Contracts Class Notes 3/9/04

Here we have an ordinary garden variety contract for the purchase and sale of real estate. It’s contract to sell a house for $40,000. The buyer pays $4,000 down at contract formation. Closing was originally going to be on November 15^th, but it was delayed by mutual agreement until December 15^th. The purchaser will come to the closing table with $24,500 in cash and will sign off on the assumption of an $11,500 mortgage. We have concurrent precedent conditions at the closing. Each side has to tender its stuff in order to switch on the duty of the other side.

Now we have a squabble! It’s pretty easy to figure out that the purchaser regrets getting into the deal. The case suggests that the market price of the house was really $33,500, and the purchaser has agreed to pay $40,000. The purchaser probably thought it was worth it at the time, but now she knows that she has a bad deal, and she wants out. A lawyer helps her look for a breach on the vendor’s part with which they can get out of the contract and get restitution. So this seems to be in quite bad faith.

It’s not uncommon that someone will regret getting into a deal that will end up costly. The purchaser looks for a legal “escape hatch” to get out. But there really isn’t much in terms of defaults or defects on the part of the vendor. There are two tiny, tiny defects: the swimming pool doesn’t have a certificate of occupancy, and the fence goes a little too far. The purchaser cites these to try to get her money back. But it doesn’t work! The purchaser loses not just the down payment, but another $1500 in damages!

The vendor was not in default, but the purchaser was. Why wasn’t the vendor in default? Because the purchaser never put the vendor in default. The purchaser could have tendered the money and willingness to assume the existing mortgage on December 15^th. If the vendor hadn’t been forthcoming with his end of the deal at that point, the vendor might be in breach, or more likely, the court will give the vendor maybe an extra week to come up with a clear title. However, the purchaser didn’t tender.

The purchaser sent a letter through her lawyer saying that “the title wasn’t legal, so send us back our down payment money or else we’ll sue you!” The court finds that the demand in this letter was unjustified and was actually an anticipatory repudiation of the contract! The purchaser put herself in breach, which allowed the vendor to recover damages! The vendor gets to keep the $4,000 plus the other $1,500 the vendor would have made in profit! Yow! So don’t get too “rambunctious”. Don’t grab onto something small when you’re just trying to get out of a bad deal. If you do so, you’ll run the risk that you’ll be the party in breach and you’ll be liable for damages.

Just for review, the vendor needs contract price minus market price to be put in the position performance would have done. That’s $40,000 minus $33,500, or $5,500. The vendor already has $4,000, so the vendor needs $1,500 more.

In order for the vendor to be able to sue the purchaser, the vendor would have to tender the deed to the property. That switches on the purchaser’s duty and puts the purchaser in breach if she doesn’t tender her payment and her signature. The vendor didn’t tender the deed! Why was the purchaser in default nevertheless? The purchaser repudiated! That excuses the vendor’s tender. It doesn’t make any sense to require the vendor to tender performance if the purchaser has flatly and clearly repudiated.

Don’t forget what we already learned about repudiation. Repudiations can often be a lot fuzzier than a flat, clear statement like: “I’m not going to perform.” Unless you have that statement, you should think about tendering performance, demanding adequate assurances, or taking other action to clarify whether or not you have a repudiation.

But even if tender is excused, the vendor must show that he could have performed. If the vendor was unable to perform, because, for example, the vendor had incurable title defects, then the idea is that the vendor doesn’t deserve to recover damages even though the purchaser repudiated. The repudiation must be the “but-for” cause of the vendor’s non-tender of performance. Here, the vendor could have tendered a clear title quite easily. If the purchaser had informed the vendor of her problems, the vendor could have cured these ills and then performance could have proceeded.

At closing, there is usually going to be a title defect: the mortgage against the property. That mortgage will get paid off by the purchaser’s money.

Beecher v. Conradt

We have already seen some of Mansfield’s ideas that we should do what we can to minimize the extension of credit. To the extent that the transaction doesn’t require the extension of credit, it shouldn’t be there. In this deal, credit is required. This is a contract for the sale of land. The vendor’s promise is to give a deed to Greenacre. The purchaser’s promise is to pay the agreed price in five equal annual installments. When you have that kind of a deal, since it’s impossible for all of the performances to occur at the same time when the deal was made, the vendor is extending credit to somebody. The parties could have contracted into whatever they wanted, but they didn’t.

So in this situation, the court fills in the purchaser extending credit to the vendor. The purchaser makes the five annual payments, and then upon the final payment, the purchaser is entitled to the deed. The purchaser’s obligation to make the first four payments is unconditional, but the tender of the last payment is conditioned upon the final delivery of the deed. Notice how the court plugs in constructive conditions that weren’t actually in the contract.

But look how things change: the purchaser misses all five payments! The vendor could have sued the purchaser for each of the payments as soon as each one was due! Alternatively, the vendor could have waited until the second payment was due and could have brought one suit for the first two payments.

But what happened here, the vendor waited until all five payments were due, and then sued. But upon the due date of the fifth payment, the vendor must tender the deed in order to switch on the purchaser’s duty! Things can change, creating constructive conditions that wouldn’t have been there if the parties had acted earlier.

The purchaser hasn’t paid when he was supposed to, and the vendor hasn’t done what he was supposed to do either.

What’s the remedy here? The remedy the vendor is seeking is full payment of the price. In most circumstances, certainly with goods under Article 2, we don’t like “cram down” remedies where the buyer makes a contract to buy goods and then decides: “I don’t want the goods.” Article 2 won’t make the buyer pay the full price unless there’s a good reason. The remedy will usually go more shallowly into the buyer’s pocket. The seller will keep the goods and the buyer will have to pay out the contract price minus the market price, rather than the full price.

It may be different with land. We may be more willing to have a “cram down” remedy that forces the buyer to pay the full price and take the land even if he doesn’t want it. How come? One reason is historical: when you have a contract for the purchase and sale of land, it’s specifically enforceable for the purchaser. Specific performance should be available for the purchaser. But then we have the weird “mutuality of remedy” doctrine, which says that for the sake of fairness, we must allow the specific performance remedy to the vendor, too. That doesn’t make much sense, but that’s why we say that vendors can get specific performance of land contracts.

The remedy often makes sense, though not always. What are the virtues in favor of specific performance for the vendor of land? Recall that when the contract is formed, the purchaser gets equitable title to the land. When the purchaser defaults, the vendor needs to clear the title so he can sell to someone else. The old-fashioned way to do that is to sue the purchaser for specific performance. This amounts to foreclosure: you foreclose the purchaser’s interest in the land. In court, the land is sold at auction to whoever will buy it. In that sale, the purchaser’s title to that land will evaporate and the vendor will get the cash. Another advantage is that if the purchaser is in possession but in hopeless default and the purchaser claims title to the land, an action for specific performance can result in ejecting the purchaser, clearing title, and cleaning up the mess. Why, if you can do it in equity, can’t you do it at law? Do you need to be able to do it both ways?

Over time, we’ve been getting more stingy with equitable relief. Money damages will be enough for the vendor more often. The purchaser can give the vendor a quit-claim deed, which may result in a much faster and cheaper solution. Specific performance is cumbersome, and the purchaser may want to avoid that method of settlement. So occasionally, we’ll make the purchaser pay the entire price of land.

Stewart v. Newbury

This is another “who’s-in-default” case. It’s a different type of contract: this is a construction (services) contract. Stewart agrees to build a foundry for the Newburys. Stewart starts building, and after he’s done a lot of building, he says: “Pay me.” They say no! So Stewart quits in the middle of building the foundry! Was Stewart justified in quitting because they didn’t pay? Or were they justified in not paying such that Stewart put himself in total breach when he quit?

The trial court wanted to know if it was understood that the payments were to be made monthly. There was no express agreement on when payments were to be made! If there was no such understanding, the Newburys were obligated to make payments at “reasonable times”. Thus, the trial court would find for the plaintiff.

But what does the Court of Appeals of New York do? They say “this is not the law”! But what is the law? In the absence of some other express provision, substantial performance is required before payment can be demanded. That’s the constructive condition or off-the-rack rule here! When you have a performance on one side that takes time in exchange for a performance on the other side that can be performed in an instant (like paying money), the constructive order of performance is that the performance that takes time goes first. Only when that performance is completed is the obligation to pay triggered.

Recall that substantial performance means “meets the essential purposes of the contract”. It’s a practical test and what it means in particular circumstances can vary and be fuzzy. But nothing half-finished or less will constitute substantial performance. Substantial performance is based in part on the fact that construction of a perfect building is impossible. If you meet the essential purposes of the contract, that will trigger the owner’s duty to pay the price. The owner is entitled to all of the plans and specifications, and thus can recover any damages suffered by any small shortfall between the actual performance rendered and what was promised.

How do we argue for the position of the Court of Appeals of New York? In smaller service situations, the idea that the servicor comes first and the payor comes around only when the servicor is done makes sense, and in fact that’s how the world works! You go get your hair cut, and then you pay. The plumber comes and fixes you pipe, and then you pay. That’s a useful way to operate. When you take a job, you extend credit to your employer. You work first, and then the employer pays you later. In the old days, you might have to extend a whole lot of credit to the employer.

The Court of Appeals of New York might be right for two big reasons: it’s hard to draw a line between big and small performances. More importantly, in construction contracting, it is the universal practice to contract out of this deal expressly. If you want periodic payments, you must say so in the contract. What if there was oral evidence of an agreement to pay periodically?

In some situations, we reverse by agreement. Sometimes the payment comes first, and the performance comes last. For example, you pay for your ticket, and then see the show afterwards. Another example is law school tuition. If you don’t like the show, it’s easier to get the money out of you before you find out that you didn’t like it.

Kelly Contr. Co. v. Hackensack Brick Co.

This is both a goods contract and a services contract. The services contract is between Kelly and the school district. The goods contract is a contract between Kelly and Hackensack to sell the brick needed to build the school. In the construction jargon, we would call Hackensack a “material man” because they are not furnishing any services. The terms of the goods contract are that the brick will be delivered bit by bit. Hackensack delivers a bit of brick, and then they ask for payment. But Kelly says: no way! Not until you’re done! Who’s in default?

It turns out that the construction company is right. Hackensack must deliver all the brick before the obligation of Kelly to pay is triggered. But…is this still law? Consider the effect of § 2-307. Does this change the result in this case? Note that this case happened in 1918.

In Tipton, we’ll discuss different kinds of contracts.

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