Contracts Class Notes 3/16/04


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.


Plante v. Jacobs


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. Kent


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 New York!


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?  Clovis says yes, and we’re getting away from it.


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 New York


Hadden took money from his employer under the table!  But the New York court decides that he doesn’t have to lose his pension.  The New York court decides that there was substantial performance.  The courts are slowly moving towards looking at what the owner got and whether it makes sense to make the owner pay the contract price or the increase in wealth the owner got.


That’s relatively simple, but here’s a case that’s not…


K & G Contr. Co. v. Harris


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!


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