Chapter 14

Checking for Conditional Language

In This Chapter

Grasping the basics of conditions

Recognizing express and implied conditions

Deciding who performs first and why it matters

Gauging substantial performance

Getting out of a condition

Almost all contracts contain at least one condition — an implied condition that goes something like this: “If you don’t perform, I don’t have to perform, either.” Parties are free to add express conditions to their contracts as well, such as “If payment in full is not received within 30 days of the billing date, finance charges may begin to accrue at the maximum rate allowable by law.”

Parties generally use conditions to encourage performance by the other party or to protect themselves when their ability to perform hinges on unpredictable future events, such as qualifying for a mortgage loan to purchase a home. Parties may also try to use conditions to excuse their performance by saying that their performance was conditional on the occurrence of a certain event that never happened.

This chapter brings you up to speed on what conditions are (and aren’t). It then explains how to use conditions to give your client more leverage in getting the other party to perform a contract and how to use conditions to give your client an escape hatch from the contract.

Defining Condition in Legal Terms

The Restatement defines condition as “an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.” This definition is pretty clear, but sometimes people confuse conditions with promises. To further muddy the waters, conditions may be express or implied. This section helps clarify these important distinctions.

When people refer to the “Terms and Conditions” that govern a contract, they’re usually referring to only the terms of the contract. Saying the “Terms” that govern the contract is more precise because terms may be promises or conditions.

Telling the difference between a promise and a condition

A term in a contract may be a promise, a condition, or both:

Condition: An event that must occur but isn’t certain to occur before some performance is due

Promise: A commitment to do or refrain from doing something

Both (sometimes called a promissory condition): A commitment to do something that’s also an event that must occur before the other party’s performance is due

Suppose I agree to sell my Ted Williams autographed baseball to you for $400 if the Red Sox win this year’s World Series, and you agree to pay 30 days after I give you the ball. This example contains all three types of terms:

Condition: One condition is the Red Sox’s winning the World Series. Neither party has promised to make this happen. It’s an event that has to occur, but isn’t certain to occur, before our performances are due.

Promise: You promise to pay me $400. You have a commitment to do this. However, your payment isn’t an event that has to occur before my performance is due, because I’ll already have performed.

Both: My promise to give you the baseball is a promissory condition. It’s a promise because I have a commitment to do it, and it’s a condition because it’s an event that has to occur before your performance of paying me the $400 is due.

These distinctions have practical implications. Breach of promise gives the non-breaching party only the right to seek damages, whereas breach of a promissory condition excuses the non-breaching party’s performance (because it’s conditional) and gives her the right to sue for damages (due to the breach).

Suppose I agree to sell you the baseball and you agree to pay me $400 for it (no 30 days to pay, no winning the World Series condition). If I refuse to deliver the baseball, you can refuse to pay me (not perform), buy one elsewhere for more money, and sue me for the extra money it cost you. Likewise, if you refuse to pay me the $400, I can refuse to give you the baseball (not perform), sell the baseball to someone else for less, and sue you for the difference.

Making your client’s performance conditional can be powerful leverage to secure performance from the other party. If your client extends credit, she gives up that leverage.

Notice that if I agree that you can pay me $400 in 30 days in exchange for the baseball instead of paying on delivery, I give up one of these rights: If you don’t pay, I can still sue you, but I can’t refuse to give you the baseball (not perform), because I’ve already performed. By extending credit, I didn’t make my performance conditional on your performance.

You may encounter vocabulary describing the promises as dependent or independent. Here’s the difference:

A dependent promise is conditional on the occurrence of some event, usually the performance of another promise.

An independent promise is unconditional — no event that has to occur before the promise must be performed.

For example, in a separation agreement, a husband promises to pay $100 per week child support, and the wife promises to give him weekend visitation with the kids. One week, he doesn’t pay. The wife retaliates by saying he can’t have visitation with the kids. She’s treating the promises as dependent and claiming that because he didn’t perform his promise, she doesn’t have to perform hers. But as a matter of policy, courts say that these promises are independent — she has to perform even though he hasn’t performed. Note that she still has a remedy — she can recover damages for breach of contract.

Determining whether a condition is express or implied

Conditions are either express or implied:

Express conditions: Express conditions are those that the parties include in their contract by stating that some performance is conditional upon the occurrence of one or more events. An express condition is easy to detect. Look for words like if or it is a condition precedent that. For more about express conditions, see the next section.

Implied conditions: Implied conditions are found by a court. Under the rule of constructive conditions of exchange, courts generally find that each party’s performance is impliedly conditional on the other party’s performance. To discover how courts find implied conditions, skip ahead to “Determining Whether Courts Will Find an Implied Condition.”

For example, assume that I say, “I’ll sell you my Ted Williams baseball for $400 if the Red Sox win the World Series this year,” and you agree to the deal. Our contract has both types of conditions:

The express condition is that I’ll sell you the ball only if the Red Sox win the World Series. This condition is directly stated in our contract.

The implied condition is each of our performances. I’m obligated to perform if you perform, and you’re obligated to perform if I perform. These conditions aren’t stated in the contract; they’re implied.

Tapping the Power of Express Conditions

Express conditions are valuable in protecting a party from unforeseen circumstances that may prevent her performance. Homebuyers often use express conditions when presenting a purchase offer to a seller; they may make the offer on the condition that they’re able to sell their own house by a certain date or that they’re able to secure a mortgage loan. If the specified event doesn’t happen, the buyer doesn’t have to perform and isn’t in breach for nonperformance.

If a party has some control over the occurrence of the conditional event, he has a good-faith duty to see that it occurs and not to prevent its occurrence.

For example, a homebuyer can’t agree to a purchase conditional upon securing a mortgage loan and then do nothing to secure that loan — the courts won’t allow it. The buyer may say, “How can I be in breach? My offer was conditional upon securing the loan, and that didn’t happen.” But because the occurrence of the condition was within the buyers’ control, a court will read in an implied promise based on the obligation of good faith, as I discuss in Chapter 10. If the buyer had put a good faith effort into securing a mortgage loan and failed to accomplish that task, then the court would probably excuse the buyer’s performance.

Determining Whether Courts Will Find an Implied Condition

If the parties haven’t made performances expressly conditional, then a court has to determine whether the contract contains implied conditions. The biggie here is that each party’s obligation to perform is impliedly conditional on the other party’s performance.

To understand how and why this rule came into being, suppose I agree to sell you the baseball and you agree to pay me $400 for it. Before I give you the baseball, you say to me, “Ha-ha! I’m not going to give you the $400.” I say, “Then I’m not going to give you the baseball.” You say, “I don’t see that in the contract. The contract says that you promised me the baseball. It doesn’t contain an express condition saying that if I don’t pay you the $400, then you don’t have to give me the baseball.”

You would’ve been right until about 1775, but fortunately after that the law changed to recognize the implied conditions that are called constructive conditions of exchange. Under this sensible rule, if one party refuses to perform, then the other party is excused from performance. I win the argument because the condition is implied as a matter of practicality. And because our promises are conditions as well, then if one party doesn’t perform, the other party has two remedies:

Refuse to perform because an implied condition to the other party’s performance didn’t occur.

Recover damages for breach of promise.

Sorting Out Conditions Precedent, Concurrent, and Subsequent

The Restatement doesn’t differentiate between classes of conditions, but the rules of Civil Procedure and some commentators muck things up by categorizing conditions into three types:

Condition precedent: A condition precedent is an event that must occur before some promise has to be performed. For example, I agree that I will sell you my baseball if the Red Sox win the World Series. This event must occur before the promise has to be performed.

Condition concurrent: A condition concurrent is an event that must occur at the same time as a promise has to be performed, such as when I promise to sell you the baseball and you promise to pay me $400 for it. Each party’s performance is conditional on the other party’s performance, and the performances must occur at the same time.

Condition subsequent: A condition subsequent is an event that discharges a duty to perform a promise. Conditions subsequent arise when a person has a duty but an event that discharges that duty (excuses the person from performing it) occurs. Conditions subsequent arise most frequently in insurance contracts. Suppose an insurer has the duty to pay for losses you suffer in a fire. The duty to pay arises in the event of a fire, but the policy may also say that the insurer’s duty is discharged if the insured doesn’t give notice of the loss within 30 days from the date of the loss. If the event (failure to give notice within 30 days) occurs, it extinguishes the insurer’s duty. That event is a condition subsequent.

The distinction between conditions precedent and conditions subsequent makes some difference in civil procedure, because a plaintiff has the burden of proving a condition precedent, whereas the defendant has the burden of proving a condition subsequent. For purposes of contract law, however, these distinctions aren’t important. In the insurance example, whether the contract stipulates a condition precedent (“It is a condition precedent to the insurer’s duty to pay that the insured give notice within 30 days of the loss”) or a condition subsequent (“The insurer’s duty to pay terminates if the insured does not give notice of the loss within 30 days”), the provision has the same effect — the insured will not be able to recover if he doesn’t give notice within 30 days of the loss. For this reason, contract law simply calls both a condition.

When pleading conditions in the documents supplied to a court, both parties are obligated to state the conditions they think did or didn’t occur, but the obligation is different depending on whether you’re a plaintiff or a defendant. Rule 9(c) of the Federal Rules of Civil Procedure states the following:

(c) Conditions Precedent.

In pleading conditions precedent, it suffices to allege generally that all conditions precedent have occurred or been performed. But when denying that a condition precedent has occurred or been performed, a party must do so with particularity.

According to this rule, which most states use as well, the plaintiff must generally plead that all conditions have been satisfied, whereas the defendant must point out the specific conditions that haven’t been satisfied and thus excuse its performance. This rule makes practical sense, because the plaintiff needs to know which conditions the other party is claiming excuse its performance.

Suppose we’ve agreed that I’ll sell you my Ted Williams baseball for $400 if the Red Sox win the World Series. If I sue you for breach, I have to put in my pleading that “all conditions have been satisfied,” because the events that conditioned your performance had to occur before your performance was due. On the other hand, you have to inform me what your defense is going to be by alleging with particularity which conditions you’re claiming did not occur — either “The Red Sox didn’t win the World Series” or “Burnham didn’t offer to give me the baseball” or both.

Avoid using the phrase “breach of condition.” If a condition is an event, then it can’t be breached — it either occurs or it doesn’t. Instead, say that a condition has been satisfied or not satisfied. If the person had a duty to bring about the event that had to occur before performance was due, then say, even though it’s a mouthful, that there’s “breach of the promise to bring about the condition” when that’s the case.

Deciding Who Must Go First

Conditions create a lot of leverage, giving a party two ways to convince the nonperforming party to perform: (1) threaten to withhold performance and (2) threaten to sue for damages. However, the non-breaching party loses its leverage if it has already performed, so the party who performs first is at a disadvantage. This section explains how courts decide who has to perform first.

Checking out the default order of performance

By default, contract law says that both parties must perform at the same time, which gives each party leverage to ensure that the other party performs. Ideally, when I sell you the baseball, I hand it to you as you hand me the $400.

Exceptions arise when circumstances prevent the parties from exchanging performances at the same time or when parties contract around the default rule. The main circumstance that prevents the performances from being due at the same time is that one performance, such as a service, may take time to perform, whereas the performance of payment can be done instantly. In these cases, the rule is that the performance that takes time must go first. This is bad news for parties providing services, because they must perform before they’re paid; however, they can work around this rule, as I explain next.

Making agreements about the order of performance

The party who performs first is at a distinct disadvantage, so if your client happens to be the party who has to go first, look for some way to reduce the risk. Because contractors have to build the building (the performance that takes time) before they get paid (the performance that can be done instantly), contractors traditionally find ways to contract around this rule. Contractors may have the benefit of statutory lien laws that give them a claim to the property they constructed to recover payment. In addition, contractors often require “progress payments” — payments tied to certain milestones. Similarly, because lawyers have to perform first, they often require clients to pay a retainer — an upfront payment so the lawyers don’t have to worry about getting paid after performing a service.

Extending credit increases the creditors’ exposure to risk, because they give up the right to make their performance conditional upon payment. For example, suppose I agree to sell you the baseball for $400 payable in 30 days. I have to give you the baseball now. If in 30 days, you don’t pay me, my only remedy is to sue for breach of promise to recover the $400 you owe me, but I don’t get the ball back. By extending credit, I relinquish my right to make my performance conditional on your performance.

When your client extends credit for the sale of goods, be sure that the contract contains language stating that your client has the right to repossess the goods if the other party fails to perform. If you omit that language, your client has no claim to the goods, only to the payment. The main remedy for breach of contract is the non-breaching party’s right to the expectancy — what they would’ve had if the contract had been performed (see Chapter 16 for details). When I sell my baseball for $400 with 30 days to pay and you don’t pay, I can claim only the $400, not the baseball. However, I can contract around this through the law of secured transactions, which allows the creditor to provide that if the other party doesn’t perform, the creditor can repossess the property.

Determining Whether a Party Has Substantially Performed

According to the rule of constructive conditions of exchange, if one party doesn’t perform at all, then the other party’s entire performance is excused. That’s easy. What’s tough is determining whether performance of one party in part excuses the other party’s performance. This is one of the toughest questions in contract law, and it’s one your clients will frequently ask. Contract law says that if a party commits a material breach, then the other party’s performance is excused. But if the breach is immaterial, then the other party must still perform.

For example, your client calls and says, “My contractor was supposed to build my swimming pool to a depth of 9 feet, but he built it only 81⁄2 feet deep. I don’t have to pay him, right?” Your client may not realize it, but he’s claiming benefit of the rule of conditions — he thinks that because the other party didn’t perform as specified in the contract, then he doesn’t have to perform, either. But if that were the rule, then people wouldn’t have to pay if they got anything less than perfect performance. The law doesn’t want that to happen because it would result in a lot of people getting a lot of stuff without having to pay for it.

To prevent a party from refusing to perform because of a minor breach by the other party, contract law created the rule of substantial performance. This rule says essentially that if a breach is immaterial, then the party has substantially performed, and we’ll pretend that performance was sufficient to satisfy the implied condition that one party has to perform before the other party’s performance is due.

If you explained this to your client, he’d probably get impatient and ask, “So do I have to pay him for the swimming pool or not?” Your client, of course, doesn’t want to wait for an appellate court to tell him whether the contractor has substantially performed — he wants to know now, from you. This section explains various ways to make this determination.

Considering how the type of breach affects the outcome

Whether a breach is material or immaterial matters because it determines how a dispute is resolved:

Immaterial breach: An immaterial breach entitles the non-breaching party to recover damages but doesn’t excuse that party’s performance. For example, if a court found that the contractor had substantially performed the contract to build the swimming pool (committed an immaterial breach), then the owner would have to pay for the pool but could recover damages for the breach.

Material breach: A material breach means that the breaching party didn’t substantially perform. Not only can the other party recover damages, but their own performance is also excused. For example, if a court found that the contractor had not substantially performed, then the owner wouldn’t have to pay for the pool under the contract. If that sounds like a harsh outcome for the contractor, contract law agrees with you and has some ways to reduce the harsh effects of conditions. To find out more about these methods, keep reading.

Running tests to find substantial performance

If I could predict when a court was going to find substantial performance, I’d be a millionaire. Contract law has no reliable test, because each situation is so different, but this section explains a few tests you can run to make an educated guess.

The mathematical test

Courts often start their discussions of substantial performance by saying that no mathematical formula is available. Technically, that’s true, but dismissing the math option entirely is baloney. A mathematical test is often a good place to start. To perform the mathematical test, look at the amount of performance as a percentage. If the performance is close to 100 percent, it probably constitutes substantial performance. If a contractor completes 90 percent of the work, that’s probably substantial, whereas 40 percent is not.

However, the math test isn’t very useful in gauging quality and other subjective factors. If a telescope lens has to be ground to precision and the manufacturer claims, “I only missed by a thousandth of an inch!,” that’s not close enough if it prevents the telescope from working. Likewise, if an asphalt roof is supposed to be a certain uniform color but it comes out multicolored and streaky, calculating what part of the contract was performed is difficult.

The Cardozo test: Purpose served

In the famous case of Jacob & Youngs v. Kent, Judge Cardozo said to look at “the purpose to be served, the desire to be gratified, the excuse for deviation from the letter, the cruelty of enforced adherence.” That’s an elegant mouthful, but it makes sense. The “purpose served” looks at whether what the party received serves the essential purpose of what was promised.

For example, if you’re an ordinary swimmer, whether your pool is 9 feet deep or 81⁄2 feet deep would probably make little difference in the functioning of the pool — its “purpose to be served.” In addition, “the cruelty of enforced adherence” — saying that the owners don’t have to pay for it — would give the homeowners a windfall at the contractor’s expense. As a result, a court would likely find substantial performance.

In the case of the streaky asphalt roof, even though the roof serves its purpose of keeping rain out of the house, the homeowner’s “desire to be gratified,” which probably meant getting a roof that was aesthetically pleasing, was not met. As a result, a court would likely find no substantial performance.

If what the party received serves the essential purpose of what was promised but isn’t quite what was promised, the party not in breach is entitled to damages to make it right.

The Restatement test

Restatement § 141 looks at a number of factors, similar to the Cardozo test, and it is similarly difficult to apply. These factors include the following:

The extent to which the injured party is deprived of the promised benefit

The extent to which the injured party can be adequately compensated by damages

The extent to which the breaching party will suffer a forfeiture (an out- of-pocket loss)

The likelihood that the breaching party will cure his failure

The extent to which the breaching party failed to act in good faith

The Get Smart test

On the popular ’60s TV show Get Smart, Agent 86 often explained that he only “missed it by that much,” holding up his thumb and forefinger to show just how close he was. Maybe if a party misses only by that much, the breach should be regarded as immaterial. I admit that this isn’t a very helpful legal test, but it’s hard to come up with a test!

Deciding whether a breach with respect to time is material

Parties often breach by failing to perform on time. The general rule is that stating a time for performance creates only a promise to perform at that time and doesn’t create an express condition. The Restatement defines condition as an event that’s “not certain to occur,” and the passage of time is certain to occur. If we agree that I’ll sell you a baseball for $400 on November 1, then the arrival of November 1 is not a condition to my performance; a promise to perform at a certain time is only a promise. If I deliver late, you can recover damages for my late delivery, but you still have to perform.

The parties are free to make performance on time an express condition. To do so, spell out the condition in the contract; for example, “If the baseball is not delivered by November 1, then the buyer does not have to accept it.”

Don’t use the stock phrase “Time is of the essence” to indicate that time is material, because many courts see this as a shopworn phrase that has lost its legal significance. Spell out the condition.

A court may determine that the circumstances make performance on time an implied condition. If I promised to tender the baseball on November 1 and still haven’t delivered it a couple of months later, that’s probably a material breach. Furthermore, circumstances may make even a short delay in performance material.

If you own a bar, I promise ten kegs of green beer on March 16, and I deliver it on the 18th, you can treat my nonperformance as though delivery on the 16th were a condition. The circumstances made the delivery date material, because a reasonable person in my shoes should’ve known that because March 17 is St. Patrick’s Day, timely delivery was important in this case.

Solving the problem by drafting express conditions

There’s no such thing as substantial performance of an express condition. Express conditions require strict performance, because a condition is an event — it’s either satisfied or not. The Red Sox will either win the World Series or they won’t — missing it by that much is irrelevant.

Because there’s no such thing as substantial performance of an express condition, one way around the problem of having a person get away with substantial performance is to put an express condition in the contract. If having a pool with a depth of 9 feet is important to you, then put in the contract, “If the pool is not nine (9) feet deep, then the owner does not have to pay for it.”

The courts have ways of getting around even express conditions, as I explain in the later section “Excusing Conditions,” but they can’t use substantial performance to do so.

Looking at Conditions in the UCC

The rules in UCC Article 2 are in practice very similar to the common-law rules. The UCC contains an express rule of constructive conditions of exchange. The default rule is that the performances are due simultaneously, so the obligation to pay is conditioned on tender of the goods, and the tender of the goods is conditioned on payment. Of course, frequently the buyer and the seller are at some distance from each other, and unless the seller arranges for delivery to be C.O.D. (Cash on Delivery), someone is going to have to go first — usually the buyer. As a result, the buyer takes on more risk.

As in common law, parties are free to contract around these rules and customs or use third-party payment services, such as PayPal, to reduce risk. Parties may also limit their exposure to risk by using an escrow service, which is common in international business transactions. With an escrow service, a third party such as a bank holds the buyer’s funds and releases them to the seller only after the seller has performed.

Although the rules in UCC Article 2 are similar to common-law rules that apply to conditions, note the two important exceptions I explain next.

Rule § 2-601: Making a “perfect tender”

UCC Article 2 doesn’t appear to have the rule of substantial performance, so if the seller fails in any respect to fully perform, the buyer seems to be excused from performance and pretty much call the shots. Section 2-601, as codified in North Carolina at 25-2-601, provides:

Buyer’s rights on improper delivery.

Subject to the provisions of this Article on breach in installment contracts (G.S. 25-2-612) and unless otherwise agreed under the sections on contractual limitations of remedy (G.S. 25-2-718 and 25-2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may

(a) reject the whole; or

(b) accept the whole; or

(c) accept any commercial unit or units and reject the rest.

This rule is known as the perfect tender rule because it appears to say that the slightest defect in goods or delivery (even a few minutes late) excuses the buyer’s performance. If read that way, sellers couldn’t claim substantial performance, because only perfect tender would create a condition to the buyer’s obligation to accept and pay for the goods.

Fortunately, few courts have enforced the rule as written. They avoid abuse by using principles such as good faith (being honest and reasonable, as I explain in Chapter 10). For example, if a buyer receives goods a day late but suffers no loss because of the delay and rejects them only because the contract price is higher than the market price, courts are likely to find that the rejection was not in good faith — the buyer didn’t reject them because they were late.

Because of the many exceptions found by courts, you’re probably safe to read the perfect tender rule as requiring the buyer to accept the goods — but allowing him to recover damages — in the event of the seller’s substantial performance.

Rule § 2-612: Dealing with installment contracts

The UCC rule on installment contracts is useful for understanding how the Code expects parties to behave. The default rule under the Code is that the seller must deliver the goods in a single shipment. But the parties are free to contract around that rule by agreeing to an installment contract. According to UCC § 2-612(1), an installment contract is “one which requires or authorizes the delivery of goods in separate lots to be separately accepted.”

A problem may arise when the parties agree to an installment contract and the seller materially breaches with respect to one of those installments. Depending on the situation, a buyer may become so annoyed with the seller that she not only rejects the installment but also cancels the rest of the contract, saying that she didn’t want the other installments.

Not so fast, says the Code. Although the buyer can clearly reject an installment under § 2-601 when the seller materially breaches its obligations with respect to that installment, the buyer can’t necessarily cancel the rest of the contract. The buyer must first determine whether the breach with respect to one installment “substantially impairs the value of the whole contract,” in the words of § 2-612(3). If the seller is in breach with respect to one installment, the Code wants the parties to try to work it out rather than end their relationship immediately.

But how can the buyer determine whether the seller will perform in the future after a breach in delivering one installment? One technique the buyer can use is to demand assurances from the seller, as I discuss in Chapter 15. A party who received a nonconforming delivery may reasonably feel insecure about subsequent deliveries. If the concerned party makes a demand for adequate assurances and doesn’t get them, then she can regard the contract as canceled.

For example, if a seller of chicken has promised to deliver broilers (young chickens) in installments and the first installment is stewing chicken (older chickens), the buyer can’t necessarily cancel the contract. But the buyer can reject that installment and deliver a letter to the seller demanding assurances that the seller will deliver broilers in the remaining installments. If the seller demonstrates an ability to deliver broilers, the contract is back on track. If the seller says in effect, “You’ll get what you get,” then the buyer can probably cancel the contract.

Excusing Conditions

Certain conditions, express or implied, may cause hardship. For example, if a contractor builds 80 percent of a house and a court finds that the contractor didn’t perform substantially, then the owner doesn’t have to pay for the house. Obviously, such a ruling would cause the builder extreme hardship and give the homeowner an unfair windfall. To avoid the “cruelty of enforced adherence” of certain conditions, express or implied, the courts have several methods to provide relief: interpretation, restitution, divisible contract, waiver, and excuse of condition. This section explains these methods so you know what to expect and can put them to use in representing your clients.

Finding promise: Interpreting your way out of a condition

If an express condition causes hardship, courts frequently declare that the language allegedly creating the condition is ambiguous and interpret it as a promise rather than a condition. That way, the non-breaching party must still perform and can claim only damages resulting from the breach.

For example, suppose a contractor contracts with an owner to do some work. The contractor then contracts with a subcontractor to do a portion of the work. The contract between the contractor and the subcontractor provides, “Contractor will pay subcontractor when owner pays contractor.” That sounds reasonable, but what happens if the owner doesn’t pay the contractor? The contractor may tell the subcontractor, “I don’t have to pay you because your payment is conditional on my receiving payment, and that didn’t happen.” This would create a hardship for the subcontractor, who wouldn’t get paid for his work.

A court is likely to find that “when” is not language of condition under which the subcontractor took the risk of not getting paid. Rather, it would interpret the agreement to mean that the contractor promised to pay the subcontractor for the work and also promised to pay him at a reasonable time.

To avoid problems of interpretation, use clear language when writing contracts.

To create a condition: Use “if” or “on condition that” or “it is a condition precedent to A that B occur.”

To create a promise: Use “shall” or “has an obligation to” or “agrees to.”

For example, an insurance company contract provides that “the owner must give notice within 30 days of the loss.” The owner gives notice on the 32nd day, and the insurance company claims that the condition is not satisfied. A court could say that “must” means “shall” and the owner only breached a promise, so the insurance company still has to perform. To prevent this outcome, the lawyers for the insurance company could change the language to something like, “If the owner does not give notice within 30 days of the loss, then the insurance company’s duty to pay for the loss is excused.” It would be hard to argue that that language doesn’t create an express condition.

Using restitution when a condition bars recovery

When one party is unjustly enriched at the expense of the other party, restitution requires that the unjustly enriched party disgorge (relinquish) the benefit, returning the enriched party to the position he was in before the benefit was conferred (see Chapter 4 for details). Restitution can be very useful when a failure to substantially perform results in nonpayment under the contract. Restitution enables the breaching party to recover for the partial performance.

For example, if a contractor conferred a substantial benefit on the owner, like building 80 percent of the project, then the contractor could claim payment for the benefit conferred in restitution. A century ago, many courts didn’t favor restitution in this situation because the courts didn’t recognize claims from parties who didn’t have clean hands, such as dirty contract-breakers. Today, however, the prevailing view is that even the breaching party may recover restitution.

The remedy for restitution starts with the value of the benefit conferred, which contract law can measure in a number of ways. But remember that the remedy for breach of promise by the non-breaching party comes before restitution for the breaching party. In other words, a court deals first with the breach and then with restitution.

Here’s an example of how restitution works:

1. A contractor builds 50 percent of a $200,000 house and quits.

2. The owner refuses to pay the contractor because the contractor didn’t substantially perform.

3. The contractor claims $100,000 in restitution.

4. The owner has a claim for damages for breach, which comes before restitution. So you need to look at what the homeowner has to pay to get the house completed before you determine how much the contractor is entitled to in restitution:

• If the owner has the house completed at a cost of $110,000, then the contractor can’t recover more than $90,000 in restitution because the owner bargained to pay $200,000 total for the house:

$200,000 – $110,000 = $90,000

• If the owner is able to get the house completed at a cost of $90,000 (for a total of $190,000 rather than $200,000), then the restitution would be limited to no more than the portion of the contract that was completed, which is 50 percent of $200,000, or $100,000.

The restitution argument is unnecessary in Code contracts. Section 2-607 of the UCC states that “The buyer must pay at the contract rate for any goods accepted.” So if a store orders 100 shirts at $20 each and the seller delivers only 80 shirts, the buyer is free to accept or reject the shirts or a portion of them, but it has to pay for any shirts it accepts under the contract at a price of $20 per shirt.

Finding a divisible contract

A divisible contract is one in which the parties agree that a part performance by one party is the “agreed equivalent” of some part performance by the other party. In sorting out performance disputes, a court may look at such a contract as a series of minicontracts, enforcing a contract claim for the part performed.

For example, suppose I was going away for 30 days and agreed to pay you $20 for each day you fed and walked my dog ($600 total). You did it for 20 days and then bailed, so I had to find someone else to do the job for the remaining time. You materially breached, so I could claim that I owe you nothing. But contract law would look at this as 30 contracts for $20 each and would likely find that you performed 20 of those contracts, so you’d have a claim for $400 under the contract. But remember that the expectancy of the non-breaching party comes before any claim by the breaching party. If I had to pay someone else $25 a day for the remaining 10 days, that would come to $250 + $400 = $650 or $50 more than the $600 I would’ve paid had you fully performed, so the maximum you could claim would be $600 – $250 = $350.

If parties have a contract that’s broken up into parts, that doesn’t necessarily mean that those parts are agreed equivalents.

For example, suppose that you mastered contracts through your study of Contract Law For Dummies and agreed to tutor a first-year student for the 14-week semester for $420. You provide tutoring for two weeks and then decide to do something else with your time. You materially breached, so the tutee, showing that she learned something about implied conditions, says she doesn’t have to pay you anything. You claim that this is a divisible contract — essentially 14 contracts to provide tutoring for $30/week. You performed two of those mini-contracts, so she owes you $60. Your tutee, however, would have a good claim that a week of tutoring and payment of $30 were not necessarily agreed equivalents — some weeks, particularly toward the end of the semester, may be more demanding, and others, such as during a break, may be less demanding. She’d argue that the contract was entire rather than divisible. If she’s successful in that argument, then you’d have to fall back on a claim for restitution.

Claiming waiver to excuse a condition

A waiver is a knowing relinquishment of a legal right. Waivers often arise when a party has a right to treat a nonperformance as triggering a condition but the party doesn’t do so. The waiver may lead the nonperforming party to believe that nothing terrible will happen if she doesn’t perform exactly as promised, and this justifiable belief may bar the other party from exercising his right in the future. Note that a waiver arises by the conduct of the parties, so it’s not a contract modification, which I discuss in Chapter 12.

For example, a consumer takes out an auto loan and promises to pay the lender a certain amount of money on the first day of the month for the next 24 months. The contract contains an express condition stating that if the consumer doesn’t pay on the first of the month, then the lender may accelerate the loan (call the entire amount due) and repossess the car if the consumer doesn’t pay the entire balance due. The consumer makes the first five payments on the 5th of the month, and the lender does nothing. When the consumer makes the next payment on the 5th, the lender exercises its right to accelerate and repossess. A court will likely find that because the lender repeatedly failed to exercise the right, the borrower was lulled into thinking that the lender wouldn’t exercise that right.

Because a waiver arises by conduct rather than agreement, a party may retract a waiver by giving the other party proper notice. The lender can send the consumer a “No More Mr. Nice Guy” letter clearly informing the consumer that if future payments are not made on the 1st, the lender will exercise its contractual rights. This letter would retract the waiver, and the consumer can no longer claim that she didn’t know the importance of timely payment.

Throwing yourself on the mercy of the court to excuse a condition

When all else fails, a party who didn’t satisfy a condition can ask the court to excuse the condition. Courts do this reluctantly and only when the party has suffered a forfeiture (an out-of-pocket loss), as the wishy-washy rule from Restatement § 229 explains:

§ 229. Excuse of a Condition to Avoid Forfeiture

To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange.

This section explains a couple of applications of this rule.

Insurance cases

Courts apply excuse of a condition to avoid forfeiture most frequently in insurance cases.

Consider an insurance company that put in a fire-insurance policy an express condition that if notice is not given in 30 days, it won’t pay for the loss. Suppose a policy owner gave notice on the 32nd day. None of the other forms of relief for avoiding the harsh effect of conditions would apply, but the court may excuse this condition because the owner will suffer a forfeiture — he would’ve paid his premiums for nothing.

The Restatement qualifies this rule with the language “unless its occurrence was a material part of the agreed exchange.” In other words, the court looks at how important the condition was to the party who imposed it.

For example, an insurance company may put in its contract that it won’t pay for a business’s fire loss “if the business does not install a sprinkler system.” The business makes a claim for fire loss, and the insurance company refuses to pay because the business didn’t install a sprinkler system. Here, it seems that the condition was material — very important for the insurance company because a sprinkler system probably would’ve reduced the fire damage and the cost to the insurance company. The insurance company could make the same argument if in the previous example, the owner gave notice not on the 32nd day but on the 332nd day. The condition is less likely to be excused because the insurance company is harmed if it can’t investigate within a reasonable time from the loss.

Conditions can give you powerful leverage to get the other party to perform. If the insurance company had put in the contract that the business promised to install a sprinkler system, then in the event of loss, the insurance company would still have to pay but could recover damages for breach of promise. Instead, it put in the contract that installation of a sprinkler system is a condition to its payment. Which method do you think would best induce the business to perform?

Jacob & Youngs v. Kent

The case of Jacob & Youngs v. Kent demonstrates the difficulty the courts face in sorting out promises and conditions. Jacob & Youngs, Inc., was a contractor that agreed to build a mansion for Mr. Kent. The contract contained numerous specifications, one of which was that “all wrought-iron pipe must be well galvanized lap welded pipe of the grade known as ‘standard pipe’ of Reading manufacture.” When the house was completed, Kent discovered that the pipe was made by the Cohoes company rather than by the Reading company.

Kent claimed that he wanted the house rebuilt with the correct pipe, and he also refused to make the final payment under the contract, which was about 5 percent of the price. His first claim sounds like a breach of promise — if Jacob & Youngs promised him a house with Reading pipe, that’s what he should have, even if it meant demolishing most of the building to get it. His second claim sounds like a condition — because Jacob & Youngs failed to perform an express condition, he didn’t have to pay for the house.

During the trial, Jacob & Youngs offered evidence that Cohoes pipe was just as good as Reading pipe, but the trial judge excluded this evidence, presumably because it was irrelevant. If Reading pipe was a condition, then it didn’t matter that some other performance was just as good, because the condition wasn’t satisfied.

On appeal, Judge Cardozo said that “considerations partly of justice and partly of presumable intention” should be used to determine whether a term is a promise or a condition. He didn’t think that reasonable parties in this situation could seriously have meant that performance of every single specification was to be a condition. Therefore, Jacob & Youngs had only promised to use Reading pipe. This conclusion drove the dissent crazy, because it appeared that the parties had drafted the term as an express condition.

But even if it was a promise, the contractors might still have materially breached the promise, and material breach would operate as the nonoccurrence of a condition, excusing Kent’s performance. But Cardozo found the equivalent pipe served the purpose and that Jacob & Youngs had acted innocently. This also drove the dissent crazy, because Jacob & Youngs could not possibly have installed that much pipe without knowing what they were doing.

Even if it was only an immaterial breach, Kent would still be entitled to damages and, as I explain in Chapter 18, courts generally award money damages rather than order the party in breach to fix the problem. Kent would’ve been very happy to recover the amount of money it would take to tear out the Reading pipe and put in new pipe in order to give him what he was promised. But Cardozo wasn’t going to let him get away with that — everyone knows that Kent wouldn’t really use the money for that purpose but would gain a windfall at the expense of the contractors. So Cardozo instead awarded him the difference in value between what he was promised — a house with Reading pipe — and what he got — a house with Cohoes pipe. Because they were equivalent pipe, that amount was zero.

Although Cardozo undoubtedly thought Kent was a chiseler trying to get away with something, the dissent was concerned that this opinion would open the floodgates for contracting parties to cut corners and get away with not giving owners what they promised. However you feel about that, parties have learned at least two practical lessons from this case:

If you’re a contractor, don’t promise to use a particular brand name, and in case you forget, include in the contract that if any brand is named in the contract, it’s only to establish a level of quality.

If you really want something to be a condition, spell it out clearly. I have no doubt that if the contract had said in big letters, “If Jacob & Youngs doesn’t use Reading pipe, then Kent doesn’t have to make the final payment,” the court would’ve enforced that understanding.