Contracts
Class Notes
What
is the purpose of this case? Why is it
in the book? What’s the lesson of the
case?
What
is the difference between a condition precedent and a condition subsequent? Is that important to this case?
Here
we have a sale of a large quantity of commercial whale oil. The buyer makes two promises to pay: one
conditional, and one unconditional. The
buyer would pay an extra $5000 if there is less oil this year than last. The condition has to do with the oil
supply. If more oil comes in this year
than last, then there is a large supply and prices are likely to be a bit
lower. In that case, the buyer doesn’t
have to pay the extra $5000.
This
was a sophisticated deal for this time!
It pitches the present price of oil against future supply and demand.
There is no question that the buyer must pay $12,000. The argument is about the extra $5000.
It does make a difference whether this is a
condition subsequent or a condition precedent.
When does this matter?
Historically, it made a difference as to burden of proof. A condition precedent would have to be proved
by the plaintiff. A condition precedent “switches
on” the defendant’s promise. However, if
it is a condition subsequent that excuses the defendant from an otherwise
existing duty, then it’s the defendant’s burden to prove it.
So
what? If we figure out whose burden it
is, that party will carry the burden in most cases, and life will go on in most
cases.
What
if the Lady Adams had arrived a week early?
Then it would be perfectly plain that more oil arrived in 1819 than in
1818 and thus the buyer doesn’t have to pay the extra $5000. In those circumstances, the burden of proof
wouldn’t matter. The same would be true
if the Lady Adams arrived way late. But
it does matter when it’s a really
close call.
Wigmore
called the burden of proof “the risk of non-persuasion”. In cases where the evidence is cloudy or
precisely balanced or scanty, the party with the risk of non-persuasion will
lose. Whoever has the burden loses in
such a case because they can’t carry the burden! The allocation of burden of proof is
result-determinative when the evidence is cloudy, evenly balanced, or slim.
Whether
a condition is precedent or subsequent has no
effect on the substantive law. It only
affects procedure. That procedural
importance is small and shrinking.
A
husband and wife both enter a second marriage.
Each has two children from the prior marriage. The husband is rich and has a big life
insurance policy. His will and insurance
policy will give everything to the wife if she’s alive at the time of his
death. On the other hand, if she’s dead
when he kicks the bucket, then his kids
get everything. On the other hand, the
wife has a will that leaves everything to her
kids. The husband and wife die in a
common disaster! There’s no way to know
who died first! This is where the burden of proof counts. You can’t prove who died first, but if you
don’t have the burden of proof then you don’t have to prove anything!
The
court treats the condition as a condition subsequent based on the language: “…then
this obligation to be void.” What it
sounds like is a duty that exists, but then gets kills off if the condition occurs.
A
condition is a condition precedent under the first Restatement if it is a fact
that must exist before a duty of immediate performance of a promise arises.
Is
it the case that there is no duty to pay until October 1st has come
and gone without as much oil as last year?
Holmes
said that almost all conditions were in
fact conditions precedent. What do
courts do with this? They have a lot of
room to move. They can look at the form and say it’s a condition subsequent with the burden on the defendant. They can look at
the substance and say it’s a condition precedent with the burden on
the plaintiff. Sophisticated courts, it was argued, paid no
attention to the condition, but merely decided who they wanted the burden to be
on and then interpret the condition accordingly.
This
distinction is merely procedural! Sometimes it’s very important, but more often
it’s not. And it’s very much subject to
manipulation by the courts! No wonder we’ve
had lots of academic literature suggesting that we should get rid of this
distinction. Perhaps, it is suggested,
we should allocate the burden of proof on other bases. Maybe the parties can assign the burden of
proof within the original contract.
The
only true condition subsequent that
Holmes could come up with was from insurance contracts. Once the insurance company’s duty to pay is
triggered, the only thing that can kill the duty is: “If suit isn’t filed by
the insured against the insurer after the proof of loss has been filed, the
insurance company will be excused from its duty to pay.” This is sort of a homemade statute of
limitations established by contract. If
the insured doesn’t assert his rights, they will get killed off after a while.
The
Second Restatement says that we don’t worry about the words “precedent” and “subsequent”.
This
isn’t a huge deal. But let’s look at
something that is a big deal.
The order of performance
Nichols
agreed to sell and deliver a cow to Raynbred, who agreed to pay 50
shillings. Did Raynbred pay the 50
shillings? Nope. Nichols sues for breach of his promise to pay
the 50 shillings. Raynbred’s defense is not that his promise was not supported
by consideration. The buyer’s promise to
pay 50 shillings was enforceable, and he didn’t pay.
What’s
his defense? His defense is that he got
no cow! The court says that that’s no defense. You have to pay for the cow, even though he
didn’t get it! What would Raynbred have
to do then? Raynbred would have to turn
around and sue Nichols for the cow or the value of the cow. This is a bilateral contract, and it seems
like it will take two suits to enforce it!
In
1615, we didn’t know much about counterclaims.
You couldn’t do it all in one suit.
You would have to do it in two suits.
That’s where the law was for a long time. What’s wrong with that bit of law? It creates a multiplicity of lawsuits, for
one thing. Willes thought this was bad
in 1744, but he didn’t think he had the power to change it!
But
what’s the biggest problem with this? Raynbred
has to fork over the 50 shillings. What
does he get in exchange? He gets a
lawsuit against the seller. Suppose that
he can win that lawsuit. Does that mean
that the seller will have the money to pay him?
Not necessarily! That money might
get dissipated! You could spend the 50
shillings on booze and eat the cow! The
worst thing about this is that it’s a mandatory extension of credit! We will force the buyer extend credit to the
seller! But the buyer didn’t agree to pay the seller before the
buyer got the cow! You impose on the buyer
the obligation to give the seller credit at a very low interest rate: free!
You
could get around this if you explicitly conditioned one promise on the
other. But if you didn’t do that, you
end up in the Nichols situation.
Then
comes Lord Mansfield! He changes
everything in…
This
is a decision that significantly changed out commercial law. This case stands Nichols on its ear!
This
case involves a decision by an elderly silk merchant to sell his business to
two young traders, one of whom was to work for him for a year and a quarter
then set up a partnership with the merchant’s nephew and then purchase the
business on credit. They were to provide
security for the purchase. This would
usually be a mortgage on an expensive piece of property or a guarantee from a
wealthy individual.
What
happens when it comes time for
Then
comes Lord
He
says there are three kinds of covenants (promises):
1. Mutual and independent
promises – either party may recover damages from the other for a breach. It’s not a defense that the other party didn’t
perform their part of the bargain. What’s
a modern case that fits this? It’s Howard. The insurance company has to pay even though
the insured broke their promise not to plow the stalks under.
2. Dependent promises – the performance
of one promise is dependent upon the performance of another. Take for example, a contract for the sale of
goods where the goods will be delivered on February 1st and the
money is due on March 1st.
The seller basically agrees to sell on credit. In that case, the seller’s performance must
come first, and a month has to elapse before the buyer’s promise to pay is
triggered. In this case, the performance
of the buyer’s promise to pay is conditioned on the prior performance of the
seller’s promise to deliver.
3. Mutual conditions to be performed
at the same time – if one party was ready to perform but the other party
refuses then the one who was ready has done their duty and the other side needs
to do theirs. This was the situation in
the present case. These are concurrent, constructive, or conditions precedent.
But
how can you tell which kind of agreement you have? It’s based on what the parties have
said. Did they provide explicitly for
how the promises depend on each other? Failing
that, in what order was performance intended to proceed? What’s the order of time in which the sense
of the transaction requires the performance of each promise?
Often,
we will think about the order in which the transaction is going to go. The transaction might require one side to go
first. In other cases, it might be
possible for both sides to move simultaneously.
However,
in the present case,
A hypothetical on Nichols
In
a writing signed by both parties, Sam agreed to sell his cow for $3,000 and
Betsy agreed to buy the cow for $3,000.
The writing says that the cow is to be delivered to the parking lot
behind the law school at
What
if Monday comes and goes and nobody shows up?
Say the cow was worth $2,500 on the market. Could the seller sue for expectation damages
of $500 under § 2-708(1)? What does §
2-507(1) say?
These
two promises can be performed simultaneously.
The cow can be handed over at the same time that the $3,000 is handed
over to the seller. The parties haven’t
agreed otherwise, so the promises are to be performed simultaneously. So unless the seller has at least tendered
the cow to the buyer, the seller is not in default. The two promises are conditioned, one on the
other, and so anyone who wants to be a successful plaintiff must tender his
part in order to put the other party in breach.
When
the seller stays home on the date of delivery, the buyer doesn’t have any duty
to pay anymore. It takes more than the
running of the delivery date to put the buyer in breach.
Alternatively,
let’s say that the buyer had a favorable contract. The cow was worth $3,600. Can the buyer recover $600 under §
2-713? What does § 2-511(1) say?
These
are concurrent conditions against.
Tender
of payment is a condition to the seller’s duty to tender delivery of the
goods. If both parties stay home, then neither party can collect damages from
the other party.
Nobody
ought to have to extend credit to anybody else unless he or she has agreed to
do so! That’s the principle behind these
statutes. In the absence of specific contract
provisions to the contrary, we assume that the deal is simultaneous tender of
goods for tender of money or else there’s no deal at all (I think…???).
“Nobody
trusts nobody, and that’s the way it ought to be unless it is agreed to
otherwise.”