Contracts
Class Notes
We
have been talking about variations on the perfect tender rule. Now let’s shift our focus to services contracts,
and construction contracts in particular.
With goods, we start with the idea that the seller’s performance
obligation is to make perfect tender. If
the seller doesn’t, the buyer can thrust the goods back on the seller and incur
no obligation to pay for them. How
come? Judge Cardozo suggested that when
a buyer rejects good, the seller gets the goods. The seller loses his expectation interest,
but he can haul off and sell the goods to a third party. He doesn’t have any sort of huge
forfeiture. Though that’s not true with
custom goods, it’s true of many goods contracts and very few service contracts.
In
a service contract, the servicer renders the service. If the buyer refuses, then the services are
consumed and gone. Unless the servicer
can enforce the contract against the buyer, the servicer will experience a big
forfeiture! That’s a big reason why we
don’t have a perfect tender rule in services contract: instead, we have a substantial
performance rule.
We’re
talking somewhat about order of performance again. This case asks: what quality standard is
there for the servicer to trigger the payor’s obligation to pay? The idea is that the servicer must substantially perform. Not 100%, and not perfect, but substantially. If the servicer does so, it trigger’s the
owner’s obligation to pay. If we have substantial
performance, but it’s short of perfect
performance, the payor pays the contract price but then can have damages for
the shortfall in the builder’s performance.
The contract price can be dinged by damages.
What
is substantial performance? This case
gives the standard definition: “The test of what amounts to substantial
performance seems to be whether the performance meets the essential purpose of
the contract.” But what good does that
do? Not much. These are fuzzy terms that can be vigorously
argued about. A vague standard makes it
hard to predict how things will come out, but it’s good in that if you did
anything else it would be hard to achieve justice.
This
is a routine contract to build a house on the owner’s land. Notice that $20,000 of the $26,765 price was
voluntarily paid by the owner. The fight
is not about the bulk of the price, but only about that last $6,000. It’s rarely the case that the parties are
fighting over a huge contract price.
Instead, they’re fighting over the last payment on a huge contract price.
In
this case, there are two big arguments: (1) Did the builder substantially perform? (2) How much can the owner subtract in damages
due to the shortfall in the builder’s performance?
We
have thought about this before in connection with Groves v. Wunder. There are two possible rules: (1) The
diminished value rule – How much would the building be worth if perfect? How much is it worth the way it is? Subtract the second from the first and you’ll
have the damages. (2) The “fix-up” rule –
How much would it cost to fix up with over-half-baked house and make it fully
baked? The court applies the two rules
to different elements and comes up with the owner’s loss due to the builder’s
shortfall in performance.
In
terms of the fix-up rule, do you think the owner really would have taken the
fix-up cost of the wall and actually fixed up the wall? The owner probably would have invested the
money and gotten a windfall instead. To
fix the misplaced wall, you would have had to destroy a perfectly good
wall. The court doesn’t like the idea of
this. The court also thinks that the
living room isn’t unduly cramped and would be okay for most people.
The
builder messed up a lot of stuff. The
builder failed to finish the house, probably because relations between the
owner and the builder turned really sour.
The holding of the case is that the trial court didn’t err when it said
that the builder had substantially performed.
What if the trial court had found the opposite? The Wisconsin Supreme Court probably would
have affirmed in that case, too. The appellate
court basically thinks that they shouldn’t upset what the trial court did.
Jacob &
Youngs v.
The
contract in this case called for a certain kind of pipe, but a different kind
of pipe was used. The contract also
called for tearing down the whole thing if anything was done wrong. But Cardozo ignored this provision! On the facts on the case, the pipe installed
was perfectly good, but just happened to be from the wrong manufacturer. There would be a lot of economic waste
involved in tearing out the old pipe. So
even if you try to write the contract to force the builder to perform in a perfect fashion, you may not be able to.
But
in most states, you could condition a builder’s right to be paid on an
architect’s certificate that says that the building meets the plans and
specifications. Recall how we talked
about conditions of personal satisfaction.
The “architect’s certificate” condition is an analogue in the realm of “professional”
opinion. But note that this doesn’t work
in
But
the builder’s price might go up if you require the approval of an architect,
especially a particularly “finicky” architect.
So you can get what you want as an owner, but you’re going to have to
pay for it.
What
if a piano was supposed to fit in the living room and the builder knew it, but the
piano doesn’t fit? That might be a
better case for failing to provide substantial performance.
What
if the builder falls short of substantial performance? The owner will sometimes get the additional
work for free, but not necessarily.
Reynolds v. Armstead
You
can get restitution to disgorge unjust enrichment if we’re confident that
otherwise the owner would be unjustly enriched.
But if the performance is bad enough, you might be able to take the
position that there is no unjust enrichment because by deviating so far from
the contract, the builder has become a volunteer
or officious intermeddler who
deserves no restitution. There will be
significant flexibility and vagueness in determining whether someone who has
performed less than substantially is entitled to restitution.
Suppose
that the contractor deviates from the contract intentionally? Does the contractor get nothing? Cardozo says yes. He says that the “willful transgressor” must
accept the consequences of his sins. If
he willfully deviates from the contract, it will usually prevent his performance
from being substantial and it won’t be unjust for the owner to keep the value
of the work. Is that bad law?
Recall,
however, that we’re arguing about the last payment in an installment contract. It will probably be something like the last
5% of the contract price.
What
if the defendant in Jacob & Youngs
willfully uses the wrong kind of pipe and then tries to get away with it? Does that make that person so bad that they
shouldn’t get paid? Not according to the
Second Restatement in § 374.
Hadden v.
Consolidated Edison Co. of
Hadden
took money from his employer under the table!
But the
That’s
relatively simple, but here’s a case that’s not…
This
is a “who’s in breach” case with a vengeance. We have a subcontractor and a general contractor
who is also the owner. The excavator is
to do a significant amount of work. The
off-the-rack rule of Stewart v. Newbury
says that the excavator gets paid only when done. But this would give too much credit to the
owner. So the excavator is going to get
progress payments. The excavator’s duty
to continue is conditioned on the progress payment. If the owner doesn’t make the progress
payment, the excavator will be justified in stopping performance.
The
builder works up a storm and earns a progress payment for work done in
July. That payment is due on August 10th. But then there’s a big accident on August 9th. The parties differ vigorously about that
event. The owner takes the position that
work was promised to be done in a workmanlike manner, and the subcontractor’s negligence
breached the contract. The builder says
that he didn’t do anything negligent, and the wall fell down for some reason
that wasn’t the builder’s fault. The
builder thinks that the owner owes the money.
So the owner stops making progress payments, and the builder quits. That turns out to be a total breach of contract
by the builder, and the builder will get nothing and will owe damages for breach
to the owner.
We’re
talking about “self-help” remedies.
Sometimes the parties can work things out outside of court and can
protect themselves by taking certain actions.
The owner protects itself here by not making a payment. The owner says that the builder has
wrongfully bulldozed a wall. Ultimately,
the court decides that the owner was
right, and that the builder failed to act in a workmanlike manner. It turns out that the owner guessed right and
the builder guessed wrong. The builder
got too rambunctious and went too far in this case. The builder got caught as a repudiator and
gets nothing in the way of protecting his expectation interest.
Make your self-help conduct
proportionate to what the other party has done wrong…and ask whether the other
party has done anything wrong at all!