Contracts Class Notes 2/24/04


A problem – Tompkins v. Dudley


Say a builder contracts to build a barn for an owner for $60,000.  The builder gets $50,000 in progress payments as he nearly completes the barn.  Then, due to no fault of either party, the barn burns down.  The owner demands that the builder rebuild the barn.  The builder refuses!  The owner goes and has another builder build the barn, and it costs $70,000.  The owner sues the builder.  What should the owner recover?


This is like Tompkins v. Dudley, where we learn that the builder is not excused.  In Taylor v. Caldwell, both parties were excused because the contract became impossible to perform.  On the other hand, in this case and in Tompkins, it’s possible to still perform the contract!  You can just build the barn!


The builder promises to create an asset.  The creator of the asset bears the risks of loss.  The builder is not excuses, and so the builder is in breach when the builder refuses to rebuild.  Therefore, the builder must put the owner in the position that performance would have done.


Where is the owner when he comes into court?  He has a $120,000 hole in his pocket.  He has a barn.  He was promised a barn for $60,000.  So he needs $60,000 to get into the position that performance would have done.


In this situation, there is a partial excuse.  If the barn is due to be done on the first of February and the fire which destroys it occurs on the 20th of January, it might be impossible to finish it by the due date.  We would thus grant the builder an excuse for delay, but not a complete excuse.


Primarily, this rule is based on precedent.  The rule could be formulated differently, but it just is the way it is.  If you want to, you could contract out of this “off-the-rack”, default rule.  More importantly, the builder can buy insurance against the risk of loss and then include the cost of such insurance in the price to the owner.  So this rule may not be the world’s best, but you can contract out of it or insure against it.  One virtue of this rule, however, is that it’s clear and offers predictable results.


Another problem – Carroll v. Bowersock


So we have a roofer and an owner.  The roofer contracted to remove the old roof from the owner’s barn and to replace it with a new roof for $10,000.  The roofer first removed the old roof at a cost of $2,000.  Then the roofer had new shingles delivered to the site at the cost of $3,000.  But before the roofer started to put on the new roof, the barn burned down without the fault of either party.  The shingles were also destroyed.  The roofer sued the owner for $6,000 ($2,000 labor so far, $3,000 in shingles, and $1,000 he would have received in profit).  What happens?  If the roofer hadn’t done any work yet, both sides would have been able to walk away.  In any case, the roofer doesn’t get his $1,000 profit.


How does this relate to Carroll?  The contract was to tear out an old floor and putting in a new floor.  The contractor recovered for the work done tearing out the old floor.  In both situations, there will be recovery for “tearing off” and removing the old thing.  In Carroll, the court says that it’s a restitution idea.  It is claimed that the owner benefited.  He started out with a warehouse with an old floor, then he had a warehouse with no floor at all.  Then it burned down.  It is argued that the warehouse without a floor is worth more.  Is there any real benefit?  No.


What is the test in Carroll?  If what is lost in the fire has been wrought into (or out of) the structure, then it’s a benefit to the owner and the builder can recover for it.  If it hasn’t been wrought into the structure, then the builder cannot recover for it.  In Carroll, the builder recovered for tearing out the old floor and pouring concrete pillars.  But he didn’t recover for putting up some wooden forms in order to put up pillars and putting in steel rods to support the pillars.  The court reasoned that the wooden forms were going to be removed later, and so they were not wrought into the structure.  There was some disagreement, but the majority said that the steel rods weren’t wrought into the structure either.


Materials sitting around the site and not yet wrought into the structure in any way can be lost entirely at the builder’s risk.  In order for the builder to get restitution, the owner must get a benefit, and there is no benefit until the builder has made something a part of the building.


This is another rule is that not fundamental; it’s lawyer-made.  But there’s not much incentive to change it because you can contract out of it.


Another reason for this rule is that the court is spreading the loss around.  The loss is split between owner and builder based on how much value is wrought into the structure.


The difference between creating an asset and working on an asset can create a difference when there is a big project with a general contractor and lots of subcontractors.  The general contractor tends to incur all the risk and the subcontractors incur none.  Is that fair?


These are relatively common situations where you have unforeseen circumstances that occur after contract formation but before performance.


Yet another problem


A consumer visits a used car dealer.  The consumer drives away with the car and promises to pay later.  But before the consumer pays, the car gets stolen.  Can the dealer recover the $10,000 cost of the car from the consumer?  On the other hand, if the consumer can show that she had a good deal and the car was really worth $12,000, can the consumer counterclaim for $2,000?  The answer to both questions is no, based on UCC § 2-613.


When goods suffer “casualty” (like theft or fire) without the fault of either party after a contract for their sale, and the bargain was for these particular “identified” goods, and the loss is total, then the contract is avoided.  The consumer doesn’t have to pay the dealer, and if she had made a down payment she doesn’t have to get it back.  Also, the dealer need not deliver a car to the consumer, even if the consumer got a good deal.


The risk of loss doesn’t pass to the consumer until the consumer receives the car.  When the seller is a merchant, the risk of loss passes to the buyer upon receipt of the goods.


In the course of Taylor, there is some talk of sale-of-goods situations.  It may be a little confusing in terms of the modern law, and that’s why we’re going over the modern law.


Even another problem


The consumer contracts to buy a certain model of refrigerator for $800 on Monday, and the store orally agrees to deliver the refrigerator on Wednesday.  The consumer isn’t buying a particular refrigerator, but rather one of a certain model.  On Tuesday, all of the refrigerators in the warehouse are destroyed by fire.  The store was not at fault.  They thus failed to deliver the refrigerator on Wednesday.  The consumer went and bought an identical refrigerator at a different store for $900.  Can the consumer sue for $100?


UCC § 2-615 says that even though the seller might not get a complete excuse, the seller might get a partial excuse for delay in delivery.  Maybe the seller can get a refrigerator from a different source.


But the buyer was entitled to have the contract performed.  If the buyer gets notice that the seller will be late, the buyer can call it quits and decide to deal with someone else.  Alternatively, the buyer can agree to a later delivery date and hold the seller to the agreed price and get it at a reasonable later time.  But we won’t cram something down the buyer’s throat to which the buyer didn’t agree.


We’ll come back to § 2-615.  It has lots of serious stuff in it.  It precedes the Second Restatement in time and was influential to that Restatement.


A problem on the sale of land


A vendor and vendee agree to the purchase and sale of the vendor’s house on the 15th of January.  The price is $200,000, and the writing provides that closing will be on February 15th.  On February 1st, the house burns down without the fault of either party.  On February 15th, the vendor sues the purchaser for specific performance.  The vendor wants the forced exchange of the lot with the smoldering remains of the house for $200,000.  What’s the result?  We have an equitable conversion.  The purchaser has equitable title at the time of contract formation.  Land contracts are automatically, off-the-shelf specifically enforceable.  In a majority of jurisdictions, when you have an equitable conversion like this, it means that the purchaser has the risk of loss from the moment of contract formation and thus the vendor will win his suit.  As best as Clovis can tell, that’s the law of Ohio even today.  It’s the opposite result that you would have if it was goods because it’s land instead.  With goods, the seller has the risk until the goods are received by the buyer.  On the other hand, with land, the starting place is the equitable conversion doctrine which says that the purchaser has equitable title and bears the risk from the very moment of contract formation.


You better have insurance at the moment that you sign the contract!


But this rule hasn’t been changed by statute.  It’s not that important.  How come?  People contract out of this.  This rule is avoided by contract in pretty much every land contract with which any kind of a professional has contact.  Any lawyer or real estate agent will contract out of this rule.  The bottom line is that this is a bad rule, but you can contract out of it.  The only time it probably won’t get contracted out is when two amateurs make a homemade contract without being aware of the rule.


When you have a bad rule that persists where it deals with planned transactions, it’s probably doing very little harm because people avoid it by contractual provision.


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