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The Story of Contract Law: Implementing the Bargain

The Story of Contract Law: Implementing the Bargain
1st Edition
Val Ricks
© 2018 CALI eLangdell Press, www.cali.org. Subject to an Attribution-NonCommercial-ShareAlike CC BY-NC-SA
Introduction
The Story of Contract Law: Implementing the Bargain

Val Ricks

Charles Weigel II Research Professor

and Professor of Law

 

South Texas College of Law Houston

 

CALI eLangdell Press 2017

About the Author

Val Ricks has taught Contracts since 1996. His scholarship on contract law appears in the Georgetown LJ, Indiana LJ, BYU LR, George Mason LR, Baylor LR, and U. Kan. LR. He claims the original discovery that Isaac Kirksey actually made a bargain with Antillico. Professor Ricks also teaches, and writes about, business associations and other intersections of law and business. Before teaching, he clerked for Judge Charles Wiggins of the 9th Circuit and practiced transactional and appellate law in Salt Lake City. Professor Ricks received a B.A. summa cum laude in Philosophy and a J.D. summa cum laude, both from BYU. He and his bride are the parents of seven beautiful children.

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Implementing the Bargain

Many judges and scholars of contract law focus their attention on the parties’ assent, on agreement. But the doctrine of contract law itself focuses on the enforcement of a promise, one promise at a time. The central organizing rule for enforcement—the idea that ties the doctrines of contract law together—is that the promise must be part of a fair exchange. In formation doctrine, courts ensure an exchange by requiring consideration (which itself requires assent) but police the fairness of the exchange through the doctrines of mistake, duress, misrepresentation, undue influence, and unconscionability.

Separating contract law into doctrines of formation, interpretation, conditions, subsequently occurring events, remedies, and third-party interests, as I do in this book, distracts to some extent from discussion of the primary goal of contract doctrine, which is to enforce fair exchange. In the cases studied in this volume, courts continue to discern and police the bargain of the parties. Of course, the meaning of “fair” will depend on the goals of the court; contract doctrine, like most legal doctrine, lies at the level of generality (not too general, not too specific) that allows the plurality of views necessary for a legal system comprising diverse and strong-willed individuals to function. Nevertheless, if you are discerning, you should expect and be able to find in these materials arguments for and against fairness based on autonomy, welfare, and other moral claims, just as you did for the doctrines of formation in Volume I.

In the end, I hope you will see, notwithstanding its occasional missteps, what a remarkable achievement contract law is and how it meshes with the culture, and encourages the success, of a mostly honest and very ambitious people whose cooperation together is vital to their flourishing.

—Val Ricks

Chapter One
What Is the Bargain?

Promises and contracts are made up of words. The words’ meaning might be clear or unclear. The words might be written or oral. They might be gathered in one place or scattered among many documents. They might even be placed in a document by mistake. The words might be words of promise, but contracts often also contain conditions, representations, statements of factual background, and other terms. Sometimes courts by law “read into” or imply in contracts terms that the parties were not aware they needed but that are suggested by the parties’ bargain.

In this first section of the casebook, we examine all the ways by which courts determine the content of the bargain. We will examine how a court determines what words in a contract mean (Subsection A), how the court decides which words are included in the contract (Subsection B), what other obligations are implied by the parties’ bargain (Subsection C), what courts do with language of condition (Subsection D), and how courts decide who should perform first if the parties have not said (Subsection E).

1.1. The Meaning of the Words: Interpretation or Construction?

After a contract forms, any attempt to enforce it requires the parties and the court to know what the words of the contract mean. As you might expect, the meaning of contractual words is sometimes not obvious. What is a court to do when the parties have agreed to words the meaning of which is unclear?

1.1.1. The “Plain Meaning” Rule or Not—When to Take Evidence About Meaning

The following case, Tips, illustrates what the law calls the “plain meaning rule.”  This case involves a negotiable instrument, namely, a promissory note. “Negotiable” means the instrument can be signed on the back by the promisee and traded (often at near face value) to someone else, like a check when it is cashed or deposited at a bank. Negotiable instruments are in a standard form that is supposed to be easily tradable, almost like cash. You can perhaps see why we would not want the terms of a negotiable instrument to be endlessly debatable. But this case also involved non-negotiable contracts, namely, a mortgage and a guaranty. These are just ordinary contracts. They cannot be negotiated (though they can be assigned). Should the rule in this case apply to all contracts? Or should we call some witnesses?

CHARLES R. TIPS FAMILY TRUST, HAZEL W. TIPS FAMILY TRUST, AND CHARLES T. WATKINS v. PB COMMERCIAL LLC

Tex. App. (2015), 459 S.W.3d 147

OPINION

MICHAEL MASSENGALE, Justice.

[1] The parties to this appeal entered into a residential loan agreement and guaranty for the principal amount of "ONE MILLION SEVEN THOUSAND AND NO/100 ($1,700,000.00) DOLLARS." The loan documentation thus identified the amount of the loan in two different ways, with one number favoring the borrower—one million seven thousand—written out in words and a larger number favoring the bank—$1,700,000—set out in numerals. The bank alleged a default on the loan, and litigation ensued. The parties filed competing motions for summary judgment, and the trial court rendered a final summary judgment in favor of the bank.

[2] The borrowers and their guarantor appeal, arguing that the written words control the meaning of the document and that the note has been satisfied in full. Applying the well-settled interpretive rule that "words prevail over numbers" in the event of such a discrepancy, we reverse in part, affirm in part, and remand the case to the trial court for further proceedings.

Background

[3] In 2007, the Charles R. Tips Family Trust and the Hazel W. Tips Family Trust executed a "Balloon Real Estate Note" in favor of Patriot Bank. The note was secured by real property in Harris County pursuant to a "Deed of Trust and Security Agreement." The same day, Charles Watkins, a trustee of both trusts, executed a "Guaranty Agreement" in favor of Patriot Bank, obligating himself to personally pay the loan if the trusts defaulted on their payment obligations. The note, the security agreement, and the guaranty agreement all described the principal amount of the loan as follows:

ONE MILLION SEVEN THOUSAND AND NO/100 ($1,700,000.00) DOLLARS

This language appears five times in the three documents, in exactly the same form each time, and no other language in the documents describes the amount of the loan.

[4] Before the note matured, the trusts made payments totaling $595,586. Neither the trusts nor Watkins made any further payments, and Patriot Bank initiated this action to collect the balance due on the note as well as unpaid interest. PB Commercial, LLC ("PBC") subsequently acquired the note and sold the property securing it at auction for $874,125. PBC was then substituted as plaintiff.

[5] PBC filed a motion for traditional summary judgment, seeking recovery on both the note and the guaranty agreement. PBC argued that the original principal amount of the loan was $1,700,000, and on that basis it calculated a deficiency under the note and guaranty agreement of $815,214.50 after application of all payments and the proceeds from the foreclosure sale. PBC attached the note, security agreement, and guaranty agreement to its motion, but it made no mention of the conflict between the printed words and numerals. It also attached a payment history showing how Patriot Bank applied payments against the loan, treating the principal amount as $1,700,000.

[6] The trusts and Watkins responded by amending their answer, filing a counterclaim, responding to PBC's motion for summary judgment, and filing a cross-motion for summary judgment. In these filings, the trusts and Watkins argued that the original principal amount of the loan under the note and guaranty agreement was $1,007,000. They argued that both documents are negotiable instruments governed by Section 3.114 of the Texas Business and Commerce Code, which provides: "If an instrument contains contradictory terms, typewritten terms prevail over printed terms, handwritten terms prevail over both, and words prevail over numbers." TEX. BUS. & COM. CODE § 3.114. According to the trusts and Watkins, applying past payments and the foreclosure sale proceeds to the lower amount leads to the conclusion that the note was fully satisfied after the foreclosure sale and, in fact, PBC has collected a surplus of $189,111 beyond the amount to which it was entitled.

[7] The amended answer included a counterclaim, which sought a declaration that:

(a) the . . . Note . . . was for the original principal amount of $1,007,000; and not $1,700,000;

(b) the Note has been fully paid and satisfied as a result of the payments made thereon prior to the Trusts' alleged default, and the amount collected by Plaintiff through the post-default foreclosure upon and sale of the real property pledged as security under the Note;

(c) Watkins is relieved of any further obligation under the Guaranty; and

(d) [PBC] is retaining and holding money obtained through the foreclosure sale that is in excess of the amount necessary to fully pay and satisfy the amounts due under the Note.

The counterclaim also sought unspecified statutory damages under the Business and Commerce Code and an award of attorney's fees. Notably, however, the cross-motion for summary judgment requested only that the trial court deny PBC's motion and award the trusts the alleged surplus resulting from the foreclosure sale. The cross-motion did not mention the claims for attorney's fees or statutory damages, nor did it provide any legal basis or evidentiary support for those claims.

[8] After a pair of hearings, the trial court granted PBC's motion and denied the cross-motion filed by the trusts and Watkins. The trial court's final judgment awarded PBC damages in the amount of $815,214.50, prejudgment and postjudgment interest, court costs, and trial and appellate attorney's fees. The trusts and Watkins appeal.

Analysis

[9] This appeal presents one issue: whether the amount of the loan must be determined from the printed words in the note or from the entire context of the transaction, including evidence of the amount of money that Patriot Bank actually made available to the borrowers. Once we have determined the amount of the loan, the trusts and Watkins ask us to reverse the trial court's judgment as to PBC's claims and render judgment in their favor or remand for further proceedings.

[10] This court reviews an order granting or denying a motion for summary judgment de novo. Tex. Mun. Power Agency v. Pub. Util. Comm'n of Tex., 253 S.W.3d 184, 192 (Tex. 2007). When both parties moved for summary judgment and the trial court granted one and denied the other, we "review the summary judgment evidence presented by each party, determine all questions presented, and render judgment as the trial court should have rendered." Id. We may affirm the judgment that the trial court rendered or reverse and render the judgment that the trial court should have rendered. See FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000).

[11] The trusts and Watkins characterize the "Balloon Real Estate Note" as a promissory note1 and as a negotiable instrument,2 and PBC does not dispute this characterization. To recover on a promissory note on which the borrower has defaulted, PBC was required to prove that (1) the note existed, (2) the maker or makers of the note signed it, (3) it was the legal owner and holder of the note, and (4) a certain balance was due and owing on the note. See, e.g., Wells Fargo Bank, N.A. v. Ballestas, 355 S.W.3d 187, 191 (Tex. App.-Houston [1st Dist.] 2011, no pet.); Clark v. Dedina, 658 S.W.2d 293, 295 (Tex. App.-Houston [1st Dist.] 1983, writ dism'd).

[12] To recover on the guaranty agreement, PBC was required to prove "the existence and ownership of the guaranty contract, the terms of the underlying contract by the holder, the occurrence of the conditions upon which liability is based, and the failure or refusal to perform by the guarantor." McShaffry v. Amegy Bank Nat'l Ass'n, 332 S.W.3d 493, 496 (Tex. App.—Houston [1st Dist.] 2009, no pet.); see also Wasserberg v. Flooring Servs. of Tex., LLC, 376 S.W.3d 202, 205 (Tex. App.—Houston [14th Dist.] 2012, no pet.).

[13] To recover the amount remaining due under the note and guaranty agreement after the foreclosure sale, PBC was required to prove "(1) the amount due on the note at the time of foreclosure, (2) that proper notice of acceleration had been given, (3) that a valid foreclosure sale was made and (4) that [PBC] has given credit to the [debtors] for the amount received at the trustee's sale and any other legitimate credits." Carruth Mortg. Corp. v. Ford, 630 S.W.2d 897, 899 (Tex. App.—Houston [1st Dist.] 1982, no writ); see also Collins v. Bayview Loan Servicing, LLC, 416 S.W.3d 682, 686 (Tex. App.—Houston [14th Dist.] 2013, no pet.). When a party holding a security interest recovers more than the amount of the obligation, it must pay out any amounts due to certain third parties, then account for and pay to the debtor the remaining surplus. TEX. BUS. & COM. CODE § 9.615(d)(1); see also id. § 9.615(a), (c).

[14] If a written instrument is worded in such a way that it can be given a definite or certain legal meaning, then the contract may be construed as a matter of law. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). "An unambiguous contract will be enforced as written, and parol evidence will not be received for the purpose of creating an ambiguity or to give the contract a meaning different from that which its language imports." David J. Sacks, P.C. v. Haden, 266 S.W.3d 447, 450 (Tex. 2008); see also Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995) (per curiam).

[15] Whether a contract is ambiguous is a question of law, which we review de novo. Coker, 650 S.W.2d at 394. When a contract contains an ambiguity, summary judgment is precluded because interpretation of the contract becomes a fact issue. Id. (citing Harris v. Rowe, 593 S.W.2d 303, 306 (Tex. 1979)).

[16] A simple lack of clarity or disagreement between parties does not render a term ambiguous. See DeWitt Cnty. Elec. Coop., Inc. v. Parks, 1 S.W.3d 96, 100 (Tex. 1999). Rather, "[a]n ambiguity arises only after the application of established rules of construction leaves an agreement susceptible to more than one meaning." Id. "[F]or an ambiguity to exist, both potential meanings must be reasonable." Id. "Whether a contract is ambiguous is a question of law for the court to decide by looking at the contract as a whole in light of the circumstances present when the contract was entered." Coker, 650 S.W.2d at 394. If the contract is ambiguous as a matter of law, only then is parol evidence of the parties' interpretation of the contract admissible. Pitts & Collard, L.L.P. v. Schechter, 369 S.W.3d 301, 313 (Tex. App.—Houston [1st Dist.] 2011, no pet.).

[17] Texas law anticipates internal contradictions in both negotiable and non-negotiable instruments and provides for the resolution of such contradictions. Under the Uniform Commercial Code, which governs negotiable instruments such as the Note, "[i]f an instrument contains contradictory terms, typewritten terms prevail over printed terms, handwritten terms prevail over both, and words prevail over numbers." TEX. BUS. & COM. CODE § 3.114; see also McNeese v. State, 596 S.W.2d 906, 907 (Tex. Crim. App. [Panel Op.] 1980); Taylor v. State, 672 S.W.2d 262, 264 (Tex. App.—Waco 1984, no writ). "It is well settled that unambiguous written words prevail over arithmetic numbers in promissory notes." First State Bank v. Keilman, 851 S.W.2d 914, 920 (Tex. App.—Austin 1993, writ denied); see also Duvall v. Clark, 158 S.W.2d 565, 567 (Tex. Civ. App.—Waco 1941, writ ref'd w.o.m.) ("It is elementary that the written words of an instrument control and prevail over figures."). This rule derives from the principle that "writing words more likely represents the parties' true intentions than writing numbers." 6B LARY LAWRENCE, ANDERSON ON THE UNIFORM COMMERCIAL CODE § 3-114:5R (3d ed. rev'd 2003); see also 6 WILLIAM D. HAWKLAND & LARY LAWRENCE, HAWKLAND & LAWRENCE UCC SERIES § 3.114:1 (1999) ("Words are preferred because writing words more likely effects the parties' true intentions than writing numbers."); France v. Ford Motor Credit Co., 913 S.W.2d 770, 772 (Ark. 1996) (noting application of identical statute when individual wrote both "8,000.00" and "Eight dollars and 00/100" on check to creditor, resulting in payment of eight dollars). The same interpretive rule applies to non-negotiable instruments. See Guthrie v. Nat'l Homes Corp., 394 S.W.2d 494, 495 (Tex. 1965).

I. Interpretation of contractual language

A. Unambiguity of loan amount

[18] We first must examine whether the loan agreements are ambiguous. If so, then summary judgment was improper for that reason. Coker, 650 S.W.2d at 394; Harris, 593 S.W.2d at 306; Simpson v. GEICO Gen. Ins. Co., 907 S.W.2d 942, 945 (Tex. App.—Houston [1st Dist.] 1995, no writ).

[19] The Note, Security Agreement, and Guaranty Agreement each describe the original amount of the loan obligation as "ONE MILLION SEVEN THOUSAND AND NO/100 ($1,700,000.00) DOLLARS." The phrase "one million seven thousand and no/100 dollars" has a plain, unambiguous meaning, namely the sum of $1,007,000.00. Thus, the words and the numerals in the loan agreements are in conflict, differing by $693,000. This impact is magnified by the fact that the actual amount of the loan affects the application of payments, resulting in different sums of interest due in each scenario.

[20] In Guthrie v. National Homes Corp., 394 S.W.2d 494 (Tex. 1965), the Supreme Court of Texas considered a similar case, in which the instrument in question stated that the obligor would pay "$5,780.00," which was written out as "Five Thousand Eighty and 00/100 Dollars." Guthrie, 394 S.W.2d at 495. The Court held that the words "Five Thousand Eighty and 00/100 Dollars" were unambiguous and controlled the numerals. Id. at 495-96. A jury had returned a verdict that, because $5,000 had been paid on the note, the obligor still owed $780. Id. at 494. In light of the unambiguous written words of the instrument, however, there was no fact issue regarding the original amount of the loan for the jury to consider, and the Court reduced the award to $80 to match the words of the instrument. Id. at 496. The Court recognized that the rule favoring words over numerals already applied to negotiable instruments such as promissory notes and held that the same rule applies to non-negotiable instruments. Id. at 495-96.

[21] Similarly, in First State Bank v. Keilman, 851 S.W.2d 914 (Tex. App.—Austin 1993, writ denied), the parties' agreement stated that interest would be paid at the "prime rate . . . plus Two percent (12.5%)," but "12.5%" was crossed out and the number "2%" written in. First State Bank, 851 S.W.2d at 920. The court of appeals explained that "[i]t is well settled that unambiguous written words prevail over arithmetic numbers in promissory notes." Id. Thus, even though handwritten or typed text ordinarily prevails over printed terms in an instrument, the alteration had no effect, as the written words would still control over the interpretation of the arithmetic numbers "12.5%" and "2%." Id.; see also Duvall, 158 S.W.2d at 567 (handwritten change from "$900.00" to "$930.00" was immaterial because written words setting payment at six percent of $15,000 controlled and were not altered).

[22] Under the UCC and Guthrie, the rule that the written words control over numerals applies to all of the documents at issue in this dispute, both negotiable and non-negotiable instruments. TEX. BUS. & COM. CODE § 3.114; Guthrie, 394 S.W.2d at 495-96. It does not matter that the discrepancy between the words and numbers here is a large one. Neither Section 3.114 nor Texas case law makes a distinction on the basis of the size of the obligation or the significance of the conflict in terms. Indeed, at least one court has applied the logic of Guthrie in holding that words controlled over numbers when a discrepancy was even larger relative to the transaction size than it is here. In In re Regency Chevrolet, Inc., 122 B.R. 60 (Bankr. S.D. Tex. 1990) (mem. op.), the bankruptcy court for the Southern District of Texas held that the terms "Seventeen Thousand Five Hundred Dollars ($10,000.00)" and "Seventeen Thousand Five Hundred Dollars ($14,000.00)" in two different leases created two monthly obligations of $17,500.00 each. 122 B.R. at 61-62 (citing Guthrie, 394 S.W.2d at 494).

[23] PBC argues that this case presents a unique circumstance in that the omission of a single word transforms "one million seven hundred thousand" into "one million seven thousand." If the former phrase were modified in any other way, according to PBC, we would be faced with either an ambiguous term or an unambiguous but absurd one. For example, PBC posits a scenario in which a scrivener's error rendered the phrase as "one seven hundred thousand," omitting the word "million." According to PBC, such an amount would be ambiguous, and the court would have to refer to the numerals and extrinsic evidence to resolve the ambiguity. But this hypothetical scenario has no bearing on this case because there is no ambiguity in the text here. Indeed, in the scenario described by PBC, one could not even say that the terms contradict each other within the meaning of Section 3.114, as the meaning of one of the potentially conflicting terms would be ambiguous.

[24] Alternatively, PBC suggests a scenario in which another scrivener's error replaced "million" with "billion," resulting in "one billion seven hundred thousand." This, PBC says, would result in the borrowers clamoring for relief and asking this court to consider evidence extrinsic to the contract. That may be, and the possibility of such an error demands careful review of proposed written agreements. But that is no basis upon which we may disregard well-settled and binding statutory and case law. We need not and do not express any opinion on what legal or equitable remedies the parties might have in such a hypothetical scenario. On the appellate record before us, the only issue is what the terms of the written agreements mean as a matter of law. Neither party sought an equitable reformation of the loan in the trial court, so no issue of equitable relief has been presented in this appeal. The scenario proposed by PBC thus has no bearing on how we must apply the law to the record before us.

[25] Here, the words "one million seven thousand" control over the numerals "$1,700,000" to set the amount of the promissory note and guaranty obligations.

B. Irrelevance of extrinsic evidence

[26] PBC also argues that the trial court properly considered evidence before it that the borrowers received $1,700,000 from Patriot Bank. But a court may not consider extrinsic evidence about a contract's meaning unless the contract is ambiguous. PBC does not contend that the documents are ambiguous; any material ambiguity in the contracts would have made summary judgment for PBC improper for that reason alone. Coker, 650 S.W.2d at 394; Harris, 593 S.W.2d at 306; Simpson, 907 S.W.2d at 945.

[27] A document is ambiguous only if it is susceptible to more than one reasonable interpretation after application of all relevant rules of construction. DeWitt Cnty. Elec. Coop., 1 S.W.3d at 100. Only one interpretation of the language in question is possible in light of controlling law.

[28] The agreements unambiguously set the amounts of the promissory note and guaranty obligations at $1,007,000.00 each. Because the amount of principal set forth in the Note and Guaranty Agreement is not ambiguous, for purposes of interpreting the documents as a matter of law, neither the trial court nor this court may consider extrinsic evidence such as the amount of money that actually changed hands amongst the parties, and such evidence could not have supported the trial court's judgment. Pitts & Collard, 369 S.W.3d at 313. * * * *

[29] To recover on the Note, PBC was required to prove that a certain balance was due and owing on the Note. Clark, 658 S.W.2d at 295. It has failed to do so and did not even address the correct amount of the loan in its motion for summary judgment. Further, to recover on the alleged deficiency, PBC was required to prove "the amount due on the note at the time of foreclosure." Carruth Mortg. Corp., 630 S.W.2d at 899. This it has also failed to do. Instead, PBC's position depends on extrinsic evidence that the amount due should be calculated based on an amount other than the amount fixed by the Note. Because the trial court could not have considered such evidence, we hold that PBC was not entitled to summary judgment on its claims for damages, interest, costs, or attorney's fees stemming from the trusts' default under the Note.

[30] To recover on the Guaranty Agreement, PBC was required to prove "the terms of the underlying contract by the holder." McShaffry, 332 S.W.3d at 496. Again, because PBC's claims depended on a misinterpretation of the unambiguous language of the Note, PBC has failed to demonstrate that it was entitled to summary judgment against Watkins under the Guaranty Agreement.

[31] Because PBC did not establish each of the elements of any of its causes of action, it was not entitled to summary judgment. We will therefore reverse the trial court's judgment insofar as it granted judgment in favor of PBC on its affirmative claims.

B. Motion for summary judgment filed by the trusts and Watkins

[32] Our inquiry does not stop here, however, as the trusts and Watkins argue that their motion for summary judgment was wrongly denied. When the parties file competing motions for summary judgment, on appeal we "review both sides' summary judgment evidence," "determine all questions presented," and "render the judgment that the trial court should have rendered." FM Props., 22 S.W.3d at 872. We must therefore determine whether the trusts and Watkins were entitled to summary judgment.

[33] In their motion, the trusts and Watkins argued that the amount of the Note was $1,007,000, resulting in the Note having been completely satisfied by the time that the lawsuit was filed. They argue that they made payments of $595,586, which, applied to the principal of $1,007,000, should have resulted in application of $273,600 to interest and $321,986 to principal. The foreclosure sale yielded an additional $874,125. Adding these numbers together yields total payments of $1,196,111. Based on a loan amount of $1,007,000, the trusts and Watkins conclude that PBC has recovered more than was due and that it now owes them $189,111.

[34] The trusts and Watkins do not provide any explanation or evidentiary support for their calculations, either in their motion or in their briefs to this court. In fact, their motion did not attach any evidence whatsoever. Neither the evidence in the record nor the parties' briefs provides any guidance for how the calculations are to be performed given the correct loan amount. Rather, the record contains only evidence of how the bank applied interest against the incorrect amount; when using the correct amount, only the results of the parties' respective calculations are given.

[35] The record before us does not establish the amount of any surplus or that such a surplus exists. We have already held that the original amount of the loan as specified in the Note, Security Agreement, and Guaranty Agreement was $1,007,000, not $1,700,000, and we thus hold that the trusts and Watkins have established that they were entitled to summary judgment on their first request for declaratory relief, namely a legal declaration that "the . . . Note . . . was for the original principal amount of $1,007,000; and not $1,700,000." The trial court erred in denying this relief on the basis of the pleadings and record before it. Because the record provides no definitive basis for calculating the amount due at the time of the foreclosure sale or at the date of the trial court's judgment, however, the trial court did not err in denying the other declaratory relief requested. We note that even if the trusts and Watkins had entirely prevailed on their summary judgment motion in the trial court, the rules of civil procedure would have permitted PBC an opportunity to assert the equitable claims that it referenced for the first time in its appellate briefing. See TEX. R. CIV. P. 63. Accordingly, we will remand the case to the trial court for further proceedings consistent with this opinion.

Conclusion

[36] The amount due under the Note, Security Agreement, and Guaranty Agreement was determined by the written words therein, not the numerals. The judgment of the trial court regarding PBC's claims for affirmative relief is therefore reversed. We also reverse the judgment to the extent that it denied summary judgment to the trusts and Watkins on their first claim for declaratory relief. Further, because the trusts and Watkins were entitled to judgment on that claim, we render judgment that the principal amount of the loan as specified in the Note was $1,007,000.00.

We remand the case to the trial court for further proceedings consistent with this opinion.

Questions:

1. What sorts of policy concerns could possibly justify this holding? Doesn’t the court care what actually happened? Is this case’s result consistent with the parties’ intentions at the time of contract formation? Either party’s intentions?

2. The rule the court follows appears in UCC Article 3 and by its terms applies only to negotiable instruments. An instrument is negotiable when it (1) is “an unconditional promise or order to pay a fixed amount of money,” (2) “is payable to bearer or order” when issued or when it comes into possession of a subsequent holder, (3) “is payable on demand or at a definite time,” and (4) does not contain any other promises or instruction that the person paying the money must do. UCC § 3-104. A common bank check is a negotiable instrument. Finance notes, such as for cars, or equipment, are often also negotiable. Why is the rule the court follows particularly appropriate for a negotiable instrument?

3. The court calls the other contracts at issue in this case “non-negotiable instruments.” E.g., 17. The UCC actually defines “instrument”: “’Instrument’ means a negotiable instrument.” UCC § 3-104. The Texas code includes this definition. Does that undercut Tips?

4. The “instrument” at issue in the Guthrie case was a non-negotiable note. Same thing in Keilman and Duvall. Should that distinguish them from this case? Why is a guaranty not a negotiable instrument? How is a guaranty different than a note?

5. The word parol is an older “Law French” term meaning words or speech. J.H. Baker, Manual of Law French 165 (1990). Its meaning has expanded to include something like “anything that is not written in the document at issue.” This might be spoken words but it also might be writing in other documents not formally connected to the contract or other actions of the parties. A letter written between the parties during negotiations, for instance, would be “parol” as the word is often used.

6. What should be your advice to drafters after reading this case?

7. Is the creditor out of luck, here? Should it have asked for another form of relief?

Caution!— The Parol Evidence Rule. Most of the cases in this section mention a rule of contract law called the “parol evidence rule.” This is a different rule than the plain meaning rule, though some courts and commentators confusingly use the “parol evidence rule” label for both the parol evidence rule and the plain meaning rule. The two rules have very different functions within the law. Be careful not to confuse them.

The parol evidence rule applies when the parties have chosen to put their contract in a writing. Putting a contract in writing is a significant act, and the parol evidence rule takes account of that significance. The rule attaches great importance to this document. The basic terms of the parol evidence rule are simply stated:

If the parties have agreed that a written document will be the final expression of their agreement, then the document cannot be contradicted by evidence of (or from) any prior or contemporaneous promise or agreement.

If the parties have agreed that the document is complete, then it cannot be supplemented by any prior or contemporaneous promise or agreement.

Though the “parol” evidence rule employs the word “parol,” consistently with the expanded meaning of that word the “parol evidence rule” applies to any (and all) prior or contemporaneous promise or agreement, including other written ones, that contradict or supplement the specified written contract. In this usage, the document designated by the parties controls, and everything else is just “words.” The the parol evidence rule polices the content of a contract by saying which words are included in it. The parol evidence rule is not about the meaning of those words; that is determined by the plain meaning rule and the other rules you learn in this section. The parol evidence rule is about what words are included in the contract at all, and the parol evidence rule applies any time the parties have put their agreement in writing.

The parol evidence rule is harder to apply than to state, for various reasons we will talk about in Part I.B, which covers the rule. However, you should know that courts often refer explicitly or implicitly to the parol evidence rule when they discuss the plain meaning rule, the one that governed the Tips case. Courts also use language that sometimes makes you think they may be referring to both rules (Tips 14, for instance); you will have to determine from context which one they are applying (in Tips, I think it’s plain meaning).

Many of the policy concerns that animate the plain meaning rule also support the parol evidence rule. Sometimes the courts even mix the two rules together. In fact, judicial statements about the parol evidence rule are famously confusing. Let the language above describing the parol evidence rule be your guide, put yourself in information-gathering mode only on the parol evidence rule for now, and we will try to sort it out when we get to it. For now, remember this: The parol evidence rule does not address the meaning of words; it is not about ambiguity and what language means. The parol evidence rule is irrelevant to those issues.

Aside—Canons of Construction and Plain Meaning

Some rules of interpretation seem to be pretty universal. For example, rules written down by Rabbi Yishmael around 200 C.E. for interpreting Jewish Law indicate that “a matter is elucidated from its context.” As an example, one of the Ten Commandments is “thou shalt not steal.” This is considered a capital offense in Jewish Law because it falls between two other capital offenses—“thou shalt not kill” and “thou shalt not commit adultery.”  Because only one kind of theft in Jewish law could be a capital offense—kidnapping a fellow Jew and treating him as a slave—Jewish legal scholars conclude that “thou shalt not steal” in the Ten Commandments refers only to kidnapping.3 Which of the following maxims of contract interpretation is most like “a matter is elucidated from its context”?

Expressio unius exclusio alterius est: The expression of one is the exclusion of the other. In Ulmer v. Harsco Corp., the court considered whether severance payments had to be paid to employees who were terminated as part of the sale of the business. The employer’s “Severance Pay Policy” or “Plan” stated when severance would be paid and specified exceptions. The Court reasoned:

In sum, while the language of the Plan is general, it is not ambiguous on its face. It clearly states that "where employment is terminated"—the language Harsco used to describe its action in its letter to employees—severance would be paid. Jt. App. at 449. Since the Plan gives several exemptions to this rule—"death, disability, retirement and military leave," Jt. App. at 450—one may assume under the principle of expressio unius exclusio alterius that other exemptions such as going concern sales were not intended.

Ulmer v. Harsco Corp., 884 F.2d 98, 103-04 (3d Cir. 1989). For this and other reasons, the court reversed summary judgment in favor of the employer.

Noscitur a sociis: It is known from its associates. Under the doctrine of noscitur a sociis, "the meaning of a word or phrase may be ascertained by reference to the meaning of other words and phrases with which it is associated.” Wolfe v. Forbes, 217 S.E.2d 899, 900 (W. Va. 1975).

United States Supreme Court Justice Antonin Scalia discussed the meaning of this rule by illustration: "If you tell me, 'I took the boat out on the bay,' I understand 'bay' to mean one thing; if you tell me, 'I put the saddle on the bay,' I understand it to mean something else." A Matter of Interpretation, (Princeton, New Jersey: Princeton University Press, 1997), p 26.

G.C. Timmis & Co. v. Guardian Alarm Co., 2003 WL 21399027 (Mich., June 18, 2003) (Young, J. dissenting).

Ejusdem generis: In applying this maxim, meaning is given to a general term in the following manner:

[T]he general term is restricted to include only things of the same kind, class, character, or nature as those specifically enumerated"; that is, because the listed items have a commonality, the general term is taken as sharing it.

In A Matter of Interpretation (Princeton, New Jersey: Princeton University Press, 1997), p. 26, United States Supreme Court Justice Antonin Scalia explains that the ejusdem generis canon of statutory construction stands for the proposition that when a text lists a series of items, a general term included in the list should be understood to be limited to items of the same sort. For instance, if someone speaks of using "tacks, staples, screws, nails, rivets, and other things," the general term "other things" surely refers to other fasteners.

Weakland v. Toledo Engineering Co., Inc., 656 N.W.2d 175, 178 & n.1 (Mich. 2003).

Under the doctrine of ejusdem generis, when a statutory clause specifically describes several classes of things and then includes "other things," the word "other" is interpreted as meaning "other such like." People v. Davis, 199 Ill.2d 130, 138, 262 Ill. Dec. 721, 766 N.E.2d 641, 645 (2002).

Applying the doctrine of ejusdem generis and strictly construing the container exemption, we determine a vehicle's glove compartment is not an "other container" under the container exemption. A glove compartment is fundamentally different from a case, firearm carrying box, or shipping box because those receptacles are portable whereas a glove compartment is a fixed area in the dashboard of a vehicle. Therefore, a glove compartment is not an "other container" similar to the ones enumerated in the container exemption.

People v. Cameron, 784 N.E.2d 438 (Ill. App. 4 Dist., 2003). Ejusdem generis is a subcategory of noscitur a sociis.

Omnia praesumuntur contra proferentem: Ambiguous terms must be construed against the drafter of the contract.

Because the contract as a whole can be reasonably interpreted to support either Mead's or ABB Power's position regarding the scope of the indemnity clause, we conclude that the contract is ambiguous as to this issue. Under Ohio law, "[a]mbiguous contractual language will be construed against the drafter of the contract." Lelux v. Chernick, 119 Ohio App.3d 6, 694 N.E.2d 471, 473 (1997) (citing Cent. Realty Co. v. Clutter, 62 Ohio St.2d 411, 406 N.E.2d 515, 517 (1980)). Because Mead drafted the contract, the ambiguity should be resolved in favor of ABB Power.

Mead Corp. v. ABB Power Generation, Inc., 319 F.3d 790, 798-99 (6th Cir. 2003).

Ut magis valeat quam pereat: “It is a fundamental rule that a contract must, if possible, be so construed as to effectuate the intention of the parties and to sustain the contract, ut res magis valeat quam pereat.” Baker v. Baker, 139 Ill. App. 217 (Ill. App. 1 Dist. 1908). “First, it is fundamental that an interpretation of a contract which results in termination of the contract is disfavored over one which affirms the existence of the contract.” Simeone v. First Bank Nat. Ass'n, 971 F.2d 103, 107 (8th Cir. 1992).

An operative intention is presumed:

We follow the established general rules that provisions of a contract must be so construed as to effectuate its spirit and purpose, that it must be considered as a whole and interpreted so as to harmonize and give meaning to all of its provisions, and that an interpretation which gives a reasonable meaning to all parts will be preferred to one which leaves a portion of it useless, inexplicable, inoperative, void, insignificant, meaningless, superfluous . . . .”

State of Ariz. v. U. S., 575 F.2d 855, 863 (Ct.Cl. 1978). This rule is an application of or at least is related to ut magis valeat quam pereat.

Specific terms control over conflicting general terms:

We have held that a contract will be construed most strongly against the party who drafted it. Security State Bank of Basin v. Newton, Wyo., 707 P.2d 173 (1985). We also have held that general terms and provisions in a contract yield to specific ones, if not reconcilable. Flora Construction Company v. Bridger Valley Electric Association, Inc., Wyo., 355 P.2d 884 (1960). Applying these rules, we find that the specific typewritten description of the collateral which the parties inserted into the printed form controls over the general description contained in the standard printed form.

Landen v. Production Credit Ass'n of Midlands, 737 P.2d 1325, 1328 (Wyo. 1987).

When construing a contract on a printed form and there is an apparent conflict, writing prevails over printing, handwriting over typewriting, and typewriting over printing.” In re Greives, 81 B.R. 912, 953 (Bkrtcy., N.D. Ind. 1987). Why do you suppose this is?

In contracts affecting the public interest, an interpretation favoring the public interest is preferred:

The court is mindful that "contracts affecting the public's interest generally are liberally interpreted to favor the public." Simon v. Farmland Indus., Inc., 505 F. Supp. 59, 61 (D.Kan.1980) (citing United States v. Kan. Gas and Elec. Co., 215 F. Supp. 532, 542 (D.Kan.1963)). Here, the Agreement clearly affects the public interest.

The public, as consumers of cable television services, has an interest in paying reasonable rates for those services. Thus, the public interest is served when consumers are given choices about whom they can select to provide their cable service. Moreover, the public has an interest in avoiding the potential disruption of having their home wiring removed upon the voluntary termination of the incumbent provider's service and then, subsequently, having the new provider install its home run wiring. The FCC Report makes clear that these are stated purposes of the Telecommunications Act of 1996, the act under which the FCC Home Run Wiring Rules were promulgated. See e.g., FCC Report 36 ("[The Telecommunication Acts] was [sic] intended to promote consumer choice and competition by permitting subscribers to avoid the disruption of having their home wiring removed upon voluntary termination and to subsequently utilize that wiring for an alternative service[.]"). Accordingly, because the Agreement at issue affects the public interest, the court will, where appropriate, liberally construe the Agreement to favor the public.

Time Warner Entertainment Co., L.P. v. Atriums Partners, L.P., 232 F. Supp.2d 1257, 1265-66 (D.Kan. 2002).

Grammar and punctuation rules normally apply:

Absent the presentation of other evidence, the trial court resolves ambiguity by interpreting the contract using accepted canons of construction and traditional rules of grammar and punctuation.

Monette v. Tinsley, 975 P.2d 361 13 (N.M. App. 1999).

PROBLEM 1: Jill agreed to assign and sell to Sam her ten-agent insurance office and business. The two obtained Jill’s landlord’s permission to transfer her lease. Sam’s lawyer drew up an agreement for the sale, which both signed. The agreement stated in the recitals that its purpose was “to allow Sam to continue on in the business just as Jill had done.” Handwritten above this recital and inserted after it were the words, “and to allow Jill to retire and reap the rewards of years of service in the insurance industry.” A clause in the contract (immediately following a description of the leased premises) included in the sale and assignment

all computer hardware and software, files and databases, copy machines, cash registers, telephone system, and other personal property.

A separate provision of the agreement provided for transfer of software licenses. After Jill and Sam signed the sale agreement, relations soured. On the day set for the closing of the sale and the transfer of the premises, Sam arrived at the office to find that Jill had taken all of the furniture, including numerous file cabinets and their contents. Sam sued for an injunction ordering return of the files and furniture (or, for the furniture, in the alternative, damages). Sam argued that the files contained current customer records necessary for the business to continue. Jill countered that she needed the files’ contents in order to collect ongoing commissions on policy renewals, and that the files were not part of their deal.

What effect do the maxims have on this dispute?

________________

The next case, PG&E, expresses a theory hostile to the plain meaning rule. Would this case have come out the same way under the plain meaning rule?

PACIFIC GAS AND ELECTRIC COMPANY v. G. W. THOMAS DRAYAGE & RIGGING COMPANY, INC.

California Supreme Court (1968), 69 Cal. Rptr. 561, 69 Cal.2d 13

OPINION

TRAYNOR, C. J.

[1] Defendant appeals from a judgment for plaintiff in an action for damages for injury to property under an indemnity clause of a contract.

[2] In 1960 defendant entered into a contract with plaintiff to furnish the labor and equipment necessary to remove and replace the upper metal cover of plaintiff's steam turbine. Defendant agreed to perform the work "at [its] own risk and expense" and to "indemnify" plaintiff "against all loss, damage, expense and liability resulting from . . . injury to property, arising out of or in any way connected with the performance of this contract." Defendant also agreed to procure not less than $50,000 insurance to cover liability for injury to property. Plaintiff was to be an additional named insured, but the policy was to contain a cross-liability clause extending the coverage to plaintiff's property.

[3] During the work the cover fell and injured the exposed rotor of the turbine. Plaintiff brought this action to recover $25,144.51, the amount it subsequently spent on repairs. During the trial it dismissed a count based on negligence and thereafter secured judgment on the theory that the indemnity provision covered injury to all property regardless of ownership.

[4] Defendant offered to prove by admissions of plaintiff's agents, by defendant's conduct under similar contracts entered into with plaintiff, and by other proof that in the indemnity clause the parties meant to cover injury to property of third parties only and not to plaintiff's property.4 Although the trial court observed that the language used was "the classic language for a third party indemnity provision" and that "one could very easily conclude that . . . its whole intendment is to indemnify third parties," it nevertheless held that the "plain language" of the agreement also required defendant to indemnify plaintiff for injuries to plaintiff's property. Having determined that the contract had a plain meaning, the court refused to admit any extrinsic evidence that would contradict its interpretation.

[5] When the court interprets a contract on this basis, it determines the meaning of the instrument in accordance with the ". . . extrinsic evidence of the judge's own linguistic education and experience." (3 Corbin on Contracts (1960 ed.) [1964 Supp. § 579, p. 225, fn. 56].) The exclusion of testimony that might contradict the linguistic background of the judge reflects a judicial belief in the possibility of perfect verbal expression. (9 Wigmore on Evidence (3d ed. 1940) § 2461, p. 187.) This belief is a remnant of a primitive faith in the inherent potency5 and inherent meaning of words.6 

[6] The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. [Omitted: a long list of citations.]

[7] A rule that would limit the determination of the meaning of a written instrument to its four-corners merely because it seems to the court to be clear and unambiguous, would either deny the relevance of the intention of the parties or presuppose a degree of verbal precision and stability our language has not attained.

[8] Some courts have expressed the opinion that contractual obligations are created by the mere use of certain words, whether or not there was any intention to incur such obligations.7 Under this view, contractual obligations flow, not from the intention of the parties but from the fact that they used certain magic words. Evidence of the parties' intention therefore becomes irrelevant.

[9] In this state, however, the intention of the parties as expressed in the contract is the source of contractual rights and duties.8  A court must ascertain and give effect to this intention by determining what the parties meant by the words they used. Accordingly, the exclusion of relevant, extrinsic, evidence to explain the meaning of a written instrument could be justified only if it were feasible to determine the meaning the parties gave to the words from the instrument alone.

[10] If words had absolute and constant referents, it might be possible to discover contractual intention in the words themselves and in the manner in which they were arranged. Words, however, do not have absolute and constant referents. "A word is a symbol of thought but has no arbitrary and fixed meaning like a symbol of algebra or chemistry, . . ." (Pearson v. State Social Welfare Board (1960) 54 Cal.2d 184, 195.) The meaning of particular words or groups of words varies with the ". . . verbal context and surrounding circumstances and purposes in view of the linguistic education and experience of their users and their hearers or readers (not excluding judges). . . . A word has no meaning apart from these factors; much less does it have an objective meaning, one true meaning." (Corbin, The Interpretation of Words and the Parol Evidence Rule (1965) 50 Cornell L.Q. 161, 187.) Accordingly, the meaning of a writing ". . . can only be found by interpretation in the light of all the circumstances that reveal the sense in which the writer used the words. The exclusion of parol evidence regarding such circumstances merely because the words do not appear ambiguous to the reader can easily lead to the attribution to a written instrument of a meaning that was never intended. [Citations omitted.]" (Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 776 (concurring opinion); see also, e.g., Garden State Plaza Corp. v. S. S. Kresge Co. (1963) 78 N.J. Super. 485; Hurst v. W. J. Lake & Co. (1932) 141 Ore. 306, 310; 3 Corbin on Contracts (1960 ed.) § 579, pp. 412-431; Ogden and Richards, The Meaning of Meaning, op.cit supra 15; Ullmann, The Principles of Semantics, supra, 61; McBaine, The Rule Against Disturbing Plain Meaning of Writings (1943) 31 Cal.L.Rev. 145.)

[11] Although extrinsic evidence is not admissible to add to, detract from, or vary the terms of a written contract, these terms must first be determined before it can be decided whether or not extrinsic evidence is being offered for a prohibited purpose. The fact that the terms of an instrument appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms. That possibility is not limited to contracts whose terms have acquired a particular meaning by trade usage,9  but exists whenever the parties' understanding of the words used may have differed from the judge's understanding.

[12] Accordingly, rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties.10 (Civ. Code, § 1647; Code Civ. Proc., § 1860; see also 9 Wigmore on Evidence, op. cit. supra, § 2470, fn. 11, p. 227.) Such evidence includes testimony as to the "circumstances surrounding the making of the agreement . . . including the object, nature and subject matter of the writing . . ." so that the court can "place itself in the same situation in which the parties found themselves at the time of contracting." (Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 761; Lemm v. Stillwater Land & Cattle Co., supra, 217 Cal. 474, 480-481.) If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, "is fairly susceptible of either one of the two interpretations contended for . . ." (Balfour v. Fresno C. & I. Co. (1895) 109 Cal. 221, 225; see also, Hulse v. Juillard Fancy Foods Co., supra, 61 Cal.2d 571, 573; Nofziger v. Holman, supra, 61 Cal.2d 526, 528; Reid v. Overland Machined Products, supra, 55 Cal.2d 203, 210; Barham v. Barham (1949) 33 Cal.2d 416, 422-423; Kenney v. Los Feliz Investment Co. (1932) 121 Cal.App. 378, 386-387), extrinsic evidence relevant to prove either of such meanings is admissible.11 

[13] In the present case the court erroneously refused to consider extrinsic evidence offered to show that the indemnity clause in the contract was not intended to cover injuries to plaintiff's property. Although that evidence was not necessary to show that the indemnity clause was reasonably susceptible of the meaning contended for by defendant, it was nevertheless relevant and admissible on that issue. Moreover, since that clause was reasonably susceptible of that meaning, the offered evidence was also admissible to prove that the clause had that meaning and did not cover injuries to plaintiff's property.12  Accordingly, the judgment must be reversed. * * * *

The judgment is reversed.

Peters, J., Mosk, J., Burke, J., Sullivan, J., and Peek, J., fn.* concurred.

McComb, J., dissented.

Questions:

1. Traynor says that when a court interprets a contract based on its plain meaning, it determines meaning according to “the extrinsic evidence of the judge’s own linguistic education and experience.” What does Traynor mean by that?

2. Is “perfect verbal expression” impossible? Is it a remnant of a “primitive faith in the inherent potency and inherent meaning of words”? Is plain meaning possible? Why or why not?

3. Can you explain, given Traynor’s view of why words have meaning, how Traynor knows even without extrinsic evidence that the word indemnify is reasonably susceptible to the meaning that excluded coverage of injuries to the plaintiff’s property? Evidence of what kind of meaning for the word indemnify would be excluded under Traynor’s view?

4. Would Traynor accept evidence that the word indemnify meant that the defendant was supposed to pay for a backpacking trip in the Himalayas?

5. To whom was the contract written? Should that make a difference?

6. To which of the following theories of theories of meaning does Traynor subscribe?

i) Reference to Reality—the meaning of a word is the thing to which it refers. The paradigm type of word for this theory is, as one would expect, the noun, perhaps even the proper noun. The words "Mt. Rushmore" obviously refer, and the reference—the connection between the word and the object to which the word refers—gives the words meaning. This theory has difficulty explaining verbs and adverbs, and even more difficulty with pronouns, articles (i.e.,"a" or "the"), and numbers.

ii) Reference to a Concept—the meaning of a word is the concept to which the word refers. This theory is a refinement on the first theory. This theory appears in one of two forms:

  • a) Mental Concept—the word refers to a mental concept existing in the mind of the person using the word. A great number of people (who haven't thought about the issue very much) hold with this theory. Communication under this theory is to convey the concepts in one's mind to the mind of another by means of words. That awful phrase "meeting of the minds" probably rests on this theory. If this theory were true, could we speak truth?  Worse, how would be learn to speak?
  • b) Metaphysical Concept—the word refers to a concept existing outside the mind of the person using the word. Folks who thought about mental concepts and words a great deal (such as Plato, perhaps) realized that a person's words still have meaning, even very clear meaning, even when that person is unconscious (when no mental concepts might exist and at least when no one in this world has access to them). To hold to the "Reference to a Concept" theory in circumstances such as these, these thinkers often begin to talk as if concepts to which words refer exist outside the mind. It doesn't make sense to talk of "where" these concepts exist, because they are not physical. Instead, they are metaphysical, we say, meaning that what is physical shows that they exist but that they do not exist in the physical sphere.

iii) Reference to a Universal Mental Language—the meaning of a word is hardwired into us biologically. This may sound odd at first, but some thinkers believe that humans are hardwired for language. Under this theory, the language capacity is already there, and the particular language we speak just plugs itself into the slots in our already prepared minds. We understand each other because we have the more or less similar, already prepared slots in all of our minds. The slots themselves form a sort of universal language, and when we learn a language, we are merely translating the slots into spoken words. Some work in artificial intelligence rests on this theory.

iv) Meaning is Use—the meaning of a word is its use in a regular linguistic activity between at least two people. This theory considers that words are not qualitatively different from other actions, though speaking a language is more complex than most other actions. Thinkers who hold with this theory point out that in order for a word to have meaning, that which gives it meaning must be available to both the speaker and the hearer—it must be public. Only our regular use of words and actions in response to them is public in that sense and available to provide meaning to words.

7. Would it surprise you to hear that courts have argued over the meaning and effect of PG&E? The court in Trident Center v. Connecticut General Life Ins. Co., 847 F.2d 564 (9th Cir. 1988), said,

Under Pacific Gas, it matters not how clearly a contract is written, nor how completely it is integrated, nor how carefully it is negotiated, nor how squarely it addresses the issue before the court: the contract cannot be rendered impervious to attack by parol evidence. If one side is willing to claim that the parties intended one thing but the agreement provides for another, the court must consider extrinsic evidence of possible ambiguity. If that evidence raises the specter of ambiguity where there was none before, the contract language is displaced and the intention of the parties must be divined from self‑serving testimony offered by partisan witnesses whose recollection is hazy from passage of time and colored by their conflicting interests.

A California court of appeals countered in ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co., 22 Cal.Rptr. 2d 206, 219 (Cal. App. 4 Dist. 1993),

With all due respect to the critics of Pacific Gas, the case is not an endorsement of linguistic nihilism. Despite what might be called its "deconstructionist" dictum, the actual holding of the case is a fairly modest one: courts should allow parol evidence to explain special meanings which the individual parties to a contract may have given certain words.

Is either one an adequate characterization of PG&E?

Note: What Kind of Intent Are We After?

Sometimes extrinsic evidence is necessary no matter what. When it is, should we then follow the parties’ subjective intent or some more objective (plain?) meaning? In re Soper’s Estate, 264 N.W. 427 (Minn. 1935), reported the following facts: Ira Soper married Adeline Westphal in October 1911. He lived with her in Louisville, Kentucky, until August 1921, when he suddenly disappeared. Their marriage was not always happy. Soper would go on “drunken sprees.” He had gone on a spree just prior to disappearing. But, just prior to disappearing, he had written suicide notes to his wife: “If there is any hereafter may meet you again.” Soper’s car was found at the bank of a nearby canal along with his hat and portions of his clothing. Pinned to his business card and left in his car was a note reading, “This belongs to Mrs. Soper.”

In fact, Soper went to Canada and then Minneapolis, where he called himself John W. Young. He started a fuel company, the Young Fuel Company, with another fellow, Karstens. In May 1927, he purported to marry Gertrude Whitby, a widow, and they lived together as husband and wife until Soper-Young really did commit suicide in 1932. Ms. Whitby had believed Soper to be a widower when they met.

After Soper married Whitby, he and Karstens created a joint stock insurance plan under which one was to buy the stock of the other if the other should die. The payments were to come from the insurance plan, and they were to be paid to the surviving “wife” of the other, if living. Soper referred to Whitby as his wife during the negotiations. The premiums were paid by the company as an expense.

When Soper died, the insurance trustee paid the proceeds over to Ms. Whitby. At the time, no one involved knew of Adeline Westphal Soper. Several months elapsed before the real Mrs. Soper showed up. The administrator of Soper’s estate then sued Ms. Whitby for return of the funds so that they could be awarded to the “wife.” Who should win? There could only be one legal wife. Is there any way to identify “wife” without extrinsic evidence? For the record, the court let Whitby keep the money over a dissenting vote.

1.1.2. Substantive Presumptions

Sometimes public policy other than contract law is so influential that it requires that words of contract be construed other than the way we might (even reasonably) expect. What policy is at issue in this case? What affect does that policy have on the legal meaning of which words?

MONTGOMERY COUNTY HOSPITAL DISTRICT f/d/b/a Medical Center Hospital v. Valarie BROWN

Supreme Court of Texas (1998), 965 S.W.2d 501

[1] The principal issue before us is whether at-will employment can be modified by nothing more than an employer's oral assurances that an employee whose work is satisfactory will not be terminated without good cause. We hold that an employer's oral statements do not modify an employee's at-will status absent a definite, stated intention to the contrary. * * * *

[2] For ten years Valarie Brown was employed by the Montgomery County Hospital District as laboratory systems manager for Medical Center Hospital. After her employment terminated, Brown brought this action against the District and its president and vice president (collectively, “the District”) for breach of oral and written contracts of employment and deprivation of property and liberty interests protected by the Texas Constitution. The district court granted summary judgment for the District. The circumstances surrounding the termination of Brown's employment, vigorously disputed by the parties, are largely irrelevant to the contract issues before us. Given the conflict in the summary judgment record, we accept as true Brown's assertion that she did not voluntarily resign but was fired without good cause. We assume that Brown is not estopped by acceptance of her severance pay to assert that she was wrongfully terminated. And we take Brown's word that:

At the time I was hired as well as during my employment, I was told by [the Hospital administrator] that I would be able to keep my job at the Hospital as long as I was doing my job and that I would not be fired unless there was a good reason or good cause to fire me. This representation was important to me since I was going to have to relocate from Houston to the Conroe area if I accepted the position with the Hospital.

[3] The court of appeals held as a matter of law that the Hospital's employee manual was not an employment contract as Brown claimed, Brown v. Montgomery County Hosp., 929 S.W.2d at 583 (Tex. App.-Beaumont 1996), and Brown has not appealed that ruling. But the appeals court held that fact questions subsisted concerning the existence of an oral employment contract, based on the hospital administrator's alleged assurances, that precluded summary judgment. 929 S.W.2d at 583-585. The court also held that such a contract was not, as a matter of law, barred by the Statute of Frauds, Tex. Bus. & Com. Code § 26.01. 929 S.W.2d at 584-585. Because the effect of an employer's oral assurances on at-will employment is an important and recurring issue, we granted the District's application for writ of error.  * * * *

[4] For well over a century, the general rule in this State, as in most American jurisdictions, has been that absent a specific agreement to the contrary, employment may be terminated by the employer or the employee at will, for good cause, bad cause, or no cause at all. Federal Express Corp. v. Dutschmann, 846 S.W.2d 282, 283 (Tex.1993) (per curiam); Schroeder v. Texas Iron Works, 813 S.W.2d 483, 489 (Tex.1991); Winters v. Houston Chronicle Pub. Co., 795 S.W.2d 723, 723 (Tex.1990); Sabine Pilot Serv., Inc. v. Hauck, 687 S.W.2d 733, 734-35 (Tex.1985); East Line & R.R.R. Co. v. Scott, 72 Tex. 70, 10 S.W. 99, 102 (1888). The District argues that its assurances to Brown were too indefinite to constitute an agreement limiting the District's right to discharge Brown at will. We agree.

[5] A promise, acceptance of which will form a contract, “is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a commitment has been made.” Restatement (Second) of Contracts § 2(1) (1981). General statements like those made to Brown simply do not justify the conclusion that the speaker intends by them to make a binding contract of employment. For such a contract to exist, the employer must unequivocally indicate a definite intent to be bound not to terminate the employee except under clearly specified circumstances.

[6] General comments that an employee will not be discharged as long as his work is satisfactory do not in themselves manifest such an intent. Neither do statements that an employee will be discharged only for “good reason” or “good cause” when there is no agreement on what those terms encompass. Without such agreement the employee cannot reasonably expect to limit the employer's right to terminate him. An employee who has no formal agreement with his employer cannot construct one out of indefinite comments, encouragements, or assurances.

[7] This is the rule in other states. For example, in Rowe v. Montgomery Ward & Co., 437 Mich. 627, 473 N.W.2d 268 (1991), the court held that a supervisor's assurance that employees would have their jobs “generally, as long as they generated sales and were honest” did not limit the employer's right to discharge an employee at will. Id. at 270. Noting that a decade earlier it had “joined the forefront of a nationwide experiment in which, under varying theories, courts extended job security to nonunionized employees,” the court retreated from earlier decisions in which it had been more inclined to find an employment agreement in general assurances made by the employer. Id. at 269. “[C]alling something a contract that is in no sense a contract cannot advance respect for the law,” the court wrote. Id. It concluded: “[O]ral statements of job security must be clear and unequivocal to overcome the presumption of employment at will.”  Id. at 275.

[8] Likewise, in Hayes v. Eateries, Inc., 905 P.2d 778 (Okla.1995), the court held that oral assurances that an employee “would be employed as long as he did an adequate job and/or performed his duties satisfactorily” did not constitute “a binding agreement that protected him from discharge except for ‘just cause’.” Id. at 782. The court explained:

Courts “must distinguish between carefully developed employer representations upon which an employee may justifiably rely, and general platitudes, vague assurances, praise, and indefinite promises of permanent continued employment.” Only when the promises are definite and, thus, of the sort which may be reasonably or justifiably relied on by the employee, will a contract claim be viable, not when the employee relies on only vague assurances that no reasonable person would justifiably rely upon. There is, thus, an objective component to the nature of such a contract claim in the form of definite and specific promises by the employer sufficient to substantively restrict the reasons for termination.

Id. at 783 (citations omitted).

[9] There are scores of cases like these throughout the country, and courts in different jurisdictions have reached different conclusions, sometimes on the basis of the particular circumstances, and sometimes because of their view that oral, informal statements in the employment context should simply be given more effect.   See generally Theresa Ludwig Kruk, Annotation, Right to Discharge Allegedly “At-Will” Employee as Affected by Employer's Promulgation of Employment Policies as to Discharge, 33 A.L.R.4th 120 (1984).   From our review of these cases we conclude that those we have cited are better reasoned.

[10] Consistent with our holding in the case, the court in Byars v. City of Austin, 910 S.W.2d 520, 523-524 (Tex.App.-Austin 1995, writ denied), held that an employee handbook's description of usual disciplinary procedures were not “clear and specific” so as to modify an employment at will. Three other decisions of our intermediate courts that have dealt with statements similar to those made to Brown in this case did not consider whether the statements made were definite enough to constitute an enforceable contract. Hardison v. A.H. Belo Corp., 247 S.W.2d 167 (Tex.Civ.App.-Dallas 1952, no writ);  Johnson v. Ford Motor Co., 690 S.W.2d 90 (Tex.App.-Eastland 1985, writ ref'd n.r.e.);  Morgan v. Jack Brown Cleaners, Inc., 764 S.W.2d 825 (Tex.App.-Austin 1989, writ denied). To the extent these cases can be read to reach a result contrary to our holding here, we disapprove them.

Accordingly, the judgment of the court of appeals is reversed and judgment is rendered for the District.

Questions:

1. If someone told you that “you will be able to keep your employment as long as you are doing your job and that you will not be fired unless there is a good reason or good cause to fire you,” would you reasonably believe that your employment could not be terminated for no reason at all?

2. If you answered “yes” to question 1 or believe that it is plausible to answer “yes” to question 1, under what rule can the court then hold as a matter of law that your reasonable belief does not matter? In other words, why did the court think it necessary to grant review in this case and issue an opinion?

3. Paragraph 9 suggests decisions are not uniform on this issue. Why is this case satisfactory or not as a matter of policy?

4. What is the role of words like reasonably, justifiably, objective, definite, and specific in paragraph 8?

5. What would Brown have to show that the hospital did in order to escape the holding in this case?

6. Was Brown deceived?

7. What policy would explain the traditional Japanese presumption of lifetime employment?

8. Can you think of any other examples of substantive interpretive presumptions? Why or why not? Consider: “[A] court can compel arbitration where there is an indisputably valid and enforceable arbitration provision and that arbitration provision can be interpreted to encompass the parties’ disputes.” Severstal U.S. Holdings, LLC v. RG Steel, LLC, 865 F. Supp. 2d 430, 439 (S.D.N.Y. 2012). Also consider this: “[B]ecause plea agreements' constitutional and supervisory implications raise concerns over and above those present in the traditional contract context, in interpreting such agreements we hold the government to a greater degree of responsibility than the defendant . . . for imprecisions or ambiguities in the plea agreements. Ambiguities in a plea agreement are therefore construed against the government . . . .” U.S. v. Bowman, 634 F.3d 357, 360 (6th Cir. 2011) (internal quotations and citations omitted).

1.1.3. Usage, Custom, and Prior Practice

All contracts have context, and sometimes only a reference to the context can resolve a dispute over the meaning of contractual language. The doctrine in this section allows the court access to that context.

Herman FISHER v. CONGREGATION B’NAI YITZHOK

Pa. Superior Ct. (1955), 110 A.2d 881

OPINION BY HIRT, J.

[1] Plaintiff is an ordained rabbi of the orthodox Hebrew faith. He however does not officiate except on occasion as a professional rabbi-cantor in the liturgical service of a synagogue. The defendant is an incorporated Hebrew congregation with a synagogue in Philadelphia. Plaintiff, in response to defendant's advertisement in a Yiddish newspaper, appeared in Philadelphia for an audition before a committee representing the congregation. As a result, a written contract was entered into on June 26, 1950, under the terms of which plaintiff agreed to officiate as cantor at the synagogue of the defendant congregation "for the High Holiday Season of 1950", at six specified services during the month of September 1950. As full compensation for the above services the defendant agreed to pay plaintiff the sum of $1,200.

[2] The purpose upon which the defendant congregation was incorporated is thus stated in its charter: "The worship of Almighty God according to the faith, discipline, forms and rites of the orthodox Jewish religion." And up to the time of the execution of the contract the defendant congregation conducted its religious services in accordance with the practices of the orthodox Hebrew faith. On behalf of the plaintiff there is evidence that under the law of the Torah and other binding authority of the Jewish law, men and women may not sit together at services in the synagogue. In the orthodox synagogue, where the practice is observed, the women sit apart from the men in a gallery, or they are separated from the men by means of a partition between the two groups. The contract in this case is entirely silent as to the character of the defendant as an orthodox Hebrew congregation and the practices observed by it as to the seating at the services in the synagogue. At a general meeting of the congregation on July 12, 1950, on the eve of moving into a new synagogue, the practice of separate seating by the defendant formerly observed was modified and for the future the first four rows of seats during religious services were set aside exclusively for the men, and the next four rows for the women, and the remainder for mixed seating of both men and women. When plaintiff was informed of the action of the defendant congregation in deviating from the traditional practice as to separate seating, he through his attorney notified the defendant that he, a rabbi of the orthodox faith, would be unable to officiate as cantor because "this would be a violation of his beliefs." Plaintiff persisted in the stand taken that he would not under any circumstances serve as cantor for defendant as long as men and women were not seated separately. And when defendant failed to rescind its action permitting men and women to sit together during services, plaintiff refused to officiate. It then was too late for him to secure other employment as cantor during the 1950 Holiday season except for one service which paid him $100, and he brought suit for the balance of the contract price.

[3] The action was tried before the late Judge Fenerty, without a jury, who died before deciding the issue. By agreement the case was disposed of by the late President Judge Frank Smith "on the notes of testimony taken before Judge Fenerty." At the conclusion of the trial, counsel had stipulated that the judge need not make specific findings of fact in his decision. This waiver applied to the disposition of the case by Judge Smith. Nevertheless Judge Smith did specifically find that defendant, at the time the contract was entered into, "Was conducting its services according to the Orthodox Hebrew Faith." Judge Smith accepted the testimony of three rabbis learned in Hebrew law, who appeared for plaintiff, to the effect: "That Orthodox Judaism required a definite and physical separation of the sexes in the synagogue." And he also considered it established by the testimony that an orthodox rabbi-cantor "could not conscientiously officiate in a 'trefah' synagogue, that is, one that violates Jewish law"; and it was specifically found that the old building which the congregation left, "had separation in accordance with Jewish orthodoxy." The ultimate finding was for the plaintiff in the sum of $1,100 plus interest. And the court entered judgment for the plaintiff on the finding. In this appeal it is contended that the defendant is entitled to judgment as a matter of law.

[4] The finding for the plaintiff in this trial without a jury has the force and effect of a verdict of a jury and in support of the judgment entered by the lower court, the plaintiff is entitled to the benefit of the most favorable inferences from the evidence. Jann v. Linton's Lunch, 150 Pa. Superior Ct. 653, 29 A.2d 219. Findings of fact by a trial judge, sitting without a jury, which are supported by competent substantial evidence are conclusive on appeal. Scott-Smith Cadillac Co., Inc. v. Rajeski, 166 Pa. Superior Ct. 116, 70 A.2d 454.

[5] Although the contract is silent as to the nature of the defendant congregation, there is no ambiguity in the writing on that score and certainly nothing was omitted from its terms by fraud, accident or mistake. The terms of the contract therefore could not be varied under the parol evidence rule. Bardwell v. The Willis Company, 375 Pa. 503, 100 A.2d 102; Mathers v. Roxy Auto Company, 375 Pa. 640, 101 A.2d 680. Another principle controls the interpretation of this contract.

[6] There is sufficient competent evidence in support of the finding that this defendant was an orthodox congregation, which observed the rule of the ancient Hebrew law as to separate seating during the services of the High Holiday Season; and also to the effect that the rule has been observed immemorially and invariably by the defendant in these services, without exception. As bearing on plaintiff’s bona fide belief that such was the fact, at the time he contracted with the defendant, plaintiff was permitted to introduce the declaration of Rabbi Ebert, the rabbi of the defendant congregation, made to him prior to signing of the contract, in which the rabbi said: “There always was a separation between men and women’ and ‘there is going to be strict separation between men and women’, referring to the seating in the new synagogue. Rabbi Lipschitz, who was present, testified that Rabbi Ebert, in response to plaintiff’s question ‘Will services be conducted as in the old Congregation’ replied ‘Sure. There is no question about that’ referring to the prior practice of separate seating. The relationship of rabbi to the congregation which he serves does not create the legal relationship of principal and agent [meaning the rabbis’ words were not legally binding on the congregation just because the Rabbi spoke them—Ricks]. * * * *

[7] In determining the right of recovery in this case the question is to be determined under the rules of our civil law, and the ancient provision of the Hebrew law relating to separate seating is read into the contract only because implicit in the writing as to the basis—according to the evidence—upon which the parties dealt. Cf. Canovaro et al. v. Bros. of H. of St. Aug., 326 Pa. 76, 86, 191 A. 140. In our law the provision became a part of the written contract under a principle analogous to the rule applicable to the construction of contracts in the light of custom or immemorial and invariable usage. It has been said that: "When a custom or usage is once established, in absence of express provision to the contrary it is considered a part of a contract and binding on the parties though not mentioned therein, the presumption being that they knew of and contracted with reference to it": 1 Henry Pa. Evid., 4th Ed., § 203. Cf. Restatement, Contracts, § 248(2) and § 249. In this case there was more than a presumption. From the findings of the trial judge supported by the evidence it is clear that the parties contracted on the common understanding that the defendant was an orthodox synagogue which observed the mandate of the Jewish law as to separate seating. That intention was implicit in this contract though not referred to in the writing, and therefore must be read into it. It was on this ground that the court entered judgment for plaintiff in this case.

Disposition

Judgment affirmed.

Questions:

1. Did Congregation Bnai Yitzhok agree to this provision?

2. Does this case set forth an exception to the plain meaning rule?

3. Did the rabbi agree to this provision?

Uniform Commercial Code § 1-303

Questions:

1. Can a single occurrence prove a course of dealing? A course of performance?

2. If express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade conflict, which wins?

RALPH'S DISTRIBUTING CO. v. AMF, INC.

U.S. Ct. App., 8th Cir. (1981), 667 F.2d 670

[1] Ralph's Distributing Company appeals from the decision of the district court granting AMF's motion for summary judgment against Ralph's claim of breach of contract. We reverse because sufficient issues of material fact have been raised to preclude summary judgment.

I.

[2] Ralph's entered into a franchise agreement with AMF in May, 1968, to become a wholesale distributor of Ski-Daddlers.13 The parties executed an identical franchise agreement in June, 1969. The franchise agreements were accompanied by letters designating Ralph's sales territory for the upcoming snowmobile season. In May, 1970, the franchise agreements were incorporated by reference in a letter from AMF extending the contract. The letter again included a designation of Ralph's sales territory. No further writings were executed, but the parties continued to operate in accordance with the provisions of the 1968 and 1969 franchise agreements through the 1971-1972 snowmobile season.

[3] As a wholesale distributor, Ralph's bought Ski-Daddlers directly from AMF and then resold them to dealers in its designated territory for resale to the public. The Ski-Daddler program was unsuccessful and, during the 1971-1972 season, AMF decided to discontinue production of that line and to consolidate all future snowmobile manufacturing and marketing activities in Harley-Davidson. As a result of this decision, AMF began to sell its remaining inventory of Ski-Daddlers directly to Harley-Davidson dealers, bypassing Ralph's and other Ski-Daddler wholesale distributors.

[4]  Ralph's brought suit against AMF, alleging that AMF's direct sales to Harley-Davidson dealers in Ralph's territory violated its contractual right to be the exclusive distributor of Ski-Daddler snowmobiles in its designated territory. Ralph's advanced three alternative theories in support of its claim: (1) that by including the designated sales territory in the franchise agreements, the parties intended to make Ralph's the sole distributor in that territory; (2) that even if the parties did not agree to include an exclusivity term in the initial agreement, they did so in subsequent oral modifications of the 1968-1969 franchise agreements; and (3) that in any event, an exclusivity provision should be implied in law by the court.14 AMF moved for summary judgment on Ralph's claims. The district court rejected each of the theories advanced by Ralph's and granted AMF's motion for a summary judgment.

II.

[5] Summary judgment should be granted only if the pleadings, stipulations, affidavits and admissions show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. * * * * All evidence must be viewed in the light most favorable to the party opposing the motion. * * * Applying these standards to Ralph's breach of contract claim, we cannot agree that AMF has demonstrated that there is no genuine issue as to any material fact concerning Ralph's first two theories of recovery. * * * *

[6] The trial court * * * found that even if Ralph's proffered parol evidence is considered, no question of fact is raised as to the parties' intention to include an exclusivity term. This finding is clearly erroneous. Fed.R.Civ.P. 52(a).

[7] The following course of performance and usage of trade evidence supports Ralph's claim that, pursuant to the franchise agreement, it was to be the sole distributor of Ski-Daddlers in its designated territory.15 Ralph's alleged in its affidavit that it expended substantial funds on racing and other promotional activities in the expectation that neither AMF nor other distributors would sell Ski-Daddler snowmobiles in its exclusive territory. Three AMF employees or former employees testified in depositions that it was their understanding that once AMF designated a distributor for a territory, the company would not assign other distributors to the same area, and that the designated distributor was entitled to believe that AMF would not assign other distributors to his sales market.16 

Ralph's also stated that many aspects of its distributorship were not covered in the franchise agreements including, for example, racing and other promotional activities, as well as the exclusivity requirement. Harold Whitten, a former division vice president at AMF, conceded in his deposition that AMF "encouraged" and "expected" distributors to engage in promotional activities such as racing despite the absence of such a requirement in the franchise agreements.

[8] Furthermore, after AMF entered into the arrangement with Harley-Davidson to market Ski-Daddler snowmobiles, AMF began to give rebates to Ski-Daddler distributors for each Ski-Daddler sold by Harley-Davidson dealers in the designated territories of those distributors. Ralph's argues this rebate plan was to compensate distributors for invasion of their exclusive territories.

[9] Finally, immediately after AMF entered into the agreement with Harley-Davidson, Ralph's protested the alleged breach of contract. It stated in its affidavit that other distributors raised similar complaints.

[10] Taking these statements in the light most favorable to Ralph's and giving it to the benefit of all reasonable inferences, we conclude that there is a genuine issue as to whether the parties intended to include an exclusivity term.

[11] Ralph's second theory for recovery is that if the contracts, when executed, did not make it the sole distributor, the franchise agreements were subsequently modified to include an exclusivity term. * * * Taking [the] * * * evidence in the light most favorable to Ralph's, we conclude that the evidence also creates a genuine issue as to whether the franchise agreements were modified subsequent to execution to include an exclusivity term.

[12] For these reasons, the district court erred in granting summary judgment against Ralph's. Accordingly, we reverse and remand for proceedings consistent with this opinion.

Questions:

1. Which verb best describes the exclusivity term's relationship to the writing of the parties? (A) explain, (B) supplement, or (C) qualify?

2. How did AMF commit to exclusivity?

3. Is this case good policy? Why or why not?

LINCOLN BIG THREE, INC. v. W.G. “Bill” THOMAS

La. Ct. App. (1983), 444 So. 2d 171

 

[1] This appeal is from a judgment of the trial court which dismissed plaintiff's suit seeking rental and replacement costs of cylinders belonging to plaintiff, delivered to and allegedly unreturned by defendant. Plaintiff appealed.

[2] This is a suit termed a suit on open account arising from the sale of oxygen and acetylene by plaintiff, Lincoln Big Three, Inc. (Lincoln), to the defendant, W.G. "Bill" Thomas, B.A. Favret and B.T. Oilfield Services, Inc. (B.T.). Plaintiff stipulated the dismissal of the individual defendants and proceeded only against the corporation, B.T.

[3] Lincoln is in the business of selling welding supplies, and B.T. was engaged in the fabrication business requiring the use of welding supplies including oxygen and acetylene gas. The gases were sold in cylinders owned by Lincoln. The cylinders were rented to the customer with Lincoln retaining ownership. The dispute giving rise to this lawsuit concerns cylinders which Lincoln alleges were not returned and for which B.T. should have to pay under the terms of the contract between the parties.

[4] Until May of 1977, B.T. was engaged in the offshore and onshore oilfield fabrication business which was operated from various locations. In the course of business B.T. would request Lincoln to supply gases contained in cylinders. Lincoln would deliver the number of cylinders requested at designated places. If the filled cylinders were replacements for empty cylinders, the empty cylinders were picked up by Lincoln at the request of B.T. Lincoln would also pick up empty cylinders which were not replacement cylinders at the request of B.T. B.T. paid for the gas it used out of the cylinders and paid a daily rental for use of the cylinders from the day of delivery to the day Lincoln was called to pick up the cylinders. This was standard business practice, as well as the custom in the fabrication industry. In many cases cylinders were delivered and picked up at places other than the user's place of business. Lincoln had specially designed trucks for delivery and pick-up of its cylinders and had special forms and procedures established for recording pick-up of its cylinders.

[5] B.T. alleges that it notified Lincoln that it was shutting down its fabrication business, that it would not need any refilled cylinders, and that all the cylinders should be picked up by Lincoln. B.T. was never notified that the cylinders were not picked up by Lincoln as instructed until it received an invoice from Lincoln for the rental of forty-two cylinders. B.T. objected to the invoice and notified Lincoln that there were no cylinders in B.T.'s possession and that it had instructed Lincoln to pick up all of the cylinders it had delivered. However, Lincoln continuously invoiced B.T. for the rental of forty-two cylinders.

[6] Lincoln subsequently filed suit against B.T. alleging B.T. owed the sum of $1,712.20 for the rental of forty-two cylinders for a 1½ year period. Lincoln also alleged in its petition that B.T. was responsible for the replacement of forty-two cylinders at a cost of $6,767.04. Attached to Lincoln's petition was an affidavit from Ronald Wayne Shaffer, a representative of Lincoln, stating that he was familiar with Lincoln's books and records and that the records showed that forty-two cylinders delivered to B.T. had not been picked up by Lincoln. Despite the insistence by B.T. that Lincoln's records were in error, Lincoln maintained its records were accurate and the debt owed by B.T. for the rental and replacement of forty-two cylinders was correct.

[7] In preparation for trial it was discovered by Lincoln that B.T. had not been given credit for some cylinders which had been returned. At trial Lincoln introduced business records which allegedly indicated that only nineteen cylinders were unaccounted for instead of forty-two. The dollar amount sued for was reduced to $2,975.93 for replacement of unreturned cylinders and $916.01 for rental on unreturned cylinders.

[8] After trial on the merits, the trial judge in oral reasons held that there probably had been a loss by Lincoln due to unreturned cylinders but that he could not attribute any of the loss to B.T., and additionally the evidence was insufficient to establish the value or number of missing cylinders. Judgment was then signed dismissing Lincoln's suit. Lincoln claims on appeal that this was error. We affirm.

[9] Lincoln contends that the responsibility of B.T. for the missing cylinders was established from Lincoln's business records as testified to by Mr. Ronald Shaffer. Lincoln contends that its business records establish that B.T. owes rental and replacement costs on nineteen cylinders. Lincoln argues that B.T. has no records of the number of cylinders received or the number of cylinders returned to Lincoln and therefore under the terms of the contract is liable for the rental of the cylinders.

[10] The shipping orders (the contract between the parties) provided that: "(2) Customer shall and must return each cylinder and container, and all fittings and attachments thereto, when empty, safely at customer's cost and expense, to the distributing station of seller from which the same were shipped originally."

[11] The standard business practice in the fabrication industry, which was adhered to by Lincoln and B.T., is that the user notifies the seller of the amount of gas it needs and the place for the gas to be delivered. The seller then delivers the gas in the cylinders to the place designated by the user and at the same time picks up any empty cylinders. This establishes a course of dealing. La.R.S. 10:1-205(3).

[12] A course of dealing is allowed to give particular meaning to and supplement or qualify terms of an agreement. The course of dealing between Lincoln and B.T. qualifies the terms of the contract to allow the distributing station (place where cylinders are to be picked up) to be the place designated by the user (B.T.). Accordingly, we hold that B.T. has not breached any written obligation owed to Lincoln.

[13] There remains the issue of whether or not the business records introduced by Lincoln sufficiently establish responsibility for the allegedly missing cylinders. The trial judge was not convinced by Lincoln's business records that B.T. is responsible. We find no manifest error in this conclusion.

[14] Mr. Shaffer, credit manager for Lincoln, testified that the procedure for picking up cylinders for return is for the truck driver for Lincoln to go to the designated dock and pick up the empty cylinders. More than one Lincoln customer would use the same dock. At the dock, the truck driver requires someone to sign a cylinder receipt form. The form, however, does not signify which of Lincoln's customers using the same dock are credited for the returned cylinders. The only evidence of which returned cylinders should have been credited to a particular customer's account would be the testimony of the particular truck driver who serviced the dock used by B.T.

[15] As in any civil case, plaintiff has the burden of proving each and every essential element of its claim by a preponderance of the evidence. Meyer v. State, Dept. of Public Safety License Control and Driver Improvement Div., 312 So.2d 289 (La.1975). The identity of the customer responsible for the missing cylinders is an essential element to Lincoln's claim. Absent the truck driver's testimony, we find that the trial court was not manifestly erroneous in finding that Lincoln had failed to establish by a preponderance of the evidence the responsibility of B.T. for the missing cylinders. Canter v. Koehring Co., 283 So.2d 716 (La.1973). Therefore, Lincoln's first assignment of error is without merit.

[16] Lincoln argues the court erred when it refused to apply the account rendered rule that failure to object within a reasonable time to an account rendered is regarded as an admission of its correctness by the party charged.

[17] William G. Thomas, Sr., president of B.T., testified that after he received the invoices from Lincoln showing B.T. still possessed forty-two cylinders, he called Lincoln on several occasions informing Lincoln that all cylinders had been returned. Although the trial judge acknowledged that there were no letters of protest written by Thomas to document the denial of this account, he found that B.T. did in fact object to the invoices. We find no manifest error.

[18] For the foregoing reasons, we affirm the judgment of the trial court. The trial judge assessed costs equally between the parties. Since neither party assigned as error the assessment of costs, we affirm the costs incurred at the trial level. However, we assess all appeal costs to the appellant.

Affirmed.

Questions:

1. Courts sometimes say that evidence of course of dealing may not contradict the written contract:

However, when considering a sale of goods contract under the U.C.C., the determination of a contract’s meaning is not made in a vacuum. Rather, it is done in conjunction with evidence about course of dealing, usage of trade, and the parties’ course of performance so long as that extrinsic evidence does not contradict the contract’s language.

Lion Oil Trading & Transp., Inc. v. Statoil Marketing and Trading (US) Inc., 728 F. Supp. 2d 531, 535 (S.D.N.Y. 2010). Did the ruling in Lincoln Big Three violate this rule? Did it comply with the statute? What does “qualify” mean? Does it allow a trade usage, course of dealing, or course of performance to contradict a written term? One court cited a commentator for the following statement:

Astonishing as it will seem to most practicing attorneys, under the Code it will be possible in some cases to use custom to contradict the written agreement . . . . Therefore usage may be used to “qualify” the agreement, which presumably means to “cut down” express terms although not to negate them entirely.

Nanakuli Paving and Rock Co. v. Shell Oil Co., Inc., 664 F.2d 772, 805 (9th Cir. 1981), quoting Joseph H. Levie, Trade Usage and Custom Under the Common Law and the Uniform Commercial Code, 40 N.Y.U. L. Rev. 1101, 1112 (1965). What in the code counters the word “qualify”? Where is the line? Did this case cross it? Can you square this result with § 1-303(e)(1)?

2. Was the re-delivery term ambiguous? Did it have to be?

3. Did the parties’ course of dealing modify their written agreement? Could Lincoln have later stopping picking up cylinders and insisted instead that B.T. re-deliver cylinders that it leased?

4. A waiver is often defined as the intentional relinquishment of a known right. Did Lincoln waive the right to have BT responsibly re-deliver cylinders?

FRIGALIMENT IMPORTING CO., Ltd. v. B.N.S. INTERNATIONAL SALES CORP.

S.D. N.Y. (1960), 190 F. Supp. 116

FRIENDLY, Circuit Judge.

[1] The issue is, what is chicken? Plaintiff says "chicken" means a young chicken, suitable for broiling and frying. Defendant says "chicken" means any bird of that genus that meets contract specifications on weight and quality, including what it calls "stewing chicken" and plaintiff pejoratively terms "fowl". Dictionaries give both meanings, as well as some others not relevant here. To support its, plaintiff sends a number of volleys over the net; defendant essays to return them and adds a few serves of its own. Assuming that both parties were acting in good faith, the case nicely illustrates Holmes' remark "that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs—not on the parties' having meant the same thing but on their having said the same thing." The Path of the Law, in Collected Legal Papers, p. 178. I have concluded that plaintiff has not sustained its burden of persuasion that the contract used "chicken" in the narrower sense.

[2] The action is for breach of the warranty that goods sold shall correspond to the description, New York Personal Property Law, McKinney's Consol. Laws, c. 41, § 95. Two contracts are in suit. In the first, dated May 2, 1957, defendant, a New York sales corporation, confirmed the sale to plaintiff, a Swiss corporation, of

"US Fresh Frozen Chicken, Grade A, Government Inspected, Eviscerated

2½-3 lbs. and 1½-2 lbs. each

all chicken individually wrapped in cryovac, packed in secured fiber cartons or wooden boxes, suitable for export

75,000 lbs. 2½-3 lbs. . . .. . . .@$33.00

25,000 lbs. 1½-2 lbs. . . .. . . .@$36.50

per 100 lbs. FAS New York

scheduled May 10, 1957 pursuant to instructions from Penson & Co., New York."

[3] The second contract, also dated May 2, 1957, was identical save that only 50,000 lbs. of the heavier "chicken" were called for, the price of the smaller birds was $37 per 100 lbs., and shipment was scheduled for May 30. The initial shipment under the first contract was short but the balance was shipped on May 17. When the initial shipment arrived in Switzerland, plaintiff found, on May 28, that the 2½-3 lbs. birds were not young chicken suitable for broiling and frying but stewing chicken or "fowl"; indeed, many of the cartons and bags plainly so indicated. Protests ensued. Nevertheless, shipment under the second contract was made on May 29, the 2½-3 lbs. birds again being stewing chicken. Defendant stopped the transportation of these at Rotterdam.

[4] This action followed. Plaintiff says that, notwithstanding that its acceptance was in Switzerland, New York law controls under the principle of Rubin v. Irving Trust Co., 1953, 305 N.Y. 288, 305, 113 N.E.2d 424 431; defendant does not dispute this, and relies on New York decisions. I shall follow the apparent agreement of the parties as to the applicable law.

[5] Since the word "chicken" standing alone is ambiguous, I turn first to see whether the contract itself offers any aid to its interpretation. Plaintiff says the 1½-2 lbs. birds necessarily had to be young chicken since the older birds do not come in that size, hence the 2½-3 lbs. birds must likewise be young. This is unpersuasive; a contract for "apples" of two different sizes could be filled with different kinds of apples even though only one species came in both sizes. Defendant notes that the contract called not simply for chicken but for "US Fresh Frozen Chicken, Grade A, Government Inspected." It says the contract thereby incorporated by reference the Department of Agriculture's regulations, which favor its interpretation; I shall return to this after reviewing plaintiff's other contentions.

[6] The first hinges on an exchange of cablegrams which preceded execution of the formal contracts. The negotiations leading up to the contracts were conducted in New York between defendant's secretary, Ernest R. Bauer, and a Mr. Stovicek, who was in New York for the Czechoslovak government at the World Trade Fair. A few days after meeting Bauer at the fair, Stovicek telephoned and inquired whether defendant would be interested in exporting poultry to Switzerland. Bauer then met with Stovicek, who showed him a cable from plaintiff dated April 26, 1957, announcing that they "are buyer" of 25,000 lbs. of chicken 2½-3 lbs. weight, Cryovac packed, grade A Government inspected, at a price up to 33¢ per pound, for shipment on May 10, to be confirmed by the following morning, and were interested in further offerings. After testing the market for price, Bauer accepted, and Stovicek sent a confirmation that evening. Plaintiff stresses that, although these and subsequent cables between plaintiff and defendant, which laid the basis for the additional quantities under the first and for all of the second contract, were predominantly in German, they used the English word "chicken"; it claims this was done because it understood "chicken" meant young chicken whereas the German word, "Huhn," included both "Brathuhn" (broilers) and "Suppenhuhn" (stewing chicken), and that defendant, whose officers were thoroughly conversant with German, should have realized this. Whatever force this argument might otherwise have is largely drained away by Bauer's testimony that he asked Stovicek what kind of chickens were wanted, received the answer "any kind of chickens," and then, in German, asked whether the cable meant "Huhn" and received an affirmative response. Plaintiff attacks this as contrary to what Bauer testified on his deposition in March, 1959, and also on the ground that Stovicek had no authority to interpret the meaning of the cable. The first contention would be persuasive if sustained by the record, since Bauer was free at the trial from the threat of contradiction by Stovicek as he was not at the time of the deposition; however, review of the deposition does not convince me of the claimed inconsistency. As to the second contention, it may well be that Stovicek lacked authority to commit plaintiff for prices or delivery dates other than those specified in the cable; but plaintiff cannot at the same time rely on its cable to Stovicek as its dictionary to the meaning of the contract and repudiate the interpretation given the dictionary by the man in whose hands it was put. See Restatement of the Law of Agency, 2d, § 145; 2 Mecham, Agency § 1781 (2d ed. 1914); Park v. Moorman Mfg. Co., 1952, 121 Utah 339, 241 P.2d 914 919 40 A.L.R.2d 273; Henderson v. Jimmerson, Tex.Civ.App.1950, 234 S.W. 2d 710 717-718. Plaintiff's reliance on the fact that the contract forms contain the words "through the intermediary of: ", with the blank not filled, as negating agency, is wholly unpersuasive; the purpose of this clause was to permit filling in the name of an intermediary to whom a commission would be payable, not to blot out what had been the fact.

[7] Plaintiff's next contention is that there was a definite trade usage that "chicken" meant "young chicken." Defendant showed that it was only beginning in the poultry trade in 1957, thereby bringing itself within the principle that "when one of the parties is not a member of the trade or other circle, his acceptance of the standard must be made to appear" by proving either that he had actual knowledge of the usage or that the usage is "so generally known in the community that his actual individual knowledge of it may be inferred." 9 Wigmore, Evidence (3d ed. 1940) § 2464. Here there was no proof of actual knowledge of the alleged usage; indeed, it is quite plain that defendant's belief was to the contrary. In order to meet the alternative requirement, the law of New York demands a showing that "the usage is of so long continuance, so well established, so notorious, so universal and so reasonable in itself, as that the presumption is violent that the parties contracted with reference to it, and made it a part of their agreement." Walls v. Bailey, 1872, 49 N.Y. 464, 472-473.

[8] Plaintiff endeavored to establish such a usage by the testimony of three witnesses and certain other evidence. Strasser, resident buyer in New York for a large chain of Swiss cooperatives, testified that "on chicken I would definitely understand a broiler." However, the force of this testimony was considerably weakened by the fact that in his own transactions the witness, a careful businessman, protected himself by using "broiler" when that was what he wanted and "fowl" when he wished older birds. Indeed, there are some indications, dating back to a remark of Lord Mansfield, Edie v. East India Co., 2 Burr. 1216, 1222 (1761), that no credit should be given "witnesses to usage, who could not adduce instances in verification." 7 Wigmore, Evidence (3d ed. 1940), § 1954; see McDonald v. Acker, Merrall & Condit Co., 2d Dept.1920, 192 App.Div. 123 126 182 N.Y.S. 607. While Wigmore thinks this goes too far, a witness' consistent failure to rely on the alleged usage deprives his opinion testimony of much of its effect. Niesielowski, an officer of one of the companies that had furnished the stewing chicken to defendant, testified that "chicken" meant "the male species of the poultry industry. That could be a broiler, a fryer or a roaster", but not a stewing chicken; however, he also testified that upon receiving defendant's inquiry for "chickens", he asked whether the desire was for "fowl or frying chickens" and, in fact, supplied fowl, although taking the precaution of asking defendant, a day or two after plaintiff's acceptance of the contracts in suit, to change its confirmation of its order from "chickens," as defendant had originally prepared it, to "stewing chickens." Dates, an employee of Urner-Barry Company, which publishes a daily market report on the poultry trade, gave it as his view that the trade meaning of "chicken" was "broilers and fryers." In addition to this opinion testimony, plaintiff relied on the fact that the Urner-Barry service, the Journal of Commerce, and Weinberg Bros. & Co. of Chicago, a large supplier of poultry, published quotations in a manner which, in one way or another, distinguish between "chicken," comprising broilers, fryers and certain other categories, and "fowl," which, Bauer acknowledged, included stewing chickens. This material would be impressive if there were nothing to the contrary. However, there was, as will now be seen.

[9] Defendant's witness Weininger, who operates a chicken eviscerating plant in New Jersey, testified, "Chicken is everything except a goose, a duck, and a turkey. Everything is a chicken, but then you have to say, you have to specify which category you want or that you are talking about." Its witness Fox said that in the trade "chicken" would encompass all the various classifications. Sadina, who conducts a food inspection service, testified that he would consider any bird coming within the classes of "chicken" in the Department of Agriculture's regulations to be a chicken. The specifications approved by the General Services Administration include fowl as well as broilers and fryers under the classification "chickens." Statistics of the Institute of American Poultry Industries use the phrases "Young chickens" and "Mature chickens," under the general heading "Total chickens," and the Department of Agriculture's daily and weekly price reports avoid use of the word "chicken" without specification.

[10] Defendant advances several other points which it claims affirmatively support its construction. Primary among these is the regulation of the Department of Agriculture, 7 C.F.R. § 70.300-70.370, entitled, "Grading and Inspection of Poultry and Edible Products Thereof." and in particular § 70.301 which recited:

"Chickens. The following are the various classes of chickens:

(a) Broiler or fryer . . .

(b) Roaster . . .

(c) Capon . . .

(d) Stag . . .

(e) Hen or stewing chicken or fowl . . .

(f) Cock or old rooster . . .

[11] Defendant argues, as previously noted, that the contract incorporated these regulations by reference. Plaintiff answers that the contract provision related simply to grade and Government inspection and did not incorporate the Government definition of "chicken," and also that the definition in the Regulations is ignored in the trade. However, the latter contention was contradicted by Weininger and Sadina; and there is force in defendant's argument that the contract made the regulations a dictionary, particularly since the reference to Government grading was already in plaintiff's initial cable to Stovicek.

[12] Defendant makes a further argument based on the impossibility of its obtaining broilers and fryers at the 33¢ price offered by plaintiff for the 2½-3 lbs. birds. There is no substantial dispute that, in late April, 1957, the price for 2½-3 lbs. broilers was between 35 and 37¢ per pound, and that when defendant entered into the contracts, it was well aware of this and intended to fill them by supplying fowl in these weights. It claims that plaintiff must likewise have known the market since plaintiff had reserved shipping space on April 23, three days before plaintiff's cable to Stovicek, or, at least, that Stovicek was chargeable with such knowledge. It is scarcely an answer to say, as plaintiff does in its brief, that the 33¢ price offered by the 2½-3 lbs. "chickens" was closer to the prevailing 35¢ price for broilers than to the 30¢ at which defendant procured fowl. Plaintiff must have expected defendant to make some profit; certainly it could not have expected defendant deliberately to incur a loss.

[13] Finally, defendant relies on conduct by the plaintiff after the first shipment had been received. On May 28 plaintiff sent two cables complaining that the larger birds in the first shipment constituted "fowl." Defendant answered with a cable refusing to recognize plaintiff's objection and announcing "We have today ready for shipment 50,000 lbs. chicken 2½-3 lbs. 25,000 lbs. broilers 1½-2 lbs.," these being the goods procured for shipment under the second contract, and asked immediate answer "whether we are to ship this merchandise to you and whether you will accept the merchandise." After several other cable exchanges, plaintiff replied on May 29 "Confirm again that merchandise is to be shipped since resold by us if not enough pursuant to contract chickens are shipped the missing quantity is to be shipped within ten days stop we resold to our customers pursuant to your contract chickens grade A you have to deliver us said merchandise we again state that we shall make you fully responsible for all resulting costs."17 Defendant argues that if plaintiff was sincere in thinking it was entitled to young chickens, plaintiff would not have allowed the shipment under the second contract to go forward, since the distinction between broilers and chickens drawn in defendant's cablegram must have made it clear that the larger birds would not be broilers. However, plaintiff answers that the cables show plaintiff was insisting on delivery of young chickens and that defendant shipped old ones at its peril. Defendant's point would be highly relevant on another disputed issue: whether if liability were established, the measure of damages should be the difference in market value of broilers and stewing chicken in New York or the larger difference in Europe, but I cannot give it weight on the issue of interpretation. Defendant points out also that plaintiff proceeded to deliver some of the larger birds in Europe, describing them as "poulets"; defendant argues that it was only when plaintiff's customers complained about this that plaintiff developed the idea that "chicken" meant "young chicken." There is little force in this in view of plaintiff's immediate and consistent protests.

[14] When all the evidence is reviewed, it is clear that defendant believed it could comply with the contracts by delivering stewing chicken in the 2½-3 lbs. size. Defendant's subjective intent would not be significant if this did not coincide with an objective meaning of "chicken." Here it did coincide with one of the dictionary meanings, with the definition in the Department of Agriculture Regulations to which the contract made at least oblique reference, with at least some usage in the trade, with the realities of the market, and with what plaintiff's spokesman had said. Plaintiff asserts it to be equally plain that plaintiff's own subjective intent was to obtain broilers and fryers; the only evidence against this is the material as to market prices and this may not have been sufficiently brought home. In any event it is unnecessary to determine that issue. For plaintiff has the burden of showing that "chicken" was used in the narrower rather than in the broader sense, and this it has not sustained.

This opinion constitutes the Court's findings of fact and conclusions of law. Judgment shall be entered dismissing the complaint with costs.

Questions:

1. Every year thousands of law students read the chicken case. What if anything do you learn from it? Will you be a better lawyer for having read it? How?

2. What did Holmes mean when he said that “the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs—not on the parties’ having meant the same thing but on their having said the same thing”?

3. Why does Friendly say that this case “nicely illustrates” Holmes’ remark?

4. Which model(s) of language meaning are consistent with Friendly’s reasoning? In other words, which models of language meaning allow the law to resolve ambiguity using evidence?

5. Judge Friendly later wrote that this case might be about assent. He said that lack of assent was proved because of the misunderstanding between the parties. Is the chicken case like the case of the two ships Peerless (which you should have studied in the first semester of Contracts)? Can you resolve the chicken case on the basis of Restatement (Second) of Contracts § 20? Interestingly enough, the statement of Holmes that Friendly quoted was about the Peerless case. If Judge Friendly’s later assertion is correct, then his earlier assumption that a contract existed in the case is wrong. And if there was no contract, the buyer would not have to pay the price of the chicken, only the chicken’s value.

1.2. Writing the Promise: What Effect?

Some contracts have traditionally been written: promissory notes, which could be traded as cash; land sales; and marriage contracts in some cultures, for example. Some promises, such as those in sealed documents, could be enforced under the common law through a streamlined procedure called debt sur obligacion. Defendants subject to an action of debt sur obligacion had very few defenses. The writing determined almost everything the court needed to know to impose a remedy. The push to capture bargains in writing was strengthened by the Statute of Frauds (1677), which required that certain important kinds of contract be written and also signed by the promisor.

Once parties decide to write a promise, the courts have to decide whether to give legal effect to the fact that the parties put the promise in writing, and what that effect will be. Neither is a foregone conclusion.

Why would one want to write a promise? Should the reason for writing a promise effect what importance a court decides to give to the writing?

1.2.1. Mistake in Transmission

GREAT-WEST INVESTORS LP v. THOMAS H. LEE PARTNERS, L.P. et al.

Del. Ch. (2011)

[1] In the Chinese version of an old folk tale, the Emperor was so impressed with the game of chess that he offered its inventor a reward of his choice. The inventor said that he was a simple man, and wanted only a few grains of rice, the number of which would be determined by the chessboard itself. All he asked for was a single grain of rice for the first square on the board, double that amount for the second square, and that amount doubled again for each of the board’s remaining sixty-two squares. The Emperor accepted the proposal immediately, pleased, and even a little insulted that the inventor had asked for so meager a reward. The inventor came to collect one square’s worth of rice per day. It was only a few grains at first, but by the third week he was collecting enough rice to feed his family for a day. By the last day of the first month, however, he was due more rice than his entire village could eat in a year. As the sixty-fourth day approached, when the man would justly be able to demand many times more rice than existed in all of China or, indeed the world,18 the Emperor realized he was ruined.

[2] In this case, the defendants (a limited partnership, its general partner, and its manager) argue that a similar deal, contemplating a fee that would more than double each year, exists between them and the plaintiff (one of the limited partners). The first square of this figurative chessboard, however, is filled not with a single grain of rice, but instead with nearly $48 million.

[3] The plaintiff has brought claims for a declaration that the limited partnership agreement does not require it to pay a fee that more than doubles every year, specific performance of the agreement as it interprets it, breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing. In the alternative, the plaintiff seeks reformation of the agreement for mistake or fraud. This memorandum opinion addresses the defendants’ motion to dismiss the Complaint.

II. BACKGROUND19 

[[4]Thomas H. Lee Partners, L.P. [the “Partnership”] is a Delaware limited partnership that promotes and manages private-equity buyout funds. A limited partnership is a partnership with both (i) a general partner(s) who has the right to manage and (ii) limited partners who are merely investors in the limited partnership. It is governed by a limited partnership agreement [here called the “LP Agreement”]. Thomas H. Lee Advisors, LLC [“TH Lee”] is the general partner of the Partnership. Thomas H. Lee Management Company, LLC [the “Manager”] is the manager, by contract with the general partner, of the Partnership.

[5] Great-West Investors LP [“Great-West”] is one of the limited partners in the Partnership. Great-West is the Special Limited Partner [“SLP”], which means that it has rights and duties different from the other limited partners. Great-West became the SLP when it bought Putnam Investments, Inc., on August 3, 2007. Putnam had been the SLP.

[6] A private equity buy-out occurs when a person or small group of persons buys all or most of the stock or other equity interest of a company. These interests entitle the persons to distributions of company profits and also subject their investment to company losses. As part of its work, the Partnership gathers groups of investors who contribute to a “fund” (best thought of as a separate entity as well as an aggregation of money); the Partnership then uses the fund to negotiate and pay for an equity buy-out(s). The funds pay the Partnership for this service, and limited partners of the Partnership receive income from the Partnership based on this activity, called Partnership Fee Income. Limited partners can also be investors in the funds, and they would receive income individually from these.

[7] The Manager, who is not a Partner but manages the business of the Partnership, is separately compensated. Specifically, the partners pay the Manager. Under the LP Agreement, certain limited partners, including the SLP, were required to pay to the Partnership “Expense Assumption” payments on Apr. 21 and Oct. 21 of each year from 1999 to 2009. The Partnership would pay these sums to the Manager. The LP Agreement gave a formula for determining the amount due. In 2009, the Expense Assumption was $47,703,343. It went up by 5% each year from 2000 to 2009, by agreement.

[8] The payments due after 2009 were not specified in the same way under the agreement. Instead, after 2009, the general partner and the SLP were to negotiate in good faith about the Expense Assumption and Fee Income. The negotiated agreement had a stated purpose: that the SLP was to have 25% of Fee Income and pay 25% of expenses. But the paragraph specifying this had a tag line:

In the event that the General Partner and the Special Limited Partner are unable to agree on such allocation, the Expense Assumption then in effect will increase on January 1 or each year, commencing January 1, 2010, by an amount equal to the product of 1.05 multiplied by the Expense Assumption in effect during the preceding year.20 

[9] That language presented a problem. Before it bought Putnam, Great-West worried about this clause. Putnam and its counsel told Great-West that the default amount by which the Expense Assumption would increase would be 5%. Great-West then asked that the provision be modified to say that clearly. On July 19, 2007, Putnam’s counsel and the Partnership’s outside counsel acknowledged that the provision “was intended ‘to effect a 5% increase and agreed to clarify the provision to make such intent more explicit.’” The Partnership’s counsel afterward told Putnam’s counsel that such a clarification was reasonable but then said that the Partnership was not interested in changing anything at this time. He said that clearly Great-West and the Partnership would need to have a negotiation, but he refused to do it then. Never did the Partnership’s counsel or the Partnership suggest that the Expense Assumption would go up any more than 5% annually if the default rate was triggered.

[10] Great-West bought Putnam on August 3, 2007, and later executed a Fourth LP Agreement that repeated the same provision quoted above, even though some other language in that paragraph changed.

[11] Later, in the years following 2009, Great-West tried to negotiate, but the Partnership instead suggested Great-West sell its interest. The Partnership proposed scenarios in which Great-West would have to divest its stake on unreasonable terms. Moreover, the Partnership then claimed that the default escalation was not 5% but 105%. No agreement was reached. The next year, the Partnership claimed the Expense Assumption went up by 105% and charged Great-West $97,791,853. Great-West estimates that the actual expenses would be covered if nothing changed from 2009. It estimates that actual expenses are about $45 million. If Great-West paid what it paid in 2009, even that would yield the managers a $2.3 million profit.

[12] Interestingly, the LP Agreement provided that any amounts paid to it to cover expenses would first be used to cover expenses but that the excess would be distributed to owners of the Manager. Some of these owners of the Manager are also limited partners of the Partnership. Great-West has no interest in the Manager, however.

[13] Incidentally, a 105% increase would make the Expense Assumption for 2019 $62.5 billion. Great-West estimates that it would exceed the total income of the partnership by 2013. Such a payment obligation would wipe out Great-West’s interest in the Partnership Fee income almost immediately.]

III. CONTENTIONS

[14] By Count I of the Complaint, Great-West seeks declaratory relief. Subpart (a) seeks a declaration that TH Lee may increase the Expense Assumption from the amount in effect for 2009 only after it engages with Great-West in good faith negotiations as required by § 12.2(c). Subpart (b) of Count I seeks a declaration that § 12.2(c) of the LP Agreement allows only a 5% annual increase in the Expense Assumption in the event such negotiations fail to reach an agreement. Defendants argue that § 12.2(c) unambiguously provides that the Expense Assumption will grow by 105% annually in the absence of an agreement to allocate expenses differently. Great-West responds that the language of § 12.2(c) is at least ambiguous, and that extrinsic evidence supports its position that the provision provides for only a 5% annual increase. * * * *

[15] Counts IV and V seek reformation of the LP Agreement for mutual mistake and unilateral mistake, respectively. Defendants argue that Great-West has failed to state a claim for mistake because it has not identified a specific prior agreement between the parties that is not reflected in the written contract. Further, Defendants argue that Great-West waived any claim for mistake based on conduct that occurred before it became the Special Limited Partner by executing the Fourth LP Agreement a year after it had acquired Putnam’s interest in the Partnership. Great-West asserts that the parties reached an agreement on the size of the default escalator in the Expense Assumption, and that whether the underlying mistake was unilateral or mutual, Great-West did not waive its claim by executing the Fourth LP Agreement because there was no reason it should have known of the mistake when it signed that agreement in 2008.

[16] Count VI seeks reformation for fraud. Defendants contend that this claim essentially duplicates Great-West’s claim for reformation for unilateral mistake and should be dismissed for the same reasons. Great-West responds that it can show that the Defendants intentionally misled it and that its allegations thus support a claim for fraud. * * * * 

IV. DISCUSSION

* * * * 2. Subpart (b): the amount of the default escalator of the Expense Assumption

[17] Under § 12.2(c), if good faith negotiations fail to result in an agreement regarding the allocation of Fee Income and expenses, the Special Limited Partner must pay an annual Expense Assumption that escalates according to the following formula: “the Expense Assumption then in effect will increase on January 1 of each year, commencing on January 1, 2010, by an amount equal to the product of 1.05 multiplied by the Expense Assumption in effect during the preceding year.”

[18] The meaning of this sentence is plain: if the Expense Assumption escalator was triggered by failure to reach an agreement in 2009, then the Expense Assumption that was in effect for 2009 would increase by 105% of the 2009 Expense Assumption amount. That is, the Expense Assumption would grow from $47,703,343 in 2009 to $47,703,343 + (1.05*$47,703,343), or $97,791,853.15, for 2010. Defendants contend that this is the only reasonable interpretation of the sentence, and that Great-West’s claim that it means something else should be rejected.

[19] Great-West argues, however, that Defendants’ reading misconstrues the meaning of the word “by,” which it says has the definition given to it by the American Heritage Dictionary: “to the extent or amount of.”  Great-West argues that using this definition leads to conclusion that § 12.2 unambiguously provides for a default 5% annual escalator: that the Expense Assumption should have increased on January 1, 2010 to the extent that the 2010 Expense Assumption would equal 105% of the 2009 Expense Assumption. Defendants contend that, even if the Court were to use Great-West’s definition of “by,” a fair reading of § 12.2 supports Defendants’ position.

[20] Although the Court understands Great-West’s desire to find an interpretation of § 12.2 that would not require the Expense Assumption to more than double annually in the event it cannot negotiate a different allocation agreement with TH Lee, the reading Great-West advances is not supported by the text. The illustration incorporated into the American Heritage Dictionary’s definition of “by,” is “He’s taller than his sister by three inches.” Using that definition in place of “by” yields: “He’s taller than his sister to the extent or amount of three inches.” Paraphrasing that sentence to build a sentence that uses “by” in the same way Great-West argues it is used in § 12.2(c), however, yields a nonsensical result. “Her brother’s height increased by three inches,” for example, cannot be read to mean “Her brother’s height increased to the extent or amount of three inches, and he is now three inches tall.”

[21] Likewise, § 12.2 provides that, in the absence of an agreement otherwise, the Expense Assumption will “increase by” 105% of the previous year’s Expense Assumption; that sentence cannot plausibly be read to mean the Expense Assumption will increase such that the 2010 amount is only 105% of the 2009 amount. The words following “increased by” must indicate the amount that will be added to the 2009 Expense Assumption to reach the 2010 amount in the event good faith negotiations do not produce an alternate agreement.

[22] Great-West also attempts to encourage a conclusion that the language of the default Expense Assumption escalator is ambiguous by insisting that the Defendants’ interpretation produces an unconscionable and absurd result.21 That Great-West does not like the result, however, does not render it ambiguous if the result is required by the plain language of the contract. As the Court has observed, “parties are free to make bad bargains.” The Court’s role is not “to rewrite the contract between sophisticated market participants, allocating the risk of an agreement after the fact, to suit the court's sense of equity or fairness.” Instead, “[i]t is to give meaning and substance to the words the parties have freely chosen.”

[23] Although Great-West may wish it had not agreed to the possibility of annual 105% increases in the Expense Assumption, the only reasonable interpretation of the sentence in question is that it in fact did so in 2007 and again in 2008. Accordingly, the Court grants Defendants’ motion to dismiss subpart (b) of Count I. The Court denies the motion to dismiss subpart (a) of Count I, which seeks a declaration that “the Expense Assumption may increase from the amount in effect for 2009 only after TH Lee has negotiated in good faith with Great-West Investors concerning the allocation of Fee Income and related expenses premised on Great-West Investors receiving 25% of Fee Income.”

E. Count IV-VI: Reformation for Mistake or Fraud

[24] Great-West next contends that, if § 12.2(c) effects a 105% annual increase in the Expense Assumption in the event the parties cannot reach a new agreement regarding the allocation of Fee Income and expenses, then the Court should reform § 12.2(c) such that it, instead, allows only a 5% annual increase in the Expense Assumption under those circumstances. The Court may reform a contract “only when the contract does not represent the parties’ intent because of fraud, mutual mistake or, in exceptional cases, a unilateral mistake coupled with the other parties' knowing silence.” Great-West presents three possible justifications for reforming the LP Agreement: mutual mistake (Count IV), unilateral mistake (Count V), and fraud (Count VI).

[25] A claim for reformation based on a mutual mistake will survive a motion to dismiss under Court of Chancery Rule 12(b)(6) only if it alleges: (i) that the parties reached a definite agreement before executing the final contract; (ii) that the final contract failed to incorporate the terms of the agreement; (iii) that the parties’ mutually mistaken belief reflected the true parties’ true agreement; and (iv) the precise mistake the parties made.

[26] Great-West alleges that on July 19, 2007, Putnam’s counsel, Mr. D’Oench, informed Mr. Kreisler of Putnam’s and Great-West’s belief that § 12.2(c) provided for a 5% annual increase. It further alleges that Mr. Kreisler agreed that § 12.2(c) had the meaning Great-West and Putnam ascribed to it as written, but that the wording should be modified to convey that meaning expressly. Great-West contends that Defendants were aware that Mr. Kreisler’s words would be conveyed to Great-West through Putnam. Finally, Great-West contends that, while Mr. Kreisler’s July 26, 2007 email to Mr. D’Oench did explain that the Partnership was not interested in making changes to the language of § 12.2(c), it did not actually retract Mr. Kreisler’s representation that §12.2(c), as written, had the meaning Mr. D’Oench had ascribed to it. Great-West became the Special Limited Partner by acquiring Putnam soon after these communications.

[27] Read in the light most favorable to it, Great-West’s allegations could support an inference that Mr. Kreisler never retracted the July 2007 representation that § 12.2(c) had the meaning Putnam’s counsel had ascribed to it, and that he did not do so because the mistaken interpretation of Great-West and Putnam was consistent with Defendants’ own interpretation of the provision at that time. Under these allegations, Great-West could conceivably prove that the parties had a definite agreement regarding the meaning of § 12.2(c), and had no reason to question that interpretation when they executed the Amended LP Agreement in August 2008. Nonetheless, the language of § 12.2(c) did not reflect that alleged agreement. As a result, Great-West has adequately alleged a mutual mistake claim.

[28] In the alternative, Great-West presents a claim for reformation of the LP Agreement on the basis of unilateral mistake. To prove unilateral mistake “[t]he party asserting this doctrine must show that it was mistaken and that the other party knew of the mistake but remained silent.”  The plaintiff must also show that the parties had come to a definite agreement that differed materially from the written agreement. Great-West alleges that, if Defendants believed all along that § 12.2(c) provided for a 105% annual escalation of the Expense Assumption, the communications between Mr. D’Oench and Mr. Kreisler indicate both knowledge of Great-West’s mistake and silence as to that mistake. Great-West’s allegations could support an inference to that effect, and its allegations regarding mutual mistake satisfy the other elements of a unilateral mistake claim.

[29] Great-West executed the Fourth LP Agreement on August 1, 2008. By that act, according to Defendants, Great-West waived any claim for mistake. As compared to the Third LP Agreement, the Fourth LP Agreement amended some of the language in § 12.2(c), but left unchanged the language concerning the default annual escalation of the Expense Assumption amount. Proof that, as of that date, Great-West knew that the escalation language provided for a 105% annual increase in the Expense Assumption might indicate that Great-West had waived its claims that the LP Agreement should be reformed based on a 2007 mistaken interpretation of that language. Great-West alleges, however, that its interpretation of the language had not changed between 2007 and 2008 and that there was no reason for it to have known of its mistake when it executed the 2008 Amended LP Agreement. Because the pleadings do not identify any additional communications between the parties between July 2007 and August 2008, the Court must accept, for purposes of the pending motion to dismiss, that Great-West had no reason to know of its mistake in August 2008 and did not waive its mistake claims by executing the Amended LP Agreement at that time.

[30] Thus, the Court denies Defendants’ motion to dismiss Counts IV and V, which seek reformation of the LP Agreement for mutual mistake and unilateral mistake, respectively.

[31] Finally, under Count VI, Great-West seeks, on the basis of fraud, reformation of § 12.2(c) to establish a default annual escalator of 5%. To state a claim for fraud, a plaintiff must allege (i) a misrepresentation, which can take the form of a statement, omission, or active concealment of the truth; (ii) the defendant’s knowledge that the representation was false; (iii) intent to induce the plaintiff to act or refrain from acting; (iv) justified reliance on the misrepresentation; and (v) damage as a result of such reliance.

[32] The Defendants have not sought dismissal of Count VI under Court of Chancery Rule 9(b), which requires that fraud be pled with particularity. GreatWest has identified three alleged misrepresentations relating to this subject matter with the particularity necessary to support a fraud claim. Great-West alleges that in a July 19, 2007 telephone conversation between Mr. Kreisler and Mr. D’Oench, Mr. D’Oench represented (i) that he agreed that the intent of §12.2(c) was to establish a 5% annual increase in the Expense Assumption as the default in absence of other agreement and (ii) that his client would clarify the language to make that meaning clear. Great-West alleges that, in a July 26 email to Mr. D’Oench, Mr. Kreisler retracted his previous representation that the language of § 12.2(c) would be clarified at that time, but represented (iii) that TH Lee would have to negotiate with Great-West regarding the provisions pertaining to the Expense Assumption at a future date. According to Great-West, Defendants made these representations knowingly and with the intent to induce Great-West to become the Special Limited Partner and to enter the LP Agreement, and GreatWest made its decisions to do so in reasonable reliance upon the alleged misrepresentations.

[33] Taken together, the representations identified by Great-West would reasonably have left it with the impression that Defendants agreed with it that § 12.2(c) was intended to effect a default annual 5% escalator in the Expense Assumption and that Defendants would negotiate to implement that intention after Great-West became the Special Limited Partner. At face value, these allegations could support a claim for reformation based on fraud.

[34] Upon closer examination, however, the requirement of justifiable reliance on the alleged misrepresentations presents a significant challenge to the survival of this claim. First, Great-West’s own arguments demonstrate the difficulty in establishing this element. During the October 18, 2010 hearing before the Court, Great-West seemed to take the position that whatever was said before it acquired Putnam regarding the meaning of § 12.2(c) did not affect its decision to become the Special Limited Partner or to enter the LP Agreement:

To some extent none of this matters. Why? Well, we became a special limited partner by operation of law. We weren't negotiating with TH Lee about this provision. We—we were about to own this thing. We would have owned it regardless. We—we had just bought Putnam. It was going to be ours. So whatever this meant, whatever they might have said in 2007, we'd probably still be here today even if we’d said “Well, we're not going to sign this amendment.” So what? We’re still going to be the special limited partner because we stepped into Putnam's shoes.

The Court is hesitant to dismiss an otherwise well-pled, even if only marginally so, fraud claim based on its counsel’s argument, especially because in the context of a motion to dismiss the Court must generally consider only the allegations of the Complaint. Here, the Complaint does allege that Great-West justifiably relied on the alleged misrepresentations identified above. Nonetheless, the argument quoted here does illustrate the challenge Great-West may encounter in proving justifiable reliance going forward.

[35] Assuming it can overcome this difficulty, Great-West might also be able to establish the other elements of its claim for reformation on the basis of fraud. Although scienter would seem difficult to establish on the basis of the specific facts set forth in the Complaint, Great-West has alleged that Defendants acted intentionally. Further, Great-West could conceivably show that, because of the alleged misrepresentations, the LP Agreement does not reflect the parties’ real agreement that § 12.2(c) would, after negotiations that were to occur after GreatWest acquired Putnam, impose by default a 5% annual escalator in the Expense Assumption.

[36] Considering Great-West’s allegations in the plaintiff-friendly light illuminating them on a motion to dismiss, they adequately state a claim for reformation on the basis of fraud, if only barely. Accordingly, the Court denies Defendants’ motion to dismiss Count VI.

Questions:

1. Does complexity equal ambiguity?

2. Does Great-West’s understanding of the meaning of the clause at issue render it ambiguous?

3. Does the mistake in transmission doctrine threaten to overwhelm the plain meaning rule? Why or why not?

4. How satisfied are you that Thomas H. Lee Partners agreed to the interpretation of the clause argued by Great-West? Do you believe the court reached the wrong result? Incidentally, Thomas H. Lee Partners’ website states, “We have built our culture upon a foundation of teamwork, open communication, and intellectual honesty. We require the highest level of personal integrity and always treat others with respect. We conduct business in a straightforward and transparent manner, working with colleagues, investors and management teams as true partners.”

1.2.2. Parol Evidence

Now we reach the parol evidence rule—the rule you were cautioned about after Tips. Please remember the issue that the parol evidence rule addresses: whether any words should be added to or taken from the parties’ written contract, when they have a written contract. The parol evidence rule is not about the meaning of words, whether in the contract or out of it. It is about which words or terms are included in the contract.

Please keep in mind what was said before: Courts sometimes mention the plain meaning rule in the same passage as the parol evidence rule, and you will have to use context to determine what they are doing. If they are ruling on ambiguity in the words, that is about meaning. If they are ruling on whether some term not in the written agreement belongs in it or otherwise modifies the writing, that is parol evidence rule territory.

COLLIERS, DOW AND CONDON, INC. v. Leonard J. SCHWARTZ et al.

Conn. App. (2003), 823 A.2d 438

Opinion

[1] WEST, J. The plaintiff, Colliers, Dow and Condon, Inc., appeals from the judgment of the trial court rendered in favor of the defendants in this breach of contract action. The plaintiff claims that the court improperly (1) relied on parol evidence to vary an express term of a real estate brokerage agreement * * *.22 We agree with the plaintiff and reverse the judgment of the trial court.

[2] The following facts are relevant to our disposition of the plaintiff’s appeal. The controversy between the parties arises from the leasing of certain commercial property at 631-635-637 Farmington Avenue in West Hartford and owned by the defendant K.F. Associates, LLP. The defendant Leonard J. Schwartz is a managing partner in K.F. Associates, LLP.23 

[3] The parties have conducted business with each other on several prior occasions. The plaintiff leased, and subsequently sold, one of Schwartz’s buildings located in Bloomfield. The plaintiff later sold a small office building in West Hartford for Schwartz. In 1994, the defendants engaged the plaintiff’s services to lease 1450 square feet of the subject property.24 Following the success of those endeavors, the parties, in 1995, signed an agreement captioned ‘‘Exclusive Right To Sell/ Exchange Agreement,’’ under which the plaintiff was to secure a buyer for the subject premises.

[4] In 1997, the parties signed an agreement captioned ‘‘Exclusive Right to Sell/Exchange/Lease Agreement,’’ which is the subject of this appeal. At that time, a company named Imagineers was occupying approximately 86 percent of the subject property as a tenant. Schwartz asked John Tully, a licensed brokerage representative of the plaintiff, to approach Imagineers about buying the property. Tully’s discussions with Imagineers culminated in a letter in which he presented two proposed acquisition plans for the property. Imagineers responded with a counteroffer at a price well below either of the plaintiff’s proposals. As an alternative, Imagineers proposed to Schwartz directly that it continue to rent the building under a five year lease, with an option to renew for another five years, at $120,000 a year for the first five years and $130,000 a year for the second five year period. Under that arrangement, Imagineers would make certain improvements to the property, and provide landscaping and snow removal. A final counteroffer proposed an initial five year lease at $135,000 with an option for an additional five year lease at $145,000, with the defendants making necessary repairs.

[5] Between March 3 and August 26, 1998, a series of letters were exchanged between Imagineers and Schwartz. On August 26, 1998, Schwartz and Imagineers signed a lease agreement, effective February 1, 1999. On April 19, 1999, the plaintiff sent the defendants a bill for real estate brokerage services rendered pursuant to their exclusive listing agreement. The amount requested was 5 percent of the anticipated rent to be paid during the first five year lease period, or $42,750.80. Schwartz refused to make payment, and this action followed.

I

[6] The plaintiff’s first claim is that the court improperly relied on parol evidence to contradict an express term of the parties’ contract. We agree.

[7]  At the outset, we set forth the applicable standard of review. Ordinarily, ‘‘[o]n appeal, the trial court’s rulings on the admissibility of evidence are accorded great deference. . . . Rulings on such matters will be disturbed only upon a showing of clear abuse of discretion. . . . Because the parol evidence rule is not an exclusionary rule of evidence, however, but a rule of substantive contract law . . . the defendants’ claim involves a question of law to which we afford plenary review.’’ (Citations omitted; internal quotation marks omitted.) Harold Cohn & Co. v. Harco International, LLC, 72 Conn. App. 43, 48, 804 A.2d 218, cert. denied, 262 Conn. 903, 810 A.2d 269 (2002).

[8] The parol evidence rule is ‘‘premised upon the idea that when the parties have deliberately put their engagements into writing, in such terms as import a legal obligation, without any uncertainty as to the object or extent of such engagement, it is conclusively presumed, that the whole engagement of the parties, and the extent and manner of their understanding, was reduced to writing. After this, to permit oral testimony, or prior or contemporaneous conversations, or usages [etc.], in order to learn what was intended, or to contradict what is written, would be dangerous and unjust in the extreme. . . .

[9] ‘‘The parol evidence rule does not of itself, therefore, forbid the presentation of parol evidence, that is, evidence outside the four corners of the contract concerning matters covered by an integrated contract, but forbids only the use of such evidence to vary or contradict the terms of such a contract. Parol evidence offered solely to vary or contradict the written terms of an integrated contract is, therefore, legally irrelevant. When offered for that purpose, it is inadmissible not because it is parol evidence, but because it is irrelevant. By implication, such evidence may still be admissible if relevant . . . to show mistake or fraud. . . . [ This ] recognized [exception is], of course, only [an example] of [a situation] where the evidence . . . tends to show that the contract should be defeated or altered on the equitable ground that relief can be had against any deed or contract in writing founded in mistake or fraud.’’ (Citations omitted; internal quotation marks omitted.) Heyman Associates No. 1 v. Ins. Co. of Pennsylvania, 231 Conn. 756, 780–81, 653 A.2d 122 (1995).

[10] As an initial matter, we must frame the issue before this court. The plaintiff contends that the trial court relied on parol evidence to vary an express term of a contract, specifically, to read the word ‘‘lease’’ out of an otherwise valid contract. The defendants argue that the court relied on the parol evidence to make a preliminary finding that because there was no meeting of the minds between the parties as to the leasing of the subject property, there was no contract at all. We agree with the plaintiff.

[11] Because the defendants conceded in their answer to the complaint that Schwartz had entered into a contract with the plaintiff for professional real estate brokerage services, the validity of the contract was not before the court; only the scope of that contract was at issue. Moreover, the court’s memorandum of decision does not state that there was no agreement. The court found only that there was no agreement as to leasing, implicitly leaving intact that portion of the agreement relating to efforts to sell the property. The legal consequence of the court’s finding, therefore, was to strike that portion of the contract relating to leasing. We analyze the claims raised in this appeal in that light.

[12] The defendants contend that the renewal of the parties’ agreement was solely for the purpose of securing a buyer for the property and was not intended to include any efforts to lease the premises. Schwartz testified in support of that proposition. He stated that upon receiving the agreement, he called Tully and asked if the agreement meant that he was going to sell the building, if, in effect, the agreement was essentially the same as the earlier ‘‘right to sell/exchange’’ agreement. According to Schwartz, Tully responded, ‘‘Yes, it’s only for selling the building.’’ On the basis of that parol evidence, the court found that there was no meeting of the minds that the plaintiff would be entitled to a commission for leasing the premises. Specifically, the court found that in entering into the agreement, the defendants had not intended to retain the services of the plaintiff to lease the subject property, but had intended to retain the plaintiff’s services solely for the purpose of selling that property.25 

[13] That finding, however, directly contradicts the express terms of the contract. The parties’ written agreement provides that a commission is to be paid to the plaintiff upon either the sale or lease of the premises. Paragraph five of that agreement states in relevant part: ‘‘Broker earns its commission . . . if during the term of this Agreement: (a) a prospective buyer or lessee is ready, willing and able to PURCHASE or EXCHANGE or LEASE the Property at the price shown in paragraph 4 above, or at any other price or terms acceptable to Owner; or (b) any contract for the SALE or TRANSFER or LEASE of the Property or any portion thereof or interest therein is entered into by Owner; or (c) Owner and a prospective buyer or tenant enter into a legally binding contract for the SALE or EXCHANGE or LEASE of the Property or any portion thereof or any interest therein and such contract is breached or rescinded by a party or the parties; or (d) Owner SELLS, LEASES or TRANSFERS the Property or any portion thereof or interest therein . . . .’’ Paragraph four states: ‘‘Owner authorizes Broker to quote a SALE/EXCHANGE price of: $500,000, and a lease rental price of $13.50 gross per square foot, per annum.’’

[14] Given the substance of the parol evidence admitted in the present case, it might be supposed that Schwartz was attempting to establish that the lease term contained in the agreement was the result of either mistake or misrepresentation. We refer specifically to Schwartz’s testimony that he asked Tully whether the 1997 contract was the same as the 1995 sale-exchange agreement. Schwartz testified that Tully replied that it was essentially the same and that it contemplated only the sale of the subject property.

[15] As stated previously, parol evidence may be introduced to show fraud in the inducement or a mistake in memorializing the terms of an agreement. Where fraudulent misrepresentation is alleged, parol evidence may be introduced to show that the legal effect of a term was misrepresented and that such misrepresentation was relied on by a party in signing the agreement. See id. The pleadings filed in the present case, however, preclude any such application of the parol evidence rule. The only special defense that the defendants raised was the assertion that the contract failed to comply with the provisions of [a statute requiring real estate brokers to serve only pursuant to a written contract]. The defendants did not raise any issue with respect to mistake or fraud.26 Even if we were to conclude that Schwartz’s testimony at trial was aimed at establishing fraud or misrepresentation by the plaintiff respecting the terms of the agreement, we could not conclude that the court was entitled to entertain such testimony. Fraud is an affirmative defense that to be availed of, must specifically be pleaded. * * * * Because it was not pleaded, the defendants are not entitled to a judgment premised on that defense even if the evidence supports a finding of fraud. * * * *

[16] We conclude, therefore, that the court’s reliance on parol evidence to contradict an express term of the parties’ contract was improper. Accordingly, we reverse the court’s judgment that the brokerage agreement did not cover the leasing of the property. * * * *

[17] The judgment is reversed and the case is remanded for further proceedings (1) to consider the defendants’ special defense relating to § 20-325a (b) and (2) for a determination of the appropriate amount of damages.

In this opinion the other judges concurred.

Questions:

1. What did the trial court do wrong?

2. Why doesn’t the court allow evidence of either mistake in transcription or fraud?

3. Had the contract been ambiguous, would Tully’s response have been admissible?

4. Should the phone conversation between Tully and Schwartz matter?

5. Is there anything in the parol evidence rule about ambiguity? Plain meaning?

6. What public policy might support the parol evidence rule?

7. Why is the parol evidence rule “not an exclusionary rule of evidence, however, but a rule of substantive contract law”? Why then do we call it an “evidence rule”?

8. The court mentions the “four corners of the contract” in its description of the parol evidence rule. Would the parol evidence rule exclude written evidence of Tully’s response?

 

Some written contracts are obviously final, and some are obviously final and complete. Some are not obviously final. Some are obviously not complete. For example, thousands of cases involve homeowners who hire contractors to do yard projects, and the writing at issue is only a signed bid. It might be final, but it is obviously not complete. Can the court consider evidence besides the written document to determine whether the written document is final and/or complete?

Bennie D. HERRING v. Hubert M. PRESTWOOD, Jr., et al.

Supreme Court of Alabama (1979), 379 So.2d 548

TORBERT, Chief Justice.

[Excerpt from the Opinion:

[1] Appellant, Bennie Herring, filed suit below for a declaratory judgment to define the terms of an option to purchase land from the appellees, Hubert and Mary Prestwood. The option granted Herring the right to purchase 320 acres of land from the Prestwoods for a purchase price of $208,000 consisting of a down payment of $96,000 with the balance of $112,000 to be paid in annual installments over a period of ten to twenty years with interest at 8%. The evidence is in dispute as to whether any consideration was paid for the option.

[2] The first amendment to the complaint reworded the complaint to allege that the written option did not reflect the total agreement of the parties and added two counts to the complaint, one for breach of contract in refusing to convey, the other for fraud. Herring insists that the written option agreement is incomplete because it does not contain that portion of the actual agreement which would allow Herring to use the 320 acres as security for a loan to pay the down payment. The Prestwoods filed a motion to strike those allegations of the complaint which referred to the alleged oral promise and that motion was granted by the court because that court found proof of those allegations would be inadmissible.]

ON APPLICATION FOR REHEARING

[3] On application for rehearing the opinion is extended to address the parol evidence rule issue, in order to give the trial court guidance on remand.

[4] We hold that the trial court committed reversible error in finding that the parol evidence rule barred any testimony to the effect that the written option did not reflect the total agreement of the parties. The appellant contends that the entire agreement of the parties included the seller's agreement to allow him to place a first mortgage on the property. The appellee contends that the entire agreement included the buyer's agreement to abstain from placing any encumbrance on the property which would impair the vendor's lien. The written option is silent as to first mortgages. Because the writing does not cover the issue of first mortgages, parol evidence is admissible to establish the agreement of the parties.

The parol evidence rule, therefore, does not apply to every contract of which there exists written evidence, but applies only when the parties to an agreement reduce it to writing, And agree or intend that the writing shall be their complete agreement. [Citations omitted.] . . . . . Where there exists doubt that the written agreement was ever intended to reflect the full agreement of the parties, the courts of this State have not hesitated to admit contradictory parol evidence. [Citations omitted.]

Hibbett Sporting Goods v. Biernbaum, 375 So.2d 431 (Ala.1979) (emphasis added).

[5] This writer expressed his understanding of the parol evidence rule in a dissenting opinion in Hibbett Sporting Goods, supra. There he disagreed with the majority because the specific issue about which the admission of parol evidence was sought had been covered in the writing. In the instant case, the writing was completely silent as to first mortgages or vendor's liens.

It is fundamental that the parol evidence rule prohibits the contradiction of a written agreement by evidence of a prior oral agreement. The rule provides that when the parties reduce a contract to writing, no extrinsic evidence of prior or contemporaneous agreements will be admissible to change, alter, or contradict such writing. Hartford Fire Insurance Co. v. Shapiro, 270 Ala. 149, 117 So.2d 348 (1960); Richard Kelley Chevrolet Co. v. Seibold, 363 So.2d 989 (Ala.Civ.App.1978); 3 A. Corbin, Corbin on Contracts § 573, at 357 (1969). When the writing is a final expression of the parties' agreement, it is said to be integrated. If the writing is final but not complete, it is partially integrated and consistent terms only can be supplied by extrinsic evidence. If the writing is final and complete, it is totally integrated and not even evidence of consistent terms can be admitted. J. Murray, Jr., Murray on Contracts § 105 (1974); J. Calamari & J. Perillo, The Law of Contracts § 40, at 76 (1970). Whether the instrument is a final and complete expression of the agreement is to be determined from the conduct and language of the parties, the surrounding circumstances, and the instrument itself. Southern Guaranty Insurance Co. v. Rhodes, 46 Ala.App. 454, 243 So.2d 717 (1971); Pasquale Food Co. v. L & H International Air, Inc., 51 Ala.App. 127, 283 So.2d 438 (1973); 9 J. Wigmore, Evidence § 2430, at 98 (3d ed. 1940). In making such a determination, "the chief and most satisfactory index for the judge is found in the circumstance whether or not the particular element of the alleged extrinsic negotiation is dealt with at all in the writing. If it is mentioned, covered, or dealt with in the writing, then presumably the writing was meant to represent all of the transaction on that element; if it is not, then probably the writing was not intended to embody that element of the negotiation." Id. at 98-99; Southern Guaranty Insurance Co. v. Rhodes, supra.

Hibbett Sporting Goods v. Biernbaum, 375 So.2d at 437 (Ala.1979).

[6] Since the written option in the instant case was silent as to vendor's liens or first mortgages, it does not embody that element of the negotiation and parol evidence is admissible to establish the understanding or agreement of the parties in regard to a first mortgage.

OPINION EXTENDED; APPLICATION FOR REHEARING OVERRULED.

BLOODWORTH, FAULKNER, ALMON and EMBRY, JJ., concur.

Questions:

1. Do you find it odd that the court considers the alleged extraneous provisions in order to determine whether the contract is integrated? Not every court is willing to do this. Consider the following from State ex rel. MHTC v. Maryville Land Partnership, 62 S.W.3d 485 (Mo. App. 2001):

[1] The parol evidence rule has been described as "a deceptive maze rather than a workable rule." Jake C. Byers, Inc. v. J.B.C. Investments, 834 S.W.2d 806, 812 (Mo. App. E.D.1992). There is a general consensus that when the parties have reduced their final and complete agreement to writing, the parol evidence rule does not permit the writing to be varied or contradicted and this principle is a substantive rule of law and not a rule of evidence. Id. (citing Commerce Trust Co. v. Watts, 360 Mo. 971, 231 S.W.2d 817, 820 (1950)); Restatement (Second) Contracts § 213. The parol evidence rule does not prevent relevant parol evidence from being admitted; but prohibits the trier of fact from using that evidence to vary, alter or contradict the terms of a binding, unambiguous and integrated written contract. Restatement (Second) Contracts § 214. The essence of the parol evidence rule is, therefore, that evidence outside a completely integrated contract cannot be used to change the agreement.

[2] The parol evidence rule does not, however, prohibit the presentation of parol evidence to determine if the contract is integrated. All authorities agree that the court must determine if the contract is integrated before it applies the parol evidence rule. Wulfing v. Kansas City Southern Industries, Inc., 842 S.W.2d 133, 146 (Mo. App. W.D.1992); Restatement (Second) Contracts § 209. A written agreement is integrated if it represents a final expression of one or more terms of the agreement. Restatement (Second) Contracts § 209(1). Contracts can be either completely or partially integrated. If a written contract is a completely integrated agreement even consistent additional terms within its scope are precluded. Centerre Bank of Kansas City v. Distributors, 705 S.W.2d 42, 51 (Mo. App. W.D.1985); Restatement (Second) Contracts § 209 (cmt.a). If, however, the writing omits a consistent additional term that is either agreed to for separate consideration or might naturally have been omitted in the circumstances, the agreement is considered only partially integrated and collateral facts and circumstances may be introduced to prove consistent additional terms. Craig v. Jo B. Gardner, Inc., 586 S.W.2d 316, 324 (Mo. banc 1979); Restatement (Second) Contracts § 216(2).

[3] Scholars disagree, however, on the method by which courts should determine if the contract is integrated. Compare 4 WILLISTON, CONTRACTS § 633 (3rd ed.1961) and 1 Restatement, Contracts, §§ 237, 240, with 3 Corbin, Contracts § 582 (1960), Restatement (Second) Contracts § 209 and UCC 2‑202; see generally, Farnsworth, Contracts § 7.3. Williston's position is that "the contract must appear on its face to be incomplete in order to permit parol evidence of additional terms." 4 Williston, Contracts § 633. If the contract appears on its face to be completely integrated, the court should simply accept that this is so, without looking to the surrounding circumstances. Id. The modern trend has been to reject this view on the ground that a "writing cannot prove its own completeness and accuracy." Corbin, The Parol Evidence Rule, 53 Yale L.J. 603, 630 (1944). Corbin, the Second Restatement, and the UCC have all taken the position that the court should take into consideration all relevant circumstances before determining that the contract is integrated. 3 Corbin, Contracts § 582; Restatement (Second) Contracts § 209 (cmt.b); UCC 2‑202 Cmt. 1.

[4] The Missouri Supreme Court has not spoken to the question; but the language used in its decisions has led this court to adopt the position advocated by Williston and the First Restatement. Jake C. Byers, Inc., 834 S.W.2d at 811‑12. So, the initial inquiry is to determine if the Escrow Agreement here is completely or partially integrated on its face. Under present Missouri law, if it is a complete agreement on its face, it is conclusively presumed to be a final as well as a complete agreement between the parties. Id. at 812. We look to the Escrow Agreement and find the following relevant provisions:

THIS ESCROW AGREEMENT, made and entered into as of this 31st day of October, 1985 by and between Lindbergh‑Warson Properties, Inc. ("Lindbergh"), and Maryville Land Partnership, a Joint Venture ("Maryville"), the Missouri Highway and Transportation Commission ("Commission"), Community Title Company ("Community") and Centerre Bank, National Association ("Bank").

WHEREAS, Lindbergh and the Commission heretofore entered into a certain Agreement . . . wherein Lindbergh agreed to pay a sum not exceeding One Million and no/100 Dollars ($1,000,000.00) in reimbursement of the Commission for the actual construction cost of the Grade Separation and the North Outer Roadway on Highway 40 in St. Louis County, Missouri, approximately midway between Route 141 and the Mason Road interchange; and

WHEREAS, Lindbergh and the Commission heretofore entered into a supplemental agreement wherein Lindbergh agreed to pay an additional sum of Ninety Thousand and no/100 ($90,000.00) for certain "culvert work"; and

WHEREAS, Maryville, of which Lindbergh is a general partner, has heretofore succeeded to the rights and obligations of Lindbergh in the Agreement; and

WHEREAS, Bank has heretofore loaned to Maryville the monies necessary to fund Maryville's obligations to the Commission under the Agreement and in connection therewith Bank agreed to advance the proceeds of said loan at the request of, and at the direction of, the Commission upon receipt from the Commission of its certification that (a) the cost of the overpass and culvert work completed to date, as a percentage of the total projected cost of said work, is not less than the amount previously disbursed plus the amount of the requested advance, expressed as a percentage of Maryville's total obligation to Commission and (b) all previous advances have been used to satisfy Maryville's obligation to partially defray the costs of the culvert and overpass work (the "Certification") and

WHEREAS, Bank would like to be relieved of its direct obligation to the Commission in this regard and the parties hereto are mutually agreed that Community shall serve as the Escrow Agent pursuant to the terms hereinafter specified. . . .

NOW, THEREFORE, in consideration of the promises and of the mutual covenants and agreements hereinafter set forth, and of other good and valuable consideration, the parties hereto covenant and agree as follows:

  1. Escrowed Funds. Maryville shall, upon execution of the Escrow Agreement, cause to be deposited with Community the sum of One Million Thirty Four Thousand Five Hundred Sixty and no/100 Dollars ($1,034,560.00), being the balance of Maryville's obligation to Commission (the "Escrowed Funds"), to secure the obligations of Maryville under the Agreement. . . .
  2. Investment. The Escrowed Funds shall be invested in Certificates of deposit with Bank in such amounts and with such maturity dates as Maryville shall direct.
  3. Escrow Funds. The Escrowed Funds shall be advanced as directed by Commission within five (5) business days of receipt of the written request of the Commission. Each such request shall be accompanied by a Certification in the form annexed hereto as Exhibit B. . . .
  4.  *  *  *  *  *  *
  5. Accumulation of Income. All income accumulated from the investment of the Escrowed Funds and not used to satisfy interest or other loan charges, if any, shall be the property of Maryville and shall be paid to Maryville, from time to time, upon request.

[5] The Escrow Agreement simply makes no reference to what would happen to any unused funds in the escrow account, but recitals in the Escrow Agreement reference both the Construction Agreement and a supplemental agreement. These references show that the fundamental purpose of the Escrow Agreement was to facilitate the Construction Agreement by replacing Lindbergh‑Warson's letter of credit with an escrow account furnished by Maryville Land, who had succeeded to Lindbergh Warson's interests. The face of the Escrow Agreement itself makes clear that a number of documents, read together, make up the entire agreement between the Commission, Lindbergh‑Warson and Maryville Land. The Escrow Agreement merely supplements terms in the underlying Construction Agreement and does not represent the entire agreement of the parties. Importantly, it does not provide for the possibility that the parties would succeed in obtaining state and federal funds for the construction of the overpass. We therefore conclude that the Escrow Agreement was not a completely integrated agreement and collateral facts and circumstances could be introduced to show consistent additional terms. See Craig v. Jo B. Gardner, Inc., 586 S.W.2d 316, 324 (Mo. 1979). The court did not err in allowing evidence to show that the parties’ agreement assumed that Maryville Land would be entitled to a return of the escrowed funds if MHTC obtained state and federal funding. MHTC's first and third points of error therefore fail.

2. Had the MHTC court followed the Corbin rule, what evidence would you expect the parties to have offered? Would use of the Corbin rule have changed the result? Justice Traynor, in Masterson v. Sine, 436 P.2d 561, 565 (Cal. 1968), wrote:

Corbin suggests that, even in situations where the court concludes that it would not have been natural for the parties to make the alleged collateral oral agreement, parol evidence of such an agreement should nevertheless be permitted if the court is convinced that the unnatural actually happened in the case being adjudicated. (3 Corbin, Contracts, s 485, pp. 478, 480; cf. Murray, The Parol Evidence Rule: A Clarification (1966) 4 Duquesne L. Rev. 337, 341‑‑342.) This suggestion may be based on a belief that judges are not likely to be misled by their sympathies. If the court believes that the parties intended a collateral agreement to be effective, there is no reason to keep the evidence from the jury.

Who resolves parol evidence questions—judge or jury? Does Corbin’s suggestion conflict with what you learned from Colliers, Dow & Condon, Inc. about the parol evidence rule’s underlying policy?

3. Doesn’t the MHTC court stop the analysis of integration a bit early? If the Escrow Agreement was supposed to function in tandem with the Construction Agreement and a supplemental agreement, shouldn’t the question be whether these three agreements were integrated?

4. The use of recitals in the MHTC Escrow Agreement is pretty standard. What is the role or function of the recitals in this contract?

Uniform Commercial Code § 2-202

Alvin SNYDER, Morris Sugarman, Herbert Thaler and Harold A. Crone, Inc. and T/A Twin Lakes Partnership v. HERBERT GREENBAUM AND ASSOCS., INC.

Maryland App. (1977), 380 A.2d 618

COUCH, J., delivered the opinion of the Court.

[1] This is an appeal from a judgment entered in the Circuit Court for Baltimore County (LAND, J.), sitting without a jury, in favor of appellee, Herbert Greenbaum and Associates, Inc., and against Alvin Snyder, Morris Sugarman, Herbert Thaler, and Harold A. Crone, individually and trading as Twin Lakes Partnership.

[2] Appellants raise three contentions in this appeal:

(I) The trial court erred in its findings that the appellants were not entitled to rescind the contract because appellee had misrepresented a material fact, which appellants relied on in forming the contract;

(II) The trial court erred in not allowing into evidence certain documents as proof of a prior oral agreement that all contracts between the parties, including the one at issue in this case, could be cancelled unilaterally prior to performance;

(III) The trial court erred in the assessment of damages.

[3] The facts that give rise to this dispute are simple. Pursuant to its plan to begin construction in 1973 of 228 garden apartments, Twin Lakes, through its management, began negotiations with the appellee, Herbert Greenbaum and Associates, Inc., to supply and install carpeting and the underlying carpet pad for the apartments. During the course of these negotiations Greenbaum estimated that approximately 19,000 to 20,000 yards of carpeting were required for the job. Thereafter the parties entered into a contract that Greenbaum would supply the necessary carpet for the 228 apartments, and install it, for a total consideration of $87,600.00. In the contract itself no mention was made of the amount of carpeting to be installed.

[3] Between the April 4, 1972 date of the contract and September, 1973, Greenbaum purchased large amounts of carpet to be used on the Twin Lakes job from several carpet wholesalers. However, no carpet was ever installed because Twin Lakes, through Alvin Snyder, cancelled the contract in September, 1973. It became apparent at some point that 19,000 to 20,000 yards of carpet was an overestimation — the actual figure needed was between 17,000 and 17,500 yards.

[4] Appellee then brought an action against the Twin Lakes Partnership for breach of contract, and was awarded a judgment for $19,407.20. It is this judgment from which this appeal stems.

[5] Before considering the points raised by the appellants, an important threshold question must be answered — whether Md. Code (1974), Commercial Law Article, specifically Title 2, Maryland Uniform Commercial Code — Sales, applies to the contract in this case, which is a mixed contract for the sale of carpet and the installation of the carpet. * * * * [The court concluded that Article 2 indeed applied.]

II

[6] At trial appellants offered five documents, purporting to be prior contracts between the parties, each one bearing on its face a notation that it was rescinded or cancelled. Appellants offered these contracts as proof of a prior course of dealing or oral agreement between appellants and appellee to the effect that either party could cancel or modify any contract between these parties unilaterally. Therefore, the appellants contend that they had a contractual right to rescind, and are not liable for breach of contract.

[7] The trial court refused to admit these documents, relying chiefly on the parol evidence rule. Appellants contend that the trial court erred in refusing to admit these documents.

[8] As a result of our holding that the Sales Title applies to this contract, the parol evidence rule, as found in Md. Code (1974), Commercial Law Article § 2-202, governs this case. That section provides:

"Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented

  • (a) By course of dealing or usage of trade ([§ 1-303]) or by course of performance * * *; and
  • (b) By evidence of consistent additional terms unless the court finds the writing to have been intended also as a complete and exclusive statement of the terms of the agreement."

[9] By the terms of § 2-202 itself, § 2-202 applies to the contract in this case. This contract was made after negotiations between the parties, and intended to be a final expression of their agreement with respect to the terms embodied therein.

[10] However, the course of dealing or agreement which appellants attempted to show does not directly contradict any of the terms expressed in the writing. There is no expression concerning cancellation or rescission in the contract. The terms of the agreement, therefore, may be "explained or supplemented" as allowed by subsections (a) or (b).

[11] Subsection (a) provides for the admission of extrinsic evidence showing a "course of dealing" between the parties. "Course of dealing" is defined in [§ 1-303(b)] as:

"[A] sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct."

[12] The import of [§ 1-303(b)] is that "course of dealing" is an interpretive device to give meaning to the words and terms of an agreement. This function is underlined by Comment 2 of the Official Comment to § 2-202, which notes that:

"Paragraph (a) makes admissible evidence of course of dealing . . . to explain or supplement the terms of any writing stating the agreement of the parties in order that the true understanding of the parties as to the agreement may be reached . . . . Unless carefully negated they have become an element of the meaning of the words used." (Emphasis added.)

See State ex rel. Yellowstone Park Co. v. District Court, 160 Mont. 262, 502 P.2d 23 (1972).

[13] That which appellants advance as a "course of dealing" does not serve as an interpretive device, but as an agreement that adds terms to the contract. Therefore, the evidence offered does not properly fall under the rubric of "course of dealing", but is properly under the requirements of Subsection (b) of § 2-202, dealing with "additional terms". See Division of Triple-T Service v. Mobil Oil Corp., 60 Misc.2d 720, 304 N.Y.S.2d 191 (1969).27 

[14] Subsection (b) allows evidence of additional terms subject to two prerequisites to admission. The first is that the writing or contract must not be found by the court to have been intended as a complete and exclusive statement of the contract terms. Second, the "additional terms" must not be inconsistent with the contract and its terms.

[15] Comment 3 of the Official Comment to § 2-202 explains the first requirement as:

"If the additional terms are such that, if agreed upon, they would certainly have been included in the document in the view of the court, then evidence of their alleged making must be kept from the trier of fact."

The nature of the additional term that appellants sought to prove at trial, allowing unconditional unilateral rescission, is such a term that would have been included in the final written agreement, and was correctly excluded by the trial judge. A term allowing unilateral cancellation would certainly have been included in the contract, given the nature of appellee's obligation. Appellee was required to take substantial preparatory steps to performance, such as the purchase of the carpet. To protect this obligation, any term allowing unilateral cancellation by appellee, had there been such a term, would have included an express qualification as to the time of cancellation. Certainly the cancellation term would have been included in the writing to evidence appellee's ability to cancel at any time. We conclude that the contract was intended to be a complete and exclusive statement of the contract terms and, therefore, the evidence of additional terms was properly excluded.

[16] At any rate, for much the same reason, we hold that the additional terms offered by appellants are inconsistent with the contract itself. In so doing we reject the narrow view of inconsistency espoused in Hunt Foods v. Doliner, 26 A.D.2d 41, 270 N.Y.S.2d 937 (1966), and Schiavone and Sons v. Securalloy Co., 312 F. Supp. 801 (D. Conn. 1970). Those cases hold that to be inconsistent the "additional terms" must negate or contradict express terms of the agreement.

[17] This interpretation of "inconsistent" is itself inconsistent with a reading of the whole of § 2-202. Direct contradiction of express terms is forbidden in the initial paragraph of § 2-202. The Hunt Foods interpretation renders that passage a nullity, a result which is to be avoided. Gillespie v. R & J Constr. Co., 275 Md. 454, 341 A.2d 417 (1975).

[18] Rather we believe "inconsistency" as used in § 2-202 (b) means the absence of reasonable harmony in terms of the language and respective obligations of the parties. § 1-205 (4); see Southern Concrete Services v. Mableton Contractors, 407 F. Supp. 581 (N.D.Ga. 1975). In terms of the obligations of the appellee, which required appellee to make extensive preparations in order to perform, unqualified unilateral cancellation by appellants is not reasonably harmonious. Therefore, evidence of the additional terms was properly excluded by the trial judge, and we find no error.

Questions:

1. Does the parol evidence rule as stated in § 2-202 differ from the common law parol evidence rule stated in Colliers, Dow and Condon, Inc.?

2. On what evidentiary showing does the court conclude that the agreement was intended to be a final expression of the parties' agreement?

3. First, in  10, the court rules that the proposed evidence does not contradict the agreement. Then, later, the court seems to rule in a manner inharmonious with that ruling. Where? Do you follow the court's reasoning? Why does it work through the statute in this manner?

4. What role does the sentence in comment 3 play in the court's interpretation of the statute?

5. Is this contract partially integrated? Fully integrated?

6. Did the court reach the right result?

PROBLEM 2: A signs an option agreement requiring A at B’s election to sell certain paintings to B at a given price for a certain period of time. Later, A contends that the option cannot be exercised unless A first receives an offer from C to buy the paintings. Is the second assertion consistent with the option?

PROBLEM 3: A printing company agrees in writing to print twelve monthly issues of a magazine for a publisher. The printing company prints the first issue very badly, however. The publisher fires the printer, and printer sues. In court, the magazine publisher wants to show that the two companies agreed informally and because it is trade usage that the publisher would have the right to terminate at any time it was not satisfied with the printing. Is that consistent?

Luther WILLIAMS, Jr. v. JOHNSON

D.C. Court of Appeals (1967), 229 A.2d 163

QUINN, J.

[1] Appellant (plaintiff below) sought to recover $670 as liquidated damages under a contract for improvements on appellees' home. Appellees' defense was that the contract never came into existence because of an unfulfilled condition precedent. This appeal raises the sole question of whether the parol evidence rule required exclusion of all testimony regarding the alleged condition.

[2] At the trial, Luther Williams, Jr., president of appellant corporation, testified that prior to the signing of the contract, he offered to arrange any necessary financing for appellees, but was advised that they had their own. He was further informed that the down payment would be made in a few days when they received their funds. After drawing plans and contacting appellees several times, he was told that their financing had not been obtained and that they had procured another contractor to make certain improvements on the property.

[3] Appellees testified that they signed the contract thinking it was merely an estimate; that they told Mr. Williams the improvements would depend upon approval of their financing by their bank; and that it was their understanding with him that they would not become obligated until they had procured the funds. Appellant objected to the introduction of all testimony concerning a parol agreement regarding financing, and later objected to jury instructions on that subject. The objections were overruled, and the jury returned a verdict for appellees.

[4] As previously stated, the issue here is a narrow one, namely, whether the admission of testimony concerning the oral condition precedent violated the parol evidence rule. Briefly stated, that rule provides that when the parties to a contract reduce their agreement to writing, that writing is presumed to be the final repository of all prior negotiations, and testimony concerning prior or contemporaneous oral agreements which tends to vary, modify or contradict the terms of the writing is inadmissible. See 3 Corbin, Contracts § 573 (1960); 4 Williston, Contracts § 631 (3d ed. 1961).

[5] In this jurisdiction, however, it is well settled that a written contract may be conditioned on an oral agreement that the contract shall not become binding until some condition precedent resting in parol shall have been performed. Burke v. Dulaney, 153 U.S. 228, 14 S.Ct. 816, 38 L.Ed. 698 (1894); Lippincott v. Kerr, 59 App.D.C. 290, 40 F.2d 802 (1930); Robertson v. Ramsay, 54 App.D.C. 346, 298 F. 557 (1924); Northeast Motor Co. v. Neal, D.C. Mun.App., 162 A.2d 287 (1960); Jess Fisher & Co. v. Darby, D.C.Mun.App., 96 A.2d 270 (1953); Wetzel v. DeGroot, D.C. Mun.App., 86 A.2d 737 (1952); Glascoe v. Miletich, D.C.Mun.App., 83 A.2d 587 (1951). Furthermore, parol testimony to prove such a condition is admissible when the contract is silent on the matter, the testimony does not contradict nor is it inconsistent with the writing, and if under the circumstances it may properly be inferred that the parties did not intend the writing to be a complete statement of their transaction. Seitz v. Brewers' Refrigerating Mach. Co., 141 U.S. 510, 12 S.Ct. 46, 35 L.Ed. 837 (1891); Jess Fisher & Co. v. Darby, supra; Glascoe v. Miletich, supra; Mitchell v. David, D.C.Mun.App., 51 A.2d 375 (1947).

[6] The contract in question contained the following clause:

"This contract embodies the entire understanding between the parties, and there are no verbal agreements or representations in connection therewith."

Two problems thus arise when applying the above rules to the instant case. First, in the light of an "integration clause," can evidence be admitted to show that the parties did not intend the writing to be a complete statement of their transaction? Second, can it be said that the testimony regarding the condition precedent does not contradict the writing when the contract states there are no agreements other than those contained in the writing?

[7] As to the first question, it has always been presumed that a written contract is the final repository of the agreement of the parties. 4 Williston, op. cit. supra § 631 at 953-954. In this regard, an integration clause merely strengthens this presumption. However, intent is a question of fact, and to determine the intent of the parties, it is necessary to look not only to the written instrument, but to the circumstances surrounding its execution.

[8] In Mitchell v. David, supra, we quoted with approval from 9 Wigmore, Evidence § 2430 (3d ed. 1940) as follows:

"Whether a particular subject of negotiation is embodied by the writing depends wholly upon the intent of the parties thereto. In this respect the contrast is between voluntary integration and integration by law. Here the parties are not obliged to embody their transaction in a single document; yet they may, if they choose. Hence it becomes merely a question whether they have intended to do so." "This intent must be sought where always intent must be sought, namely, in the conduct and language of the parties and the surrounding circumstances. The document alone will not suffice. What it was intended to cover cannot be known till we know what there was to cover. The question being whether certain subjects of negotiation were intended to be covered, we must compare the writing and the negotiations before we can determine whether they were in fact covered. Thus the apparent paradox is committed of receiving proof of certain negotiations in order to determine whether to exclude them; and this doubtless has sometimes seemed to lower the rule to a quibble. But the paradox is apparent only. The explanation is that these alleged negotiations are received only provisionally. Although in form the witnesses may be allowed to recite the facts, yet in truth the facts will be afterwards treated as immaterial and legally void, if the rule is held applicable. There is a preliminary question for the judge to decide as to the intent of the parties, and upon this he hears evidence on both sides; his decision here, pro or con, concerns merely this question preliminary to the ruling of law. If he decides that the transaction was covered by the writing, he does not decide that the excluded negotiations did not take place, but merely that if they did take place they are nevertheless legally immaterial. If he decides that the transaction was not intended to be covered by the writing, he does not decide that the negotiations did take place, but merely that if they did, they are legally effective, and he then leaves to the jury the determination of fact whether they did take place." 51 A.2d at 378.

See also, Giotis v. Lampkin, D.C.Mun.App., 145 A.2d 779 (1958); 3 Corbin, op. cit. supra § 582. We are still of the opinion that this expresses the better practice.

[9] As to the second question, we are aware that some courts have answered it in the negative. See, e. g., Rowe v. Shehyn, 192 F. Supp. 428 (D.D.C.1961); J & J Construction Co. v. Mayernik, 241 Or. 537, 407 P.2d 625 (1965). We believe, however, that this is an erroneous interpretation of Restatement, Contracts § 241 (1932) which provides as follows:

"Where parties to a writing which purports to be an integration of a contract between them orally agree, before or contemporaneously with the making of the writing, that it shall not become binding until a future day or until the happening of a future event, the oral agreement is operative if there is nothing in the writing inconsistent therewith." (Emphasis added.)

To explain this section, the following illustration is given:

"A and B make and sign a writing in which A promises to sell and B promises to buy goods of a certain description at a stated price. The parties at the same time orally agree that the writing shall not take effect unless within ten days their local railroad has cars available for shipping the goods. The oral agreement is operative according to its terms. If, however, the writing provides `delivery shall be made within thirty days' from the date of the writing, the oral agreement is inoperative."

In our opinion, it is clear from the example that what is intended is not the exclusion of evidence because of the existence of an "integration clause," 3 Corbin, op. cit. supra § 578 at 405-407, but an exclusion only if the alleged parol condition contradicts some other specific term of the written agreement. See Fadex Foreign Trad. Corp. v. Crown Steel Corp., 272 App.Div. 273, 70 N.Y.S.2d 892, aff'd, 297 N.Y. 903, 79 N.E.2d 739 (1947); 3 Corbin, op. cit. supra § 577 example (5). In the instant case, no provision was made regarding financing. Therefore, the parol condition would not contradict the terms of the writing.

[10] For the above-stated reasons, we hold that it was not error to admit testimony tending to show that the writing was not intended to be a complete statement of the agreement of the parties and to instruct the jury to find for appellees if they determined that the negotiations regarding the condition precedent had taken place and that the contract was not to become binding unless the financing was first obtained.

Affirmed.

Questions:

1. Is the ntegration clause conclusive?

2. Is the integration clause consistent with the oral condition?

3. Evidence submitted to prove a contract void or voidable—fraud, mistake, duress, illegality, etc.—is admissible notwithstanding the parol evidence rule. Why?

4. Conditions—you probably studied them when you studied illusory promises. Understanding them depends on seeing what it is that they make conditional. Can you discern the difference between a condition of a contract and a condition of a duty? Would the latter prevent a contract from forming?

RIGGS BANK, N.A. v. Edward J. HARRIS, Jr., et al.

D. Md. (2000)

MEMORANDUM

[1] Riggs Bank has brought this action against Edward J. Harris, Jr. and Andre Downey to collect on guaranties executed by defendants with respect to a commercial term loan in the original principal amount of $500,000 made to Abatement Environment Resources, Inc. (“AER”). AER, which is now in bankruptcy, defaulted on the loan. Proper demand for payment has been made upon AER and upon defendants. After defendants refused to pay, Riggs filed this action and moves for summary judgment.

[2] Defendants assert that the loan made to AER was to finance the sale of AER to themselves. They further allege that their guaranties were subject to an oral condition precedent that this sale would close.

[3] Under the law of the District of Columbia—which the parties appear to agree is governing—where the parties’ intentions are “clear, unambiguous and not ‘reasonably or fairly susceptible of different constructions or interpretations, or of two or more different meanings,’ . . . no evidence may be introduced of prior agreements or terms, whether consistent or inconsistent, within the scope of the written agreement.” Bolle v. Hume, 619 A.2d 1192, 1196 (D.C. 1993) * * *.

[4] Here, the guaranties executed by defendants contained an integration clause providing that:

This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to matters set forth in this Guaranty. No alteration of or amendment of this this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Each of the guaranties also provided that it “would take effect when received by Lender [Riggs] . . . .” Nothing in the related loan documents suggests that the oral condition precedent alleged by defendants existed. To the contrary, the only condition precedents mentioned in the loan documents were in favor of Riggs. The commitment letter conditioned Riggs’ obligations upon the execution of a management agreement between defendants and Joseph Downey, the owner of AER, and the business loan agreement between Riggs and AER conditioned Riggs’ obligations under the loan upon Riggs’ receipt of defendants’ guaranties.

[5] Defendants rely upon an exception to the parole evidence rule permitting extrinsic evidence that a contract containing unconditional obligations was not itself to become effective until an oral condition precedent had been met. As a matter of abstract logic, this exception could virtually swallow the rule. Therefore, its parameters must be judged by the context in which it has been articulated.

[6] The three cases cited by defendants in which the exception was applied are clearly different from the present case. Two of them, Williams v. Johnson, 229 A.2d 163 (D.C. 1967) and * * * involved consumer transactions and presented factual disputes as to whether the party seeking to enforce the contract had been guilty of heavy-handed treatment if not outright fraud. * * * *

[7] It might appear that the easy way to avoid a collision between the parole evidence rule and the “oral condition precedent” exception to the rule relied upon by defendants would be to deny Riggs’ motion for summary judgment and permit discovery to proceed. That course would, however, result in substantial litigation expense and at least some delay. It would thus defeat the very purpose of the parole evidence rule “to promote the stability of transactions by preventing disgruntled parties from avoiding obligations by alleging oral understandings that conflict with their written agreement when those agreements were reduced to writing in order to forestall just such contentions.” * * * *

[The court refused to allow discovery and granted Riggs Bank summary judgment on the issue of defendant’s liability.]

Question: What is going on here?

1.3. Implied Obligations

Even while contract law takes words seriously, the law also recognizes that the words used in a contract could not possibly include everything the parties mean to say. Our inability to specify obligations with perfect completeness sometimes tempts people to read their contracts in a wooden or technical way in favor of their own positions. Non-lawyers call such a reading “finding a loophole.” But the duties of cooperation and good faith ensure that the bargain’s substance is enforced notwithstanding the incompleteness of our contracts.

In the following cases, what did the parties fail to promise to do, or not do, specifically that a judge later decides to include in one party’s obligation? Do you feel safer making contracts, generally speaking—are you more willing to become a contracting party—because you know courts may add specificity to your or your counter-party’s contractual obligations under the duty of cooperation or the duty of good faith?

1.3.1. Duty of Cooperation

PATTERSON v. MEYERHOFER

Court of Appeals of New York (1912), 97 N.E. 472

WILLARD BARTLETT, J.

[1] The parties to this action entered into a written contract whereby the plaintiff agreed to sell, and the defendant agreed to buy, four several parcels of land with the houses thereon for the sum of $23,000, to be partly in cash and partly by taking title subject to certain mortgages upon the property. When she executed this contract, the defendant knew that the plaintiff was not then the owner of the premises which he agreed to sell to her, but that he expected and intended to acquire title thereto by purchasing the same at a foreclosure sale. Before this foreclosure sale took place, the defendant stated to the plaintiff that she would not perform the contract on her part, but intended to buy the premises for her own account without in any way recognizing the said contract as binding upon her, and this she did, buying the four parcels for $5,595 each. The plaintiff attended the foreclosure sale, able, ready, and willing to purchase the premises, and he bid for the same, but in every instance of a bid made by him the defendant bid a higher sum. The result was that she acquired each lot for $155 less than she had obligated herself to pay the plaintiff therefor under the contract for $620 less in all.

[2] In the foreclosure sale was included a fifth house, which the defendant also purchased. This was not mentioned in the written contract between the parties, but, according to the complaint, there was a prior parol agreement which provided that the plaintiff should buy all five houses at the foreclosure sale, and should convey only four of them to the defendant, retaining the fifth house for himself.

[3] Upon these facts the plaintiff brought the present action, demanding judgment that the defendant convey to him the fifth house, and declaring that he has a lien upon the premises purchased by her at the foreclosure sale, and that she holds the same in trust for the plaintiff subject to the contract. The complaint also prays that the plaintiff be awarded the sum of $620 damages, being the difference between the price which the defendant paid at the foreclosure sale for the four houses mentioned in the contract and the price which she would have had to pay the plaintiff thereunder. The learned judge who tried the case at Special Term rendered judgment in favor of the defendant, holding that, under the contract of sale, there was no relation of confidence between the vendor and vendee. ‘In the present case,’ he said, ‘each party was free to act for his own interest, restricted only by the stipulations of the contract.’ He was, therefore, of the opinion that ‘the defendant had a right to buy in at the auction, and that she is entitled to hold exactly as through she had been a stranger, and that the plaintiff is not entitled to recover the difference between the price paid at the auction and the contract price.’

[4] I am inclined to agree with the trial court that no relation of trust can be spelled out of the transactions between the parties. There is no finding of any parol agreement in respect to the fifth house which has been mentioned, and, even if there had been such an agreement resting merely in parol, I do not see that it would have been enforceable. As to the four parcels which constituted the subject-matter of the written contract, the defendant avowed her intention to ignore that contract before bidding for them, and cannot be regarded as having gone into possession under the plaintiff as vendor, but did so rather in defiance of any right of his * * * . * * * *

[5] There is no need of judicially declaring any trust in the defendant, however, to secure to the plaintiff the profit which he would have made if the defendant had not intervened as purchase at the foreclosure sale, and had fulfilled the written contract on her part. This is represented by his claim for $620 damages. That amount, under the facts as found, I think the plaintiff was entitled to recover. He has demanded it in his complaint, and he should not be thrown out of court because he has also prayed for too much equitable relief.

[6] In the case of every contract there is an implied undertaking on the part of each party that he will not intentionally and purposely do anything to prevent the other party from carrying out the agreement on his part. This proposition necessarily follows from the general rule that a party who causes or sanctions the breach of an agreement is thereby precluded from recovering damages for its nonperformance or from interposing it as a defendant to an action upon the contract. Young v. Hunter, 6 N.Y. 203; Barton v. Gray, 57 Mich. 622, 24 N.W. 638, and cases there cited. ‘Where a party stipulates that another shall do a certain thing, he thereby impliedly promises that he will himself do nothing which may hinder or obstruct that other in doing that thing.’ Gay v. Blanchard, 32 La. Ann. 497.

[7] By entering into the contract to purchase from the plaintiff property which she knew he would have to buy at the foreclosure sale in order to convey it to her, the defendant impliedly agreed that she would do nothing to prevent him from acquiring the property at such a sale. The defendant violated the agreement thus implied on her part by bidding for and buying the premises herself. Although the plaintiff bid therefor, she uniformly outbid him. Presumably, if she had not interfered, he could have bought the property for the same price which she paid for it. He would then have been able to sell it to her for the price specified in the contract (assuming that she fulfilled the contract), which was $620 more. This sum, therefore, represents the loss which he has suffered. If is the measure of the plaintiff’s damages for the defendant’s breach of contract.

[8] I see no escape from this conclusion. It is true that the contract contemplated that the four houses should go to the defendant and they have gone to her; but that is not all. The contract contemplated that they should go to the plaintiff first. In that event the plaintiff would have received $620 which he has not got. This would have had to be paid by the defendant if she had fulfilled her contract; and she should be required to pay it now unless she can present some better defense than is presented in this record. This will place both parties in the position contemplated by the contract. The defendant will have paid no more than the contract obligated her to pay. The plaintiff will have received all to which the contract entitled him. I leave the fifth house out of consideration because as to that it seems to me there was no enforceable agreement.

[9] For these reasons, the judgments of the Appellate Division and the Special Term should be reversed and a new trial granted, with costs to abide the event.

CHASE, J. (dissenting). [Omitted.] * * * *

Judgment reversed, etc.

Questions:

1. Did Patterson breach? The answer to this question is “yes,” but Patterson’s breach is excused for failure of a condition precedent. Under the doctrine of constructive conditions, which we will soon study, the law implies that the parties’ performances which are to occur simultaneously are conditions of each counterparties’ duty to perform. Meyerhofer’s duty of cooperation is to occur simultaneously with Patterson’s performance, so Meyerhofer’s performance of the duty of cooperation is deemed a constructive condition of Patterson’s duty. When Meyerhofer does not perform, Patterson’s performance does not become due, and Patterson’s failure to perform is excused.

2. What is the source of the duty to cooperate?

3. What was Meyerhofer thinking?

4. Should Meyerhofer be liable for the tort of interference with contractual relations? The “elements of a cause of action for tortious interference with contractual relations are (1) there was a contract subject to interference, (2) the act of interference was willful and intentional, (3) such intentional act was a proximate cause of plaintiff's damage, and (4) actual damage or loss occurred.” Juliette Fowler Homes, Inc. v. Welch Associates, Inc., 793 S.W.2d 660 (Tex. 1990).

PROBLEM 4: Hensel contracted to sell a house to Billman for $54,000 cash. Billman gave a check for $1,000 earnest money. “A condition of the contract was the ability of the buyers to secure a conventional mortgage on the property for not less than $35,000 within thirty (30) days.” On the day following execution of the contract, Billman met with an agent of Lincoln Bank. The Bank told Billman that he “could not obtain a mortgage loan of $35,000 unless he could show he had the difference between the purchase price and the amount of the mortgage. After totaling his available resources, including a 90-day short term note for $10,000 representing the proceeds from the sale of his present home, Billman was $6,500 short of the required $19,000 balance.” Billman then invited his parents to tour the home. Billman’s father did not like the home. In the meantime, Hensel deposited the earnest money check. Billman then told Hensel that he could not buy the house because he could not obtain a $5,000 gift from his parents. Hensel replied that she would lower the price of the home by $5,000. Billman then said he was still $1,500 short. Billman did not deposit funds to cover the check and stopped payment on it. Billman then claimed to cancel the contract. Billman never contacted another financial institution and never formally applied for a loan. Hensel sued for the earnest money. Should she get it? Can you construct an argument based on Patterson v. Meyerhofer? Billman v. Hensel, 391 N.E.2d 671 (Ind. Ct. App. 1979).

Questions:

1. In Seaward Construction Company, Inc. v. City of Rochester, 383 A.2d 707 (N.H. 1978), Seaward Construction entered into a contract to install sewer pipe for the City at a rate of $19 per foot for pipe installed 0-10 feet and $60 per foot installed at 10-18 feet. The contract stated,

2. All monies due under the Contract are subject to the receipt of said monies by said Rochester Housing Authority from the Federal Housing and Urban Development Agency (HUD) and turned over to said City of Rochester for payment of the construction of said facilities.

5. The City of Rochester shall be under no legal obligation to advance any of its own funds for said construction.

6. Payment to said Seaward Construction Company, Inc. is contingent upon receipt of funds by the Rochester Housing Authority and turning same over to the City of Rochester for payment to said Seaward Construction Company.

Throughout the course of the contract, Seaward claimed funds for over 1,000 feet of pipe laid. The City paid most (920 feet worth) at a rate of $19 over Seaward’s objection that this pipe was installed lower than 10 feet deep. When Seaward filed a formal claim for the difference between $19 and $60 for the 920 feet, the City claimed that it had never received funds from HUD. No evidence showed that the City had applied for funds, however. The court stated:

In every agreement there exists an implied covenant that each of the parties will act in good faith and deal fairly with the other. Griswold v. Heat Corporation, 108 N.H. 119, 124, 229 A.2d 183, 187 (1967). The mere fact that the defendant is a city does not release it from this implied obligation to act in good faith and deal fairly with the plaintiff. See Leary v. City of Manchester, 90 N.H. 256, 257, 6 A.2d 760, 761 (1939). The express language in the agreement is perfectly clear that the city will not be required to expend its own funds for payment of the installation of the sewer line, but it is also reasonably clear that the city was under an implied obligation to make a good-faith effort to obtain funds from HUD to pay the plaintiff. Rochester Park, Inc. v. City of Rochester, 38 Misc.2d 714, 238 N.Y.S.2d 822, 826-27 (1963) aff'd 19 A.D.2d 776, 241 N.Y.S.2d 763 (1963). Public Market Co. v. Portland, 171 Or. 522, 588-89, 130 P.2d 624, 649-50 (1942).

The court held that, if Seaward showed that it had buried the pipe deeper than 10 feet, and the City had made no attempt to obtain funds, Seaward should be given judgment. Is there any difference between Seaward Construction and Billman? Is there any difference between these two and Patterson?

2. What was the City thinking?

3. Why was the financing clause a condition precedent and not subsequent (in either Billman or Seaward Constr. Co.)?

4. For whose benefit is the “subject to financing” clause inserted?

5. If the purchaser doesn’t obtain financing but wants to and is able to close, anyway, can the purchaser do so? What argument suggests it can?

6. The buyer need not apply for a loan if the effort would be futile. In Nicholls v. Pitoukkas, 491 N.E.2d 574 (Ind. App. 1986), the financing condition stipulated that the buyer would apply for a loan within six days. The Pitoukkases, buyers, did not apply during that time. Their efforts thereafter were unsuccessful. The anticipated mortgage payment was $719.58 per month. The Pitoukkases together had income of only $806 per month. The court found, “Mr. and Mrs. Pitoukkas could not have obtained financing had they made ten timely and diligent applications for financing.” Id. at 575. Then the court explained, “It is this undisputed fact which distinguishes this case from Billman v. Hensel (1979), 181 Ind. App. 272, 391 N.E.2d 671. In Billman the evidence did not exclude the possibility a reasonable and good faith effort to obtain financing would have been successful.” Id. n.3.

7. What is the source of the duty here?

1.3.2. Good Faith

DESERT HERITAGE LIMITED PARTNERSHIP v. CITY OF TUCSON

Ariz. App. (2008)

HOWARD, Presiding Judge.

[1] Appellant Desert Heritage Limited Partnership appeals from the trial court’s grant of appellee City of Tucson’s motion for summary judgment on Desert Heritage’s claim that the City breached a lease by cancelling it and of the City’s motion to dismiss Desert Heritage’s claims of unpaid rent and unamortized tenant improvements. Because issues of fact preclude summary judgment on the cancellation claim, we reverse that ruling, but affirm the dismissal of the unpaid rent claim.

Factual and Procedural Background

[2] The basic factual background is undisputed. The City leased office space in a building owned by Desert Heritage. Although there were multiple leases for different spaces, the lease at the center of this controversy involved space used by the City’s Human Resources Department (“HR lease” or “the lease”). An addendum to the lease included a cancellation clause providing circumstances under which the City could cancel the lease before the end of its term, March 31, 2008. The clause reads:

In the event that the Mayor and Council of the City of Tucson shall not appropriate sufficient funds for the payment of the rent (as set forth by the Lease) in the adopted budget for the fiscal years subsequent to 2000 – 2001, then [the City] shall have the right annually upon the anniversary of its lease term, with 90 days prior written notice to [Desert Heritage], to cancel the lease. In such an event, [the City] will immediately pay to [Desert Heritage] the total sum of any unamortized costs for tenant[‘]s improvements to the demised premises.

In December 2005, the Mayor and Council adopted a resolution directing the City Manager to “eliminate funding from the annual City budget for outside rental of office space for the City of Tucson Department of Human Resources for fiscal Year 2006–2007.” One week later, the City notified Desert Heritage that it would exercise the cancellation clause in the lease, effective April 1, 2006.

[3] Desert Heritage then sued the City, claiming it had breached the lease by failing to comply with the cancellation clause and by violating the covenant of good faith and fair dealing in exercising that clause. It also sought damages for unpaid rent and unamortized tenant improvement costs. The City moved for partial summary judgment, contending that it had complied with the cancellation clause and that it did not violate the covenant of good faith and fair dealing. The trial court granted that motion. * * * *

Compliance with the Cancellation Clause

[4] Desert Heritage first argues the trial court erred by granting summary judgment against it on its claim that the City breached the lease by failing to properly comply with the cancellation clause. We review the grant of summary judgment de novo and view the facts in the light most favorable to the opposing party. Liberty Mut. Fire Ins. Co. v. Mandile, 192 Ariz. 216, 222, 963 P.2d 295, 301 (App. 1997). “[W]e reverse the summary judgment if our review reveals that reasonable inferences concerning material facts could be resolved in favor of the opposing party.” Id.

[5] Our goal in interpreting a contract is to determine the parties’ intent and give effect to the contract as a whole. Potter v. U.S. Specialty Ins. Co., 209 Ariz. 122,  7, 98 P.3d 557, 559 (App. 2004). We view the language of the contract in the context of the surrounding circumstances. Id. We will enforce a valid contract even if the result is harsh. Freedman v. Cont’l Serv. Corp., 127 Ariz. 540, 545, 622 P.2d 487, 492 (App. 1980).

[6] Desert Heritage contends the cancellation clause requires that the Mayor and Council fail to appropriate funds and asserts the process of cancellation and relocation had begun before the Mayor and Council were even involved. But the cancellation clause does not require that the idea of cancellation originate with the Mayor and Council. It simply requires that they fail to appropriate funds and allows the City to cancel the lease on an anniversary date so long as it provides Desert Heritage with ninety days’ notice. It did provide such notice. The trial court did not err in finding that the City had complied with the express terms of the cancellation clause.

[7] * * * *

[8] Finally, Desert Heritage contends that the only valid reason for cancellation under the clause is a lack of sufficient funds to pay for the lease. But the cancellation clause does not limit the reasons for cancellation to a lack of funds. Instead, the decision to “appropriate” funds is a discretionary, legislative act. Therefore, this argument also fails.

[9] Even assuming the City’s cancellation was “self-serving,” as Desert Heritage argues, the trial court correctly determined that the City properly had complied with the express terms of the cancellation clause. And, therefore, the City was entitled to summary judgment on that portion of the cancellation claim.

Covenant of Good Faith and Fair Dealing

[10] Desert Heritage next argues the trial court erred by determining that Desert Heritage had not raised a genuine issue of material fact concerning the City’s alleged breach of the lease’s implied covenant of good faith and fair dealing. Again our review is de novo. Liberty Mut. Fire Ins. Co., 192 Ariz. at 222, 963 P.2d at 301.

[11] The covenant of good faith and fair dealing is implied in every contract. Bike Fashion Corp. v. Kramer, 202 Ariz. 420,  13, 46 P.3d 431, 434 (App. 2002). “A party may breach an express covenant of the contract without breaching the implied covenant of good faith and fair dealing.” Wells Fargo Bank v. Ariz. Laborers, Teamsters & Cement Masons Local No. 395 Pension Trust Fund, 201 Ariz. 474,  64, 38 P.3d 12, 29 (2002). “Conversely, because a party may be injured when the other party to a contract manipulates bargaining power to its own advantage, a party may nevertheless breach its duty of good faith without actually breaching an express covenant in the contract.” Id.

[12] It follows from this that “‘[i]nstances inevitably arise where one party exercises discretion retained or unforeclosed under a contract in such a way as to deny the other a reasonably expected benefit of the bargain.’” Bike Fashion Corp., 202 Ariz. 420,  14, 46 P.3d at 435, quoting Wells Fargo Bank, 201 Ariz. 474,  66, 38 P.3d at 30 (alteration in Bike Fashion Corp.).

Thus, Arizona law recognizes that a party can breach the implied covenant of good faith and fair dealing both by exercising express discretion in a way inconsistent with a party’s reasonable expectations and by acting in ways not expressly excluded by the contract’s terms but which nevertheless bear adversely on the party’s reasonably expected benefits of the bargain.

Id.

[13] In Wells Fargo Bank, the court quoted Professor Steven J. Burton’s explanation of the duty of good faith:

“‘The good faith performance doctrine may be said to permit the exercise of discretion for any purpose—including ordinary business purposes—reasonably within the contemplation of the parties. A contract thus would be breached by a failure to perform in good faith if a party uses its discretion for a reason outside the contemplated range—a reason beyond the risks assumed by the party claiming a breach.’”

201 Ariz. 474,  66, 38 P.3d at 30, quoting Sw. Sav. & Loan Ass’n v. SunAmp Sys., Inc., 172 Ariz. 553, 558-59, 838 P.2d 1314, 1319-20 (App. 1992) (footnotes omitted in Sw. Sav.& Loan), quoting Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv. L. Rev. 369, 385-86 (1980). The court further observed:

Burton’s recitation fully comports with RESTATEMENT (SECOND) OF CONTRACTS § 205 cmt. a (1981), which states, “Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party.” Consistent with Burton and the RESTATEMENT, this court has held in a variety of contexts that a contracting party may not exercise a retained contractual power in bad faith. See Rawlings [v. Apodaca, 151 Ariz. 149,] 153-157, 726 P.2d [565,] 569-73 [(1986)] (power to adjust claims in an insurance contract); Wagenseller [v. Scottsdale Memorial Hosp., 147 Ariz. 370,] 385-86, 710 P.2d [1025,] 1040-41 [(1985)] (power to fire employee at will for a bad cause).

Wells Fargo Bank, 201 Ariz. 474,  66, 38 P.3d at 30. Whether a party’s actions constitute a breach of the covenant of good faith and fair dealing is a question of fact. See id.  69-70.

[14] Desert Heritage produced evidence of continuous conflict between it and representatives of the City that had been ongoing before the City exercised the cancellation clause. This included evidence that the City had offered to remain at Desert Heritage’s building if Desert Heritage dropped its claim for unpaid rent. Desert Heritage also claimed that, when the City was unable to obtain the concessions it wanted concerning the lease during settlement negotiations, the City decided to exercise the cancellation clause. A jury could determine that the City’s alleged use of the cancellation clause to force Desert Heritage to make other concessions regarding the lease was “‘“outside the contemplated range—a reason beyond the risks assumed by the party claiming a breach.”’” Wells Fargo Bank, 201 Ariz. 474,  66, 38 P.3d at 30, quoting Sw. Sav. & Loan, 172 Ariz. at 558-59, 838 P.2d at 1319-20, quoting Burton, supra, at 385-86.

[15] The City claims that it cancelled the lease to reduce expenses and to increase efficiency. But Desert Heritage produced evidence that the City had another motivation and therefore has raised a genuine issue of material fact. Furthermore, based on the limited arguments and evidence presented so far, a jury reasonably could conclude that these goals should have been considered by the City before it entered the lease and, accordingly, were outside the contemplated range. Conversely, a jury could conclude these reasons were not outside the contemplated range. Therefore, even if the jury finds that the City was motivated by cost savings and efficiency, an issue of fact exists at this point in time with regard to whether those motivations constitute bad faith. Accordingly, we conclude the trial court erred by granting summary judgment on this portion of the claim.

[16] The City, however, relies on Southwest Savings & Loan for the proposition that “‘[a]cts in accord with the terms of one’s contract cannot without more be equated with bad faith.’” Sw. Sav. & Loan, 172 Ariz. at 558, 838 P.2d at 1319 (emphasis in Sw. Sav. & Loan), quoting Balfour, Guthrie & Co. v. Gourmet Farms, 166 Cal. Rptr. 422, 427-28 (Ct. App. 1980). We agree with that statement of the law. But here Desert Heritage produced some evidence from which a reasonable jury could conclude the City had acted in bad faith. If the jury determines that the City acted in bad faith as outlined above, the cancellation was not an act in accord with the terms of the contract, without more.

[17] Because we have concluded an issue of fact exists as to whether the City breached the covenant of good faith and fair dealing by cancelling the lease, we need not address Desert Heritage’s argument that, even if cancellation was proper, the City could not cancel the lease until March 2007. Additionally, Desert Heritage’s claim for unamortized tenant improvements may become moot, and we will not, therefore, address whether the trial court properly dismissed the claim. * * * *

Conclusion

25 For the foregoing reasons, * * * we reverse the summary judgment with respect to Desert Heritage’s claim that the City violated the covenant of good faith and fair dealing when it cancelled the lease. We remand the case for proceedings consistent with this decision. * * * *

Questions:

1. Choose a source for the good faith obligation as described and applied by the Desert Heritage court: (a) community standards, (b) economic efficiency, (c) agreement, (d) the bargain of the parties. Why?

2. Not all courts have been so functional with their definitions of good faith. The courts have struggled for a long time with what good faith requires. The law has coalesced around something like what the Desert Heritage case describes. Consider the following from Wilson v. Amerada Hess Corp., 773 A.2d 1121, 1126-31 (N.J. 2001):

[1] A covenant of good faith and fair dealing is implied in every contract in New Jersey. Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420, 690 A.2d 575 (1997) (citing numerous cases of this Court holding covenant implied in every contract). That covenant is among the few terms that "[c]ourts have been called upon to supply." E. Allan Farnsworth, Contracts § 1.5, at 12-14 (1990).

[2] Implied covenants are as effective components of an agreement as those covenants that are express. Aronsohn v. Mandara, 98 N.J. 92, 100, 484 A.2d 675 (1984). Although the implied covenant of good faith and fair dealing cannot override an express term in a contract, a party's performance under a contract may breach that implied covenant even though that performance does not violate a pertinent express term. Sons of Thunder, Inc., supra, 148 N.J. at 419, 690 A.2d 575. Unlike many other states, in New Jersey "a party to a contract may breach the implied covenant of good faith and fair dealing in performing its obligations even when it exercises an express and unconditional right to terminate." Id. at 422, 690 A.2d 575; see also Bak-A-Lum Corp. v. Alcoa Bldg. Prods., Inc., 69 N.J. 123, 129-30, 351 A.2d 349 (1976) (finding that defendant's conduct in terminating contract constituted bad faith although conduct did not violate express terms of written agreement); cf. Burger King Corp. v. Weaver, 169 F.3d 1310, 1316 (11th Cir.1999) (finding that under Florida law action for breach of implied covenant of good faith and fair dealing cannot be maintained in absence of breach of express contract provision); Payne v. McDonald's Corp., 957 F. Supp. 749, 758 (D.Md.1997) (determining that under Illinois law covenant of good faith and fair dealing does not provide independent source of duties). Other jurisdictions regard the implied covenant of good faith and fair dealing as merely a guide in the construction of explicit terms in an agreement. See Payne, supra, 957 F. Supp. at 758 (citing Beraha v. Baxter Health Care Corp., 956 F.2d 1436, 1443 (7th Cir.1992)).

[3] What constitutes good faith performance and fair dealing has been the subject of considerable analysis. For transactions involving merchants and the sale of goods, the Uniform Commercial Code has defined good faith as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." N.J.S.A. 12A:2-103(1)(b). The Restatement (Second) of Contracts notes that every contract imposes on each party a duty of good faith and fair dealing in its performance and enforcement. Restatement (Second) of Contracts § 205 (1981). A comment to the Restatement states that "[g]ood faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving `bad faith' because they violate community standards of decency, fairness or reasonableness." Restatement (Second) of Contracts § 205 comment a (1981). In Sons of Thunder, Inc., supra, we reaffirmed our earlier formulation:

  • In every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract; which means that in every contract there exists an implied covenant of good faith and fair dealing.

[148 N.J. at 421, 690 A.2d 575 (quoting Palisades Properties, Inc. v. Brunetti, 44 N.J. 117, 130, 207 A.2d 522 (1965))(citing 5 Williston on Contracts § 670, at 159-60 (3d ed.1961)).]

[4] * * * * Here we are confronted with the question of the appropriate force of the implied covenant of good faith and fair dealing in reviewing the actions of a contracting party expressly vested with unilateral discretionary authority over pricing. Stated differently, the task here is to identify in that context the parties' reasonable expectations.

[5] In his widely cited law review article, Professor Steven J. Burton discusses the implied covenant of good faith and fair dealing in respect of contracts authorizing one party to have the discretion to make decisions as to quantity, price, time, and other conditional aspects of a contract. Steven J. Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv. L.Rev. 369 (1980). Professor Burton comments that decisions concerning price that are deferred to the discretion of one of the parties must be made in good faith. Id. at 381-82. He explains that "[a] party with discretion may withhold all benefits for good reasons. . . . The fact that a discretion-exercising party causes the dependent party to lose some or all of its anticipated benefit from the contract thus is insufficient to establish a breach of contract by failing to perform in good faith." Id. at 384-85. A good faith performance doctrine may be said to permit the exercise of discretion for any purpose—including ordinary business purposes—reasonably within the contemplation of the parties. Id. at 385-86. It follows, then, that "[a] contract thus would be breached by a failure to perform in good faith if a party uses its discretion for a reason outside the contemplated range— a reason beyond the risks assumed by the party claiming the breach." Id. at 386.

[6] Professor Burton's approach respects the express bargain of parties that gave unilateral authority over price to one party alone. That approach also requires that the discretion-exercising party not unilaterally use that authority in a way that intentionally subjects the other party to a risk beyond the normal business risks that the parties could have contemplated at the time of contract formation. In this manner,

  • [t]he good faith performance doctrine may be said to enhance economic efficiency by reducing the costs of contracting. The costs of exchange include the costs of gathering information with which to choose one's contracting partners, negotiating and drafting contracts, and risk taking with respect to the future. The good faith performance doctrine reduces all three kinds of costs by allowing parties to rely on the law in place of incurring some of these costs.

[Id. at 393.]

[7] In the same vein, various courts have stated that a party must exercise discretion reasonably and with proper motive when that party is vested with the exercise of discretion under a contract. * * * *

III.

[8] The question remaining is whether plaintiffs had a full opportunity to show bad motive on Hess's part before Hess was granted summary judgment. Plaintiffs claim that they were denied information that would provide circumstantial evidence of lack of good faith. Plaintiffs' bad faith claim is that Hess set its DTW prices with the specific intent to impair the ability of the dealers to compete in the gasoline market or, alternatively, to discourage the franchisees from continuing in the business in order to replace them with Hess co-op stations.

[9] Plaintiffs moved to compel the production of documents showing the performance, costs, volumes, margins, and profits of the Hess co-op stations and DAP stations in the marketing areas of plaintiffs' stations. They contend that those documents would have shown that Hess knew that based on the necessary operating costs involved with running plaintiffs' stations, plaintiffs could not sustain their businesses on the pricing differential allowed and the resultant decreased sales volume. Plaintiffs contend that that information, in conjunction with information showing that, since the 1980s, Hess stations have changed from being predominantly run by franchisees to predominantly Hess-run, would create a jury question concerning whether Hess acted with an improper motive. Plaintiffs' requested discovery was denied by the trial court. Although deference is generally accorded to the trial court on such matters, see Connolly v. Burger King Corp., 306 N.J.Super. 344, 349, 703 A.2d 941 (App. Div.1997) (stating that abuse of discretion standard applies to review of decision regarding discovery), in this instance we cannot dismiss the possibility that the information plaintiffs sought would raise a jury question on the issue of breach of the implied covenant. * * * *

[10] We part company with the Appellate Division * * * in respect of its conclusion that the further discovery sought by plaintiffs was unlikely to lead to the discovery of relevant evidence on the question of breach by Hess. Here, the contention is that Hess set prices intending to destroy plaintiffs economically. Although that allegation may be difficult to prove, our province is not to decide questions of fact, but only to determine whether sufficient information has been presented to warrant a jury determination. A corollary of that principle is that a plaintiff must have a reasonable opportunity to obtain facts not available to it other than through formal discovery.

Choose a source for the good faith obligation as described and applied by the Amerada Hess court: (a) community standards, (b) economic efficiency, (c) agreement, (d) the bargain of the parties. Why?

3. Does the good faith standard allow sufficient certainty that parties may ex ante be assured of the economic efficiency of their deals?

4. If you had to choose a moral basis for the good faith standard, what would it be?

5. Is the good faith obligation an extension of the cooperation requirement? Vice versa? Are they separate?

Uniform Commercial Code §§ 1-201(b)(20), 1-304

NEUMILLER FARMS, INC. v. Jonah D. CORNETT et al.

Alabama Supreme Court (1979), 368 So.2d 272

SHORES, Justice.

[1] Jonah D. Cornett and Ralph Moore, Sellers, were potato farmers in DeKalb County, Alabama. Neumiller Farms, Inc., Buyer, was a corporation engaged in brokering potatoes from the growers to the makers of potato chips. The controversy concerns Buyer's rejection of nine loads of potatoes out of a contract calling for twelve loads. A jury returned a verdict of $17,500 for Sellers based on a breach of contract. Buyer appealed. We affirm.

[2] From the evidence, the jury could have found the following:

[3] On March 3, 1976, the parties signed a written contract whereby Sellers agreed to deliver twelve loads of chipping potatoes to Buyer during July and August, 1976, and Buyer agreed to pay $4.25 per hundredweight. The contract required that the potatoes be United States Grade No. 1 and "chipt [sic] to buyer satisfaction." As the term was used in this contract, a load of potatoes contains 430 hundredweight and is valued at $1,827.50.

[3] Sellers' potato crop yielded twenty to twenty-four loads of potatoes and Buyer accepted three of these loads without objection. At that time, the market price of chipping potatoes was $4.25 per hundredweight. Shortly thereafter, the market price declined to $2.00 per hundredweight.

[4] When Sellers tendered additional loads of potatoes, Buyer refused acceptance, saying the potatoes would not "chip" satisfactorily. Sellers responded by having samples of their crop tested by an expert from the Cooperative Extension Service of Jackson County, Alabama, who reported that the potatoes were suitable in all respects. After receiving a letter demanding performance of the contract, Buyer agreed to "try one more load." Sellers then tendered a load of potatoes which had been purchased from another grower, Roy Hartline. Although Buyer's agent had recently purchased potatoes from Hartline at $2.00 per hundredweight, he claimed dissatisfaction with potatoes from the same fields when tendered by Sellers at $4.25 per hundredweight. Apparently the jury believed this testimony outweighed statements by Buyer's agents that Sellers' potatoes were diseased and unfit for "chipping."

[5] Subsequently, Sellers offered to purchase the remaining nine loads of potatoes from other growers in order to fulfill their contract. Buyer's agent refused this offer, saying ". . . `I'm not going to accept any more of your potatoes. If you load any more I'll see that they're turned down.'. . . `I can buy potatoes all day for $2.00.'" No further efforts were made by Sellers to perform the contract.

[6] At the time of Buyer's final refusal, Sellers had between seventeen and twenty-one loads of potatoes unharvested in their fields. Approximately four loads were sold in Chattanooga, Tennessee; Atlanta, Georgia; and local markets in DeKalb County. Sellers' efforts to sell their potato crop to other buyers were hampered by poor market conditions. Considering all of the evidence, the jury could properly have found that Sellers' efforts to sell the potatoes, after Buyer's final refusal to accept delivery, were reasonable and made in good faith.

[7] This case presents three questions: 1) Was Buyer's refusal to accept delivery of Sellers' potatoes a breach of contract? 2) If so, what was the proper measure of Sellers' damages? and 3) Was the $17,500 jury verdict within the amount recoverable by Sellers under the proper measure of damages?

[8] § 7-2-703, Code of Alabama 1975 (UCC), specifies an aggrieved seller may recover for a breach of contract "Where the buyer wrongfully rejects . . . goods . . . ." (Emphasis Added.) We must determine whether there was evidence from which the jury could find that the Buyer acted wrongfully in rejecting delivery of Sellers' potatoes.

[9] A buyer may reject delivery of goods if either the goods or the tender of delivery fails to conform to the contract. § 7-2-601, Code of Alabama 1975. In the instant case, Buyer did not claim the tender was inadequate. Rather, Buyer asserted the potatoes failed to conform to the requirements of the contract: i. e., the potatoes would not chip to buyer satisfaction.

[10] The law requires such a claim of dissatisfaction to be made in good faith, rather than in an effort to escape a bad bargain. Shelton v. Shelton, 238 Ala. 489, 192 So. 55 (1939); Jones v. Lanier, 198 Ala. 363, 73 So. 535 (1916); Electric Lighting Co. v. Elder Bros., 115 Ala. 138, 21 So. 983 (1896).

[11] Buyer, in the instant case, is a broker who deals in farm products as part of its occupation and, therefore, is a "merchant" with respect to its dealings in such goods. § 7-2-104, Code of Alabama 1975. In testing the good faith of a merchant, § 7-2-103, Code of Alabama 1975, requires ". . . honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." A claim of dissatisfaction by a merchant-buyer of fungible goods must be evaluated using an objective standard to determine whether the claim is made in good faith. Because there was evidence that the potatoes would "chip" satisfactorily, the jury was not required to accept Buyer's subjective claim to the contrary. A rejection of goods based on a claim of dissatisfaction, which is not made in good faith, is ineffectual and constitutes a breach of contract for which damages are recoverable. * * * *

[12] Suffice it to say that there is evidence in the record from which the jury could reasonably conclude that the Sellers substantially performed their part of the bargain and had incurred substantially all of the expenses incidental to performance on their part. This being so, the jury's verdict of $17,500 was within those damages recoverable by Sellers as a consequence of Buyer's breach of contract.

AFFIRMED.

TORBERT, C. J., and MADDOX, JONES and BEATTY, JJ., concur.

Question: Did the court use the Desert Heritage definition of good faith? The Amerada Hess standard? If you were to make explicit what good faith required in this contract that was breached by the Buyer, how would you state it?

Paul REID v. KEY BANK OF SOUTHERN MAINE, INC.

1st Cir. U.S. Ct. App. (1987), 821 F.2d 9

BOWNES, Circuit Judge.

[1] Plaintiffs Paul and Mary J. Reid brought a seventeen-count action in United States District Court for the District of Maine against Key Bank of Southern Maine, Inc., defendant. Plaintiffs alleged various federal and state claims resulting from the actions of Depositors Trust Co. of Southern Maine (Depositors), Key Bank's predecessor in interest. The suit grew out of the circumstances surrounding the termination by Depositors of plaintiffs' credit arrangement with it. A jury trial resulted in a verdict for plaintiffs on one of the counts and an award of damages. Both parties have appealed.

I. SUMMARY OF THE FACTS

[2] In mid-1975, Paul Reid approached Depositors to obtain financing for the establishment of a painting business. From 1976 through 1979, Depositors granted Reid a series of loans which Reid used for the operation of his business, Pro Paint and Decorating. During this period, Peter H. Traill was the loan officer responsible for Reid's accounts, Marco F. DeSalle was the president of the bank, and Henry Lawson was, for a time, an assistant vice-president.

[3] On March 2, 1979, Reid and Depositors entered into a $25,000 commercial credit agreement. The agreement was variously explained at trial as a "line of credit" and an "incomplete loan." However defined, it was the largest amount of credit Depositors had yet extended to Reid. Reid sought the credit primarily to finance work he was performing at the Bucksport Housing Project for Nickerson & O'Day, Inc., a general contractor.

[4] In mid-May, 1979, Traill telephoned Reid and informed him that Depositors would not grant him any further advances under the March agreement. Reid had thought at the time that this halt of further advances might only be temporary. Defendant claimed that Traill sent Reid a follow-up letter on May 18, 1979, stating that Depositors would no longer honor overdrafts on Reid's accounts and suggesting that Reid restructure his debts with another lender. Reid denied receiving the letter and alleged that it was never, in fact, sent to him.

[5] On May 29, 1979, Nickerson & O'Day sent a check to Depositors as payment for Reid's work at the Bucksport Housing Project. The check was for $6,507.90. It was made out to Depositors and to Pro Paint pursuant to an agreement between Depositors and Reid whereby Reid assigned his accounts receivable to Depositors as security for the March loan. Depositors credited $2,500 to the account of Pro Paint and applied the remaining $4,007.90 to offset part of the outstanding balance on Reid's March loan. Reid claimed that Depositors undertook this action without his authorization.

[6] Reid claimed that another check was also inappropriately handled by Depositors. He testified that on June 8, 1979, he gave Traill a check for an amount somewhere between eleven and fifteen thousand dollars. Reid contended that this check represented the proceeds for work he performed at Brunswick Naval Air Station. He alleged that Depositors converted the check and used it to offset part of the balance on the March loan. Defendant strongly contested this claim and implied at trial that the check in question existed only in Reid's imagination.

[7] On September 20, 1979, Reid received a past-due notice on the March loan. The notice requested payment of $694.84 in interest and stated that the payment had been due on September 5, 1979. Reid testified that this was the first notice he had received concerning the March loan.

[8] On November 5, 1979, Depositors repossessed Reid's personal automobile and one of his vans. Reid discovered one of the vehicles in a lot and attempted to drive it away. He testified that he did not know it had been repossessed and thought it had been stolen. On a complaint by Lawson, Reid was arrested in connection with this incident and was placed for a time in jail.

[9] Reid's business collapsed and he lost his four vehicles and his home. On November 7, 1979, Reid filed a Chapter 13 bankruptcy proceeding which was converted to a Chapter 11 proceeding in January, 1980. Mrs. Reid suffered emotional problems and drug dependency. The couple separated for a period of a year and a half.

[10] The Reids, who are black, claimed that Depositors acted in bad faith to limit and then terminate their credit. They also claimed that Depositors' actions were motivated by racial prejudice. Defendant claimed that Depositors acted in good faith to secure its financial interests when it learned of Reid's personal difficulties and mismanagement of his business; it denied that its actions were racially motivated.

[11] At trial, the district court directed a verdict for defendant on plaintiffs' claims for violations of the Fair Credit Reporting Act and for breach of fiduciary duties. Plaintiffs withdrew their claims for interference with contractual relations and wrongful dishonoring of checks. The jury found for defendant on plaintiffs' claims for violation of the express terms of the credit agreement, racial discrimination, two counts for infliction of emotional distress, and failure to comply with Article 9 of the Uniform Commercial Code. The jury found for plaintiffs on their pendent state claim for breach of the March loan agreement based on violation of an implied covenant of good faith and fair dealing. It awarded plaintiffs $100,000 in compensatory and $500,000 in exemplary damages; the exemplary damages award was struck by the court. Both parties have appealed. In Part II, we address defendant's arguments on appeal; in Parts III-VI we address those of plaintiffs.

II. IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

A. The Existence of the Cause of Action in Maine

[12] Plaintiffs' recovery in contract was based on the theory that when Depositors, in May 1979, and thereafter, shut off Reid's credit and took steps to realize upon its collateral, it violated an implied covenant of good faith contained in the March loan agreement between plaintiffs and Depositors. The district court took as self-evident the proposition that Maine contract law required good faith performance. See generally Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv.L.Rev. 369 (1980). The Uniform Commercial Code, as adopted by Maine, states: "Every contract or duty within this Title imposes an obligation of good faith in its performance or enforcement." 4 Me.Rev.Stat.Ann. tit. 11, Sec. 1-203 (1964). That this obligation carries with it a cause of action seems clear from another provision of the Code: "Any right or obligation declared by this Title is enforceable by action unless the provision declaring it specifies a different and limited effect." Id. at Sec. 1-106(2). See also Restatement (Second) of Contracts Sec. 205 (1979).

[13] We interpret the Maine cases making reference to the general duty of good faith in light of this general acceptance of the principle. The Maine Supreme Judicial Court has explicitly recognized the U.C.C.'s "broad requirements of good faith, commercial reasonableness and fair dealing." Schiavi Mobile Homes, Inc. v. Gironda, 463 A.2d 722, 724-25 (Me.1983) (citing U.C.C. Secs. 1-203, 2-103 & 1-106, Comment 1). In addition, some aspects of the present case concern the handling of Reid's bank accounts with Depositors and would thus be governed by the standard of "good faith" and "ordinary care" under section 4-103 of the U.C.C. See C-K Enterprises v. Depositors Trust Co., 438 A.2d 262, 265 (Me.1981).

[14] In Linscott v. State Farm Mutual Auto Ins. Co., 368 A.2d 1161 (Me.1977), the court discussed whether a duty of good faith existed between an insurer and a third-party tort claimant. The court stated that, while such a duty is "implicit" in the contract between an insurer and its insured, the essentially "adversary" relationship between an insurer and a third-party claimant precludes the finding of such an implicit duty in their dealings. Defendant would have us view the court's finding of a good faith duty between the insurer and the insured as exceptional; under defendant's interpretation, an "adversary" relationship, whether contractual or not, would have no good faith requirement.

[15] We cannot agree with this reading of Linscott. The general principles of modern contract law, as embodied in Maine's Uniform Commercial Code and recognized in Schiavi, mandate that we interpret Linscott as finding no duty of good faith toward a third-party claimant primarily because of the absence of a contractual relationship. We view the Maine court as implicitly recognizing that contractual relationships of the present nature are governed by a requirement of good faith performance. We do not think that this duty to perform in good faith is altered merely by calling the contractual relationship "adversary."

[16] Defendant next argues that a cause of action based on the duty is not generally accepted, even if the principle of good faith performance has been widely acknowledged. Defendant cites several cases finding no such cause of action in their jurisdictions. See, e.g., Management Assistance, Inc. v. Computer Dimensions, Inc., 546 F. Supp. 666 (N.D.Ga.1982), aff'd, 747 F.2d 708 (11th Cir.1984). These cases generally cite as their authority Chandler v. Hunter, 340 So.2d 818, 821 (Ala.App.1976), for the proposition that no jurisdiction has been found that allows such a cause of action.

[17] We reject the applicability of Chandler and the cases based on it for two reasons. First, a determination that no such cause of action exists would conflict with the clear meaning of section [1-304] of the U.C.C. * * * . We assume that the Maine courts would adhere to the plain language of th[is provision], as well as to generally accepted modern contract principles. Secondly, the fact that numerous jurisdictions have allowed recovery on theories of breach of good faith refutes the empirical assumption upon which Chandler appears to have been based. See, e.g., K.M.C. Co. v. Irving Trust Co., 757 F.2d 752 (6th Cir.1985) (suit under New York law by borrower against lender for arbitrary termination of credit); Power Motive Corp. v. Mannesmann Demag Corp., 617 F. Supp. 1048 (D.Colo.1985) (Ohio law); Fortune v. National Cash Register Co., 373 Mass. 96, 364 N.E.2d 1251 (1977) (Massachusetts law). See also Atlas Truck Leasing, Inc. v. First NH Banks, Inc., 808 F.2d 902 (1st Cir.1987) (interpreting New Hampshire law).28 

[18] Defendant argues that the "demand" provision of the note establishing the credit agreement precludes a good faith requirement in this case, even if such a requirement is recognized in general. Defendant contends that this exception to the general good faith requirement is mandated by section [1-208 [now 1-309] of the U.C.C., as interpreted by the U.C.C. Comment to the section. Section 1-208 states:

Sec. 1-208. Option to accelerate at will

A term providing that one party or his successor in interest may accelerate payment or performance or require collateral or additional collateral "at will" or "when he deems himself insecure" or in words of similar import shall be construed to mean that he shall have power to do so only if he in good faith believes that the prospect of payment or performance is impaired. . . .

The U.C.C. Comment observes:

Obviously this section has no application to demand instruments or obligations whose very nature permits call at any time with or without reason.

[19] We turn, therefore, to the documents establishing the loan to see whether they clearly gave Depositors the right to demand payment or terminate the relationship on demand and without cause. The "Secured Interest Note," dated March 2, 1979, states in its opening paragraph:

On Demand, after date, for value received, [Paul Reid d/b/a Pro Paint & Decorating] . . . promise[s] to pay to the order of [Depositors] . . . Twenty-five Thousand and no/100 DOLLARS with interest at 13.75 per cent per annum payable quarterly.

[20] This provision appears, at first glance, to be an unambiguous demand clause. It cannot, however, possibly be read literally in the context of the kind of agreement entered into here. Although the note seems to grant Depositors the right to immediate repayment of $25,000 "on demand," Reid had not yet received that sum of money from the bank. Indeed, he was never to receive the full amount. The "demand" provision thus cannot represent the beginning and end of the inquiry into the time term of the contract.

[21] DeSalle, president of Depositors, testified to similar effect at trial, based on his knowledge of banking practices. He said that the "demand" provision in such an agreement is to be interpreted in light of the other conditions in the note and that a bank could not simply terminate the agreement capriciously. He also thought that the absence of a time term in such a note indicated the likelihood that the schedule for repayment of the principal was governed by a verbal agreement between the loan officer and the debtor. In view both of our reading of the document and of DeSalle's testimony about banking practices, we find that the "demand" provision in the note should not be understood as a completely integrated agreement on the time term of the contract. See Astor v. Boulos Co., 451 A.2d 903, 905 (Me.1982); Restatement (Second) of Contracts Sec. 209 (1979).

[22] Furthermore, the documents establishing the loan place conditions on the acceleration of payment or termination of the agreement. The "Secured Interest Note" provides for various conditions which would "render" the obligation "payable on demand." The "Security Agreement," also signed March 2, 1979, lists a series of events whose occurrence would signify that Reid would be in "default." The presence of such conditions in both documents indicates that the agreement could not simply be terminated at the whim of the parties; rather, the right of termination or acceleration was subjected to various limitations. The detailed enumeration of events that would "render " the note "payable on demand," or which would put Reid in "default," shows the qualified and relative nature of any "demand" provision. It would be illogical to construe an agreement, providing for repayment or default in the event of certain contingencies, as permitting the creditor, in the absence of the occurrence of those contingencies, to terminate the agreement without any cause whatsoever. Under such a construction, the enumerated conditions would be rendered meaningless. We find, therefore, that the documents establishing the loan defeat neither the legal obligation nor the justifiable expectation of the parties that the contract be performed in good faith.

C. The Standard

[23] Defendant challenges the district court's formulation of the test of "good faith" in its instruction to the jury. Defendant claims that the judge instructed the jury that the test for good faith comprises both an objective and a subjective component. Defendant argues that under Maine law an objective standard, such as a "reasonable man" test, may only be applied in cases involving the sales of goods that fall under Article 2 of the U.C.C. Otherwise, defendant claims, any consideration of "good faith" should be limited to its subjective definition in section 1-201(19) [now 1-201(20)] as "honesty in fact."

[24] We have examined the judge's original instructions as well as his subsequent clarification of those instructions to determine the precise nature of the test submitted to the jury. In regard to the contract claim, the judge initially formulated two standards. First, he stated that the contract, as a whole, was subject to a "covenant of good faith and fair dealing." Second, with specific reference to the claim that Depositors inappropriately disposed of Reid's collateral, he stated that the bank had a duty to act in a "commercially reasonable manner." In setting the latter standard, he cited Article 9 of the U.C.C. See 5 Me.Rev.Stat.Ann. tit. 11, Secs. 9-501-504. He then twice defined "good faith" in terms indicating a purely subjective standard. He concluded the instruction, however, by reformulating the "good faith" test as including an objective standard of reasonableness.

[25] The jury later requested that the judge clarify these instructions. In his new instructions, the judge clearly formulated a subjective standard for good faith:

Now good faith is defined as honesty in fact.

One acts with good faith, in general, when one acts honestly.

Good faith means that one acts without any improper motivation. One acts with the truth and not for some ulterior motive that is unconnected with the substance of the agreement in question when one is acting with good faith.

The judge again referred to the "commercially reasonable" standard only in connection with Article 9 violations.

[26] We find, therefore, that the judge ultimately instructed the jury to decide the issue of good faith under the subjective standard. "Honesty in fact" is required under all interpretations of the duty of good faith under section 1-203. Thus, even if we agreed with defendant that the Maine courts would limit an objective standard for good faith to Article 2 cases, we would not find a fatal error in the judge's instructions here.29 

D. Sufficiency of Evidence

[27] Finally, defendant contends that there was insufficient evidence to support a finding of an absence of good faith, particularly in view of the jury's failure to find that racial discrimination had been an "effective factor" in the termination of Reid's credit at Depositors. We disagree. We affirm the district court's holding that evidence concerning the manner in which Depositors conducted their dealings with Reid was sufficient to support a jury verdict of bad faith and was not based on mere speculation. The standard for defendant's motion for a judgment notwithstanding the verdict was whether the evidence, viewed in the light most favorable to plaintiffs, would lead to the conclusion that no reasonable jury could have found for plaintiffs on the good faith issue. This heavy burden was not met by defendant.

[28] We think the jury could have reasonably inferred that Depositors' actions were not taken in good faith. The March, 1979, credit agreement represented the largest amount of credit extended to Reid by the bank, and could be seen as the culmination of an ongoing and mutually beneficial relationship. The jury could have found that by mid-May, when Reid's line of credit was abruptly shut off, he was not in default and his overall position had not changed that significantly, especially as the bank did not first register complaints to him or ask him to alter his conduct in some manner. The bank's president testified that it was customary before cutting off a customer's line of credit to send notices in advance and call the customer to the bank for discussion. This was not done as to Reid, nor was any convincing reason advanced by the bank for not doing so. (The bank, indeed, did not even call as a witness the officer who had dealt directly with Reid and could have best explained why the bank acted as it did.) The jury could have found that in restricting Reid's credit when and as it did the bank was motivated by ulterior considerations, not a good faith concern for its financial security. The jury could have found that the bank decided in bad faith and without notice to terminate the credit relationship as a whole. The jury might have viewed the bank's actions to restrict and terminate Reid's credit to be in bad faith in part because they were taken only a short time after the bank had shown confidence in Reid and had given him grounds to rely on the continuation of the relationship. The jury might have inferred bad faith from these actions of the bank, even if it did not believe that racial prejudice was the effective factor that motivated the bank's bad faith. In sum, the jury could have reasonably found that the bank acted in bad faith in precipitously and without warning halting further advances on which it knew Reid's business depended, in failing to make a sufficient effort to negotiate alternative solutions to any problems it perceived in its relationship with Reid, and in failing to give notice that it intended to terminate the relationship entirely. The evidence concerning these and other aspects of Depositors' actions provided a sufficient basis for a jury finding that the bank's actions were not taken in good faith. * * * *

[29] Affirmed. No costs to either party.

Questions:

1. Does the provision of the note stating that payment shall be “on demand” preclude a good faith obligation relevant to this claim?

2. Bonus question: Why doesn’t a demand note lack consideration? If the lender can demand the money back immediately, the lender has no obligation.

3. Did the trial court here mis-instruct as to the definition of good faith?

4. Was evidence sufficient to show lack of good faith?

5. What does good faith mean in this case?

6. How does the Burton test work out here?

7. Is this court’s understanding of good faith based on the same juridical principles as the Burton test or on some other basis?

Uniform Commercial Code § 2-306

Please be forewarned. The court’s analyses in the following case and its notes will make your head spin. You can prepare by diagramming carefully subsection (1) of 2-306.

ATLANTIC TRACK & TURNOUT CO. v. PERINI CORP.

1st Cir. U.S. Ct. App. (1993), 989 F.2d 541

TORRUELLA, Circuit Judge.

[1] Appellant Atlantic Track & Turnout Company ("Atlantic") brought this breach of contract action pursuant to the Uniform Commercial Code ("Code"), Mass.Gen.L. ch. 106, § 2-101, et seq. (1992). Atlantic alleged that appellee Perini Corporation ("Perini") failed to perform under a contract for the purchase and sale of railroad materials.

[2] The court deferred decision on cross motions for summary judgment and ordered a trial limited to two issues: (1) whether the contract was ambiguous; and (2) whether trade usage would supplement the contract terms to enable Atlantic to maintain its action. After Atlantic's proffer, the court entered a judgment on partial findings pursuant to Fed.R.Civ.P. 52(c) in favor of Perini. We affirm that judgment.

BACKGROUND

[3] On October 21, 1987, the Massachusetts Bay Transportation Authority ("MBTA") awarded Perini the Eastern Route Track Rehabilitation Project. The project required Perini to rehabilitate a thirteen mile section of double track. The rehabilitation included undercutting the track to replace the ballast, the track's stone foundation, and disposing of any contaminated ballast materials.

[4] In the spring of 1988, a sub-contractor tested the ballast under the track and determined that it was all contaminated. Perini received the test results on June 21, 1988 and discussed them with the MBTA on July 17, 1988.

[5] In early June, 1988, Perini solicited an offer from Atlantic to buy certain salvage from the project. Between June 28 and 30, 1988, Atlantic issued five purchase orders for "all available" materials. The orders also furnished an estimate of the amount of salvage that would become available.

[6] On August 18, 1988, the MBTA directed Perini to suspend undercutting operations until further notice. On September 13, 1988, the MBTA permanently halted all undercutting due to fiscal constraints. As the elimination of the undercutting reduced the value of the contract by 52%, Perini stopped all work. By October 26, Perini had no physical presence on the project site.

[7] On October 31, 1988, Perini proposed an equitable adjustment of the MBTA contract. The proposal entailed an increase in payment for completion of the remaining work under the contract. The MBTA rejected Perini's proposal. Perini and the MBTA thus agreed to terminate the contract.

[8] Atlantic knew by August 22, 1988 that all undercutting was suspended and later asked Perini when the remainder of the materials would be available. Perini replied that the MBTA might terminate the project and that Perini had already shipped "all available" salvage in accordance with the purchase orders.30 Atlantic sued Perini, claiming that the amount of materials shipped was well below the stated estimates.

LEGAL ANALYSIS

[9] Two reasonable interpretations of the contract's plain language exist. On one hand, "all available" implies that Perini satisfied its obligation under the contract by supplying the salvage material that became available; if no material became available to Perini, Perini faced no liability under the contract.31 On the other hand, the estimates offered in the purchase orders suggest that Perini had to deliver a quantity nearing those estimates.

[10] To convince the court that the latter interpretation represented the true agreement, Atlantic had to overcome two hurdles. First, as the plaintiff, Atlantic had the burden of proving its interpretation by a preponderance of the evidence. Second, any ambiguity in the contract should normally be interpreted against Atlantic, the drafter of the purchase orders. LFC Lessors, Inc. v. Pacific Sewer Maintenance, 739 F.2d 4, 7 (1st Cir.1984).

[11] Atlantic offered two theories beyond the plain language of the contract supporting its interpretation of the terms. Specifically, Atlantic argued that: (1) trade usage of the term "all available" required Perini to deliver close to the estimated quantity of materials, and (2) § 2-306 of the Code expressly required Perini to provide a quantity approximating its stated estimate. In addition, Atlantic argued that Perini acted in bad faith. Atlantic revives these theories in this appeal, and we address them in turn.

I. Trade Usage

[12] The district court ruled that Atlantic's trade usage proffer failed to prove by a preponderance of the evidence that the contract terms embodied Atlantic's proposed meaning. As this conclusion constitutes a factual finding, Mass.Gen.L. ch. 106, § 1-205(2), we review it only for clear error, Athas v. United States, 904 F.2d 79, 80 (1st Cir.1990).

[13] Trade usage will supplement the terms of a contract only when the parties know or should know of that usage. Mass.Gen.L. ch. 106, § 1-205(3). In the present case, Atlantic provided no evidence that Perini knew or should have known of Atlantic's interpretation of the term "all available." There was no evidence that Perini engaged in the same trade as Atlantic. Indeed, one Atlantic witness testified that Perini was not a competitor of Atlantic's. Transcript, Non-Jury Trial Proceedings—Day 1, at 106. Therefore, we cannot assume knowledge of Atlantic's trade practices. Furthermore, another Atlantic witness testified that he discussed the terms of the contract with a Perini representative, but never explained the alleged trade usage of "all available." Id. at 70. Given the lack of evidence, we cannot find that the district court clearly erred in finding that the proposed trade usage of the term did not supplement the contract terms.

II. Section 2-306

[14] Both parties agree that the disputed contract constitutes an output contract governed by § 2-306 of the Code. Section 2-306 of the Code provides in relevant part:

(1) A term which measures the quantity by the output of the seller . . . means such actual output . . . as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate . . . may be tendered or demanded.

In the present case, the contract provided an estimate of the expected output, and Perini tendered only 15% of that quantity. Thus, Atlantic argues that according to § 2-306, Perini violated the contract.

[15] While many courts and commentators have discussed the meaning of the "unreasonably disproportionate" clause of § 2-306 as applied to requirements contracts, little has been written on the clause's application to output contracts. We review the former analysis, however, because it provides valuable instruction due to the similarity between these two types of contracts.

[16] With respect to requirements contracts, courts differ on the meaning of the "unreasonably disproportionate" clause. Some courts find that "even where one party acts with complete good faith, the section limits the other party's risk in accordance with the reasonable expectations of the parties." Orange Rockland v. Amerada Hess, 59 A.D.2d 110, 397 N.Y.S.2d 814, 819 (1977). Most courts and commentators, however, treat cases in which the buyer demands more than the stated estimate differently than cases in which the buyer demands less. See, e.g., Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333, 1337-38 (7th Cir.1988); Angelica Uniform Group, Inc. v. Ponderosa Systems, Inc., 636 F.2d 232, 232 (8th Cir.1980) (per curiam); R.A. Weaver and Associates, Inc. v. Asphalt Construction, Inc., 587 F.2d 1315, 1322 (D.C.Cir.1978). The courts that employ separate analyses hold that while § 2-306 precludes buyers from demanding a quantity of goods that is unreasonably disproportionate to a stated estimate, it permits "good faith reductions that are highly disproportionate." R.A. Weaver and Associates, Inc., 587 F.2d at 1315 (emphasis added).32 

[17] The Seventh Circuit explained the argument well, Empire Gas Corp., 840 F.2d at 1338-40, and we adopt its reasoning. Essentially, the argument is the following. The "unreasonably disproportionate" clause is somewhat redundant in light of the good faith requirement in that section. The clause therefore was likely provided to explain the good faith term. The good faith requirement with respect to disproportionately increased demands needed explanation as certain forms of exploitation in that situation do not clearly constitute bad faith. For example, if the market price of the subject goods rises above the contract price, a buyer in a requirements contract might be tempted to demand more goods than it truly needs in order to resell them for the better market price. The clause eliminates that opportunity. On the other hand, exploitation, beyond bad faith, is not a concern if a buyer demands less than a stated estimate. The seller has the opportunity to sell any excess of the subject goods on the market.

[18] Moreover, an obligation to buy approximately a stated estimate of goods would pose a significant burden on buyers as it would force them to make inefficient business judgments, when the point of entering a requirements contract was to engage suppliers without binding themselves to buy more goods than they need. Essentially, a requirements contract represents a risk allocation. "The seller assumes the risk of a change in the buyer's business that makes continuation . . . costly, but the buyer assumes the risk of a less urgent change in [ ] circumstances." Id. at 1340.

[19] The same rationale supports different treatment of cases such as the present one, in which the seller in an output contract tenders less than a stated estimate, from cases in which the seller tenders more. See John C. Weistart, Requirements and Output Contracts: Quantity Variations under the UCC, 1973 Duke L.J. 599, 638-39 (1973). If a seller saw an opportunity to increase his profits by buying additional goods to resell as output to the buyer, this exploitation might not conclusively establish bad faith. The proviso would forbid such conduct. See Empire Gas Corp., 840 F.2d at 1338. On the other hand, an obligation to sell approximately the stated estimate may force the seller to make inefficient business decisions that the seller did not likely intend when he bargained to keep the contract's quantity provision open.

[20] Like the risk allocation in the requirements contract, the output contract allocates to the buyer the risk of a change in the seller's business that makes continuation costly, while the seller assumes the risk of a less urgent change in circumstances. Indeed, pre-Code Massachusetts courts held that output contracts necessarily contemplated that the level of production would be governed by business judgment. See Neofotistos v. Harvard Brewing Co., 341 Mass. 684, 171 N.E.2d 865, 868 (1961); see also Weistart, supra, at 639 n. 96. We see no reason for a change in that rationale.

[21] Adopting this interpretation of § 2-306, our next, and only inquiry under this section, is whether Perini acted in good faith.

III. Good faith

[22] The district court determined that Perini acted in good faith. This was a factual determination that we review only for clear error. Athas, 904 F.2d at 80.

[23] Atlantic offers two indications of bad faith by Perini. First, Atlantic argues that Perini acted in bad faith by failing to notify Atlantic of the June 21 test results. However, Atlantic offered no evidence that the additional contaminated ballast signified to Perini that the contract would end. Indeed, the record indicates that the additional contamination was good news to Perini because the more contamination that existed, the more money Perini stood to earn under the contract. The MBTA did not notify Perini of its desire to end the contract until August 18 when it suspended the undercutting; Atlantic learned of the suspension just four days later. Thus, the court did not clearly err in finding that Perini acted in good faith with respect to notification.

[23] Second, Atlantic argues that Perini acted in bad faith by failing to make a reasonable attempt to complete the MBTA project when the MBTA eliminated the undercutting. Atlantic contends that in its negotiations for an equitable adjustment of the contract, Perini requested an unreasonable increase in the contract price. Thus, Atlantic argues that Perini's attempt to complete the project was in bad faith.

[24] Based on the evidence presented, however, this argument fails. For one thing, a contractor may seek an equitable adjustment to the contract when a large quantity of work is eliminated. See Peter Kiewit Sons' Co. v. United States, 74 F. Supp. 165, 109 Ct.Cl. 517, 522-23 (1947). Atlantic failed to show that Perini did not make reasonable attempts to negotiate an adjustment. That the MBTA and Perini failed to reach an acceptable agreement does not show that the attempted negotiations were in bad faith.

[25] Moreover, a party who ceases performance under an output contract for independent business reasons acts in good faith. Neofotistos, 171 N.E.2d at 868. Atlantic offered no evidence that Perini did not agree to end the MBTA contract due to a valid independent business reason. Indeed, Atlantic offered no evidence of any reason why Perini agreed to end the contract. Thus, the district court did not clearly err in its good faith determination.

 

CONCLUSION

[26] Based on the evidence presented, the district court properly granted summary judgment in favor of Perini.

Affirmed.

Questions:

1. Did the contract in this case call for materials in the estimated amount to be shipped?

2. Why all the policy analysis around 2-306? Do good faith and reasonableness mean the same thing? If so, then aren’t they redundant in the statute?

3. What purpose does the good faith doctrine serve in this case?

4. In Simcala, Inc. v. American Coal Trade, Inc., 821 So.2d 197 (Al. 2001), Simcala issued a purchase order to American stating it would purchase during 1998 17,500 tons of coal at $78.50 per ton. The PO also stated,"[T]he above [i.e. 17,500 tons] is an approximate quantity and to be shipped as required." During 1998 Simcala actually purchased only 7,200 tons of coal from ACT, only 41% of the estimate. American sued for breach. The trial court found no evidence of bad faith but held that Simcala had failed to buy the stated estimate, in breach of the contract. On appeal, Simcala argued that the “estimate” clause in the statute should not apply to decreases in quantities ordered in a requirements contract. The Alabama Supreme Court responded:

[1] The question presented is one of first impression in Alabama:  Whether § 7-2-306(1), Ala. Code 1975, permits a buyer purchasing pursuant to a requirements contract to reduce its requirements to a level unreasonably disproportionate to an agreed-upon estimate so long as it is acting in good faith.  The trial court interpreted § 7-2-306(1) to mean that a requirements-contract buyer who has provided the seller an estimate of its requirements may not reduce its requirements to a level unreasonably disproportionate to that estimate, even when it does so in good faith.  The trial court concluded that the reduction in this case was unreasonable. The trial court's interpretation of § 7-2-306(1) involves a question of law;  it is reviewed de novo by an appellate court, without any presumption of correctness. Aetna Cas. & Sur. Co. v. Mitchell Bros., Inc., 814 So.2d 191, 195 (Ala.2001);  Reed v. Board of Trustees for Alabama State Univ., 778 So.2d 791, 793 n. 2 (Ala.2000);  Donnelly v. Doak, 346 So.2d 414, 416 (Ala.1977).

II. Application of § 7-2-306(1)

[2] “Words used in a statute must be given their natural, plain, ordinary, and commonly understood meaning, and where plain language is used a court is bound to interpret that language to mean exactly what it says.” IMED Corp. v. Systems Eng'g Assocs. Corp., 602 So.2d 344, 346 (Ala.1992), quoted in Ex parte Fann, 810 So.2d 631, 633 (Ala.2001). Our primary obligation is to “ascertain and give effect to the intent of the Legislature as that intent is expressed through the language of the statute.” Ex parte Krothapalli, 762 So.2d 836, 838 (Ala.2000). Moreover, we must presume “ ‘that every word, sentence, or provision was intended for some useful purpose, has some force and effect, and that some effect is to be given to each, and also that no superfluous words or provisions were used.’ ” Ex parte Children's Hosp. of Alabama, 721 So.2d 184 (Ala.1998), quoting Sheffield v. State, 708 So.2d 899, 909 (Ala. Crim. App.1997). See also Elder v. State, 162 Ala. 41, 45, 50 So. 370, 371 (Ala. 1909) (stating that it is unreasonable to presume that the Legislature intended the words it used to be meaningless).

[3] Because this case presents a question of first impression concerning language used in the Uniform Commercial Code, “we look for guidance to the Uniform Commercial Code itself, the official Comments to the Code, the writings of commentators, and the case law of other jurisdictions.” Massey Ferguson Credit Corp. v. Wells Motor Co., 374 So.2d 319, 321 (Ala. 1979). Comment 3 of the official comments to § 7-2-306 states:

  • “If an estimate of output or requirements is included in the agreement, no quantity unreasonably disproportionate to it may be tendered or demanded. Any minimum or maximum set by the agreement shows a clear limit on the intended elasticity. In similar fashion, the agreed estimate is to be regarded as a center around which the parties intend the variation to occur.”

(Emphasis added.) The use of the word “center” clearly indicates that the drafters intended to prohibit both unreasonably disproportionate increases and decreases from the estimates in a requirements contract. To interpret § 7-2-306(1) to prohibit only unreasonably disproportionate increases, but not decreases, would make the description in official comment 3 of an estimate as a “center around which the parties intend the variation to occur” mere surplus verbiage.

[4] Simcala emphasizes official comment 2 in support of its argument that § 7-2-306(1) prohibits only unreasonably disproportionate increases. Comment 2 states:

  • “Reasonable elasticity in the requirements is expressly envisaged by this section and good faith variations from prior requirements are permitted even when the variation may be such as to result in discontinuance. A shut-down by a requirements buyer for lack of orders might be permissible when a shut-down merely to curtail losses would not. The essential test is whether the party is acting in good faith.”

(Emphasis in Simcala's brief.)  While comment 3 begins with the words, “If an estimate ․ is included ․,” comment 2 does not mention estimates. Comment 2 addresses the general limitation of “good faith,” which applies when there is no agreed-upon estimate. See Orange & Rockland Utils., Inc. v. Amerada Hess Corp., 59 A.D.2d 110, 115, 397 N.Y.S.2d 814, 818-19 (1977). The specificity of comment 3, however, dealing with estimates, displaces the generality of comment 2. Comment 3 therefore applies in the special case, like this one, where the parties have agreed on an estimate. Thus, the drafters' comments to § 7-2-306 support the conclusion that the statute applies both to unreasonably disproportionate increases and decreases from agreed-upon estimates.

[5] Some federal courts and other state courts have previously addressed this question. Brewster of Lynchburg, Inc. v. Dial Corp., 33 F.3d 355, 365 (4th Cir. 1994) (predicting direction of Arizona law); Atlantic Track & Turnout Co. v. Perini Corp., 989 F.2d 541, 544-45 (1st Cir.1993) (predicting direction of Massachusetts law on an output contract); Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333, 1335 (7th Cir.1988) (predicting direction of Illinois law); R.A. Weaver & Associates, Inc. v. Asphalt Constr., Inc., 587 F.2d 1315, 1321-22 (D.C.Cir.1978) (predicting direction of District of Columbia law);  Canusa Corp. v. A & R Lobosco, Inc., 986 F. Supp. 723, 729 (E.D.N.Y.1997) (predicting direction of New York law as to an output contract); Indiana-American Water Co. v. Town of Seelyville, 698 N.E.2d 1255, 1260 (Ind. App.1998); Romine, Inc. v. Savannah Steel Co., 117 Ga. App. 353, 354, 160 S.E.2d 659, 660-61 (1968). Most of these courts have resolved this issue in favor of the party in Simcala's position, holding that unreasonably disproportionate decreases are permissible so long as the buyer has acted in good faith, but that unreasonably disproportionate increases are impermissible. However, in Romine v. Savannah Steel Co., 117 Ga. App. at 354-55, 160 S.E.2d at 661, the Georgia Court of Appeals interpreted the statute to apply to deviations both above and below the stated estimate. Of course, while these decisions from other jurisdictions may be persuasive, this Court is not bound by federal or other state court decisions construing the laws of other states, even though the law being construed may be identical to Alabama law. Weems v. Jefferson-Pilot Life Ins., Co., 663 So.2d 905, 913 (Ala.1995); Fox v. Hunt, 619 So.2d 1364, 1367 (Ala.1993).

[6] Several courts that have reached the opposite conclusion have candidly acknowledged that by its plain meaning, the statute prohibits unreasonably disproportionate decreases from estimates. Brewster, 33 F.3d at 364 (“Although this statute may appear to prescribe both unreasonably disproportionate increases and reductions in a buyer's requirements, judicial interpretations of this statute provide otherwise.”), Empire Gas, 840 F.2d at 1337 (“The proviso does not distinguish between the buyer who demands more than the stated estimate and the buyer who demands less, and therefore if read literally it would forbid a buyer to take (much) less than the stated estimate.”), R.A. Weaver & Assocs., 587 F.2d at 1322 (“The limiting language of Section 2-306(1) accordingly would seem to preclude appellant's reducing its requirements to zero, for zero would appear the quintessential ‘disproportionate amount.’ ”).

[7] Courts interpreting analogous provisions of § 7-2-306(1) to allow unreasonably disproportionate decreases from stated estimates if those decreases are in good faith emphasize concerns over market impact that would flow from following the plain meaning of the statute. See, e.g., Atlantic Track & Turnout Co., 989 F.2d at 545 (“an obligation to buy approximately a stated estimate of goods would pose a significant burden on buyers as it would force them to make inefficient business judgments”); Empire Gas, 840 F.2d at 1338 (“If the obligation were not just to refrain from buying a competitor's goods but to buy approximately the stated estimate . . ․ the contract would be altogether more burdensome to the buyer.”).

[8] While other courts may be willing to look beyond the language chosen by their legislatures, we have repeatedly reaffirmed the fundamental principle of statutory construction that, where possible, words must be given their plain meaning. See, e.g., Ex parte Smallwood, 511 So.2d 537, 539 (Ala.2001); Ex parte Krothapalli, 762 So.2d at 838;  IMED Corp., 602 So.2d at 346. The plain language of § 7-2-306(1) admits of only one interpretation—that both unreasonably disproportionate increases and reductions in estimates are forbidden. See Brewster, 33 F.3d at 364;  Empire Gas, 840 F.2d at 1337.

[9] As we have repeatedly stated, the function of this Court is “‘to say what the law is, not what it should be.’” Ex parte Achenbach, 783 So.2d 4, 7 (Ala.2000), quoting DeKalb County LP Gas Co. v. Suburban Gas, Inc., 729 So.2d 270, 276 (Ala.1998). To hold as Simcala requests we do—that the statute forbids only unreasonably disproportionate increases but not decreases—would require us to presume that the Legislature did not intend the ordinary meaning of the words that it chose to use in its enactment. We conclude that the interpretation supported by the plain meaning of the language of the statute and by the official comments is that § 7-2-306(1) prohibits unreasonably disproportionate decreases made in good faith. If adverse effects on market conditions warrant a different result, it is for the Legislature, not this Court, to amend the statute.

[10] The trial court found no evidence that Simcala had acted in bad faith in reducing its requirements, but it found that Simcala had breached the contract because its actual purchases of coal—7,200 tons—were unreasonably disproportionate to its stated estimate—17,500 tons.  Simcala does not challenge the finding that its actual purchases from ACT were unreasonably disproportionate to the estimate. Under our construction of § 7-2-306(1), even assuming Simcala's good faith, Simcala breached its requirements contract with ACT by demanding an unreasonably disproportionate reduction from its stated estimate.  Thus, further discussion of the trial court's finding that Simcala had acted in good faith is unnecessary.

5. Consider two other arguments: The Simcala court seems to think that the word “unreasonably” in the statute meant only “very.” That is one of its meanings. But “unreasonably” might mean “without reason.” That is also a common meaning. The court did not ask what reason justified the decrease but only focused on its magnitude. Perhaps the “good faith” and “estimate” clauses could be harmonized by reading unreasonably this way. In the absence of an estimate, good faith is the standard. If an estimate is made, then reasons must be proved. “Unreasonably” is just a slightly higher standard. There is often a good business reason for having fewer requirements or lower output. Would this reading work?

Also, the statute is written in parallel fashion, output first and requirements second, i.e., “output of the seller or the requirements of the buyer means such actual output or requirements.” In the estimate clause, this parallel structure means that “may be tendered” goes with output contracts only; “or demanded” only applies to requirements contracts. Therefore, for output contracts, the estimate clause only prohibits certain kinds of tenders. Not tendering is not prohibited by the estimate clause at all. Presumably, only the good faith standard would apply to an output seller who stopped all production. The same would be true of a requirements buyer who did not demand. Not tendering or not demanding is the most extreme form of quantity decrease. If these situations escape the estimate clause entirely, perhaps the estimate clause was not intended to apply to decreases in quantity.

Both of these arguments are grounded in the language of the statute. I wish the Simcala court had addressed them.

LARESE v. CREAMLAND DAIRIES, INC.

10th Cir. U.S. Ct. App. (1985), 767 F.2d 716

McKAY, Circuit Judge.

[1] The issue in this case is whether a franchisor has an absolute right to refuse to consent to the sale of a franchisee's interest to another prospective franchisee.

[2] Plaintiffs entered into a 10-year franchise agreement with defendant, Creamland Dairies, in 1974. The franchise agreement provided that the franchisee "shall not assign, transfer or sublet this franchise, or any of [the] rights under this agreement, without the prior written consent of Area Franchisor [Creamland] and Baskin Robbins, any such unauthorized assignment, transfer or subletting being null and without effect." The plaintiffs attempted to sell their franchise rights in February and August of 1979, but Creamland refused to consent to the sales. Plaintiffs brought suit, alleging that Creamland had interfered with their contractual relations with the prospective buyers by unreasonably withholding its consent. The district court granted summary judgment for the defendant on the ground that the contract gave the defendant an absolute, unqualified right to refuse to consent to proposed sales of the franchise rights. Plaintiffs appeal, claiming that defendant franchisor has a duty to act in good faith and in a commercially reasonable manner when a franchisee seeks to transfer its rights under the franchise agreement.

[3] The Colorado courts have never addressed the question of whether a franchisor has a duty to act reasonably in deciding whether to consent to a proposed transfer. The Colorado courts have, however, imposed a reasonableness requirement on consent to transfer clauses in other types of contracts. In Basnett v. Vista Village Mobile Home Park, 699 P.2d 1343 (Colo.App.1984), the Colorado appellate court held that a landlord cannot unreasonably refuse to consent to assignment or subleasing by a tenant. While the court indicated that the courts would enforce a provision expressly granting the landlord an absolute right to consent if such a provision was freely negotiated, it refused to find such an absolute right in a provision which provided simply that the landlord must consent to assignment. At 1346 (citing Restatement (2d) of Property Sec. 15.2(2) (1977)). The question before us, therefore, is whether the Colorado courts would impose a similar requirement of reasonableness on restraint on alienation clauses in franchise agreements.

[4] Counsel for both parties have argued that the franchisor-franchisee relationship is a special one which is not directly analogous to that of a landlord and tenant. As the Supreme Court of Pennsylvania has noted, "[u]nlike a tenant pursuing his own interests while occupying a landlord's property, a franchisee . . . builds the good will of both his own business and [the franchisor]." Atlantic Richfield v. Razumic, 480 Pa. 366, 390 A.2d 736, 742 (1978). This aspect of the relationship has led a number of courts to hold that the franchise relationship imposes a duty upon franchisors not to act unreasonably or arbitrarily in terminating the franchise. See, e.g., Atlantic Richfield, 390 A.2d at 742; Arnott v. American Oil Co., 609 F.2d 873 (8th Cir.1979), cert. denied, 446 U.S. 918, 100 S.Ct. 1852, 64 L.Ed.2d 272 (1980); Shell Oil Co. v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973). As did these courts, we find that the franchisor-franchisee relationship is one which requires the parties to deal with one another in good faith and in a commercially reasonable manner. See Arnott, 609 F.2d at 881 (finding fiduciary duty inherent in franchise relationship); Atlantic Richfield, 390 A.2d at 742 (basing decision that franchisor cannot arbitrarily terminate relationship on franchisor's "obligation to deal with its franchisees in good faith and in a commercially reasonable manner").

[5] Defendants argue that the franchise assignment situation differs from the franchise termination situation in that the franchisor must work with the person to whom the franchise is assigned. To impose a duty of reasonableness, they argue, would violate the rule of United States v. Colgate & Co., 250 U.S. 300, 307, 39 S.Ct. 465, 468, 63 L.Ed. 992 (1919), that a manufacturer engaged in private business has the right "freely to exercise his own independent discretion as to parties with whom he will deal." This right, however, must be balanced against the rights of the franchisees. As is true in the termination cases, the franchisee has invested time and money into the franchise and, in doing so, has created benefits for the franchisor. We do not find it an excessive infringement of the franchisor's rights to require that the franchisor act reasonably when the franchisee has decided that it wants out of the relationship. The franchisee should not be forced to choose between losing its investment or remaining in the relationship unwillingly when it has provided a reasonable alternative franchisee.

[6] We do not hold that a provision which expressly grants to the franchisor an absolute right to refuse to consent is unenforceable when such an agreement was freely negotiated. We do not believe the Colorado courts would find such an absolute right, however, in a provision such as the one involved in this case which provides simply that the franchisee must obtain franchisor consent prior to transfer. See Vista Village, at 1346. Rather, the franchisor must bargain for a provision expressly granting the right to withhold consent unreasonably, to insure that the franchisee is put on notice. Since, in this case, the contracts stated only that consent must be obtained, Creamland did not have the right to withhold consent unreasonably.

[7] Reversed and remanded for further proceedings consistent with this opinion.

Questions:

1. What is the source of the good faith obligation here?

2. Suppose you are the franchisor in this case. Why do you want to control who owns the franchise?

3. What kind of franchisee would pass in any event?

4. Why did the parties provide for approval of an assignment rather than a clause with greater specificity?

1.4. Express Conditions

PREFERRED MORTGAGE BROKERS, INC. v. Hervin BYFIELD

Supreme Ct., App. Div., 2d Dept. (2001), 723 N.Y.S.2d 230

[1] On November 3, 1997, the defendants retained the plaintiff mortgage broker to assist them in securing financing to purchase a house. The parties' contract required the defendants to pay the plaintiff a fee "directly upon [the] signed acceptance of a commitment." Although the plaintiff alleges that it earned its fee by obtaining a mortgage loan commitment on the defendants' behalf, it is undisputed that the defendants never signed any document accepting the commitment, and did not close on the proposed loan. When the defendants refused to pay the plaintiff a fee, the plaintiff commenced this action seeking damages for breach of contract.

[2] The defendants contend that the Supreme Court erred in granting the plaintiff's motion for summary judgment because their signed acceptance of a commitment was a condition precedent to their obligation to pay the plaintiff a broker's fee. We agree. A condition precedent is "an act or event * * * which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises" (Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co., 86 N.Y.2d 685, 690; Calamari and Perillo, Contracts § 11-2, at 438 [3d ed]). Express conditions precedent, which are those agreed to and imposed by the parties themselves, "must be literally performed" (Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co., supra, at 690). Since the record reveals that the defendants never accepted the loan commitment in writing, the express condition precedent contained in the contract was not satisfied, and the defendants were not obligated to pay a broker's fee (see, Oppenheimer & Co. v Oppenheim, Appel, Dixon & Co., supra; Bradenton Realty Corp. v United Artists Prop. I Corp., 264 A.D.2d 405; Stanton v Power, 254 A.D.2d 153). Therefore, the Supreme Court erred in granting summary judgment to the plaintiff.

[3] Furthermore, although the defendants did not cross-move for summary judgment, this Court is authorized by CPLR 3212 (b) to search the record and grant summary judgment to a nonmoving party (see, Dunham v Hilco Constr. Co., 89 N.Y.2d 425; Bartley v Accu-Glo Elec. Corp., 272 A.D.2d 352). Accordingly, summary judgment is granted to the defendants dismissing the complaint.

Questions:

1. What’s the difference between the legal effect of the condition in this case and that of the condition in Luther Williams, Inc.?

2. Why wasn’t the defendants’ failure to sign the commitment a failure to cooperate or a breach of the duty of good faith?

2. Please consider the facts of Dove v. Rose Acre Farms, Inc., 434 N.E.2d 931 (Ind. App. 1982):

[1] The evidence most favorable to support the judgment and the facts found specially by the trial court are as follows. Dove had been employed by Rose Acre Farms, operated by David Rust (Rust), its president and principal owner, in the summers and other times from 1972 to 1979. The business of Rose Acre was the production of eggs, and, stocked with 4,000,000 hens and staffed with 300 employees, it produced approximately 256,000 dozen eggs per day. Rust had instituted and maintained extensive bonus programs, some of which were for one day only, or one event or activity only. For example, one bonus was the white car bonus; if an employee would buy a new white car, keep it clean and undamaged, place a Rose Acre sign on it, commit no tardiness or absenteeism, and attend one management meeting per month, Rose Acre would pay $100 per month for 36 months as a bonus above and beyond the employee's regular salary, to apply on payments. Any slight violation, such as being a minute late for work, driving a dirty or damaged car, or missing work for any cause, would work a forfeiture of the bonus. Other bonuses consisted of egg production bonuses, deed conversion bonuses, house management bonuses, and a silver feather bonus. This last bonus program required the participant to wear a silver feather, and a system of rewards and penalties existed for employees who participated. While the conditions of the bonuses varied, one condition existed in all bonus programs: during the period of the bonus, the employee must not be tardy for even a minute, and must not miss work any day for any cause whatever, even illness. If the employee missed any days during the week, he was sometimes permitted to make them up on Saturday and/or Sunday. Any missed work not made up within the same week worked a forfeiture of the bonus. These rules were explained to the employees and were stated in a written policy. The bonus programs were voluntary, and all the employees did not choose to participate in them. When a bonus was offered a card was issued to the participant stating his name and the terms and amount of the bonus. Upon completion of the required tasks, the card was attached to the pay sheet, and the bonus was added to the paycheck. Rust was strict about tardiness and absenteeism, whether an employee was on a bonus program or not. If an employee was tardy, his pay would be docked to the minimum wage, or he would be sent home and lose an entire day. A minute's tardiness would also deprive the employee of a day for purposes of seniority. As was stated in the evidence, bonuses were given for the "extra mile" or actions "above and beyond the call of duty." The purpose of the bonus programs and penalties was to discourage absenteeism and tardiness, and to promote motivation and dependability.

[2] In June 1979, Rust called in Dove and other construction crew leaders and offered a bonus of $6,000 each if certain detailed construction work was completed in 12 weeks. As Dove conceded in his own testimony, the bonus card indicated that in addition to completing the work, he would be required to work at least five full days a week for 12 weeks to qualify for the bonus. On the same day Dove's bonus agreement, by mutual consent, was amended to ten weeks with a bonus of $5,000 to enable him to return to law school by September 1. Dove testified that there was no ambiguity in the agreement, and he understood that to qualify for the bonus he would have to work ten weeks, five days a week, commencing at starting time and quitting only at quitting time. Dove testified that he was aware of the provisions concerning absenteeism and tardiness as they affected bonuses, and that if he missed any work, for any reason, including illness, he would forfeit the bonus. The evidence disclosed that no exception had ever been made except as may have occurred by clerical error or inadvertence.

[3] In the tenth week Dove came down with strep throat. On Thursday of that week he reported to work with a temperature of 104°, and told Rust that he was unable to work. Rust told him, in effect, that if he went home, he would forfeit the bonus. Rust offered him the opportunity to stay there and lay on a couch, or make up his lost days on Saturday and/or Sunday. Rust told him he could sleep and still qualify for the bonus. Dove left to seek medical treatment and missed two days in the tenth week of the bonus program.

[4] Rust refused Dove the bonus based solely upon his missing the two days of work. While there was some question of whether the construction job was finished, Rust does not seem to have made that issue the basis of his refusal. Bonuses to other crew leaders were paid. The trial court denied Dove's recovery and, in the conclusions of law, stated that Dove had not shown that all of the conditions of the bonus contract had been met. Specifically, Dove failed to work five full days a week for ten weeks.

Dove appealed. Can you think of any arguments (legal, moral, philosophical, or economic) in his favor?

OPPENHEIMER & CO., INC. v. OPPENHEIM, APPEL, DIXON & CO.

N.Y. (1995), 636 N.Y.S.2d 734

CIPARICK, J.

[1] The parties entered into a Letter Agreement setting forth certain conditions precedent to the formation and existence of a sublease between them. The agreement provided that there would be no sublease between the parties "unless and until" plaintiff delivered to defendant the prime landlord's written consent to certain "tenant work" on or before a specified deadline. If this condition did not occur, the sublease was to be deemed "null and void." Plaintiff provided only oral notice on the specified date. The issue presented is whether the doctrine of substantial performance applies to the facts of this case. We conclude it does not for the reasons that follow.

I.

[2] In 1986, plaintiff Oppenheimer & Co. moved to the World Financial Center in Manhattan, a building constructed by Olympia & York Company (O & Y). At the time of its move, plaintiff had three years remaining on its existing lease for the 33rd floor of the building known as One New York Plaza. As an incentive to induce plaintiff's move, O & Y agreed to make the rental payments due under plaintiff's rental agreement in the event plaintiff was unable to sublease its prior space in One New York Plaza.

[3] In December 1986, the parties to this action entered into a conditional Letter Agreement to sublease the 33rd floor. Defendant already leased space on the 29th floor of One New York Plaza and was seeking to expand its operations. The proposed sublease between the parties was attached to the Letter Agreement. The Letter Agreement provided that the proposed sublease would be executed only upon the satisfaction of certain conditions. Pursuant to paragraph 1(a) of the agreement, plaintiff was required to obtain "the Prime Landlord's written notice of confirmation, substantially to the effect that [defendant] is a subtenant of the Premises reasonably acceptable to Prime Landlord." If such written notice of confirmation were not obtained "on or before December 30, 1986, then this letter agreement and the Sublease * * * shall be deemed null and void and of no further force and effect and neither party shall have any rights against nor obligations to the other."

[4] Assuming satisfaction of the condition set forth in paragraph 1(a), defendant was required to submit to plaintiff, on or before January 2, 1987, its plans for "tenant work" involving construction of a telephone communication linkage system between the 29th and 33rd floors. Paragraph 4(c) of the Letter Agreement then obligated plaintiff to obtain the prime landlord's "written consent" to the proposed "tenant work" and deliver such consent to defendant on or before January 30, 1987. Furthermore, if defendant had not received the prime landlord's written consent by the agreed date, both the agreement and the sublease were to be deemed "null and void and of no further force and effect," and neither party was to have "any rights against nor obligations to the other." Paragraph 4(d) additionally provided that, notwithstanding satisfaction of the condition set forth in paragraph 1(a), the parties "agree not to execute and exchange the Sublease unless and until * * * the conditions set forth in paragraph (c) above are timely satisfied."

[5] The parties extended the Letter Agreement's deadlines in writing and plaintiff timely satisfied the first condition set forth in paragraph 1(a) pursuant to the modified deadline. However, plaintiff never delivered the prime landlord's written consent to the proposed tenant work on or before the modified final deadline of February 25, 1987. Rather, plaintiff's attorney telephoned defendant's attorney on February 25 and informed defendant that the prime landlord's consent had been secured. On February 26, defendant, through its attorney, informed plaintiff's attorney that the Letter Agreement and sublease were invalid for failure to timely deliver the prime landlord's written consent and that it would not agree to an extension of the deadline. The document embodying the prime landlord's written consent was eventually received by plaintiff on March 20, 1987, 23 days after expiration of paragraph 4(c)'s modified final deadline.

[6] Plaintiff commenced this action for breach of contract, asserting that defendant waived and/or was estopped by virtue of its conduct33 from insisting on physical delivery of the prime landlord's written consent by the February 25 deadline. Plaintiff further alleged in its complaint that it had substantially performed the conditions set forth in the Letter Agreement.

[7] At the outset of trial, the court issued an order in limine barring any reference to substantial performance of the terms of the Letter Agreement. Nonetheless, during the course of trial, the court permitted the jury to consider the theory of substantial performance, and additionally charged the jury concerning substantial performance. Special interrogatories were submitted. The jury found that defendant had properly complied with the terms of the Letter Agreement, and answered in the negative the questions whether defendant failed to perform its obligations under the Letter Agreement concerning submission of plans for tenant work, whether defendant by its conduct waived the February 25 deadline for delivery by plaintiff of the landlord's written consent to tenant work, and whether defendant by its conduct was equitably estopped from requiring plaintiff's strict adherence to the February 25 deadline. Nonetheless, the jury answered in the affirmative the question, "Did plaintiff substantially perform the conditions set forth in the Letter Agreement?," and awarded plaintiff damages of $1.2 million.

[8] Defendant moved for judgment notwithstanding the verdict. Supreme Court granted the motion, ruling as a matter of law that "the doctrine of substantial performance has no application to this dispute, where the Letter Agreement is free of all ambiguity in setting the deadline that plaintiff concededly did not honor." The Appellate Division reversed the judgment on the law and facts, and reinstated the jury verdict. The court concluded that the question of substantial compliance was properly submitted to the jury and that the verdict should be reinstated because plaintiff's failure to deliver the prime landlord's written consent was inconsequential.

[9] This Court granted defendant's motion for leave to appeal and we now reverse.

II.

[10] Defendant argues that no sublease or contractual relationship ever arose here because plaintiff failed to satisfy the condition set forth in paragraph 4(c) of the Letter Agreement. Defendant contends that the doctrine of substantial performance is not applicable to excuse plaintiff's failure to deliver the prime landlord's written consent to defendant on or before the date specified in the Letter Agreement and that the Appellate Division erred in holding to the contrary. Before addressing defendant's arguments and the decision of the court below, an understanding of certain relevant principles is helpful.

[11] A condition precedent is "an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises" (Calamari and Perillo, Contracts § 11-2, at 438; see Restatement [Second] of Contracts § 224; see also Merrit Hill Vineyards v Windy Hgts. Vineyard, 61 NY2d 106, 112-113). Most conditions precedent describe acts or events which must occur before a party is obliged to perform a promise made pursuant to an existing contract, a situation to be distinguished conceptually from a condition precedent to the formation or existence of the contract itself (see M.K. Metals v Container Recovery Corp., 645 F2d 583). In the latter situation, no contract arises "unless and until the condition occurs" (Calamari and Perillo, Contracts § 11-5, at 440).

[12] Conditions can be express or implied. Express conditions are those agreed to and imposed by the parties themselves. Implied or constructive conditions are those "imposed by law to do justice" (Calamari and Perillo, Contracts § 11-8, at 444). Express conditions must be literally performed, whereas constructive conditions, which ordinarily arise from language of promise, are subject to the precept that substantial compliance is sufficient. The importance of the distinction has been explained by Professor Williston:

Since an express condition * * * depends for its validity on the manifested intention of the parties, it has the same sanctity as the promise itself. Though the court may regret the harshness of such a condition, as it may regret the harshness of a promise, it must, nevertheless, generally enforce the will of the parties unless to do so will violate public policy. Where, however, the law itself has imposed the condition, in absence of or irrespective of the manifested intention of the parties, it can deal with its creation as it pleases, shaping the boundaries of the constructive condition in such a way as to do justice and avoid hardship. (5 Williston on Contracts § 669, at 154 [3d ed].)

In determining whether a particular agreement makes an event a condition, courts will interpret doubtful language as embodying a promise or constructive condition rather than an express condition. This interpretive preference is especially strong when a finding of express condition would increase the risk of forfeiture by the obligee (see Restatement [Second] of Contracts § 227[1]).

[13] Interpretation as a means of reducing the risk of forfeiture cannot be employed if "the occurrence of the event as a condition is expressed in unmistakable language" (Restatement [Second] of Contracts § 229 comm b, at 185; see § 227, comm b [where language is clear, "[t]he policy favoring freedom of contract requires that, within broad limits, the agreement of the parties should be honored even though forfeiture results"]). Nonetheless, the nonoccurrence of the condition may yet be excused by waiver, breach or forfeiture. The Restatement posits that "[t]o the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange" (Restatement [Second] of Contracts § 229).

[14] Turning to the case at bar, it is undisputed that the critical language of paragraph 4(c) of the Letter Agreement unambiguously establishes an express condition precedent rather than a promise, as the parties employed the unmistakable language of condition ("if," "unless and until"). There is no doubt of the parties' intent and no occasion for interpreting the terms of the Letter Agreement other than as written.

[15] Furthermore, plaintiff has never argued, and does not now contend, that the nonoccurrence of the condition set forth in paragraph 4(c) should be excused on the ground of forfeiture.34 Rather, plaintiff's primary argument from the inception of this litigation has been that defendant waived or was equitably estopped from invoking paragraph 4(c). Plaintiff argued secondarily that it substantially complied with the express condition of delivery of written notice on or before February 25th in that it gave defendant oral notice of consent on the 25th.

[16] Contrary to the decision of the court below, we perceive no justifiable basis for applying the doctrine of substantial performance to the facts of this case.

[17] The flexible concept of substantial compliance "stands in sharp contrast to the requirement of strict compliance that protects a party that has taken the precaution of making its duty expressly conditional" (Farnsworth on Contracts § 8.12, at 415). If the parties "have made an event a condition of their agreement, there is no mitigating standard of materiality or substantiality applicable to the non-occurrence of that event" (Restatement [Second] of Contracts § 237 comm d, at 220). Substantial performance in this context is not sufficient, "and if relief is to be had under the contract, it must be through excuse of the non-occurrence of the condition to avoid forfeiture" (id.; see Brown- Marx Associates, Ltd. v Emigrant Savings Bank, 703 F2d 1361, 1367- 1368 [11th Cir]; see also Childres, Conditions in the Law of Contracts, 45 NYU L Rev 33, 35]).

[18] Here, it is undisputed that plaintiff has not suffered a forfeiture or conferred a benefit upon defendant. Plaintiff alludes to a $1 million licensing fee it allegedly paid to the prime landlord for the purpose of securing the latter's consent to the subleasing of the premises. At no point, however, does plaintiff claim that this sum was forfeited or that it was expended for the purpose of accomplishing the sublease with defendant. It is further undisputed that O & Y, as an inducement to effect plaintiff's move to the World Financial Center, promised to indemnify plaintiff for damages resulting from failure to sublease the 33rd floor of One New York Plaza. Consequently, because the critical concern of forfeiture or unjust enrichment is simply not present in this case, we are not presented with an occasion to consider whether the doctrine of substantial performance is applicable, that is, whether the courts should intervene to excuse the nonoccurrence of a condition precedent to the formation of a contract.

[19] The essence of the Appellate Division's holding is that the substantial performance doctrine is universally applicable to all categories of breach of contract, including the nonoccurrence of an express condition precedent. However, as discussed, substantial performance is ordinarily not applicable to excuse the nonoccurrence of an express condition precedent.

[20] Our precedents are consistent with this general principle. In Maxton Bldrs. v Lo Galbo (68 NY2d 373) the defendants contracted on August 3 to buy a house, but included in the contract the condition that if real estate taxes were found to be above $3,500 they would have the right to cancel the contract upon written notice to the seller within three days. On August 4 the defendants learned that real estate taxes would indeed exceed $3,500. The buyers' attorney called the seller's attorney and notified him that the defendants were exercising their option to cancel. A certified letter was sent notifying the seller's attorney of that decision on August 5 but was not received by the seller's attorney on August 9. We held the cancellation ineffective and rejected defendants' argument that reasonable notice was all that was required, stating: "It is settled * * * that when a contract requires that written notice be given within a specified time, the notice is ineffective unless the writing is actually received within the time prescribed" (id. at 378). We so held despite the fact that timely oral notice was given and the contract did not provide that time was of the essence. * * * *

[21] Plaintiff's reliance on the well-known case of Jacob & Youngs v Kent (supra) is misplaced. There, a contractor built a summer residence and the buyer refused to pay the remaining balance of the contract price on the ground that the contractor used a different type of pipe than was specified in the contract. The buyer sought to enforce the contract as written. This would have involved the demolition of large parts of the structure at great expense and loss to the seller. This Court, in an opinion by then-Judge Cardozo, ruled for the contractor on the ground that "an omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting damage and will not always be the breach of a condition to be followed by a forfeiture" (230 NY, at 241). But Judge Cardozo was careful to note that the situation would be different in the case of an express condition:

This is not to say that the parties are not free by apt and certain words to effectuate a purpose that performance of every term shall be a condition of recovery. That question is not here. This is merely to say that the law will be slow to impute the purpose, in the silence of the parties, where the significance of the default is grievously out of proportion to the oppression of the forfeiture (id. at 243-244).

The quoted language contradicts the Appellate Division's proposition that the substantial performance doctrine applies universally, including when the language of the agreement leaves no doubt that an express condition precedent was intended (see 205 AD2d, at 414). More importantly, Jacob & Youngs lacks determinative significance here on the additional ground that plaintiff conferred no benefit upon defendant. The avoidance-of- forfeiture rationale which engendered the rule of Jacob & Youngs is simply not present here, and the case therefore "should not be extended by analogy where the reason for the rule fails" (Van Iderstine Co. v Banet Lumber Co., 242 NY 425, 434). * * * *

III

[22] In sum, the Letter Agreement provides in the clearest language that the parties did not intend to form a contract "unless and until" defendant received written notice of the prime landlord's consent on or before February 25, 1987. Defendant would lease the 33rd floor from plaintiff only on the condition that the landlord consent in writing to a telephone communication linkage system between the 29th and 33rd floors and to defendant's plans for construction effectuating that linkage. This matter was sufficiently important to defendant that it would not enter into the sublease "unless and until" the condition was satisfied. Inasmuch as we are not dealing here with a situation where plaintiff stands to suffer some forfeiture or undue hardship, we perceive no justification for engaging in a "materiality-of-the- nonoccurrence" analysis. To do so would simply frustrate the clearly expressed intention of the parties. Freedom of contract prevails in an arm's length transaction between sophisticated parties such as these, and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain. If they are dissatisfied with the consequences of their agreement, "the time to say so [was] at the bargaining table" (Maxton, supra, at 382).

[23] Finally, the issue of substantial performance was not for the jury to resolve in this case. A determination whether there has been substantial performance is to be answered, "if the inferences are certain, by the judges of the law" (Jacob & Youngs v Kent, 230 NY 239, 243).

[24] Accordingly, the order of the Appellate Division should be reversed, with costs, and the complaint dismissed.

Aside—Waiver

 

R. CONRAD MOORE & ASSOCS., INC. v. LERMA

Tex. Ct. App. (1997), 946 S.W.2d 90

OPINION

LARSEN, Justice.

* * * * FACTS

[1] On January 30, 1990, the Lermas (Appellees) and R. Conrad Moore & Associates, Inc. (Appellant) entered into an earnest money contract for the purchase of two lots at 1900 Gus Moran in El Paso. The Lermas tendered a check to Moore for $13,500 as part of the earnest money contract. The sale of the lots was contingent upon the Lermas using Moore as a builder. On April 16, 1990, the Lermas and Moore incorporated the previous contract into a new home residential earnest money contract. This contract provided for the construction of a custom home on the lots for a total price, including the lots, of $180,000. The new contract called for an additional payment of $6,500 earnest money, due upon the Lermas’ approval of the house plan. Paragraph 4 of the contract required the following:

FINANCING CONDITIONS:  This contract is subject to approval for Buyer of a conventional (type of loan) loan (the Loan) to be evidenced by a promissory note (the Note) in the amount of $ 80,000. Buyer shall apply for the Loan within 15 days from the effective date of this contract and shall make every reasonable effort to obtain approval from Competitive Mortgage Co., as lender, or any lender that will make the Loan. If the Loan cannot be approved within 60 days from the effective date of this contract, this contract shall terminate and the Earnest Money shall be refunded to Buyer without delay. [Emphasis added.]

[2] In addition to the standard provision of the preprinted contract, special handwritten provisions were included under Paragraph 11:

1) Seller give One Year (1) Builders Warranty and 10-Year H.O.W. warranty

2) On Lot held more than 60 days, Earnest Money is non-refundable.

3) Lot purchase contract dated January 30, 1990 is hereby transferred to this Home construction contract.

4) Balance of Down Payment to be made at time of sale of properties located at 1400 Bodega and 3509 Breckenridge.  [Emphasis added.]

[3] Construction on the house began in December 1990, and was completed in the summer of 1991. The Lermas were ultimately denied credit and were unable to close on the house. In September 1991, after demanding the return of their earnest money, they initiated this suit in November 1992. After trial to a jury, the Lermas were awarded $20,000 in damages. The jury found that Moore breached the contract by failing to return the Lermas’ earnest money upon the Lermas’ failure to get loan approval within the 60 days contemplated by Paragraph 4 of the contract. Moore appeals.

STANDARD OF REVIEW:  LEGAL AND FACTUAL SUFFICIENCY

[4] Moore asserts in its first six points of error that the evidence was legally or factual insufficient to support the jury’s findings.

[5] In reviewing a “no evidence” or legal sufficiency claim, we examine only the evidence favorable to the verdict and disregard all evidence to the contrary. * * * *

[6] In reviewing a “matter of law” challenge, we first examine the record to see if any evidence supports the finding, ignoring all evidence to the contrary. If no evidence supports the finding, we then determine whether the evidence conclusively establishes its converse. If so, we must reverse. * * * *

Loan Approval

[7] In its first point of error, Moore asserts the evidence is legally and factually insufficient to support the jury finding that the Lermas failed to get loan approval for the purchase of the home. After a diligent search of the record, we have been unable to find any evidence that would support a finding that the Lermas did get financing for the purchase. Moore testified that “someone” at Sun World Savings informed her that the Lermas were approved within the 60 day period. However, Ms. Nancy Montes of Mortgage Plus, who took the Lermas’ loan application, testified that they were never approved. She stated that a “take out” letter sent out in October 1990 was not final loan approval but a prequalification report that indicates a conditional approval subject to verification and continuing good credit. Ms. Montes further testified that she exhausted all her sources in attempting to get financing for the Lermas. Ultimately, the Lermas were denied credit and were unable to close on the house. The record overwhelmingly supports the jury’s finding that the Lermas did not get loan approval for the purchase of the house. Therefore, Moore’s first point of error is overruled.

Waiver

[8] In its second point of error, Moore asserts that the evidence establishes as a matter of law that the Lermas waived any right to have the earnest money refunded. We agree.

[9] Any contractual right can be waived. Purvis Oil Corp. v. Hillin, 890 S.W.2d 931, 937 (Tex.App.-El Paso 1994, no writ). A waiver is an intentional release, relinquishment, or surrender of a known right. Id. The following elements must be met to find waiver:  (1) a right must exist at the time of the waiver;  (2) the party who is accused of waiver must have constructive or actual knowledge of the right in question;  and (3) the party intended to relinquish its right. See Riley v. Meriwether, 780 S.W.2d 919, 922 (Tex.App.-El Paso 1989, writ denied). Intentional relinquishment of a known right can be inferred from intentional conduct which is inconsistent with claiming the contractual right.  Id.

[10] It has been conclusively established that the Lermas did not obtain financing for the purchase of the house from Moore. Paragraph 4 of the contract clearly states that if the purchasers are unable to obtain financing within 60 days of the effective date of the contract, they had a right to have their money returned. Thus, on June 15, 1990, the Lermas had a right to the return of their earnest money. The Lermas’ intention to relinquish their right to the return of the earnest money, however, is clearly established by their conduct after June 15. Between the date the contract was signed and the date construction began on the house, the Lermas participated in the design of the house, approved the blueprints in July 1990, and tendered an additional $6,500 in earnest money to Moore in October. The Lermas were then conditionally approved for financing which allowed Moore to get a construction loan to begin building the house.

[11] Additionally, after construction of the house began in December 1990, the Lermas monitored its progress on a daily basis. In March 1991, they requested and paid for an upgrade in tile for the house.   In June, Isabel Lerma executed a promissory note in the principal amount of $6,000 to Moore to pay for the addition of another room to the house. During this same time period, the Lermas sold their home and another property, as agreed in the contract, to fund the down payment. Mr. Lerma testified that he fully intended to buy the house that Moore was building, and at no time prior to August 1991 did he consider the contract terminated. Mrs. Lerma also testified that until August 1991, they wanted and intended to purchase the home.

[12] Although the Lermas claim that they were unaware that they could get their money back on that date, both Mr. and Mrs. Lerma signed the contract. Mrs. Lerma testified that she read the contract. Mr. Lerma was not sure if he read the contract, but testified that no one prevented him from doing so. A person who signs a contract is presumed to know and understand its contents;  absent a finding of fraud, failure to apprehend the rights and obligations under the contract will not excuse performance. See G-W-L, Inc. v. Robichaux, 643 S.W.2d 392 (Tex.1982);  Thigpen v. Locke, 363 S.W.2d 247 (Tex.1962).   There is no evidence of fraud, actual or constructive, on the part of Moore. Thus, we conclude the Lermas had knowledge of their right to a refund of the earnest money on June 15.

[13] There is no evidence to support the jury’s finding that the Lermas did not waive the right to have the earnest money refunded. The Lermas’ intentional conduct after the right to the return of the earnest money arose was inconsistent with claiming that right. They intentionally relinquished a known right, and therefore, we find as a matter of law, that the Lermas waived Paragraph 4 of the contract, and the contract continued in effect, including Paragraph 11 allowing Moore to retain the earnest money on the lots.

[14] The Lermas argue that Paragraph 4 operates as a condition precedent. When the Lermas failed to obtain financing within 60 days, the contract, including any forfeiture provisions, terminated. Thus, the Lermas assert Paragraphs 16 and 11 never became effective. Many Texas cases have construed provisions similar to Paragraph 4 as conditions precedent. See e.g., * * * .   We agree with the Lermas that Paragraph 16, a simple default clause included in the preprinted sections of the contract, may not have become effective in the event the Lermas failed to obtain financing within 60 days. In this case, however, we have an additional handwritten provision that is somewhat out of the ordinary and distinguishable from the clauses considered in the cases finding conditions precedent. Under Paragraph 11, the “special provisions” section of the contract, the parties added the phrase “on Lot held more than 60 days, Earnest Money is non-refundable.” This brief passage is less than a model of clarity. At first blush, it appears in direct contradiction to Paragraph 4, the termination clause.

[15] If a contract is worded so that it can be given a certain or definite legal meaning or interpretation, then it is not ambiguous and the court will construe the contract as a matter of law.  City of Pinehurst v. Spooner Addition Water Co., 432 S.W.2d 515, 518 (Tex.1968);  First City Nat’l Bank of Midland v. Concord Oil Co., 808 S.W.2d 133, 137 (Tex.App.-El Paso 1991, no writ).   There is no allegation in this case that the earnest money contract is ambiguous, and it does not appear to us to be so.   Generally, the parties to a contract intend every clause to have some effect and the Court may not ignore any portion of the contract unless there is an irreconcilable conflict.  Ogden v. Dickinson State Bank, 662 S.W.2d 330, 332 (Tex.1983);  Woods v. Sims, 154 Tex. 59, 273 S.W.2d 617 (1954).   In the interpretation of contracts, the primary concern of courts is to ascertain and to give effect to the intentions of the parties as expressed in the instrument.  Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983);  Duracon, Inc. v. Price, 817 S.W.2d 147, 149 (Tex.App.-El Paso 1991, writ denied).   This requires the court to examine and consider the entire instrument and reach a decision so that none of the provisions will be rendered meaningless. Id.

[16] By its wording, Paragraph 11 is not merely a forfeiture clause subject to the condition precedent stated in Paragraph 4. Paragraph 11 envisions the non-occurrence of the condition (in this case financing obtained within 60 days), references the 60-day provision, and provides for continuation of the contract beyond 60 days.   To give effect to both provisions and render neither meaningless, we must construe the handwritten provision to allow the buyer, at its option, to continue the contract after 60 days in the absence of financing.   A condition precedent like any other provision of a contract can be waived.  Purvis Oil Corp., 890 S.W.2d at 931.   Thus, if financing were not obtained in 60 days, the Lermas could do nothing, the contract would terminate, and the Lermas would be entitled to return of the earnest money.   On the other hand, the Lermas could take action to have the lot “held more than 60 days” thereby waiving the right to the return of the earnest money.

[17] The record establishes that the Lermas chose the latter option.   They worked with Moore on the design of the house, tendered additional earnest money four months after the contract would have expired under Paragraph 4, contracted with Moore to increase the square footage of the house, paid for tile upgrades, and sold both the home they were living in and another property in anticipation of closing on the house when it was completed.   The record therefore conclusively establishes that the Lermas waived termination of the contract and instead continued to operate pursuant to the contract under Paragraph 11.

* * * *

[18] We must reject the Lermas’ arguments and affirm Moore’s second point of error.

* * * *

CONCLUSION

[19] Having sustained Moore’s second point of error, we reverse the judgment of the trial court and render judgment that the Lermas take nothing on their contract * * * cause[] of action.

Questions:

1. Is this a case of express or implied waiver?

2. What facts show the Lermas’ intent? Do you believe the Lermas intended to relinquish their right?

3. Did the Lermas promise to apply for a loan?

4. Is reliance on a waiver necessary for the waiver to have legal effect?

5. What exactly was waived?

6. Can anything be waived? In Clark v. West, 86 N.E. 1 (N.Y. 1908), Clark and West contracted for Clark to write a book (and perhaps several books) that West would publish. Clark was to be paid $2 per page “and if [Clark] abstains from the use of intoxicating liquor and otherwise fulfills his agreements as hereinbefore set forth, he shall be paid an additional $4 per page in manner hereinbefore stated.” But, after Clark began writing, he drank, and West knew it, but West told Clark that he would pay $6 per page notwithstanding Clark’s drinking, or at least that is what Clark later alleged. When West paid only $2 per page, Clark sued, and West defended by claiming Clark drank. In response, Clark claimed West had waived the requirement of Clark’s abstinence. In return, West argued that Clark’s abstinence was the consideration for the contract, and could not be waived. While the court agreed that the consideration for a contract cannot be waived, the court said that Clark’s writing books—not Clark’s abstinence—was consideration, and Clark’s abstinence was a waivable point. The point of law, though, is not controversial: the consideration of a contract cannot be waived, though we say it differently now: “A material part of the agreed exchange cannot be waived.” Was what the Lermas waived a material part of the agreed exchange?

Note: Retraction of Waivers

Once a waiver occurs, is it binding in the future? In other words, can it be retracted?

To some extent, a waiver is like a contractual modification. It can be characterized as a promise, namely, a promise to accept something that was not acceptable before. West promised that Clark would not forfeit the $4 per page as a result of Clark’s drinking. If a waiver is viewed in this way, the question is whether the promise is enforceable. One might expect such a promise to be enforceable according to the same doctrines by which any other promise is enforceable.

On the other hand, it is also possible to think of contractual rights as a kind of property, at least after a contract forms. If one thinks this way, then a waiver is like an abandonment of property. West abandoned the contractual right to pay only $2 per page if Clark drank. If a waiver is viewed in this way, the question is whether the abandoned right may be reclaimed. The answer from property law is generally no. Once property is abandoned, the person abandoning it has no more rights in it. To some extent, the property view is more consistent with our manner of speaking about waivers. We do not usually talk of a breach of a waiver, as we would if the waiver was a promise. We do, on the other hand, sometimes talk of waivers as being retracted, although that makes them sound more like a grant of property rather than an abandonment of it.

Either way one thinks about waivers, one must ask if they can be taken back. For instance, suppose after West grants Clark a waiver, Clark drinks to excess and begins turning in work of lesser quality. Let’s suppose the work is satisfactory but not as good as Clark’s normal work. In that case, West may regret the waiver. If Clark has not finished the book, may West retract the waiver with respect to the remaining pages?

The rule for this scenario is recited in Fitzgerald v. Hubert Herman, Inc., 179 N.W.2d 252 (Mich. App. 1970): “[A]n executory waiver being in the nature of a promise or a contract must be supported by consideration to be enforceable. But a waiver . . . partaking of the principle of an election needs no consideration . . . and cannot be retracted.”

Some have had trouble understanding this rule on first reading it. The rule divides waivers into two types: executory and “partaking of the principle of an election.” Executory waivers are treated like promises. Those partaking of the principle of an election are treated like abandonments of property. The trick here is to find which waivers are executory, then. What does executory mean? That a thing is incomplete and that some part of it is yet to be done. A contractual performance is executory before it has been completed. So does that help establish the meaning of the rule? Of course, as performance continues, what was executory becomes no longer so.

Here are some hypotheticals against which to test your knowledge:

PROBLEM 5. In the facts of Clark v. West, West tells Clark that Clark may drink without forfeiting the $4 per page West would otherwise have a right to withhold under the contract. When Clark turns in his next installment, pages 220-230 (out of 3,470), West is not pleased with Clark’s work. It is acceptable, but not as good as what Clark had been writing. West therefore sends a letter to Clark stating that West will from the date of the letter’s receipt forward insist that Clark not drink on pain of losing the $4 per page. Should Clark now drink?

PROBLEM 6. Marco contracted with Andrea that Andrea would deliver to him 22 tons of long grain rice on November 4. Andrea delivered the rice on November 7, at which time Marco accepted it. Two weeks later, Marco called Andrea and informed her that he was declining the rice and that she could pick it up or pay storage for it. He said he was not going to pay her because the rice was late. Must Marco pay?

1.5. Implied in Law or Constructive Conditions
1.5.1. Who Performs First If the Parties Did Not Say

The doctrine of constructive conditions may be the most counter-intuitive doctrine you will study in this class. Most law students never understand the doctrine because they do not see the need for it. They fail to see even the issue that the doctrine addresses.

There was no doctrine of constructive conditions in 1615, when Nicholas v. Raynbred was decided. So this case gives you some idea of what occurs when the doctrine is absent.

Don’t be “cowed” by the archaic language. Assumes means literally “undertakes,” but in this context it means “promises.” Assumpsit means “he has undertaken,” but here it means either “undertakings” or “promises,” on the one hand, or “an action based on a promise” on the other. To aver is to allege. A writ is a complaint.

NICHOLAS v. RAYNBRED

King's Bench and Exchequer Chamber (1615), Jenk. 296, 145 ER 215, Hob. 88, 80 ER 238

[1] A sells a cow to B for 5l. and assumes to deliver her to him at a certain day; at the same time B assumes to A to pay him 5l. for the said cow, at the said day. A brings an assumpsit for the 5l. not paid, and does not aver delivery of the cow: it need not be averred; but the writ ought to aver the mutual assumpsit; for they are reciprocal assumpsits: and such mutual assumpsits are a good consideration, and each of them has a remedy against the other; one for the cow, and other for the 5l.

[2] Judged in both courts [the King's Bench and the Exchequer]. * * * *

Questions:

1. Does A have to deliver the cow before he sues for the money? Is delivery of the cow a condition precedent to B’s duty to pay the money? Is delivery of the money a condition precedent to A’s duty to deliver the cow?

2. How will B get the cow?

3. Let’s suppose a court followed Nicholas in a sale of property. Suppose A was to deliver not a cow but a deed. Under Nicholas, need A deliver the deed before suing for the money?

4. In a case from the 1670s called Peters v. Opie, a worker was supposed to build a house in exchange for money. The worker sued the owner but did not allege that he had built the house (or allege that he had done anything at all). The owner argued that the worker had to allege that he had done the work before he could collect the money. What result, under Nicholas? In the course of the argument, one judge, Chief Justice Hale, showed his disagreement with the Nicholas rule. He said he never let workers win unless they alleged that they had performed; otherwise the owner might be forced to pay, and then sue, a beggar! 2 Keble 837, 84 ER 529, 530 (1671). Imagine, forcing landowners to pay for work before it was done!

5. If the parties choose mutual promises as the form of their exchange, aren’t they simply extending credit to each other? They don’t have to do that. B could have exchanged her promise of 5l. for actual delivery of the cow. That would be a unilateral contract—a promise in exchange for a performance. And A could agree to deliver the deed only after B paid the money. And the landowner could bargain for the completed work in exchange for his promise to pay money. If the parties could easily have protected themselves in this manner (and most did in the days of Nicholas), then why should the law step in paternalistically and protect them from their own folly? Nicholas is no longer good law. Kingston v. Preston is.

KINGSTON v. PRESTON

King’s Bench (1773)

2 Doug. 690, 99 E.R. 437 (report taken from arguments of counsel in Jones v. Barkley (1781))

[1] [Kingston alleged as follows: Richard Preston was a mercer, a dealer in silks. On March 24, 1770, John Kingston promised to serve Preston as an employee for fifteen months at a salary of £200 per year. Preston promised in exchange that, at the end of fifteen months, Preston would convey his mercer business, including all his inventory, at a “fair valuation” to Kingston and Preston’s nephew, or some other person nominated by Preston, who would become partners in the mercer business for a 14-year period. Kingston, for his part, also promised to accept the mercer business and enter into the partnership. But the partners were to pay for the mercer business over a period of time, presumably out of profits. To induce Preston to allow the partners to pay out of profits, Kingston also promised to “cause and procure good and sufficient security to be given” to Preston, approved by Preston, for the payment of £250 per month to Preston until the debt for the mercer business could be reduced to the value of £4,000.]

[2] Then the plaintiff averred, that he had performed, and been ready to perform, his covenants, and assigned for breach on the part of the defendant, that he had refused to surrender and give up his business, at the end of the said year and a quarter. —The defendant pleaded, 1. That the plaintiff did not offer sufficient security; and, 2. That he did not give sufficient security for the payment of the £250, &c. — And the plaintiff demurred generally to both pleas.

[3] On the part of the plaintiff, the case was argued by Mr. Buller, who contended, that the covenants were mutual and independant, and, therefore, a plea of the breach of one of the covenants to be performed by the plaintiff was no bar to an action for a breach by the defendant of one of which he had bound himself to perform, but that the defendant might have his remedy for the breach by the plaintiff, in a separate action. On the other side, Mr. Grose insisted, that the covenants were dependent in their nature, and, therefore, performance must be alleged: the security to be given for the money, was manifestly the chief object of the transaction, and it would be highly unreasonable to construe the agreement, so as to oblige the defendant to give up a beneficial business, and valuable stock in trade, and trust, to the plaintiff's personal security, (who might, and, indeed, was admitted to be worth nothing,) for the performance of his part.

[4] In delivering the judgment of the Court, Lord Mansfield expressed himself to the following effect: There are three kinds of covenants: 1. Such as are called mutual and independant, where either party may recover damages from the other, for the injury be may have received by a breach of the covenants in his favour, and where it is no excuse for the defendant, to allege a breach of the covenants on the part of the plaintiff. 2. There are covenants which are conditions and dependent, in which the performance of one depends on the prior performance of another, and, therefore, till this prior condition is performed, the other party is not liable to an action on his covenant. 3. There is also a third sort of covenants, which are mutual conditions to be performed at the same time; and, in these, if one party was ready, and offered, to perform his part, and the other neglected, or refused, to perform his, he who was ready, and offered, has fulfilled his engagement, and may maintain an action for the default of the other; though it is not certain that either is obliged to do the first act. — His Lordship then proceeded to say, that the dependence, or independence, of covenants, was to be collected from the evident sense and meaning of the parties, and, that, however transposed they might be in the deed, their precedency must depend on the order of time in which the intent of the transaction requires their performance. That, in the case before the Court, it would be the greatest injustice if the plaintiff should prevail: the essence of the agreement was, that the defendant should not trust to the personal security of the plaintiff, but, before he delivered up his stock and business, should have good security for the payment of the money. The giving such security, therefore, must necessarily be a condition precedent. - Judgment was accordingly given for the defendant, because the part to be performed by the plaintiff was clearly a condition precedent.

Questions:

1. On what precedent could Buller call on to support Kingston’s case? Why?

2. Must Kingston prove that he has given sufficient security before he may sue Preston for breach?

3. Mansfield’s opinion actually changes one rule and adds another. Both are necessary for the court to rule for Preston. The first rule is the general default that mutual promises create independent covenants. What does Mansfield change that rule to? What further thing does he add to this case besides dependence?

4. How does Mansfield say the courts should determine which case falls where, in the structure that he creates?

5. How much of Mansfield’s opinion actually discerns the intent of the parties? How does Mansfield propose that judges will say in what order the parties should perform?

6. If it’s fair that Kingston had to trust Preston for 15 months, while Kingston worked in contemplation that Preston would convey his stock in trade and let Kingston take over the mercer business, without security, isn’t it fair to make Preston trust Kingston for a little while, or let Preston sue for failure to obtain security?

7. If Preston didn’t want Kingston’s promise as consideration, why did he agree to it? If he didn’t bargain for Kingston’s performance as consideration, why does the court require it? Doesn’t that give Preston more than he bargained for?

8. Kingston actually brought a cause of action for debt, not assumpsit, but everyone saw the writing on the wall, and this opinion has been universally adopted. It is still not a bad summary, which is why this area of the law is so counter-intuitive to some students.

GOODISON v. NUNN

King’s Bench (1792), 4 T.R. 761, 100 E.R. 1288

Lord Kenyon, Ch.J. - This case is extremely clear, whether considered on principles of strict law or of common justice. The plaintiff engaged to sell an estate to the defendant, in consideration of which the defendant undertook to pay 210l; and, if he did not carry the contract into execution, he was to pay 21l; and [plaintiff’s] now not having conveyed his estate, or offered to do so, or taken any one step towards it, the plaintiff has brought this action for the penalty. Suppose the purchase-money of an estate was 40,000l. [I]t would be absurd to say that the purchaser might enforce a conveyance without payment, and compel the seller to have recourse to him, who perhaps might be an insolvent person. The old cases, cited by the plaintiff's counsel, have been accurately stated; but the determinations in them outrage common sense, I admit the principle on which they profess to go: but I think that the Judges misapplied that principle. It is admitted in them all that where they are dependent Covenants, no action will lie by one party unless he have performed, or offered to perform his covenant. Then the question is, whether these are, or are not, dependent covenants? I think they are; the one is to depend on the other; when the one party conveyed his estate he was to receive the purchase-money; and when the other parted with his money he was to have the estate. They were reciprocal acts, to be performed by each other at the same time. It seems, from the case in Strange, that the Judges were surprised at the old decisions; and in order to get rid of the difficulty, they said that a tender and refusal would amount to a performance: it is true they went farther, and said that "in consideration of the premises," meant only in consideration of the covenant to transfer, and not in consideration of the actual transferring of the stock: but to the latter part of that judgment I cannot accede. It is our duty, when we see that principles of law have been misapplied, in any case, to overrule it. The principle is admitted in all the cases alluded to, that, if they be dependent covenants, performance, or the offer to perform, must be pleaded on the one part, in order to found the action against the other. The mistake has been in the misapplication of that principle in the cases cited; and I am glad to find that the old cases have been over-ruled; and that we are now warranted by precedent as well as by principle to say that this action cannot be maintained.

Questions:

1. Must Goodison allege payment or tender?

2. How does Kenyon know that the covenants are dependent? What is the test for that?

3. Kenyon’s opinion suggests that this problem arose only because the courts held that a promise was consideration for another promise. It is true that courts say that a promise is consideration. They still say that. Kenyon’s opinion does not purport to overrule the rule that a mutual promise is consideration. Is it consistent to say that a promise is consideration but that the promisor must actually perform or at least tender performance before the defendant is obligated? What exactly is bargained for when a mutual promise is consideration? If Nunn didn’t want Goodison’s promise but instead wanted actual payment, why did Nunn promise in exchange for Goodison’s promise?

Jeffrey A. PITTMAN v. Lily V. CANHAM

Cal. Ct. App. (1992), 3 Cal. Rptr. 2d 340

OPINION

GILBERT, J.

[1] When is a contract no longer a contract? When it contains concurrent conditions and neither party tenders timely performance. Unlike love or taxes, concurrent conditions do not last forever.

[2] We hold that where a contract creates concurrent conditions and neither party tenders timely performance, both parties are discharged. We affirm the judgment.

Facts

[3] Jeffrey A. Pittman was a licensed real estate broker. In 1987 he contacted Lily V. Canham, then 85 years old, to purchase a parcel of property she owned in San Luis Obispo County. After many telephone calls to Canham between May and November 1987, she agreed to sell a 56-acre parcel to Pittman for $250,000.

[4] Pittman drafted the contract dated November 24, 1987, and deposited $1,000 in escrow. The contract called for a further deposit of $24,000 in cash, with the balance of the purchase price to be paid by a note secured by a deed of trust on the property. Closing of escrow was to be within 30 days. The contract provided that "[t]ime is of the essence. All modification or extensions shall be in writing signed by the parties."

[5] The parties executed escrow instructions that provided: "Time is of the essence of these instructions. If this escrow is not in condition to close by the Time Limit Date of December 24, 1987 and written demand for cancellation is received by you from any principal to this escrow after said date, you shall act in accordance with [other provisions of the instructions]. . . . [] If no demand for cancellation is made, you will proceed to close this escrow when the principals have complied with the escrow instructions." Paragraph 2 of section 4 of the instructions provided, however, that the instructions were not intended to amend, modify or supersede the contract.

[6] About the second week of December Canham gave a signed copy of the escrow instructions to Pittman for delivery to escrow. With the instructions, Canham included a signed deed to the property. The escrow company pointed out, however, that the deed had not been notarized. When Pittman contacted Canham, she told him she would have it notarized at an escrow company near her home.

[7] The December 24 closing date came and went. Canham had not tendered a notarized deed nor had Pittman tendered $24,000, a promissory note or deed of trust.

[8] By March 1988, Canham had been contacted by another broker who wanted to list the property. On March 21 she told Pittman she wanted $10,000 per acre. Pittman embarked on an effort to find out what a fair price for the property was.

[9] In May 1988, Canham told Pittman that she had entered into a contract with other purchasers to buy the property for $600,000. Pittman wrote a letter demanding that she perform on his contract, but she sold the property to the other buyers.

[10] Pittman sued Canham for breach of contract. At trial he attributed the difference in the $250,000 he offered Canham and the $600,000 sales price six months later to an escalating real estate market.

[11] At the end of Pittman's case, Canham moved for a judgment of nonsuit. (Code Civ. Proc., § 581c.) A ruling on the motion was reserved, however, until all the evidence was presented. After the presentation of the evidence, the court granted the motion on the ground that time was of the essence of the contract and neither party tendered performance. The court also gave a statement of decision in which it found that Pittman and not Canham was responsible for the delay in performance, that Canham had not waived time for performance, and that Pittman defaulted when he failed to tender the purchase money, note and deed of trust by December 24, 1987.

Discussion

[12] Pittman contends the trial court erred in finding he was in default for failing to tender the purchase money note and deed of trust. He concedes that the result reached by the trial court would be proper if his performance had been a condition precedent, but he points out that here the contract provision requiring Canham to deliver a recordable deed into escrow and the provision requiring him to deposit money, a note and a deed of trust are concurrent conditions. Pittman claims that unlike the failure to perform a condition precedent, the failure of both parties to perform concurrent conditions does not automatically terminate the contract, but that one party must tender performance before the other party is in default. (Citing Chan v. Title Ins. & Trust Co. (1952) 39 Cal. 2d 253 [246 P.2d 632]; Rubin v. Fuchs (1969) 1 Cal. 3d 50 [81 Cal.Rptr. 373, 459 P.2d 925]; 1 Miller & Starr, Cal. Real Estate (2d ed. 1989) § 1:135, p. 488.)

[13] Concurrent conditions are conditions precedent which are mutually dependent, and the only important difference between a concurrent condition and a condition precedent is that the condition precedent must be performed before another duty arises, whereas a tender of performance is sufficient in the case of a concurrent condition. (1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 737, pp. 667-668.)

[14] Contrary to Pittman's assertion, the failure of both parties to perform concurrent conditions does not leave the contract open for an indefinite period so that either party can tender performance at his leisure. The failure of both parties to perform concurrent conditions during the time for performance results in a discharge of both parties' duty to perform. Thus, where the parties have made time the essence of the contract, at the expiration of time without tender by either party, both parties are discharged. (3A Corbin on Contracts (1960) § 663, p. 181.) Here, because time was made the essence of the contract, the failure of both parties to tender performance by December 24, 1987, discharged both from performing. Neither party can hold the other in default and no cause of action to enforce the contract arises. (See Pitt v. Mallalieu (1948) 85 Cal. App. 2d 77, 81 [192 P.2d 24].)

[15] Pittman relies on the portion of the escrow instructions that states: "Time is of the essence of these instructions. . . . If this escrow is not in condition to close by the Time Limit Date of December 24, 1987 and . . . [i]f no demand for cancellation is made, you will proceed to close this escrow when the principals have complied with the escrow instructions." He claims this provision shows that time was not truly of the essence in this transaction.

[16] But it is difficult to see how a paragraph that begins with the words "[t]ime is of the essence" could reasonably be construed as meaning time is not truly of the essence. The provision relied on by Pittman merely instructs the escrow holder not to cancel escrow on its own initiative, but to close escrow should the parties voluntarily and notwithstanding discharge mutually decide to perform. As we read the paragraph, it does not purport to give a party the unilateral right to demand performance after the time for performance has passed. Such a construction would render meaningless the parties' agreement that time is of the essence.

[17] We appreciate the reluctance of a buyer to act first by placing money into escrow. But in a contract with concurrent conditions, the buyer and seller cannot keep saying to one another, "No, you first." Ultimately, in such a case, the buyer seeking enforcement comes in second; he loses. * * * *

[18] The judgment is affirmed. Costs are awarded to Canham.

Questions:

1. Is there any contract left at this point?

2. What’s the difference between a condition precedent and a concurrent condition?

3. Are concurrent conditions here express conditions?

4. How does the court know they are supposed to be concurrent and not precedent?

From K & G Const. Co. v. Harris, 164 A.2d 451, 455 (Md. 1960):

In the early days, it was settled law that covenants and mutual promises in a contract were prima facie independent, and that they were to be so construed in the absence of language in the contract clearly showing that they were intended to be dependent. Williston, op. cit., 816; Page, op. cit., 2944, 2945. In the case of Kingston v. Preston, 2 Doug. 689, decided in 1774, Lord Mansfield, contrary to three centuries of opposing precedents, changed the rule, and decided that performance of one covenant might be dependent on prior performance of another, although the contract contained no express condition to that effect. Page, op. cit., 2946; Williston, op. cit., 817. The modern rule, which seems to be of almost universal application, is that there is a presumption that mutual promises in a contract are dependent and are to be so regarded, whenever possible. Page, op. cit., 2946; Restatement, Contracts, 266. Cf. Williston, op. cit., 812.

Thomas R. MOORE v. Martin KOPEL

Supr. Ct. App. Div. (1997), 237 A.D.2d 124, 653 N.Y.S.2d 927

[1] Defendant Martin Kopel, D.V.M., purchased the veterinary practice of Pasquale Campanile, D.V.M., for whom he had worked for the previous six years. Finding the income from the practice less than sufficient to meet the $20,000 monthly payments to Dr. Campanile, defendant engaged the services of plaintiff Thomas R. Moore, Esq., to seek a reduction in the purchase price, and in certain tax liabilities, in exchange for a contingent fee of one third of whatever reductions were obtained. Plaintiff was successful in obtaining certain reductions in defendant's liabilities and billed defendant for his services. Upon defendant's failure to remit payment, plaintiff brought this action to recover legal fees.

[2] Defendant argues that plaintiff failed to perform a condition precedent to collection of his fee pursuant to the parties' written agreement. He further maintains that the agreement presents certain issues of fact with respect to the reasonableness of the fee.

[3] Insofar as pertinent, the agreement states:

"Whereas Kopel has engaged Moore to seek to reduce payments from Kopel to Pasquale Campanile, P. C. (`Campanile') and to Federal, State and local tax authorities (`T.A.') and otherwise reduce Kopel's liabilities and debt, and increase Kopel's assets and income,

"Now, therefore, Kopel agrees to pay Moore one-third of any said savings achieved through Moore's efforts in reducing Kopel's payments to Campanile and T.A. and in increasing Kopel's assets and income through refunds or rebates from Campanile and T.A., such payments to be made to Moore by Kopel when such reduced payments are made by Kopel and such refunds or rebates are received by Kopel."

[4] Defendant contends that the recitation in the agreement that plaintiff has been engaged, inter alia, to "increase Kopel's assets and income" constitutes a condition precedent. He concludes that plaintiff's failure to demonstrate that there has been an increase in the assets and income of the veterinary practice therefore precludes summary judgment in his favor.

[5] We do not agree. The agreement does not employ express language of condition (see, e.g., Charles Hyman, Inc. v Olsen Indus., 227 A.D.2d 270 [joint venture agreement]; Lindenbaum v Royco Prop. Corp., 165 A.D.2d 254 [mortgage contingency clause]), nor has defendant demonstrated that the parties, by the language employed, implicitly agreed that an increase in the assets and income of the practice would be a prerequisite to payment (cf., World Point Trading PTE v Credito Italiano, 225 A.D.2d 153, 160; Calamari and Perillo, Contracts § 141, at 229-230). While performance of work under a contract is a constructive condition to payment (Calamari and Perillo, Contracts § 156, at 244), it is subject to the general rule that payment is due when the promisee has substantially performed his obligations under the agreement (Calamari and Perillo, Contracts § 157 [b], at 248). Moreover, it is clear that the basis of compensation, stated in the "Now" clause, is "reducing Kopel's payments" and "increasing Kopel's assets and income through refunds or rebates" (emphasis supplied). Therefore, the recitation to "increase Kopel's assets and income" is not a condition precedent. It is not an express condition. It is not even a constructive condition. It is merely one of the objectives of the contract, as recited in the "Whereas" clause of the agreement. * * * *

[6] Order of the Supreme Court, New York County * * * , which, inter alia, denied plaintiff's motion for partial summary judgment as to liability and dismissal of defendants' first and second counterclaims, unanimously reversed, on the law, without costs, the motion granted, and the matter remanded to Supreme Court for assessment of damages.]

Questions:

1. While the court says that “increase Kopel’s assets and income” is not a condition precedent, either express or constructive, what is clearly a constructive condition of payment? One court put the matter obscurely by referring to one performance as faciendo and one as dando, and saying that, when that is the case, faciendo must precede dando. Coletti v. Knox Hat, 252 N.Y. 468, 472, 169 N.E. 649, 649 (1930). Was Chief Justice Hale correct, then, and do you share his prejudice?

2. Why should a constructive condition be subject to the doctrine of substantial performance, while express condition must be strictly performed?

3. Interestingly, the Moore v. Kopel court suggested the application of substantial performance law to what well may have been a unilateral contract. In a unilateral contract, a promise is exchanged for a performance. Because the performance is consideration for the promise, the promise is not binding until the performance is finished. (Section 45 of the Restatement, if adopted, binds the promisor to an option to give the promisee a reasonable time to finish, but the promisor is bound to the promise only if the promisee finishes.) No doctrine of constructive conditions is necessary because the promise is not binding at all, even contingently, until the performance occurs.

A bargain comprising mutual promises is different. There, a binding contract forms when the promises are traded, as Nicholas v. Raynbred affirmed. But who is to say whether the promises are conditions of each other, and which should be performed first? That is why we have the doctrine of constructive conditions with its attached order of performance doctrines. We presume the two promises are dependent—are conditioned on the performance of the other. If one promise is for work and the other for payment, then the Moore rule applies to show the order of performance.

If the contract in Moore v. Kopel was a unilateral contract, then the constructive conditions doctrine was irrelevant. If it was a trade of mutual promises, then the doctrine applied. Can you tell which it was? Does it make a difference as to the result? In either case, performance had to occur before pay was warranted, so the legal result was the same in that case. That it was and is the same in so many other cases is probably why so many lawyers confuse the doctrines. The way the result is reached is very different, however, and the difference is not just a technicality. The doctrines we are about to study—substantial performance, divisible contract, and so on—apply only when the constructive conditions doctrine applies. They do not apply at all to the performance that is consideration in a unilateral contract.

1.5.2. Mitigating Doctrines

Having created a doctrine conditioning the duty to perform one of two mutual promises on the prior performance of the other promise, the courts then had to deal with the unintended consequences of their lawmaking. The following doctrines mitigate the harshness that would otherwise flow from application of the doctrine of constructive conditions.

a. Substantial Performance

JACOB & YOUNGS, INC. v. KENT

N.Y. (1921), 230 N.Y. 239

OPINION OF THE COURT

CARDOZO, J.

[1] The plaintiff built a country residence for the defendant at a cost of upwards of $77,000, and now sues to recover a balance of $3,483.46, remaining unpaid. The work of construction ceased in June, 1914, and the defendant then began to occupy the dwelling. There was no complaint of defective performance until March, 1915. One of the specifications for the plumbing work provides that "all wrought iron pipe must be well galvanized, lap welded pipe of the grade known as 'standard pipe' of Reading manufacture." The defendant learned in March, 1915, that some of the pipe, instead of being made in Reading, was the product of other factories. The plaintiff was accordingly directed by the architect to do the work anew. The plumbing was then encased within the walls except in a few places where it had to be exposed. Obedience to the order meant more than the substitution of other pipe. It meant the demolition at great expense of substantial parts of the completed structure. The plaintiff left the work untouched, and asked for a certificate that the final payment was due. Refusal of the certificate was followed by this suit.

[2] The evidence sustains a finding that the omission of the prescribed brand of pipe was neither fraudulent nor willful. It was the result of the oversight and inattention of the plaintiff's subcontractor. Reading pipe is distinguished from Cohoes pipe and other brands only by the name of the manufacturer stamped upon it at intervals of between six and seven feet. Even the defendant's architect, though he inspected the pipe upon arrival, failed to notice the discrepancy. The plaintiff tried to show that the brands installed, though made by other manufacturers, were the same in quality, in appearance, in market value and in cost as the brand stated in the contract—that they were, indeed, the same thing, though manufactured in another place. The evidence was excluded, and a verdict directed for the defendant. The Appellate Division reversed, and granted a new trial.

[3] We think the evidence, if admitted, would have supplied some basis for the inference that the defect was insignificant in its relation to the project. The courts never say that one who makes a contract fills the measure of his duty by less than full performance. They do say, however, that an omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting damage, and will not always be the breach of a condition to be followed by a forfeiture (Spence v. Ham, 163 N. Y. 220; Woodward v. Fuller, 80 N. Y. 312; Glacius v. Black, 67 N. Y. 563, 566; Bowen v. Kimbell, 203 Mass. 364, 370). The distinction is akin to that between dependent and independent promises, or between promises and conditions (Anson on Contracts [Corbin's ed.], sec. 367; 2 Williston on Contracts, sec. 842). Some promises are so plainly independent that they can never by fair construction be conditions of one another. (Rosenthal Paper Co. v. Nat. Folding Box & Paper Co., 226 N. Y. 313; Bogardus v. N. Y. Life Ins. Co., 101 N. Y. 328). Others are so plainly dependent that they must always be conditions. Others, though dependent and thus conditions when there is departure in point of substance, will be viewed as independent and collateral when the departure is insignificant (2 Williston on Contracts, secs. 841, 842; Eastern Forge Co. v. Corbin, 182 Mass. 590, 592; Robinson v. Mollett, L. R., 7 Eng. & Ir. App. 802, 814; Miller v. Benjamin, 142 N. Y. 613). Considerations partly of justice and partly of presumable intention are to tell us whether this or that promise shall be placed in one class or in another. The simple and the uniform will call for different remedies from the multifarious and the intricate. The margin of departure within the range of normal expectation upon a sale of common chattels will vary from the margin to be expected upon a contract for the construction of a mansion or a 'skyscraper.' There will be harshness sometimes and oppression in the implication of a condition when the thing upon which labor has been expended is incapable of surrender because united to the land, and equity and reason in the implication of a like condition when the subject-matter, if defective, is in shape to be returned. From the conclusion that promises may not be treated as dependent to the extent of their uttermost minutiae without a sacrifice of justice, the progress is a short one to the conclusion that they may not be so treated without a perversion of intention. Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable. If something else is in view, it must not be left to implication. There will be no assumption of a purpose to visit venial faults with oppressive retribution.

[4] Those who think more of symmetry and logic in the development of legal rules than of practical adaptation to the attainment of a just result will be troubled by a classification where the lines of division are so wavering and blurred. Something, doubtless, may be said on the score of consistency and certainty in favor of a stricter standard. The courts have balanced such considerations against those of equity and fairness, and found the latter to be the weightier. The decisions in this state commit us to the liberal view, which is making its way, nowadays, in jurisdictions slow to welcome it (Dakin & Co. v. Lee, 1916, 1 K. B. 566, 579). Where the line is to be drawn between the important and the trivial cannot be settled by a formula. 'In the nature of the case precise boundaries are impossible' (2 Williston on Contracts, sec. 841). The same omission may take on one aspect or another according to its setting. Substitution of equivalents may not have the same significance in fields of art on the one side and in those of mere utility on the other. Nowhere will change be tolerated, however, if it is so dominant or pervasive as in any real or substantial measure to frustrate the purpose of the contract (Crouch v. Gutmann, 134 N. Y. 45, 51). There is no general license to install whatever, in the builder's judgment, may be regarded as "just as good" (Easthampton L. & C. Co., Ltd., v. Worthington, 186 N. Y. 407, 412). The question is one of degree, to be answered, if there is doubt, by the triers of the facts (Crouch v. Gutmann; Woodward v. Fuller, supra), and, if the inferences are certain, by the judges of the law (Easthampton L. & C. Co., Ltd., v. Worthington, supra). We must weigh the purpose to be served, the desire to be gratified, the excuse for deviation from the letter, the cruelty of enforced adherence. Then only can we tell whether literal fulfilment is to be implied by law as a condition. This is not to say that the parties are not free by apt and certain words to effectuate a purpose that performance of every term shall be a condition of recovery. That question is not here. This is merely to say that the law will be slow to impute the purpose, in the silence of the parties, where the significance of the default is grievously out of proportion to the oppression of the forfeiture. The willful transgressor must accept the penalty of his transgression (Schultze v. Goodstein, 180 N. Y. 248, 251; Desmond-Dunne Co. v. Friedman-Doscher Co., 162 N. Y. 486, 490). For him there is no occasion to mitigate the rigor of implied conditions. The transgressor whose default is unintentional and trivial may hope for mercy if he will offer atonement for his wrong (Spence v. Ham, supra).

[5] In the circumstances of this case, we think the measure of the allowance is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing. Some of the exposed sections might perhaps have been replaced at moderate expense. The defendant did not limit his demand to them, but treated the plumbing as a unit to be corrected from cellar to roof. In point of fact, the plaintiff never reached the stage at which evidence of the extent of the allowance became necessary. The trial court had excluded evidence that the defect was unsubstantial, and in view of that ruling there was no occasion for the plaintiff to go farther with an offer of proof. We think, however, that the offer, if it had been made, would not of necessity have been defective because directed to difference in value. It is true that in most cases the cost of replacement is the measure (Spence v. Ham, supra). The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value. Specifications call, let us say, for a foundation built of granite quarried in Vermont. On the completion of the building, the owner learns that through the blunder of a subcontractor part of the foundation has been built of granite of the same quality quarried in New Hampshire. The measure of allowance is not the cost of reconstruction. "There may be omissions of that which could not afterwards be supplied exactly as called for by the contract without taking down the building to its foundations, and at the same time the omission may not affect the value of the building for use or otherwise, except so slightly as to be hardly appreciable" (Handy v. Bliss, 204 Mass. 513, 519. Cf. Foeller v. Heintz, 137 Wis. 169, 178; Oberlies v. Bullinger, 132 N. Y. 598, 601; 2 Williston on Contracts, sec. 805, p. 1541). The rule that gives a remedy in cases of substantial performance with compensation for defects of trivial or inappreciable importance, has been developed by the courts as an instrument of justice. The measure of the allowance must be shaped to the same end.

The order should be affirmed, and judgment absolute directed in favor of the plaintiff upon the stipulation, with costs in all courts.

MCLAUGHLIN, J. (dissenting).

[1] I dissent. The plaintiff did not perform its contract. Its failure to do so was either intentional or due to gross neglect which, under the uncontradicted facts, amounted to the same thing, nor did it make any proof of the cost of compliance, where compliance was possible.

[2] Under its contract it obligated itself to use in the plumbing only pipe (between 2,000 and 2,500 feet) made by the Reading Manufacturing Company. The first pipe delivered was about 1,000 feet and the plaintiff's superintendent then called the attention of the foreman of the subcontractor, who was doing the plumbing, to the fact that the specifications annexed to the contract required all pipe used in the plumbing to be of the Reading Manufacturing Company. They then examined it for the purpose of ascertaining whether this delivery was of that manufacture and found it was. Thereafter, as pipe was required in the progress of the work, the foreman of the subcontractor would leave word at its shop that he wanted a specified number of feet of pipe, without in any way indicating of what manufacture. Pipe would thereafter be delivered and installed in the building, without any examination whatever. Indeed, no examination, so far as appears, was made by the plaintiff, the subcontractor, defendant's architect, or any one else, of any of the pipe except the first delivery, until after the building had been completed. Plaintiff's architect then refused to give the certificate of completion, upon which the final payment depended, because all of the pipe used in the plumbing was not of the kind called for by the contract. After such refusal, the subcontractor removed the covering or insulation from about 900 feet of pipe which was exposed in the basement, cellar and attic, and all but 70 feet was found to have been manufactured, not by the Reading Company, but by other manufacturers, some by the Cohoes Rolling Mill Company, some by the National Steel Works, some by the South Chester Tubing Company, and some which bore no manufacturer's mark at all. The balance of the pipe had been so installed in the building that an inspection of it could not be had without demolishing, in part at least, the building itself.

[3] I am of the opinion the trial court was right in directing a verdict for the defendant. The plaintiff agreed that all the pipe used should be of the Reading Manufacturing Company. Only about two-fifths of it, so far as appears, was of that kind. If more were used, then the burden of proving that fact was upon the plaintiff, which it could easily have done, since it knew where the pipe was obtained. The question of substantial performance of a contract of the character of the one under consideration depends in no small degree upon the good faith of the contractor. If the plaintiff had intended to, and had complied with the terms of the contract except as to minor omissions, due to inadvertence, then he might be allowed to recover the contract price, less the amount necessary to fully compensate the defendant for damages caused by such omissions. (Woodward v. Fuller, 80 N. Y. 312; Nolan v. Whitney, 88 N. Y. 648.) But that is not this case. It installed between 2,000 and 2,500 feet of pipe, of which only 1,000 feet at most complied with the contract. No explanation was given why pipe called for by the contract was not used, nor was any effort made to show what it would cost to remove the pipe of other manufacturers and install that of the Reading Manufacturing Company. The defendant had a right to contract for what he wanted. He had a right before making payment to get what the contract called for. It is no answer to this suggestion to say that the pipe put in was just as good as that made by the Reading Manufacturing Company, or that the difference in value between such pipe and the pipe made by the Reading Manufacturing Company would be either "nominal or nothing." Defendant contracted for pipe made by the Reading Manufacturing Company. What his reason was for requiring this kind of pipe is of no importance. He wanted that and was entitled to it. It may have been a mere whim on his part, but even so, he had a right to this kind of pipe, regardless of whether some other kind, according to the opinion of the contractor or experts, would have been "just as good, better, or done just as well." He agreed to pay only upon condition that the pipe installed were made by that company and he ought not to be compelled to pay unless that condition be performed. (Schultze v. Goodstein, 180 N. Y. 248; Spence v. Ham, supra; Steel S. & E. C. Co. v. Stock, 225 N. Y. 173; Van Clief v. Van Vechten, 130 N. Y. 571; Glacius v. Black, 50 N. Y. 145; Smith v. Brady, 17 N. Y. 173, and authorities cited on p. 185.) The rule, therefore, of substantial performance, with damages for unsubstantial omissions, has no application. (Crouch v. Gutmann, 134 N. Y. 45; Spence v. Ham, 163 N. Y. 220.)

[4] What was said by this court in Smith v. Brady (supra) is quite applicable here: "I suppose it will be conceded that everyone has a right to build his house, his cottage or his store after such a model and in such style as shall best accord with his notions of utility or be most agreeable to his fancy. The specifications of the contract become the law between the parties until voluntarily changed. If the owner prefers a plain and simple Doric column, and has so provided in the agreement, the contractor has no right to put in its place the more costly and elegant Corinthian. If the owner, having regard to strength and durability, has contracted for walls of specified materials to be laid in a particular manner, or for a given number of joists and beams, the builder has no right to substitute his own judgment or that of others. Having departed from the agreement, if performance has not been waived by the other party, the law will not allow him to allege that he has made as good a building as the one he engaged to erect. He can demand payment only upon and according to the terms of his contract, and if the conditions on which payment is due have not been performed, then the right to demand it does not exist. To hold a different doctrine would be simply to make another contract, and would be giving to parties an encouragement to violate their engagements, which the just policy of the law does not permit." (p. 186.)

[5] I am of the opinion the trial court did not err in ruling on the admission of evidence or in directing a verdict for the defendant.

[6] For the foregoing reasons I think the judgment of the Appellate Division should be reversed and the judgment of the Trial Term affirmed.

HISCOCK, Ch. J., HOGAN and CRANE, JJ., concur with CARDOZO, J.; POUND and ANDREWS, JJ., concur with MCLAUGHLIN, J.

Order affirmed, etc.

Questions:

1. Did Jacob & Youngs’ failure to perform exactly what was in the contract—install Reading pipe—deprive it of its right to Kent’s performance?

2. Would this case come out differently if we learned that the president of Reading Pipe had been Jacob’s rival since they were kids? Would this case come out differently if we learned that Mrs. Kent had been Miss Reading Pipe in a “scholarship pageant” while in high school?

3. Why is good faith part of this doctrine? Will lack of good faith preclude substantial performance or only make it less likely?

4. Suppose the contract said that payment shall be conditioned on compliance with the requirement that Reading Pipe be installed. Any difference? Would substantial performance be available to Jacobs & Young?

5. If Reading and Cohoes pipe are the same, why doesn’t Kent just pay the bill?

TOMPKINS et al. v. DUDLEY

N.Y. (1862), 25 N.Y. 272

DAVIES, J.

[1] On the 31st of August, 1857, Cornelius Chambers, by a written contract, agreed to make, erect, build and furnish for the plaintiffs a school-house, according to certain plans and specifications, and to furnish the materials for the sum of $678.50. The school-house was to be completed on the 1st day of October, 1857. The defendants guaranteed the performance of the contract on the part of the builder. The building was not completed on the 1st day of October, and it was burned down on the night of the 5th of October. The judge who tried the cause found, as matter of fact, that the contract was substantially performed by Chambers, but that the building was not entirely completed according to the specifications, there remaining to be done a small amount of painting and the hanging of the window blinds, and that the same had not been formally accepted nor the key delivered on the 5th of October. This action is brought to recover the money paid on account to Chambers as the building progressed, and for the damages which the plaintiffs have sustained by reason of the non-completion of the contract, the fulfillment of which was guaranteed by the defendants. It is undeniable that the school house was not completed, nor delivered and accepted by the plaintiffs at the time of its destruction. They had a right to insist upon the completion of the contract according to its terms, and the builder did not allege or pretend that he had completed it. A substantial compliance with the terms of the contract will not answer when the contractor, as in this case, admits and concedes that the work was incomplete; he was still in possession, engaged in its completion. According to the testimony, about $60 was yet to be expended on the building. Had the builder completed the building and complied with his contract at the time of the destruction of the school house? I am constrained to say he had not. He was not only to complete it in accordance with its terms, but was to deliver it over to the plaintiffs thus finished, or offer to deliver it, before his whole duty was performed. Now it is undeniable that the builder did not do this. A portion of the work was yet to be done; the builder was still in possession, and actually engaged in the work of completion at the time of its destruction. * * * * In Mucklow v. Mangles (1 Taunt., 218), which arose out of a contract for building a barge, the whole price was paid in advance, the vessel was built and the name of the person who contracted for it was painted on the stern, yet it was held that the title remained in the builder. LAWRENCE, J., said, “No property vests till the thing is finished and delivered.” * * * *

[2] The builder, in the present case, by his own contract, created a liability and incurred a duty, which the defendants guaranteed he should perform, and which he has not performed. In justification of such non-performance, he alleges the destruction of the building by fire and inevitable accident, without any fault on his part. The law is well settled, that this is no legal justification for the non-performance of the contract. * * * *

[3] The only additional case needful to refer to, is that of School Trustees of Trenton v. Bennett (3 Dutcher [N. J.], 514). In that case a person had contracted with the owner of a lot to build, erect and complete a building thereon, and by reason of a latent defect in the soil the building fell down before it was completed, and the Supreme Court of New Jersey held that the loss fell upon the contractor, and that when the contract was, by its terms, to build and complete a building, and find materials for a certain entire price, payable in instalments as the work progresses, the contract is entire, and if the building, either by fault of the builder or by inevitable accident, is destroyed before completion, the owner may recover back the instalments he has paid.

[4] The court, in its opinion, says:

“No rule of law is more firmly established by a long train of decisions than this, that where a party, by his own contract, creates a duty or charge upon himself, he is bound to make it good, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.”

And in reference to the argument of hardship, the court very justly says:

“No matter how harsh and apparently unjust in its operation the rule may occasionally be, it cannot be denied that it has its foundation in good sense and inflexible honesty. The party that agrees to do an act should do it, unless absolutely impossible. He should provide against contingencies in his contract. When one of two innocent persons must sustain a loss, the law casts it upon him who has agreed to sustain it, or, rather, the law leaves it where the agreement of the parties has put it; the law will not insert for the benefit of one of the parties, by construction, an exception which the parties have not, either by design or neglect, inserted in their engagement. If a party, for a sufficient consideration, agrees to erect and complete a building upon a particular spot, and find all the materials, and do all the labor, he must erect and complete it, because he has agreed so to do.”

[5] I arrive at the conclusion that the law is well settled that the defence interposed by the defendants constitutes no justification to Chambers, the builder, for the non-performance of his contract with the plaintiffs, and that, having guaranteed for an adequate consideration, expressed therein, its performance, they are liable to respond to the plaintiffs for the damages which they have sustained by reason of such non-performance. If these views are concurred in by my brethren, the judgment appealed from must be reversed, and a new trial should be had, with costs to abide the event.

WRIGHT, GOULD, ALLEN and SMITH, Js., concurred.

Judgment reversed, and new trial ordered.

Questions:

1. Can Chambers keep anything?

2. Did Chambers breach?

3. Did the plaintiff have to allege tender before recovering? Why or why not?

4. What would you advise Chambers if he brought this contract to you to look over just after it was signed?

PROBLEM 7. On March 1, Vendor contracted to sell land to Vendee for $8,000 and turned over possession of the property. Vendee paid $2,000 at the time of contracting and agreed to pay $1,000 by the first of each succeeding month until the total price was paid. Vendor agreed to convey the deed on September 1, the day final payment was due. Vendee fails to make the June 1 payment. Can Vendor recover possession without tendering?

Suppose instead that Vendor agreed to put a deed in escrow at the signing of the contract. Different result?

PROBLEM 8. The following evidence was presented at trial:

The written contract required defendant to install a new roof on plaintiff's home for $648.00. The contract describes the color of the shingles to be used as "russet glow," which defendant defined as a "brown varied color." Defendant acknowledges that it was his obligation to install a roof of uniform color.

After defendant had installed the new roof, plaintiff noticed that it had streaks which she described as yellow, due to a difference in color or shade of some of the shingles. Defendant agreed to remedy the situation and he removed the nonconforming shingles. However, the replacement shingles do not match the remainder, and photographs introduced in evidence clearly show that the roof is not of a uniform color. Plaintiff testified that her roof has the appearance of having been patched, rather than having been completely replaced. According to plaintiff's testimony, the yellow streaks appeared on the northern, eastern and southern sides of the roof, and defendant only replaced the non-matching shingles on the northern and eastern sides, leaving the southern side with the yellow streaks still apparent. The result is that only the western portion of the roof is of uniform color.

When defendant originally installed the complete new roof, it used 24 "squares" of shingles. In an effort to achieve a roof of uniform color, five squares were ripped off and replaced. There is no testimony as to the number of squares which would have to be replaced on the southern, or rear, side of the house in order to eliminate the original yellow streaks. Although there is expert testimony to the effect that the disparity in color would not be noticeable after the shingles have been on the roof for about a year, there is testimony to the effect that, although some nine or ten months have elapsed since defendant attempted to achieve a uniform coloration, the roof is still "streaky" on three sides. One of defendant's experts testified that if the shingles are properly applied the result will be a "blended" roof rather than a streaked roof.

In view of the fact that the disparity in color has not disappeared in nine or ten months, and in view of the fact that there is testimony to the effect that it would be impossible to secure matching shingles to replace the nonconforming ones, it can reasonably be inferred that a roof or uniform coloration can be achieved only by installing a completely new roof.

The evidence is undisputed that the roof is a substantial roof and will give plaintiff protection against the elements.

After the roofer did what the facts relate, the roofer filed a lien on the plaintiff’s house. The plaintiff sued to get the lien removed and for damages. The roofer counterclaimed for payment for the roof. The plaintiff continued to live in the house. She paid nothing for the roof before suit, because she objected to the work for the reasons related. Does plaintiff owe for the roof? O.W. Grun Roofing and Constr. Co. v. Cope, 529 S.W.2d 258 (Tex. App. 1975).

b. Divisibility

Marcus LOWY v. UNITED PACIFIC INS. CO.

Cal. (1967), 67 Cal. 2d 87

McCOMB, J.

[1] Plaintiffs appeal from a judgment in favor of defendant Arnold Wolpin (hereinafter referred to as "defendant") on a cross-complaint for damages for breach of an excavation and grading contract.

[2] Facts: Plaintiffs, owners and subdividers, entered into a contract with defendant, a licensed contractor, for certain excavation and grading work on lots and streets, together with street improvement work consisting of paving the streets and installing curbs and gutters, in a subdivision containing 89 residential lots.

[3] After defendant had performed 98 percent of the contracted excavation and grading work, a dispute arose between the parties regarding payment of $7,200 for additional work, consisting of importing dirt for fills, necessitated by changes made by plaintiffs in the plans.

[4] Defendant ceased performance. Plaintiffs immediately employed others to do street improvement work called for by the contract and thereafter sued defendant and his bonding company for breach of contract. Defendant answered and cross-complained for damages for breach of contract and reasonable services rendered. The trial court determined that plaintiffs were entitled to nothing against defendant and his bonding company and allowed defendant recovery on his cross-complaint.

[5] Questions: First. Was the contract between the parties divisible and the doctrine of substantial performance applicable?

[6] Yes.

[7] The contract provided, in part, as follows: "[Defendant] agrees to provide and pay for all materials, labor, tools, equipment, light, transportation and other facilities necessary for the execution, in a good and workmanlike manner, of all the following described work: Excavation, Grading and Street Improvements in Tracts No. 26589 and 19517 in accordance with plans and specifications . . . and Exhibit 'A' attached hereto . . . ."

[8] "The price which [plaintiffs] shall pay [defendant] for performing his obligations, as aforesaid or as hereunder set forth, is at the following prices indicated: . . . ."

[9] "See Exhibits 'A' and 'B' attached hereto." (Italics added.)

[10] Exhibit "A" states in part: "[Defendant] agrees to furnish all equipment, labor and material necessary for street improvements, onsite and offsite grading, grade and excavation and erosion control on Tracts 26589 and 19517 . . . for the lump sum price of Seventy-Three Thousand, Five Hundred Dollars ($73,500.00) including, without limitation, all grading, compaction, cleaning, grade and erosion control and dumping, all of which are to be performed to satisfaction of [plaintiffs]. . . ." (Italics added.)

[11] The construction of pavement, curbs and gutters is not included in the list of specific items for which the sum of $73,500 is to be paid.

[12] Exhibit "B" lists 45 unit prices ranging from $.04 to $4.50 per unit for use in the computation of the amount to be charged for the performance of that part of the street improvement work consisting of paving the streets and installing curbs and gutters. The unit prices are entirely unrelated to excavation and grading.

[13] The contract further provides: "In invoicing [plaintiffs], multiply all the final quantities by the unit prices set forth in Exhibit 'B.' All quantities will be determined by Delta Engineering & Surveying Co. and approved by [defendant] and [plaintiffs], with the exception of grading, etc., mentioned in Exhibit 'A' of this Agreement, which is a lump sum price for a complete job without any limitations." (Italics added.)

[14] The latter paragraph of the contract shows clearly that the lump sum of $73,500 was not intended to include payment for paving the streets and installing curbs and gutters.

[15] The trial court found that under the contract there were two phases of work to be performed, (1) grading and (2) street improvements; that defendant performed all the terms and conditions thereof relating to grading, except work which could be completed for $1,470, being 2 percent of the total grading cost contracted for; that defendant performed additional grading work, reasonably worth $7,200, necessitated by changes in plans on the part of plaintiffs and not attributable to defendant, which additional work was also authorized by plaintiffs through their superintendent; that plaintiffs breached the contract by employing others to do street improvement work and by not making payments to defendant for grading work done by him when due, thereby excusing further performance by defendant; and that defendant was entitled to recover on his cross-complaint for damages, as follows:

Contract price for grading               $73,500.00

Additional work                                  7,200.00

                                                           80,700.00

Less amount paid defendant            -60,227.50

                                                           20.472.50

Less credit for uncompleted work     -1,470.00

                                                           19,002.50

Less credit for items paid for             -1,166.00

defendant’s account                         $17,836.50

[16] The trial court also found that defendant was entitled to reasonable attorney's fees in the sum of $4,000, the contract providing for reasonable attorney's fees to be awarded to the prevailing party in any action brought to enforce the terms and conditions thereof.

[17] The trial court further found that defendant had breached that portion of the contract relating to street improvement work and was not entitled to recover damages for loss of profits in connection therewith.

[18] As indicated above, the contract required the performance of two kinds of work. First, certain excavation and grading work was to be done on lots and streets. Thereafter, street improvement work, consisting of paving the streets and installing curbs and gutters was required.

[19] Plaintiffs agreed to pay defendant for the excavation and grading work (including street grading work) the sum of $73,500, as set forth in Exhibit "A" of the contract; and they agreed to pay defendant for the paving of the streets and the installation of curbs and gutters (all commonly called "street improvement work") pursuant to the unit prices set forth in Exhibit "B" of the contract.

[20] Accordingly, since the consideration was apportioned, the contract was a severable or divisible one.35 (See Keene v. Harling, 61 Cal.2d 318, 323 [5] [38 Cal.Rptr. 513, 392 P.2d 273]; Simmons v. California Institute of Technology, 34 Cal.2d 264, 275 [14] [209 P.2d 581].)

[21] Before defendant commenced the excavation and grading work, for which a lump sum price of $73,500 was set by the contract, he gave a surety bond for $73,500. When the excavation and grading work was nearing completion, and it was almost time for work under the second phase to begin, plaintiffs requested that defendant provide a surety bond for "street improvements" in the sum of $125,000, stating that "no work should be performed on any portion of the street improvement portion of the contract until such bond is furnished." Thus, it is clear that the parties treated the contract as a divisible one.

[22] Under the circumstances, the fact that defendant did not perform the second phase of the contract does not prevent his recovering for work done under the first phase.

[23] Defendant did not entirely perform under the first phase of the contract. However, the doctrine of substantial performance, ordinarily applied to building contracts, is here applicable, since the evidence shows that defendant completed 98 percent of the work under the first phase and was prevented from completing the balance through the fault of plaintiffs. * * * *

[24] The judgment is affirmed. * * * *

TRAYNOR, C. J., PETERS, J., TOBRINER, J., MOSK, J., BURKE, J., and SULLIVAN, J., concurred.

Questions:

1. Was this contract divisible?

2. What is the legal effect of finding a contract divisible?

3. Did Wolpin substantially perform? A portion?

4. How does the divisible contract doctrine relieve from forfeiture?

5. What about a contract to work for one year at $1,000 per week. Is that divisible? How about at-will employment? Is that divisible? How?

NEW ERA HOMES CORP. v. FORSTER

N.Y. (1949), 86 N.E.2d 757

DESMOND, J.

[1] Plaintiff entered into a written agreement with defendants, to make extensive alterations to defendants’ home, the reference therein to price and payment being as follows:

‘All above material, and labor to erect and install same to be supplied for $3,075.00 to be paid as follows:

  • $150.00 on signing of contract,
  • $1,000.00 upon delivery of materials and starting of work,
  • $1,500.00 on completion of rough carpentry and rough plumbing,
  • $425.00 upon job being completed.’

[2] The work was commenced and partly finished, and the first two stipulated payments were made. Then, when the ‘rough work’ was done, plaintiff asked for the third installment of $1,500 but defendants would not pay it, so plaintiff stopped work and brought suit for the whole of the balance, that is, for the two last payments of $1,500 and $425. On the trial plaintiff stipulated to reduce its demand to $1,500, its theory being that, since all the necessary ‘rough carpentry and rough plumbing’ had been done, the time had arrived for it to collect $1,500. It offered no other proof as to its damages. Defendants conceded their default but argued at the trial, and argue here, that plaintiff was entitled not to the $1,500 third payment, but to such amount as it could establish by way of actual loss sustained from defendants’ breach. In other words, defendants say the correct measure of damage was the value of the work actually done, less payments made, plus lost profits. The jury, however, by its verdict gave plaintiff its $1,500. The Appellate Division, Second Department, affirmed the judgment, and we granted defendants leave to appeal to this court.

[3] The whole question is as to the meaning of so much of the agreement as we have quoted above. Did that language make it an entire contract, with one consideration for the doing of the whole work, and payments on account at fixed points in the progress of the job, or was the bargain a severable or divisible one in the sense that, of the total consideration, $1,150 was to be the full and fixed payment for ‘delivery of materials and starting of work’, $1,500 the full and fixed payment for work done up to and including ‘completion of rough carpentry and rough plumbing’, and $425 for the rest. We hold that the total price of $3.075 was the single consideration for the whole of the work, and that the separately listed payments were not allocated absolutely to certain parts of the undertaking, but were scheduled part payments, mutually convenient to the builder and the owner. That conclusion, we think, is a necessary one from the very words of the writing, since the arrangement there stated was not that separate items of work be done for separate amounts of money, but that the whole alteration project, including material and labor, was ‘to be supplied for $3,075.00’. There is nothing in the record to suggest that the parties had intended to group, in this contract, several separate engagements, each with its own separate consideration. They did not say, for instance, that the price for all the work up to the completion of rough carpentry and plumbing was to be $1,500. They did agree that at that point $1,500 would be due, but as a part payment on the whole price. To illustrate: it is hardly conceivable that the amount of $150, payable ‘on signing of the contract’ was a reward to plaintiff for the act of affixing its corporate name and seal.

[4] We would, in short, be writing a new contract for these people if we broke this single promise up into separate deals; and the new contract so written by us might be, for all we know, most unjust to one or the other party.

[5] We find no controlling New York case, but the trend of authority in this State, and elsewhere, is that such agreements express an intent that payment be conditioned and dependent upon completion of all the agreed work. Tompkins v. Dudley, 25 N.Y. 272, 82 Am. Dec. 349; Ming v. Corbin, 142 N.Y. 334, 37 N.E. 105; United States v. United States Fidelity & Guaranty Co., 236 U.S. 512, 35 S. Ct. 298, 59 L.Ed. 696; Integrity Floring v. Zandon Corp., 130 N.J.L. 244, 32 A.2d 507; Peist v. Richmond, 97 Vt. 97, 122 A. 420; 17 C.J.S., Contracts, ss 331-334; 1 Restatement, Contracts, 2 266, illustration 4 on p. 386. We think that is the reasonable rule after all, a house holder who remodels his home is, usually, committing himself to one plan and one result, not a series of unrelated projects. The parties to a construction or alteration contract may, of course, make it divisible and stipulate the value of each divisible part. But there is no sign that these people so intended, see Integrity Flooring v. Zandon, supra. It follows that plaintiff, on defendants’ default, could collect either in quantum meruit for what had been finished, Heine v. Meyer, 61 N.Y. 171, or in contract for the value of what plaintiff had lost that is, the contract price, less payments made and less the cost of completion. Witherbee v. Meyer, 155 N.Y. 446, 50 N.E. 58; Washburne v. Property Owners’ Co-operative Ass’n of Middlesex Country, 209 App. Div. 365, 205 N.Y.S. 36, affirmed 240 N.Y. 663, 148 N.E. 749.

[6] The judgments should be reversed, and a new trial granted, with costs to abide the event.

[7] Loughran, C.J., and Dye, Fuld and Bromley, JJ., concur with Desmond, J.

[8] Lewis, J., dissents in opinion in which Conway, J., concurs.

[9] Judgements reversed, etc.

Questions:

1. Is this contract divisible under the test given in Lowy?

2. Does the formula for damages given by the court put the builder in the position it would have been in had there been no breach?

3. How does the formula protect expectation interests?

4. How does the formula protect reliance interests?

5. Why did the builder want a different formula to be used?

c. Equitable Relief from Forfeiture

William LEWIS v. PREMIUM INVESTMENT CORP.

S.C. (2002), 568 S.E.2d 361

BURNETT, J.

[1] The Court granted a writ of certiorari to review the Court of Appeals' decision in Lewis v. Premium Investment Corp., 341 S.C. 539, 535 S.E.2d 139 (Ct.App.2000). We affirm as modified.

FACTS

[2] On October 29, 1976, Respondent William Lewis (Purchaser) entered into an installment sales contract to purchase real estate in North Myrtle Beach from Petitioner Premium Investment Corporation (Seller).  The contract contains the following default provision:

In the event the Purchaser should fail to make any due installment, and such default shall continue for a period of thirty (30) days, the Seller shall have the right to declare this contract terminated and all amounts previously paid by the Purchaser will be retained by the Seller as rent.

Four months after executing the contract, Purchaser placed a mobile home on the lot and his family moved in. Purchaser made all payments through July 1988.36 After July 1988, no further payments were made.

[3] In October 1989, one year after Purchaser's default, Seller mailed Purchaser a notice canceling the contract. The notice was returned “unclaimed” to Seller. Although sent by certified mail to the correct address, Purchaser asserts he did not receive the notice.

[4] In 1992, Purchaser's wife contacted Seller's representative to determine if he would allow her to assume the payments. The representative passed away without making a commitment.

[5] On August 27, 1996, Purchaser's attorney forwarded Seller a check for $2,451.34. Seller refused to accept the check.

[6] At the time of default (August 1988), Purchaser had made 141 of the approximately 182 monthly payments and owed $2,440.14. The balance as of August 31, 1998, was $7,726.33.

[7] Purchaser brought this action for breach of contract and specific performance. In its amended answer and counterclaim, Seller alleged Purchaser was in default and sought an order terminating the contract. Alternatively, Seller sought judgment in the amount of $7,443, reasonable attorney's fees, and foreclosure of any equitable interest Purchaser may have obtained as a result of the transaction.37 

[8] The master-in-equity determined Purchaser was in default of the agreement and Seller had the right to terminate the agreement pursuant to its terms. The Court of Appeals reversed, holding Purchaser had an equitable interest in the property and, therefore, Seller's right to seek forfeiture or to foreclose was subject to Purchaser's right of redemption which could not have been waived by the agreement. Id.

ISSUE

[9] Did the Court of Appeals err by declining to apply the forfeiture provision of the installment land contract, instead determining Purchaser has an equitable interest in the property which includes a right of redemption upon default?

DISCUSSION

[10] Whether an equitable right of redemption exists in spite of a strict forfeiture provision in an installment land contract has not been specifically decided by this Court. In deciding the answer to this question, we must determine whether equitable principles may alter the clear and unambiguous terms of the parties' contract.

Installment Land Contracts

[11] Real property is often sold under contracts that provide for the payment of the purchase price in a series of installments. These contracts, usually termed installment land contracts, are drafted in many ways. Typically, the vendor retains legal title to the property until all of the purchase price has been paid ․ Also typically, the purchaser is entitled to immediate possession․ Installment contracts almost always contain forfeiture clauses. When enforced, these clauses enable the vendor to terminate the contract, recover the property, and retain all installments paid when the purchaser defaults.

15 Richard R. Powell, Real Property ′84D.01 at 3 (2000); Ellis v. Butterfield, 98 Idaho 644, 570 P.2d 1334, 1336 (1977) (installment land contract is “frequently called a ‘poor man's mortgage’ because the vendor, as with a mortgage, finances the purchaser's acquisition of the property by accepting installment payments on the purchase price over a period of years, but the purchaser does not receive the benefit of those remedial statutes protecting the rights of mortgagors.”).38 Contrary to existing mortgage protections, a seller may typically avoid foreclosure procedures by including a forfeiture remedy in the installment land contract.  See Matthew Cole Bormuth, note, Real Estate B The Wyoming Installment Land Contract:  A Mortgage in Sheep's Clothing? Or What You See Isn't What You Get, 28 Land and Water Law Review 309 (1993);  Juliet M. Moringiello, A Mortgage by Any Other Name:  A Plea for the Uniform Treatment of Installment Land Contracts and Mortgages under the Bankruptcy Code, 100 Dick. L.R.. 733 (1996) (forfeiture remedy makes installment land contract more favorable to vendor than seller-financed mortgage).

South Carolina Law

[12] Basic contract law provides that when a contract is clear and unambiguous, the language alone determines the contract's force and effect. * * * *

[13] Parties to a contract may stipulate as to the amount of liquidated damages owed in the event of nonperformance. Tate v. Le Master, 231 S.C. 429, 99 S.E.2d 39 (1957). Where, however, the sum stipulated is plainly disproportionate to any probable damage resulting from breach of contract, the stipulation is an unenforceable penalty. Id.; Kirkland Distributing Co. of Columbia, S.C. v. United States, 276 F.2d 138 (4th Cir.1960). Equity will not enforce a penalty for breach of contract. South Carolina Dep't of Health and Envtl. Control v. Kennedy, 289 S.C. 73, 344 S.E.2d 859 (Ct.App.1986). “Equity does not favor forfeitures or penalties and will relieve against them when practicable in the interest of justice.” Lane v. New York Life Ins. Co., 147 S.C. 333, 374, 145 S.E. 196, 209 (1928) citing Bangert v. John L. Roper Lumber Co., 169 N.C. 628, 86 S.E. 516, 517 (1915).

[14] The above-stated principles of contract law are consistent with the conclusion that a provision in an installment land contract declaring forfeiture in the event of purchaser default can, in particular circumstances, constitute a penalty. In those circumstances, as in other contractual instances where a stipulated sum amounts to a penalty, we conclude it would be inequitable to enforce the forfeiture provision without first allowing the purchaser an opportunity to redeem the installment contract by paying the entire purchase price.

[15] Our conclusion is supported by authority from other jurisdictions. In numerous other states, courts claim an equitable power to “deny or delay forfeiture when fairness demands.” Freyfogle, supra 620;  see Hatfield v. Mixon Realty Co., 269 Ark. 803, 601 S.W.2d 894 (Ct.App.1980); Cedar Lane Investments v. American Roofing Supply of Colorado Springs, Inc., 919 P.2d 879 (Colo.Ct.App.1996);  Ellis v. Butterfield, supra;  Nelson v. Robinson, 184 Kan. 340, 336 P.2d 415 (1959);  Perkins v. Penney, 387 A.2d 205 (Me.1978);  Rothenberg v. Follman, 19 Mich.App. 383, 172 N.W.2d 845 (1969);  O'Meara v. Olson, 414 N.W.2d 563 (Minn.Ct.App.1987);  Beck v. Strong, 572 S.W.2d 484 (Mo.Ct.App.1978);  Sharp v. Holthusen, 189 Mont. 469, 616 P.2d 374 (1980);  Martinez v. Martinez, 101 N.M. 88, 678 P.2d 1163 (1984);  Lamberth v. McDaniel, 131 N.C.App. 319, 506 S.E.2d 295 (1998);  Straub v. Lessman, 403 N.W.2d 5 (N.D.1987);  T-Anchor Corp. v. Travarillo Assocs., 529 S.W.2d 622 (Tex.Civ.App.1975);  Call v. Timber Lakes Corp., 567 P.2d 1108 (Utah 1977);  Bailey v. Savage, 160 W.Va. 523, 236 S.E.2d 203 (1977);  see also 4 Richard R. Powell, Real Property § 37.21[1] [c] at 132 (2001) (“[t]he main problem with the forfeiture remedy is that it often puts the seller in too favorable a position and, therefore, is subject to attacks based on equitable considerations of unfairness and unconscionability.”). In fact, the authoritative treatise on real property law provides, “no state today is likely to condone a purchaser forfeiture that greatly exceeds the vendor's loss.” 15 Powell, Real Property § 84D.01[4] at 12.

[16] As discussed at length in Bartles v. Livingston, 282 S.C. 448, 319 S.E.2d 707 (Ct.App.1984), the common law recognized an equitable right of redemption in the context of mortgages well before any statutory right was granted. The mortgagor was given an equitable right to redeem the property irrespective of the terms of the mortgage and this right to redeem was considered an equitable interest in the land.  For years, in an executory contract for the sale of land our Court has equated the vendor with the mortgagee and the vendee with the mortgagor. Dempsey v. Huskey, 224 S.C. 536, 80 S.E.2d 119 (1954).39 There is no equitable reason why the right of redemption should not likewise be afforded to vendees in an installment land contract in appropriate circumstances.

[17] For the above reasons, we hold courts of equity can relieve a defaulting purchaser from the strict forfeiture provision in an installment land contract and provide the opportunity for redemption when equity so demands.40 Accordingly, this matter is remanded to the master-in-equity to determine whether Purchaser has an equitable right of redemption.

[18] The decision of the Court of Appeals is AFFIRMED AS MODIFIED.

Questions:

1. The court mentions several items that should be considered in a determination of whether equity should grant relief from forfeiture. Can you generalize these?

2. Other courts asking whether equity should avoid a forfeiture have also considered the degree of fault of the defaulting party and whether the condition that did not occur was a condition precedent or a condition subsequent. In fact, you may use Restatement (Second) of Contracts § 229 as your statement of the rule for relief from forfeiture, as long as you add these two factors to the list. Relief is much more likely in the case of a condition subsequent. One can in fact argue that in the case a condition precedent, nothing can be forfeited, because the failure of the condition means that no benefit ever arises such that it can be forfeited. Was the condition in Lewis a condition precedent or subsequent? Which of these is a notice condition for the renewal of a lease?

PROBLEM 9: Juan’s garage caught fire and burned. It was separate from the house. Juan quickly called the fire department, and his work with a water hose and the fire department’s help with their water contained the fire to the garage and eventually put it out. Juan immediately called his home insurance company to report the loss. The next day, he uploaded pictures to the insurance company’s website of various items destroyed by the fire. Juan guessed that it will require around $35,000 to rebuild the garage and replace the items. An adjuster arrived a few days later, took several hundred pictures, and told Juan that she would file a report. The next day, a fire investigator arrived who also took several hundred pictures. Three weeks later, the insurance company posted a notice to Juan on its website notifying him that it was denying coverage solely because of Juan’s failure to file a written claim notifying them of the loss. He checked his policy. Sure enough, it provided as follows:

“Notice of Claim: Written notice of claim must be given to the insurance company within twenty (20) days after the occurrence or commencement of any loss covered by the policy, or as soon thereafter as is reasonably possible. Written notice given by or on behalf of the insured to the insurance company at 435 S. Surety Drive, Actuary, OK 35580, or to any authorized agent of the insurance company, with information sufficient to identify the insured, shall be deemed notice to the insurance company.”

Will this provision be enforced? How?

d. Unjust Enrichment

BRITTON v. TURNER

N.H. (1834), 6 N.H. 481

[1] ASSUMPSIT for work and labour, performed by the plaintiff, in the service of the defendant, from March 9th, 1831, to December 27, 1831.

[2] The declaration contained the common counts, and among them a count in quantum meruit, for the labor, averring it to be worth one hundred dollars.

[3] At the trial in the C. C. Pleas, the plaintiff proved the performance of the labor as set forth in the declaration.

[4] The defence was that it was performed under a special contract—that the plaintiff agreed to work one year, from some time in March, 1831, to March 1832, and that the defendant was to pay him for said year's labor the sum of one hundred and twenty dollars; and the defendant offered evidence tending to show that such was the contract under which the work was done.

[5] Evidence was also offered to show that the plaintiff left the defendant's service without his consent, and it was contended by the defendant that the plaintiff had no good cause for not continuing in his employment.

[6] There was no evidence offered of any damage arising from the plaintiff’s departure, farther than was to be inferred from his non fulfilment of the entire contract.

[7] The court instructed the jury, that if they were satisfied from the evidence that the labor was performed, under a contract to labor a year, for the sum of one hundred and twenty dollars, and if they were satisfied that the plaintiff labored only the time specified in the declaration, and then left the defendant's service, against his consent, and without any good cause, yet the plaintiff was entitled to recover, under his quantum meruit count, as much as the labor he performed was reasonably worth, and under this direction the jury gave a verdict for the plaintiff for the sum of $95.

[8] The defendant excepted to the instructions thus given to the jury.

[9] PARKER, J. delivered the opinion of the court.

[10] It may be assumed, that the labor performed by the plaintiff, and for which he seeks to recover a compensation in this action, was commenced under a special contract to labor for the defendant the term of one year, for the sum of one hundred and twenty dollars, and that the plaintiff has labored but a portion of that time, and has voluntarily failed to complete the entire contract.

[11] It is clear, then, that he is not entitled to recover upon the contract itself, because the service, which was to entitle him to the sum agreed upon, has never been performed.

[12] But the question arises, can the plaintiff, under these circumstances, recover a reasonable sum for the service he has actually performed, under the count in quantum meruit.

[13] Upon this, and questions of a similar nature, the decisions to be found in the books are not easily reconciled.

[14] It has been held, upon contracts of this kind for labor to be performed at a specified price, that the party who voluntarily fails to fulfil the contract by performing the whole labor contracted for, is not entitled to recover any thing for the labor actually performed, however much he may have done towards the performance, and this has been considered the settled rule of law upon this subject. [Citations omitted.]

[15] That such rule in its operation may be very unequal, not to say unjust, is apparent.

[16] A party who contracts to perform certain specified labor, and who breaks his contract in the first instance, without any attempt to perform it, can only be made liable to pay the damages which the other party has sustained by reason of such non performance, which in many instances may be trifling—whereas a party who in good faith has entered upon the performance of his contract, and nearly completed it, and then abandoned the further performance—although the other party has had the full benefit of all that has been done, and has perhaps sustained no actual damage—is in fact subjected to a loss of all which has been performed, in the nature of damages for the non fulfilment of the remainder, upon the technical rule, that the contract must be fully performed in order to a recovery of any part of the compensation.

[17] By the operation of this rule, then, the party who attempts performance may be placed in a much worse situation than he who wholly disregards his contract, and the other party may receive much more, by the breach of the contract, than the injury which he has sustained by such breach, and more than he could be entitled to were he seeking to recover damages by an action.

[18] The case before us presents an illustration. Had the plaintiff in this case never entered upon the performance of his contract, the damage could not probably have been greater than some small expense and trouble incurred in procuring another to do the labor which he had contracted to perform. But having entered upon the performance, and labored nine and a half months, the value of which labor to the defendant as found by the jury is $95, if the defendant can succeed in this defence, he in fact receives nearly five sixths of the value of a whole year's labor, by reason of the breach of contract by the plaintiff a sum not only utterly disproportionate to any probable, not to say possible damage which could have resulted from the neglect of the plaintiff to continue the remaining two and an half months, but altogether beyond any damage which could have been recovered by the defendant, had the plaintiff done nothing towards the fulfillment of his contract. * * * *

[19] There are other cases, however, in which principles have been adopted leading to a different result.

[20] It is said, that where a party contracts to perform certain work, and to furnish materials, as, for instance, to build a house, and the work is done, but with some variations from the mode prescribed by the contract, yet if the other party has the benefit of the labor and materials he should be bound to pay so much as they are reasonably worth. [Citations omitted.] * * * *

[21] It is in truth virtually conceded in such cases that the work has not been done, for if it had been, the party performing it would be entitled to recover upon the contract itself, which it is held he cannot do.

[22] Those cases are not to be distinguished, in principle, from the present, unless it be in the circumstance, that where the party has contracted to furnish materials, and do certain labor, as to build a house in a specified manner, if it is not done according to the contract, the party for whom it is built may refuse to receive it—elect to take no benefit from what has been performed—and therefore if he does receive, he shall be bound to pay the value—whereas in a contract for labor, merely, from day to day, the party is continually receiving the benefit of the contract under an expectation that it will be fulfilled, and cannot, upon the breach of it, have an election to refuse to receive what has been done, and thus discharge himself from payment.

[23] But we think this difference in the nature of the contracts does not justify the application of a different rule in relation to them.

[24] The party who contracts for labor merely, for a certain period, does so with full knowledge that he must, from the nature of the case, be accepting part performance from day to day, if the other party commences the performance, and with knowledge also that the other may eventually fail of completing the entire term.

[25] If under such circumstances he actually receives a benefit from the labor performed, over and above the damage occasioned by the failure to complete, there is as much reason why he should pay the reasonable worth of what has thus been done for his benefit, as there is when he enters and occupies the house which has been built for him, but not according to the stipulations of the contract, and which he perhaps enters, not because he is satisfied with what has been done, but because circumstances compel him to accept it such as it is, that he should pay for the value of the house.

[26] Where goods are sold upon a special contract as to their nature, quality, and price, and have been used before their inferiority has been discovered, or other circumstances have occurred which have rendered it impracticable or inconvenient for the vendee to rescind the contract in toto, it seems to have been the practice formerly to allow the vendor to recover the stipulated price, and the vendee recovered by a cross action damages for the breach of the contract. * * * *

[27] So where a person contracts for the purchase of a quantity of merchandize, at a certain price, and receives a delivery of part only, and he keeps that part, without any offer of a return, it has been held that he must pay the value of it. 5 Barn. & Cres. Shipton v. Casson; Com. Dig. Action F. Baker v. Sutton; 1 Camp. 55, note. * * * *

[28] There is a close analogy between all these classes of cases, in which such diverse decisions have been made. * * * *

[29] It is as "hard upon the plaintiff to preclude him from recovering at all, because he has failed as to part of his entire undertaking," where his contract is to labor for a certain period, as it can be in any other description of contract, provided the defendant has received a benefit and value from the labor actually performed.

[30] We, hold then, that where a party undertakes to pay upon a special contract for the performance of labor, or the furnishing of materials, he is not to be charged upon, such special agreement until the money is earned according to the terms of it, and where the parties have made an express contract the law will not imply and raise a contract different from that which the parties have entered into, except upon some farther transaction between the parties.

[31] In case of a failure to perform such special contract, by the default of the party contracting to do the service, if the money is not due by the terms of the special agreement he is not entitled to recover for his labor, or for the materials furnished, unless the other party receives what has been done, or furnished, and upon the whole case derives a benefit from it. 14 Mass. 282, Taft v. Montague; 2 Stark. Ev. 644.

[32] But if, where a contract is made of such a character, a party actually receives labor, or materials, and thereby derives a benefit and advantage, over and above the damage which has resulted from the breach of the contract by the other party, the labor actually done, and the value received, furnish a new consideration, and the law thereupon raises a promise to pay to the extent of the reasonable worth of such excess. This may be considered as making a new case, one not within the original agreement, and the party is entitled to "recover on his new case, for the work done, not as agreed, but yet accepted by the defendant." 1 Dane's Abr. 224. * * * *

[33] In fact we think the technical reasoning, that the performance of the whole labor is a condition precedent, and the right to recover any thing dependent upon it—that the contract being entire there can be no apportionment—and that there being an express contract no other can be implied, even upon the subsequent performance of service—is not properly applicable to this species of contract, where a beneficial service has been actually performed; for we have abundant reason to believe, that the general understanding of the community is, that the hired laborer shall be entitled to compensation for the service actually performed, though he do not continue the entire term contracted for, and such contracts must be presumed to be made with reference to that understanding, unless an express stipulation shows the contrary.

[34] Where a beneficial service has been performed and received, therefore, under contracts of this kind, the mutual agreements cannot be considered as going to the whole of the consideration, so as to make them mutual conditions, the one precedent to the other, without a specific proviso to that effect. 1 H. Black. 273, note, Boone v. Eyre; 6 D. & E. 570, Campbell v. Jones; 10 East, 295, Ritchie v. Atkinson; 4 Taunt. 745, Burn v. Miller.

[35] It is easy, if parties so choose, to provide by an express agreement that nothing shall be earned, if the laborer leaves his employer without having performed the whole service contemplated, and then there can be no pretence for a recovery if he voluntarily deserts the service before the expiration of the time.

[36] The amount, however, for which the employer ought to be charged, where the laborer abandons his contract, is only the reasonable worth, or the amount of advantage lie receives upon the whole transaction, (ante 15, Wadleigh v. Sutton,) and, in estimating the value of the labor, the contract price for the service cannot be exceeded. 7 Green. 78; 4 Wendell, 285, Dubois v. Delaware & Hudson Canal Company; 7 Wend. 121, Koon v. Greenman. * * * *

[37] If in such case it be found that the damages are equal to, or greater than the amount of the labor performed so that the employer, having a right to the full performance of the contract, has not upon the whole case received a beneficial service, the plaintiff cannot recover.

[38] This rule, by binding the employer to pay the value of the service he actually receives, and the laborer to answer in damages where he does not complete the entire contract, will leave no temptation to the former to drive the laborer from his service, near the close of his term, by ill treatment, in order to escape from payment; nor to the latter in desert his service before the stipulated time, without a sufficient reason; and it will be in most instances settle the whole controversy in one action, and prevent a multiplicity of suits and cross actions. * * * *

[39] Applying the principles thus laid down, to this case, the plaintiff is entitled to judgment on the verdict.

[40] The defendant sets up a mere breach of the contract in defence of the action, but this cannot avail him. He does not appear to have offered evidence to show that he was damnified by such breach, or to have asked that a deduction should be made upon that account. The direction to the jury was therefore correct, that the plaintiff was entitled to recover as much as the labor performed was reasonably worth, and the jury appear to have allowed a pro rata compensation, for the time which the plaintiff labored in the defendant's service. * * * *

[41] Judgment on the verdict.

Questions:

1. What is the measure of Britton’s damages?

2. Should willfulness of the breach stop a restitution action?

3. Most hornbooks report Britton as the minority rule. I’m not so sure that it is. But there are some courts that affirmatively hold opposite Britton. Suppose Cope were decided in New Hampshire. Same result?

4. What does Justice Parker mean in [15] when he says that the rule "may be very unequal"?

5. Why does Parker say in [32] that "a new case" arises, "one not within the original agreement"? Where does the promise to pay in this "new case" come from?

6. Does Parker always insist that the plaintiff’s case here is one of quantum meruit or unjust enrichment?

7. Aren't you glad you did not write the sentence in [33]? Epaphroditus Peck, in The Law of Persons: Or, Domestic Relations 275 n.10 (1913), reported that Parker regarded Britton "as his chief title to fame; and when he sat for his portrait, ordered by the state of New Hampshire, he held a law book open before him, plainly showing the volume and page of that decision." What did Parker see in the decision, do you suppose (because it obviously wasn't the rhetoric)?

8. Does [34] provide an independent ground for the decision?

Ellis SATCHELL v. Derrick V. VAN BRODE

Fla. App. (1971), 248 So.2d 245

PER CURIAM.

[1] Plaintiff-appellee Van Brode ("Buyer") sued defendant-appellant Satchell ("Seller") for return of a $500.00 earnest money deposit on a written purchase-sale agreement for a residence owned by the Seller for $28,000.00. The Seller counterclaimed for damages for breach of the agreement. A final judgment in a non-jury trial awarded the Buyer his $500.00 earnest money deposit and denied recovery on the Seller's counterclaim.

[2] The contract, which was not drafted by an attorney, contained no provisions for what was to be the disposition of the deposit in the event of a breach.

[3] The instant appeal presents the following threshold question: Where a contract for the purchase of real property fails to contain a liquidated damages provision, may the defaulting purchaser recover his $500.00 earnest money deposit? We express the view that the case is governed by the following rule, which is stated in Beatty v. Flannery, Fla. 1950, 49 So.2d 81, 82:

"It is well settled that, even in the absence of such a forfeiture provision, a vendee in default is not entitled to recover from the vendor money paid in part performance of an executory contract." (Citations omitted.)

Accord: Haas v. Crisp Realty Co., Fla. 1953, 65 So.2d 765, 768-769. We note that there are exceptions to the rule quoted, and they are adequately discussed in the cases cited; the exceptions do not apply here.

[4] The appellant Seller contends that an adverse judgment on his counterclaim is erroneous. Here, the court sat without a jury and determined the facts, and his findings are clothed with a presumption of correctness. Reversible error not having been demonstrated, that portion of the final judgment is affirmed.

[5] For the reasons stated, that portion of the final judgment awarding $500.00 to the plaintiff-appellee Van Brode, the buyer, is reversed.

Reversed in part and affirmed in part.

Note: In Beautty v. Flannery, cited in Satchell, the court wrote regarding exceptions:

We recognize that there are exceptions to the general rule that a vendee in default cannot recover, but we find no such circumstances in this case. There was no intimation of fraud on the part of the vendor, nor that the vendee's failure to fulfill the contract was due to any misfortune beyond his control that gave the vendor a benefit, the retention of which was shocking to the conscience of the court. Nor is it here contended that there was a mutual rescission of the contract.

49 So.2d at 82.

Questions:

1. Is Satchell inconsistent with Britton?

2. Satchell is the rule in a great number of American jurisdictions with regard to earnest money. Can you think of reasons for it?

3. What if the vendee had paid half the payments in an installment contract? Same result?

4. Why would one choose Britton or Satchell?

e. Anticipatory Repudiation

HOCHSTER v. DE LA TOUR

Queen’s Bench (1852), 2 Ellis and Blackburn 678, 118 ER 922

* * * *

[1] On the trial, before Erle J. at the London sittings in last Easter Term, it appeared that plaintiff was a courier, who, in April, 1852, was engaged by defendant to accompany him on a tour, to commence on lst June 1852, on the terms mentioned in the declaration. On the 11th May 1852, defendant wrote to plaintiff that he had changed his mind, and declined his services. He refused to make him any compensation. The action was commenced on 22d. May. The plaintiff, between the commencement of the action and the lst June, obtained an engagement with Lord Ashburton, on equally good terms, but not commencing till 4th July. —The defendant's counsel objected that there could be no breach of the contract before the 1st of June. The learned Judge was of a contrary opinion, but reserved leave to enter a nonsuit on this objection. The other questions were left to the Jury, who found for plaintiff. * * * *

[2] Lord Campbell C.J. now delivered the judgment of the Court.

[3] On this motion in arrest of judgment, the question arises, Whether, if there be an agreement between A. and B. whereby B. engages to employ A. on and from a future day for a given period of time, to travel with him into a foreign country as a courier, and to start with him in that capacity on that day, A. being to receive a monthly salary during the continuance of such service, B. may, before the day, refuse to perform the agreement and break and renounce it, so as to entitle A. before the day to commence an action against B. to recover damages for breach of the agreement; A. having been ready and willing to perform it, till it was broken and renounced by B. The defendant's counsel very powerfully contended that, if the plaintiff was not contented to dissolve the contract, and to abandon all remedy upon it, he was bound to remain ready and willing to perform it till the day when the actual employment as courier in the service of the defendant was to begin; and that there could be no breach of the agreement, before that day, to give a right of action. But it cannot be laid down as a universal rule that, where by agreement an act is to be done on a future day, no action can be brought for a breach of the agreement till the day for doing the act has arrived. If a man promises to marry a woman on a future day, and before that day marries another woman, he is instantly liable to an action for breach of promise of marriage; Short v Stone (8 Q. B. 358). If a man contracts to execute a lease on and from a future day for a certain term, and, before that day, executes a lease to another for the same term, he may be immediately sued for breaking the contract; Ford v Tiley (6 B. & C. 325). So, if a man contracts to sell and deliver specific goods on a future day, and before the day he sells and delivers them to another, he is immediately liable to an action at the suit of the person with whom he first contracted to sell and deliver them; Bowdell v Parsons (10 East, 359). One reason alleged in support of such an action is, that the defendant has, before the day, rendered it impossible for him to perform the contract at the day: but this does not necessarily follow; for, prior to the day fixed for doing the act, the first wife may have died, a surrender of the lease executed might be obtained, and the defendant might have repurchased the goods so as to be in a situation to sell and deliver them to the plaintiff. Another reason, may be, that, where there is a contract to do an act on a future day, there is a relation constituted between the parties in the meantime by the contract, and that they impliedly promise that in the meantime neither will do any thing to the prejudice of the other inconsistent with that relation. As an example, a man and woman engaged to marry are affianced to one another during the period between the time of the engagement and the celebration of the marriage. In this very case, of traveller and courier, from the day of the hiring till the day when the employment was to begin, they were engaged to each other; and it seems to be a breach of an implied contract if either of them renounces the engagement. * * * * The declaration in the present case, in alleging a breach, states a great deal more than a passing intention on the part of the defendant which he may repent of, and could only be proved by evidence that he had utterly renounced the contract, or done some act which rendered it impossible for him to perform it. If the plaintiff has no remedy for breach of the contract unless be treats the contract as in force, and acts upon it down to the 1st June 1852, it follows that, till then, he must enter into no employment which will interfere with his promise “to start with the defendant on such travels on the day and year,” and that he must then be properly equipped in all respects as a courier for a three months' tour on the continent of Europe. But it is surely much more rational, and more for the benefit of both parties, that, after the renunciation of the agreement by the defendant, the plaintiff should be at liberty to consider himself absolved from any future performance of it, retaining his right to sue for any damage he has suffered from the breach of it. Thus, instead of remaining idle and laying out money in preparations which must be useless, he is at liberty to seek service under another employer, which would go in mitigation of the damages to which he would otherwise be entitled for a breach of the contract. It seems strange that the defendant, after renouncing the contract, and absolutely declaring that he will never act under it, should be permitted to object that faith is given to his assertion, and that an opportunity is not left to him of changing his mind. If the plaintiff is barred of any remedy by entering into an engagement inconsistent with starting as a courier with the defendant on the lst June, he is prejudiced by putting faith in the defendant's assertion: and it would be more consonant with principle, if the defendant were precluded from saying that he had not broken the contract when he declared that he entirely renounced it. Suppose that the defendant, at the time of his renunciation, had embarked on a voyage for Australia, so as to render it physically impossible for him to employ the plaintiff as a courier on the continent of Europe in the months of June, July and August 1852: according to decided cases, the action might have been brought before the lst June; but the renunciation may have been founded on other facts, to be given in evidence, which would equally have rendered the defendant's performance of the contract impossible. The man who wrongfully renounces a contract into which he has deliberately entered cannot justly complain if he is immediately sued for a compensation in damages by the man whom he has injured: and it seems reasonable to allow an option to the injured party, either to sue immediately, or to wait till the time when the act was to be done, still holding it as prospectively binding for the exercise of this option, which may be advantageous to the innocent party, and cannot be prejudicial to the wrongdoer. An argument against the action before the lst of June is urged from the difficulty of calculating the damages: but this argument is equally strong against an action before the lst of September, when the three months would expire. In either case, the Jury in assessing the damages would be justified in looking to all that had happened, or was likely to happen, to increase or mitigate the loss of the plaintiff down to the day of trial. We do not find any decision contrary to the view we are taking of this case. * * * *

[4] Upon the whole, we think that the declaration in this case is sufficient. It gives us great satisfaction to reflect that, the question being on the record, our opinion may be reviewed in a Court of Error. In the meantime we must give judgment for the plaintiff.

[5] Judgment for plaintiff.

Questions:

1. C.J. Campbell suggests that there is a “relation constituted between the parties in the meantime by the contract, and that they impliedly promise that in the meantime neither will do any thing to the prejudice of the other inconsistent with that relation.” What have we called that relation?

2. What is meant by “passing intention on the part of the defendant which he may repent of”? Can you give an example?

3. Why isn’t this case grounded on impossibility?

4. Why is it necessary to treat renunciation as a breach?

5. What happens if one sues before the duty is due, absent a renunciation?

H.B. TAYLOR v. Elizabeth G. JOHNSTON

Cal. (1975), 123 Cal. Rptr. 641

OPINION

SULLIVAN, J.

[1] In this action for damages for breach of contract defendants Elizabeth and Ellwood Johnston, individually and as copartners doing business as Old English Rancho, appeal from a judgment entered after a nonjury trial in favor of plaintiff H.B. Taylor and against them in the amount of $132,778.05 and costs.

[2] Plaintiff was engaged in the business of owning, breeding, raising and racing thoroughbred horses in Los Angeles County. Defendants were engaged in a similar business, and operated a horse farm in Ontario, California, where they furnished stallion stud services. In January 1965 plaintiff sought to breed his two thoroughbred mares, Sunday Slippers and Sandy Fork to defendants' stallion Fleet Nasrullah. To that end, on January 19 plaintiff and defendants entered into two separate written contracts—one pertaining to Sunday Slippers and the other to Sandy Fork. Except for the mare involved the contracts were identical. We set forth in the margin the contract covering Sunday Slippers.41 

[3] The contract provided that Fleet Nasrullah was to perform breeding services upon the respective mares in the year 1966 for a fee of $3,500, payable on or before September 1, 1966. If the stud fee was paid in full and the mares failed to produce a live foal (one that stands and nurses without assistance) from the breeding a return breeding would be provided the following year without additional fee.

[4] On October 4, 1965, defendants sold Fleet Nasrullah to Dr. A.G. Pessin and Leslie Combs II for $1,000,000 cash and shipped the stallion to Kentucky. Subsequently Combs and Pessin syndicated the sire by selling various individuals 36 or 38 shares, each share entitling the holder to breed one mare each season to Fleet Nasrullah. Combs and Pessin each reserved three shares.

[5] On the same day defendants wrote to plaintiff advising the latter of the sale and that he was "released" from his "reservations" for Fleet Nasrullah.42 Unable to reach defendants by telephone, plaintiff had his attorney write to them on October 8, 1965, insisting on performance of the contracts. Receiving no answer, plaintiff's attorney on October 19 wrote a second letter threatening suit. On October 27, defendants advised plaintiff by letter that arrangements had been made to breed the two mares to Fleet Nasrullah in Kentucky.43 However, plaintiff later learned that the mares could not be boarded at Spendthrift Farm where Fleet Nasrullah was standing stud and accordingly arranged with Clinton Frazier of Elmhurst Farm to board the mares and take care of the breeding.

[6] In January 1966 plaintiff shipped Sunday Slippers and Sandy Fork to Elmhurst Farm. At that time, however, both mares were in foal and could not be bred, since this can occur only during the five-day period in which they are in heat. The first heat period normally occurs nine days, and the second heat period thirty days, after foaling. Succeeding heat periods occur every 21 days.

[7] On April 17, 1966, Sunday Slippers foaled and Frazier immediately notified Dr. Pessin. The latter assured Frazier that he would make the necessary arrangements to breed the mare to Fleet Nasrullah. On April 26, the ninth day after the foaling, Frazier, upon further inquiry, was told by Dr. Pessin to contact Mrs. Judy who had charge of booking the breedings and had handled these matters with Frazier in the past. Mrs. Judy, however, informed Frazier that the stallion was booked for that day but would be available on any day not booked by a shareholder. She indicated that she was acting under instructions but suggested that he keep in touch with her while the mare was in heat.

[8] Sunday Slippers came into heat again on May 13, 1966. Frazier telephoned Mrs. Judy and attempted to book the breeding for May 16.44 She informed him that Fleet Nasrullah had been reserved by one of the shareholders for that day, but that Frazier should keep in touch with her in the event the reservation was cancelled. On May 14 and May 15 Frazier tried again but without success; on the latter date, Sunday Slippers went out of heat.

[9] On June 4, the mare went into heat again. Frazier again tried to book a reservation with Fleet Nasrullah but was told that all dates during the heat period had been already booked. He made no further efforts but on June 7, on plaintiff's instructions, bred Sunday Slippers to a Kentucky Derby winner named Chateaugay for a stud fee of $10,000.

[10] Sandy Fork, plaintiff's other mare awaiting the stud services of Fleet Nasrullah, foaled on June 5, 1966. Frazier telephoned Mrs. Judy the next day and received a booking to breed the mare on June 14, the ninth day after foaling. On June 13, 1966, however, she cancelled the reservation because of the prior claim of a shareholder. Frazier made no further attempts and on June 14 bred Sandy Fork to Chateaugay.

[11] Shortly after their breeding, it was discovered that both mares were pregnant with twins. In thoroughbred racing twins are considered undesirable since they endanger the mare and are themselves seldom valuable for racing. Both mares were therefore aborted. However, plaintiff was not required to pay the $20,000 stud fees for Chateaugay's services because neither mare delivered a live foal.

[12] The instant action for breach of contract proceeded to trial on plaintiff's fourth amended complaint, which alleged two causes of action, the first for breach of the two written contracts, the second for breach of an oral agreement. Defendants cross-complained for the stud fees. The court found the facts to be substantially as stated above and further found and concluded that by selling Fleet Nasrullah defendants had "put it out of their power to perform properly their contracts," that the conduct of defendants and their agents Dr. Pessin and Mrs. Judy up to and including June 13, 1966, constituted a breach45 and plaintiff "was then justified in treating it as a breach and repudiation of their contractual obligations to him," and that defendants unjustifiably breached the contracts but plaintiff did not.46 The court awarded plaintiff damages for defendants' breach in the sum of $103,122.50 ($99,800 net damage directly sustained plus $3,322.50 for reasonable costs and expenses for mitigation of damages). "Because of defendants' wholly unwarranted, high-handed, and oppressive breach of their contractual obligation to plaintiff, the plaintiff is entitled to recover from the defendants pre-judgment interest at the rate of 7% per annum on the sum of $99,800.00 from August 1, 1968. . . ." It was concluded that defendants should take nothing on their cross-complaint. Judgment was entered accordingly. This appeal followed.

[13] Defendants' main attack on the judgment is two-pronged. They contend: first, that they did not at any time repudiate the contracts; and second, that they did not otherwise breach the contracts because performance was made impossible by plaintiff's own actions. To put it another way, defendants argue in effect that the finding that they breached the contracts is without any support in the evidence. Essentially they take the position that on the uncontradicted evidence in the record, as a matter of law there was neither anticipatory nor actual breach. As will appear, we conclude that the trial court's decision was based solely on findings of anticipatory breach and that we must determine whether such decision is supported by the evidence.

[14] Nevertheless both aspects of defendants' argument require us at the outset to examine the specifications for performance contained in the contracts. (See fn. 1, ante.) We note that the reservation for "one services" for Fleet Nasrullah was "for the year 1966." As the evidence showed, a breeding is biologically possible throughout the calendar year, since mares regularly come into heat every 21 days, unless they are pregnant. The contracts therefore appear to contemplate breeding with Fleet Nasrullah at any time during the calendar year 1966. The trial court made no finding as to the time of performance called for by the contracts.47 There was testimony to the effect that by custom in the thoroughbred racing business the breeding is consummated in a "breeding season" which normally extends from January until early July, although some breeding continues through August. It is possible that the parties intended that the mares be bred to Fleet Nasrullah during the 1966 breeding season rather than the calendar year 1966.48 

[15] However, in our view, it is immaterial whether the contract phrase "for the year 1966" is taken to mean the above breeding season or the full calendar year since in either event the contract period had not expired by June 7 and June 14, 1966, the dates on which Sunday Slippers and Sandy Fork respectively were bred to Chateaugay49 and by which time, according to the findings (see fn. 5, ante) defendants had repudiated the contracts. There can be no actual breach of a contract until the time specified therein for performance has arrived. (Gold Min. & Water Co. v. Swinerton (1943) 23 Cal.2d 19, 29 [142 P.2d 22]; 1 Witkin, Summary of Cal. Law (8th ed.) § 629, p. 536; see Rest. 2d Contracts (Tent. Draft No. 8, 1973) § 260.) Although there may be a breach by anticipatory repudiation: "[b]y its very name an essential element of a true anticipatory breach of a contract is that the repudiation by the promisor occur before his performance is due under the contract." (Gold Min. & Water Co. v. Swinerton, supra, 23 Cal.2d at p. 29.) In the instant case, because under either of the above interpretations the time for performance had not yet arrived, defendants' breach as found by the trial court was of necessity an anticipatory breach and must be analyzed in accordance with the principles governing such type of breach. To these principles we now direct our attention.

[16] Anticipatory breach occurs when one of the parties to a bilateral contract repudiates the contract. The repudiation may be express or implied. An express repudiation is a clear, positive, unequivocal refusal to perform (Guerrieri v. Severini (1958) 51 Cal.2d 12, 18 [330 P.2d 635]; Gold Min. & Water Co. v. Swinerton, supra, 23 Cal.2d 19, 29; Whitney Inv. Co. v. Westview Dev. Co. (1969) 273 Cal. App.2d 594, 602-603 [78 Cal. Rptr. 302]; Atkinson v. District Bond Co. (1935) 5 Cal. App.2d 738, 743-744 [43 P.2d 867]); an implied repudiation results from conduct where the promisor puts it out of his power to perform so as to make substantial performance of his promise impossible (Zogarts v. Smith (1948) 86 Cal. App.2d 165 [194 P.2d 143]; 1 Witkin, Summary of Cal. Law (8th ed.) § 632, pp. 538-539; 4 Corbin, Contracts (1951) § 984, pp. 949-951).

[17] When a promisor repudiates a contract, the injured party faces an election of remedies: he can treat the repudiation as an anticipatory breach and immediately seek damages for breach of contract, thereby terminating the contractual relation between the parties, or he can treat the repudiation as an empty threat, wait until the time for performance arrives and exercise his remedies for actual breach if a breach does in fact occur at such time. (Guerrieri v. Severini, supra, 51 Cal.2d 12, 18-19.) However, if the injured party disregards the repudiation and treats the contract as still in force, and the repudiation is retracted prior to the time of performance, then the repudiation is nullified and the injured party is left with his remedies, if any, invocable at the time of performance. (Id., at pp. 19-20; Salot v. Wershow (1958) 157 Cal. App.2d 352, 357-358 [320 P.2d 926]; see Cook v. Nordstrand (1948) 83 Cal. App.2d 188, 194-195 [188 P.2d 282]; Atkinson v. District Bond Co., supra, 5 Cal. App.2d 738, 743-744.

[18] As we have pointed out, the trial court found that the whole course of conduct of defendants and their agents Dr. Pessin and Mrs. Judy from the time of the sale of Fleet Nasrullah up to and including June 13, 1966, amounted to a repudiation which plaintiff was justified in treating as an anticipatory breach. (See fn. 5, ante.) However, when the principles of law governing repudiation just described are applied to the facts constituting this course of conduct as found by the trial court, it is manifest that such conduct cannot be treated as an undifferentiated continuum amounting to a single repudiation but must be divided into two separate repudiations.

[19] First, defendants clearly repudiated the contracts when, after selling Fleet Nasrullah and shipping him to Kentucky, they informed plaintiff "[y]ou are, therefore, released from your reservations made to the stallion." However, the trial court additionally found that "[p]laintiff did not wish to be `released' from his `reservations' . . . insist[ed] on performance of the stud service agreements . . . [and] threaten[ed] litigation if the contracts were not honored by defendants. . . ." Accordingly defendants arranged for performance of the contracts by making Fleet Nasrullah available for stud service to plaintiff in Kentucky through their agents Dr. Pessin and Mrs. Judy. Plaintiff elected to treat the contracts as in force and shipped the mares to Kentucky to effect the desired performance. The foregoing facts lead us to conclude that the subsequent arrangements by defendants to make Fleet Nasrullah available to service plaintiff's mares in Kentucky constituted a retraction of the repudiation. Since at this time plaintiff had not elected to treat the repudiation as an anticipatory breach50  and in fact had shipped the mares to Kentucky in reliance on defendants' arrangements, this retraction nullified the repudiation. Thus, plaintiff was then left with his remedies that might arise at the time of performance.

[20] The trial court found that after the mares had arrived in Kentucky, had delivered the foals they were then carrying and were ready for servicing by Fleet Nasrullah, plaintiff was justified in concluding from the conduct of defendants, their agent Dr. Pessin, and their subagent Mrs. Judy, that "defendants were just giving him the runaround and had no intention of performing their contract in the manner required by its terms" and in treating such conduct "as a breach and repudiation of their contractual obligation to him." (See fn. 5, ante.) Since, as we have explained, defendants retracted their original repudiation, this subsequent conduct amounts to a finding of a second repudiation.

[21] There is no evidence in the record that defendants or their agents Dr. Pessin and Mrs. Judy ever stated that Sunday Slippers and Sandy Fork would not be serviced by Fleet Nasrullah during the 1966 breeding season or that they ever refused to perform. Frazier, plaintiff's agent who made arrangements for the breeding of the mares admitted that they had never made such a statement to him.51 Accordingly, there was no express repudiation or unequivocal refusal to perform. (Guerrieri v. Severini, supra, 51 Cal.2d 12, 18; Atkinson v. District Bond Co., supra, 5 Cal. App.2d 738, 743-744.)

[22] The trial court's finding of repudiation, expressly based on the "conduct of the defendants" and their agents suggests that the court found an implied repudiation. However, there is no implied repudiation, i.e., by conduct equivalent to unequivocal refusal to perform, unless "the promisor puts it out of his power to perform." (Zogarts v. Smith, supra, 86 Cal. App.2d 165, 172-173; 1 Witkin, Summary of Cal. Law (8th ed.) § 632, p. 538; 4 Corbin, Contracts, supra, § 984, pp. 949-951; Rest. 2d Contracts (Tent. Draft No. 8, 1973) §§ 268, 274.) Once the mares arrived in Kentucky, defendants had the power to perform the contracts; Fleet Nasrullah could breed with the mares. No subsequent conduct occurred to render this performance impossible. Although plaintiff was subordinated to the shareholders with respect to the priority of reserving a breeding time with Fleet Nasrullah, there is no evidence in the record that this subordination of reservation rights rendered performance impossible. Rather it acted to postpone the time of performance, which still remained within the limits prescribed by the contracts. It rendered performance more difficult to achieve; it may even have cast doubt upon the eventual accomplishment of performance; it did not render performance impossible.52 

[23] Because there was no repudiation, express or implied, there was no anticipatory breach. Plaintiff contends that defendants' conduct, as found by the trial court, indicated that "defendants were just giving him the runaround and had no intention of performing their contract" and therefore that this conduct was the equivalent of an express and unequivocal refusal to perform. Plaintiff has not presented to the court any authority in California in support of his proposition that conduct which has not met the test for an implied repudiation, i.e. conduct which removed the power to perform, may nonetheless be held to amount to the equivalent of an express repudiation and thus constitute an anticipatory breach. Without addressing ourselves to the question whether some conduct could ever be found equal to an express repudiation, we hold that defendants' conduct in this case as a matter of law did not constitute an anticipatory breach.

[24] To constitute an express repudiation, the promisor's statement, or in this case conduct, must amount to an unequivocal refusal to perform: "A mere declaration, however, of a party of an intention not to be bound will not of itself amount to a breach, so as to create an effectual renunciation of the contract; for one party cannot by any act or declaration destroy the binding force and efficacy of the contract. To justify the adverse party in treating the renunciation as a breach, the refusal to perform must be of the whole contract . . . and must be distinct, unequivocal and absolute." (Atkinson v. District Bond Co., supra, 5 Cal. App.2d 738, 743.)

[25] To recapitulate, Sandy Fork was in foal in January 1966, the commencement of the 1966 breeding season, and remained so until June 5, 1966. Throughout this period Fleet Nasrullah could not perform his services as contracted due solely to the conduct of plaintiff in breeding Sandy Fork in 1965. Biologically the first opportunity to breed Sandy Fork was on June 14, 1966, nine days after foaling. Frazier telephoned Mrs. Judy on June 6, 1966, and received a booking with Fleet Nasrullah for June 14, 1966. On June 13 Mrs. Judy telephoned Frazier and informed him she would have to cancel Sandy Fork's reservation for the following day because one of the shareholders insisted on using that day. Mrs. Judy gave no indication whatsoever that she could not or would not breed Sandy Fork on any of the following days in that heat period or subsequent heat periods. Frazier made no further attempts to breed Sandy Fork with Fleet Nasrullah. Thus, plaintiff, who delayed the possibility of performance for five months, asserts that the delay of performance occasioned by defendants' cancellation of a reservation on the first day during the six-month period that plaintiff made performance possible amounts to an unequivocal refusal to perform, even though there was adequate opportunity for Fleet Nasrullah to perform within the period for performance specified in the contract and even though defendants never stated any intention not to perform. We conclude that as a matter of law this conduct did not amount to an unequivocal refusal to perform and therefore did not constitute an anticipatory breach of the contract covering Sandy Fork.

[26] Sunday Slippers foaled on April 17, 1966, first came into heat on April 26 and then successively on May 13 and June 4, 1966. Mrs. Judy informed Frazier that she would breed Sunday Slippers on any day that one of the shareholders did not want to use the stallion. Frazier unsuccessfully sought to breed the mare on April 26, May 14, May 15 and June 4, 1966, Fleet Nasrullah being reserved on those dates. Mrs. Judy continued to assure Frazier that the breeding would occur. Sunday Slippers was due to come into heat again twice during the breeding season: June 25 and July 16, 1966. At most this conduct amounts to delay of performance and a warning that performance might altogether be precluded if a shareholder were to desire Fleet Nasrullah's services on all the remaining days within the period specified for performance in which Sunday Slippers was in heat. We conclude that as a matter of law this conduct did not amount to an unequivocal refusal to perform and therefore did not constitute an anticipatory breach of the contract covering Sunday Slippers.

[27] In sum, we hold that there is no evidence in the record supportive of the trial court's finding and conclusion that defendants repudiated and therefore committed an anticipatory breach of the contracts. * * * *

The judgment is reversed.

Questions:

1. Did anticipatory repudiation occur?

2. What would be smoking gun evidence of implied anticipatory repudiation before the mares’ owners agreed to ship them to Kentucky?

3. Suppose the shareholders said, “We have sold the horse, but you must be able to breed your mares this month or not at all”—would that be anticipatory repudiation?

4. Why wasn’t forcing the mare owners to go to Kentucky a breach?

5. Why wasn’t having to wait for the shareholders a breach?

6. Suppose a vendor of land conveys it to another person. Is that anticipatory repudiation?

7. Suppose a vendee of land discovers before closing that the vendor’s Aunt Lulu, a living person but not a party to the contract, has an interest in the land by inheritance. Is that a repudiation?

8. If the mare owners failed to show that the stud owner breached in Kentucky, then how should we characterize what happened to the contract, legally?

9. In order to sue for stud fees, does the stud owner have to show that it kept Fleet Nasrullah available?

Uniform Commercial Code §§ 2-609, 2-610, 2-703(a), 2-705, 2-711(1)

AMF, INC. v. McDONALD'S CORP.

7th Cir. U.S. Ct. App. (1976), 536 F.2d 1167

CUMMINGS, Circuit Judge.

[1] AMF, Incorporated, filed this case in the Southern District of New York in April 1972. It was transferred to the Northern District of Illinois in May 1973. AMF seeks damages for the alleged wrongful cancellation and repudiation of McDonald's Corporation's ("McDonald's") orders for sixteen computerized cash registers for installation in restaurants owned by wholly-owned subsidiaries of McDonald's and for seven such registers ordered by licensees of McDonald's for their restaurants. In July 1972, McDonald's of Elk Grove, Inc. sued AMF to recover the $20,385.28 purchase price paid for a prototype computerized cash register and losses sustained as a result of failure of the equipment to function satisfactorily. Both cases were tried together during a fortnight in December 1974. A few months after the completion of the bench trial, the district court rendered a memorandum opinion and order in both cases in favor of each defendant. The only appeal is from the eight judgment orders dismissing AMF's complaints against McDonald's and the seven licensees.53 We affirm. * * * *

[2] In 1966, AMF began to market individual components of a completely automated restaurant system, including its model 72C computerized cash register involved here. The 72C cash register then consisted of a central computer, one to four input stations, each with a keyboard and cathode ray tube display, plus the necessary cables and controls.

[3] In 1967 McDonald's representatives visited AMF's plant in Springdale, Connecticut, to view a working "breadboard" model 72C to decide whether to use it in McDonald's restaurant system. Later that year, it was agreed that a 72C should be placed in a McDonald's restaurant for evaluation purposes.

[4] In April 1968, a 72C unit accommodating six input stations was installed in McDonald's restaurant in Elk Grove, Illinois. This restaurant was a wholly-owned subsidiary of McDonald's and was its busiest restaurant. Besides functioning as a cash register, the 72C was intended to enable counter personnel to work faster and to assist in providing data for accounting reports and bookkeeping. McDonald's of Elk Grove, Inc. paid some $20,000 for this prototype register on January 3, 1969. AMF never gave McDonald's warranties governing reliability or performance standards for the prototype.

[5] At a meeting in Chicago on August 29, 1968, McDonald's concluded to order sixteen 72C's for its company-owned restaurants and to cooperate with AMF to obtain additional orders from its licensees. In December 1968, AMF accepted McDonald's purchase orders for those sixteen 72C's. In late January 1969, AMF accepted seven additional orders for 72C's from McDonald's licensees for their restaurants. Under the contract for the sale of all the units, there was a warranty for parts and service. AMF proposed to deliver the first unit in February 1969, with installation of the remaining twenty-two units in the first half of 1969. However, AMF established a new delivery schedule in February 1969, providing for deliveries to commence at the end of July 1969 and to be completed in January 1970, assuming that the first test unit being built at AMF's Vandalia, Ohio, plant was built and satisfactorily tested by the end of July 1969. This was never accomplished.

[6] During the operation of the prototype 72C at McDonald's Elk Grove restaurant, many problems resulted, requiring frequent service calls by AMF and others. Because of its poor performance, McDonald's had AMF remove the prototype unit from its Elk Grove restaurant in late April 1969.

[7] At a March 18, 1969, meeting, McDonald's and AMF personnel met to discuss the performance of the Elk Grove prototype. AMF agreed to formulate a set of performance and reliability standards for the future 72C's, including "the number of failures permitted at various degrees of seriousness, total permitted downtime, maximum service hours and cost." Pending mutual agreement on such standards, McDonald's personnel asked that production of the twenty-three units be held up and AMF agreed.

[8] On May 1, 1969, AMF met with McDonald's personnel to provide them with performance and reliability standards. However, the parties never agreed upon such standards. At that time, AMF did not have a working machine and could not produce one within a reasonable time because its Vandalia, Ohio, personnel were too inexperienced. After the May 1st meeting, AMF concluded that McDonald's had cancelled all 72C orders. The reasons for the cancellation were the poor performance of the prototype, the lack of assurances that a workable machine was available and the unsatisfactory conditions at AMF's Vandalia, Ohio, plant where the twenty-three 72C's were to be built.

[9] On July 29, 1969, McDonald's and AMF representatives met in New York. At this meeting it was mutually understood that the 72C orders were cancelled and that none would be delivered.

[10] In its conclusions of law, the district court held that McDonald's and its licensees had entered into contracts for twenty-three 72C cash registers but that AMF was not able to perform its obligations under the contracts (see note, 1, supra). Citing Section 2-610 of the Uniform Commercial Code (Ill.Rev.Stats. (1975) ch. 26, § 2-610) and Comment 1 thereunder, the court concluded that on July 29, McDonald's justifiably repudiated the contracts to purchase all twenty-three 72C's.

[11] Relying on Section 2-609 and 2-610 of the Uniform Commercial Code (Ill.Rev.Stats. (1975) ch. 26, §§ 2-609 and 2-610), the court decided that McDonald's was warranted in repudiating the contracts and therefore had a right to cancel the orders by virtue of Section 2-711 of the Uniform Commercial Code (Ill.Rev.Stats. (1975) ch. 26, § 2-711). Accordingly, judgment was entered for McDonald's. * * * *

[12] Whether in a specific case a buyer has reasonable grounds for insecurity is a question of fact. Comment 3 to UCC § 2-609; Anderson, Uniform Commercial Code, § 2-609 (2d Ed. 1971). On this record, McDonald's clearly had "reasonable grounds for insecurity" with respect to AMF's performance. At the time of the March 18, 1969, meeting, the prototype unit had performed unsatisfactorily ever since its April 1968 installation. Although AMF had projected delivery of all twenty-three units by the first half of 1969, AMF later scheduled delivery from the end of July 1969 until January 1970. When McDonald's personnel visited AMF's Vandalia, Ohio, plant on March 4, 1969, they saw that none of the 72C systems was being assembled and learned that a pilot unit would not be ready until the end of July of that year. They were informed that the engineer assigned to the project was not to commence work until March 17th. AMF's own personnel were also troubled about the design of the 72C, causing them to attempt to reduce McDonald's order to five units. Therefore, under Section 2-609 McDonald's was entitled to demand adequate assurance of performance by AMF.54 

[13] However, AMF urges that Section 2-609 of the UCC * * * is inapplicable because McDonald's did not make a written demand of adequate assurance of due performance. In Pittsburgh-Des Moines Steel Co. v. Brookhaven Manor Water Co., 532 F.2d 572, 581 (7th Cir. 1976), we noted that the Code should be liberally construed55 and therefore rejected such "a formalistic approach" to Section 2-609.56 McDonald's failure to make a written demand was excusable because AMF's Mr. Dubosque's testimony and his April 2 and 18, 1969, memoranda about the March 18th meeting showed AMF's clear understanding that McDonald's had suspended performance until it should receive adequate assurance of due performance from AMF (Tr. 395; AMF Exhibit 79; McD. Exhibit 232).

[14] After the March 18th demand, AMF never repaired the Elk Grove unit satisfactorily nor replaced it. Similarly, it was unable to satisfy McDonald's that the twenty-three machines on order would work. At the May 1st meeting, AMF offered unsatisfactory assurances for only five units instead of twenty-three. The pe­rformance standards AMF tendered to McDonald's were unacceptable because they would have permitted the 72C's not to function properly for 90 hours per year, permitting as much as one failure in every fifteen days in a busy McDonald's restaurant. Also, as the district court found, AMF's Vandalia, Ohio, personnel were too inexperienced to produce a proper machine. Since AMF did not provide adequate assurance of performance after McDonald's March 18th demand, UCC Section 2-609(1) permitted McDonald's to suspend performance. When AMF did not furnish adequate assurance of due performance at the May 1st meeting, it thereby repudiated the contract under Section 2-609(4). At that point, Section 2-610(b) (note 3 supra) permitted McDonald's to cancel the orders pursuant to Section 2-711 (note 6, supra), as it finally did on July 29, 1969. * * * *

[15] Judgment Affirmed.

Questions:

1. Did McDonald’s have reasonable grounds for insecurity?

2. But McDonald’s didn’t make a demand in writing. Does that matter?

3. Did AMF give adequate assurance?

4. Assuming you answered “no” to 3, what is McDonald’s remedy?

5. Is insolvency of the performing party reasonable grounds?

6. Karl Llewellyn, principle drafter of Article 2 of the UCC, wanted the doctrine of substantial performance to apply to the sale of goods. Did he get his wish?

7. Section 251 of the Restatement (Second) of Contracts suggests that the UCC doctrine applied here also be adopted into the common law of contracts. Should it? Can you argue that it is effectively already the law? \Many states have explicitly applied section 251 to contracts not covered by the UCC.

Roger DIAMOND v. UNIVERSITY OF SOUTHERN CALIFORNIA

Cal. App. (1970), 11 Cal. App. 3d 49

Opinion

KAUS, P.J.

[1] Plaintiff, an attorney, who in this class action represents himself and about six hundred others “similarly situated,” appeals from a judgement in defendant’s favor. * * * *

[2] The complaint was filed on December 9, 1968, two weeks after defendant’s football team had been selected to play in the Rose Bowl game on January 1, 1969. It contained the following allegations: before the start of the 1968 football season defendant had offered to sell to the public so-called “economy” season tickets, promising that each buyer of such a ticket would be given an option to purchase a Rose Bowl ticket, if the team were to be selected to play there. Plaintiff and the members of his class purchased economy season tickets for the 1968 season. This was the first time they had done so. After the team’s selection for the Rose Bowl game, on or about December 4, 1968, instead of the promised application for a Rose Bowl ticket, plaintiff received a note to the effect that for reasons beyond defendant’s control, first time economy season ticket holders could not be furnished with such applications. The note, however, thanked plaintiff for his support of Trojan football. From the receipt of this note plaintiff concluded that defendant had breached its contract with all first time economy season ticket holders, each of who was alleged to have been damaged in the sum of $12, the difference between the market value of a Rose Bowl ticket and the price which defendant would have charged, had it fulfilled its agreement. Since, according to the complaint, the total number of season tickets purchased by the six hundred members of plaintiff’s class was three thousand, total damages alleged are $36,000. The complaint also prays for costs, attorney fees, “such other relief as the court deems just and proper” and “[t]hat upon rendition of judgement against defendant as a condition of participation in said judgement by any of the other parties plaintiff similarly situated, that such party pay [a] proportionate share to plaintiff of the cost and expenses of this litigation.” A demurrer was overruled on January 6, 1969. In the meanwhile the game had become history.

[3] On January 23, 1969, defendant filed its notice of motion for summary judgement which was accompanied by the declaration of Elton D. Phillips, the business manager of defendant and the chairman of its “Football Ticket Committee.”

[4] According to Mr. Phillips’ declaration the university had sold a total of 46,052 season tickets for the 1968 football season, all with the representation that the purchaser would receive an option to buy a Rose Bowl ticket. After the selection of defendant’s team to play in the Rose Bowl, the Pasadena Tournament of Roses Association allotted defendant 53,003 tickets of which 10,590 were to go to certain “specifically named groups, companies and associations.” This left 42,513 tickets for the 46,052 season ticket holders. A system of priorities was then established and first time economy season ticket holders were given the lowest priority. Applications for Rose Bowl tickets were then mailed to all other season ticket holders. They contained a proviso that orders for tickets had to be mailed to defendant no later than December 4, 1968. Between December 8 and December 16 it appeared that a sufficient number of season ticket holders had not availed themselves of their option so that it became possible to send applications for tickets to those who had previously received none, this is to say, the first time economy ticketed holders. This was done on December 17.

[5] It thus appeared that, somewhat belatedly, defendant met its obligation to the members of plaintiff’s class. * * * *

[6] Defendant’s motion for summary judgment was granted on February 10, 1969, and the judgement from which this appeal is taken was entered on March 4.

[7] Admittedly the sole purpose of the appeal is to vindicate plaintiff’s right to attorney’s fees.

[8] Plaintiff reasons that he is entitled to attorney’s fees on the following analysis:

  1. The notice of December 4 was an anticipatory repudiation of defendant’s obligation to furnish plaintiff with a ticket application.
  2. The filing of the action on December 9 was a change in position which terminated defendant’s power to retract the repudiation. * * * *

[9] Plaintiff’s argument breaks down at step one. Granting, at least for the sake of argument, that the filing of an action is a sufficient change in position to destroy the power to retract an anticipatory repudiation of a contract, plaintiff forgets that, logically or not, it is the general rule, recognized in this state, that the doctrine of breach by anticipatory repudiation does not apply to contracts which are unilateral in their inception or have become so by complete performance by one party. [Citations omitted.] The theory underlying this rule is that since the plaintiff has no future obligations to perform, he is not prejudiced by having a wait for the arrival of the defendant’s time for performance in order to sue for breach. [More citations deleted.]

[10] It is quite evident that when defendant repudiated its obligation on December 4, the contract had become unilateral. Plaintiff and the members of his class had done all that they had ever been obligated to do, that is to pay the price of a season ticket. Nothing was left but for defendant to furnish the applications of the Rose Bowl Tickets. The action was, therefore, premature.

Questions:

1. Under the rule from Diamond, is it possible for an insurance company to anticipatorily breach an annuity contract? If the promisor in the annuity contract, usually an insurance company, files bankruptcy, should the rule preclude the annuitant’s claim?

2. You might think that consumers who buy cars on multi-year finance contracts might also be unable to commit an anticipatory breach. However, the point is moot because finance companies always write into the finance contract a clause dealing with early breach. What does the clause require, do you suppose?

3. Not every court is so stuffy. Can you identify the rationale against the Diamond rule in the following case?

POLLACK v. POLLACK

Commission of Appeals of Texas, Section A (1932), 46 S.W.2d 292

[1] * * * * After the rendition of the judgement overruling the first motion for rehearing, the Supreme Court has permitted Henry Pollack to file a second motion for rehearing, such permission being also granted on our recommendation.

[2] In our original opinion we held: “In this connection we hold that Henry, having not only failed and refused to meet the monthly payment due on the contract, but, on the other hand, having absolutely repudiated the obligation, all without just excuse, has breached the contract, and therefore Charles is entitled to maintain his action in damages at once for the entire breach, and is entitled in one suit to receive in damages the present value of all that he would have received if the contract had been performed, and he is not compelled to resort to repeated suite to recover the monthly payments.[”] * * * *

[3] The contract made the basis of this suit is set out in full in our original opinion, and in the interest of brevity we will not repeat it here. By its terms Charles conveys to Henry all the property therein described, and Henry, in consideration for such conveyance, agrees to pay Charles $5,000 per year, in equal monthly installments as long as Charles lives, provided Henry outlive Charles, and in such event such monthly installments fully satisfy the contract. The contract then further provides that, in the event Henry should die before Charles, he (Henry) will bequeath to Charles property, real or personal, or both, of the value of $100,000. The contract further provides that, in the event Charles and the representatives, devisees, etc., of Henry cannot agree upon a partition of Henry’s estate so as to enable Charles to take property therefrom of value of $100,000, then so much of Henry’s estate shall be sold as shall be necessary to pay Charles $100,000.

[4] In the second motion for a rehearing in this court counsel for Henry for the first time contends that we were in error in applying the doctrine of anticipatory breach to this case because the record shows that the contract out of which this suit originated has been fully performed by Charles, and is still executory only as to Henry. In this connection Henry contends that the rule anticipatory breach only applies to contracts still executory on both sides. [Citations omitted.]

[5] In our opinion this contract is not absolutely performed on the part of Charles. * * * *

[6] However, even should we treat the contract as fully performed by Charles, and yet to be performed on the part of Henry only, we are of the opinion that the rule of anticipatory breach should still be applied, because every reason that can be given for applying the rule to the one instance applies with equal force to the other. The doctrine which excepts contracts fully performed by one side from the general rule is purely arbitrary, and without foundation in any logical reason.

[7] Simply stated, the rule of anticipatory breach is founded on the theory that the repudiation of the contract by one of the parties to it before the time of performance has arrived amounts to a tender of a breach of the entire contract, and, if it is accepted by the other party, it constitutes what is known in law as an anticipatory breach of such contract as a whole, and in such event the injured party is at liberty to at once demand his damages for such breach, and, if necessary, begin an action therefor. The damages are to be ascertained as of date of the breach, but such damages are to be full compensation for the loss occasioned by depriving plaintiff of the benefit of the contract. The doctrine of anticipatory breach is not founded on the theory that it moves the performance ahead of the time provided in the contract, but on the theory that, when a party bound to perform under the contract repudiates it and denies his liability thereunder, he thereby wrongfully destroys the contract so far as he is able to do so, and is liable for damages for such wrongful act. Also, since the injury is to the contract as a whole, the measure of damages is the value of the thing injured or destroyed regarded as an article of property. Segwick on Damages, Vol 2, p. 1249, § 636-d. It is also held that the promisee has a right to have the contract kept open and recognized as an article of property, and as a valid, subsisting, and effective contract. The repudiation of the contract denies the promisee all of these rights. * * * *

[8] We are aware of the fact that the rule adhered to by the English authorities, where the doctrine of anticipatory breach originated, only applies same to contracts still to be performed, in whole or in part, by both sides. We are further aware of the fact that the great weight of authority in America adheres to the English rule. Notwithstanding all this, we are constrained to hold that, since to except contracts performed on one side from the rule violates every reason that can be given for its existence in the first instance, and since this court has never committed itself to the exception, it should not now do so. * * * *

[9] I perceive no reason for believing that the plaintiffs, by reason of having performed their part of the contract, are in a less favorable positon than if the contact was still executory as to them. * * * *

[10] It is evident from the above [omitted discussion] that Judge Van Devanter understood the exception to go no further than money contracts, pure and simple. The exception is thus announced in many of the authorities. In other words, it is stated in many of the authorities that the rule of anticipatory breach does not apply to money contracts, pure and simple, which have been fully performed on one side. * * * * The contract under consideration here is certainly not a money contract, pure and simple. Be that as it may, we are of the opinion that the rule of anticipatory breach should be applied without distinction to contacts still to be performed on both sides and those fully executed by one side, and we are further of the opinion that no distinction should be made between contracts to pay money, pure and simple, and other such contracts.

[11] We recommend that the second motion for rehearing filed herein by Henry Pollack, plaintiff in error, be in all things overruled.

Question: Which of the two cases, Diamond or Pollack, is more consistent with the doctrine of constructive conditions?

f. Perfect Tender

Uniform Commercial Code § 2-601

The following case not a reliable precedent. It has not been reversed or overruled, but it takes a position opposite that of other cases on this same issue, and it runs counter to the code. Please do not follow it (unless I tell you that you are arguing Connecticut law in the federal District of Connecticut). Instead, follow the perfect tender rule, a rule taught clearly in this case.

D.P. TECHNOLOGY CORP. v. SHERWOOD TOOL, INC.

D.Conn. (1990), 751 F. Supp. 1038

RULING ON DEFENDANT'S MOTION TO DISMISS

NEVAS, District Judge.

[1] In this action based on diversity jurisdiction, the plaintiff seller, D.P. Technology ("DPT"), a California corporation, sues the defendant buyer, Sherwood Tool, Inc. ("Sherwood") a Connecticut corporation, alleging a breach of contract for the purchase and sale of a computer system. Now pending is the defendant's motion to dismiss, pursuant to Rule 12(b)(6), Fed.R. Civ.P., for failure to state a claim upon which relief can be granted. For the reasons that follow, the defendant's motion to dismiss is denied.

I.

A.

[2] The facts of this case can be easily summarized. On January 24, 1989, the defendant entered into a written contract to purchase a computer system, including hardware, software, installation and training, from the plaintiff. The complaint alleges that the computer system was "specifically" designed for the defendant and is not readily marketable. The contract57, executed on January 24, 1989, incorporates the delivery term set forth in the seller's Amended Letter of January 17, 1989 stating that the computer system would be delivered within ten to twelve weeks. The delivery period specified in the contract ended on April 18, 1989. The software was delivered on April 12, 1989 and the hardware was delivered on May 4, 1989. On May 9, 1989, the defendant returned the merchandise to the plaintiff, and has since refused payment for both the software and the hardware. Thus, the plaintiff alleges that the defendant breached the contract by refusing to accept delivery of the goods covered by the contract while the defendant argues that it was rather the plaintiff who breached the contract by failing to make a timely delivery.

B.

[3] In considering a motion to dismiss under Rule 12(b)(6), Fed.R.Civ.P., for failure to state a claim upon which relief can be granted, a court is under a duty to determine whether the plaintiff has a valid claim under any possible theory. * * * * For purposes of a motion to dismiss, the court must take the allegations of the complaint as true * * * and construe all reasonable inferences to be drawn from those facts in favor of the plaintiff. * * * *

C.

[4] A federal court sitting in diversity must be mindful that it follow the law determined by the highest court of the state whose law is applicable to resolution of the dispute. * * * * When that state court has not directly ruled on the issue under consideration, the federal court "`must make an estimate of what the state's highest court would rule to be its law.'" * * * *

II.

[5] Because the contract between the parties was a contract for the sale of goods, the law governing this transaction is to be found in Article 2 of the Uniform Commercial Code ("UCC"); Conn.Gen.Stat. §§ 42a-2-101 et seq. In its motion to dismiss, the defendant argues that the plaintiff fails to state a claim upon which relief can be granted because the plaintiff breached the contract which provided for a delivery period of ten to twelve weeks from the date of the order, January 24, 1989. Since the delivery period ended on April 18, 1989, the May 4 hardware delivery was 16 days late. The defendant contends that because the plaintiff delivered the hardware after the contractual deadline, the late delivery entitled the defendant to reject delivery, since a seller is required to tender goods in conformance with the terms set forth in a contract. U.C.C. § 2-301; Conn.Gen.Stat. § 42a-2-301. * * * *

[6] * * * [P]laintiff argues that the defendant relies on the perfect tender rule, allowing buyers to reject for any non-conformity with the contract. Plaintiff points out that the defendant has not cited one case in which a buyer rejected goods solely because of a late delivery, and that the doctrine of "perfect tender" has been roundly criticized. While it is true that the perfect tender rule has been criticized by scholars principally because it allowed a dishonest buyer to avoid an unfavorable contract on the basis of an insubstantial defect in the seller's tender, Ramirez v. Autosport, 88 N.J. 277, 283-85, 440 A.2d 1345, 1348-49 (1982); Moulton Cavity & Mold, Inc. v. Lyn-Flex Indus., Inc., 396 A.2d 1024, 1027 (Me.1979); E. Peters, Commercial Transactions 33-37 (1971) (even before enactment of the UCC, the perfect tender rule was in decline), the basic tender provision of the Uniform Commercial Code continued the perfect tender policy developed by the common law and embodied in the Uniform Sales Act. Section 2-601 states that with certain exceptions,58 the buyer has the right to reject "if the goods or the tender of delivery fail in any respect to conform to the contract." (emphasis supplied). Conn.Gen.Stat. § 42a-2-601. The courts that have considered the issue have agreed that the perfect tender rule has survived the enactment of the Code. See, e.g., Intermeat, Inc. v. American Poultry, Inc., 575 F.2d 1017, 1024 (2d Cir. 1978) ("There is no doubt that the perfect tender rule applies to measure the buyer's right of initial rejection of goods under UCC section 2-601."); Capitol Dodge Sales, Inc. v. Northern Concrete Pipe, Inc., 131 Mich.App. 149, 158, 346 N.W.2d 535, 539 (1983) (adoption of 2-601 creates a perfect tender rule replacing pre-Code cases defining performance of a sales contract in terms of substantial compliance); Texas Imports v. Allday, 649 S.W.2d 730, 737 (Tex.App.1983) (doctrine of substantial performance is not applicable under 2-601); Ramirez, 440 A.2d at 1349 (before acceptance, the buyer may reject goods for any nonconformity); Sudol v. Rudy Papa Motors, 175 N.J.Super. 238, 240-241, 417 A.2d 1133, 1134 (1980) (section 2-601 contains perfect tender rule); see also Bowen v. Young, 507 S.W.2d 600, 602 (Tex.Civ.App. 1974) (where goods fail in any respect to conform to the contract the buyer may, under 2-601, reject the entire unit); Maas v. Scoboda, 188 Neb. 189, 193, 195 N.W.2d 491, 494 (1972) (under the UCC a buyer is given the right to reject the whole if the goods fail in any respect to conform to the contract); Ingle v. Marked Tree Equip. Co., 244 Ark. 1166, 1173, 428 S.W.2d 286, 289 (1968) (a buyer may accept or reject goods which fail to conform to the contract in any respect). Similarly, courts interpreting 2-601 have strictly interpreted it to mean any nonconformity, thus excluding the doctrine of substantial performance.59 Printing Center of Texas, Inc. v. Supermind Pub. Co. Inc., 669 S.W.2d 779, 783 (Tex.App.1984) (the term conform within 2-601 authorizing the buyer to reject the whole if the goods or tender of delivery fail in any respect to conform to the contract does not mean substantial performance but complete performance); Astor v. Boulos, Inc., 451 A.2d 903, 906 (Me.1982) (the generally disfavored "perfect tender rule" survives enactment of the UCC as respects a contract for sale of goods but does not control in the area of service contracts which are governed by the standard of substantial performance); Moulton Cavity & Mold, Inc. v. Lyn-Flex Indus., Inc., 396 A.2d 1024, 1027-28 (1979) (holding that the doctrine of substantial performance "has no application to a contract for the sale of goods"); Jakowski v. Carole Chevrolet, Inc., 180 N.J.Super. 122, 125, 433 A.2d 841, 843 (1981) (degree of nonconformity of goods is irrelevant in assessing buyer's concomitant right to reject them). These courts have thus found that the tender must be perfect in the context of the perfect tender rule in the sense that the proffered goods must conform to the contract in every respect. Connecticut, however, appears in this regard to be the exception. Indeed, in the one Connecticut case interpreting 2-601, Franklin Quilting Co., Inc. v. Orfaly, 1 Conn.App. 249, 251, 470 A.2d 1228, 1229 (1984), in a footnote, the Appellate Court stated that "the `perfect tender rule' requires a substantial nonconformity to the contract before a buyer may rightfully reject the goods." Id. at 1229 n. 3, citing White & Summers, Uniform Commercial Code (2d Ed.), section 8-3 (emphasis supplied). Thus, the Connecticut Appellate Court has adopted "the White and Summers construction of 2-601 as in substance a rule that does not allow rejection for insubstantial breach such as a short delay causing no damage." Id. (3rd Ed.) section 8-3. See also National Fleet Supply, Inc. v. Fairchild, 450 N.E.2d 1015, 1019 n. 4 (Ind.App.1983) (despite UCC's apparent insistence on perfect tender, it is generally understood that rejection is not available in circumstances where the goods or delivery fail in some small respect to conform to the terms of the sales contract (citing White and Summers)); McKenzie v. Alla-Ohio Coals, Inc., 29 U.C.C.Rep.Serv. (Callaghan) 852, 856-57 (D.D.C.1979) (there is substantial authority that where a buyer has suffered no damage, he should not be allowed to reject goods because of an insubstantial nonconformity).

[7] As noted above, a federal court sitting in diversity must apply the law of the highest court of the state whose law applies. Since this court has determined that Connecticut law governs, the next task is to estimate whether the Connecticut Supreme Court would affirm the doctrine of substantial nonconformity, as stated in Orfaly, an opinion of the Connecticut Appellate Court. When the highest state court has not spoken on an issue, the federal court must look to the inferior courts of the state and to decisions of sister courts as well as federal courts. As noted, the weight of authority is that the doctrine of substantial performance does not apply to the sale of goods. However, as noted by White and Summers, in none of the cases approving of perfect rather than substantial tender was the nonconformity insubstantial, such as a short delay of time where no damage is caused to the buyer. White and Summers, Uniform Commercial Code (3rd Ed.), section 8-3 n. 8. In the instant case, there is no claim that the goods failed to conform to the contract. Nor is there a claim that the buyer was injured by the 16-day delay. There is, however, a claim that the goods were specially made, which might affect the buyer's ability to resell. Thus Connecticut's interpretation of 2-601 so as to mitigate the harshness of the perfect tender rule reflects the consensus of scholars that the rule is harsh and needs to be mitigated.60 Indeed, Summers and White state that the rule has been so "eroded" by the exceptions in the Code that "relatively little is left of it; the law would be little changed if 2-601 gave the right to reject only upon `substantial' non-conformity," especially since the Code requires a buyer or seller to act in good faith. R. Summers and J. White, Uniform Commercial Code (3rd Ed. 1988), 8-3, at 357. See also Alden Press Inc. v. Block & Co., Inc., 123 Ill.Dec. 26, 30, 173 Ill.App.3d 251, 527 N.E.2d 489, 493 (1988) (notwithstanding the perfect tender rule, the reasonableness of buyer's rejection of goods and whether such rejection of goods is in good faith are ultimately matters for the trier of fact); Printing Center of Texas v. Supermind Pub. Co., Inc., 669 S.W.2d 779, 784 (Tex.App.1984) (if the evidence establishes any nonconformity, the buyer is entitled to reject the goods as long as it is in good faith); Neumiller Farms, Inc. v. Cornett, 368 So.2d 272, 275 (Ala.1979) (claim of dissatisfaction with delivery of goods so as to warrant their rejection must be made in good faith, rather than in an effort to escape a bad bargain). A rejection of goods that have been specially manufactured for an insubstantial delay where no damage is caused is arguably not in good faith.

[8] Although the Connecticut Supreme Court has not yet addressed the issue of substantial nonconformity, it has stated, in a precode case, Bradford Novelty Co. v. Technomatic, 142 Conn. 166, 170, 112 A.2d 214, 216 (1955), that although "[t]he time fixed by the parties for performance is, at law, deemed of the essence of the contract," where, as here, goods have been specially manufactured, "the time specified for delivery is less likely to be considered of the essence . . . [since] in such a situation there is a probability of delay, and the loss to the manufacturer is likely to be great if the buyer refuses to accept and pay because of noncompliance with strict performance." Id. But see Marlowe v. Argentine Naval Com'n, 808 F.2d 120, 124 (D.C.Cir.1986) (buyer within its rights to cancel a contract for 6-day delay in delivery since "time is of the essence in contracts for the sale of goods") (citing Norrington v. Wright, 115 U.S. 188, 203, 6 S.Ct. 12, 14, 29 L.Ed. 366 (1885) ("In the contracts of merchants, time is of the essence.")

[9] After reviewing the case law in Connecticut, this court finds that in cases where the nonconformity involves a delay in the delivery of specially manufactured goods, the law in Connecticut requires substantial nonconformity for a buyer's rejection under 2-601, and precludes a dismissal for failure to state a claim on the grounds that the perfect tender rule, codified at 2-601, demands complete performance. Rather, Connecticut law requires a determination at trial as to whether a 16-day delay under these facts constituted a substantial nonconformity.

CONCLUSION

For the foregoing reasons, the defendant's rule 12(b)(6) motion to dismiss this one count complaint is denied.

SO ORDERED.

Questions:

1. Any difference if the computer system had been for delivery in California?

2. Why would anyone choose anything but perfect tender?

Uniform Commercial Code §§ 2-508, 2-606, 2-608

Wayne TUCKER and Elna Tucker v. AQUA YACHT HARBOR CORP.

N.D. Miss. (1990), 749 F. Supp. 142

SENTER, Chief Judge.

[1] This case involves allegations that all defendants breached express and implied warranties and violated the Magnuson-Moss Warranty Act in connection with plaintiffs' purchase of a boat. Plaintiffs also allege tortious conduct on the part of defendant Aluminum Cruisers. Plaintiffs seek to revoke their acceptance of the boat and to recover its purchase price and other damages, including punitive damages from Aluminum Cruisers. This cause is now before the court on a motion for summary judgment filed solely by defendant Chrysler.

FACTS

I.

[2] On June 18, 1988, the Tuckers purchased a boat from Aqua Yacht in Iuka, Mississippi, for $93,920.00, less a trade-in allowance on another boat and a cash downpayment. Aluminum Cruisers manufactured the boat itself; Chrysler manufactured and supplied the two marine engines which Aluminum Cruisers installed in the boat. From Chrysler, plaintiffs received a written warranty which provided that the engines would be free "from defects in material and workmanship under normal use and service" for one year or three hundred hours, whichever occurred first. During the warranty period, Chrysler expressly agreed to repair or replace at its factory or its authorized repair facility any part or parts of such products returned to it (with transportation charges pre-paid) which its examination shall disclose to its satisfaction to have been thus defective provided it receives written notice of any such claimed defect within thirty (30) days from the date of discovery.

[3] The Tuckers took delivery of the boat on the date of purchase and returned to their home in Alabama. For the next seven to eight weeks, they used the boat without complaint. Then, on August 6, 1988, plaintiffs took the boat on an extended trip to Chattanooga. During the return trip, plaintiffs noticed an oil leak in the starboard engine which Mr. Tucker promptly reported to Eddie Trimble at Aqua Yacht. Mr. Trimble recommended that plaintiffs bring the boat in for repairs, but they declined to do so because the oil was "just dripping" and was, at that time, nothing to be concerned about.

[4] On August 22, Aqua Yacht sent two of its employees to Huntsville to examine the boat. They were unable to fix the leak, and in September, plaintiffs took the boat to Aqua Yacht's Iuka facilities. At that time, Aqua Yacht "pulled" both engines and installed new oil seals; the engines were then tested and reinstalled.

[5] Plaintiffs experienced no further oil leakage problems until February, 1989, when the starboard engine again began leaking oil. On February 4, Mr. Tucker informed Mr. Trimble by letter of this problem, and on February 27, plaintiffs redelivered the boat to Aqua Yacht for additional repairs. At this time, plaintiffs lodged the following complaints about the starboard engine: (1) it leaked oil, (2) it did not run smoothly, and (3) it consumed 30 percent more gas than the port engine.

[6] Approximately a week later, plaintiffs retrieved the boat from Aqua Yacht. Unsatisfied with the performance of the engines, Mr. Tucker again wrote Mr. Trimble, charging that "the engine is still not operating properly and something must be done about it."

[7] On April 25, 1989, plaintiffs noticed a drop in the oil pressure on the port engine. Because it was knocking and would not idle down, Mr. Tucker cut off the engine and subsequently contacted Aqua Yacht. He was told to bring the boat in for repairs using only the starboard engine. On May 3, Mr. Tucker began the trip to Iuka, but, after he was approximately three miles from the dock, he heard a loud noise from the starboard engine and saw blue smoke; he returned to the dock.

[8] A few days later, Mr. Tucker wrote directly to Aluminum Cruisers, Aqua Yacht, and Chrysler regarding the problems with the engines. On May 10, 1989, a Mr. Humme from Chrysler contacted Mr. Tucker and assured him that the engines would be repaired or replaced, to which Mr. Tucker responded that replacement was the "only acceptable cure."

[9] Plaintiffs were instructed to deliver the boat to Wholesale Marine, Inc. in Huntsville. Wholesale was to remove the engines and determine the cause of the problems. Plaintiffs delivered the boat as directed, and, on May 24, Wholesale discovered that the pistons were the source of the engines' troubles. Within two days, Chrysler shipped two new engine blocks to Wholesale for installation in plaintiffs' boat. The engines arrived six days later. According to its records, Wholesale reassembled the non-defective parts on the new engine blocks on June 8, 9, 12, and 13; and on June 28, 1989, Wholesale completed the installation of the engines. However, in the interim June 15 to be exact plaintiffs commenced their suit before this court.

[10] Although plaintiffs had filed suit and revoked their acceptance, Mr. Tucker nevertheless carried the boat out overnight the day after the new engines were installed. On September 8, 1989, Mr. Tucker returned the boat to Aqua Yacht and left it, simply saying, "Here's the boat." He noted that the new engines "seemed to function properly"; yet, he also stated that they leaked oil during this trip, but that the oil leak was not severe enough to require him to put any oil in the engines.

II.

[11] In its answer to plaintiffs' complaint, Aqua Yacht cross-claimed against Chrysler and Aluminum Cruisers, contending that it was merely the retailer of the boat, and that if it were liable to the Tuckers on any theory of breach of warranty, it would be entitled to indemnity from Chrysler, as the manufacturer of the marine engines, and Aluminum Cruisers, as the manufacturer of the boat. Subsequently, Chrysler cross-claimed against Aqua Yacht, arguing that it might be entitled to indemnity from Aqua Yacht in light of the Tuckers' allegations that Aqua Yacht failed properly to repair the boat engines.

[12] Chrysler now seeks summary relief as to all claims asserted against it (1) in the amended complaint and (2) in Aqua Yacht's cross-claim. Chrysler argues that plaintiffs' claims for breach of express and implied warranties fail as a matter of law, and therefore, if it is absolved of such liability, then it is entitled to relief on Aqua Yacht's cross-claim for indemnity as well.

DISCUSSION

I.

[13] Chrysler contends that summary disposition of this case is appropriate not only because it honored each of its obligations under the express and implied warranties, but also because it was entitled to a reasonable opportunity to cure any defects in the marine engines in plaintiffs' boat. Chrysler relies on Fitzner Pontiac-Buick-Cadillac, Inc. v. Smith, 523 So.2d 324 (Miss. 1988) and 15 U.S.C. § 2310(e) for the proposition that a seller must be afforded a reasonable opportunity to cure any defects in goods accepted by a buyer.

[14] In response, plaintiffs do not refute Chrysler's argument that it was entitled to a reasonable opportunity to cure, nor could they do so under the applicable law. Rather, plaintiffs contend that the question of whether Chrysler was given a reasonable opportunity to cure is a question of fact which precludes the granting of summary judgment. Plaintiffs argue that Chrysler was afforded three opportunities to repair the boat and that "[a] jury could . . . reasonably find that Chrysler's authorized factory representative did not use reasonable means to timely repair and replace the engines."

[15] With these opposing positions drawn, the court is now in a position to address the only issue which is properly before the court, i.e., whether Chrysler has established as a matter of law that it was not given a reasonable opportunity to cure before plaintiffs revoked acceptance.

II.

[16] Plaintiffs have not sought to reject their acceptance of the boat under section 75-2-508 of the Mississippi Code but rather have attempted to revoke that acceptance under section 75-2-608. Noticeably absent from section 75-2-608 is any mention of a seller's right to cure following the buyer's revocation. Although a seller seems to have the right to cure only when the buyer rejects goods, the Mississippi Supreme Court, by analogy to 75-2-508 and as a matter of public policy, has determined that before a buyer may revoke acceptance under 75-2-608, the seller must be afforded a reasonable opportunity to cure, even though there may have been a breach of an implied warranty. Fitzner Pontiac-Buick-Cadillac, Inc. v. Smith, 523 So.2d 324, 325 (Miss.1988). In reaching this conclusion, the court stated:

We recognize that a strict reading of the cure provisions of Miss.Code Ann. § 75-2-508 (1972) reveals no explicit application to [a] revocation situation . . . . The law's policy of minimization of economic waste strongly supports recognition of a reasonable opportunity for cure. Though the express language of Section 75-2-508 does not apply here, cure is not excluded by Section 75-2-608.

Id. at 328 n. 1.

[17] Federal law also provides for a similar right of cure: an action for breach of express or implied warranty may not be brought under Magnuson-Moss "unless the person obligated under the warranty . . . is afforded a reasonable opportunity to cure such failure to comply." 15 U.S.C. § 2310(e). See Royal Lincoln-Mercury Sales, Inc. v. Wallace, 415 So.2d 1024, 1027 (Miss.1982) (alleged breach of warranty can form basis of action under applicable sections of UCC and under Magnuson-Moss).

[18] The "reasonable opportunity to cure" language which is employed by the Mississippi Supreme Court to determine compliance with the revocation statute does not appear in the statute itself. It is the phrase expressly utilized in Magnuson-Moss, but none of these sources offers any insight into its meaning. However, the terms "reasonable time," which is used in section 75-2-508, and "seasonably," which is used in both 75-2-508 and 75-2-608, are defined: "What is a reasonable time for taking any action depends on the nature, purpose and circumstances of such action," Miss.Code Ann. § 75-1-204(2); "[a]n action is taken `seasonably' when it is taken at or within . . . a reasonable time." Id. at § 75-1-204(3).

[19] Although the seller has a right to effect cure in the context of a buyer's revocation, that right is not boundless. Guerdon Industries, Inc. v. Gentry, 531 So.2d 1202, 1208 (Miss.1988). As oft quoted,

[T]he seller does not have an unlimited time for the performance of the obligation to replace and repair parts. The buyer . . . is not bound to permit the seller to tinker with the article indefinitely in the hope that it may ultimately be made to comply with the warranty.

Orange Motors of Coral Gables, Inc. v. Dade County Dairies, Inc., 258 So.2d 319, 320-21 (Fla.Dist.Ct.App.1972). See Rester v. Morrow, 491 So.2d 204 (Miss.1986) (quoting Orange Motors and stating, "There comes a time when enough is enough when a[] . . . purchaser . . . is entitled to say, `That's all,' and revoke, notwithstanding the seller's repeated good faith efforts [to repair]").

[20] Plaintiffs do not rely on Mississippi law for the proposition that the law of this state requires this case to be submitted to a jury. See Royal Lincoln, 415 So.2d at 1027 (in applying Magnuson-Moss, whether seller has been given a reasonable opportunity to cure is fact question which is "properly left for the jury's determination under correct instructions"). Instead, they present their argument in the familiar terms of Rule 56 of the Federal Rules of Civil Procedure. In any event, this court is governed by a federal standard, and if the evidence before the court is such that a reasonable jury could not return a verdict for the nonmovant, then summary judgment is appropriate. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). On summary judgment, the role of the court is to determine if there is a genuine issue for trial, i.e., whether "there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson, 477 U.S. at 249, 106 S.Ct. at 2510.

[21] Essentially, the basic facts are undisputed in this case: (1) on two separate occasions, Aqua Yacht tried to repair the starboard engine; (2) when both engines failed, Chrysler offered to replace the engines as Mr. Tucker requested; (3) before the engines could be repaired by Wholesale Marine, plaintiffs instituted suit. Plaintiffs' complaint against Chrysler now seems to be not that it did not fix the engines but that it did not "timely" repair them.

[22] Yet, according to Mr. Tucker's own deposition testimony, there were two specific reasons why Wholesale was delayed in making the necessary repairs to the engines in question. First, Mr. Tucker stated that the water in the Huntsville area rose during June to the point that Wholesale was unable to reach plaintiffs' boat to replace the engines. In fact, for about two to three weeks, the water was so high that it was impossible for Wholesale even to travel down the road to get to the boat. Second, Mr. Tucker charged that certain necessary parts—the gaskets—were not sent with the new engine blocks, thus leading to further delay.

[23] In response to the motion for summary judgment, plaintiffs submit Mr. Tucker's affidavit wherein he attempts to explain how Chrysler and Wholesale Marine could have overcome these two obstacles and proceeded with the repair of his boat. Initially, Mr. Tucker proposes various ways in which Wholesale Marine could have surmounted the high water problem since "[i]t is reasonably foreseeable in the Huntsville . . . area that the Tennessee Tombigbee Waterway will experience a water level fluctuation of 20 feet during the spring months." For example, Mr. Tucker suggests that Wholesale could have "trailered" the boat to its shop and replaced the engines there, or it could have replaced the engines when the water receded in late May and early June. Next, he charges that Chrysler and Wholesale Marine did not take "any steps whatsoever in expediting receipt of the gaskets." He maintains that they could have easily procured the missing gaskets since "[t]he Chrysler Engines in this boat are quite common and the oil gaskets necessary to reassemble an engine are readily available and can be shipped anywhere across the continental United States overnight."

[24] Although Mr. Tucker's theories are not disingenuous, his affidavit fails to meet the basic requirement of Rule 56(e), i.e., that the affidavit be made on personal knowledge. Fed.R.Civ.P. 56(e). Mr. Tucker offers no basis, except hindsight, for his opinions regarding how Chrysler and Wholesale could have more quickly repaired the engines. He does not, for example, indicate that he made these suggestions to the appropriate persons at the time the repairs were taking place. Further, these theories were not divulged in his lengthy deposition. Consequently, the court finds that Chrysler's argument that the affidavit "is insufficient to create any issue of fact on this matter" is well taken.

[25] The phrase "reasonable opportunity to cure" is necessarily a flexible one, and its meaning is dependent on the facts and circumstances of each case. Even when "all justifiable inferences" are drawn in favor of the plaintiffs as the nonmoving party, Anderson, 477 U.S. at 255, 106 S.Ct. at 2513, the court finds that only one conclusion can be reached: Chrysler was not afforded a reasonable opportunity to cure before plaintiffs revoked acceptance. Once Wholesale Marine determined the cause of the problems with the subject engines, Chrysler shipped two new replacements. Less than twenty business days then elapsed between the time Wholesale received the new engines and the final repairs were performed; less than ten business days elapsed before plaintiffs filed suit. No reasonable juror could conclude, under these facts and circumstances, that filing suit while repairs were ongoing afforded Chrysler a reasonable opportunity to cure.

[26] This is not a case in which the seller unsuccessfully attempted to repair the goods thirty times in a one-year period, Tiger Motor Co. v. McMurtry, 284 Ala. 283, 224 So.2d 638 (1969), or installed three successive engines in a span of ten months, Volkswagen of America, Inc. v. Novak, 418 So.2d 801 (Miss.1982). Rather, this is a case in which the seller was brought into court while in the process of making repairs, which by Mr. Tucker's own testimony, resulted in the proper functioning of the engines.

[27] Having determined that there exists no genuine issue of fact and that defendant Chrysler is entitled to judgment as a matter of law, the court finds the motion for summary judgment on both the complaint and the cross-claim is well taken and is granted.

Questions:

1. What problems do you see with the court’s analysis of the affidavit?

2. Why did Tucker really file suit on June 15th?

3. What policy supports the court’s rule?

4. What purpose does a warranty have to Tucker? To Chrysler?

Uniform Commercial Code § 2-612 & comments

Daniel HUBBARD v. UTZ QUALITY FOODS, INC.

W.D.N.Y. (1995), 903 F. Supp. 444

LARIMER, District Judge.

[1] This is a breach-of-contract action brought by Daniel Hubbard ("Hubbard") against UTZ Quality Foods, Inc. ("UTZ"). Hubbard is a Bath, New York potato farmer and UTZ is a Pennsylvania corporation that purchases potatoes for processing into potato chips.

[2] On April 20, 1992, Hubbard executed a written contract to supply UTZ with a quantity of potatoes. The contract, a two-page, form-contract prepared by UTZ, required that the potatoes comply with certain quality standards. Hubbard claims that he was ready and able to deliver the required shipments of potatoes but that UTZ wrongfully and without basis rejected his potatoes. Hubbard contends that the sample potatoes provided to UTZ complied with all the quality requirements and, therefore, he complied with all terms of the contract. Hubbard claims that UTZ breached the contract and claims damages for the full contract price, $68,750.

[3] UTZ denies Hubbard's allegations. UTZ contends that the potatoes supplied by Hubbard did not meet the quality requirements of the contract and, therefore, they were properly rejected. UTZ filed a counterclaim against Hubbard contending that he breached the contract by failing to provide the potatoes required by contract.

[4] The case was tried to the Court for 5 days. The Court took testimony from 13 witnesses and received numerous documents and deposition testimony in evidence. This decision constitutes my findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52.

FACTS

APRIL 20, 1992 POTATO CONTRACT.

[5] On April 20, 1992, Hubbard signed the two-page contract prepared by UTZ for farmers who produced potatoes for UTZ. UTZ is a large food processor in Hanover, Pennsylvania whose principal products are potato chips and other snack foods. The contract required Hubbard, beginning "approximately September 5, 1992" to ship 11,000 hundred-weight of Norwis (657) new chipping potatoes. Hubbard was to ship 2,000 to 4,000 hundred-weight per week with schedules to be arranged with UTZ. The price was $6.25 per hundred-weight, F.O.B. New York.

[6] The contract provided that the potatoes must meet certain quality standards. The buyer, UTZ, was entitled to reject the potatoes if they failed to do so. The potatoes had to meet United States Department of Agriculture ("USDA") standards for No. 1 white chipping potatoes. They had to have a minimum size and be free from bruising, rotting and odors which made them inappropriate for use in the processing of potato chips.

[7] The principal standard at issue in this lawsuit is the color standard. UTZ did not want dark potato chips but white or light ones and, therefore, the potatoes had to be the whitest or lightest possible color. The specific paragraph in the contract relating to color reads as follows: "Color" shall be at least # 1 or # 2 on the 1978 Snack Food Association "Fry Color Chart." The Fry Color Chart is a color chart prepared by the Potato Chip/Snack Food Association which has five color designations. Color designation No. 1 is the best or lightest and the chart contains a visual depiction of potato chips with that color. The last color designation, No. 5, is the darkest reading. The contract required that the chips produced from Hubbard's potatoes must at least meet the No. 2 color designation.

CLAIMS OF THE PARTIES.

[8] In a nutshell, this lawsuit revolves around the color of the potato chips processed from potatoes submitted by Hubbard to UTZ. UTZ rejected all of the submitted potatoes claiming that they did not meet the required "color" standard. UTZ claims that the samples were too dark and did not meet UTZ' standards for producing white or light chips. Hubbard, on the other hand, contends that UTZ was arbitrary in its refusal to accept his potatoes and that his potatoes substantially complied with the color requirement. Hubbard contends in his pleadings that UTZ' rejection was motivated by concerns about price, not by quality. Hubbard alleges that after rejecting his potatoes, UTZ obtained similar potatoes from other sources at prices below his contract price.

[9] The ultimate factual issue in this case is whether the potato chips made from Hubbard's potatoes failed to meet the color specifications of the contract. In other words, was UTZ' rejection of the installments proper.

[10] In large part, this case turns on matters of law relating to the rights of a buyer, such as UTZ, to reject a seller's goods that are deemed to be non-conforming. The facts and the rights and obligations of the parties must be analyzed pursuant to the New York Uniform Commercial Code ("UCC").

[11] Before discussing the principal issue, whether UTZ wrongfully rejected Hubbard's potatoes, I will deal with several other issues raised by the parties at trial. Some are material, some are not. Based on the evidence and the reasonable inferences from that evidence, I find the following facts.

REJECTION OF HUBBARD'S POTATOES.

[12] Hubbard contends that he sent several sample loads of potatoes to UTZ for inspection. On or about September 22, 1992, he sent 1,000 pounds of potatoes from one of his fields to UTZ for testing. These were rejected. Hubbard thought that they looked good when he harvested them but UTZ reported that when they were processed the color was poor. Hubbard discussed this rejection with Richard P. Smith, UTZ' Potato Manager, who told Hubbard to keep sending samples.

[13] Thereafter, on October 1, 1992, Hubbard sent an entire truck load of potatoes to UTZ for processing under the contract. This installment consisted of 425-450 one-hundred-pound bags. Hubbard did not accompany this shipment to Pennsylvania but he was advised by telephone that none of the potatoes would be accepted due to their poor color.

[14] Hubbard requested that UTZ put the reasons for this rejection in writing and Smith did so in a letter dated October 1, 1992 (Ex. 404).

[15] Smith stated in that letter that the load had been rejected because the color (a No. 3 color designation) was unacceptable under the contract. Smith attached a photograph of the potato chips which had been processed and he returned a sample bag of those processed chips.

[16] Smith told Hubbard that he did not intend to cancel the entire contract but told [Hubbard] that more tests should be run on Hubbard's other fields to see if the contract could be filled with crop from those fields.

[17] About a week later, on October 7, Hubbard and his brother prepared a 1,000 pound load of potatoes and drove it to UTZ' facility in Pennsylvania to see if the potatoes would pass muster. Hubbard watched the chips go through UTZ' lines, and he made a video tape of some of the process. On that tape, Hubbard is heard to say that when he saw the chips being processed, they looked "better" than he thought they would. Once again, the chips were rejected, this time by an UTZ employee Kim R. DeGroft. DeGroft had been employed by UTZ for 16 years and in 1991 he was a "lead" person or supervisor in the Potato Department. He recalled that when these chips were processed, Hubbard commented that they should have been sold to Wise, a company that routinely accepted darker chips for processing. DeGroft testified that he had been inspecting potatoes for 5-6 years, and he believed Hubbard's lot was in the No. 3 color range.

[18] Hubbard testified that he became quite upset at this rejection, because he believed that the chips looked good enough to meet the No. 1 or No. 2 color designation. He insisted that UTZ perform an Agtron instrument reading on the chips. Although he was not allowed to witness the test, it was reported to Hubbard that the Agtron reading was 54.2, which was in the No. 3 color category, but just below the 55 designation which would have qualified as a No. 2 designation.

[19] After Hubbard returned from Pennsylvania, on October 8, 1992, he had a telephone conversation with Smith during which Smith told him that based on the samples, it did not appear that Hubbard's potatoes "would work" because they did not meet the contract specifications. Smith, however, told Hubbard that he could send additional samples and shipments to Pennsylvania for inspection. Smith, however, refused to arrange for the transportation but directed Hubbard to do so. Hubbard refused saying that was not the "custom" and that in the past UTZ had always sent trucks to the fields for delivery of the product. There was apparently some dispute between Smith and Hubbard as to whether Hubbard was in default on charges to certain trucking companies for other, unrelated shipments.

[20] After October 7, Hubbard never delivered, or caused to be delivered, any other shipments of potatoes for UTZ pursuant to the contract.

[21] After allegedly conversing with certain government officials, Hubbard advised UTZ by telegram that he intended to sell his potatoes on the open market and charge UTZ for the difference in price. * * * *

INCLEMENT WEATHER.

[22] * * * * I find as fact that the entire potato industry suffered that season because of the weather and that other farmers had their potatoes rejected by UTZ for the same reasons that Hubbard's potatoes were rejected.

VISUAL INSPECTION/AGTRON READING.

[23] UTZ employees Smith and DeGroft relied on their visual inspection of the processed potato chips when they rejected them. Hubbard contends that this rejection was arbitrary and unreasonable. He advances two interrelated arguments on this point. First, he contends that he took samples of the rejected chips and had them analyzed for color at two separate locations. Both tests determined that the samples for the most part exceeded the No. 3 color designation on the Fry Color Chart. This testing was done not by visual inspection but by use of an Agtron instrument. He claims that these tests demonstrate that his potatoes in fact met the contract specifications for color.

[24] Second, Hubbard suggests that UTZ' rejection was wrongful because it used visual inspection and not the Agtron instrument to determine color.

[25] An Agtron machine is a photo electric instrument that measures reflectants of light on a surface. The higher the Agtron reading, the greater the reflectants and, therefore, the lighter or brighter the item that is being measured. The Fry Color Chart contains comparable Agtron readings for each of the five color designations. For example, color designation No. 1 on the Fry Color Chart equates to an Agtron reading of 65 or higher; a color designation No. 2 equates to an Agtron reading of 55 to 64. * * * *

[26] Several points must be made concerning the Agtron testing issue. First of all, the contract between the parties does not specify how the chips are to be tested, visually or by machine. The contract simply requires that the chips must exceed the No. 3 color designation.

[27] I recognize that the contract was a "form" contract prepared by UTZ but, nevertheless, there was no evidence to suggest that either Hubbard or UTZ were unable to require that the color test be done in a certain fashion. The manner of testing was not specified. * * * *

[28] [Even though Hubbard had his potatoes tested on the Agtron machine, the readings experts obtained using those machines on Hubbard’s potatoes marked some of the potatoes No. 3s. Moreover, the machine would sometimes give different readings on the same set of potatoes.] These reports show that, assuming that the same sample was tested by Gould and by Cornell's experts, there is variation even when using the Agtron device. And, as mentioned, at least some of the Agtron readings support UTZ' decision to reject the potatoes.

[29] But aside from these internal inconsistencies, I am concerned about the reliability of the samples used in the testing. There was very little control over the samples from the time they were turned back to Hubbard until they were tested, several months later. Portions of the samples were consumed by Hubbard and his family and the rest were stored in Hubbard's parents home but with very little security or supervision. There was confusion, even at trial, as to how the samples were preserved, maintained and delivered for later testing.

[30] Therefore, I am not able to place much weight on either of these tests * * * . * * * *

[31] I find as a fact that under all the circumstances that existed in the fall of 1992, it was reasonable for UTZ to rely on visual inspection when it determined whether Hubbard's installments complied with the contract.

[32] As mentioned, the contract did not require Agtron readings. Therefore, the contract did not prevent UTZ from using visual inspections. Second, the testimony was uncontradicted that those in the industry consistently used visual inspections when grading potatoes under contracts of this nature. Even at the trial, almost three years after the events at issue, visual inspection is still the norm. Hubbard's expert, Wilbur Gould, testified that in his view the Agtron machine was the preferred method for testing, but he conceded that visual inspection is used in the industry. Some processors did not wish to incur the $20,000 cost of obtaining an Agtron machine and so visual inspections persist.

[33] Furthermore, both Smith, UTZ' Potato Manager, and Jack Corriere, UTZ' General Manager, testified that the first Agtron machine obtained by UTZ was in October 1992, and that it was not properly calibrated and used until late October 1992, well after Hubbard's potatoes had been rejected. Both Smith and Corriere testified that visual inspection of chips was the standard in the industry at the time Hubbard presented his potatoes for inspection. Hubbard presented no evidence to contradict that testimony. Smith testified that he had been potato manager for UTZ for over 30 years and during that time he relied on visual inspection and his expertise to determine whether to accept or reject loads.

I credit the testimony, and I find as a fact, that in September and October 1992, visual inspection of potatoes was the standard used in the industry. I also find that plaintiff understood that his crop would be judged by the visual observations of UTZ' inspectors at the plant, since that was the standard procedure that had been used prior to 1992 when Hubbard and his father had sent potatoes to UTZ for processing.

MOTIVATION OF UTZ.

[34] Hubbard has also failed to convince me, by a preponderance of the evidence, that UTZ benefited by its rejection of Hubbard's potatoes. Smith and Corriere testified that they had suffered significant losses in the past when their potatoes had turned bad in storage. In 1992, UTZ took steps to see that such a disaster did not reoccur and so they were careful in their decisions to accept or reject potatoes.

[35] Furthermore, there is no compelling evidence that UTZ purchased potatoes at lower market prices after it rejected Hubbard's crop. On the contrary, the evidence (Ex. 39) suggests that the market price during late 1992 and early 1993 was equal to or higher than Hubbard's contract price. Hubbard has failed to convince me that UTZ' motivation for rejecting his potatoes was to obtain similar potatoes but at a reduced cost. Therefore, I find as a fact, that UTZ' reason and motivation for rejection was its belief that the potatoes failed to meet the quality standards in the contract.

DISCUSSION

UTZ' REJECTION OF HUBBARD'S POTATOES.

[36] The primary legal issue in this matter is whether UTZ' rejection of Hubbard's potatoes was proper or wrongful. It is clear that the transaction at issue is a sale of goods governed by the New York Uniform Commercial Code ("UCC") Article 2. Indeed, the parties have stipulated that both Hubbard and UTZ are "merchants" as defined by UCC § 2-104(3).

[37] It is also clear that the contract between the parties is an "installment contract" as that term is defined in UCC § 2-612(1): it contemplates "delivery of goods in separate lots to be separately accepted." That the contract is an installment contract does not appear to have been disputed by the parties. However, it is also evident as a matter of law from terms found throughout the contract.

[38] For instance, in paragraph 1, the contract calls for the sale of "11,000 hundred weight of new chipping potatoes . . ." to be shipped in quantities of "2,000 to 4,000 hundred weight per week" starting around September 5, 1992. This language clearly contemplates between 3 and 6 total shipments.

[39] Additionally, paragraphs 3(a) and 3(b) specifically note that standards must be met by "all shipments," which suggests that more than one shipment is contemplated.

[40] Finally, paragraph 4, concerning payment, states that "[b]uyer agrees to pay for all potatoes accepted within 30 days of acceptance. . . ." This language suggests paying per shipment, since each shipment is separately subject to inspection (and acceptance), as indicated by paragraph 3. Clearly this is an "installment" contract as defined in UCC § 2-612(1).

[41] As an installment contract, the question of whether UTZ' rejection was wrongful or proper is governed by UCC § 2-612(2) and (3). UCC § 2-612(2) states that a "buyer may reject any installment which is nonconforming if the non-conformity substantially impairs the value of that installment and cannot be cured. . . ." UCC § 2-612(3) states that "whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole."

[42] The purpose of this "substantial impairment" requirement is "to preclude a party from canceling a contract for trivial defects." Emanuel Law Outlines, Inc. v. Multi-State Legal Studies, 1995 WL 519999, *7, No. 93 Civ. 7212 (S.D.N.Y.1995). In this case, UTZ rejected Hubbard's potatoes based upon their failure to satisfy the color standard set forth in paragraph 3(c) of the contract. Thus, the issue for me to decide is whether the failure of Hubbard's potatoes to meet the required # 1 or # 2 color minimum constitutes a "substantial impairment" of the installments.2

[43] Whether goods conform to contract terms is a question of fact. See Emanuel Law Outlines, Inc., supra, at *6 (citing Interoil v. Apex Oil Co., 604 F. Supp. 978, 981 (S.D.N.Y.1985)); see also, Processed Minerals v. AMF Tuboscope, 123 A.D.2d 511, 507 N.Y.S.2d 102 (4th Dep't 1986). Moreover, in determining whether goods conform to contract terms, a buyer is bound by the "good faith" requirements set forth in N.Y.U.C.C. § 1-203 — "Every . . . duty within this Act imposes an obligation of good faith in its enforcement or performance." Thus, UTZ' determination that Hubbard's potatoes failed to satisfy the contract terms must have been fairly reached.

[44] The UTZ-Hubbard contract contains many specific requirements regarding the quality of the potatoes. In paragraph 1 the contract states that "only specified varieties as stated in contract will be accepted. . . ." Paragraph 3(a) states that

All shipments shall meet the United States Standards For Grades of Potatoes for Chipping, USDA, January 1978 . . ., in addition to other provisions enumerated in this `Section 3'. Loads that do not meet these standards may be subject to rejection . . . . (emphasis added)

Paragraph 3(b) sets forth specific size requirements (85% or better . . . graded to a 1 7/8 ″ minimum size); paragraph 3(c) sets forth specific gravity requirements (at least 1.070 in a standard eight pound test); paragraph 3(d) contains the color requirements at issue in this case; and paragraph 3(f) sets forth a number of other defects or incidents of improper treatment or handling of the potatoes that provide UTZ with the right to reject the potatoes.

[45] Clearly, the quality standards are of great importance to UTZ. They are the most detailed aspect of the contract — far more so than timing or even quantity specifications.

[46] In a contract of this type, where the quality standards are set forth with great specificity, the failure to satisfy one of the specifically enumerated standards is a "substantial impairment." UTZ obviously cares the most about the specific quality specifications, as is evident from the numerous references throughout the contract.

[47] Additionally, I find that UTZ' determination that the potatoes did not meet the required # 2 color standard was made in good faith, as required by UCC § 1-203. As noted above, the manner of visual testing utilized by UTZ was reasonable and customary. Further, Smith and DeGroft, the UTZ testers who rejected Hubbard's potatoes, provided credible testimony about their respective experience (Smith — 30 years, DeGroft — 5-6 years) and method of making such determinations. Accordingly, I find that UTZ fairly and in good faith determined that Hubbard's potatoes were nonconforming.

[48] Thus, I find that Hubbard's failure to meet the proper color standard amounted to a "substantial impairment" of the installments (§ 2-612(2)), substantially impairing the whole contract (§ 2-612(3)). Accordingly, I find that UTZ' rejection of Hubbard's potatoes was proper.61 * * * *

CONCLUSION

[49] I find that plaintiff has failed to establish the claims set forth in his complaint by a preponderance of the evidence and, therefore, I find in favor of defendant on plaintiff's claims. Plaintiff's complaint is dismissed and judgment shall be entered accordingly in favor of defendant.

Defendant has failed to prove its counterclaims against plaintiff, and they are all dismissed.

IT IS SO ORDERED.

Questions:

1. What is the purpose of the “substantial non-conformity” requirement?

2. Is that perfect tender?

3. Are the comments to 2-612 any help in understanding what is going on here?

4. Compare the definition of installment contract in section 2-612 with the test for divisibility in Lowy. Certainly not all divisible contracts are installment contracts, but most installment contracts are divisible.

  • 1

    A "promissory note" is: "An unconditional written promise, signed by the maker, to pay absolutely and in any event a certain sum of money either to, or to the order of, the bearer or a designated person." BLACK'S LAW DICTIONARY 1226 (10th ed. 2014).

  • 2 See TEX. BUS. & COM. CODE § 3.104(a)-(d).
  • 3 Thanks to Michael Rothenberg, STCLH Class of ‘02, for the translation and explanation.
  • 4 Although this offer of proof might ordinarily be regarded as too general to provide a ground for appeal (Evid. Code, § 354, subd. (a); Beneficial etc. Ins. Co. v. Kurt Hitke & Co. (1956) 46 Cal.2d 517, 522; Stickel v. San Diego Elec. Ry. Co. (1948) 32 Cal.2d 157, 162-164; Douillard v. Woodd (1942) 20 Cal.2d 665, 670), since the court repeatedly ruled that it would not admit extrinsic evidence to interpret the contract and sustained objections to all questions seeking to elicit such evidence, no formal offer of proof was required. (Evid. Code, § 354, subd. (b); Beneficial etc. Ins. Co. v. Kurt Hitke & Co., supra, 46 Cal.2d 517, 522; Estate of Kearns (1950) 36 Cal.2d 531, 537.)
  • 5 E.g., "The elaborate system of taboo and verbal prohibitions in primitive groups; the ancient Egyptian myth of Khern, the apotheosis of the words, and of Thoth, the Scribe of Truth, the Giver of Words and Script, the Master of Incantations; the avoidance of the name of God in Brahmanism, Judaism and Islam; totemistic and protective names in mediaeval Turkish and Finno-Ugrian languages; the misplaced verbal scruples of the 'Precieuses'; the Swedish peasant custom of curing sick cattle smitten by witchcraft, by making them swallow a page torn out of the psalter and put in dough . . . .' from Ullman, The Principles of Semantics (1963 ed.) 43. (See also Ogden and Richards, The Meaning of Meaning (rev. ed. 1956) pp. 24- 47.)
  • 6 " 'Rerum enim vocabula immutabilia sunt, homines mutabilia,' " (Words are unchangeable, men changeable) from Dig. XXXIII, 10, 7, § 2, de sup. leg. as quoted in 9 Wigmore on Evidence, op. cit. supra, § 2461, p. 187.
  • 7 "A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent." (Hotchkiss v. National City Bank of New York (S.D.N.Y. 1911) 200 F. 287, 293. See also C. H. Pope & Co. v. Bibb Mfg. Co. (2d Cir. 1923) 290 F. 586, 587; see 4 Williston on Contracts (3d ed. 1961) § 612, pp. 577-578, § 613, p. 583.)
  • 8 "A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful." (Civ. Code, § 1636; see also Code Civ. Proc., § 1859; Universal Sales Corp. v. California Press Mfg. Co. (1942) 20 Cal.2d 751, 760; Lemm v. Stillwater Land & Cattle Co. (1933) 217 Cal. 474, 480.)
  • 9 Extrinsic evidence of trade usage or custom has been admitted to show that the term "United Kingdom" in a motion picture distribution contract included Ireland (Ermolieff v. R.K.O. Radio Pictures, Inc. (1942) 19 Cal.2d 543, 549-552); that the word "ton" in a lease meant a long ton or 2,240 pounds and not the statutory ton of 2,000 pounds (Higgins v. California Petroleum etc. Co. (1898) 120 Cal. 629, 630-632); that the word "stubble" in a lease included not only stumps left in the ground but everything "left on the ground after the harvest time" (Callahan v. Stanley (1881) 57 Cal. 476, 477-479); that the term "north" in a contract dividing mining claims indicated a boundary line running along the "magnetic and not the true meridian" (Jenny Lind Co. v. Bower (1858) 11 Cal. 194, 197-199) and that a form contract for purchase and sale was actually an agency contract. (Body-Steffner Co. v. Flotill Products (1944) 63 Cal.App.2d 555, 558-562). See also Code Civ. Proc., § 1861; Annot., 89 A.L.R. 1228; Note (1942) 30 Cal. L. Rev. 679.)
  • 10 When objection is made to any particular item of evidence offered to prove the intention of the parties, the trial court may not yet be in a position to determine whether in the light of all of the offered evidence, the item objected to will turn out to be admissible as tending to prove a meaning of which the language of the instrument is reasonably susceptible or inadmissible as tending to prove a meaning of which the language is not reasonably susceptible. In such case the court may admit the evidence conditionally by either reserving its ruling on the objection or by admitting the evidence subject to a motion to strike. (See Evid. Code, § 403.)
  • 11 Extrinsic evidence has often been admitted in such cases on the stated ground that the contract was ambiguous (e.g., Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 761). This statement of the rule is harmless if it is kept in mind that the ambiguity may be exposed by extrinsic evidence that reveals more than one possible meaning.
  • 12

    The court's exclusion of extrinsic evidence in this case would be error even under a rule that excluded such evidence when the instrument appeared to the court to be clear and unambiguous on its face. The controversy centers on the meaning of the word "indemnify" and the phrase "all loss, damage, expense and liability."  The trial court's recognition of the language as typical of a third party indemnity clause and the double sense in which the word "indemnify" is used in statutes and defined in dictionaries demonstrate the existence of an ambiguity. (Compare Civ. Code, § 2772, "Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person," with Civ. Code, § 2527, "Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability, arising from an unknown or contingent event."  Black's Law Dictionary (4th ed. 1951) defines "indemnity" as "A collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or of some third person." Stroud's Judicial Dictionary (2d ed. 1903) defines it as a "Contract . . . to indemnify against a liability . . . ."  One of the definitions given to "indemnify" by Webster's Third New International Dict. (1961 ed.) is "to exempt from incurred liabilities.")

    Plaintiff's assertion that the use of the word "all" to modify "loss, damage, expense and liability" dictates an all inclusive interpretation is not persuasive. If the word "indemnify" encompasses only third-party claims, the word "all" simply refers to all such claims. The use of the words "loss," "damage," and "expense" in addition to the word "liability" is likewise inconclusive. These words do not imply an agreement to reimburse for injury to an indemnitee's property since they are commonly inserted in third-party indemnity clauses, to enable an indemnitee who settles a claim to recover from his indemnitor without proving his liability. (Carpenter Paper Co. v. Kellogg (1952) 114 Cal.App.2d 640, 651. Civ. Code, § 2778, provides: "1. Upon an indemnity against liability . . . the person indemnified is entitled to recover upon becoming liable; 2. Upon an indemnity against claims, or demands, or damages, or costs . . . the person indemnified is not entitled to recover without payment thereof; . . .")

    The provision that defendant perform the work "at his own risk and expense" and the provisions relating to insurance are equally inconclusive. By agreeing to work at its own risk defendant may have released plaintiff from liability for any injuries to defendant's property arising out of the contract's performance, but this provision did not necessarily make defendant an insurer against injuries to plaintiff's property. Defendant's agreement to procure liability insurance to cover damages to plaintiff's property does not indicate whether the insurance was to cover all injuries or only injuries caused by defendant's negligence.

  • 13 Prior to April, 1972, companies owned by AMF manufactured and marketed two lines of snowmobiles. The AMF Western Tool Division manufactured and marketed AMF Ski-Daddler snowmobiles. Harley-Davidson Motor Company, Inc., manufactured and marketed Harley-Davidson snowmobiles. Ralph's sold only Ski-Daddlers.
  • 14

    * * * * Under Iowa law, a contractual term is implied in law only when such implication is a legal necessity to carry out the contract and when it can be assumed that it would have been included in the agreement if the parties had considered it. Fashion Fabrics of Iowa, Inc. v. Retail Investors Corp., 266 N.W.2d 22, 28 (Iowa 1978). The district court, applying this test, held that no exclusivity term should be implied in law. We find no error in this action.

  • 15 This testimony has aspects of both course of performance and usage of trade. Course of performance evidence is admissible to establish the meaning the parties attached to contractual terms, as evidenced by their actions in carrying out the contract. Iowa Code § 554.2208 and Uniform Commercial Code Comment 1; White & Summers, Uniform Commercial Code, § 2-10 at 87 (2d ed. 1980). Usage of trade evidence is admissible to furnish background and give meaning to the contractual terms used by the parties as evidenced by past use of the language in the trade generally. Iowa Code § 554.1205 and Uniform Commercial Code Comment 4; Kirst, Usage of Trade and Course of Dealing: Subversion of the UCC Theory, 1977 U.Ill.L.F. 811, 814-840 (1977).
  • 16

    For example, Charles Merical, a Ski-Daddler sales representative during the period in question here, stated during his deposition:

    Q. Now, it does state in your letter, and I am now reading from it, "Your (Ralph's) territory will consist of the complete State of Iowa, Kansas, Missouri and the counties in Nebraska east of a line and including: Knox, Antelope, Boone, Nance, Merrick, Hamilton, Clay and Nuckolls."

    Now, do you know how that territory was determined, how it was awarded, or whatever the phrase would be?

    A. Well, I think basically areas that the distributor covered in his other products.

    Q. And, also, that would not be inconsistent with territory previously awarded to someone else?

    A. Yes.

    Q. Would it be a fair statement that you typically did not have two distributors covering the same territory?

    A. Yes.

    Q. Would it also be a fair statement that you typically did not overlap territories either?

    A. That's correct.

    Q. From the company's point of view, what did this territory designation mean? As you understood the company designation, were you to abide by this in some manner?

    A. If it was in writing that the distributor was given these territories, then you know, I probably generally would not try to overlap them at all.

    Q. And you would not also set up another distributor in that same territory for that line of products?

    A. Generally not.

    Joseph Puglisi, currently an AMF vice president and, at the time in controversy here, director of marketing for Ski-Daddler snowmobiles, testified during his deposition:

    Q. Without terminating a distributorship agreement, was it AMF's understanding, your understanding, that you could not establish another dealer or sell yourself in that territory?

    A. I think it would have to be classified as an exception. No. The understanding would be that that distributor had a responsibility in that territory.

    Q. Would that distributor have been entitled to believe that AMF would not appoint another distributor in that territory?

    A. I think that's correct.

    Q. Would he be entitled to believe that AMF would not become his competitor in that territory and start selling direct or creating their own dealers in that territory?

    A. I think that would be an interpretation, yes.

    Q. Was that your understanding?

    A. Yes.

    For purposes of a summary judgment motion, this testimony by Puglisi is sufficient to support a finding that the franchise agreements may have included an exclusivity term even though he also stated elsewhere in his deposition that the agreements did not contain such a provision.

  • 17 These cables were in German; "chicken", "broilers" and, on some occasions, "fowl," were in English.
  • 18 The last square would contain 263, or 9,223,372,036,854,775,808 grains of rice. At more than 29,000 grains per pound (see http://www.producersrice.com/rice/facts.html), this figure represents nearly 213 times the amount of rice produced globally in 2009. See Food and Agric. Org. of the U.N.,Rice Market Monitor, December 2009, http://www.fao.org/es/ESC/en/15/70/highlight_71.html.
  • 19 Facts here given by the casebook author.
  • 20 Does the clause require EA x 1.05 = Next Year’s EA, or EA + (EA • 1.05) = Next Year’s EA?
  • 21

    Despite making a passing reference to an “unconscionable 105%” annual increase in the Expense Assumption (Compl. 2), Great-West has not squarely alleged that it can avoid the contract as written because it is unconscionable—perhaps because it might be difficult to prevail under that theory. A contract is unconscionable only if it is characterized by both “an absence of meaningful choice and contract terms unreasonably favorable to one of the parties.” Tulowitzki v. Atl. Richfield Co., 396 A.2d 956, 960 (Del. 1978). Great-West and the Defendants are all sophisticated parties. Great-West was concerned about the language of §12.2(c) before it acquired Putnam and, had it been sufficiently alarmed, could have chosen to walk away from its purchase of Putnam. See Progressive Int’l Corp. v. E.I. Du Pont de Nemours & Co., 2002 WL 1558382, at *8 (Del. Ch. July 9, 2002) (holding that strict, unilaterally-imposed confidentiality requirements that hampered Progressive’s due diligence efforts did not deprive Progressive of a meaningful choice because it always retained the ability to walk away from the transaction).

  • 22 As framed by the plaintiff, the parol evidence claim challenges: (1) the court’s conclusion that the parties’ contract did not allow the plaintiff to recover a commission in the event that the subject property was leased, and (2) the court’s finding that there was no understanding between the parties that the plaintiff would be entitled to a commission for leasing the premises. Because we conclude that the court’s reliance on parol evidence was improper, we need not reach the issue of whether the finding derived from that evidence, that there was no meeting of the minds between the parties as to leasing of the subject property, was clearly erroneous.
  • 23 K.F. Associates, LLP, a limited liability partnership formed on October 22, 1996, is the successor in interest to K.F. Associates, a general partnership formed on January 25, 1983. Schwartz also was the managing partner of the general partnership. Any references to K.F. Associates regarding transactions that occurred prior to October 22, 1996, are to the general partnership, rather than to the limited liability partnership.
  • 24 That brokerage service was provided pursuant to a contract captioned ‘‘Exclusive Right To Lease Agreement.’’
  • 25

    In looking to the circumstances surrounding the making of the agreement, the court relied on Lar-Rob Bus Corp. v. Fairfield, 170 Conn. 397, 407–408, 365 A.2d 1086 (1976). Lar-Rob Bus Corp. did not involve a situation in which the trial court relied on parol evidence to contradict the express terms of a written contract. Rather, the court relied on such evidence only to resolve an ambiguity in the contract’s language. * * * *

  • 26 Although the defendants pleaded a counterclaim against the plaintiff, alleging a violation of the Connecticut Unfair Trade Practices Act, General Statutes § 42-110a et seq., the court found that the defendants had failed to brief that claim and deemed it to be abandoned.
  • 27 Triple-T holds that a custom or usage of the trade and/or a course of dealing are in essence covered by the essential requirement of "additional terms" — that it be consistent. The practical effect is to restrict a "course of dealing" to being an interpretive device, unless § 2-202 (b) is resorted to.
  • 28

    For an extensive list of jurisdictions recognizing the general obligation of good faith, see the appendix to Burton, Breach of Contract and the Common Law Duty to Bargain in Good Faith, 94 Harv.L.Rev. at 404. [Editor: Burton’s article is actually entitled “. . . Duty to Perform in Good Faith, not Bargain.]

  • 29 Moreover, we think there are strong indications that such a limitation would not represent the Maine court's future, or even current, thinking on this matter. First, we note that many courts have construed the "good faith" provision of Sec. 1-208 as including an objective component. See, e.g., K.M.C. Co. v. Irving Trust Co., 757 F.2d 752, 760-61 (6th Cir.1985). This construction was supported by the views of Professor Gilmore, one of the drafters of the U.C.C. See 2 G. Gilmore, Security Interests in Personal Property Sec. 43.4 at 1197 (1965). See also J. White and R. Summers, Uniform Commercial Code 1088 (2d ed.1980) ("The draftsmen apparently intended an objective standard."). Moreover, as many commentators have shown, the difference between so-called "objective" and "subjective" standards is often minimal in practice. See, e.g., J. White and R. Summers at 1088-90. Finally, we note the following pronouncement of the Maine court, broadly paraphrasing Sec. 4-103 of the U.C.C.: "[I]n fact the Uniform Commercial Code imposes a duty of ordinary care and good faith on banks in their dealings with customers."  C-K Enterprises v. Depositors Trust Co., 438 A.2d 262, 264 (1981). The use of the sweeping phrase, "in their dealings with customers," arguably extends the protection of "ordinary care" in Maine beyond those bank transactions specifically covered in Article 4.
  • 30 At this point, Perini had delivered approximately 15% of the materials estimated.
  • 31 Of course, the Code requires that Perini attempt to attain the materials in good faith. Mass.Gen.L. ch. 106, § 2-306.
  • 32 The comments to the Code shed little light on the issue as they, too, are ambiguous. Empire Gas Corp. v. American Bakeries Co., 840 F.2d at 1338. Comment 3 to § 2-306, for example, provides that an "agreed estimate is to be regarded as a center around which the parties intend the variation to occur," suggesting that the two situations should be treated similarly. Comment 2 to § 2-306, on the other hand supports the view that the two situations should receive different treatment as it provides that "good faith variations from prior requirements are permitted even when the variation may be such as to result in discontinuance." Id.
  • 33 Plaintiff argued that it could have met the deadline, but failed to do so only because defendant, acting in bad faith, induced plaintiff into delaying delivery of the landlord's consent. Plaintiff asserted that the parties had previously extended the agreement's deadlines as a matter of course.
  • 34 The Restatement defines the term "forfeiture" as "the denial of compensation that results when the obligee loses [its] right to the agreed exchange after [it] has relied substantially, as by preparation or performance on the expectation of that exchange" (section 229 comm b).
  • 35

    Williston defines a divisible contract, as follows: "A contract under which the whole performance is divided into two sets of partial performance, each part of each set being the agreed exchange for a corresponding part of the set of performances to be rendered by the other promisor, is called a divisible contract. Or, as expressed in the cases:

    “A contract is divisible where by its terms, 1, performance of each party is divided into two or more parts, and 2, the number of parts due from each party I the same, and 3, the performance of each part by one party I the agreed exchange for a corresponding part by the other party.”  96 Williston, Contracts (3d ed. 1962) s 860, pp. 252-254.)

  • 36 The contract price was $7,500 plus interest. Purchaser paid $75.00 as a down payment. Monthly payments were $75.00.
  • 37 The parties agree this is an action in equity. * * * *
  • 38 An installment land contract does have advantages for buyers. In addition to immediate possession, installment land contracts offer the benefits of a low down payment and easy credit requirements. Buyers do not have to procure expensive and, sometimes unavailable, traditional mortgage financing. Closing costs are often minimal and, since there is no outside lender, there are no loan origination fees. Eric T. Freyfogle, Vagueness and the Rule of Law:  Reconsidering Installment Land Contract Forfeitures, 1988 Duke L.J. 609.
  • 39

    The Court of Appeals has specifically held that in an installment land contract, the vendee in possession of the land is considered the owner of an equitable interest in the property. Southern Pole Bldgs., Inc. v. Williams, 289 S.C. 521, 347 S.E.2d 121 (Ct.App.1986). We note the right of redemption is distinguishable from an equitable estate which may pass to the purchaser under the theory of equitable conversion. Unlike the equitable right of redemption, the theory of equitable conversion does not apply if the parties provide to the contrary by contract. Brook v. Council of Co-Owners of Stones Throw Horiz. Prop. Regime I, 315 S.C. 474, 445 S.E.2d 630 (1994). In this case, the contract provides that, upon default, all amounts previously paid will be retained by Seller as rent. Although this provision may prevent Purchaser from claiming an equitable estate in the property for the amount of the payments made, it cannot defeat his equitable right of redemption.

  • 40

    A variety of case-specific factors should be considered to determine if redemption is equitable under the circumstances. See Cedar Lane Investments v. American Roofing Supply of Colorado Springs, Inc., supra (the amount of the purchaser's equity, the length of the default period and the number of defaults, the amount of monthly payments in relation to rental value, the value of improvements to the property, the adequacy of the property's maintenance);  Rothenberg v. Follman, 19 Mich.App. 383, 172 N.W.2d 845 (1969) (whether forfeiture is unreasonable depends upon amount and length of default, amount of forfeiture, reason for delay in payment, and speed in which equity is sought); 4 Powell, Real Property § 37.21[1] at 135 (“In determining whether the attempted forfeiture should be set aside, courts consider the amount of default, the reason for the purchaser's default, the amount of money the purchaser would forfeit compared to the purchase price, and the relationship of the monthly payments to the fair rental value of the property.”).

  • 41

    [The contract follows:]

    "Original IMPORTANT

    PLEASE SIGN ORIGINAL AND RETURN AS QUICKLY AS POSSIBLE RETAINING DUPLICATE FOR YOUR OWN FILE.

    January 8, 1965

    “OLD ENGLISH RANCHO

    Route 1, Box 224-A

    Ontario, California 91761

    "Gentlemen:

    "I hereby confirm my reservation for one services to the stallion FLEET NASRULLAH for the year 1966.

    "TERMS: $3,500.00 — GUARANTEE LIVE FOAL.

    "FEE is due and payable on or before Sept. 1, 1966.

    "IF stud fee is paid in full, and mare fails to produce a live foal (one that stands and nurses without assistance) from this breeding, a return breeding the following year to  said mare will be granted at no additional stallion fee.

    "FEE is due and payable prior to sale of mare or prior to her departure from the state. If mare is sold or leaves the state, no return breeding will be granted.

    "STUD CERTIFICATE to be given in exchange for fees paid.

    "VETERINARIAN CERTIFICATE due in lieu of payment if mare is barren.

    "I hereby agree that OLD ENGLISH RANCHO shall in no way be held responsible for accidents of any kind or disease.

    Mr. H.B. Taylor

    "Mare: SUNDAY SLIPPERS

    Roan filly 1959

    MOOLAH BUX-MAOLI-ORMESBY

    112 North Evergreen Street

    Burbank, California 91505

    "(Veterinary certificate must accompany all barren mares.)

    "Stakes winner of $64,000.00 last raced in 1962

    /s/  H.B. Taylor"

  • 42 Defendants' letter stated in part: "We wish to inform you that FLEET NASRULLAH has been sold and will stand the 1966 season in Kentucky. You are, therefore, released from your reservations made to the stallion."
  • 43 Defendants' letter stated in part: "Mr. Johnston has made arrangements for you to breed SANDY FORK . . . and SUNDAY SLIPPERS . . . to FLEET NASRULLAH for the 1966 season. Therefore, you should communicate with Dr. A.G. Pessin of Spendthrift Farm, Lexington, Kentucky, to finalize breeding arrangements. . . ."
  • 44 Frazier did not seek to breed Sunday Slippers on May 13, 1966, because the mare's follicle had not yet ruptured; conception can occur up to 12 hours after rupture of the follicle. Accordingly, Frazier normally tried to book a breeding for three days after the onset of heat.
  • 45 We set forth the significant paragraph of the findings at length: "When defendants sold Fleet Nasrullah in 1965 to a purchaser who shipped him to Kentucky, defendants put it out of their power to perform properly their contracts with plaintiff. Those contracts did not require that plaintiff's rights to the breeding services of Fleet Nasrullah should be relegated to a secondary or subordinate position to that of any other person, whether he be a holder of shares in the stallion or not. No such conditions were stated in the contracts and none can be inferred therefrom. From the conduct of the defendants, their agent Dr. Pessin, and their subagent Mrs. Judy, plaintiff was justified in concluding that the defendants were just giving him the runaround and had no intention of performing their contract in the manner required by its terms and as required by the covenant of good faith and fair dealing. Their conduct and that of their agent Dr. Pessin, and their subagent Mrs. Judy up to and including June 13, 1966 constituted a breach of defendants' breeding contracts with plaintiff (plaintiff's Exhibits 8, 9 and 10) and plaintiff was then justified in treating it as a breach and repudiation of their contractual obligation to him."
  • 46 The court concluded that "The defendants unjustifiably breached these contracts; the plaintiff did not breach these contracts."
  • 47 The trial court was not compelled to specify the exact time for performance because it concluded that defendants had breached the contracts by anticipatory repudiation, i.e., a breach which occurs prior to the time for performance.
  • 48 Perhaps the fact that the stud fees were due to be paid September 1, 1966, at the close of the breeding season supports such a conclusion. Moreover, defendants concede without argument that the trial court impliedly found the time of performance to be the breeding season.
  • 49 Both Sunday Slippers and Sandy Fork would have had at least one more heat during the 1966 breeding season — that of Sunday Slippers commencing on June 26, 1966, and that of Sandy Fork commencing on July 7, 1966.
  • 50 Plaintiff concedes that the repudiation was not "accepted by plaintiff."
  • 51

    "Q. . . . At any time, did Mrs. Judy or anyone else ever tell you that she could not or would not breed either mare to Fleet Nasrullah before the end of 1966? . . .

    "THE WITNESS: No."

  • 52 Plaintiff suggests that this conduct, namely delaying plaintiff's breeding until a day not reserved by a shareholder, amounted to an anticipatory breach because Mrs. Judy inserted a condition to defendants' performance, which as the trial court found was not contemplated by the contracts. Assuming arguendo that this conduct might have amounted to a breach of contract by improperly delaying performance, at most it would have constituted only a partial breach—insufficiently material to terminate the contracts (see Rest. 2d Contracts (Tent. Draft No. 8, 1973) §§ 262, 266, 268, 274). It did not constitute a repudiation of the contracts which was the sole basis of the trial court's decision since "[t]o justify the adverse party in treating the renunciation as a breach, the refusal to perform must be of the whole contract or of a covenant going to the whole consideration. . . ."  (Atkinson v. District Bond Co., supra, 5 Cal. App.2d 738, 743.)
  • 53 AMF's lawsuits against said licensees were governed by the parent case and were dismissed in the light of the district court's memorandum opinion and order entered in AMF's case against McDonald's.
  • 54 McDonald's was justified in seeking assurances about performance standards at the March 18th meeting. The parts and service warranty in the contracts for the twenty-three 72C's was essentially a limitation of remedy provision. Under UCC § 2-719(2) (Ill.Rev.Stats. (1975) ch. 26, § 2-719(2)) if the 72C cash registers failed to work or could not be repaired within a reasonable time, the limitation of remedy provision would be invalid, and McDonald's would be entitled to pursue all other remedies provided in Article 2. See , 673 (5th Cir. 1971); , 985-987 (Hawaii 1975). Because McDonald's would have a right to reject the machines if they proved faulty after delivery and then to cancel the contract, it was consistent with the purposes of Section 2-609 for McDonald's to require assurances that such eventuality would not occur. See Comment 1 to UCC § 2-719.
  • 55 UCC Section 1-102(1) provides that the Code "shall be liberally construed and applied to promote its underlying purposes and policies" (Ill.Rev.Stats. (1975) ch. 26, § 1-102(1)).
  • 56

    * * * * A passing reference was made to UCC Section 609's written requirement for a demand in National Ropes, Inc. v. National Diving Service, Inc., 513 F.2d 53, 61 (5th Cir. 1975). However, the court held that Section 2-609 was not applicable because there was no finding that the seller had reasonable grounds for insecurity and because the record would not support such a finding.

  • 57 The contract incorporates three writings attached to the complaint as exhibits: the seller's Quotation 5005, dated January 17, 1989; the seller's Amended Letter, dated January 24, 1989; and the buyer's final sale order, dated January 24, 1989.
  • 58 See, e.g., sections 2-508 (seller's limited right to cure defects in tender), 2-608 (buyer's limited right to revoke acceptance) and 2-612 (buyer's limited right to reject nonconforming tender under installment contract). See also Calamari and Perillo, Contracts, (2d Ed.1972) at 413 n. 81 ("It has been suggested that these exceptions in fact represent a new rule, supplanting the traditional perfect tender rule in that despite 2-601, the intent of the Code is to apply the doctrine of substantial performance to sales contracts.").
  • 59 This interpretation allowing a buyer to cancel a contract for any nonconformity dates back to the common law interpretation of the perfect tender rule in the law of sales which differed from the law of contracts, which allows rescission only for material breaches. Ramirez v. Autosport, 88 N.J. 277, 284, 440 A.2d 1345, 1349 (1982). Thus, Judge Learned Hand stated in Mitsubishi Goshi Kaisha v. J. Aron & Co., Inc., 16 F.2d 185, 186 (2d Cir.1926), that "[t]here is no room in commercial contracts for the doctrine of substantial performance." While Judge Hand wrote in a pre-UCC context, modern courts have reiterated the view that perfect tender does not require substantial performance but complete performance.
  • 60 This was the concern of Karl Llewellyn, which led the Code's drafters to carve out exceptions to the perfect tender rule. See, e.g., Leitchfield Dev't Corp. v. Clark, 757 S.W.2d 207 (Ky. App. 1988) (perfect tender rule of UCC is modified and limited by Code language that seller has reasonable opportunity to cure improper tender); T.W. Oil, Inc. v. Consolidated Edison Co. of New York, Inc., 457 N.Y.S.2d 458, 463, 57 N.Y.2d 574, 443 N.E.2d 932, 937 (1982) (seller's right to cure defective tender, Section 2-508, was intended to act as a meaningful limitation on the absolutism of the perfect tender rule under which no leeway was allowed for any imperfections.)
  • 61 This is not a case where UTZ has rejected the potatoes because they were a week (or a month late) or where the quantities were lower than anticipated. Such nonconformity would not constitute "substantial impairment" of this contract because timing and quantity are not its critical components. See, e.g., Emanuel, supra, (delay in installment shipment of bar review study aids not significant where shipment was still timely for the purposes of the contract); Hudson Feather & Down Products, Inc. v. Lancer Clothing Corp., 128 A.D.2d 674, 513 N.Y.S.2d 173 (2d Dep't 1987) (delay in installment payment did not substantially impair value of whole contract).
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