Constructive Conditions

Contracts – Prof Merges

April 19, 2011

Conditions

• Express

•Constructive

Express conditions

• Clear conditional language

–“It shall be a condition of buyer’s performance under this contract that buyer obtain suitable financing for the purchase of Owner’s house”

Express conditions (cont’d)

• Other language that creates a condition

• E.g., Internatio-Rotterdam: “delivery in December with 2 weeks call”

Express conditions

• Language creating a condition

–Must be seen in light of all facts and circumstances: CONTEXT matters

• Presumption against construing language as a condition: Peacock as an example of why

Mitigating Doctrines

1. Prevention: Luttinger calls bank, says “do not approve our loan”

2. Waiver: Luttinger says “Don’t worry about the loan rate, we will buy”

3. Interpretation to avoid a forfeiture: Peacock; Jacobs & Young

Constructive Conditions

• Explicit condition: (Luttinger): “subject to and conditional upon”

• Constructive condition: When a court believes the same effect as an explicit condition – discharge – is warranted by the facts, even though there is no express condition in the K

Kingston v. Preston

Lord Mansfield

Kingston v. Preston

• Facts

• Procedural History

What did the K say?

• Pmts by apprentice Kingston for purchase of Preston’s business, £ 250 per month

• Kingston to give “good and sufficient security at and before the sealing and delivery of the deeds”

What is π’s argument here?

What is π’s argument here?

•Why doesn’t Kingston argue that the security he offered was “good and sufficient”?

What is π’s argument here?

• State the π’s (apprentice’s) argument in terms of conditions

What is Δ’s argument here?

What is Δ’s argument here?

• State the Δ’s argument in terms of a condition

Terminology

• “Independent Covenants” – old Yearbook discussion from 1500

Two interlocking promises; each must be treated as independent

Uncle Nephew

Uncle Nephew

“K-1”

“K-2”

“Dependent promises”

• My duty to perform depends upon your prior performance

• If you do not perform, my remedy is nonperformance, as opposed to suit for breach

Mansfield’s 3 categories – p. 717

1. Mutual and independent

2. “Conditions and dependent”

3. Mutual, to be performed at the same time

Example

Independent: see why?

PEACOCK CONSTRUCTION: Owner pmt is independent of GC’s duty to pay

• Kingston: Preston’s duty to convey business dependent upon apprentice’s supplying good security

Dependent promises

Category 3: Mutual, performed at same time

• Sometimes called “simultaneous”

• Only difference: Party asserting nonoccurrence must show (1) Nonoccurrence, PLUS (2) that he/she was “ready, willing and able to perform”

Category 3: typical at closing

• If seller has bad title at closing, buyer must show (1) good title was a condition, and (2) buyer was “ready, willing and able” to perform at closing

• No one will lend to buyer? No excuse, no remedy in breach

Ready, Willing and Able doctrine

• Hellrung v. Hoechst, 384 SW2d 561 (Mo. 1964)

• Buyer who says “I will give you the money if you will give me title,” did not have money in possession: no discharge for buyer, no breach by seller

Stewart v. Newbury

• Plaintiff built 1 floor of defendant’s building, sought payment of $896 for 1st installment of work

• Defendant said work defective, refused to pay; Plaintiff brought suit to recover $896

Defendant’s argument: constructive conditions

• Full and satisfactory performance by plaintiff was a constructive condition of defendant’s obligation to pay

• Faulty and incomplete performance by plaintiff excused defendant of obligation to perform

Plaintiff’s argument

• 85% customary payment rule should apply here

• Defendant breached when it did not pay 1st bill; this excused defendant from obligation to perform

Holding

• Defendant wins

• No obligation to pay until work is complete

• UNLESS the K provides otherwise

Default rule

• Good default rule?

• Burden on builder to specify progress pmts

• Otherwise, must wait until the end

Substantial performance

• Described as a “mitigating doctrine”

• What does it “mitigate”?

– The harsh impact of a constructive condition

Constructive condition not met . . .

• Results in excused performance on the part of the contracting party in whose favor the constructive condition runs

• His may be harsh; may work a “forfeiture” in the words of the older cases

What is forfeited?

• The right to compensation for your performance

• The money due to you from having almost precisely performed (and hence complied with the constructive condition)

What is “substantial performance”?

• Step 1: There is a constructive condition – A excused from performance when B’s performance not perfectly rendered

• Step 2: B almost completely complied with the condition; failed in a small or minor respect

Jacob & Youngs v. Kent

• Stated in terms of constructive conditions: – The completion of the house with all

specifications complied with, including Reading pipe, is a constructive condition of the owner’s obligation to perform

• Condition not met; owner need not perform (make final pmt)

Kirkland v. Archbold

• Restitution: another mitigating doctrine

• Why needed here?

• Failure to comply with a constructive condition; K performance excused

Restitution

• A “mitigating” remedy – mitigates the harshness of the constructive condition doctrine

• Otherwise, party in whose favor a condition runs can keep all benefits if condition not met in some minor respect

Kirkland

• Plaintiff/builder wanted to be excused from continued performance, and collect the 1st $1000 payment

• Not permitted; K not “severable” (1st pmt not a constructive condition)

• But: restitution for part performance