#10994 - Conditions And Breach - Contracts

Conditions and Breach

A. Conditions, Obligations and Constructive Conditions of Exchange

1. There is a distinction between contractual conditions and contractual performance obligations (promises). Generally, courts interpret conditions in a much more literal and strict fashion than they interpret promises.

2. Condition

a) Restatement (Second) § 224: A condition is an event, not certain to occur, which must occur before performance under a contract becomes due.

b) Can be precedent (duty to perform is contingent on condition occurring) or subsequent (after breach has occurred, party will no longer have duty to perform)

c) Allocates the risk of non-occurrence of condition

d) There is an implied constructive condition of exchange. Even though people don’t necessarily specify that the duty to perform is conditioned on performance by the other party, courts will read this condition into the contract.

3. Conditions vs. Promises

a) Conditions are not promises. Conditions are on/off.

(1) Courts are more likely to consider something a condition if it was bargained for and the court thinks the condition was priced into the contract.

b) Conditions interpreted in a much more literal and strict fashion than promises

c) By including express conditions to a party’s obligation to perform, the risk of the non-occurrence of those conditions is effectively shifted over to the other party

d) Courts don’t like forfeiture of accrued contract rights so if it is doubtful whether something is a condition or a promise, it will likely be interpreted to be a promise.

e) If a party breaks a contractual promise, the other party can seek damages after proving detrimental reliance, but they’re still obligated to perform. If a party doesn’t meet a condition of the contract, the other party can simply void the contract.

f) However, courts frown on parties who opportunistically seek to justify their nonperformance due to the nonoccurrence of a condition.

g) Conditions are not subject to substantial performance but promises are.

h) Insurance policies are generally interpreted in favor of the insured because

1) insurers wrote the contract and were in the position to make language more specific

2) there’s a risk of the consumer paying something and getting nothing in return

h) Condition Not Found: Howard v. Federal Crop Insurance Co. – P’s tobacco crop was damaged by heavy rain. P filed notice and proof of loss with FCIC, but prior to the FCIC’s inspection, the Howards had either plowed or disked under the tobacco fields in order to sow a cover crop of rye to preserve the soil. When the FCIC adjuster later inspected the fields, he found the stalks had been largely obscured or destroyed by plowing or disking and denied the claims, on the ground that the plaintiffs had violated a portion of policy that provides that the stalks on any acreage where the losses occurred shall not be destroyed until the corporation makes an inspection. The court ruled in P’s favor, holding that when ambiguity exists with regards to whether words created a condition or promise, they tend to be interpreted as promises. The relevant paragraph did not contain the terms “condition precedent” and other paragraphs did (ambiguity).

Counter: This holding is explicitly pro-consumer, but by expanding FDIC’s scope of liability, it will almost certainly cause the FDIC to raise prices, which will affect all of its consumers. The decision was intended to minimize the possibility of opportunistic behavior by one party, but it has also increased the ability of other party to act opportunistically.

g) Condition Not Found: Rhode v. Massachusetts Mutual Life Insurance Co. - an applicant for a life insurance policy suffered a fatal heart attack the day that he sent in his application to the insurance company. The contract provided that he would be covered from the day he sent in the form, as long as he was deemed an acceptable risk. In light of his death, the insurer decided that he would not be an acceptable risk, though objective evidence indicated that he would have been accepted had he survived. Based on this evidence, the court held that the insurer was liable to his widow for the full value of the policy.

h) Condition Found: Inman v. Clyde Hall Drilling Co. – Where plaintiff sued defendant employer for breach of contract 4 months after he was fired, and where the employment contract included a provision that made a 30-day written notice of any claim that could only be brought between 6-12 months after the written notice a condition precedent to recovery. The court held that the contractual provision barred plaintiff’s recovery, as the provision was neither unfair, nor unreasonable, and plaintiff admitted to reading and breaching the terms. The court rejected the plaintiff’s argument that the provision was void as against public policy, as there was no specific public policy that the argument violated, and the court did not feel it was appropriate to speculate about future public policy.

Note: This is a more laissez faire approach to contracting.

B. Constructive Conditions of Exchange and Substantial Performance

1. Implied Conditions

a) There can be an implied constructive condition of exchange – even though the parties didn’t say the duty to perform was conditional on performance by the other party, courts can read this into the contract sometimes.

b) Bell v. Elder – P and D entered into a contract for the sale of D’s land. Included in the contract was a provision that D would agree to provide power to the property and P would agree to obtain a building permit and construct a house. Neither side agreed to meet their obligations until the other had first, and P sued for rescission of the contract. Court held that when determining the order of performance, if it is not specified in the contract, the law implies that the obligations be performed concurrently. Given this, neither party could claim a breach by the other unless it had performed.

2. Substantial Performance

a) Assume that the parties have stipulated (either expressly or by default) the standards by which the promisor’s performance is to be judged. We now ask: how much deviation from those standards will be permitted before we conclude that the performance has not been rendered?

b) If one party does not substantially perform, the other can suspend his own performance.

c) Goal: Prevents strategic behavior of owners who withhold payment for trivial defects as breach of contract

d) Elements:

(1) Not FRAUDULENT or WILLFUL (designed to minimize fraud on the part of the builders)

(2) Defect is insignificant relative to the overall project

(a) If the defect is substantial, you are in breach!

(3) Cost of fixing the problem is HIGH (if it’s low, you’d better do it)

e) Even if substantial performance has been found, D will owe P the difference in market value between what was agreed to and what currently exists.

f) Substantial Performance Found: Jacobs & Young v. Kent -- Where plaintiff built a country home for defendant and defendant later discovers that similar pipes were installed instead of the specified Reading pipes, and defendant withholds payment demanding that plaintiff replace the pipes, which would involve substantial destruction, the court found this was not a breach of the contract, but instead a trivial, innocent omission, that was neither willful nor fraudulent, and under the substantial performance doctrine, defendant must pay plaintiff for his performance, minus the cost of replacement or - since replacement would be excessively expensive - the market value of the difference between the pipes.

Counter: Contracting party should have right to expect performance in accordance with stated specifications. If the term was unimportant, it wouldn’t have been included in the contract.

g) Substantial Performance Not Found: O.W. Grun Roofing & Construction Co. v. Cope - The defendant agreed to install a russet glow roof on the plaintiff’s home for $648.00.

The roof that the defendant installed had yellow streaks on it due to a difference in color of some of the shingles. The defendant agreed to replace these shingles, but the new ones still didn’t quite match the rest of the roof. Court ruled in plaintiff’s favor, holding that a deficiency will not be tolerated if it frustrates an essential term of the contract. P contracted for a roof of a uniform color, not just a roof. In the matter of homes and their decorations, aesthetic considerations can be extremely important and so the failure to meet these considerations may be inconsistent with substantial performance.

h) Substantial Performance Found: Haymore v. Levinson - Defendants agreed to buy a house from the plaintiff for $36,000, but there was a provision included that said $3,000 of the purchase price was to be withheld until there was “satisfactory completion of the work” which referred to a list of items attached to the contract. Plaintiff performed the requested tasks, but the defendants kept saying that the work was unsatisfactory. P sued and the court ruled in his favor. The court made the distinction between contracts aimed to please the personal taste or sensibility of another, which have a subjective standard, and contracts that involve mechanical utility or structural completion, which have an objective standard. In contracts of the latter sort, one party cannot unilaterally declare a job unsatisfactory, as this would allow him to indefinitely escape his own obligations. An objective standard only requires that the work be...