XI. Termination of Contract A. Upon Performance Obligations are taken seriously and are to be performed. An obligation is extinguished upon its proper and complete performance, because the creditor has no right to anything more. What constitutes full performance? The obligation must be performed according to the criteria set forth in the contract or by law, or according to the principles of good faith and reasonability 1 . An obligor does not have the right to perform his obligation in parts unless so provided by agreement or by law. Performance is a matter of proof. There is no magic incantation which the parties must recite to terminate the contract upon performance; there is no legal requirement for the parties to write up a statement that the performance has been fully rendered. B. Upon Expiration Of Term An obligation may be extinguished upon the expiration of a term. This is actually a subset of the principle that obligations extinguish upon performance, but it is worth considering separately. Example: Company A grants Company B a one month license to use certain proprietary software. Upon the expiration of the month, Company A’s obligations cease. Upon the expiration of the term, the obligation simply is extinguished. All that was called for has been performed. If the contract has does not have a termination date, the contract can be terminated by either party at will (without regard to cause) at any time upon reasonable notice given to the other party. 1 E.g., Lithuanian Code §6.37.3.
Transcript
XI. Termination of Contract
A. Upon Performance
Obligations are taken seriously and are to be performed. An obligation is extinguished upon its proper and complete performance, because the creditor has no right to anything more.
What constitutes full performance? The obligation must be performed according to the criteria set forth in the contract or by law, or according to the principles of good faith and reasonability1.
An obligor does not have the right to perform his obligation in parts unless so provided by agreement or by law.
Performance is a matter of proof. There is no magic incantation which the parties must recite to terminate the contract upon performance; there is no legal requirement for the parties to write up a statement that the performance has been fully rendered.
B. Upon Expiration Of Term
An obligation may be extinguished upon the expiration of a term. This is actually a subset of the principle that obligations extinguish upon performance, but it is worth considering separately.
Example: Company A grants Company B a one month license to use certain proprietary software. Upon the expiration of the month, Company A’s obligations cease.
Upon the expiration of the term, the obligation simply is extinguished. All that was called for has been performed.
If the contract has does not have a termination date, the contract can be terminated by either party at will (without regard to cause) at any time upon reasonable notice given to the other party.
Principles of European Contract Law§6:109: Contract for an Indefinite PeriodA contract for an indefinite period may be ended by either party by giving notice of reasonable length.
1 E.g., Lithuanian Code §6.37.3.
Lietuvos Civilinis Kodeksas§6.199 straipsnis. Sutartis neapibrėžtam terminui Neapibrėžtam terminui sudarytą sutartį bet kuri šalis gali nutraukti apie tai per protingą terminą iš anksto įspėjusi kitą šalį, jeigu įstatymai ar sutartis nenumato ko kita.
Lithuanian Civil Code§6.199. Contract for an Indefinite PeriodA contract for an indefinite period may be ended by either party by giving notice of reasonable length, unless otherwise provided by law or agreement.
The corrollary of this rule is that if a contract does set a term of expiration, it may not be terminated in such a manner before that date (unless otherwise provided for in the agreement).
Example: Parties enter into a ten-year contract. After five years, one party gives the other reasonable notice that it is terminating the agreement. This termination is not effective and indeed is a material breach.
Example: Parties enter into a contract. The contract is silent as to the period it has been entered into. It does state that a party may terminate the contract at will upon six months notice. A party does give such notice. The contract will then terminate with the expiration of the period.
C. Upon Mutual Agreement
It is evident that the parties have a right to end their obligations by agreeing to do so. As stated in §1134 of the French Civil Code, “[a]greements … may be revoked only by mutual consent … .” If the parties discharge their duties by mutual agreement, they are said to have rescinded the contract. See Rescission, p.Error: Reference source not found.
D. Release
Both under Anglo-American law as well as Continental law, a release by the creditor of the debtor's obligation acts to discharge it completely. In England as well as in some U.S. states, the release must be under seal to be effective.2 The provision of the Lithuanian Civil Code are illustrative.
2 The reader is cautioned to note that in the United States, unless the release is under seal (which is unlikely) a release, to be valid, must be supported by new consideration. See Accord and Satisfaction, p. Error: Reference source not found.
Lithuanian Civil Code§6.129. Releasing the Debtor from Performance of the Obligation1. An obligation is discharged when the creditor releases the debtor from his
duty to perform it or states that the obligation does not exist, if the release from the performance of the duty does not prejudice the rights of third parties to the property of the creditor.
2. The release must be iterated clearly and unambiguously. It can be for consideration or gratuitous.
3. The release acts to discharge the obligation completely, except in cases where the creditor clearly provides that it is to discharge only part of the duty of performance. …
5. An offer to release a duty of performance in return for consideration which is addressed to the debtor is considered to be accepted if the debtor does not reject it without undue delay.
E. Unilateral Withdrawal
The parties may agree during the formation of the contract that one or both of them can withdraw from a contract if he so chooses. This is called in French law a clause de dédit. In practice it is coupled with an earnest money clause (see infra).
Example: A landlord and a tenant agree on Day One that, beginning in six months, the tenant shall rent certain premises from the landlord. The agreement contains both an earnest money provision and a clause de dédit, allowing the tenant to change his mind. Thus, if the tenant changes his mind, the landlord keeps the money paid under the earnest money provision—but the landlord cannot successfully sue the tenant for damages caused by the tenant’s backing out of the contract.
F. Upon Material Breach
In principle, a creditor is entitled to exactly what the debtor obligated himself to do. If, then, a performance by the debtor falls short of 100% perfect, the debtor is in breach and, in principle, the creditor does not have to perform his own obligation; this is because the creditor’s performance is said to be conditioned upon the performance of the debtor. This is what is meant by the phrase concurrent conditions of exchange.
Traditionally courts denied restitution to the party in breach. In 1824 the Supreme Judicial Court of Massachusetts proclaimed, “It will not admit of the monstrous absurdity, that a man may voluntarily and without cause violate his agreement, and make the very breach of that agreement the foundation of an action which he could not maintain under it.” Stark v. Parker, 19 Mass. 2 Pick. 267, 275 1824. Courts also opposed restitution because it would impose on the injured party both an obligation different from the one for which that party had bargained and the burden of proving damages resulting from the breach.
They preferred to deny to the defaulting employee recovery for the benefit conferred on the injured employer by part performance and to deny the defaulting purchaser recovery for the benefit conferred upon the injured vendor by part payment.
In an historic opinion, the Supreme Court of New Hampshire in the year 1834 forcefully stated the opposite view in Britton v. Turner. Britton, who had agreed to work for Turner for a year for $120, left his service without cause after less than ten months and sued for the value of the work done. The court pointed out that, under the traditional view, the forfeiture a party suffers on its breach increases as the party’s performance continues, so that “the party who attempts performance may be placed in a much worse position that he who wholly disregards his contract.” In addition, the injured party might receive a windfall since that party “may receive much more, by the breach of the contract, than the injury which he has sustained by such breach.” The court concluded that if “a party actually receives labor, or materials, and thereby derives a benefit and advantage, over and above the damage which has resulted from the breach of the contract by the other party, … the law thereupon raises a promise to pay to the extent to the reasonable worth of such excess.” 8 N.H. 481, 487, 492 Since then, this liberal view has become widely accepted.
This view is now the law in all Western jurisdictions as well as Russia. The Lithuanian code sets forth the applicable rules explicity, while the Russian code does so implicitly.
Thus the general rule is that a debtor must perform his obligation perfectly. See, e.g., Russian Civil Code §408.1.
A subsidiary rule is that if a debtor has performed his obligation substantially but not exactly as promised, although the debtor is indeed in breach, this substantial performance will preclude the other party from terminating the contract. This in turn means that the non-breaching party will have an absolute duty to perform. The non-breaching party will be able to offset their own performance for the damages done by the breaching party.
Example: Henry agrees to put aluminum sideing upon the outer walls of Esther’s house, including all of the windowsills, for $5000. Note that since the contract does not otherwise specify, this sum would be payable only upon completion of the performance. Henry does a workmanlike job, but he misses a windowsill on an upper floor. Esther calls another firm and determines that it would cost $100 for the windowsill to be covered with aluminimun sideing. Can Esther terminate the contract and not pay Henry anything? No, because it is clear that Henry has substantially performed, and therefore Esther’s duty to pay the consideration has arisen. Nevertheless, Esther can assert a setoff against Henry for breach of her promise and reduce the amount of her obligation. Note that Henry, because of his substantial performance, has a right to the full amount contracted-for minus the monetary equivalent of her breach.
Thus, if a party can prove it has substantially performed, it is entitled to the full price, minus the monetary equivalent of the damages.
In some cases, the condition must occur exactly as the parties contemplated it before a duty to perform matures. If the parties have expressly stated a condition in the contract or the court imposes an implied–in-fact condition, the condition must be completely satisfied. This is another way of saying that not every contract contemplates a possibility of substantial performance.
Example: Ben promises to buy Sam’s house if Ben obtains financing “of 80% of the purchase price, with interest no greater than 8%.” If, after reasonable efforts to secure financing, Ben can only find financing for 75% of the purchase price at 8%, or can only find 80% financing at 8.125%, Ben will not be obligated to perform.
As stated by T. Antony Downs (Textbook on Contract p. 275), the payment obligation is a strict obligation, so that in theory the exact amount must be made available unconditionally and in legal tender (English case: Betterbee v. Davis 1811 3 Camp 70. See Lithuanian Civil Code §6.217.2.2, §6.314.4.
If a breach is willful it will be treated as material, whereas if the same non- or faulty performance had been merely negligent (non-willful), it would have been treated as a less-than material breach.3 This principle, for example, is enunciated in the Lithuanian Civil Code at § 6.222.1.
Example: Henry agrees to put aluminum sideing upon the outer walls of Esther’s house, including all of the windowsills, for $5000. Henry does a workmanlike job, but he purposely leaves a windowsill on an upper floor uncovered, stating that “they will never notice.” Esther calls another firm and determines that it would cost $100 for the windowsill to be covered with aluminimun sideing, but that if it had not been discovered, there would have been a serious risk of rain damage. Henry has materially breached the contract and forfeits the $5000.
Study Note: While a material breach will allow a creditor to lawfully terminate the contract, he does not have to do so. He may simply offset the amount of damage from his own performance.
3 There is some movement away from this position. See Restatement 2nd, §374.
Restatement 2nd of Contracts §2342 Except to the extent stated in subsection 1, where the performance of only one party under such an exchange requires a period of time, his performance is due at an earlier time than that of the other party, unless the language or the circumstances indicate the contrary. …Comment e: Where the performance of one party requires a period of time and the performance of the other party does not, their performance cannot be simultaneous. Since one of the parties must perform first, he must forego the security that a reqauirement of simultaneous performance affords agaisnt disappointment of his expectation of an exchange of performances, and he must bear the burden of financing the other party before the latter has performed. Of course the parties can by express provision mitigate the harshness of a rule that requires that one completely perform before the other perform at all.
Thus, it is evident that the doctrine of material breach will have its greatest affect upon construction contracts and upon other contracts in which performance by one party must be performed as a condition precedent of the other party‘s performance.
Example: Company X agrees to construct a building for Company B in exchange for a certain sum of money. If Company X constructs two-thirds of the building and then materially breaches the contract, Company B is justified in terminating the contract. Since Company B‘s performance, the payment, of the money was conditioned (as a default provision of the code) upon the full performance of Company X, Company B does not have to pay any money to Company A. Company B will also get to keep the two-thirds of the building constructed, since the courts will not award restitution in the event of a material breach. (Regarding the issues of restititution and termination, see the section on Methodology of Termination for Material Breach below at p. 6.)
Note on Terminology: The EPCL uses the term fundamental breach instead of material breach, but the meaning is the same.
G. Methodology of Termination For Material Breach
All of the legal systems we are examining are in accord: if there is a material breach, the contract can be terminated. There are, however, two entirely different regimes. One is prospective: it treats the contract as having been in force and then terminated. The other is essentially retrospective: essentially the contract is thought of as being rescinded ab initio. It is easy to see that this second type of approach would result in a code wherein the general rule would be that a contract can be terminated (rescinded) only by a judge and not by a party, since rescission and a settlement of equities (restitution) is a complicated matter4.
4 Its real difficulty lies in relation to third parties. If a good was transferred to the debtor, and if the contract is treated as rescinded, then title would immediately vest in the creditor.
Retrospective Systems:
Some systems influenced by the French model are retrospective in this sense. The general rule is that only the court can terminate a contract; a party can terminate the contract only if this is provided for by the contract itself. (Note that in practice the vast majority of contracts contain such a provision.)
Thus, the 1964 Civil Code of (occupied) Lithuania5 and the 1964 Civil Code of the Russian Soviet Federated Republic both followed the French model. The present-day Russian civil code continues to do so (§406 and §450).
Example: A contract is silent as to termination for material breach. Under French law as well as Russian law, in the event of material breach the aggrieved party must apply to the court for termination (rescission); it cannot terminate the contract by serving notice. If, however, the contract states that the parties can unilaterally terminate the contract for material breach (without a court proceeding) then they may do so.
In cases where the parties are to perform their obligations in instalments, restitution will be given only prospectively. Thus in a contract of rental with monthly payments, restitution would be only prospective.
If however the parties are to perform their obligations over time, but the court holds that the contract is one of the entirety, then restitution will be given retrospectively, almost as if there had been no contract formed. In certain cases this can result in over-compensation to the aggrieved party.
Example: Father pays 1000 Fr to Company X which agrees to teach Father’s Son how to drive, with the teaching to continue until Son passes the requisite exams to obtain his licence. Company X materially breaches the contract after having given a complete course of instruction to Son, subsequent to which Son failed the drivers exam and demanded more lessons. The court found that this contract was not one of instalments. Thus the Father received full restitution (the full 1000 Fr), and he has a claim for damages. France: Cass.civ. 1re, 13 January 1987. (Other systems would merely give the father a claim for damages.)
The difference between “regular” nullity and this type of rescission is that the aggrieved party has a right to obtain damages and may enforce a penalty clause.
Prospective Systems:
In the English and American legal systems, however, termination is prospective. Hence the general rule is that a party can terminate a contract for material breach on its own, without the need for a court order.
Additionally, since the termination is prospective, the termination does not act to re-vest the ownership of property which has been transferred to the debtor by the aggrieved party. The aggrieved party ordinarily only has a right to sue for the (unpaid) purchase price.
Thus, if services have been provided by the breaching party, if there has not been substantial performance, he is not entitled to any recovery. If services were rendered by the aggrieved party, the aggrieved party has an action for damages, or may recover the value of the services rendered (quantum meruit).
In the case of money paid by the aggrieved party: since the general rule is that damages are rewarded, an aggrieved party will be able to recover the amount paid only in the total absence of consideration. (This does not mean the aggrieved party cannot obtain an award for damages.)
The Principles of European Contract Law have also adopted this prospective regime.
Principles of European Contract Law§ 9:303: Notice of Termination(1) A party's right to terminate the contract is to be exercised by notice to the other party.(2) The aggrieved party loses its right to terminate the contract unless it gives notice within a reasonable time after it has or ought to have become aware of the non-performance.(3) (a) When performance has not been tendered by the time it was due, the aggrieved party need not give notice of termination before a tender has been made. If a tender is later made it loses its right to terminate if it does not give such notice within a reasonable time after it has or ought to have become aware of the tender.(b) If, however, the aggrieved party knows or has reason to know that the other party still intends to tender within a reasonable time, and the aggrieved party unreasonably fails to notify the other party that it will not accept performance, it loses its right to terminate if the other party in fact tenders within a reasonable time.
From 2001, with the advent of the new Civil Code, this is also the Lithuanian position.
Civil Code of Lithuania§6.218.1 In cases provided for under §6.217 [i.e., in the vast majority of cases] the aggrieved party can terminate the contract unilaterally, without court action. The other party must be given the time period for notice of termination set forth in the contract, and if the contract does not set forth any such period, then the period will be 30 days.”
The Lithuanian code has an unusual time-delay built into its system of termination which diverges from the European Principles (and also from American law), wherein when in the case of material breach, a party terminates the contract by giving notice to the other party, the contract
nevertheless remains in effect until expiration of a time period set out in the contract or for thirty days. Only after this delay is the contract is terminated. In other words, the notice of termination, once served upon the other party, goes into effect upon the expiration of the time set out in the contract or in thirty days.
Example. Lithuanian law: A contract between Moneypenney and Goodnight provides that, in the case of material breach, notice of termination must be given forty days in advance. Moneypenney commits a material breach. Goodnight serves a notice of termination upon Moneypenney. The termination goes into effect after forty days.
Note: Because of the doctrine of non adimpleti contractu (the defense of non-execution), Goodnight can withhold her performance from the time of Moneypenny’s breach. The delay built into the statute is in order to allow a contract to be cured (see our section on Cure at p.43 and our section on Termination for Delay immediately below at p.9). This rule is set out as well in the Lithuanian Civil Code §6.209.2.
Note: In the case of anticipatory repudiation (see p.18), no notice is required.
Termination for Delay
The Principles of European Contract law set out a very interesting section on termination for delay. The underlying idea is that a delay is not usually a material breach; time is not usually of the essence. By use of this section, time can be made to be of the essence, and therefore any uncertainty as to the materiality of the delay can be avoided.
Example: A contract calls for the debtor to provide a service by a certain date. The debtor is late. The creditor would like to terminate the contract for material breach. But it may not at all be clear that the delay in truth constitutes a material breach. Therefore if he does terminate the contract, he may very well himself be committing a material breach.
The Principles of European Contract Law addresses this problem as follows:
Principles of European Contract Law§ 8.106: Notice Fixing Additional Period for Performance(1) In any case of non-performance the aggrieved party may by notice to the other party allow an additional period of time for performance.(2) During the additional period the aggrieved party may withhold performance of its own reciprocal obligations and may claim damages, but it may not resort to any other remedy. If it receives notice from the other party that the latter will not perform within that period, or if upon expiry of that period due performance has not been made, the aggrieved party may resort to any of the remedies that may be available under chapter 9.(3) If in a case of delay in performance which is not fundamental the aggrieved party has given a notice fixing an additional period of time of reasonable length, it may terminate the contract at the end of the period of notice. The aggrieved party may in its notice provide that if the other party does not perform within the period fixed by the notice the contract shall terminate automatically. If the period stated is too short, the aggrieved party may terminate, or, as the case may be, the contract shall terminate automatically, only after a reasonable period from the time of the notice.
The Civil Code of Lithuania reproduces § 8:106 in part. Instead of referring, however, to the non-performance of an obligation, the code refers to the non-performance of a contract, which is not really the same thing. At any rate, the applicable sections can be translated as follows:
§6.209 Papildomas terminas sutarčiai įvykdyti1. Jeigu sutartis neįvykdyta, nukentėjusi šalis gali raštu nustatyti protingą papildomą terminą sutarčiai įvykdyti ir pranešti apie tai kitai šaliai.3. Jeigu termino praleidimas nėra esminis sutarties pažeidimas ir nukentėjusi šalis nustatė protingą papildomą terminą, tai pasibaigus šiam terminui ji gali sutartį nutraukti. Jeigu papildomas terminas nustatytas neprotingai trumpas, tai jis turi būti atitinkamai pailgintas. Nukentėjusi šalis savo pranešime dėl papildomo termino gali nurodyti, kad sutartis bus vienašališkai nutraukta, jeigu kita šalis jos neįvykdys per nustatytą papildomą terminą.
Civil Code of Lithuania§6.209 Additional Time Period For Performance1. If the agreement has not been
performed, the aggrieved party can set an additional and reasonable time period for its performance by giving written notice to the other party.
3. If the tardy performance was not material, and if the aggrieved party did set a reasonable additional time period for its performance, then at the end of this period it can terminate the contract. If the additional time period was unreasonably short, then it must be lengthened. The aggrieved party in its notice setting the additional time period can state that the contract will be unilaterally terminated if the other party does not perform it during the additional time period.
In both the Principles and the Lithuanian Code, the effect of the additional time
period allows the aggrieved party to set a condition which, if not fulfilled, is clearly a material breach.
Note that the Principles are explicit—the aggrieved party may provide in its notice that unless the wrongdoer performs within the additional time period that the contract will terminate automatically. Here the Lithuanian code diverges from the European Principles. Unfortunately this greatly undercuts the utility of the article in question, since in every case the Lithuanian aggrieved party will have to terminate the contract according to the general provisions regarding termination—meaning that it will have to provide notice of termination, which will come into effect only upon the expiration of the time period set forth in the contract or in thirty days.6
6 This second waiting period poses interesting questions regarding the power of cure: see p.43.
Case # 1Jacob & Youngs v. Kent
New York: Court of Appeals (1921)230 N.Y.239
Note: The New York Court of Appeals is the highest court in the State of New York.
CARDOZO, J. The plaintiff built a country residence for the defendant a cost of upwards of $77,000, and now sues to recover a balance of $3,483.46, remaining unpaid. The work of construction ceased in June, 1914, and the defendant then began to occupy the dwelling. There was no complaint of defective performance until March, 1915. One of . the specifications for the plumbing work provides that —
All wrought-iron pipe must be well galvanized, lap welded pipe of the grade known as "standard pipe" of Reading manufacture.
The defendant learned in March, 1915, that some of the pipe, instead of being made in Reading, was the product of other factories. The plaintiff was accordingly directed by the architect to do the work anew. The plumbing was then encased within the walls except in a few places where it had to be exposed. Obedience to the order meant more than the substitution of other pipe. It meant the demolition at great expense of substantial parts of the completed structure. The plaintiff left the work untouched, and asked for a certificate that the final payment was due. Refusal of the certificate was followed by this suit.
The evidence sustains a finding that the omission of the prescribed brand of pipe was neither fraudulent nor willful. It was the result of the oversight and inattention of the plaintiffs subcontractor. Reading pipe is distinguished from Cohoes pipe and other brands only by the name of the manufacturer stamped upon it at intervals of between six and seven feet. Even the defendant's architect, though he inspected the pipe upon arrival, failed to notice the discrepancy. The plaintiff tried to show that the brands installed, though made by other manufacturers, were the same in quality, in appearance, in market value, and in cost as the brand stated in the contract — that they were, indeed, the same thing, though manufactured in another place. The evidence was excluded, and a verdict directed for the defendant. The Appellate Division reversed, and granted a new trial.
We think the evidence, if admitted, would have supplied some basis for the inference that the defect was insignificant in its relation to the project. The courts never say that one who makes a contract fills the measure of his duty by less than full performance. They do say, however, that an omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting damage, and will not always be the breach of a condition to be followed by a forfeiture. Spence v. Ham, 163 N.Y. 220, 57 N.E. 412, 51 L.R.A. 238; Woodward v. Fuller, 80 N.Y. 312; Glacius v. Black, 67 N.Y. 563, 566; Bowen v. Kimbell, 203 Mass. 364, 370, 89 N.E. 542, 133 Am. St. Rep. 302. The distinction is akin to
that between dependent and independent promises, or between promises and conditions. Anson on Contracts (Corbin's ed.) §367; 2 Williston on Contracts, §842. Some promises are so plainly independent that they can never by fair construction be conditions of one another. Rosenthal Paper Co. v. Nat. Folding Box & Paper Co., 226 N.Y. 313, 123 N.E. 766; Bogardus v. N.Y. Life Ins. Co., 101 N.Y. 328, 4 N.E. 522. Others are so plainly dependent that they must always be conditions. Others, though dependent and thus conditions when there is departure in point of substance, will be viewed as independent and collateral when the departure is insignificant. 2 Williston on Contracts, §§841, 842; Eastern Forge Co. v. Corbin, 182 Mass. 590, 592, 66 N.E. 419; Robinson v. Mollett, L.R., 7 Eng. & Ir. App. 802, 814; Miller v. Benjamin, 142 N.Y. 613, 37 N.E. 631. Considerations partly of justice and partly of presumable intention are to tell us whether this or that promise shall be placed in one class or in another. The simple and the uniform will call for different remedies from the multifarious and the intricate. The margin of departure within the range of normal expectation upon a sale of common chattels will vary from the margin to be expected upon a contract for the construction of a mansion or a "skyscraper." There will be harshness sometimes and oppression in the implication of a condition when the thing upon which labor has been expended is incapable of surrender because united to the land, and equity and reason in the implication of a like condition when the subject-matter, if defective, is in shape to be returned. From the conclusion that promises may not be treated as dependent to the extent of their uttermost minutiae without a sacrifice of justice, the progress is a short one to the conclusion that they may not be so treated without a perversion of intention. Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable. If something else is in view, it must not be left to implication. There will be no assumption of a purpose to visit venial faults with oppressive retribution.
Those who think more of symmetry and logic in the development of legal rules than of practical adaptation to the attainment of a just result will be troubled by a classification where the lines of division are so wavering and blurred. Something, doubtless, may be said on the score of consistency and certainty in favor of a stricter standard. The courts have balanced such considerations against those of equity and fairness, and found the latter to be the weightier. The decisions in this state commit us to the liberal view, which is making its way, nowadays, in jurisdictions slow to welcome it. Dakin & Co. v. Lee, 1916, 1 K.B. 566, 579. Where the line is to be drawn between the important and the trivial cannot be settled by a formula. "In the nature of the case precise boundaries are impossible." 2 Williston on Contracts, §841. The same omission may take on one aspect or another according to its setting. Substitution of equivalents may not have the same significance in fields of art on the one side and in those of mere utility on the other. Nowhere will change be tolerated, however, if it is so dominant or pervasive as in any real or substantial measure to frustrate the purpose of the contract. Crouch v. Gutmann, 134 N.Y. 45, 51, 31 N.E. 271, 30 Am. St. Rep. 608. There is no general license to install whatever, in the builder's judgment, may be regarded as "just as good." Easthampton L.&C. Co., Ud., v. Worthington, 186 N.Y.407, 412, 79 N.E. 323. The question is one of degree, to be answered, if there is doubt, by the triers of the facts (Crouch v. Gutmann; Woodward v. Fuller, supra), and, if the
inferences are certain, by the judges of the law (Easthampton L.&C. Co., Ltd., v. Worthington, supra). We must weigh the purpose to be served, the desire to be gratified, the excuse for deviation from the letter, the cruelty of enforced adherence. Then only can we tell whether literal fulfillment is to be implied by law as a condition. This is not to say that the parties are not free by apt and certain words to effectuate a purpose that performance of every term shall be a condition of recovery. That question is not here. This is merely to say that the law will be slow to impute the purpose, in the silence of the parties, where the significance of the default is grievously out of proportion to the oppression of the forfeiture. The willful transgressor must accept the penalty of his transgression. Schultze v. Goodstein, 180 N.Y. 248, 251, 73 N.E. 21; Desmond-Dunne Co. v. Friedman-Doscher Co., 162 N.Y. 486, 490, 56 N.E. 995. For him there is no occasion to mitigate the rigor of implied conditions. The transgressor whose default is unintentional and trivial may hope for mercy if he will offer atonement for his wrong. Spence v. Ham, supra.
In the circumstances of this case, we think the measure of the allowance is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing. Some of the exposed sections might perhaps have been replaced at moderate expense. The defendant did not limit his demand to them, but treated the plumbing as a unit to be corrected from cellar to roof. In point of fact, the plaintiff never reached the stage at which evidence of the extent of the allowance became necessary. The trial court had excluded evidence that the defect was unsubstantial, and in view of that ruling there was no occasion for the plaintiff to go farther with an offer of proof. We think, however, that the offer, if it had been made, would not of necessity have been defective because directed to difference in value. It is true that in most cases the cost of replacement is the measure. Spence v. Ham, supra. The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value. Specifications call, let us say, for a foundation built of granite quarried in Vermont. On the completion of the building, the owner learns that through the blunder of a subcontractor part of the foundation has been built of granite of the same quality quarried in New Hampshire. The measure of allowance is not the cost of reconstruction. "There may be omissions of that which could not afterwards be supplied exactly called for by the contract without taking down the building to its foundations, and at the same time the omission may not affect the value of the building for use or otherwise, except so slightly as to be hardly appreciable." Handy v. Bliss, 204 Mass. 513, 519, 90 N.E. 864, 134 Am. St. Rep. 673. Cf. Foeller v. Heintz, 137 Wis. 169, 178, 118 N.W. 543, 24 L.R.A. (N.S.) 321; Ob-eriies v. Bullinger, 132 N.Y. 598, 601, 30 N.E. 999; 2 Williston on Contracts, §805, p. 1541. The rule that gives a remedy in cases of substantial performance with compensation for defects of trivial or inappreciable importance has been developed by the courts as an instrument of justice. The measure of the allowance must be shaped to the same end.
The order should be affirmed, and judgment absolute directed in favor of the plaintiff upon the stipulation, with costs in all courts.
MCLAUGHLIN, J. I dissent. The plaintiff did not perform its contract. Its failure to do so was either intentional or due to gross neglect which, under the uncontradicted facts, amounted to the same thing, nor did it make any proof of the cost of compliance, where compliance was possible.
Under its contract it obligated itself to use in the plumbing only pipe (between 2,000 and 2,500 feet) made by the Reading Manufacturing Company. The first pipe delivered was about 1,000 feet and the plaintiff's superintendent then called the attention of the foreman of the subcontractor, who was doing the plumbing, to the fact that the specifications annexed to the contract required all pipe used in the plumbing to be of the Reading Manufacturing Company. They then examined it for the purpose of ascertaining whether this delivery was of that manufacture and found it was. Thereafter, as pipe was required in the progress of the work, the foreman of the subcontractor would leave word at its shop that he wanted a specified number of feet of pipe, without in any way indicating of what manufacture. Pipe would thereafter be delivered and installed in the building, without any examination whatever. Indeed, no examination, so far as appears, was made by the plaintiff, the subcontractor, defendant's architect, or any one else, of any of the pipe except the first delivery, until after the building had been completed. Plaintiffs architect then refused to give the certificate of completion, upon which the final payment depended, because all of the pipe used in the plumbing was not of the kind called for by the contract. After such refusal, the subcontractor removed the covering or insulation from about 900 feet of pipe which was exposed in the basement, cellar, and attic, and all but 70 feet was found to have been manufactured, not by the Reading Company, but; by other manufacturers, some by the Cohoes Rolling Mill Company, some by the National Steel Works, some by the South Chester Tubing Company, and some which bore no manufacturer's mark at all. The balance of the pipe had been so installed in the building that an inspection of it could not be had without demolishing, in part at least, the building itself.
I am of the opinion the trial court was right in directing a verdict for the defendant. The plaintiff agreed that all the pipe used should be of the Reading Manufacturing Company. Only about two-fifths of it, so far as appears, was of that kind. If more were used, then the burden of proving that fact was upon the plaintiff, which it could easily have done, since it knew where the pipe was obtained. The question of substantial performance of a contract of the character of the one under consideration depends in no small degree upon the good faith of the contractor. If the plaintiff had intended to, and had, complied with the terms of the contract except as to minor omissions, due to inadvertence, then he might be allowed to recover the contract price, less the amount necessary to fully compensate the defendant for damages caused by such omissions. Woodward v. Fuller, 80 N.Y. 312; Nolan v. Whitney, 88 N.Y. 648. But that is not this case. It installed between 2,000 and 2,500 feet of pipe, of which only 1,000 feet at most complied with the contract. No explanation was given why pipe called for by the contract was not used, nor that any effort made to show what it would cost to remove the pipe of other manufacturers and install that of the Reading Manufacturing Company. The defendant had a right to contract for what he wanted. He had a right before making payment to
get what the contract called for. It is no answer to this suggestion to say that the pipe put in was just as good as that made by the Reading Manufacturing Company, or that the difference in value between such pipe and the pipe made by the Reading Manufacturing Company would be either "nominal or nothing." Defendant contracted for pipe made by the Reading Manufacturing Company. What his reason was for requiring this kind of pipe is of no importance. He wanted that and was entitled to it. It may have been a mere whim on his part, but even so, he had a right to this kind of pipe, regardless of whether some other kind, according to the opinion of the contractor or experts, would have been "just as good, better, or done just as well." He agreed to pay only upon condition that the pipe installed were made by that company and he ought not to be compelled to pay unless that condition be performed. Schultze v. Goodstein, 180 N.Y. 248, 73 N.E. 21; Spence v. Ham, supra; Steel S.&E.C. Co. v. Stock, 225 N.Y. 173, 121 N.E. 786; Van Clief v. Van Vechten, 130 N.Y. 571, 29 N.E. 1017; Glacius v. Black, 50 N.Y. 145, 10 Am. Rep. 449; Smith v. Brady, 17 N.Y. 173, and authorities cited on page 185, 72 Am. Dec. 442. The rule, therefore, of substantial performance, with damages for unsubstantial omissions, has no application. Crouch v. Guimann, 134 N.Y. 45, 31 N.E. 271, 30 Am. St. Rep. 608; Spence v. Ham, 163 N.Y. 220, 57 N.E. 412, 51 L.R.A. 238.
What was said by this court in Smith v. Brady, supra, is quite applicable here:
I suppose it will be conceded that every one has a right to build his house, his cottage or his store after such a model and in such style as shall best accord with his notions of utility or be most agreeable to his fancy. The specifications of the contract become the law between the parties until voluntarily changed. If the owner prefers a plain and simple Doric column, and has so provided in the agreement, the contractor has no right to put in its place the more costly and elegant Corinthian. If the owner, having regard to strength and durability, has contracted for walls of specified materials to be laid in a particular manner, or for a given number of joists and beams, the builder has no right to substitute his own judgment or that of others. Having departed from the agreement, if performance has not been waived by the other party, the law will not allow him to allege that he has made as good a building as the one he engaged to erect. He can demand payment only upon and according to the terms of his contract, and if the conditions on which payment is due have not been performed, then the right to demand it does not exist. To hold a different doctrine would be simply to make another contract, and would be giving to parties an encouragement to violate their engagements, which the just policy of the law does not permit. (17 N.Y. 186, 72 Am. Dec. 442).
I am of the opinion the trial court did not err in ruling on the admission of evidence or in directing a verdict for the defendant.
For the foregoing reasons I think the judgment of the Appellate Division should be reversed and the judgment of the Trial Term affirmed. …
Order affirmed, etc.
Exercises
1. Acme Programming, Inc., is hired to create a computer program for Purchaser Corporation in exchange for monetary consideration. The contract between the two entities requires that Acme not incorporate any pre-existing software of whatever type into the final product. It further states that Purchaser shall pay one-half of the total amount due upon presentation by Acme of the first half of the programming. Acme performs half of the requisite programming, transfers this half to Purchaser, and Purchaser pays Acme as provided for under the contract. Acme owns a piece of programming, called the X Factor, which would fit beautifully into the program that they are producing for Purchaser. In an effort to cut costs, Acme’s Chief Executive Officer, Mr. Frank, orders that the X Factor be incorporated into the finished product. The finished program works perfectly. It is rejected by Purchaser, however, upon their finding out that indeed it incorporates the X Factor. Purchaser terminates the contract. What result?
2. Joe’s Bookkeeping Service, Inc. agrees to perform general bookeeping services for Pete’s Big Corporation in exchange for monetary consideration, to be payable on a monthly basis. There is no expiration date set for the contract. Pete is the Chief Executive Officer of Pete’s Big Corporation. Although Joe’s Bookeeping Service, Inc. is providing adequate service, Pete would like to cancel the contract and give it to his nephew, Junior, who has just graduated college with an accounting degree. What is your advice?
3. Corporation A and Corporation B are small corporations. They enter into an agreement and each party performs their obligations. Corporation A’s Chief Executive Officer asks you whether they need to sign a document attesting that each has performed their obligations under the contract satisfactorily. This question is of some concern for Corporation A, since they have thousands of such contracts each year. What is your advice?
4. Corporation X and Corporation Z have entered into a bilateral contract whose term is to expire five years from the present date. The contract expressly provides that either party can terminate the contract at their discretion upon ten days notice to the other party. Some months after the formation of the contract the Chief Executive Officer of Corporation X calls you. In order to continue to perform its obligations under the contract for the next twelve months, Corporation X must immediately purchase certain supplies in bulk from a third party supplier. This will require the expenditure of a significant amount of money. The CEO wants to know, however, if there is any way legally to guarantee that Corporation Z will not terminate the contract, leaving Corporation X with a large amount of supplies and no use for them. What would be your advice?
5. Jonas Jonaitis agreed to write a computer program for Petras Ponaitis’s business, to be completed in six months. After completing half of the program, Jonaitis demanded that Ponaitis pay him one-half of the promised fee. Ponaitis refused, and Jonaitis quit writing the program and told Ponaitis
that he would write no more. Ponaitis hired another programmer to write the program. Jonaitis sued Ponaitis. What result?7 MORE ON DELAY, TERMINATION, EFFECT
C. Anticipatory Repudiation
Principles of European Contract Law§ 9.304: Anticipatory Non-PerformanceWhere prior to the time for performance by a party it is clear that there will be a fundamental non-performance by it the other party may terminate the contract.
Lietuvos Civilinis kodeksas §6.219-Iš anksto numatomas sutarties neįvykdymasŠalis gali nutraukti sutarį, jeigu iki sutarties įvykdymo termino pabaigos iš konkrečių aplinkybių ji gali numanyti, kad kita šalis pažeis sutartį iš esmės.
Civil Code of Lithuania§ 6.219 - Anticipatory Breach:A party can terminate a contract if, prior to the completion of the contract, concrete facts would allow the party to conclude that the other party will commit a material breach.
General Rule: An innocent party may terminate a contract because of an anticipatory breach of the other party.
We have seen that a party that has not performed his contractual obligation can be forced to do so or to pay money damages. What, however, happens if a party to a contract, at a time prior to the time specified for his performance, indicates by word or deed that he shall not perform his obligation? Must the other, non-breaching, party wait until the time scheduled for performance and only then sue for damages?
No. In such a case, the non-breaching party may terminate the contract at once, because the other party has materially breached the contract in anticipation (prior to) of its performance. This is the doctrine of anticipatory repudiation (otherwise known as anticipatory breach).
A repudiation may be manifested by word or by act. If by word, the words must unambiguously and unequivocally express the wrongdoer’s intention to breach. The breach concerned must be a material one, and it must be one which is directly communicated by one party to another.
Example: “We’re having problems. I’m worried that we won’t get the project done by the time agreed in the contract.” This does not constitute anticipatory breach as it is an expression of doubt.
But
7 Adapted from a problem in Crandall Whaley, Cases, Problems, and Materials on Contracts, 2nd
Ed. (Boston: Little, Brown, and Co., 1993.
Example: The contract calls for Builder to construct a building and calls for periodic payments. Owner tells Builder that there will be no more money for him after December 15. This is an anticipatory repudiation.
Example: Builder goes to a party where Owner is not in attendance. While there, he states to witnesses that he does not intend to comply with the requirements of the contract with Owner. This is not an anticipatory repudiation, because Builder has not communicated it to Owner directly.
Good Faith: Good faith is not a defense. Therefore if a party mistakenly asserts a right it does not have, or demands a performance which is not in the contract, while threatening not to perform unless its demands are satisfied, this will be considered anticipatory repudiation—even if done in good faith.
Example: X mistakenly believes it has the right to have a certain computer program called Program WWW installed as part of the purchase price of the computers it has purchased. X tells the Seller that “Unless you install Program WWW in all of these computers we are cancelling the deal.” X has repudiated.
Repudiation by Conduct
A wrongdoer’s voluntary action which renders him prospectively unable to perform can also be an anticipatory repudiation.
Example: Owner enters into a contract by which he obligates himself to lease certain premises to Lessee One by Day Ten. On Day Five Owner leases the premises to another lessee for one year. Even though Owner could conceivably come to an agreement with the other lessee to rescind or cancel their agreement and then perform without breach, nevertheless Lessee One is justified in treating this as an anticipatory breach because satisfactory performance by the Owner is so unlikely.
Anglo-American law and Continental law both distinguish between anticipatory repudiation that is a result of voluntary action and a party’s apparent inability to perform that is not a result of his voluntary action.
Example: If John has agreed to plow Farmer’s fields on March 10th, but John’s tractor is destroyed on March 5th, there is no repudiation of the contract. John may still be able to perform by replacing the lost equipment before the March 10th date for performance.
Thus, if an anticipatory breach is verbal or caused by the voluntary actions of the party, it is the general rule that the non-breaching party has the right to terminate the contract immediately, without the need to give advance notice to the breaching party (the notice would allow the breaching party to give adequate assurance of his performance). The Lithuanian Civil Code treats of the matter in a separate section, §6.219, from the general case, which does require such advance notice. The separate section does not require notice to be sent, and at any rate the notice would be superfluous, by definition. Notably, the French jurisprudence also dispenses with the requirement of
notice in such cases.8
The CISG treats of the question of notice more obliquely. It requires the non-breaching party (in cases of non-verbal repudiation or prospective inability to perform) to inform the other that the non-breaching party intends to terminate the contract; in such a case, should the other party assure the non-breaching party that it does intend to terminate the contract, the non-breaching party would not be able to terminate the contract.
CISG72 straipsnis
(1) Jeigu iki sutarties įvykdymo datos tampa aišku, kad viena iš šalių padarys esminį sutarties pažeidimą, kita šalis gali pareikšti apie sutarties nutraukimą.
(2) Jeigu leidžia laikas, šalis, ketinanti pareikšti apie sutarties nutraukimą, privalo nusiųsti protingą pranešimą kitai šaliai tam, kad suteiktų jai galimybę pateikti pakankamą garantiją, kad ji įvykdys savo prievoles.
(3) Ankstesniojo punkto reikalavimai netaikomi, jeigu kita šalis pareiškė, kad ji nevykdys savo prievolių.
CISGArticle 72
(1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.
(2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance.
(3) The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations.
French Law:
If a party makes manifest his intent to breach, it is true that the French jurisprudence dispenses with the requirement of notice (mise en demeure) in such cases9. But nevertheless where an obligation is due only upon the occurence of a certain event (like a date), then performance cannot be claimed before that event occurs10 and the innocent party cannot claim damages or have the contract rescinded before that occurrence. It is therefore sometimes asserted that the doctrine of anticipatory breach is unknown in French law.
Netherlands Law:
Anticipatory breach is known in Netherlands law.
8 FLOC p. 238 fn.29.9 FLOC p. 238 fn.29.10 For a discussion of mis en demeure, see infra at p.___. See also John Bell, et al., Principles of French Law. Oxford University Press 1999 at p.337.
§6.83 Default commences without the formality of putting into default:... c. Where the creditor must conclude from a communication by the debtor that the latter will fail in the performance of the obligation.§6.80.1 The consequence of non-performance take effect even before the claim is exigible:
a. if it is certain that performance without failure will be impossible;b. if the creditor must conclude from a communication by the debtor
that the latter will fail in performance ... .
D. Assurance
Sometimes, however, a party’s conduct, while shaking the confidence of the other party that the obligation will be performed, falls short of being clearly a repudiation. This brings us to the matter of assurance.
Principles of European Contract Law§ 8:105: Assurance of Performance(1) A party who reasonably believes that there will be a fundamental non-performance by the other party may demand adequate assurance of due performance and meanwhile may withhold performance of its own obligations so long as such reasonable belief continues.(2) Where this assurance is not provided within a reasonable time, the party demanding it may terminate the contract if it still reasonably believes that there will be a fundamental non-performance by the other party and gives notice of termination without delay.
***
Lietuvos Respublikos Civilinis Kodeksas§6.219. Iš anksto numatomas sutarties neįvykdymasŠalis gali nutraukti sutarį, jeigu iki sutarties įvykdymo termino pabaigos iš konkrečių aplinkybių ji gali numanyti, kad kita šalis pažeis sutartį iš esmės.§6.220. Patvirtinimas apie tinkamą įvykdymą1. Šalis, kuri atsižveldama į aplinkybes tikisi, kad kita šalis gali iš esmės pažeisti sutartį, turi teisę iš pastarosios šalies pareikalauti patvirtinti, kad ši sutartį įvykdys tinkamai. Šalis gali sustabdyti savo sutartinių prievolių vykdymą tol, kol kita sutarties šalis patvirtina, kad ji sutarį tikrai įvykdys tinkamai.2. Jeigu šio straipsnio 1 dalyje nurodyto patvirtinimo šalis negauna per protingą terminą, ji gali sutartį nutraukti.
Civil Code of Lithuania§6.219 Anticipatory RepudiationA party can terminate a contract if, prior to the completion of the contract, concrete facts would allow the party to conclude that the other party will commit a material breach.§6.220. Assurance1.If a party has reasonable cause to believe that the other party may commit a material breach, then the party has the right to demand that the other party provide an assurance of that it will perform the contract satisfactorily. A party may suspend its own performance until such time as the other party has provided assurance of its satisfactory performance.2. If a party does not receive such an assurance as provided for under subsection 1 above in a reasonable time, it can terminate the contract.
Netherlands Civil Code§6.80.1 The consequence of non-performance take effect even before the claim is exigible:
c. if the creditor has good reasons to fear that the debtor will fail in the performance and the debtor does not comply with a written warning indicating those reasons and requesting the debtor to confirm that he is willing to perform his obligation within a reasonable time period specified in that warning.
Assurance
Various codes, including the UCC, provide that, under certain circumstances, a party may demand an assurance from the other party that it intends to perform its obligation. In such an instance, the party demanding the assurance may suspend its own performance until such time as he receives the assurance; if no assurance is forthcoming within a reasonable time, he may terminate the contract.
The applicable UCC provisions appear to have been meant to deal with the problem of the prospective, non-volitional (apparent) inability to perform, in that a party really should be required to give notice of his intention to termi-nate the contract unless assurance is received, since by definition the apparent inability to perform is only apparent, not unequivocal. The Lithuanian and Netherlands civil codes are in accord. Thus if a party’s prospective inability to perform is less than a voluntary repudiation, neither under the UCC, nor the
CISG, nor the Lithuanian or Netherlands codes will a party have the right to ter-minate the contract without first seeking “assurance” from the other party.
Example. The obligor (debtor) states in writing that it shall not perform under any circumstances. Under Lithuanian Civil Code §6.219, the obligee (party not-in-breach, i.e., the creditor), can terminate (cancel) the contract at once. Note that notice is not required. Note also that the obligee MAY request assurance.
Example. The obligee, Company A, learns that the obligor has taken on some extra work for third parties, and therefore Company A begins to doubt whether the obligee can perform its obligation to the obligee (Company A). Since this (the taking on of extra work) is less than an unequivocal voluntary renuncia-tion, then, under Netherlands Civil Code §6.80.1, the obligee (Company A) may not terminate (cancel the contract) at once. It may only demand assurance. If the assurance is not made within a reasonable time, or if it is not commercially reasonable, then the obligee (Company A) has the right to cancel the contract. Note that notice would not be required.
There is, however, a practical problem that one should look out for. If a party does indeed voluntarily repudiate a contract (by, let us say, an unequivocal statement), and if the non-breaching party then elects to request an assurance instead of terminating the contract, and if then the putative wrongdoer does is-sue an assurance, then the matter rests on the reasonability of the assurance. If it is not in good faith, the court should determine that the aggrieved (inno-cent) party (the party which had requested the assurance) did nevertheless have a right to terminate the contract. This would be a direct result of the gen-eral requirement of good faith.
Table of Permutations11
Unequivocable verbal renuncia-tion =reasonable be-lief that party will not perform
Demand for assurance not necessary
Non-breaching party may termi-nate at once.
Unequivocable verbal renuncia-tion =reasonable be-lief that party will not perform
IF Demand for assurance made12
And If the wrong-doer provides reasonable assur-ance--
--then the non-breaching party may not terminate the contract.
11 Lithuanian Civil Code is here abbreviated at the LT Civil Code.12 This eventuality is commented upon in Official Comment 2 to §2-611 of the UCC.
Voluntary act leading to rea-sonable belief that wrongdoer will not perform
Under CISG a demand for assurance must be made IF time per-mits; under LT Civil Code and UCC no such demand is necessary
Under LT Civil Code and the UCC the non-breaching party has the right to terminate at once.Under CISG the non-breaching party has the right to terminate if adequate as-surance is not re-ceived within 30 days
Voluntary act leading to rea-sonable belief that wrongdoer will not perform
Under CISG a demand for assurance must be made IF time per-mits; under LT Civil Code and UCC no such demand is necessary
If a demand is made under any of the three codes described, under these cir-cumstances, if a reasonable assur-ance is given, then--
--the non-breaching party may not termi-nate the contract
Reasonable belief that the “wrongdoer” may not be able to perform, not result of a voluntary act
Under LT Civil Code and the UCC, a de-mand for as-surance must be made.Under CISG, a demand for assurance must be made IF time per-mits
If a demand is made under any of the three sys-tems described, under these cir-cumstances, if a reasonable assur-ance is given, then
--the non-breaching party may not termi-nate the contract
Reasonable belief that the “wrongdoer” may not be able to perform, not result of a voluntary act
Under LT Civil Code and the UCC, a de-mand for as-surance can be made.Under CISG, a demand for assurance must be made IF time per-mits
If a less than commercially reasonable assur-ance is given (un-der the UCC—as between mer-chants)
Then the party that had demanded the assurance has the right to terminate the contract (the un-reasonableness of the assurance being a material breach)
Party seeking assurance actually has no reasonable basis to believe the “wrongdoer” will not be able to perform
In all 3 sys-tems, if an as-surance is de-manded
And if no assur-ance is given
Party having de-manded assurance will be in material breach if he “termi-nates” the contract as a result of their having been no as-surance given
Plaintiff, a physician specializing in roentgenology, brought this suit to recover damages in the sum of $124,585.35, allegedly sustained as a consequence of defendants' breach of contract to give him a 10% interest in a partnership to be formed for the practice of medicine. Primarily, he prays for a specific performance of the partnership agreement which, for reasons hereinafter pointed out, could not be granted but the principal demand stated in the petition is for damages in the amount claimed and, as a second alternative, for recompense on a quantum meruit.
To plaintiff's original petition, defendants, who are Drs. G. Gordon McHardy and Donovan C. Browne, interposed numerous exceptions among which was an exception of no cause of action and a plea of liberative prescription. Plaintiff then filed a lengthy supplemental and amended petition with exhibits attached thereto and, after a hearing on defendants' objections, all exceptions were referred to the merits. However, the trial judge, believing the claim to be prescribed by the three-year prescription provided by Article 3538 of the Civil Code, sustained defendants' plea and dismissed the suit. Plaintiff has appealed and defendants, following two unsuccessful attempts to have the appeal dismissed (see Marek v. McHardy, 231 La. 505, 91 So.2d 773 and 233 La. 835, 98 So.2d 207), answered, reurging their exception of no cause of action and praying for an affirmance of the judgment below.
An examination of the original and supplemental petitions, in connection with three certain letters which exhibit the contract between the parties, reveals the following well-pleaded facts: Sometime prior to February 19, 1948, Doctors McHardy and Browne, who were engaged in the practice of medicine as partners, contemplated expansion of their organization by forming a medical group to operate a clinic for the general practice of medicine. To this end, defendants acquired real estate to be used for the clinic and sought to obtain the services of various specialists to join them in their practice of internal medicine, the combined operation to be known as the "Browne-McHardy Medical Group".
During this time, plaintiff was practicing his specialty of radiology at the Mayo Clinic in Rochester, Minnesota. He was contacted by telephone by Dr. McHardy, who sought to enlist his services and have him join the planned group of physicians. Following this solicitation, Dr. McHardy wrote plaintiff a letter on February 19, 1948 in which he stated that he and Dr. Browne were forming a medical diagnostic group which was to include two other internists, a neuro-psychiatrist and a radiologist, who would have charge of the X-ray Department; that they were renovating the ground floor of the old Carol Hotel in New Orleans and would have a full complement of general X-ray equipment on hand; that they were desirous of having plaintiff take charge of this department and would pay him $8,000 per year for the first three years with a percentage interest at the beginning of the fourth year "which percentage in the business and equipment will have been purchased by the three years of service the individual has dedicated to the group". Plaintiff was requested by Dr. McHardy to give his reaction to this offer as early as possible.
Following receipt of this letter, further telephonic conversations were had between plaintiff and Dr. McHardy, culminating in a letter written by the latter to plaintiff on March 23, 1948, stated to be a confirmatory letter "which we will each consider equivalent to a contract". The terms of this contract were that plaintiff was to join the Browne-McHardy Medical Group as a roentgenologist on October 1, 1948 and as a salaried member of the organization for 36 months, the yearly salary being $8,000 with the understanding that, at the end of each year, an evaluation of the financial structure of the organization would be reviewed to consider the possibility of an increase of the salary. It was further provided in the letter that "Beginning October 1, 1951, having completed thirty-six months of your contract with us as specified, it is agreed that thereafter you will be a participating partner to the extent of ten percent in all income, equipment and accounts payable to the Browne-McHardy Medical Group. This partnership agreement drawn up in the proper form will be completed on October 1, 1951 at which time it goes into effect". On March 27, 1948 plaintiff accepted the proposition in writing and stated in his letter that "My wife and I are looking forward to October when we will come home to New Orleans to live."
On October 1, 1948, plaintiff joined the group and remained in its service for some 34 months when, according to his allegations, he was informed by Dr. McHardy that the defendants had no intention of granting him a one-tenth interest in the medical enterprise on October 1, 1951 but that, instead, he would have to buy this interest from them. Plaintiff asserts that his expectancy of being made a partner constituted a material part of the consideration for the three years employment and that, except for this promise, he would not have worked at the salary paid by defendants.
[The court first addressed a question concerning whether the action was barred by a three year statute of limitation for actions based on the services provided by medical doctors. The court decided the matter was governed by the general statute of limitation and hence the action was maintainable.]
We pass on to a consideration of the exception of no cause of action which was referred to the merits by the trial judge and which has been reurged by defendants in their answer to the appeal. This exception is founded on several legal propositions which will be hereinafter discussed.
At the outset, it is appropriate to point out that, although plaintiff initially prays for a specific performance of the partnership feature of the contract, it is plain from a consideration of the alleged facts and the nature of the obligation that the case is not one in which a specific performance could or should be ordered. Whereas, Article 1926 of the Civil Code provides that, on the breach of any obligation to do or not to do, the obligee is entitled to damages or, at his option, to a specific performance of the contract in cases which permit it, the following Article 1927 limits the remedy in ordinary cases of breach of contract, declaring that the party aggrieved is entitled only to damages unless this would be inadequate, in which instance specific performance may be granted if the defaulting party has the power of performing the contract. Manifestly, in a case like this involving personal services coupled with a promise of the obligees to make the plaintiff their business partner, the court would not order the exceptional relief of a specific performance. See Snyder v. Wilder, 146 La. 811, 84 So. 104. Hence, plaintiff's remedy is for dissolution of the contract (see Articles 2046 and 2047 of the Civil Code) and for the damages (Articles 1926 and 1927) he has occasioned by defendants' breach. This relief he has prayed for and we think he would be entitled to it if he is able to sustain the well-pleaded allegations of his petitions.
Defendants contend that plaintiff states no cause of action for these alleged damages for a number of reasons. They specify, first, that the alleged promise for the formation of a partnership was too vague and indefinite to support its enforcement in that, among other things, no provision was made for the duration of the partnership.
We find no merit in this postulation. The contract evidenced by McHardy's letter of March 23, 1948 is clear and concise, constituting a valid working agreement supported by adequate consideration. The omitted details, which defendants assert were essential, were such matters as hours, days off, vacations, sick leave, retirement and plans depending on contingencies such as death or retirement of partners, all of which were susceptible of agreement or controlled by law without need for stipulation. In any case, subsequent failure to reach an agreement as to these details would not be destructive of the legal effectiveness of defendants' promise and bar an action by plaintiff for the damages he is able to prove he suffered as a consequence of the breach.
The next contention of defendants that their offer was never accepted by plaintiff is without basis in view of the letter of March 23, 1948 which denominates it as a contract. This letter contains succinct statements of a prior verbal understanding reached by the parties and the agreement was later placed in execution, apparently in good faith, when plaintiff came to New Orleans and took charge of defendants' radiology department.
We also find untenable defendants' next argument that the latter of March 23,
1948 was intended to be a contract only insofar as the three years employment was concerned and that the mention of the partnership was only by way of a proposal which would be negotiated after three years if both parties were still interested. The letter itself refutes this proposition as it states that "… having completed thirty-six months of your contract with us as specified, it is agreed that thereafter you will be a participating partner to the extent of ten percent …".
Defendants further contend that plaintiff is not entitled to damages because the petitions show that he is admittedly in default. They say that plaintiff was bound under the contract to complete his three years of employment in order to entitle him to a 10% interest in the partnership and yet, according to his own allegations, he left his employment on August 10, 1951, or before the end of the 36-month period. Closely connected with this contention is defendants' claim that they have not been put in default and their breach, if any, was merely passive.
Plaintiff alleges that the reason why he did not continue his performance for the full thirty-six months is that defendants informed him that they were not going to make him a partner in accordance with their promise and, therefore, it would have been vain and useless for him to continue to perform as the expectancy of being made a partner constituted a material part of the consideration for his three years employment and that, except for this expectancy, he would not have agreed to work for the salary paid by defendants.
Thus, the allegations of plaintiff's petition present the question of whether or not a party to a commutative contract in Louisiana may discontinue his performance when the other party notifies him that the contract will be repudiated. In other words, is the doctrine of anticipatory repudiation entitled to recognition in this State? If so, then defendants' claim that they have not been placed in default has no substance as the alleged unjustified repudiation by defendants of their promise is to be regarded as an active violation, of their obligation rendering them amenable to damages from that moment without the necessity of being placed in default. See Articles 1931 and 1932 of the Civil Code.
Under the common law, a breach of a contract before the time of performance allows the injured party to sue for damages immediately. 12 Am.Jur. Verbo Contracts, Sections 391, 401; Williston on Contracts, Revised Edition, Section 1296, et seq., especially Section 1314; Restatement of the Law of Contracts, Section 959, et seq. It is generally recognized, however, that, the repudiator may retract his repudiation unless the promise, in relying on the repudiation, has changed his position to such an extent that subsequent performance is impractical, in which case the injured party may, nevertheless, recover damages. Corbin, op. cit. Sections 977, 978.
In Section 1337A of Williston on Contracts, Rev.Ed., it is said that "There seems no recognition of any doctrine of anticipatory breach in the civil law until within comparatively recent times." A reference is made to the views obtaining in
France and also in Germany where there are certain variations. The conclusions of Mr. Williston are founded on the difference in the civil law system's first choice of remedy in actions ex contractu, it being observed that damages are the rule at common law and specific performance the exception, whereas the reverse is true of the civil law. See also comment "Anticipatory Repudiation in Louisiana", 7 Tulane L.Rev. 586.
While Mr. Williston may be correct that the civil law, as obtaining in France, accords a specific performance as its first choice of remedy, this is not the rule in Louisiana - for, as we have above pointed out, Article 1927 of the Civil Code plainly declares that the breach of an obligation to do or not to do entitles the party aggrieved in ordinary cases only to damages. See Article "The Implied Resolutory Condition for Non Performance of a Contract", 12 Tulane L.Rev. 376-400 and 509-533. It is only where damages would not furnish adequate compensation and the defaulting party has the power of performing the contract, that specific performance will be allowed in the absence of a special statute authorizing this relief, such as Article 2462 of the Civil Code, as amended, dealing with an agreement to sell. (It is to be noted that Article 1927 is not contained in the Code Napoleon and the jurisprudence construing the Article is that specific performance has never been favored in our law. See Pratt v. McCoy, 128 La. 570, 54 So. 1012 and the many authorities cited therein.)
On the other hand, Articles 2046 and 2047 of the Civil Code provide that in every commutative contract there is a resolutory condition to take effect if either party does not perform and, in cases where there is a willful breach, the contract is resolved only by suit in which the court may, in its discretion, allow a further time for performance. These Articles, we think, have no effect on Article 1927, declaring that damages are the rule and specific performance the exception, as this Article establishes the ordinary remedy accorded by law, whereas Articles 2046 and 2047 refer to the judicial discretion which may be exercised after a hearing where the defendant is pleading for a chance to perform.
From all of this we deduce that an anticipatory breach of contract is actionable in Louisiana. Whether the contract will be resolved depends upon the facts and circumstances of each particular case. Accepting as true the allegations of fact in the case at bar, we are of the opinion that plaintiff was legally justified in treating the contract breached when he was informed by defendants in August of 1951 that they would repudiate their promise to include him as a partner on October 1, 1951 and, therefore, he was not required to continue in their service until October 1st as a condition precedent to the assertion of a claim for damages. The question of whether plaintiff's discontinuance of performance in August of 1951 deprived defendants of the right to retract their repudiation and perform the contract is a matter of defense and does not affect the cause of action stated by plaintiff. Obviously, this would be a matter of importance only if it is shown on the trial that defendants were willing to perform their promise on the due date.
Finally, defendants' argument that no contract came into being until the writing
of a partnership agreement, is without merit for the reasons stated above. The letter of March 23, 1948 is a complete contract containing an executory promise of a 10% interest in the partnership. No new written agreements were absolutely essential to carry into effect the covenants contained therein.
The exception of no cause of action is not well taken and should have been overruled.
The judgment appealed from is reversed and the case remanded for further proceedings consistent with the views herein expressed.
Case # 3Pittsburgh-Des Moines Steel v. Brookhaven Manor Water Co.
USA: 7th Circuit (1976) 532 F.2d 572
Before Clark, Associate Justice, and Cummings and Pell, Circuit Judges. Associate Justice Tom C. Clark, United States Supreme Court, Retired, is sitting by designation.
PELL, Circuit Judge.
This is an appeal by the Pittsburgh-Des Moines Steel Company (hereinafter PDM) from the district court's entry of a judgment notwithstanding the verdict against PDM on its complaint for repudiation of contract and for Brookhaven Manor Water Company (hereinafter Brookhaven) on its counterclaim for breach of contract and from the district court's subsequent adjudgment of damages. The questions raised on appeal are whether the district court erred in entering judgment notwithstanding the verdict in favor of Brookhaven on the liability issue and whether error was committed in the district court's subsequent assessment of damages against PDM.
The record discloses the following series of events. On July 24, 1968, PDM, a designer, fabricator, and engineer of steel products, submitted a proposal to Brookhaven for the construction of a one-million-gallon water tank for $175,000. The original proposal incorporated, as terms of payment, 60 percent upon receipt of materials in PDM's plant, 30 percent upon completion of erection, and 10 percent upon completion of testing, or within 30 days after the tank had been made ready for testing. The original terms were not satisfactory to Brookhaven's president, Irving Betke, and were subsequently changed. The altered payment term provided that 100% of the contract price was due and payable within 30 days after the tank had been tested and accepted. The altered proposal was signed and accepted by Brookhaven on November 26, 1968.
Sometime during the following month Norman Knuttel, PDM's district manager
who had prepared and signed the original and revised proposals, talked to a representative of the Arbanas Construction Company which company had contracted with Brookhaven for the construction of the tank foundation. Knuttel was informed that Brookhaven had received a loan from Diversified Finance Corporation. Although this information as to the receipt of the loan was incorrect, Brookhaven had negotiated with Diversified for a loan for the purpose of the construction which negotiation continued into the following year. Under date of January 3, 1969, PDM's credit manager wrote Diversified with a copy to Betke which letter in part was as follows:
"[W]e hereby request a letter assuring that $175,000,00 for payment of the referenced project will be held in escrow and fully committed to payment to us upon completion of referenced elevated tank. "As a matter of good business we are holding this order in abeyance until receipt of such notification."
The contract contained no provision for escrow financing. Brookhaven, through Betke, took no action upon the receipt of the copy of the letter. Subsequently, after further correspondence and meetings, resulting primarily from Brookhaven's not having secured a planned loan of $275,000.00 from Diversified Finance, PDM's credit manager sent an air mail, special delivery letter to Betke, dated March 19, 1969, which suggested that Betke "mail us your personal guarantee of payment of $175,000.00 as per the contract, to protect us in the interim between now and the time your loan is completed."
While the contract specified the payment of the amount mentioned no later than 30 days after completion of the tank, it was silent as to any reference to a personal guarantee by Betke. The letter concluded as follows:
"Upon receipt of such guarantee, we could immediately set in motion our shop fabrication which would result in earlier completion of your new tank.
"When your loan is completed we will still require a letter of instructions to be forwarded from you to your bank, or other financial institution which extends this loan, that $175,000.00 is to be held in escrow for disbursement only to Pittsburgh-Des Moines Steel Company in accordance with our contract."
The construction of the water tower was scheduled to begin on April 15, 1969. A crew had been scheduled for the site three months previously, and a crew was ready to appear there on April 15, 1969. As matters transpired, however, the tank was never installed at Brookhaven's site. On March 31, 1969, Betke sent PDM Comptroller Harry Kelly his personal financial statement, but he did not send PDM his personal guarantee for the loan. After Betke failed to provide his personal guarantee of the $175,000.00 contract price, PDM took no further steps toward performance.13 On April 22, 1969, Kelley, PDM Secretary-
13 Footnote in original:The record indicates that as of April 22, 1969, the foundation, the construction of which was the obligation of Brookhaven, had been completed and two-thirds of the required tankage parts, which were the obligation of PDM, had been fabricated. However, it is also noted that as late as March 19, 1969, PDM had written Betke that upon the receipt of
Treasurer Tom Morris, PDM Sales Manager Dwight Long, and Betke attended a meeting on the Brookhaven premises. Although the record reveals somewhat inconsistent versions of the details of that meeting, it appears that Morris told Betke that PDM would complete the fabrication of the tank and deliver it to the job site within a matter of weeks but that Betke replied that he had no need for the tank until the following year.
Further efforts to implement the contract broke down completely after April 22, 1969. Brookhaven's installation of the reinforced concrete foundation for the tank had been accomplished at a cost to it of $18,895. Subsequent to the March meeting, Brookhaven purchased additional land and developed two wells which provided an adequate water supply. Brookhaven later sold all its assets, including both equipment and land, to the City of Darien. At the trial of the damages issue, an expert in demolition testified that the cost of removing the reinforced concrete foundation would be about $7,000. On the basis of this testimony, which was proffered upon the legal theory that Brookhaven had a right to recover the cost of the removal, the district court found that the total amount of damages sustained by Brookhaven was the sum of $25,895.00 and entered judgment in its favor for that amount.
II. Claimed Bases of Liability
Under the contract as executed, into which prior negotiations had been merged, Brookhaven's performance of its principal obligation to pay the purchase price was not due until after the completion of construction. Nevertheless within a period of time shortly more than one month after the contract became effective, PDM was requesting that a prospective lender of the funds to Brookhaven should hold the entire $175,000.00 in escrow. This was not a request that a lending institution give a letter of intent or otherwise confirm that it would make a particular loan when the payment became due after completion of construction. Instead the letter explicitly would, if honored, have required Brookhaven to complete all necessary loan papers and to arrange for the consummation of the loan, the proceeds of which would then be held by Diversified for some months until the work was completed. It is no answer to say that perhaps Brookhaven could have arranged for the escrowed fund to have been invested in some safe, readily liquidable form which might offset in part at least the loss to Brookhaven resulting from having to pay interest on money already borrowed. PDM having purported to agree not to ask for progress payments during the course of construction, more than half of which would have been due before the first act took place by PDM on the construction site, it now was substituting another requirement clearly beyond any requirement contemplated in the contract which would not have put the purchase price in hand but would nevertheless have it where it could be available for the picking at the appropriate time. The contract is silent as to any right of PDM to insist Brookhaven provide any such guarantee during the period before completion of construction. Further, PDM made it quite clear that it was "holding this order in abeyance until receipt of" notification that the money was
the guarantee, the shop could immediately set in motion fabrication. It is not clear whether PDM did anything to dispel the clear inference to Betke that there would be no fabrication, or at least further fabrication, until the guarantee had been received.
being so held. We find no basis for an inference that at this time Brookhaven was not ready, willing and able to perform its obligations under the contract nor that it would not be able to pay when it owed. The fact that there had been negotiations for a loan of money that would not be needed for some months, which negotiations had not come to fruition, does not support such an inference. Two months after the letter to Diversified, PDM reaffirmed its lack of retreat from the position of requiring assurance that the money would be forthcoming.
PDM argues that its position was in accordance with Section 2-609 of the Uniform Commercial Code (UCC) enacted into law in Illinois as Ill.Rev.Stat. ch. 26, sec. 2-609. That section which "creates a new contract enforcement procedure for the situation where one party feels insecure as to the other's performance" reads in pertinent portion as follows:
"Right to Adequate Assurance of Performance. (1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.
"(2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.
"(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding 30 days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract."
"There is no evidence in the record that defendant's finances or ability to pay changed in any way after the contract was accepted on November 26, 1968 or that plaintiff had any objective grounds to feel insecure. Plaintiff began inquiring about defendant's financing soon after the contract was signed, but no adverse information was found. Ultimately plaintiff refused to erect the fabricated parts of the tank, but it showed no justification for this."
The question […] is whether PDM's actions subsequent to the execution of the contract were within the protection provided by § 2-609. We hold that they were not.
The performance to which PDM was entitled was the full payment of the purchase price within a specified time after the completion of the tank. While we have a substantial question as to whether PDM made a written demand as required by the statute, in keeping with our concept that the UCC should be liberally construed, we do not desire to rest our decision on a formalistic approach. Letters were written which conveyed what PDM wanted done before they would pursue their obligations under the contract. The fundamental
problem is that these letters, if they be deemed to be in the nature of a demand, demanded more than that to which PDM was entitled and the demand was not founded upon what in our opinion was an actuating basis for the statute's applicability.
We do not construe § 2-609 as being a vehicle without more for an implied term being inserted in a contract when a substantially equivalent term was expressly waived in the contract. The something more to trigger applicability of the statute is that the expectation of due performance on the part of the other party entertained at contracting time no longer exists because of "reasonable grounds for insecurity" arising. We find that PDM's actions in demanding either the escrowing of the purchase price or a personal guarantee lacked the necessary predicate of reasonable grounds for insecurity having arisen. The contract negates the existence of any basis for insecurity at the time of the contract when PDM was willing to wait 30 days beyond completion for payment. The fact that Brookhaven had not completed its loan negotiations does not constitute reasonable grounds for insecurity when the money in question was not to be needed for some months. Reasonable business men prefer in the absence of some compulsive reason not to commence paying interest on borrowed money until the time for the use for that money is at hand. The credit manager's January letter that the order was being held in abeyance until receipt of notification of escrowing was based upon a "matter of good business," but not upon any change of condition bearing upon Brookhaven's ability to discharge its payment obligation under the contract. With regard to the later request for a personal guarantee, it is not uncommon for an individual to decline assuming obligations of a corporation in which he is a shareholder. Indeed, the use of the corporate device frequently has as a principal purpose the limitation on individual exposure to liability. If an unfavorable risk in dealing with a corporation exists at contracting time, good business judgment may well indicate that an assurance be secured before contracting that there will be individual shareholder backup. None of this occurred and the record is silent as to any reasonable grounds for insecurity arising thereafter.
It is true that one officer of PDM testified that the company did not send a crew because we questioned whether we might be paid for the project "at that time." Some more objective factual basis than a subjective questioning, in our opinion, is needed to demonstrate reasonable grounds for insecurity. Likewise, another PDM officer testified that it was the company's normal and regular procedure not to erect a structure "until we have reason to believe that the funds to pay for the structure are available." The time of which he was speaking was a time at which there was no contractual requirement that the funds be available. The funds were only required to be available after completion of installation. He testified further that the normal procedure was not to erect until satisfactory arrangements were made. None of this subjectively normal procedure was imposed as a provision in the contract which in view of the withdrawn provision for progress payments showed reasonably to Brookhaven that not only payment, but arrangements for payment, would not be necessary until after completion.
We, of course, would not deprive PDM of resort to § 2-609 if there had been a demonstration that reasonable grounds for insecurity had arisen. The proof in that respect was lacking. The comptroller and supervisor of PDM's credit department testified that he had access to all of the credit information that the company had regarding Brookhaven, that he had reviewed that information, and that he was unaware of any change in the financial condition of Brookhaven between November of 1968 and the end of 1969. Finally, we note that despite the professed subjective questioning in April as to whether PDM might be paid, the credit manager as early as January had said that the job would be held in abeyance until arrangements had been made for escrowing and a month after the questioning, the questioning officer had offered to proceed with construction in exchange for an interest in Brookhaven, an unlikely course if Brookhaven were financially in a questionable condition. There was also testimony with the same inference that PDM was not fearful of Brookhaven's financial stability or ability to pay in connection with PDM lending to Brookhaven the amount involved at an interest rate of 9 1/2% which rate was then unacceptable to Brookhaven. If the buyer was unable to pay for the performance of the contract, it is difficult to see that it was better able to pay a promissory note. We do not fault Brookhaven for its rejection of various proposals advanced by PDM each of which amounted to a rewriting of the contract in the absence of a proper § 2-609 basis. The fact, if it were a fact, that Brookhaven may not have had a large amount of cash lying in the bank in a checking account, not an unusual situation for a real estate developer, does not support the belief that it, as a company with substantial assets, would fail to meet its obligations as they fell due. Section 2-609 is a protective device when reasonable grounds for insecurity arise; it is not a pen for rewriting a contract in the absence of those reasonable grounds having arisen, particularly when the proposed rewriting involves the very factors which had been waived by the one now attempting to wield the pen. The situation is made no more persuasive for PDM when it is recalled that that company was the original scrivener.
Brookhaven's request to put off the contract for a year clearly came after PDM's repudiation of the contract and was indicative of nothing more than that Brookhaven was willing to undertake a new arrangement with PDM a year hence. Pursuant to § 2-610 of the UCC, Brookhaven was entitled to suspend its own performance by virtue of the anticipatory repudiation by PDM and to resort to available remedies, including damages pursuant to § 2-711 of the Code.14
For the reasons hereinbefore set out the judgment of the district court is
Affirmed.
14 Footnote in original: [W]e find no merit in PDM's argument that even if its January action could be construed as an anticipatory repudiation under § 2-610, its subsequent actions demonstrated a retraction of the anticipatory repudiation pursuant to § 2-611. That section requires a clear indication to the aggrieved party "that the repudiating party intends to perform." PDM only made it clear throughout that it intended to perform if Brookhaven gave assurances not required of it legally or contractually.
CUMMINGS, Circuit Judge (concurring).Although I agree with the result reached in the majority opinion, I differ with the reasoning. Reasonable men could certainly conclude that PDM had legitimate grounds to question Brookhaven's ability to pay for the water tank. When the contract was signed, the parties understood that Brookhaven would obtain a loan to help pay for the project. When the loan failed to materialize, a prudent businessman would have "reasonable grounds for insecurity." I disagree that there must be a fundamental change in the financial position of the buyer before the seller can invoke the protection of UCC § 2-609. Rather, I believe that the Section was designed to cover instances where an underlying condition of the contract, even if not expressly incorporated into the written document, fails to occur. See Comment 3 to UCC § 2-609. Whether, in a specific case, the breach of the condition gives a party "reasonable grounds for insecurity" is a question of fact for the jury.
UCC § 2-609, however, does not give the alarmed party a right to redraft the contract15. Whether the party invoking that provision is merely requesting an assurance that performance will be forthcoming or whether he is attempting to alter the contract is a mixed question of law and fact, depending in part upon the court's interpretation of the obligations imposed on the parties. In this case, PDM would have been assured only if significant changes in the contract were made, either by receiving Betke's personal guarantee, by attaining escrow financing or by purchasing an interest in Brookhaven. The district court could properly conclude as a matter of law that these requests by PDM demanded more than a commercially "adequate assurance of due performance."
Note:
Both the Uniform Commercial Code and the Lithuanian Civil Code requireA. That the party demanding assurance have a reasonable basis to believe
that the other party will breach the agreement.B. That the party demanding assurance has a right only to demand
assurance and therefore has no right to demand further guarantees of performance.
The UCC is explicitly requires that the assurance be commercially reasonable; however, the same result would be reached under the Lithuanian Civil Code as a function of the requirement of good faith and the fact that the assurance must in some reasonable way overcome a reasonable fear of the innocent party.
Exercises
1. Placidus and Fromo enter into a contract pursuant to which Fromo is to perform certain services within 60 days of the date of signing. Placidus is told by a fortune-teller that Fromo will not perform the services. Placidus
15 TK: Emphasis added.
demands assurance from Fromo. Fromo does not provide any assurance. Placidus terminates the contract. A. What can Placidus recover from Fromo?B. Can Fromo recover from Placidus?C. Who committed the material breach? When and how?
2. Placidus and Fromo enter into a contract pursuant to which Fromo is to perform certain services within 60 days of the date of signing. Several days after the formation of the contract, Fromo says to Placidus, “I’ve been having headaches. I don’t think I’ll be able to finish the project on time.” Placidus terminates the contract.
A. What can Placidus recover from Fromo?B. Can Fromo recover from Placidus?C. Who committed the material breach? When and how?
3. Placidus and Fromo enter into a contract pursuant to which Fromo is to perform certain services within 60 days of the date of signing. Several days after the formation of the contract, Fromo says to Placidus, “I’ve been having headaches. I don’t think I’ll be able to finish the project on time.” Placidus returns home and then the next day demands an assurance of Fromo. Fromo does not provide an assurance.
A. What can Placidus recover from Fromo?B. Can Fromo recover from Placidus?C. Who committed the material breach? When and how?
4. Placidus and Fromo enter into a contract pursuant to which Fromo is to perform certain services within 60 days of the date of signing. 45 days later, the parties meet and Fromo states, “Placidus, Frankly, I’ve always hated your guts and there’s no way I’m going to perform those services.” Placidus terminates the contract.
A. What can Placidus recover from Fromo?B. Can Fromo recover from Placidus?C. Is there a requirement of notice of intent to terminate? Under which
statutes?D. Who committed the material breach? When and how?
4. Placidus and Fromo enter into a contract pursuant to which Fromo is to perform certain services within 60 days of the date of signing. 45 days later, the parties meet and Fromo states, “Placidus, frankly, I’ve always hated your guts and there’s no way I’m going to perform those services.” Placidus waits a day and then demands an assurance from Fromo. Fromo is very sorry for his words and provides an adequate assurance. Placidus terminates the contract.
A. What can Placidus recover from Fromo?B. Can Fromo recover from Placidus?C. Is there a requirement of notice of intent to terminate? Under
which statutes?D. Did Fromo’s “assurance” have any legal effect?E. Who committed the material breach? When and how?
5. Placidus and Fromo enter into a contract pursuant to which Fromo is to perform certain services within 60 days of the date of signing. Placidus knows that Fromo has to obtain a loan to be able to perform the services. 45 days after the date of signing Placidus learns that Fromo’s application for a loan has been turned down by a bank. Placidus demands an assurance from Fromo. Fromo states that he will perform as contracted. Placidus terminates the contract.
A. What can Placidus recover from Fromo?B. Can Fromo recover from Placidus?C. Is there a requirement of notice of intent to terminate? Under
which statutes?D. Did Fromo’s “assurance” have any legal effect?E. Who committed the material breach? When and how?
6. Placidus and Fromo enter into a contract pursuant to which Fromo is to perform certain services within 60 days of the date of signing. Placidus knows that Fromo has to obtain a loan to be able to perform the services. 45 days after the date of signing Placidus learns that Fromo’s application for a loan has been turned down by a bank. Fromo’s firm is well-established. Placidus terminates the contract.
A. What can Placidus recover from Fromo?B. Can Fromo recover from Placidus?C. Who committed the material breach? When and how?
7. Placidus and Fromo enter into a contract pursuant to which Fromo is to perform certain accounting services within 60 days of the date of signing. 40 days later, Fromo fires all of his workers. Placidus terminates the contract.
A. Is it impossible for Fromo to perform the contract?B. What can Placidus recover from Fromo?C. Can Fromo recover from Placidus?D. Who committed the material breach? When and how?
8. Placidus and Fromo enter into a contract pursuant to which Fromo is to perform certain accounting services within 60 days of the date of signing. 40 days later, Fromo fires all of his workers. Placidus demands assurance. Fromo responds, saying, “Ah, I think I’ll have new employees by then.” Placidus terminates the contract.
A. Is it impossible for Fromo to perform the contract?B. What can Placidus recover from Fromo?C. Can Fromo recover from Placidus?D. Who committed the material breach? When and how?
9. Placidus and Fromo enter into a contract pursuant to which Fromo is to perform certain quite ordinary accounting services within 60 days of the date of signing. 30 days later an earthquake destroys Fromo’s place of business and all of Fromo’s computers. Placidus immediately terminates the contract.
A. Is it impossible for Fromo to perform the contract?B. What can Placidus recover from Fromo?C. Can Fromo recover from Placidus?D. Was notice of intent to terminate necessary?
E. Has a material breach been committed? When and how?
D. Cure
Principles of European Contract Law§ 8.104 - Cure by Non-Performing PartyA party whose tender of performance is not accepted by the other party because it does not conform to the contract may make a new and conforming tender where the time for performance has not yet arrived or the delay would not be such as to constitute a fundamental non-performance.
Lietuvos Civilinis kodeksas §6.208 Įvykdymo trūkumų pašalinimas1. Sutartį pažeidusi šalis gali savo sąskaita pašalinti įvykdymo trūkumus, jeigu: 1) ji be nepateisinamo uždelsimo praneša kitai šaliai apie įvykdymo trūkumų pašalinimo būdą ir laiką; 2) nukentėjusioji šalis neturi teisėto intereso atsisakyti nuo įvykdymo trūkumų pašalinimo; 3) įvykdymo trūkumų pašalinimas yra atliekamas nedelsiant; 4) įvykdymo trūkumų pašalinimą pateisina konkrečios aplinkybės.2. Kitos šalies pareiškimas apie sutarties nutraukimą nepanaikina teisės pašalinti įvykdymo trūkumus.3. Šalis, gavusi tinkamą pranešimą apie pasiūlymą pašalinti įvykdymo trūkumus, negali įgyvendinti savo teisių, kurios yra nesuderinamos su sutarties vykdymu tol, kol nepasibaigs terminas, nustatytas įvykdymo trūkumams pašalinti.4. Šalis gali sustabdyti savo prievolių įvykdymą tol, kol kita šalis nepašalins įvykdymo trūkumų, bei reikalauti nuostolių atlyginimo.5. Šalis privalo bendradarbiauti su įvykdymo trūkumus šalinančia šalimi visą trūkumų šalinimo laikotarpį.
Lithuanian Civil Code§6.208 Cure Of Improper Performance1. The party in breach can,
at its expense, cure its breach if:1) the party, without undue delay, gives notice to the other party regarding the method and time of cure of improper performance;
2) the injured party does not have a rightful interest in refusing the cure;
3) the cure is accomplished without delay;
4) concrete facts justify the cure of improper performance
2. The notification by the other party about the termination of the contract does not destroy the right to cure the improper performance. [Note: Under LT law there is usually a period of time between notice of termination and the coming into effect of the termination.]
3. A party, having gotten a proper offer to have the improper performance cured, cannot exercise its rights which are in conflict with the performance of the contract until the end of the term during which the cure is to be accomplished.
4. A party can stop the performance of its obligations until the other party does not effect the cure, and can demand the reimbursement of damages.
5. A party must cooperate with the party which is curing its improper performance during the entire period of cure.
Louisiana Civil Code§ 2610. Cure of NonconformityUpon rejection of nonconforming things by the buyer, the seller may cure the nonconformity when the time for performance has not yet expired or when the seller had a reasonable belief that the nonconforming things would be acceptable to the buyer. In such a case the seller must give reasonable notice of his intention to cure to the buyer.
Uniform Commercial Code§2-508. Cure by Seller of Improper Tender or Delivery; Replacement1. Where any tender or delivery by the seller is rejected because non-
conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.
2. Where a buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.
The concept of Cure evolved from considerations of the termination of contracts for material breach. It was called forth specifically by this sort of situation: a material breach is committed innocently prior to the final time by which performance must be rendered. The breaching party offers to cure its breach, to make its performance acceptable—but the non-breaching party refuses to accept this cure, terminates the contract, and sues for damages. The breaching party seeks to defend against the court action by arguing that, while it may be liable for some limited amount of damages due to its faulty initial performance, that it should have been allowed to cure its performance; indeed, it would argue, its right to cure a faulty performance was breached by the other party.
As E. Alan Farnsworth has written, “[a]lthough the concept of cure was known before the Uniform Commercial Code, the Code must be credited with giving a seller of goods a clear right to cure and with popularizing the word cure in this context.”16 But the UCC provision in question governs only sales contracts, whereas the European Principles, however, incorporate a right of cure into every type of contract.
The right of cure, then, is a power in the debtor to erase the effects of his breach; upon exercise by the debtor of the right to cure, the justification for the creditor’s defensive non-performance disappears. The effect is that the creditor now must perform, whereas he otherwise would have been justified in withholding performance (and eventually terminating the contract) due to the debtor’s breach.
The right of cure as set forth in the European Principles does appear to be the law in England and Scotland. The law of the majority of other nations of continental Europe have some form of the right of cure, but these are, 16 Alan Farnsworth, Contracts 3rd Ed. Aspen Law and Business: New York (1999). p.587-590.
generally speaking, limited to certain contracts; this is true as well for Russian law.
Almost nowhere is the matter addressed in the general terms found in the European Principles. For instance the Dutch require the debtor, in order to cure, to contemporaneously offer payment for damages, and debtor’s right to cure ends upon notification from the creditor that he is claiming damages instead of performance.
New Netherlands Civil Code§6.86 The creditor may refuse performance offered after the beginning of the default, so long as the offer does not also comprise the payment of damages which have, in the meantime, become due, as well as of costs.§6.87 To the extent that performance is not already permanently impossible, the obligation is converted into one to pay damages by equivalence where the debtor is in default and the creditor notifies him in writing that he claims damages instead of performance.17
Under Russian law, the buyer of goods is under a duty to notify the seller of the non-conformity of transferred goods if the non-conformity is remediable, in which case the seller has a right to remedy its performance. See Russian Civil Code §475.
Under French law (§ 1184), a delai de grâce may be granted by the court to a debtor: this is a last chance to perform. This formerly applied only to judicial resolution (termination), but pursuant to a 1994 amendment is applicable to unilateral termination provided by contract (§1244-3).
This, however, is quite different from the right of cure contemplated by the European Principles. Although the European Principles set forth a general right of cure, “[c]ure is not always possible, as in the case of a singer who fails to show up on the night of the opera.”18 In such a case, the time of performance has passed.
Thus, under the Principles and American law, a party may cure their faulty performance up until the time for performance has actually arrived, or even if it has, if the delay is immaterial. This is a right of the debtor and it may not be defeated by a purported termination by the non-breaching party.
Example: (European Principles and American law): The contract specifies a service is to be rendered by the 15th day of the month. The service provider does not tender his performance until the 16th. The court may find that the delay, upon the particular circumstances, is immaterial19, in which case the debtor has cured his faulty performance (he will be liable only for moratory
17 P.P.C.Haanappel, Ejan Mackay. New Netherlands Civil Code: Patrimonial Law. Kluwer: Deventer, Boston (1990, 1997) p.264.18 Farnsworth, p. 587 at footnote 1.19 “Netherlands Civil Code §6.39: “Where a term for performance has been set, it is presumed only to prevent the obligation from being claimed earlier.” P.P.C.Haanappel, Ejan Mackay. New Netherlands Civil Code: Patrimonial Law. Kluwer: Deventer, Boston (1990, 1997)
damages). Usually, if a contract specifies that performance by a certain date is a condition of the other party’s performance, the courts will enforce this clause and hence cure beyond that date would be impossible. Note that in this example, performance by a certain date was not explicitly a condition of the other party’s duty of performance.
But it should be noted that under the European Principles, if a breach is truly material (past the time for performance and where delay is material), there is no delay period allowed during which a performance can be cured. This is quite different from the French system, which in all such cases allows a delai de grâce.20 Of course, this is within the discretion of the trial court.
Lithuanian Law:
Under Lithuanian law, there are two separate rules pertaining to this situation. The first rule has to do with late performance. If the performance is deficient due to being late, the rule is that the creditor must first notify the debtor that it is withholding its own performance due to the debtor’s breach, and the creditor must specify an additional time period during which the debtor can cure his breach. Only if the debtor does not cure the breach during this additional time period can the creditor terminate the contract. See §6.217.3. (Unfortunately, this section does not specify that the creditor can terminate the contract “at once21,” and therefore the next article applies—which specifies that notices of termination come into effect only after the expiration of the date set forth in the contract, or in thirty days, meaning that there is yet another time period prior to the actual termination of the contract. In such a case, however, it is unlikely that a court would allow a debtor to cure in this second waiting period since the time period or term for performance has passed—but in these circumstances the waiting period has no utility and unnecessarily places the creditor in a position of not being sure in this second waiting period whether he has the right to refuse the tendered cure.)22
For most other material breaches (except as provided for by contract and in cases of anticipatory repudiation) the termination will go into effect only after thirty days or after the period provided for under the contract. This diverges significantly from both American law and the European Principles, in which a termination is operative immediately. During this period, if cure is possible, the
20 It is interesting to speculate whether the curious delay period in the Lithuanian code between notice of termination and effective termination is not an attempt at establishing a general period of cure, somewhat like a genericdelai de grâce. But it is not co-terminous with the period allowed for cure, and thus it’s purpose is difficult to discern.21 The corresponding section of the European Principles does indeed specify that in the case of delay, the aggrieved party may give notice to the defaulting party, setting an additional time period for performance, and if the performance is not rendered during that period, the aggrieved party can consider the contract terminated at once. See §8.106.3.22 Lithuanian Civil Code. §6.217.3. “When a period for performance has expired, the aggrieved party can terminate the contract, if the other party does not perform it during an additional period of time.” §6.218.1. In cases provided for under §6.217 the aggrieved party can terminate the contract unilaterally, without court action. The other party must be given the time period for notice of termination set forth in the contract, and if the contract does not set forth any such period, then the period will be 30 days.”
debtor (the party in breach) has the right to cure its performance; notification of termination does not obviate the right of the debtor to cure (§ 6.208.2). In this regard, if the creditor (the aggrieved party) does not accept the tendered cure, it itself is now in material breach of the contract.
Example: (Under Lithuanian law): A contract specifies a service is to be rendered by Day 90. On Day 30 the debtor-service provider renders the service, which is materially deficient. On Day 31 the creditor serves notice of termination, which is to go into effect after 10 days as provided for by contract. On Day 36 the debtor notifies the creditor that it intends to cure its performance by Day 50. The creditor must accept the cure and the notice of termination is without effect. Note that the original term for performance was 90 days and that the tendered cure is within that period and that it was the performance, not the delay, which was material.
Example: (Under Lithuanian law): The contract specifies a service is to be rendered by the 15th day of the month. Assuming under the circumstances that time was not of the essence, on the 16th sets an additional ten day period for the performance. The debtor does not tender performance during this time period. The creditor notifies the debtor of termination which is to go into effect in 30 days. The debtor tenders within these 30 days. The creditor refuses acceptance. The court should rule that the debtor’s right of cure had lapsed.
Note that it is conceivable, under certain circumstances, that the debtor’s power to cure could lapse prior to the expiration of the time period set by the notice of termination. It is unfortunate that the Lithuanian code is not specific in terms of the fair possibility of cure: that is, for instance, the PECL states outright that cure is possible "where the time for performance has not yet arrived or the delay would not be such as to constitute a fundamental non-performance." (§8.104). This same idea is a fundamental part of the legal concept of cure, but we do not know if it is to be read into the Lithuanian code, which only has a provision stating that the promissee can refuse a tender if he has a legitimate interest in doing so. This is not quite the same thing; the Lithuanian code states a principle, but leaves the matter to the judge, whereas the PECL and other codes make this a question of law.
American Law and the European Principles:
What exactly will constitute an effective cure? This is not described in the UCC nor in its official comments. Clearly, the offer to cure itself must not be defective: it cannot seek to impose upon the non-breaching party any costs, such as shipping23. When the problem is easily repairable and minor, an offer to repair the product will be sufficient. But a party may well be justified in refusing to accept an offer to repair or adjust a product if the product is new, expensive, and when the repair would be a major one. “For example, in one well-known case, Zabriskie Chevrolet, Inc. v. Smith, 240 A.2nd 195 1968, the New Jersey Supreme Court held that a buyer who purchased a new automobilie was entitled to rescind the contract when the seller attempted to cure a defect
23 See Farnsworth, p. 588 fn. 6.
in the transmission by substituting a transmission from another vehicle on the showroom floor. The court referred to the buyer’s “shaken faith” to justify the decision.” 24
Exercises:
1. Apply Dutch law. A contract sets forth a date for performance. The debtor tenders performance two days late, but does not tender moratory damages or other costs. The creditor refuses to accept the performance. The debtor sues. What result?
2. A professor enters into a contract to deliver a speech on Saturday. He does not show up for the lecture. The next day he offers to give the speech the next Saturday. The aggrieved party does not accept this offer and terminates the contract. The professor sues. What result?
3. A company enters into an obligation to deliver 10,000 t-shirts with a certain design printed on them by the 15th of March. The purchaser intends to give them away over the next few months. The company tenders the t-shirts on the 17th day, but the purchaser does not accept them. The t-shirt company sues for damages. What result?
4. A company enters into an obligation to perform certain services. The contract specifies that the services are to be performed within 30 days. The company tenders performance on day 20. The client (purchaser, obligee) immediately informs the company that the performance as rendered is fundamentally deficient. The client also immediately serves notice of termination. The very next day the company offers to cure its breach; the breach is relatively easily curable. The client refuses to accept the cure. The company-obligor sues for damages. What result?
5. A company enters into an obligation to perform certain services. The contract specifies that the services are to be performed within 30 days. The company tenders performance on day 30. The client (purchaser, obligee) immediately informs the company that the performance as rendered is fundamentally deficient. The client also immediately serves notice of termination. The very next day the company offers to cure its breach; the breach is relatively easily curable. The client refuses to accept the cure. The company-obligor sues for damages. What result?
6. A company enters into an obligation to perform certain services. The contract specifies that the services are to be performed within 30 days. The company tenders performance on day 20. The client (purchaser, obligee) immediately informs the company that the performance as rendered is fundamentally deficient. The client also immediately serves notice of termination. The very next day the company offers to cure its breach. The cure would necessitate completely re-performing the service: the services
24 Charles L. Knapp and Nathan M. Crystal, Problems in Contract Law 3rd ed. Little, Brown & Co. USA 1993 p.1165.
were for an audit, and the accountants doing the work were found to be imposters not having the educational qualifications they had claimed to have had. The company makes assurances that other accountants will be assigned to the job. The client does not accept the tendered cure. The company sues. What result?
Case # 4Continental Forest v. White Lumber
Supreme Court of Oregon (1970)256 Or. 466; 474 P.2d 1
SLOAN, J.
This is an action by plaintiff for the alleged wrongful breach of a contract for the sale by plaintiff to defendant of 20 carloads of plywood. The contract was an installment contract as defined by ORS 72.6120 (1) (UCC 2-612(11)): see appendix to this decision. The carloads of plywood were to be shipped by plaintiff to Gainesville, Georgia.
The first carload arrived in Gainesville, Georgia, on January 4, 1967. Defendant concluded that this car did not meet the specifications of the contract. On January 17, 1967, defendant served notice on plaintiff of its intent to cancel the contract because of the failure of the first carload to conform to specifications. Defendant alleged that a substantial amount of the plywood was too thin. In the meantime, plaintiff had already shipped the second and third carloads, as per the contract. The second carload arrived at Gainesville, Georgia, while the third carload was stopped enroute after the cancellation.
After the cancellation the parties agreed to an inspection of the first two carloads of plywood to be made in accordance with the U.S. Products Standard PS 1-66, which was, as mentioned, a part of the agreement. The standard for conformance to specifications provides that a variance of 5 per cent from specifications is allowable. A variance above 5 per cent, however, permits the buyer to reject the nonconforming plywood but does not allow a cancellation or rejection of the entire shipment. The inspection of the first carload disclosed a variance of 9 per cent. The second carload was within the 5 per cent tolerance. Defendant paid for the first carload without deduction for the deviation from the specifications but refused to pay for any of the other cars. The last two carloads were sold to other buyers.
As a result of defendant's attempted cancellation of the entire contract, plaintiff brought this action to recover his damages. In an action tried without a jury, the trial court made extensive findings of fact in favor of plaintiff and judgment was entered accordingly. Defendant appeals.
The record submitted to this court is unique in that it contains only the findings
of fact and conclusions of law of the trial court. It is defendant's contention that certain language used by the court, in its findings and conclusions, will not support the judgment.
Subsection 2 of ORS 72.6120 permits the buyer to reject an installment "which is nonconforming if the nonconformity substantially impairs the value of that instalment and cannot be cured … ." On the other hand, subsection 3 permits the buyer to reject the entire contract if the nonconformity or default in respect to one or more of the installments "substantially impairs tge value of the whole contract …”
The trial court's specific findings with respect to delivery, testing, and other specific facts relating to the conformance of the shipments from plaintiff to defendant, would sustain a conclusion that this was a nonconformity as defined in subsection 2 of the statute and could be cured. However, in a conclusionary finding of fact made by the trial court, the court found "such breach as to thickness in the plywood contained in the first car … constituted a material breach and entitled the defendant to request assurance that future shipments would conform to the contract. The second inspected did so conform." And, as a conclusion of law, the trial court stated "the failure of the first car to meet the specifications of the contract constituted a material breach of the contract and allowed defendant to request further reasonable assurances of performance."
Defendant's entire argument on appeal is based upon the findings and conclusions just quoted. It is defendant's contention that, particularly in respect to the conclusion of law just quoted, the trial court's language that failure "to meet the specifications of the contract constituted a material breach of the contract" was the equivalent of the requirements of subsection 3 of the statute, to wit: the nonconformity substantially impaired the value of the whole contract and was, therefore, a breach of the whole. Taken out of the total context, without regard to the other specific findings of what actually occurred in this situation, defendant's contention appears to have merit. However, the total findings and the facts set forth therein lead to the inevitable conclusion that the ambiguity in the trial court's findings must be resolved to mean that the nonconformity only impaired the value of the first installment and, more importantly, that the nonconformity could be "cured."
Authority relating to the application of subsections 2 and 3 of this section of the code is scarce, but the existing authority conforms to the following statement found in 3 Duesenberg & King, Bender's Uniform Commercial Code Service, § 14-02 (3)(i) pages 14-25:
"As far as any nonconforming installment is concerned, the buyer may only reject if there is substantial impairment regarding the value of that installment and when the substantial impairment cannot be cured. Thus, it is clear that three things are necessary for a buyer to be able to reject an installment. Assuming that the nonconformity exists, the nonconformity must impair the value of that installment and such impairment must be substantial; the third element is that the defect giving rise to the nonconformity cannot be cured."
In regard to a situation in which the buyer may claim a violation of subsection 3, the authors at pages 14-27, 28 state:
"Some matters are clear from this section. If there is a minor breach which is curable by the seller, the installment must be accepted and the buyer cannot cancel the contract. He would be entitled, however, under Section 2-609 to demand adequate assurance of performance."
Peters, Remedies for Breach of Contracts, 1963, 73 Yale L J 199, at 225, states: "The section is reasonably clear at the extremes. If the breach is trivial and curable, the buyer must accept the installment and cannot categorically refuse further installments."
Paragraph 5 of the official comments to this section of the code states: "Cure of nonconformity of the installment in the first instance can usually be afforded by an allowance against the price… ."
1. The parties in this instance do not dispute that the word "cure" includes price deduction for nonconformity. Therefore, we are not required to decide what other methods of cure may have existed or should be required. The trade standards adopted by the parties provide that the buyer may reject that part of the shipment which is more than 5 per cent below grade and "shall accept the balance of the shipment as invoiced." The necessary implication is that the rejected plywood need not be paid for but does not allow a total rejection. Thus, by adopting the trade standards, the parties also bargained for a reduction in price as a method of cure.
2. The parties dispute the applicability of ORS 72.6090. Defendant argues that the trial court apparently based its conclusions in part, on the requirements of the latter section and if so, that the assurances provided for and permitted by ORS 72.6090 are not applicable to the given case. Plaintiff argues to the contrary.
We consider it unnecessary in this case to decide the extent to which the assurances and provisions of ORS 72.6090 relate to ORS 72.6120. As above stated, we are satisfied that the actual facts found by the trial court and included within his finding of fact, which are not disputed, demonstrate that this was actually a minor deviation from conformity and curable within the meaning of subsection 2 of ORS 72.6120.
The judgment is affirmed.
APPENDIX TO THE OPINION
72.5080 Cure by seller of improper tender or delivery; replacement. (1) Where any tender or delivery by the seller is rejected because nonconforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.
(2) Where the buyer rejects a nonconforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender. [1961 c.726 § 72.5080]
72.6090 Right to adequate assurance of performance. (1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.
(2) Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.
(3) Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance.
(4) After receipt of a justified demand failure to provide within a reasonable time not exceeding 30 days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract. [1961 c.726 § 72.6090]
72.6120 "Instalment contract"; breach. (1) An "instalment contract" is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause "each delivery is a separate contract" or its equivalent.
(2) The buyer may reject any instalment which is nonconforming if the nonconformity substantially impairs the value of that instalment and cannot be cured or if the nonconformity is a defect in the required documents; but if the nonconformity does not fall within subsection (3) of this section and the seller gives adequate assurance of its cure the buyer must accept that instalment.
(3) Whenever nonconformity or default with respect to one or more instalments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a nonconforming instalment without seasonably notifying of cancellation or if he brings an action with respect only to past instalments or demands performance as to future instalments. [1961 c.726 § 72.6120]
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