Contracts Class Notes 3/3/04

 

Gray v. Gardner

 

What is the purpose of this case?Why is it in the book?Whatís 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 doesnít 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 ďswitches onĒ the defendantís promise.However, if it is a condition subsequent that excuses the defendant from an otherwise existing duty, then itís the defendantís 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 doesnít have to pay the extra $5000.In those circumstances, the burden of proof wouldnít matter.The same would be true if the Lady Adams arrived way late.But it does matter when itís a really close call.

 

Wigmore called the burden of proof ďthe risk of non-persuasionĒ.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 canít 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 sheís alive at the time of his death.On the other hand, if sheís 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!Thereís no way to know who died first!This is where the burden of proof counts.You canít prove who died first, but if you donít have the burden of proof then you donít have to prove anything!

 

The court treats the condition as a condition subsequent based on the language: ďÖthen this obligation to be void.ĒWhat 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 itís a condition subsequent with the burden on the defendant.They can look at the substance and say itís 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 itís very important, but more often itís not.And itís very much subject to manipulation by the courts!No wonder weíve 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.

 

Clovis says that we should clean this up!The leading article arguing for cleanup was published in 1948, but this is still a problem!This isnít good law, but itís still the law and itís not going away quickly.

 

The only true condition subsequent that Holmes could come up with was from insurance contracts.Once the insurance companyís duty to pay is triggered, the only thing that can kill the duty is: ďIf suit isnít 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.ĒThis is sort of a homemade statute of limitations established by contract.If the insured doesnít assert his rights, they will get killed off after a while.

 

The Second Restatement says that we donít worry about the words ďprecedentĒ and ďsubsequentĒ.

 

This isnít a huge deal.But letís look at something that is a big deal.

 

The order of performance

 

Nichols v. Raynbred

 

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.Raynbredís defense is not that his promise was not supported by consideration.The buyerís promise to pay 50 shillings was enforceable, and he didnít pay.

 

Whatís his defense?His defense is that he got no cow!The court says that thatís no defense.You have to pay for the cow, even though he didnít 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 didnít know much about counterclaims.You couldnít do it all in one suit.You would have to do it in two suits.Thatís where the law was for a long time.Whatís wrong with that bit of law?It creates a multiplicity of lawsuits, for one thing.Willes thought this was bad in 1744, but he didnít think he had the power to change it!

 

But whatís 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 itís a mandatory extension of credit!We will force the buyer extend credit to the seller!But the buyer didnít 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 didnít do that, you end up in the Nichols situation.

 

Then comes Lord Mansfield!He changes everything inÖ

 

Kingston v. Preston

 

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 merchantís 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 Preston to deliver his business?He doesnít do it.Kingston sues!Prestonís excuse is that Kingston failed to provide him with adequate security for the transaction.Does this hold water?Not under Nichols.The fact that the security hasnít been furnished wonít be a reason not to deliver the business as promised.Under Nichols, you would make Preston give up his business and then turn around and sue Kingston for failing to put up the security.

 

Then comes Lord Mansfield...and all hell breaks loose!

 

He says there are three kinds of covenants (promises):

 

1.     Mutual and independent promises Ė either party may recover damages from the other for a breach.Itís not a defense that the other party didnít perform their part of the bargain.Whatís a modern case that fits this?Itís Howard.The insurance company has to pay even though the insured broke their promise not to plow the stalks under.

2.     Dependent promises Ė 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 sellerís performance must come first, and a month has to elapse before the buyerís promise to pay is triggered.In this case, the performance of the buyerís promise to pay is conditioned on the prior performance of the sellerís promise to deliver.

3.     Mutual conditions to be performed at the same time Ė 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?Itís 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?Whatís 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, Mansfield finds that the promise to get security for the transaction was a condition precedent to the promise to give up the business.

 

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 9 AM on Monday morning.Thatís the deal!There is obviously consideration both ways.

 

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 ß 2-708(1)?What does ß 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 havenít 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 doesnít have any duty to pay anymore.It takes more than the running of the delivery date to put the buyer in breach.

 

Alternatively, letís say that the buyer had a favorable contract.The cow was worth $3,600.Can the buyer recover $600 under ß 2-713?What does ß 2-511(1) say?

 

These are concurrent conditions against.

 

Tender of payment is a condition to the sellerís 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!Thatís 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 thereís no deal at all (I thinkÖ???).

 

ďNobody trusts nobody, and thatís the way it ought to be unless it is agreed to otherwise.Ē

 

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