Contracts Class Notes 3/10/04


Tipton v. Feitner


There might not be much to learn from this case.  We have a contract for the sale for dead pigs for 7 cents a pound and a bunch of live pigs from Ohio for 5.5 cents per pound.  The seller delivers the dead pigs, but the buyer doesn’t pay for them.  Was this a “barrelhead” transaction?  The court says yes.  The court says that we should minimize the extension of credit.  In order to deserve to get the dead pigs, the buyer needs to be tendering the price of the pigs, and the buyer doesn’t do that!  How come?


What’s happening?  The seller could have withheld the dead pigs when he isn’t paid, but instead, what does he do?  The seller could have required payment against the delivery of the dead pigs, but he didn’t do that!  He was lenient with the buyer and gave the buyer a break.  The buyer was pretty much given the dead pigs on credit.  That turns out to be a bad decision by the seller.


If the seller had been tougher, he would have gotten his money or would have put the buyer in enough of a breach that the seller could have peddled the dead pigs somewhere else and not be liable for the non-delivery of the live pigs.  But the seller was lenient!  Because he wavered on the buyer’s duty to pay for the dead pigs, the buyer is not in the kind of breach which terminates the entire contract and excuses the seller from the duty to deliver the live pigs.


Instead, the seller gets antsy about the live pigs and hauls off and sells them to someone else.  This results in a repudiation on the seller’s part as far as the live pigs are concerned.  It’s another “who’s in default?” case.  This is also about divisibility.  Is this contract divisible?  Check out § 240: if you can pair up performances in pairs that correspond, one party’s performance of half of each pair has the same effect as if the contract only consisted of that one pair of performances.


The seller’s delivery of the dead pigs triggered the duty to pay for the dead pigs.  But then the seller hauls off and repudiates with respect to the live pigs!  The defendant can recover for the loss from not getting those pigs on a counterclaim.




Most contracts aren’t divisible.  Most are “entire”, which is the opposite of divisible.  In most contracts, you can’t divide them up into agreed equivalents.  Take, for example, a standard construction contract.  The basic agreement is to build a certain building according to certain plans.  The owner’s promise is to pay some contract price.  Generally, by agreement, there will be progress payments.  Otherwise, there will be too much credit extended by the builder to the owner.  The stages of constructing the building are not separable; they are just convenient times to pay part of the cost of the building.  Such a contract will be interpreted as entire.


Today we don’t need the common law difference between “divisibility” or “entire” contracts for the sale of goods because we have the UCC.  § 2-307 says that unless specified otherwise, all the goods have to be delivered and paid for at the same time.  So § 240 applies to non-sale of goods contracts, not including construction contracts which are entire.  Employment contracts are generally divisible at common law, but there are lots of employment statutes such as periodic pay statutes.  The common law doesn’t do much work as far as employment contracts work.  But in any case, most employment situations are at-will.


Here’s a construction contract that would be treated as divisible.  The builder will build three houses on three tracts of land right next to each other.  Each house will cost $300,000.  Each house is divisible from one another.  If the builder finishes one house, he gets the right to get paid $300,000 for that one house even if he runs away and doesn’t perform as to the other houses.  Damages for running away will be set off from his recovery for the first house.


“There is less than meets the eye than seems to be going on here.”  Entire versus divisible contracts haven’t turned out to be as useful as we thought.


What’s we’ve been talking about lately is the order of performance and what’s conditioned on what.  Now we’ll shift to…


The quality of the promised performances – the perfect tender rule


What kind of quality is necessary to trigger the opposing party’s duty?  Let’s look at sales of goods contracts and find out what performance by a seller is needed before the buyer’s duty to pay the price is triggered.  We’ll generally assume a “barrelhead” transaction: if the seller gets up to the required level of performance, that will create the duty to pay.


Oshinsky v. Lorraine Mfg. Co.


Here’s a contract for the purchase and sale of “shirtings”.  “Stock” means the bulk of the shirtings to be delivered.  What happens?  The seller tenders the stock on November 16 and the buyer says “I don’t want it!  I reject it!  Get it out of here!  I don’t want to pay for it!”  Why did the buyer did that?  It’s not likely that it was because it was a day late.  If it were a wedding dress, maybe it would make a difference.  But with “shirtings”, whatever they are, it probably doesn’t make a difference.


So maybe what really happened was that the buyer found out he could get the shirtings from somebody else for cheaper, or else the buyer had second thoughts and wanted out of the deal.  So the buyer rejects the goods (thrusts them back upon the seller) and says he won’t pay for them.  Is this rejection rightful or wrongful?


The trial court finds the rejection wrongful because it interprets November 15th to mean “on or about November 15th”.  Thus, the trial court finds that the seller’s performance on November 16th triggered the buyer’s promise to pay.


However, the Second Circuit will have none of this!  The appellate court says that 15th means 15th and not a day later!  Delivery on the 16th means that the defendant doesn’t have to pay a nickel!


This is the perfect tender rule.  In services contracts, only substantial performance is required to trigger the duty to pay.  But in goods contracts, perfect tender is required (at least at common law).  In the UCC, the current version is § 2-601.


The buyer has some choices if the goods that are delivered or the tender of those goods have something wrong with them.  The buyer can accept everything, reject everything, or accept some units and reject others.  Is this a good rule?  If this rule was subject to so much criticism, then why was it enacted in Article 2 and reenacted in the new version of Article 2?


Consider some hypotheticals.  There is a core of “good stuff” here.  Say you’re the buyer and you have agreed to buy a pair of shoes, size 9.  The seller tenders shoes that are size 8½.  Under the perfect tender rule, the buyer doesn’t have to take the shoes.  On the other hand, say the precise car you want is not on the lot because your favorite color is blue.  You haggle on the price for a car that is blue with very specific accessories.  You go in to pay for the car when it arrives, and it’s pink.  You don’t have to accept the pink car!  If the goods fail in any respect to conform to the contract, you don’t have to take the goods!  The perfect tender rule protects the reasonable, justifiable expectations on the part of the buyer and usually makes a lot of sense.


With that background, let’s consider some situations where it doesn’t make quite as much sense.  What does § 2-601 really say?


Say that a seller and a buyer signed a written agreement on July 1st.  They agree to the purchase and sale of 500 bushels of #1 Big Boy tomatoes for $5 per bushel with delivery to be made at the buyer’s dock on or before August 15th.  The tender of each side must be made at the buyer’s dock.  Notice how this is different than the cow hypothetical.  Tender is easier when the seller delivers to the buyer’s point because the buyer makes a tender by staying at home with the money.


Suppose that on August 15th, the seller tenders 500 bushels of #2 Big Boys demanding $4.50 a bushel instead of $5.  Is the buyer obligated to accept and pay for the tomatoes?  No way!  Under § 2-507(1), the seller’s tender is a condition to the buyer’s duty to accept and pay.  The tender we’re talking about is a tender pursuant to § 2-601 which conforms to every aspect of the contract.  #2’s may be okay, but they’re not what the buyer has contracted for!  The buyer need not accept and pay for these inferior tomatoes.


Suppose, on the other hand, that instead of tendering 500 bushels of #2 Big Boys, the seller tenders 480 bushels of #1’s and 20 bushels of #2’s.  He again asks for $4.50 for the #2’s.  Let’s say the buyer is my client.  Is the buyer obligated to accept the tomatoes?  The market price is $4 for #1’s.  The buyer wants to reject and buy somewhere else.  What should the buyer do?  What happens if the rejection turns out to be wrongful?  The buyer will have to pay damages to the seller.  The damages here would be under § 2-708 (1) – the contract price minus the market price.  There may also be § 2-710 damages – incidental damages for the cost of hauling the tomatoes over to the buyer’s place.  The buyer’s damages would pretty much wipe out any benefit of getting a better tomato deal elsewhere.


Does the seller’s tender conform?  § 2-106 (2) says that goods conform when they are in accordance with the obligations under the contract.  This means that perfect tender doesn’t mean “perfect in the abstract”.  It means perfect in relation to the contract.  But what’s a contract under the UCC?  It’s the “total legal obligation that results from the parties agreement as effected by the law”…but what’s the “agreement”?  It’s the bargain of the parties in fact or by implication from things like course of dealing.  So where are we?  We should be cautious about telling our buyer to reject.


What’s the course of dealing between the parties?  What if the buyer buys from the seller every year?  What if the buyer has taken #2 tomatoes in the past?  If the tender has always been okay in the past but now it’s not okay, the rejection will be wrongful.  Contract terms can be modified by course of dealing.


A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is to be regarded as establishing a basis of understanding for interpreting what they say and write in regard to their current deals.


Here are the UCC sections that matter in this hypothetical: §§ 1-205(1), (3), and (4); 1-201 (3) and (11); and 2-106 (2).


This is kind of what the trial court was trying to do in Oshinsky, and this was rejected by the appellate court in this context.


How about the obligation of good faith?  The seller could argue that the buyer is not rejecting in good faith.  The buyer doesn’t care about what type of tomatoes there are.  Instead, the buyer is trying to get out of what he sees as a bad deal.  Good faith for a consumer simply means honesty in fact.  For merchants, good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing.


Suppose the buyer rejects the tomatoes and the seller says that he’s be back with all #1’s.  Look at § 2-508 (1), which is another big qualification on perfect tender.  The seller can tell the buyer that he’s going home to get 20 substitute #1’s before the end of the day.  So that’s a significant limitation to the perfect tender rule.


§ 2-508 (2) sometimes allows the seller to go beyond the contract time.


§ 2-601 references § 2-612 which talks about installment contracts.  Let’s say that our tomato contract called for two deliveries of 250 bushels each.  It turns out that in essence the perfect tender rule doesn’t apply to installment contracts.  Installment contracts require or authorize delivery of goods in separate lots to be separately accepted.  This statute does something similar yet different from divisibility.  The original “on or before August 15th” contract may even be an installment contract if the seller has a truck that can’t hold all the tomatoes called for in the contract.  Delivery in separate lots would be implicitly authorized under the contract.


If we had the facts of Oshinsky today, we would get the opposite result because the buyer can reject any particular installment that is non-conforming such that its value is “substantially impaired”.  Notice how this echoes the substantial performance rule!  But the impairment must be substantial, and the defect must be incurable.  Maybe the defect can be remedied with a price allowance on the inferior tomatoes.  If we have an installment contract, rejections will almost always be wrongful.  Thus, if you represent a seller, try to interpret the facts to produce an installment contract!  That’s good for the seller!  But don’t get too rambunctious, because we interpret contracts as for single deliveries unless we say otherwise in the contract.


Why is that?  Perfect tender went with single-delivery and a softer standard went with installment contracts at common law.  There are also policy reasons.  Installment contracts tend to involve merchants with ongoing relationships rather than one-time deals involving consumers.  Also, there isn’t as much need for nit-picking in installment contracts.  So remember that Oshinsky would be decided the other way today because it is plainly an installment contract.


Note that the text of § 2-612 addresses what the buyer can do but not what the seller can do.  However, in case law, this has been extended to the seller.


The perfect tender rule works reasonably well if you understand it.


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