Contracts
Class Notes
“Condition
of satisfaction”…
Recall
the hypothetical from yesterday:
Suppose we have a deal between Ursula Ugly and Rick
Rembrandt. Rick Rembrandt promises to
paint Ursula Ugly’s portrait (with sympathy) and Ursula promises to pay Rick $10,000
if she is satisfied with the portrait. Say
Rick paints, and Ursula is dissatisfied.
Or, suppose Rick paints, and Ursula is too upset to even look at the
painting and won’t pay him. Or, suppose
that before Rick has begun to paint, Ursula finds that she can have Dave paint
for $5,000. Rick sues. Can he recover? Or, what if Rick repudiates? If Dave would do the portrait for $15,000,
can Ursula sue for the $5,000 difference?
What
if Ursula is unreasonably dissatisfied with the painting, though in good
faith? By the terms of Ursula’s promise,
her promise has not be triggered (“switched on”). She has conditioned her duty to pay on being
satisfied.
We
divide the world of personal conditions of satisfaction in half. One type of condition of satisfaction is
where we apply a good faith test; this is a condition of satisfaction that
concerns “taste, fancy, or judgment”.
The other type is what is called “operative fitness”. Say the seller promised to supply a great big
boiler and the buyer’s duty to pay is conditioned on the buyer’s
satisfaction. The interpretation is that
if a reasonable person would be satisfied, you must pay because you can figure
out objectively whether or not a boiler is built correctly (you can judge it
against its blueprints, see how well it boils, etc.).
On
the other hand, we determine whether a portrait is satisfactory based on the
idiosyncratic tastes of the purchaser of that portrait. Likewise, if someone buys a tract of land, we’ll
judge whether the land is satisfactory based on a subjective standard rather
than objective standard.
There
may not be a bright line, but there is a continuum. The case of Ursula is definitely at the “personal”
end of the continuum.
What
we’ve been talking about so far has nothing to do with consideration or
mutuality of obligation. All we’ve
talked about so far is the conditional nature of her promise.
What
if Ursula can’t ever bear to look at the portrait? In that situation, she is in breach.
One
way to interpret Ursula’s promise is as a set of two alternatives: either (1)
she’ll pay for the painting, or (2) examine it and express her dissatisfaction. If we find that either of these could be
bargained-for consideration, then the agreement will be upheld. It may be that Ursula’s promise, overall, is
quite flimsy. It may well be that Rick
was foolish to agree to the deal.
However, as long as there’s a deal, we’ll enforce it.
Here’s
the rub: if Ursula likes the painting, but lies about it because she wants to get
out of what she sees as a bad deal, she’s liable for the price – in
theory. But if you’re Rick, how do you
prove she’s lying about her satisfaction with the painting? You might be able to get evidence from one of
Ursula’s friends if she told someone that she actually liked the painting but
was trying to cheat her way out of paying for it.
If
Ursula breaches before Rick paints, she is in breach and her promise shall be enforced. Not having the painting painted wasn’t
among the promised alternatives.
Note
that Ursula’s promise is not illusory because it is quite possible to break
it. However, it is a flimsy problem that
may put Rick at some risk.
Let’s
say Rick refuses to perform before he starts painting. Say Ursula goes to Dave DiVinci, who paints
her picture for $15,000. Can Ursula sue
Rick for $5,000? Rick made a flat
promise to paint, and he’s plainly in breach.
But the difficult issue is whether or not his promise is supported by consideration,
and thus enforceable. The answer as
articulated by Omni
is that her promise was not illusory, and therefore it constituted good consideration
and Rick’s promise shall be enforced.
You’ll see this over and over again.
Sometimes
the condition of satisfaction is based on an evaluation by an expert. For example, maybe you will condition your
payment for a building on a satisfactory report from a building inspector or
architect. That’s part of what’s going
on in Omni.
UCC
§ 2-306
Output, Requirements and Exclusive Dealings.
(1) A term which measures the quantity by the output
of the seller or the requirements of the buyer means such actual output or
requirements as may occur in good faith, except that no quantity unreasonably
disproportionate to any stated estimate or in the absence of a stated estimate
to any normal or otherwise comparable prior output or requirements may be
tendered or demanded.
(2) A lawful agreement by either the seller or the
buyer for exclusive dealing in the kind of goods concerned imposes unless
otherwise agreed an obligation by the seller to use best efforts to supply the
goods and by the buyer to use best efforts to promote their sale.
Let’s
say a cheese factory agrees to buy all the milk they require for a year from a
certain milk supplier. Let’s say the
amount of milk ordered by the cheese factory fluctuates all over the place and the
uncertainty is a burden on the milk supplier.
What protection does § 2-306 give the milk supplier? It doesn’t give the milk supplier protection
if the requirements are fluctuating in good faith and aren’t too far from a
stated estimate. Thus, a seller will
want to have a stated estimate of requirements in the contract.
Let’s
say there wasn’t any stated estimate.
Then you’ll look at the cheese factory’s ordinary requirements before
they made the contract and see if what they’re demanding now is out of
line. If their current demands are
out of line, there is no obligation to meet them.
If
there is no stated estimate and the buyer is getting into a new venture, the contract
may be held void for vagueness. But even
if you can’t come up with an exact stated estimate, you can still come up with,
for example, a “ceiling” and “floor”.
Sometimes
indefiniteness is a good thing, but it can be a bad thing if one party is in
total control of that indefiniteness to the detriment of the other party.
Feld v. Henry S. Levy & Sons, Inc.
“A
truly crummy case.”
Here,
the buyer promises to buy everything that the seller produces. That’s not an illusory promise. However, in a situation like this, one party
controls the quantity, which could be difficult for the other party.
The
seller performs for a while, but then shuts down. What can the buyer do? We find out from this case that sometimes an
output seller can shut down without being in breach. Also, sometimes a requirements buyer
can shut down without being in breach.
But other times, one side shutting down may constitute a breach.
When
a shutdown is in bad faith (is dishonest), there is a breach and the injured
party can get a remedy.
The
Court of Appeals of
What
principles should guide the trial court?
The defendant would be justified in good faith in shutting down their bread
crumb production only if they would incur “more than trivial losses” by
continuing.
There
is some evidence that the output seller was in breach. The output seller wanted to get more money
for the crumbs. Also, the seller had the
chance to get out of the contract on six months notice. The court suggests that they ought to work
hard to keep their crumb production going until that six months is up.
The
comments to § 2-306 say:
A shut-down by a requirements buyer for lack of
orders might be permissible when a shut-down merely to curtail losses would not.
This
is something for Feld, the buyer, to jump up and down about at trial. But is this such good language? You could just raise your prices to
ridiculous levels in order to prevent any more orders.
The
comments continue:
The essential test is whether the party is acting in
good faith.
The
bottom line is that the parties better be careful when they enter into
an output, requirements, or exclusive contract.
If they aren’t careful, § 2-306 might help them out, but it might not.
Franchising
This
is big business. A franchisor, which is
the stronger economic party, deals with a franchisee, which tends to be much
weaker. There is a lot of competition to
get franchises.
Usually,
the franchisor’s promise is as close to illusory as you can get. They want to be able to dump the franchisee
quickly for any or no reason. How
come? The franchisor has a huge interest
in having each of its franchisees behave.
For example, if a McDonald’s got rat-infested, it would give all
McDonald’s restaurants a bad name.
McDonald’s wants to be able to revoke the franchise really fast. We don’t police those agreements much in the
courthouse. That’s hard on the
franchisee because the franchisee must put up a big investment at the
beginning, in reliance on an almost wholly illusory promise. Franchisees take a big risk. Is that fair?
The common law and UCC have had very little effect on this.
However,
statutes have had an effect on the franchisor-franchisee relationship. These statutes police the franchisor in terms
of what it tells the franchisee. The
franchisor has to disclose a lot of information. The statutes also control ways in which the
franchisor can close out the franchisee.
It is thought, however, that the franchisor needs a lot of power to
maintain even quality throughout its franchises. This policing, therefore, is often a lot more
modest than you might think.
Dealers’
relations with their franchisors have been, for a long time, primarily a matter
of arbitration.
This
is an interesting area if you’re interested in it.
Next
week, we’ll do Embry
and other stuff.