Sec. 4 “liquidated damages” and “penalties” p.679
Liquidated damage
(1), pick up terms which seems to be a stipulated damage clause
(2) issue – whether the stipulated damage clause is enforceable liquidated damage clause OR unenforceable penalty clause ;;
(3) liquidated damage clause is a sum a party agrees to pay if he breaks a promise, “a pre-estimate of probable actual damage “, to compensate promisee for non-performance ;; penalty clause - punishment, to compel promisor to perform
(4) the role of liquidated damage – i) control the exposure to risk in advance, ii) avoid uncertainty and expense of judicial process, iii) judicial economy, freedom of contract
(5) a stipulated damage is sustained as liquidated damage if i) actual damage is very difficult to estimate accurately, ii) reasonable efforts by the parties to estimate fair compensation, iii) the amount bears a reasonable relation to probable actual damage, iv) not disproportionate to any damages reasonably to be anticipated
Wasserman's v. Twp. of Middletown, p.680
liquidated damage clause, penalty clause>
- Commercial lease for a tract ; the agreement contained a clause providing that if the lessor cancelled the lease, it would pay the lessee a pro-rata reimbursement for any improvement costs and damages of twenty-five percent of the lessee’s average gross receipt for one year (“a stipulated damage clause”)
Conclusion
- (i) the lease is enforceable, (ii) affirm that the D is liable to P for terminating the lease, (iii) affirm … awarding P damages for renovation cost (improvement cost), (iv) remand the issue whether the stipulated damage clause based on the lessee’s gross receipt is a valid liquidated damages clause
Question
- The stipulated damage clause based on the lessee’s gross receipt, whether it is an enforceable liquidated damages clause OR it is an unenforceable penalty clause
Rule
- The overall single test of validity is whether the clause is reasonable under the totality of circumstances
- Enforceability of stipulated damages clause depends on whether the set amount is a reasonable forecast of just compensation for the harm that is caused by the breach
- Modern trend toward assessing reasonableness either at the time of contract formation OR at the time of the breach
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- Liquidated damages is the sum a party to a contract agrees to pay, if he breaks some promise, and which, having been arrived at by a good faith effort to estimate in advance the actual damages that will probably ensue from the breach, is legally recoverable as agreed damages if the breach occurs. – “a pre-estimate of probable actual damage”
- A penalty is the sum a party agrees to pay in the event of a breach, but which is fixed, not as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach. The courts are reluctant to enforce penalty clause.
reasoning
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- < the factors considered in determining reasonableness> to consider the reasonableness of the clause … (i) the reasonableness of the use of gross receipts as the measure of damages no matter when the cancellation occurs; the significance of the award of damages based on twenty-five percent of one year's average gross receipts, rather than on some other basis such as total gross receipts computed for each year remaining under the lease; the reasoning of the parties that supported the calculation of the stipulated damages; the lessee's duty to mitigate damages; and the fair market rent and availability of replacement space.
Here
- Gross receipt, unlike net profits, do not account for ordinary expense
- We cannot determine, from P’s gross receipt, the losses they sustained because of the D’s cancellation of the lease (DO- the stipulated damage clause should not be more than compensation of actual damage; cannot determine actual damage from the gross receipt)
Dave Gustafson & Co. v. State, 1968,
- P surfaced a new state highway ; The contract provided a graduated scale of “liquidated damages per day” under which damages of $210 per day were fixed …
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Here
- The stipulated damage clause in question is liquidated damage clause than a penalty because
- (i) damages for delay in constructing a new highway are impossible of measurement, (ii) the amount stated in the contract as liquidated damages indicates an endeavor to fix fair compensation for the loss, inconvenience, added costs, and deprivation of use caused by delay. … (iii) such damages are obviously graded according to the extent of the breach, increasing proportionately with each day's delay … the amount stipulated in the contract bears a reasonable relation to probable damages and is (iv) not, as a matter of law, disproportionate to any and all damage reasonably to be anticipated from the unexcused delay in performance
Ch. 8. Performance and Breach p.691
Sec. 1 conditions
(A), effects of conditions
Luttinger v. Rosen, 1972, <contingency clause> p.692
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- < Rule> the law does not require the performance of a futile act ;
- “contingency clause” = “condition precedent to performance of the contract” - an event which the parties intend must take place before there is a right to performance
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Internatio-Rotterdam, Inc. v. River Brand Rice Mills, Inc., p.695
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(B), problem of interpretation, whether condition or not p.700
Peacock Constr. Co. v.
- contract between general contractor and sub-contractor, containing a provision that “general contractor would make final payment to the subcontractor, within 30 days after, (i) completion of the work… (ii) written acceptance by the Architect, (iii) full payment by the owner” ; general contractor refused to make final payment to subcontractor because it did not receive full payment from owner
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- Intent of the parties as to the “after … full payment by the owner” is that owner’s payment is NOT a condition precedent to the duty of general contractor to pay subcontractor,, but a reasonable time ; ß the small contractor unlikely assumed the risk of owner’s failure to pay general contact
Gibson v. Cranage, < (subjective) condition precedent to the duty of payment> , p.704
- P painter contracted to portray the deceased daughter of D ; P painter agreed to get paid only if D is satisfied with the painting ; D was not ; P cannot get paid
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- (DO- if a party free to perform or to withdraw from the agreement at his own unrestricted pleasure, the promise is deemed illusory ) is this illusory?
(C,) mitigating doctrine
Drake v. Hosley, 1986, < prevention – prevent occurrence of condition> , p.709
- Real estate broker … alleging he had fulfilled terms of exclusive listing agreement and was entitled to payment of commission.
- Held- (i) vendor's frustrating conduct prevented title from passing to purchasers found by broker; (ii) existence or nonexistence of an agreement between broker and vendor's attorney was immaterial; and (iii) broker did not breach his fiduciary duty to vendor.
McKenna v. Vernon, < waiver of condition ; estoppels > p.711
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- With one single exception, each of the seven payments was made without the architect’s certificate ; given the constant and repeated disregard, he waived the condition, cannot complain when the other party fails to meet the condition
Hicks v. Bush, , p.713
- Hicks and Bush company entered into a merger contract ; Hicks transferred stock and the others not ; Hicks sought for specific performance ;
- One written condition requires acceptance of stock subscription (to perform merger agreement) ; in addition, parol condition requires procuring expansion funds
- (i) the parol evidence (condition) does not contradict with written condition
- (ii) the parol evidence deals with a matter on which the written agreement is silent
- (iii) the two conditions can stand side by side ; the parol one is just a further one
- (iv) since the parol condition was not performed, no binding contact came into effect
DO- § 216. Consistent Additional Terms
- (1) Evidence of a consistent additional term is admissible to supplement an integrated agreement unless the court finds that the agreement was completely integrated.
Sec. 2 constructive conditions of exchange p.716
Kinston v. Preston, 1773, p.717 è. P.754 in K&G construction
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. E.g. the insurance company has to pay even though the insured broke their promise …
- (2) dependent promises - the performance of one promise is dependent upon the performance of another. E.g. a contract for the sale of goods where the goods will be delivered on credit. … the performance of the buyer’s promise to pay is conditioned on the prior performance of the seller’s promise to deliver.
- (3) mutual promise (conditions) to be performed at the same time - if one party was ready and offered to perform his part, (tender) and the other neglected or refused to perform his, he who was ready and offered has fulfilled his engagement. This was the situation in the present case. à. concurrent constructive condition
Here
- mutual conditions to be performed at the same time,
- the D should not trust to the personal security of the P,
- before he delivered up his stock, he should have good security for the payment of the money.
- The giving such security must be a condition precedent. (DO- giving such security AND delivery is to be performed at the same time)
Stewart v. Newbury,
- Contract for construction of a building, which contains nothing about the time and manner of payments
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<concurrent condition and tender>
U.C.C. Text § 2-507 (Article 2. Sales, Part 5. Performance)
§ 2-507. Effect of Seller's Tender ; Delivery on Condition.
(1) (seller’s) Tender of delivery is a condition to the buyer's duty to accept the goods and, …, to the buyer's duty to pay for them. Tender entitles the seller to … payment according to the contract.
(2) If payment is due and demanded on the delivery to the buyer of goods …, the seller may reclaim the goods delivered upon a demand made within a reasonable time after the seller discovers or should have discovered that payment was not made.
§ 2-511. Tender of Payment by Buyer ; Payment by Check.
(1) … tender of payment is a condition to the seller's duty to tender and complete any delivery.
Sec. mitigating doctrine
(A), Substantial performance
- means that degree of performance of a contract which, while not equal to full and complete performance, is so nearly equivalent that it would be unreasonable to deny the contractor the payment agreed upon in the contract, subject, of course, to the owner's right to recover whatever damages he has suffered by reason of the contractor's failure to render full and complete performance.
Jacob & Youngs, Inc. v. Kent, , p.645
- contract for building a home using a specific type of pipe for all of the plumbing, P did not use the specified pipe ; the omission was neither fraudulent nor willful, instead, result of the oversight of the P’s sub-contractor ; the pipe installed were the same in quality, appearance, market value, cost as the specified pipe in the contract (the pipe installed was essentially identical to the one specified in the contract) ; D did not complain about the defective performance until pipe was almost completely encased in the wall of the home
<cost of replacement = cost of remedying the defect = cost of completing the contract> = what it would cost to complete the contract as contemplated by the parties
(1), rule – cost of completing the contract, coz law gives promisee what he was promised,
(2), exception (i) substantial performance, (ii) defect both innocent and trivial, economic waste
- P was under contract with D to build a home using a specific pipe. P did not use the pipe specified. The omission was neither fraudulent nor willful. It was the result of the oversight and inattention of the P’s sub-contractor. The pipe used was essentially identical to specified pipe.
Rule
- Jacob is a typical of substantial performance - if a good-faith attempt to perform does not precisely meet the terms of an agreement …, the performance will still be considered complete if the essential purpose is accomplished, subject to a claim for damages for the shortfall. ; (i) good faith in performing, (ii) not precisely meet the terms of the agreement, (iii) essential purpose is accomplished,, then,, (i) the performance is considered complete, (ii) subject to a claim for damage for the shortfall
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Here
- The omission (defect) of specified pipe was neither fraudulent nor willful, and the pipe used was essentially identical to the pipe specified. (defect was innocent and trivial)
- Thus, the plaintiff was due payment for substantial performance with compensation for the trivial defect
Plante v. Jacobs,
Fact
- P builder contracted with D to furnish the materials and construct a house for the sum of $26,800. During the course of construction, P was paid $20,000. Dispute arose between the parties, D refused to continue payment. P did not complete the house.
- P sued to establish a lien on the property as a way of recovering the unpaid balance of the contract price. The D (owner) answered with allegation of no substantial performance e.g. faulty workmanship and incomplete construction, in particular, misplacing of the wall. Expert testified the misplacing of the wall would not affect market price of the house.
Fist question
- <1st question> whether P can recover the unpaid balance = whether there has been substantial performance = whether the performance meets the essential purpose of the contract
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- Here, the contract was substantially performed
Second question
- <2nd question> when the contract was substantially, but incompletely, performed, what is the amount of the recovery?
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Here
- Regarding other defects than misplacing the wall, the cost of replacement rule,
- Regarding misplacing the wall, the diminished rule ; economic waste would be unreasonable and unjustified ; misplacing the wall had no effect on the market price ; D suffered no legal damage.
DO
- The court did not examine whose fault it is when D refused to continue payment. E.g. D could have refused arbitrarily. But, here, since the cause of action is to recover the unpaid balance, the issue of whose fault it is seems not matter.
- If cause of action were breach of contract, the issue would matter. If D arbitrarily refused, breached the contract, P would recover damage based on expectation measure.
- If the analysis is true, next question is amount of money, damage ; it seems that both of cause of action – recover for unpaid balance and recover for damage for breach of contract – generate same result, amount of damage, because the expectation measure will deduct the damage caused by defect.
- A buyer was entitled to reject goods unless the seller made a perfect tender, regarding not only quality and quantity of the goods, but also details of shipment
- “there is no room in commercial contract for the doctrine of substantial performance”
(B), divisibility
Gill v. Johnstown Lumber Co.,
Facts
- Contract to drive logs (several items) to several locations. P delivered only some of the lumber, because a flood carried away some of the lumber ; P sought payment for the lumber successfully delivered.
Question
- whether the contract upon which the plaintiff sued is entire or severable ; if entire, the judgment in favor of D was correct. If severable, should have been submitted to jury.
rule
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Here
- the contract was severable because the work undertaken by plaintiff consisted of several deliveries of several types of logs to a variety of locations, and payment for the work was apportioned amongst the deliveries at different rates of pay, so plaintiff was due payment for the logs he successfully delivered.
- DO- impracticability – “because of flood”, risk-allocation,
- è. ** Exam partial performance without fault à. Divisibility issue (+ quantum meruit as well?) ; partial performance voluntarily à. Quantum meruit (? Divisibility as well?) ; divisibility and quantum meruit are to prevent windfall
Britton v. Turner, <quantum meruit for partial performance in employment contract, with voluntary failure > p.736
- P (employee) contracted to work for D(employer) for an entire year ; P voluntarily quit the job, without any good cause, without D’s consent, before the year up ; P (employee)’s cause of action is to recover in quantum meruit for the labor performed
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- DO- since it is not a contract for construction, substantial performance not kink in
Sec.4 self-help in the form of suspension of performance or termination of contract p.745
- at an earlier stage than substantial performance
- Whether a breach justifies the injured party in (i) suspending performance OR (ii) refusing performance and terminating the contract.
- Such injured party can be either P who brings a suit against the other party for damages for total breach and justifies its non-performance, OR justifies its non-performance in an action by the other party.
Three questions ***
- Whether an uncured breach
- Whether a breach was under an exchange of promises (as opposed to a duty on which the injured party’s promise does not depend) (DO- if not under an exchange of promise, the injured party anyway has to perform contractual duty)
- Whether a breach which is uncured breach and under an exchange of promise is material (material = serious enough to justiry self-help in the form of suspension or termination)
If a partial breach, not material breach, the aggrieved party
- treat the breach as a partial breach ; has no right to suspend (performance) or terminate (contract) ; has to continue performance ; has a right to damages
If a material breach, the aggrieved party
- has a choice either (i) treat the breach as a partial breach or (ii) treat the breach as a total breach
- (i) - see up
- (ii) - no duty to continue performance + right to damages for total breach
whether material or not material
- The aggrieved party cannot decide whether material or not material ; (can decide whether to treat partial or total)
- Once determined as material breach, the aggrieved party has a choice
If breach is curable
- If the circumstances make it appropriate for the aggrieved party to suspend performance and give the other party a chance to cure,, the aggrieved party is expected to do so, before treating the breach as total
Walker & Co. v. Harrison,
- D is dry-cleaning biz ; P (Walker) is servicing ads sign ; rental of sign agreement between P and D ;
- D alleged (i) P’s failure to perform maintenance of the sign is material breach, (ii) stopped making payment to P, (stopped perform D’s duty) (iii) justified in repudiation of contract ; (D claimed , (i) P’s breach is material, (ii) refuse his performance, i.e. making payment, (iii) termination of contract i.e. repudiation contract)
- P sued for entire balance due under the contract
- Held, Walker’s (P’s) breach was not material ; D; termination of contract was not justified ; D has to perform his duty ;
- Provides criteria in determining whether material, e.g. substantial benefit
K & G Constr. Co. v. Harris,
- P general contractor ; D sub-contractor ; contract to do excavating and earth moving work ; progress payments – monthly ; subcontractor’s employee, bulldozer negligently caused contractor’s house to collapse ; not compensate general contractor for the collapse nor repair the collapse ;; general contractor refused progress payment for the month, however, permitted subcontractor to continue performance ;; next month general contractor refused payment because of the unrecovered unrepaired bulldozer damage ;; subcontractor discontinue performance because of failure of payment
- P general contract sued for (i) damage for the bulldozer negligence, (ii) damage for total breach of the contract
- D subcontractor counter-claimed, (i) for work done, (ii) for profit it lost by not being permitted to complete the work
- constructive condition >
Whether the bulldozer’s negligence is material breach
- (if so, general contractor has a choice to refuse to make progress payment)
- the court held the collapse of the wall by the bulldozer’s negligence is a material breach of the subcontractor’s promise to perform his work ß the damage to the wall amounted to more than double the payment for the month
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Iron Trade Products Co. v. Wilkoff Co.,
Facts
- P entered into a contract with D for the purchase of rails. D failed to deliver the rails. P filed a suit claiming as damages the difference between what it had been compelled to pay and the contract price.
D contend
- There are only two places in US where the rails can be obtained. D was negotiating for the rails. P announced to the trade its urgent desire to purchase the rails. P’s conduct reduced the availability of the rails and enhanced the price.
Rule
- mere difficulty of performance will not excuse a breach of contract ;; the conduct of one party which prevents the other from performing his part is an excuse for non-performance
- That a party (buyer) subsequently made performance by the seller more difficult by making other purchases which increased the scarcity of the available supply and caused the price thereof to rise furnished the seller no excuse for refusal to perform; there being no intent by the purchaser to embarrass the seller in the performance of his contract.
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here
- P’s conduct did not prevent performance by D, although it may have added to the difficulty and expense thereof.
New England Structures, Inc. v. Loranger, p.762
- P general contractor claimed breach of contract by D sub-contractor,, sent to sub-contractor telegram providing a certain ground for terminating sub-contract,, engages another sub-contractor to complete the work,, sue for damage for breach of contract
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- (subcontract provision requiring general contractor to give at least five days' prior written notice to subcontractor of termination of subcontract) (1) interpretation of the provision is a matter of law ; (2) the provision does not give subcontractor [ period in which to cure continuing defaults ],, but was intended to require that subcontractor be told [ when he must quit the premises ] and to give subcontractor an opportunity to take steps during five-day period to protect himself from injury, and, therefore, subcontractor had no further opportunity to cure defaults after notice.
- (DO- i) though promisee give notice of reasons or grounds for termination of contract, the promisee is not bound by it, i.e. can invoke other grounds than earlier mentioned one, to terminate contract ; ii) requirement to give five-day-prior-notice, not to give time to cure, but to let him know when to quit )
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Prospective non-performance
(a), anticipatory repudiation <repudiating party ; non-repudiating party>
Repudiation
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Hoch ster v. De La Tour ,
- In April, contract formation, to employ Hoch-ster (P) as his courier from June (the future performance due) ; in May, (between closing the contract and the future performance due, renunciation of agreement) ; … Hochster was no longer needed. In May (between closing the contract and the future performance due, commenced action to recover damage) Hochster sued.
- D argued that Hochster was still under an obligation to stay ready and willing to perform till the day when performance was due, and therefore could commence no action before.
- the P was ready and willing to start travel, would have entered the service on that day
- DO- in case of concurrent (constructive) condition, one party cannot put the other in default,, unless he is ready, able, willing to perform his duty, and manifests this,, although a tender of performance is not necessary if the other party has shown that he cannot or will not perform - in Kanavos, p.771
Rule
- after renunciation of the agreement by the D (between contract formation and future performance due),
- P (injured party) should have option (i) to sue immediately, or (ii) to wait till the time when future performance due
- P injured party may absolve himself from any future performance, retaining his right to sue for any damage he has suffered from the breach
reasoning
- e.g. if a man promises to marry a woman on a future day, and before that day marries another woman, he is instantly liable to an action for breach of promise of marriage
- the repudiating party rendered it impossible for the non-repudiating party to perform his duty when future performance due
- Both parties impliedly promise that in the meantime neither will do anything to the prejudice of the other inconsistent with that relation. (VCLT once you sign, should not do anything which defeat the object and purpose of the treaty0
- if P has to treat the contact in force till that day, he must enter into no employment which will interfere with his promise (DO- cannot mitigate the damage, duty to mitigate)
Kanavos v. Hancock Bank & Trust Co.,
- D gave P the right to acquire all the stocks in an apartment complex before D would sell the stock to anyone else (option contract) ; in violation of the contract, D entered into a purchase an sale agreement to sell the stocks to a third person without giving P notice and opportunity to purchase the stock
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- Repudiating party will be absolved of any duty, if it appears that there would have been a total failure of performance by non-repudiating party
- Even in case of not concurrent condition, non-repudiating party could only recover nominal or small damages against repudiating party, where it would have been impossible for the non-repudiating party to perform his duty arising shortly after the repudiating party’s breach
- Non-repudiating party should prove his readiness, willingness, ability to perform his duty ß least cost, the evidence is far better known to non-repudiating party
McCloskey & Co. v. Minweld Steel Co.,
- Contract between P general contractor and D subcontractor, to furnish and erect steel for building ; no provision as to due date ; P general contractor later requires assurance of 30 days delivery ;; D replied that it would be difficult to obtain steel coz of K. war and asked for help with obtaining steel ;; P treated it as D’s repudiation, procured steel without trouble, hired new subcontractor
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- Here, the letter by subcontractor, mere failure to take preparatory action , stating that it was unable to give assurance as to the preparatory arrangement ; failure to take preparatory action before the time when performance is due is not an anticipatory breach
C.L. Maddox, Inc. v. Coalfield Servs., , p.780
- Contract between P general contractor and D sub-contractor ; D began to work and make repeated request to p to sign the proposal ; D eventually stopped the work ;
- Held, D's performance of a substantial part of the work was evidence that the parties had a contract, because it was hardly plausible that D would have done so much work without a contract ;; The work stoppage was excused because of plaintiff's refusal to sign the proposal
- DO- (i) a duty to sign the proposal ? reluctance to sign the proposal = reluctance to perform his duty when future performance due (make payment) = anticipatory repudiation (e.g. need not be in words)
- (ii) refusal to sign the proposal = material breach, coz of matter of payment,,, non repudiating party can treat it as total breach,,, recover damage for breach of contract ;;; measure of damage - “partial performance” , not due to impracticability in delivering log case, divisibility, not due to voluntary failure in employment case,, here due to repudiating party’s fault,
Permissible response to repudiation p.783
Cosden Oil & Chemical Co. v.
- Seller of polystyrene sued buyer, seeking damages for buyer's failure to pay for delivered polystyrene. Buyer counterclaimed for seller's failure to deliver polystyrene as agreed.
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- market price at time buyer learns of breach by seller is appropriate measure of damages in cases where buyer learns of breach at or after time for performance.
United States v. Seacoast Gas Co., <retracting repudiation of contract> p.790,
- contract for supplying gas ; gas company notified the other party of its intention to cancel the contract (repudiation of contract) ; non-repudiating party stated it would sign a new contract with another gas company if the repudiating party does not retract the anticipatory breach within three days ; the repudiating party, gas company, retracted the repudiation of contract after the three day period expired but before new contract with another was signed ;
- Held, the retraction - after the three day period – did not heal the breach, coz the retraction came after the three day period,, the signing of the contract with another gas company was not delayed to allow the repudiating gas company an extended time to retract the anticipatory breach
(B) assurance of due performance p.794
Pittsburgh <1M gallon water tank case>,
- Seller of one-million gallon water tank brought action against buyer for repudiation of the sales contract and buyer counterclaimed for breach of contract.
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Norcon Power . v. <debt of 610M dollars case>, <adequate assurance of performance ; no need to be insolvent?> p.799
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- Though the other party is presently solvent, a party has a right to adequate assurance of performance, if it is reasonable under the circumstances to demand the assurance
- Here, although the other party (power producer) is presently solvent, a party has a right to adequate assurance of performance, when the other party would owe over 610M dollars, reasonable concern that the other party will not pay the vast sum
