Constructive Conditions

1. Constructive Conditions Contracts – Prof Merges April 19, 2011

2. Conditions • Express • Constructive

3. 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”

4. Express conditions (cont’d) • Other language that creates a condition • E.g., Internatio-Rotterdam: “delivery in December with 2 weeks call”

5. 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

6. Mitigating Doctrines • Prevention: Luttinger calls bank, says “do not approve our loan” • Waiver: Luttinger says “Don’t worry about the loan rate, we will buy” • Interpretation to avoid a forfeiture: Peacock; Jacobs & Young

7. 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

8. Kingston v. Preston

9. Lord Mansfield

10. Kingston v. Preston • Facts • Procedural History

11. 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”

12. What is π’s argument here?

13. What is π’s argument here? • Why doesn’t Kingston argue that the security he offered was “good and sufficient”?

14. What is π’s argument here? • State the π’s (apprentice’s) argument in terms of conditions

15. What is Δ’s argument here?

16. What is Δ’s argument here? • State the Δ’s argument in terms of a condition

17. Terminology • “Independent Covenants” – old Yearbook discussion from 1500  Two interlocking promises; each must be treated as independent

18. Uncle Nephew

19. “K-1” Uncle Nephew “K-2”

20. “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

21. Mansfield’s 3 categories – p. 717 • Mutual and independent • “Conditions and dependent” • Mutual, to be performed at the same time

22. Example Independent:see why? PEACOCK CONSTRUCTION: Owner pmt is independent of GC’s duty to pay

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

24. 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”

25. 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

26. 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

27. 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

28. 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

29. 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

30. Holding • Defendant wins • No obligation to pay until work is complete • UNLESS the K provides otherwise

31. Default rule • Good default rule? • Burden on builder to specify progress pmts • Otherwise, must wait until the end

32. Substantial performance • Described as a “mitigating doctrine” • What does it “mitigate”? • The harsh impact of a constructive condition

33. 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

34. 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)

35. 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

36. 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)

37. Kirkland v. Archbold • Restitution: another mitigating doctrine • Why needed here? • Failure to comply with a constructive condition; K performance excused

38. 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

39. 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