Conditions Being What They Are . . .

Contracts – Prof. Merges

April 18, 2011

Agenda

• Language of conditions

• Effect of a condition – discharge of duty

• Interpretation issues

Lutinger v. Rosen

Lutinger v. Rosen

• Facts

• History

§ 224. Condition Defined

A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.

A condition is an event . . . which must occur . . . before performance under a contract becomes due.

Formation Condition Performance

Formation Condition Performance

Formation Condition Performance

Nonoccurrence of condition excuses performance

Luttinger

• Very common provision: financing term

• What is at stake when the court asks, “is it a condition?”

What is Defendant (seller’s) argument?

“The defendants claim that the plaintiffs did not use due diligence in seeking a mortgage within the terms specified in the K.”

Effect of nonoccurrence of condition

If the plaintiff failed to obtain financing after using reasonable efforts, “all sums paid under the K would be refunded and the K terminated”

-- P. 692

Internatio-Rotterdam, Inc. v. River Rice Mills, Inc.

Internatio-Rotterdam, Inc. v. River Rice Mills, Inc.

• Facts

• History

What did the K say?

What did the K say?

• “FAS Lake Charles and/or Houston, Texas”

• Shipment: “December, 1952, with two weeks call from buyer”

• LOC, payable vs dock receipts

Merges, Toward a Computerized System for Negotiating Ocean Bills of Lading, 6 J. L. & Commerce 23 (1985) (with Glenn Reynolds).

What was the “condition” question in the case?

What was the “condition” question in the case?

• Was seller’s duty to perform conditioned on notice on or before Dec 17?

What is at stake?

Whether the giving of shipment instructions on or before December 17 was required in order for the defendant/seller to have to perform, i.e., deliver rice to the buyer

In the language of conditions . . .

Whether the buyer’s giving of shipment orders was A CONDITION of the seller’s duty to perform (i.e., deliver the rice)

But the K says that the buyer must give instructions . . .

DUTY vs. CONDITION

“notice of shipping instructions before Dec. 17 was not merely a duty of the [buyer] . . .”

Duty vs. Condition

Mere duty: a contractual obligation which, if not performed, may result in damages

Condition: an event, the nonoccurrence of which EXCUSES the other party from performance

Mere duty (cont’d)

If a mere duty is breached, damages may follow but the other party – the one owed the duty – MUST CONTINUE TO PERFORM

Example

• P. 700: Section (B)

• “a duty to sail with the next wind”

• Not sailing will NOT excuse the sender from paying for shipment– BUT the shipping co. may owe some damages

for sailing late . . .

Peacock Construction Co. v. Modern AC Inc.

Peacock Construction Co. v. Modern AC Inc.

• Facts

• History

Peacock: The K

Peacock [GC] will make final payment to subcontractors [Modern] “within 30 days after the completion of the work included in this subcontract, written acceptance by the Architect and full payment therefor by the Owner”

P. 701

Owner – contractor – sub K

• What was the “condition” argument in the case?

• Owner went bankrupt, never made final payment to Peacock

• Peacock will make final payment “within 30 days of . . . Full payment by the Owner . . .”

Holding

• Owner pmt to GC NOT a condition of GC’s duty to pay subs

Conflicting interpretations

• Condition: no payment from Owner, GC has no obligation to pay subcontacors

Discharge: they are “off the hook”

• OR: merely a “convenient time at which to make payment”; not a requirement for GC to have to pay