(4) Conditions, Performance, Etc.

Question 1

Duty of Good Faith:

Answer 1

• Wood v. Lucy, Lady Duff-Gordon is often cited for the principle that every contract contains an implied covenant of good faith and fair dealing.
o UCC 1-304 and R2K §205 use the same language to state that parties to every K are subject to a duty of good faith and fair dealing in the performance and enforcement of the K. (more of an objective standard)
o Need to take reasonable efforts.
• But see UCC 2-306à You can draft “reasonable” because it says the party’s have the choice (comment). But be consistent! If you leave it out, the court will impose “best” since that’s in the statute.

Question 2

Implied terms:

Answer 2

• Implied in fact
- Agreed to by the parties implicitly rather than explicitly
• Implied in Law
- Selected by the court to fill in the gap, consistent with but not representing the parties’ choice. COPCODUOT may also be a source of implied terms, representing the presumed intent of the parties.
• Gapfillers
- Courts can use default provisions (only binding if the parties did NOT agree to the contrary)
- - UCC 2-305, 207, 308, 309, 314, 315 are gap fillers for the sale of goods.
- Public policies
- - Prevent unjust enrichment, forfeiture (the loss of compensation that results when a party loses his right to the agreed exchange after he has relied substantially, as by preparation or performance, on the expectation of that exchange), and overreaching (gaining an unconscionable advantage over another, especially by unfair or deceptive means).

Question 3

Output vs. Requirement Contracts (UCC):

Answer 3

• SOBR (Seller Output, Buyer Requirement)
o Remember, for an output contract, the seller drives the output. For a requirements contract, the buyer drives the requirements. Output of the seller or requirements of the buyer means actual output or requirements that occur in good faith.
o A limit to this is that no party can demand or tender a quantity that is unreasonably disproportionate to a stated estimate, if there is one, or if there is not a stated estimate, to any normal or otherwise comparable prior output or requirement.

Question 4

Conditions in the UCC:

Answer 4

• UCC § 2-507: Tender of delivery is a condition to the buyer’s duty to accept the goods and to pay for them.
• UCC § 2-511 is the flip side of this: The tender of payment is a condition to the seller’s duty to tender and complete any delivery.
• Parties can contract contrary to these conditions.

Question 5

Express Conditions:

Answer 5

• In general, express conditions must be met with strict compliance.
• If not met, no duty arises for the person benefitting from the condition.

Question 6

Judicial Excuse of Express Condition:

Answer 6

• Forfeiture
o Very important. Courts despise parties suffering forfeitures.
o To 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
• Duty to Try
• Duty not to Interfere

Question 7

Condition of Satisfaction:

Answer 7

• R2K§228
o One way an express condition may be used in a K is to make one party’s contractual duty conditional on the other party’s “satisfaction” with the other party’s performance. Follow these stepsàSee if there’s a satisfaction clause; look at language and see if it’s clear (i.e., K lays out what standard will be used); if it’ clear, take it as it is; if it’s unclear, ask if it’s a matter of fancy, taste, or personal judgment OR mechanical/commercial/utility.
• If fancy/taste, the test is subjective and must be exercised in good faith (your taste is in good faith). To negate, obligor must show they were perfectly performing.
• If commercial, test is objective and question is whether the performance would satisfy the RPP.

Question 8

Waiver of Condition:

Answer 8

chart

Question 9

Implied Conditions:

Answer 9

• Mutual and independent promises (uncommonàparty must do so expressly)
o There are no conditions. Each party must perform.
• Sequential dependent
o There is an implied order to each party’s performance (implied conditions connect).
o Typically service contracts
• Simultaneous dependent
o Each party’s performance is due at the same time (implied concurrent conditions).
o Typically buy/sell contracts

Question 10

Order of Performance:

Answer 10

• R2K § 234
• Where all or part of performances to be exchanged can be done simultaneously, they are to that extent due simultaneously, unless language or circumstances indicate they should not be.
• Where the performance of only one party requires a period of time, his performance is due before the other party’s performance, unless language or circumstances indicate otherwise.

Question 11

Substantial performance:

Answer 11

chart

Question 12

Substantial performance 2:

Answer 12

• R2K § 237: Except as stated in section 240 (divisibility), it is a condition of each party’s remaining duties that there be no uncured material failure by the other party to render any such performance due at an earlier time (This is the substantial performance provision.).
• R2K § 241: To determine whether a breach is material, consider five factors:
o The extent to which the injured party will be deprived of the benefit which he reasonably expected,
o The extent to which the injured party can be adequately compensated,
o The extent to which the breaching party will suffer a forfeiture,
o The likelihood that the breaching party will cure his failure, and
o The extent to which the breaching party comports with standards of good faith and fair dealing.
• R2K § 242: The cure provision.
o Consider the materiality factors, as well as the extent to which it reasonably appears the injured party will be delayed or hindered in making substitute arrangements, and the extent to which the agreement provides that time is of the essence.

Question 13

Substantial performance 3:

Answer 13

• Breach: the injured party has a right to sue the breaching party for breach of contract.
• (2) Immaterial breach? (see R2K § 241)
o The breaching party has substantially performed, and the injured party must still perform.
• (3) Material breach?
o The breaching party has NOT substantially performed.
• (4) If it is a material breach, is it curable? (see R2K § 242)
o If not, the injured party does NOT have to perform and can cancel the contract.
o If so, the injured party can suspend performance and the breaching party has a reasonable time to cure the breach.
• (5) If the material breach was curable, did the breaching party actually cure (to the extent of at least substantial performance) within a reasonable time?
o If so, there has been substantial performance and the injured party must perform.
o If not, there has NOT been substantial performance and the injured party does NOT have to perform. (see R2K § 237)

Question 14

Divisibility:

Answer 14

• R2K § 240
• If the contract’s performances can be apportioned into equal parts, then the contract is treated as divisible and breach of one part of the contract is not a breach of the other part(s). See Gill on p. 723.
• Divisibility typically arises with price-per-unit contracts, not service contracts (even in the construction area, where the contractor is often paid in installments).
• However, a court may not apply the doctrine of divisibility to a contract where the loss of one piece destroys the whole purpose for the contract. See Menorah Chapels on pp. 723-24.

Question 15

Anticipatory Repudiation:

Answer 15

• R2K § 250: A repudiation is:
o (1) a statement (oral/written/conduct) by the obligor directly to the obligee that the obligor will commit a material breach, or,
o (2) a voluntary affirmative act that renders the obligor unable or apparently unable to perform without committing a material breach.
• R2K § 253: If the obligor repudiates the contract before he has committed a breach by nonperformance AND before he has received all of the agreed exchange for it (from the injured party), his repudiation alone gives rise to a claim for total breach (in other words, it has the effect of being an uncured material breach).
o An example of the repudiating party already receiving all of the agreed exchange for his performance is when the injured party has already completely performed and all that is left is for the repudiator to pay the injured party. This means that the repudiation does not give rise to a claim for total breach until date of performance was supposed to happen. See, e.g., illustrations 3, 4, 5, and 6; R2K § 243(3) and comments c and d.
• R2K § 254(1): Injured party must prove ability to otherwise perform as scheduled (ignoring conflicts or inability triggered by injured party’s mitigation efforts).

Question 16

Nullifying an Anticipatory Repudiation:

Answer 16

• R2K § 256:
• The repudiating party can nullify his repudiation by words if the injured party is notified of the retraction
o before the injured party has materially changed its position in reliance on the repudiation, and
o before the injured party has indicated to the repudiating party that it considers the repudiation to be final.
• The repudiating party can also nullify the repudiation by conduct if
o the injured party knows that the original repudiating conduct is no longer in existence,
o the injured party has not materially changed his position in reliance on the repudiation, AND
o the injured party has not indicated to the repudiating party that he considers the repudiation to be final.

Question 17

Anticipatory Repudiation in the UCC:

Answer 17

• UCC § 2-610
o If the repudiation would be a material breach (i.e., the nonperformance will “substantially impair the contract value” to the injured party), the injured party can
• Wait a commercially reasonable time for the repudiator to change his mind and perform (subsection (a)), OR
• Sue for breach (subsection (b)).
• But in either case, the injured party can suspend his performance (subsection (c)).
• UCC § 2-611(Nullification)
o Under subsection (1), the repudiating party CAN retract his repudiation UNLESS
• The injured party has since cancelled the contract,
• The injured party has materially altered his position, OR
• The injured party indicates that it considers that repudiation final.
o Retraction may be accomplished by any method clearly indicating to the injured party that he intends to perform, but MUST include any justifiably demanded assurances (demanded by the injured party) (subsection (2)).

Question 18

Assurances of Performance (R2K § 251 and UCC 2-609):

Answer 18

• If a party is afraid another party may repudiate, they have the right to demand adequate assurances.
o NOTE: If a party demands and receives specific assurances, then absent a further change of circumstances, the assurances demanded and received are adequate, and the party who has demanded the assurances is bound to proceed.
• Other party must use reasonable (or best) efforts to supply the assurances.

Question 19

UCC Perfect Tender:

Answer 19

chart

Question 20

UCC Perfect Tender Wrinkle:

Answer 20

• The UCC does not follow the perfect tender rule for installment contracts. (To be an installment K, both parties have to agree on separate deliveries, and the separate deliveries must be within the same K. If it’s just something like the seller unilaterally deciding to make multiple deliveries, that’s not an installment contract. Also, separate K’s are not installment K’s. See UCC § 2-612 for installment contracts.)
• The buyer can only reject an installment when the nonconformity substantially impairs the value of that installment (literally) and cannot be cured. The buyer can only reject the entire contract when the nonconformity substantially impairs the value of the whole contract. The buyer must seasonably notify the seller of cancellation.

Question 21

Impracticability (“painful to perform”):

Answer 21

• R2K § 261
o An event which occurred AFTER contract formation (but before performance);
o The nonoccurrence of the event was a basic assumption (of both parties) on which the contract was made;
o The performance (by the party claiming excuse) has become impracticable (or impossible); and,
o Make sure there’s no alternate way to perform!
o The party claiming excuse is not at fault (intentional OR negligence),
o Then his breach is excused, UNLESS
o He assumed the risk, either in the contract or by the circumstances.
• UCC § 2-615 (More narrow than R2K’s impracticability – Only Applies to Seller)
o Except so far as the Seller has assumed the risk and subject to UCC § 2-614 (substituted performance), the Seller’s delay in delivery or nondelivery is not a breach if the performance was made impracticable by the occurrence of a contingency (event), the nonoccurrence of which was a basic assumption on which the contract was made, OR performance was made impracticable by a good faith compliance with the applicable foreign or domestic governmental regulation or order. (only applies to seller b/c buyer can always pay)
o Seller must notify Buyer that there will be a delay or nondelivery.

Question 22

Events Which Are a Basic Assumption Under Which the Contract Was Made:

Answer 22

• R2K § 262: death or incapacity
o If a particular person is necessary for performance, his death or incapacity
• R2K § 263: destruction, deterioration, or failure to come into existence of a thing
o If the existence of a specific thing is necessary for performance, its failure to come into existence, destruction, or deterioration
• R2K § 264: governmental regulation or order
o Having to comply with a domestic or foreign governmental regulation or order

Question 23

Frustration of Purpose (“pointless to perform”):

Answer 23

• R2K § 265
o Event occurs AFTER contract formation,
o The nonoccurrence of which is a shared basic assumption on which the contract was made,
o The party claiming excuse is not at fault, AND
o That party’s principal purpose of the contract is substantially frustrated,
o Then his breach is excused, UNLESS
• He assumed the risk, either in the contract or by the circumstance