Contracts
Class Notes
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
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.
Divisibility
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.
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.