Contracts Class Notes 3/8/04

Some problems on order of performance

Last time, we ended up talking about the story of Sam and Betsy, where we see Lord Mansfield’s idea of concurrent conditions working out in a sale-of-goods context. You’ll find this codified at § 2-507 and § 2-511.

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.  That’s the deal!  There is obviously consideration both ways.

Let’s say neither side showed up in the parking lot on Monday. Suppose the seller could show that he had a good deal (the cow was worth $2500), and thus the seller has a positive expectation interest of $500. If the buyer defaults, the seller can resell for $2500, but he would need $500 to be put in the position performance would have done. Can he recover? No! The buyer is not in default! Look at § 2-507(1). The seller has to tender deliver of the goods before the buyer incurs the duty to pay. The seller would have to show up in the parking lot at 9 AM on Monday in order to create the duty to pay in the buyer. The buyer’s duty to accept and pay wasn’t switched on (triggered)! The buyer isn’t in default.

On the other hand, say neither party showed up but the buyer had a positive expectation interest because the buyer could prove that the cow’s market price was $3600. Can the buyer recover $600? Under § 2-511, the answer is no, unless expressly agreed to otherwise. There is a concurrent condition running the opposite direction. In this case, tender of payment is a condition to the seller’s duty to tender delivery of the goods (the cow in this case).

We have a stalemate! Neither party is in default, and neither party can get into the other’s pocket to recover damages. Neither party deserves to recover damages, because neither “came out of his hole” and offered performance. On the other hand, neither party deserves to be held liable in damages because neither party was offered the exchange performance. Neither party’s non-performance is reprehensible enough to deserve a remedy in damages.

Consider what’s happening in terms of Williston’s writings: it’s possible under a bilateral contract to have a stalemate where neither party is in default. In our legal system, however, it is impossible to have a situation where both parties are in total breach. If your analysis comes out that way, you must have screwed something up. Both parties can be in no breach at all, but both parties cannot be in total breach.

What puts the buyer in default? If the buyer doesn’t show up, but the seller shows up ready and willing to perform, then the buyer is in default. The seller will be in default if the buyer shows up willing and able to tender the cash, but the seller doesn’t show up.

Price v. Van Lint

How does this relate to Kingston v. Preston? In Kingston, the old silk merchant agrees to sell his silk business to a young trader in exchange for security. The old guy is not forthcoming with his business, and is sued by the young guy. The old guy is found not to be in default because the judge provides a constructive condition that the young guy must supply security in order for the duty of the old guy to kick in.

In this case, we have a brief writing where Price promises to secure his promise to repay by a mortgage on the land he’s buying. But he fails to tender a mortgage on the date set for making the loan. Is the lender in default? Yes! We get the opposite result from Kingston. Is there a sufficient difference in the facts of the two cases that justifies such a different result?

Has there been a contract breach in this case? Is the defendant, the person who promised to make a loan, in default? The answer is no, if there was a condition to his duty and that condition did not occur. So, is the lender in breach in this case? What is the significant factual difference between the two cases?

When the parties make the deal in Price, they know that the $1500 is for two purposes: to buy a tract of land from a seller in Holland (for $134), and the rest of the loan is to build a building on the land. This is after the war in Europe has begun and the United States military is getting ready. There is a military base in Cimarron, New Mexico. Price wants to build a “nightclub” to entertain the soldiers (and rip them off). That’s the business background of what’s happening.

The land is owned by a Dutch vendor, with an agent in Cimarron, New Mexico. Van Lint will be the personal lender. There is to be a mortgage, but there’s can’t be a mortgage until the land is deeded into it. You need a deed from the Dutch vendor. The deed must cross to Holland by boat, and then the deed must come back across the ocean in another boat. That may take a considerable period of time, especially with war conditions in Europe. They can expect that getting the deed for the mortgage will take a heck of a long time. The deed might be back by February 1^st, but maybe not. It actually comes back in early March. How do those facts change things? Was there a repudiation here? Why did Van Lint change his mind?

It’s not 100% clear whether there was a repudiation or not. So, in these facts, under these circumstances, Van Lint’s promise to make the loan is unconditional and independent. On the other hand, in Kingston, the promise to sell the business was conditioned on the buyer acquiring good security. If the deed had gotten back from Holland by February 1^st, then you could have a conditioned promise. But the New Mexico court says that it’s appropriate to read the promise as unconditional.

Here, the parties provided for a loan on February 1^st, when they knew it might be impossible to get a mortgage on February 1^st. The best way to make sense of what they did is to say that if they couldn’t get the mortgage, the loan would be unsecured until the deed got back from Europe.

When the deed is not back from Holland, the intent of this transaction requires the transfer of the money on February 1^st, even though you can’t provide the money on February 1^st. In this case, the lender/creditor has agreed, if the facts turn out as they did, to make an unsecured loan. That’s not what the business owner in Kingston agreed to. We presume that transactions are unsecured unless agreed otherwise.

Go back to the hypothetical. Let’s change the nature of the agreement between Sam and Betsy. Suppose that Sam promises to deliver a cow on March 1^st and the buyer promises to pay on April 1^st. It’s 30 days open credit, which is a common way that goods are sold. Under those circumstances, we don’t have concurrent conditions: if March 1^st comes and goes and the seller doesn’t show up with the cow, then the seller is in default because the seller has made an unconditional and independent promise. The buyer’s promise to pay is conditioned on the seller’s month-early delivery of the cow. If the cow doesn’t arrive, the buyer’s promise to pay won’t be triggered. But the seller’s promise to deliver is unconditional.

What the parties really agree to in Price is that unsecured credit will be extended if the deed can’t be acquired by February 1^st. Thus, we find that under the facts as they turned out, the lender is in default.

Note that Van Lint, himself, has promised to lend $1500 to Price. He is also selling a tract of land as an agent of his Dutch superiors.

The holding of the case is: “Where a contract contains mutual promises to pay money or perform some other act, and the time for performance for one party is to, and does, arrive before the time for performance by the other, the latter promise is an independent obligation.”

The lender is in default. For what damages will the lender be responsible? When you have an enforceable promise to make a loan and a breach of that promise, what are the damages to the borrower? There are damages if the borrower must substitute a higher-interest lender; in that case, the buyer’s damages will be measured by the difference in interest charges. In many cases, these damages will be zero or approximately zero because the credit market is highly competitive and a borrower will be able to get a substitute loan at an interest rate very close to the original one offered. So it’s unlikely you’ll get significant damages from this alone.

But Price is trying to recover consequential damages. You can usually mitigate these damages by getting a substitute loan. However, in this case, the borrower wasn’t able to get a loan from most ordinary lenders. He had real trouble coming up with a substitute loan. And Van Lint knew this at the time of contract formation. Thus, there is enough knowledge on the part of the contract breaker to trigger the second rule of Hadley v. Baxendale and, in turn, consequential damages.

We see that losses must be proved to a reasonable degree of certainty. Price can recover some of the damages here that the trial court gave him, but not all of them.

Note that the statute of frauds will not interfere with contracts for the making of loans unless they will necessarily take over a year to perform.

What if the deed had arrived from Holland on January 26^th? Could the plaintiff have insisted on payment of the $1500 without tendering a mortgage? No! If he can tender the mortgage, he must do so to trigger the promise to pay the $1500.

What if the deed had arrived in early March, but the plaintiff, instead of demanding the money promised on February 1^st, had remained silent until after the deed had arrived? You need to tender the mortgage to put the lender in default.

The Lord Mansfield approach is that we won’t make people extend credit against their will, and we won’t make them extend more credit than they would like against their will.

Ziehen v. Smith

In this case, there’s a deal for the sale of some land with a country hotel on it. The purchase price was $3500 (in 1896 dollars). How is that money to be paid? The agreement is, for starters, $500 down at the time of the signing of the contract. This is the extension of credit from the buyer to the seller before any deed is forthcoming. But the buyer would be in breach if he didn’t pay it! He was agreeing to extend such credit to the seller.

Next, we find that a little more than a month later the buyer must pay $300 more on the price. That’s specified in the writing. The other things that are specified are the assumption of an existing mortgage and then a promise to pay $1700 in the future, such promise being secured by a mortgage.

When? When are the three things not expressly provided for in the writing supposed to occur? When is the purchaser supposed to sign the paper that causes him to assume the existing mortgage as well as the note and mortgage for $1700? What do we do?

One approach that courts shouldn’t and won’t take would be to say that the writing is fatally defective and that it will not be treated as a contract at all. The court could send both parties away. But most courts won’t do that!

The court says that we have a date specified: $300 on September 15^th, 1892. The parties probably intended to have the tender of the deed and the purchaser’s giving of two mortgages to happen on the very same day. All of that will be contemporaneous. There was only one date mentioned in the contract!

This squares with §§ 234 and 238. When performances can be rendered simultaneously, they are due simultaneously unless something indicates otherwise. In this case, the first $500 was to be paid when the contract was signed, but everything else ought to happen simultaneously.

The court is constructing conditions and order of performance in order to make this go forward as a sensible deal. The court will supply gap-filling terms that protect both parties.

So where are we in the situation where the purchaser wants to have the vendor be in breach? The purchaser didn’t tender performance on September the 15^th, so we start with the proposition that the vendor wasn’t put in breach. But the purchaser says that his tender was excused: the vendor didn’t have a good title! Is the vendor in default because he couldn’t have performed?

“The contract is not broken by the mere fact of the existence on the date of performance of some lien or incumbrance which it is within the power of the vendor to remove.” Notice that in the sale of most land, there is an outstanding mortgage on the land right up to the time of closing because the vendor has borrowed money from a bank to mortgage the property. That mortgage is usually not entirely paid off when the vendor decides to sell it. How will it be paid off? It will be paid off by the purchaser’s price. That title defect won’t be cured until the purchaser’s price is obtained. But then again, the purchaser’s price is coming from another lender. The purchaser may have secured financing from a different bank which will be secured by a new mortgage. Everything will be cleared up at the closing. It would be nutty to say that the vendor is in default because he hasn’t cleared his mortgage prior to closing. It makes sense to clear that mortgage with the proceeds that will come out of the closing. A mortgage that can be removed does not put the vendor in default.

So Ziehen is another stalemate situation. But the purchaser doesn’t get his down payment back! This was the approach of this case, but not the best one, according to Clovis. Clovis believes that the restitution interest should be protected in a stalemate situation, as we see in Willener v. Sweeting.

In land cases, though we’re often lenient when the purchaser doesn’t have the money on the day set for closing or the vendor doesn’t quite have the title together, we’ll let them get it together, too much delay is too much. However, in some situations where a lot of time has passed, the stalemate is “too stale”, and we’ll leave the parties as they lie.

Cohen v. Krantz

The closing date was “adjourned” from November 15^th to December 15^th. This is usually allowed. If you don’t like the idea of this, you can put in a clause that says “time is of the essence”…except, what does that mean? In any case, you’re attempting to make it an express condition to go forward that the other party tenders on the precise day at the precise time. That may make it impossible for the court to be lenient with the other party.

This is another land contract case. The deal here is $40,000 (a lot of money in 1959) for a house in suburban New York. There is a $4,000 down payment at the time of contract formation. The deal is that $24,500 of the remaining price will be paid in cash at closing, while the remainder will consist of the assumption of an existing mortgage by the purchaser.

The vendor is to be forthcoming with the deed, and the purchaser is to be forthcoming with the $24,500 in cash plus their signature agreeing to adopt the obligations of the mortgage.

What happens? There are two ways to think about it. (1) What was said? (2) What are the underlying motivations for what was said?

Two weeks before closing, the plaintiff purchaser’s lawyer writes a letter to the defendants. The “structure is not legal”, thus the title is not marketable. The plaintiff wants the down payment back. Why did the purchaser write this letter? What’s motivating the purchaser? What were the title defects? There is a swimming pool on the property without a certificate of occupancy. It wouldn’t really be hard to get the certificate of occupancy. It might be slightly time consuming, but not expensive. Also, the fence gets too close to the street. Under the development regulations, it’s said to be unsightly. That’s not a tough one, either! We have two highly curable title defects. This are really tiny problems!

The real deal is that the purchaser wants out and is seizing on anything that can be done to get out! It turns out that this is because the purchaser got a bad deal, paying $40,000 for a property that was really worth $33,500. They were trying to cheat their way out of a bad deal! This is a “who’s in default” case. The purchaser says that the vendor is in default, but the court says: “No, you’re in default, and you have to pay damages!”

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