Conditions Outline - Contracts II PDF

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Conditions 1.

The nature and effect of express conditions, the time classification of conditions

Morrison, Jr. v. Bare (2007) -THE FAILURE TO SATISFY A CONDITION IS NOT A BREACH OF CONTRACT **FACTS: Jack Morrison was looking into buying a house that Jonas Bare owned. When inspecting the house, Morrison noticed a sticker on the furnace that stated that the furnace had a cracked heat exchanger. Bare stated that the furnace had been repaired recently, although he did not specifically mention the heat exchanger. Morrison made an offer on the house, but in his offer he included a “Special Condition” that Bare give Morrison a copy of the furnace repair bill within 14 days of the offer. Bare gave Morrison the repair bill, but it contained nothing about the heat exchanger. Indeed, the heat exchanger had not been replaced. Morrison then stated that he would close on the house only if Bare replaced the furnace or reduced the purchase price. Bare refused and Morrison brought suit for breach of contract. Bare filed a motion for summary judgment, which the trial court granted. Morrison appealed. **ISSUE: Whether the failure to satisfy a condition constitutes a breach of contract **HOLDING/REASONING: No. The failure to satisfy a condition is not a breach of contract. A condition is not a promise. A promise creates a legal duty; a condition does not create a duty, but rather must occur to activate an existing duty. If that condition does not occur, it does not warrant any remedy in and of itself; it merely relieves a party of a duty that was contingent on the condition. In the present case, the requirement that Bare produce a bill showing that the heat exchanger was repaired was a condition and not a promise. Given Morrison’s specific concern about the heat exchanger, Bare could not satisfy the special condition without providing a bill that showed that the heat exchanger was repaired. Since the heat exchanger was never repaired, Bare could not do so and Bare failed to satisfy the condition. Morrison’s duty to pay for the house was contingent on that condition, and thus his duty was not activated. However, Bare’s failure to satisfy the condition was merely that; it was not a breach of contract. Accordingly, Morrison cannot maintain an action for breach of contract. The trial court is affirmed. Audette v. L’Union St. Joseph (1901) WHERE A PARTY’S OBLIGATION TO PERFORM IS CONDITIONED ON THE ACT OF AN UNRELATED THIRD PARTY, USCH THIRD PARTY’S REFUSAL TO PERFORM THE ACT DOES NOT EXCUSE ITS NECESSITY

**FACTS: After Louis Audette died, Malvina Audette, the administratrix of his estate, sued L’Union St. Joseph for sick benefits. A bylaw of L’Union provided that no benefits were to be given without receipt of a sworn physician certificate. The intestate’s physician had refused to sign a certificate because of a religious objection to making oaths. The trial court decided in favor of L’Union, and Audette appealed. **ISSUE: Whether the physician’s refusal to perform excuses the necessity of the physician’s performance. **HOLDING/REASONING: No. Where a party’s obligation to perform is conditioned on the act of a stranger, such stranger’s refusal to act does not excuse the necessity that such act be accomplished. For example, in an earlier Massachusetts case, an insured who was required to provide a certificate as to his loss of property was not relieved of such requirement by the fact that he could not obtain the proper signatures despite using his best efforts to do so. Here, Audette’s case against L’Union is premature. Until the physician certificate is produced, there is no valid claim for benefits. The decision of the lower court is affirmed. Inman v. Clyde Hall Drilling Co. (1962) A CONTRACTUAL PROVISION REQUIRING NOTICE AS A CONDITION PRECEDENT TO RECOVERY IS NOT CONTRARY TO PUBLIC POLICY **FACTS: On November 16, 1959, Inman signed an employment contract with Clyde Hall Drilling Company. The contract contained a provision stating that an employee must provide written notice to Clyde within 30 days after a claim arises and that written notice was a condition precedent to any recovery. On March 24, 1960, Inman was terminated. On April 14, 1960, Inman served a complaint on Clyde for breach of contract, but failed to provide written notice as required by the contract. The trial court held for Clyde finding that failure to provide notice barred recovery. Inman appealed. **ISSUE: Whether the contractual provision requiring notice as a condition precedent to recovery is contrary to public policy **HOLDING/REASONING: No. Generally, parties should be free to contract and the court should only interfere as a matter of public policy where it is clear that certain contractual provisions are the result of unequal bargaining power. This is because it is not the duty of the court to determine that contractual provisions are illegal, but only to prevent injustice. Here, there is no evidence of unequal bargaining power between Inman and Clyde. Inman understood the terms of the contract and agreed to them. More specifically, Inman was aware that he was required to provide written notice to Clyde prior to commencing suit and that written notice was a condition precedent to any recovery. Because the notice requirement is not contrary to public policy, Inman’s failure to provide notice to Clyde barred any recovery and judgment in favor of Clyde was proper. The judgment of the trial court is affirmed.

FEDERAL RULES OF CIVIL PROCEDURE RULE 9. PLEADING SPECIAL MATTERS (c) Conditions Precedent. In pleading the performance or occurrence of conditions precedent, it is sufficient to aver generally that all conditions precedent have been performed or have occurred. A denial of performance or occurrence shall be made specifically and with particularity. **PROBLEMS (1)A term in a loan agreement (known as “acceleration clause”) allows Lender, in case of default by Borrower, to declare all future payments by Borrower immediately due and payable…On March 22, Lender ailed Borrower the following notice…Borrow received the notice on March 26 but ignored the notice and made no payments to Lender. On may1, Lender sued Borrower to collect $450,700. Will Lender Prevail? -Maybe. Lender did not exactly specify the breach. Also did not specify that paying the amount was the cure to a breach (2)Husband and wife were lost at sea when the Lusitania was sunk. The husband had a policy on his life which provided: Five Thousand Dollars . . . to his wife, if living; if not, then to the insured’s executors, administrators or assigns.” Should the money be paid to the administrator of the wife or the husband? -Husband; he is the insured.

2.

Distinguishing Express Conditions from other provisions a. Does the contract create an express condition, a promise, or both?

New York Bronze Powder Co. v. Benjamin Acquisition Corp. (1998) **FACTS: New York Bronze Powder Company, Inc. agreed to sell assets to Benjamin Acquisition Corp. for $4.5 million. Because of a valuation dispute, the parties amended their agreement to defer a portion of the purchase price based on the findings of an audit to be performed at Benjamin’s expense. In connection with the amendment, Benjamin executed a nonnegotiable note to New York Bronze in the amount of $350,000. The note required that New York Bronze surrender it to Benjamin “in order to receive payment.” Benjamin never had the audit performed and did not make any payments on the note. New York Bronze sued. At trial, it came out that New York Bronze was uncertain where the original note was but had good reason to believe it was in the hands of its lender along with other original documents from the transaction. The court decided in favor of New York

Bronze, and Benjamin appealed. The Court of Special Appeals reversed the trial court decision, ruling that the note’s requirement of surrender to receive payment was an express condition to Benjamin’s obligation to pay. New York Bronze appealed. **ISSUE: Whether the requirement that the non-negotiable note be surrendered in order for payment to be received is an express condition, such that the failure of the note holder to surrender the note will relieve the note maker’s obligation to pay **HOLDING/REASONING: No. Whether parties intend to create an express condition or a covenant depends on the language of their agreement. Because the note in this case is expressly governed by New York law, the court looks to Oppenheimer & Co., Inc. v. Oppenheim, Appel, Dixon & Co., 660 N.E.2d 415 (1995), recently decided by the Court of Appeals of New York. There, the court stated that where a requirement of performance is ambiguous as to the parties’ intent, it should be interpreted as a covenant or constructive condition rather than as an express condition. Consistent with New York law is the principle set forth in Restatement (Second) of Contracts (1981) § 227(2), which establishes a preference for interpreting an ambiguous requirement as a covenant rather than a condition. Such rule, comments the Restatement, avoids an unduly harsh result to the party to whom the requirement applies while still protecting the other party. In this case, the “in order to” language of the note is ambiguous as to whether a condition was intended to be created. Moreover, language elsewhere in the note suggests that the requirement was intended to be a covenant. First, an introductory paragraph states that payment is “subject to” certain provisions, none of which include surrender of the note. Second, the section of the note requiring surrender deals with terms such as how and when payment is to be made. Such terms are clearly covenants since an immaterial noncompliance therewith would not justify Benjamin’s nonpayment. Finally, because the note is nonnegotiable, the requirement of surrender makes sense as a form of protecting Benjamin from the unlikely possibility that a third party would seek to enforce the note, essentially making Benjamin pay twice. Not only is such event unlikely but if it occurred, Benjamin would have recourse in suing New York Bronze for damages. In consideration of the full context, the parties were unlikely to have intended the surrender requirement to be a condition to Benjamin’s performance. Consequently, the judgment of the appellate court is reversed.

1. Distinguishing Express Conditions from other provisions a. Time or Express Condition? Thos. J. Dyer Co. v. Bishop International Engineering Co. (1962)

**FACTS: Bishop International Engineering Co. was the general contractor on a project to construct a racetrack for The Kentucky Jockey Club, Inc. Bishop contracted the services of Thos. J. Dyer Co. to perform plumbing work for a total price of $115,000. According to the subcontract agreement, Bishop’s payment to Dyer was not due until 35 days after the work was completed to the satisfaction of Jockey Club and five days after Jockey Club had paid Bishop for such work. Dyer completed the work requested and performed additional services in accordance with change orders. Jockey Club accepted the work in August 1959. It paid Bishop the price of Dyer’s work as set forth in the initial contract but did not pay for the additional work performed. Bishop then paid Dyer only for the work covered by Jockey Club, leaving a balance of $108,519.11. In December 1959, Jockey Club filed for bankruptcy protection. It never paid Bishop for all of the work performed. Dyer sued Bishop and Bishop’s bond provider, General Insurance Company of America (defendant). The court granted summary judgment in favor of Dyer, and the defendants appealed. **ISSUE: Whether the provision of the subcontract is to be construed as a conditional promise to pay or an unconditional promise to pay with the time of payment being postponed until the happening of a certain event, or for a reasonable period of time **HOLDING/REASONING: No. Whether a promise is conditional or unconditional requires interpretation of the agreement to determine the parties’ intent. Addressing this issue, the Court of Appeals of Kentucky stated that where a contract specifies the time of performance in relation to the occurrence of another act, the general rule is that the provision simply fixes the time of performance. Unless the language clearly provides that such act is an express condition, it is not deemed to be a condition precedent to performance. Accordingly, the nonoccurrence of the act does not discharge the promise. Rather, it merely obliges performance of the promise within a reasonable time. In construction cases like this one, the rule makes good sense. While the general contractor assumes the risk that the owner will become insolvent, the general contractor can manage that risk through various legal and contractual means. A subcontractor, on the other hand, lacks a similar relationship with the owner. The subcontractor’s concern is the solvency of the contractor. If the parties intend to allocate risk of the owner’s insolvency to the subcontractor, they must expressly provide for such in their contract. Here, the best interpretation of the time provision in the subcontract is that the parties intended to give Bishop a reasonable period of time to pay Dyer after work was completed. Accordingly, the judgment of the trial court is affirmed. J.J. Shane, Inc. v. Aetna Cas. & Surety Co. (1998) **FACTS: J.J. Shane, Inc. was a subcontractor on a construction project run by general contractor Recchi America, Inc. for the project owner

Metropolitan Dade County (County). The subcontract agreement provided that Shane was dependent on the “financial responsibility” of the County and that Recchi’s payments to Shane would come from funds received by Recchi from the County. Shane performed work on the project, but Recchi did not make payment because the County did not pay Recchi. Shane sued Recchi for payment. A jury found in favor of Recchi, and Shane appealed. **ISSUE: Whether payment to general contractor was a condition precedent to payment to subcontractor **HOLDING/REASONING: Yes. As a general rule, an owner’s payment to a general contractor is not a condition precedent to such contractor’s payment to a subcontractor because subcontractors do not ordinarily assume the risk of the owner’s insolvency. An exception to this rule applies, however, where the parties expressly assign the risk of the owner’s nonpayment to the subcontractor. In this case, the language of the agreement unambiguously allocates such risk to the subcontractor. Thus, the County’s payment to Recchi operates as a condition precedent to Recchi’s payment to Shane. Because the County has not yet paid Recchi, Recchi is not yet obligated to pay Shane. Shane’s lawsuit is therefore premature. Accordingly, the court reverses the judgment in the trial court and orders dismissal of the case without prejudice. **NOTE: Some jurisdictions declare these conditions void as violating public policy that underlies the anti-waiver provisions of lien laws. **PROBLEMS pg. 494 (1)π alleges that ∆ agreed to sell him a lot and to construct a residence and that “it was understood” that the marsh on which the lot fronted would be cleaned out by a named third party and that, when the marsh had been cleaned out and turned into a lake, the ∆ would install a sand beach. P promised to pay $350,000 when the house was completed. (This price included all the landscaping work.). π did pay on completion of the house. Later π sues, alleging that ∆ failed to transform the marsh into a lake and to install the sand beach; consequently the house was worth less than it would have been worth if it was located on a beachfront. Is a cause of action stated? -example of the provision creating a promise and an express condition -promise that the third party would perform -express condition to happen after third party cleared the marsh. -Draining the marsh is not an express condition precedent to the obligation to build the beach. It is a combination of a promise and a condition, at the same time, and the promise is to see to it that the condition has been met -π may be able to recover the landscaping portion of the price, but ∆ did not breach the contract

(2)S entered into a contract with B to build a yarn-spinning mill for B. The contract provided the standards that had to be met before performance would be deemed completed. The work was not accepted because the machinery supplied by S lacked the capacity to produce the quantity and quality of yarn described in the contract. The contract was ambiguous on the issue of whether S promised to meet these standards. B asserts a claim for damages for breach of contract. S contends that B is entitled only to withhold the unpaid portion of the contract price. Who is right? -if it is ambiguous on whether it is a promise or express condition, then it is a promise. -if S failed to adhere to a promise, then B would be entitled to damages. -if S failed to meet an express condition precedent to B’s obligation to pay, then the result is different -the issue is some of the money was already paid. Withholding the remainder would render it an express condition. But is it a promise to pay? Run both sets of numbers to determine the answer (3)Vendee entered into a written agreement with Vendor for the purchase and sale of a specific house on specified terms and conditions. The agreement stated: “This contract is contingent upon buyer being able to obtain mortgage loan in the amount of $50,000.” (Further terms and conditions of the prospective loan were detailed.). Vendor seeks a declaratory judgment that the alleged contract is void as the purchaser’s promise is illusory. The purchaser, he argues, can effectively defeat the contract by failing to seek out financing. What result? -implied duty of good faith

2. Constructive Conditions Stewart v. Newbury (1917) **FACTS: Stewart contracted to do excavation and concrete work for Newbury, with payment to be made on a per-cubic-foot and per-ton basis, respectively. However, the written contract made no specification as to when payment was to occur. After working from July to September, Stewart submitted a bill. Newbury responded by letter that the bill would not be paid because Newbury disagreed with the content of the bill and because the work was not complete. Stewart stopped working on the building and sued Newbury. At trial, Stewart testified that after sending his bill, he had a telephone conversation with Newbury, confirming that payment was to be made “in the usual manner.” Stewart testified further that it was customary to receive payment for 85 percent of the work on a monthly basis. Newbury denied the phone conversation, and asserted that he was not obligated to pay Stewart’s bill since Stewart had not completed the work. The trial court instructed the jury that if the parties’ agreement was silent regarding the

timing of payment, Stewart was entitled to payment at reasonable intervals, and Newbury’s refusal to pay entitled him to stop working and sue for damages. The jury returned a verdict for Stewart and Newbury appealed. The Appellate Division affirmed and Newbury appealed that decision. **ISSUE: Whether work must be substantially performed before payment is due when the contract is silent as to timing of payment **HOLDING/REASONING: Yes. It is well settled that when a contract is made for the performance of work but does not specify when payment should be made, the work must be substantially performed before payment is required. Here, the trial court instructed the jury to find for Stewart if the agreement did not specify the timing for payment and Newbury failed to pay Stewart’s bill. However, the rule directs the opposite outcome. Since the agreement between Stewart and Newbury did not specifically require that some payment be made monthly, then the rule of substantial performance applies and Newbury could not be required to make payments until Stewart had substantially performed the contracted work. Since the matter was submitted to the jury on two grounds, and it cannot be determined which of the grounds the jury based its award, a new trial is necessary. The judgment of the Appellate Division is reversed and the matter remanded to the trial court for a new tri...