary, performance by the party to do something is a condition precedent to the other’s having to pay. Note, by the way, the court’s observation that Stewart had not substantially performed. We will consider the doctrine of substantial performance under the materials on mitigating doctrines. The default rule is universal but rarely comes up because express provision for payment is likewise universal.

76 Concurrent Conditions and Tender,p.721 Recall the third type of condition described by the court in Kingston v. Preston: Concurrent conditions, where each party’s performance is a condition of the other, neither being a condition precedent. Where conditions are concurrent, both parties must at least ‘tender’ performance, i.e., show they were ready to perform. Note the example from Kx’s for the sale of goods, p.722.

77 Mitigating Doctrines, p.723 Substantial Performance – Where a promissory condition is express, as in Luttinger, nothing short of strict adherence to the terms of the condition will satisfy it. In that case, financing for the purchase of the house from a source other than a bank would not satisfy the express condition in the sales Kx. In short, ‘real close’ won’t do to satisfy an express condition. – Recall that the failure of a condition, express or constructive, works a forfeiture on one party-the breaching plaintiff. (Remember, that’s the reason courts will find a promissory condition versus a promissory duty if there’s any doubt that an express condition is intended).

78 Mitigating Doctrines, p.723 Substantial Performance – With the dependency of promises (i.e., one party’s performance is a constructive condition precedent of the other’s duty to perform) firmly entrenched in Kx law, the risk of forfeiture is elevated and the potential for harsh results increases. It is one thing to insist on meticulous satisfaction of an express condition precedent that was the subject of negotiation, it is another to insist on fastidious satisfaction of a constructive condition. – The following case, Jacobs & Young v. Kent demonstrates the point concretely and emphatically.

79 Jacob & Young v. Kent, p.725 Kx Formation Enforcement: Enforceable Kent (Owner)J&Y (Builder) Promise to build & use Reading pipe promise to pay

80 Jacob & Young v. Ken Performance and Breach: Allegation? – Breach by D, Kent, did not pay final installment due on completion. Response? – No Breach, Justification: my not paying is justified by your breach, not using Reading Pipe (i.e., full performance meant using Reading Pipe, and the builder’s performance was a constructive condition precedent of the owner’s performance, paying).

81 Jacob & Young v. Ken Was using Reading Pipe an express condition precedent of owner’s having to pay? What does Cardozo’s analysis and the outcome of the case indicate? – Where there is an express promissory condition precedent to a party’s having to perform, nothing short of complete satisfaction of the condition will do: strict compliance is required. Had the court determined that using Reading Pipe was an express condition precedent to Kent’s performance, paying the builder, J&Y’s using pipe just as good would not satisfy the condition, would not constitute full performance. Recall Luttinger: the express condition in the Kx called for 8 ½ % financing from a bank: substitute financing from the seller wouldn’t do: with express conditions, real close isn’t good enough.

82 Jacob & Young v. Ken Using Reading Pipe, then, was a promissory duty-part of the builder’s performance, not an condition precedent to payment. That said, wasn’t the builder’s performance a constructive condition of Kent’s performance, paying? – Yes.

83 Jacob & Young v. Ken Ok, so the builder’s performance in accordance with the specs in the kx, including the use of Reading Pipe, was a constructive condition precedent to Kent’s paying. Did the builder fully perform? – Certainly not: the builder is in breach. Nevertheless, the builder prevails

84 Jacob & Young v. Kent Let’s rework the analysis in light of the holding: Performance and Breach: – Breach by D, Kent, did not pay final installment due on completion. Response – No Breach, Justification: my not paying is justified by your breach, not using Reading Pipe. Anytime there is an allegation of breach, the party against whom it is alleged is entitled to respond.

85 Jacob & Young v. Kent Response – No Breach, Justification: my not paying is justified by your breach, not using Reading Pipe. Since Kent has alleged that J&Y breached, J&Y may respond. Does the builder have a response to the allegation of breach? So far, we’ve considered: No breach, compliance No breach, justification Neither works here: the builder did not comply with the Kx terms, nor was the builder’s not using Reading Pipe ‘justified’ by Kent’s not paying.

86 Jacob & Young v. Kent While we will consider other Responses later (none of which would apply in this case in any event), all that is available to the builder is to admit breach: again, a breaching plaintiff. How, then, does the builder recover? Enter the doctrine of substantial performance

87 Jacob & Young v. Kent – Substantial performance means pretty much what it sounds like: the Kx’ing party mostly performed. The same concept can be stated alternatively in terms of immaterial breach. That is, where a party has substantially performed, by hypothesis the breach resulting from the failure fully to perform must be an immaterial breach: Kx Formation Full Performance If this is substantial performance... Substantial Performance This must be an immaterial breach

88 Jacob & Young v. Kent – The term, substantial performance, is generally used in the construction cases, while the term, immaterial breach, is generally used in other contexts. Again, the are two sides of the same coin. Kx Formation Full Performance Substantial Performance What is left undone = immaterial breach

89 Jacob & Young v. Kent What, precisely is the effect of the doctrine? That is, what is the effect of substantial performance by a breaching plaintiff? First, consider this: when a party raises the No breach, justification response, what is it that party is asserting is justified? – The assertion is that the non-breaching party is justified in withholding its performance which is not due unless and until the other party has performed (constructive condition precedent)

90 Jacob & Young v. Kent Where a breaching party has substantially performed, such that the breach is immaterial, the non-breaching party is NOT justified in withholding its performance. What is the policy at work in this mitigating doctrine? – Avoid forfeiture in the event of an immaterial breach. Did it really matter to Kent which brand of pipe was used, provided it was the same quality? What if Kent had paid only half the Kx price due? Should he be able to keep the house while paying only half based on the failure of the constructive condition, i.e., full performance in every detail by J&Y?

91 Jacob & Young v. Kent Can you state the principle in terms of constructive conditions? – Where performance by one party is a constructive precedent condition precedent of performance by the other, the condition is satisfied on substantial performance. Substantial performance is not full performance and constitutes a breach, but it is enough to satisfy the constructive condition such that the non-breaching party is not justified in withholding its performance.

92 Jacob & Young v. Kent What is the view of the Dissent? Kent did state in the Kx that he wanted Reading Pipe—why didn’t that create an express condition? See last sentence of the last paragraph, p.725. Why was it that the builder didn’t use Reading Pipe? Does it matter? See the end of the majority opinion, p.726. Compare Plante, infra. What if the pipe used proved to be significantly inferior to the Reading Pipe called for?

93 Jacob & Young v. Kent While J&Y substantially performed so that Kent was not justified in withholding his performance, an immaterial breach is a breach, nonetheless. As the builder would seem to have no response, should Kent be entitled to anything?

94 Plante v. Jacobs, p.728 Jacobs Promise to pay Promise to build per specs Kx Price=$26, 765 Defendant pays $20,000 Plaintiff failed to furnish several item agreed to (about $1,600) Wall misplaced: didn’t effect value; cost to complete-$4,000 Plaintiff sues for balance (lien)

95 Plante v. Jacobs Kx Formation Enforcement P&B – Breach by D, Jacobs, did not pay – Response: No breach, justification: our not paying is justified by your breach, $1,600 in items not furnished and misplacing the wall—breaching plaintiff – Plaintiff’s response: No response: breach, but... substantial performance: I am in breach, but I substantially performed so you are not justified in withholding your performance (breach immaterial)

96 Plante v. Jacobs – Plaintiff’s response: substantial performance – The court finds that the builder, Plante, substantially performed: what facts were at the basis of that determination? Plan was a stock floor plan showing no details as to constructing No blueprints, no architect Specs (with a few mods) were on standard printed forms The Jacobs were living in the house

97 Plante v. Jacobs Given those fact, it is concluded that the “essential purpose of the Kx” was fulfilled, i.e., Plante substantially performed and, though in breach, the Jacobs were not justified in withholding their performance. That said, the Jacobs nevertheless successfully alleged breach by Plante—not supplying several items such as gutters, sidewalks, etc. Moreover, there’s the matter of the misplaced wall: the living room was a foot smaller than called for and the Jacobs wanted a wider living room.

98 Plante v. Jacobs Jacobs: “Breach by Plaintiff, Plante, did not furnish [a bunch of items amounting to something over $1,600] and misplaced the wall.” Response by Plante/builder: None-admit breach. Remedy: having established breach, the Jacobs are entitled to a remedy for Br/Kx.

99 Plante v. Jacobs Remedy – For the cluster of sundry items: cost to complete/replace – What about damages for the misplaced wall? The cost to repair/replace was $4,000 and entailed considerable reconstruction. The trial court did not award them the cost to repair/replace, and the appellate court affirmed. Why did the court deny those damages? What was the measure of recovery for Plante’s breach in misplacing the wall?

100 Plante v. Jacobs It appears that Plante’s breach was willful (the parties were in dispute during the course of construction). In Jacobs & Young v. Kent it seems the use of Cohoe pipe, rather than Reading Pipe, was inadvertent. Did Cardoza indicate whether the result in that case might have been different if the failure to use Reading Pipe had been a deliberate breach?

101 Plante v. Jacobs In Jacobs & Young, Cardozo suggested that the builders could not have made out a case for substantial performance if the breach had been willfull/deliberate. Is the standard for substantial performance in Wisconsin different? – The Wisconsin court seems to go well beyond the New York view as espoused in Jacobs & Young.

102 Perfect Tender Rule in Sale of Goods The traditional rule required that a seller make “perfect tender”, that is, the seller was required to perform perfectly in every regard, including even shipping details. Article 2 governing sale of goods retains the traditional rule: what is the rationale? See first full paragraph, p.732. The drafters did, however, relax the rule to some degree

103 Perfect Tender Rule in Sale of Goods The drafters did, however, relax the rule to some degree. – §2-508: allows seller to ‘cure’ defects – §2-608: if buyer has already accepted the goods, she can only revoke and return the goods if the defect substantially impairs their value. – §2-612: similar to §2-608 where delivery of goods is in installments

104 Mitigating Doctrines: (B)Divisibility, p.733 Gill v. Johnstown Lumber Co. Kx Formation: Gill agrees to drive four million feet of logs down river to Johnstown Lumber’s facility. The price was allotted variously at $1 per thousand feet,.75 per thousand feet, and so forth, depending on the type of logs (oak, pine, etc.). Due to a flood, much of the lumber was carried past Johnstown Lumber Company’s facility to the Potomac, from which it was washed into the Chesapeake.

105 Gill v. Johnstown Lumber Co. P&B – Breach by D, JLC, did not pay – Response: No breach, justification: our not paying is justified by your failure to deliver (most?) of the lumber. – Gills’ Response to the allegation of breach? Essentially, must concede breach, and Gill’s performance, delivering the lumber, was a constructive condition precedent to JLC’s having to pay.

106 Gill v. Johnstown Lumber Co. P&B – Gill has no response to the allegation of breach. What about substantial performance? – No: apparently, Gill successfully drove less lumber than was lost. His breach, that is to say, was material. – What, then, is Gill’s argument that he should be paid for the lumber that did reach JLC’s facility? The Kx was divisible, such that he should be paid for those portions completed.

107 Gill v. Johnstown Lumber Co. Divisibility, like substantial performance, ameliorates the sometimes harsh results of constructive conditions, i.e., forfeiture. The doctrine only applies, however, if the Kx is divisible. It does not apply where the Kx is “Entire” (not to be confused with the use of that term as it applies to the PER!). How does one distinguish the two; that is, what is the test for deciding whether a Kx is divisible?

108 Gill v. Johnstown Lumber Co. A Kx is divisible, as opposed to Entire, where it is “apportioned or apportionable”. The doctrine only applies, however, if the Kx is divisible. It does not apply where the Kx is “Entire” (not to be confused with the use of that term as it applies to the PER!). How does one distinguish the two; that is, what is the test for deciding whether a Kx is divisible?

109 Gill v. Johnstown Lumber Co. A Kx is divisible, as opposed to Entire, where it is “apportioned or apportionable”. On what basis did the court in Gill decide the Kx was apportioned?

110 Gill v. Johnstown Lumber Co. The price for driving the logs was based on units of performance: so much for each 1000 feet of logs driven to the facility. It is enough if the Kx states prices for separate parts or units of the performance, or if, for instance, a price list provides separate prices for various items. Is there any other requirement? Consider Note (1), p.734. Was the Kx divisible by distances?

111 Gill v. Johnstown Lumber Co. See Re.2 nd §240. There are two requirements in the Restatement: first, the performance must be apportioned; second, corresponding parts (i.e., a unit of performance and corresponding unit of payment) must be regarded as equivalents. Would driving the logs 50% of the way be regarded as the equivalent of 50% payment?

112 Gill v. Johnstown Lumber Co. Here’s another set of examples 1.Builder contracts to build three houses for owner at $100,000 each. Builder completes one house, but does not build the other two. Owner refused to pay anything. Has builder substantially performed? No. Is the Kx divisible? Probably: first, the Kx is apportioned, viz, $100,000 per house. Are the parts of performance and units of payment equivalents? Again, probably. The Kx is divisible.

113 Gill v. Johnstown Lumber Co. (Examples) 2.Builder contracts to one house for owner at a cost of $100,000. The Kx provides that builder is to receive $50,000 on finishing half the work, the remaining $50,000 on completion of the house. Assume Builder stops after completing half the house. Substantial performance? Doubtful. Is the Kx divisible? Arguably, it is apportionable--$50,000 for the first half, $50,000 for the second half. Are the corresponding pairs of performance (50% of the work, 50% payment) equivalents? That is to say, are half a house and half payment regarded as equivalents? Likely not.

114 Gill v. Johnstown Lumber Co. That driving some logs to the JLC facility is equivalent to the units of payment for those logs seems to be implicit in the court’s holding. That is, the case rests on the unstated premise that driving part of the lumber benefited JLC to that extent.

115 Mitigating Doctrines: (C)Restitution, p.735 We have seen that where there is no recovery in a Kx action because an action cannot be stated, whether because there is no Kx formed or it is unenforceable, recovery might be had in a cause of action for Restitution (Quasi-Kx). Restitution may also be available where a Kx action fails at the level of Performance and Breach.

116 Mitigating Doctrines: (C)Restitution, p.735 For instance, where the aggrieved party is in breach and has no response and cannot deploy one of the ameliorating doctrines (substantial performance or divisibility), recovery still might be had in restitution, avoiding complete forfeiture. What is the traditional view on restitution for breaching plaintiffs? The traditional view did not allow recovery in restitution for a breaching plaintiff, particularly where the breach was willful. The rationale was that a party might perform as much as suited him, then stop performing knowing that he might still cut his losses by recovering in a Restitution action rather than an action on the Kx.

117 Mitigating Doctrines: (C)Restitution, p.735 Espousing the traditional view, one court asserted that to permit a breaching plaintiff to recover in Restitution would “tend to demoralize the whole country,... ; all faith and fair dealing would be at an end, and all confidence between man and man would be destroyed.” In a bold stroke, the following case rejected the traditional view, and in the century and a half to follow, the liberal view adopted in the that case became the majority view.

118 Britton v. Turner, p.736 Kx Formation BrittonArchbold Promise to work for one year Promise to pay $120 1 yrKx FormationBritton quits

119 Britton v. Turner P&B – Breach by D, Turner, did not pay – Response: No breach, justification: my not paying is justified by your breach, quitting after 9 ½ months. – Britton’s response to allegation of breach? – None: Britton’s full performance was a constructive condition precedent of Turner’s performance, paying $120

120 Britton v. Turner P&B (Britton-breaching plaintiff) What about substantial performance? – Note the the date, substantial performance not available. Divisibility? That doctrine was available: was the Kx divisible? – No. Payment was a single, lump sum of $120 to be paid at the end of one year, full performance by Britton.

121 Britton v. Turner Britton, thus, cannot state a cause of action in Kx: 1.Scope 2.Kx Formation: no problems 3.Enforcement: no bars 4.Performance and Breach 1.No breach, justification C/A: Restitution 1.Unjust 2.Enrichment

122 Britton v. Turner Note in the second paragraph of the opinion at p.736, the court refers to “quantum meruit”, yet another (and decidedly quaint) name for a Restitution action. Why did the Britton court abandon the traditional view denying restitution to a breaching plaintiff? See the example the court uses to demonstrate the rationale at paragraphs four and five, p.737.

123 Britton v. Turner The case is remanded for a determination of damages due Britton in Quasi Kx, namely, the value of the benefit conferred (the “worth” of Britton’s labor for 9 ½ months). How had the jury calculated the worth of the benefit? See first (incomplete) paragraph at the top of p.742. Did the court impose any limit on recovery? See third full paragraph, p.741.

124 Britton v. Turner Britton was a breaching plaintiff without a response: wasn’t Turner entitled to damages for breach of Kx? See last paragraph of the opinion. Consider again Gill v. Johnston Lumber. While Gill recovered for the parts of the Kx performed as the Kx was divisible, Gill was also a breaching plaintiff, suggesting JL Co. was entitled to damages for breach. The reason they could not recover is Gill had a response, no breach excuse, to be considered in upcoming materials.

125 Kirkland v. Archbold, p.443 A contemporary application of Britton v. Turner. There is no possibility of recover in an action on the Kx. The contractor was clearly in breach, and could offer no response other than admitting breach. There is no claim of substantial performance that would allow a breaching plaintiff to recover on the Kx, less damages occasioned by the plaintiff’s breach. Nor is the Kx divisible. Plaintiff recovers in restitution. How would the plaintiff/builder’s restitution damages be measured?

126 Kirkland v. Archbold, p.443 Example: Assume Builder agrees to build a home for Owner for $1 million. The cost of Builder’s performance is $900,000, such that the $100,000 difference represents Builder’s profit. Assume further that Builder and Owner have a dispute and that Builder stops work having spent $500,000. The cost to Builder to complete the house would be $400,000.

127 Kirkland v. Archbold, p.443 Assume now that Builder was at fault in the dispute, is a breaching plaintiff without response to whom the mitigating doctrines of substantial performance and divisibility are not available. Recovery can only be had in Restitution. Owner secures another builder to finish, but at a cost of $600,000. What, then, is the value of the benefit received by Owner from the first builder, suing in restitution?

128 Kirkland v. Archbold, p.443 If Owner is at fault in the dispute and is in breach, Builder could recover its expectation damages in an action on the Kx, calculated in either of two ways: Kx Price minus cost avoided: (1)$1 million less the $400,000 Builder saved in not having to finish the house = $600,000. (2) Cost of performance plus profit: $500,000 spent at the time of breach plus $100,000.

129 Suspending Performance and Terminating the Kx, p.75 Walker & Co. v. Harrison, p.748 Unlike the prior cases on the justification response, here, the dispute is in midstream. Why wasn’t the failure of the lessor to maintain the sign a material breach? See Re.2 nd §175. How would you have advised the Harrisons before they discontinued paying the rentals on the sign?

130 Hindrance and Prevention, p.758 Iron Trade Products v. Wilkoff Co., p.759 Seller doesn’t deliver the rails, owing to a rising market. What, according to Seller, contributed the added cost of its performance? Promise to sell rails Wilkoff (Seller) ITP (Buyer) Promise to buy rails

131 Iron Trade Products v. Wilkoff Co P&B – Breach by D, Seller, did not deliver rails – Response? – This is effectively a ‘no breach, justification response: ‘my non-performance is justified by your breach, preventing/hindering my performance’. What, apparently, is the duty breached here (as argued by Seller)? Is it express or implied? – Each party has an implied duty not to prevent or hider the other’s performance.

132 Iron Trade Products v. Wilkoff Co Why wasn’t ITP, the buyer, in breach of that duty to Wilkoff, the seller? Merely making the other party’s performance more difficult, absent bad faith, is not prevention of performance. With no response to the allegation of breach, buyer, ITP, prevails.

133 Section5: Prospective Nonperformance, p.765 (A) Breach by Anticipatory Repudiation – What is repudiation? – A statement of intention by a contracting party not to perform. See Re.2 nd, §250.

134 Hochster v. De La Tour, p.766 Plaintiff agreed to work as a courier for Defendant for three months, beginning June 1 st. Defendant notified by letter May 11 th of his repudiation of the Kx. Plaintiff brought an action for breach of Kx May 22 nd, ten days before performance by either party was due. In the interim, the plaintiff found employment on the same terms elsewhere, but commencing July 4 th.

135 Hochster v. De La Tour, p.766 What did the defendant argue regarding the plaintiff’s entering into another employment Kx before June 1 st ? Defendant argued that Plaintiff had to remain ready to perform up until June 1 st when defendant was to perform. What did the court hold on that issue? The court held that after defendant’s repudiation, the plaintiff was free to seek an alternative Kx elsewhere. What was the court’s rationale? See first full paragraph, p.767.

136 Hochster v. De La Tour, p.766 What was the other issue before the court? The defendant argued that plaintiff could not bring an action for breach of Kx until June 1 st, when breach actually would have occurred: defendant’s performance was not due until that time. The court held, however, that the plaintiff need not have waited until the time for performance, but could bring his action at any time after repudiation. What was the court’s rationale? Is that rationale sound? See Note 1, p.770.

137 Hochster v. De La Tour, p.766 Sound or not, non sequitur notwithstanding, the holding is universally followed in American courts.

138 Kanavos v. Hancock Bank, p.771 What if, in Hochster v. De La Tour, supra, the plaintiff had fallen ill and could not have travelled with, and acted as courier for, the defendant? What is the rule from Kanavos on the matter? The court in Kanavos states the fundamental rule: to recover damages where defendant will not perform, the burden is on the plaintiff to show it could have performed; otherwise, defendant’s repudiation did not cause plaintiff’s loss.

139 Ch.9 Basic Assumptions: Mistake, Impracticability and Frustration (Herein, No Breach, Excuse) p., 807 Mistake, Impracticability (sometimes treated as a category of Impossibility) and Frustration of Purpose populate the No Breach, Excuse response. All three involve the existence of circumstances, conditions or events that render performance difficult or impossible, or which frustrate the object of the Kx, and which might excuse one party’s non-performance. In the case of Mistake, the circumstances or conditions were extant at the time of Kx formation, but were unknown to the parties. In the cases of Impracticability and Frustration of Purpose, excuse is premised on conditions, circumstances or events that arose after Kx formation.

140 Section 1: Mutual Mistake. P.808 It is necessary to distinguish Mutual Mistake from Unilateral Mistake. The traditional rule regarding Unilateral Mistake is that it does not excuse performance. Many of the cases in the area involve construction contracts and bid errors. Some inroads have been made, with courts allowing avoidance where it would be unconscionable to do otherwise; however, for the most part, courts are reluctant to excuse a party’s performance on the ground of mutual mistake. Of course, where the other party knows of the mistake and that fact can be demonstrated, performance will likely be excused or, alternatively, the party knowing of the mistake estopped from enforcing the Kx. Where the mistake is obvious (e.g., A offers to sell her patently expensive sports car worth $50,000 to B for $500) it is always possible to argue no offer (B not justified in believing an offer was made), and so no Kx.

141 Section 1: Mutual Mistake Mutual Mistake occurs when both parties are mistaken as to the facts existing at the time of Kx formation. To avoid Kx based on mutual mistake, the disadvantaged party must show three elements: (See Re.2 nd §154) 1.The mistake must be of a basic assumption on which the Kx was made (e.g., an essential term of the agreement). Compare “Diamond in the Rough Case” with “Pregnant Cow Case”, p.815.

142 Section 1: Mutual Mistake (To avoid Kx based on mutual mistake, the disadvantaged party must show three elements:) 2.The mistake must be material. Inducement to Kx (“I wouldn’t have entered into the Kx if I’d known the facts”) satisfies the materiality element for Misrepresentation, but not for avoidance based on mutual mistake: more is required. Materiality in that context requires that enforcement would be fundamentally unfair. 3.The mistake must not have involved a risk the party seeking rescission or avoidance assumed, expressly or impliedly. This requirement eliminates most of the cases concerning mistake as to value or quality.

143 Section 1: Mutual Mistake (3. Risk not allocated) The risk that facts at the time of formation might not be known may be allocated Expressly in the Kx (e.g., buyers of a house assume the risk that the plumbing is bad where the Kx for sale provided the house was sold “as is”. The party seeking to disaffirm/ avoid for mutual mistake entered the Kx lacking knowledge of the facts simply took the risk. See, Re.2 nd, §154(b). See, e.g., “Diamond in the Rough Case”, p.815). The risk is allocated by the court to best risk bearer (e.g., seller of land in best position to know oil under surface).

144 Section 1: Mutual Mistake (3. Risk allocated by court) Recall Watkins v. Carrig: Could the excavator have avoided the Kx based on mutual mistake? Apply the three elements.

145 Stees v. Leonard, p.808 What was the mistake in this case as to facts unknown at the time of Kx formation? Were both parties mistaken (i.e., is this a case of mutual mistake? What does the court hold, and what is the rule from the case? See second full paragraph, p.809. – Stees represents a strong statement of the traditional view. Nothing short of literal impossibility will excuse a party from performing. The duties of the parties as expressly provided in the Kx are absolute.

146 Renner v. Kehl, p.811 Kx for the sale of land. Both seller, the Kehls, and the buyer, Renner, were under the mistaken impression that the land would be fit for growing “jojoba”, when, indeed, it was not fit for that purpose as revealed by the test wells dug by the buyers. What is the cause of action brought by Renner?

147 (Renner v. Kehl) What is the cause of action brought by Renner? The action is for rescission premised on mutual mistake. Are the elements necessary to show mistake satisfied on the facts of this case? What is the remedy sought by Renner on successful rescission?

148 (Renner v. Kehl) What damages did the trial court award Renner? – The trial court ordered Kehl to return Renner’s down payment, together with expenses incurred by Renner in developing the property, including the cost of drilling the test wells. The Arizona Court of Appeals upheld the trial courts award. The Arizona Supreme Court remanded on the question of damages. What was the proper measure of damages for a rescinding party? – Absent misrepresentation, the proper measure of damages for rescission is restitution. What was the proper measure of damages available to Renner?

149 (Renner v. Kehl) First, the rescinding party (Renner) was required to return any benefit received under the Kx. What benefit, according to the court, might Renner have received? – Fair market value of the use of the property for the period Renner was in possession (i.e., rental value)

150 (Renner v. Kehl) Next, Renner, the rescinding party, is entitled to receive the value of any benefit conferred on the Kehls. What would that include? – Down payment plus the value of any improvements made to the property which enhanced its value to the Kehls. – What about the cost of drilling the test wells? The trial court awarded damages to Renner for those costs.

151 (Renner v. Kehl) The wells did not enhance the value of the property and so did not constitute a benefit conferred for which Renner was entitled to recover in restitution. What sort of damages, then, would the cost of the wells represent (the trial court referred to those costs as ‘consequential damages’)? – The trial court was mistaken: the cost of digging the test wells was a cost in reliance. Recall Kirksey v. Kirksey: sister in law incurred costs in moving to brother in laws land, but he received no measureable benefit from those expenditures-the were reliance damages. Either way, they were not recoverable by Renner as they did not constitute restitutionary damages.

152 Section 2: Impracticability, p.821 (No Breach, Excuse) Taylor v. Caldwell, p.825 – Taylor contracted to rent Surrey Gardens and Music Hall for four days for a series of concerts and the like. Shortly thereafter, the Hall burned to the ground. Taylor sued for breach of Kx. P&B: Breach by D, Caldwell, did not provide the Hall Response, no breach Excuse-Impossibility

153 Section 2: Impracticability (No Breach, Excuse) The court holds that Caldwell is excused as performance was literally impossible. What was the court’s rationale for concluding that Caldwell was excused from his performance? See first paragraph, p.826. – The court’s rationale appears to rest on the doctrine of implied conditions, the a party’s performance is subject to the condition that performance be possible. A narrower reading might be that the continuing existence of the subject matter of the Kx will continue to exist, such that if does not, a condition of performance has not been met and performance is excused.

154 Section 2: Impracticability (No Breach, Excuse) Though Taylor v. Caldwell is the leading case on the matter of excuse based on impossibility, the rationale upon which it rests-the doctrine of implied conditions- has given way to a more direct form of analysis premised on risk allocation (note that the Taylor court observes the risk the music hall might not be available was not allocated in the Kx by way of express warranty or condition, first paragraph, p.826). The current analysis deployed by courts somewhat resembles that used in deciding whether a party should be excused based on mutual mistake in terms of risk analysis.

155 Analysis: Impossibility 1.Did an unforeseen, supervening event arise? (Recall that mutual mistake is the appropriate doctrine where the is a mistake as to facts that exist at the time of Kx formation.) 2.Did the event render performance impossible? 3.Was the risk of the event allocated by Kx or otherwise? 4.Which party is the better risk-bearer? What result in Taylor v. Caldwell under this analysis?

156 Mineral Park Land Co. v. Howard, p.821 MPL Co. (D) LA County Kx to build bridge MPL Co. (D) Howard (P) Grant right to take gravel for bridge project Promise to take all gravel needed for project from P’s land, 5 cents per yd

157 (Mineral Park Land Co. v. Howard) D took about half the gravel it required for the project from P’s land as agreed; however, to take the remainder of the gravel it needed from P’s land would have required extraordinary means and methods, the cost of which to D would have been ‘prohibitive’. Accordingly, D acquired the remaining gravel for the project elsewhere.

158 (Mineral Park Land Co. v. Howard) Kx Formation Enforcement Performance and Breach – P, Howard, alleges breach by D, MPL Co., did not take and pay for all gravel needed for the project from my land. – Response: No breach, excuse: my non- performance, not taking all the gravel required for the project, is excused because of impossibility (impracticability).

159 (Mineral Park Land Co. v. Howard) Was D’s performance literally impossible? What result under Taylor v. Caldwell? Does the court conclude D was excused owing to impossibility? How did it define that term? See paragraph four, p.823. Does the court go so far as to say performance in impossible/impracticable where it proves to be more expensive than the party seeking to avoid enforcement contemplated? See same paragraph.

160 (Mineral Park Land Co. v. Howard) The analysis for Impracticability is nearly identical with that for Impossibility (literal impossibility ala Taylor v. Caldwell) with a single adjustment: 1.Did an unforeseen, supervening event arise? (Recall that mutual mistake is the appropriate doctrine where the is a mistake as to facts that exist at the time of Kx formation.) 2.Did the event render performance impracticable? 3.Was the risk of the event allocated by Kx or otherwise? 4.Which party is the better risk-bearer?

161 (Mineral Park Land Co. v. Howard) The court essentially says D was excused because performance was more costly: few cases have gone so far as to say mere added expense constitutes impracticability. The court does indicate that D’s cost to perform was significantly higher. Is it also possible that the court regarded Howard as the better risk bearer? Why might that be the case?

162 Transatlantic Financing Corp. v. U.S., p.830 Scope: the court repeatedly refers to UCC § Does the Article 2 apply to this case? If not, why does the court refer to it? – Well developed commentary useful by analogy Elements of Impossibility/Impracticability Response 1.Was the closing of the Canal a supervening contingency/event? Does it matter that the event was, perhaps, forseeable? 2.Was the risk that the Suez route might not be available allocated? What facts suggest it might have been impliedly allocated to TFC, if at all? See first full paragraph, p.835. What does the court conclude on the question of allocation?

163 Transatlantic Financing Corp. v. U.S., p The Kx price of carriage was something over $300,000; the additional expense to TFC in having to sail around the Cape of Good Hope was something over $40,000. Did that render TFC’s performance impracticable? Note that, unlike in the Mineral Park case, where the D raised impracticability as a response to the allegation of breach, the suitor in this case is TFC. That is to say, TFC isn’t defending its non-performance based on excuse: TFC fully performed and now seeks restitution for the value of the benefit conferred on the U.S. The court suggests this was a tactical error on the part of TFC. How so? See last paragraph, p What should TFC have done instead?

164 Transatlantic Financing Corp. v. U.S., p.830 Force Majeure Clauses: parties sometimes expressly provide for excusing there performance in the event of named contingencies, e.g., delay. Such clauses are generically referred to as Force Majeure clauses.

165 Section 3: Frustration of Purpose, p.854 No breach, Excuse, Frustration of Purpose bears a close relationship to the Impossibility/Impracticability response. However, in the case of frustration of purpose, performance of the Kx is possible, but the reason for its making has dissolved. The term sometimes used is ‘failure of consideration’.

166 Krell v. Henry, p.854 The prototypical frustration case. Henry was certainly capable of performing-paying the price of the rental: there was no impediment to performance. On what basis was Defendant excused from performance? – The basis upon which the kx was formed was frustrated, excusing Henry’s performance.

167 Krell v. Henry The modern analysis for the frustration response is, it should come as no surprise, nearly identical with that for Impossibility: 1.Did an unexpected event occur? 2.Did the event frustrate the purpose of the Kx, rendering the consideration to be received valueless? 3.Was the risk of the event allocated by Kx or custom? 4.Who should bear the risk of the event and consequent frustration of purpose?

168 Swiss Canadian Co. v. Banet, p.858 What was the unexpected event which, from the buyer’ (defendant’s) perspective frustrated the Kx? Did, indeed, the event frustrate the purpose of the Kx? See near bottom of paragraph 2, p.860. In any event, was the risk of the “event” allocated in the Kx? Were the shipping instructions relevant in deciding the question?

169 Chapter 7 Remedies for Breach: Section 2. Measuring Expectations, p.606 Once it ha been shown that a Kx has been formed, is enforceable and has been breached, the plaintiff is entitled to a remedy for Br/Kx. The remedies therefore may compensate the plaintiff for lost expectations for the defendant’s non-performance (expectancy, or expectation interest), for costs incurred in relying on the Kx (reliance interest) and for any benefit conferred by the plaintiff on the defendant (restitution interest). The latter, restitution interest, in this context refers to restitution as a remedy for Br/Kx, NOT to restitution as a cause or action (Quasi Kx, Quantum Meruit, etc.).

170 Chapter 7 Remedies for Breach: Section 2. Measuring Expectations, p.606 Generally, the injured party fares best with compensation based on lost expectations, but compensation based on either reliance or restitution may sometimes exceed the recovery based on the plaintiff’s expectation interest.

171 Measuring Expectation Interest Compensatory Damages: Farnsworth’s Formula (A): Loss on the Bargain = Loss in Value + Other losses – Cost Avoided Loss in Value = the difference between what plaintiff expected to get (i.e., was promised) and what plaintiff actually got, if anything (i.e., partial performance by breaching party). Cost Avoided is the savings to the plaintiff from breach.

172 Measuring Expectation Interest (Farnsworth’s Formula (A)) Loss on Bargain Loss in Value What breaching party was to have done What breaching party actually did Cost Avoided Savings to non-breaching party from not having to perform all or part of its obligations because of D’s breach

173 Measuring Expectation Interest (Plus Incidentals) Translating Formula A into Quadrants Expected to get Expected to Give Actually Got (i.e., part performance by breaching party) Actually Gave (i.e., part performance by non-breaching party) Not what Plaintiff expected to give, but what P ended up having to give b/c of D’s breach Incidentals (post breach expenses) PLUS Net of these quadrants = Loss in Value Net of these quadrants Cost Avoided

174 Measuring Expectation Interest (Formula A) Hypo: Kx price for the work is $100K Assume Contractor’s cost to build is $80K (profit is $20K) After spending $50K, Contractor is wrongfully dismissed by Owner Owner paid Contractor nothing to that point Owner Prom to build Contractor Prom to pay $100K

175 Measuring Expectation Interest (Formula A) Hypo: Expected to get $100K Expected to Give $80K Actually Got -0- Actually Gave $50K Owner Loss in Value=$100K Prom to build Contractor Prom to pay $100K Cost Avoided=$30K Loss in Value – Cost Avoided = Loss on Bargain=Expectation Damages $100K-$30K=$70K

176 Measuring Expectation Interest Compensatory Damages: Farnsworth’s Formula (B): Profit + Cost of Reliance = expectation damages/Loss on the Bargain

177 Measuring Expectation Interest (Farnsworth’s Formula (B)) Loss on Bargain Cost NOT avoided (i.e., amount spent in reliance) Kx Price – Kx Cos = Profit (i.e., Expected to get less Expected to Give

178 Measuring Expectation Interest (Formula B) Hypo: Expected to get $100K Expected to Give $80K Actually Got -0- Actually Gave $50K Owner Prom to build Contractor Prom to pay $100K Profit + Cost of Reliance=Expectation Dmgs MINUS = PROFIT Cost of Reliance

179 Lost Profits and Fixed Costs, p.608 Vitex Mfr. Corp. v. Caribtex Corp., p.609 Formula A Expected to get $31,250 Expected to Give $10,136 Actually Got -0- Actually Gave -0- Owner Loss in Value=$31,250 Prom to process wool Vitex Prom to supply wool and pay for processing Cost Avoided=$10,136 Loss in Value – Cost Avoided = Loss on Bargain=Expectation Damages $31,250-$10,136=$21,114

180 Vitex Mfr. Corp. v. Caribtex Corp The issue in the case involves a dispute over what part, if any, overhead should play in calculating damages. What is overhead? – These are the fixed costs of doing business, or the “continuous expenses of running the business irrespective of the outlay on a particular contract”. Examples include, property taxes, salaries, administrative expenses and the like.

181 Vitex Mfr. Corp. v. Caribtex Corp The defendant, Caribtex, asserts that the plaintiff’s overhead should be a factor in determining damages due to the plaintiff. Which component of the damages formula would be effected by the inclusion of overhead? – Caribtex argued that a portion of plaintiff’s overhead should be allocated pro rata to the Kx between them and included as a cost avoided. To do so would, of course, reduce plaintiff’s recovery.

182 Vitex Mfr. Corp. v. Caribtex Corp The court holds that overhead costs are not part of cost avoided. What is the court’s rationale? – Not having to perform the Kx with Caribtex did not reduce plaintiff’s overhead cost: they would be the same with or without the Caribtex Kx. Accordingly, Vitex saved nothing by way of overhead in avoiding performance owing to Caribtex’s breach: overhead was not a cost avoided.

183 Vitex Mfr. Corp. v. Caribtex Corp Doesn’t the court’s characterization of overhead fly in the face of accounting principles (see last paragraph, p.611.) How does the court address that point? See first two paragraphs, p.612.

184 Laredo Hides Co. v. H&H Meat Products Co., p.613 Scope – Subject matter: which law within the state? – This is a Kx for the sale of goods, and is thus governed by UCC Article 2. Kx Formation: Kx for the sale of hides Enforcement-no bars P&B: Breach by seller, H&H, did not deliver hides – What response does H&H initially raise?

185 Laredo Hides Co. v. H&H Meat Products Co H&H’s “No breach, justification”. The response fails: why? See second paragraph, p.614. What, do you suppose, was the real reason H&H didn’t deliver the hides as promised? With no response to the allegation of breach, it remains only to determine the remedy available to Laredo Hides. Note that, when it was unable to obtain the hides it needed elsewhere, LH initially sought specific performance. What, in the end, did LH do when H&H refused to deliver the hides?

186 Laredo Hides Co. v. H&H Meat Products Co LH bought the hides it needed from another seller at a considerably higher cost. As the case is governed by the UCC, the Codes provisions on damages control. What are a buyer’s options under Article 2 on seller’s default? The beginning point is UCC which essentially contains a menu of options for the buyer. What options are available?

187 Laredo Hides Co. v. H&H Meat Products Co Which option did LH choose? LH chose to ‘cover’: see What other options might LH have elected under that provision?

188 Laredo Hides Co. v. H&H Meat Products Co Cover 1.Damages = Cost to cover (i.e., cost of substitute goods) – Kx Price. Note ‘without unreasonable delay” qualification: what purpose does it serve? 2.Authorizes Incidental and Consequential damages Damages for Non-delivery/Repudiation 1.Damages = Market Price – Kx Price + Incidental and Consequential damages.


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