Allocation Of Risk – Conditions Or Warranties

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Condition

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An event which must occur before a particular performance is due

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Condition precedent

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• Condition precedent - any even which must occur before performance under a K

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Condition subsequent

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• Condition subsequent – an event which operates by agreement of the parties to discharge a duty of performance after it has become absolute

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Concurrent Condition

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• Concurrent Conditions – a particular kind on condition precedent which exists only when the parts to a K are to exchange performances at the same time. Found in most contract for the sael of goods and contracts for the conveyance of land.

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Express and Constructive Conditions
R §226.

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Express and Constructive Conditions – an even which may be made a condition either by agreement of the parties (express condition) or by a term supplied by the court making it a constructive condition.
R §226.

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Express conditions may be implied in fact

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• Express conditions may be implied in fact - Applies to any condition on which the parties agree, whether their agreement is stated explicitly, or merely implied from their conduct.

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Constructive conditions

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• Constructive conditions – not agreed on by the parties (even by implication), but which the court imposes as a matter of law, in order to ensure fairness.

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Distinction b/e express conditions and constructive conditions

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• Distinction – literal compliance with express conditions is ordinarily necessary before the other person’s duty of performance arises. However, substantial compliance is sufficient for constructive conditions.

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Benefit of putting a condition into a K

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The benefit of putting a condition into a K is immediate contractual discharge, rather than having to go to court and sue for breach.

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Dove v. Rose Acre Farms {Express Condition}

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• P participated in a bonus program offered by D. One condition of bonus was that employee couldn’t be one minute late or miss a day or work for any reason. P missed some days b/c of illness and didn’t make them up. D refused to give him a bonus.
• HOLDING: Bonus rules were known to P, P was free to not participate. No fraud or bad faith on D’s part. This was an express condition b/c the parties agreed to it. Therefore, literal compliance is required. The main purpose of the bonus program was not getting the work done, but preventing tardiness and absenteeism.

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Avoidance of Forfeiture

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You can avoid applying the literal compliance rule where forfeiture would result. A forfeiture occurs when one party has relied on the bargain (either by preparing to perform or partially performed) and enforcing literal performance would cause him to fail to receive the expected benefits of the deal.

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Each party’s performance conditional on others

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where each party makes one or more promises to the other, each party’s substantial performance of his promise is generally a constructive condition to the performance of any subsequent duties by the other party.

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Order of performance

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do not always make clear the order in which performance is to occur. If they do, then that order applies, and substantial performance of the duty which is due first is a constructive condition of the other party’s later duty.
• If parties don’t agree upon the order of performance , the courts apply general rules
o Where only one party’s work requires a period of time – performance requiring time must ordinarily come first, and its performance is a constructive condition to the other party’s performance.
o Simultaneous performance – normally require that the two occur simultaneously. In this situation, the two performances are concurrent conditions.

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Where only one party’s work requires a period of time

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performance requiring time must ordinarily come first, and its performance is a constructive condition to the other party’s performance.

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Simultaneous performance

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o Simultaneous performance – normally require that the two occur simultaneously. In this situation, the two performances are concurrent conditions.

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Three ways to look at contracts:

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Three ways to look at contracts:
• Mutual and Independent
o Either party may recover damages from the other (breaching party can recover)
• Conditional and Dependent
o Until the condition is formed, the other party isn’t liable to an action on his promise
• Mutual Conditions to be Simultaneously Performed (Concurrent)
o Person who was ready and offered to fulfill his engagement may maintain an action for default of the other, even though isn’t certain that the other is obligated to do the first act.

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Independent vs. Dependent promises

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• Courts will presume that the promises are in exchange for each other. The court will treat the promises as being mutually dependent, and will make each party’s duty of performance constructively conditional upon the other’s substantial performance of all previous duties.
o Independent promises – courts won’t apply constructive conditions

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Kingston v. Preston {Concurrent and Dependent}

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• P promised to work for D for one year and a quarter. P promised to give him the business at that time and in exchange P promised to give good security. P argues that he was ready to perform and D refused to surrender his business, D said P didn’t offer sufficient security.
• HOLDING: P’s promise to give D adequate security was a condition which had to be met before D would be required to turn over the business (condition precedent).

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Goodison v. Nunn {Concurrent and Dependent}

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• P to sell estate to D for $210 w/ a $21 liquidated damages clause. Seller sues buyer claiming that seller was ready to perform.
• HOLDING: Promises were dependent and intended to occur at the same time.

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Substantial Performance

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• Relation to material breach - either a party has substantially performed or he has materially breached
• Substantial Performance (non-material breach) – where a party breaches the K by deviating from its terms, but nonetheless performs well enough that the breach isn’t material, the other party always has a claim for damages resulting from the breach.
• Material Breach – the non-breaching party may not only recover damages but may also suspend or be discharged from his own obligations under the K.

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Factors determining whether a breach is material

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The more the breach defeats the purpose of the K, and the expectations of the non-breaching party, the more likely it is to be considered material.
• Deviation of benefit the other party reasonably expected
• Adequacy of compensation for loss by the awarding of damages
• Part performance – the greater the part performance which has been rendered by the breaching party, the less likely it is that a breach will be deemed material
• Willfulness of breach – willful breach is more likely to be regarded as a material breach
• Delay in performance – constitute a material breach only if it operates to significantly deprive the other party of the benefits of the contract.
o Time not necessarily an issue unless the contract so states

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Palmer v. Fox

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• P, vendor, sues D, vendee, for incomplete payment for a sale of land; D defends saying that P hasn’t performed b/c it didn’t cinderize the streets, something they promised to do
• HOLDING: breach was definitely material; promises are dependent and concurrent; vendor must do something to allege his performance; breach must be material to prevent P from recovering; buyer didn’t have to go forward with his remaining duties b/c there was an uncured failure

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Jacobs & Youngs v. Kent

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• P build a house for D; specification that all pipe was to be made by Reading; D learned that some of the pipe came from other manufacturers; no difference in quality; removing it would necessitate many of the walls being taken down; P wasn’t fraudulent or willful in using the wrong pipe; P suing for undue payments b/c contract was conditioned on the architect’s approval of final certification, which wasn’t fulfilled
• HOLDING: Cardozo doesn’t treat architect’s approval as an express condition but as a constructive condition of exchange b/c he’s worried about large forfeiture; defect was insignificant, so the promises are conditional; measure of damages where a condition isn’t material isn’t the cost of replacement but the difference in value; judgment affirmed for P; very unlikely to find substantial performance if breach is willful; theoretically, owner can get damages for difference between pipe used and Reading pipe; piping just utilitarian
• Problem with approach: never say you fill the measure of your duty by less than full performance
• Criteria for deciding whether a condition is material

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O.W. Grun Roofing and Construction Co. v. Cope

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• P, homeowner’s, sued D, roofers, to put aside mechanic’s lien; refused to pay money for a roof installed in their house b/c it was discolored
• HOLDING: roof lacking in uniformity of color is a material breach; can’t be fixed except by completely redoing the house, so its not substantial performance; can’t show that P got or accepted benefit from discolored roof; P doesn’t have to pay contract price; also gets expectancy damages

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Waivers

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• You can waive a condition in a K when it isn’t a material part of the consideration or the essence of the contract
• To try to “waive” a material part of the K, you would need to have an actual modification of the K w/ new consideration
• Promissory estoppel could apply here – party’s manifestation of the waiver induces the other party to change his position in reliance on the waiver

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Clark v. West

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o P agreed to write a series of law books for D. K had a condition that P would totally abstain from drinking to get $6/page. P violated the condition, but D continued to pay P. D then tries to pay P a reduced rate b/c P didn’t totally quit drinking.
o HOLDING: K wasn’t intended to get P to stop drinking, but to get P to write satisfactory law books (which happened). Therefore, the condition wasn’t at heart of the contract and therefore could be waived w/o consideration. D waived the condition when he continued to pay P after he knew he was drinking.

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UCC (in relation to waivers)

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No need for consideration for the sale of good since an agreement modifying a K need no consideration to be binding under the UCC. A modification must be in writing if the K would be within the SOF.

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Retraction of waivers

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If there has been no consideration given for the waiver, and the party receiving the benefit of the waiver has not detrimentally relied on it, retraction of the waiver may reinstate the condition.

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Duty of Good Faith

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• Implied obligation of good faith in both UCC and non-UCC contracts
• Consistency w/ other party’s expectations - a party is required to behave in a way that is consistent w/ the other party’s reasonably expectations about how the K will work.

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When one can invoke good faith

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o During the formation process
• Very limited duty here
• Duty to refrain from misrepresentations and a duty to be honest
o During performance

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Measuring Good Faith

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o Subjective Standard
o Objective standard
• Look at market alternatives
• Factors in Omni

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Orange and Rockland Utilities v. Amerada Hess Corp. {GOOD FAITH}

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*See notes!