CONTRACTS ESSAY & ANSWER..
Art and Betty own adjoining farms in County, an area, where all agriculture requires irrigation. Art bought a well-drilling rig and drilled a 400-foot well from which he drew drinking water. Betty needed no additional irrigation water, but in January 1985, she asked Art on what terms he would drill a well near her house to supply better tasting drinking water than the County water she has been using for years. Art said that because he had never before drilled a well for hire, he would charge Betty only $10 per foot, about $1 more than his expected cost. Art said that he would drill to a maximum depth of 600 feet, which is the deepest his rig could reach. Betty said, “OK, if you guarantee June 1 completion.” Art agreed and asked for $3500 in advance, with any additional further payment or refund to be made on completion. Betty said, ” OK,” and paid Art $3500. Art started to drill on May 1. He had reached a depth of 200 feet on May 10 when his drill struck rock and broke, plugging the hole. The accident was unavoidable. It had cost Art $12 per foot to drill this 200 feet. Art said he would not charge Betty for drilling the useless hole, but he would have to start a new well close by, and could not promise its completion before July 1. Betty, annoyed by Art’s failure, refused to let Art start another well and on June 1, she contracted with Carlos to drill a well. Carlos agreed to drill to a maximum depth of 350 feet for $4500, which Betty also paid in advance, but Carlos could not start drilling until October 1. He completed drilling and struck water at 300 feet on October 30. In July, Betty sued Art seeking to recover her $3500, plus the $4500 paid to Carlos. On August 1, County’s dam failed, thus reducing the amount of water available for irrigation. Betty lost her apple crop worth $15,000. The loss could have been avoided by pumping from Betty’s well if it had been operational by August 1. Betty amended her complaint to add the $15,000 loss. In her suit against Art, what are Betty’s rights and what damages, if any, will she recover? Discuss.
WAS A VALID CONTRACT FORMED? Betty’s (B’s) rights against Art (A) depend on whether a valid contract was formed between them, and whether it was breached and by whom. A and B clearly agreed on the subject matter (drilling a well) and price ($10 a foot) and time for performance (June 1 completion). These terms suffice to form a contract. The contract did not have to be in writing. A writing to evidence a contract is required by the statute of frauds when land is transferred, but not for services to be performed, as here. Betty would not have rights against A if the contract called only for drilling for water, but the subject matter here is clearly a completed well, not the mere act of drilling: B’s interest (known to A) was in the water, and she asked him about drilling “to supply drinking water,” and further asked for a guaranteed completion date. Thus A may be liable, if his performance was not excused. IMPOSSIBILITY A’s performance under the contract might be excused by impossibility. Under the doctrine of impossibility of performance, however, performance is excused only if performance would not be possible by anyone: an objective standard applies. While A’s drilling accident was “unavoidable,” other drillers with different or better equipment, or drilling another place, would still be able to perform (as shown by Carlos’ performance). Art himself may have been able to perform in time after the accident, according to his statement that he couldn’t promise performance by July 1. Thus A’s performance cannot be excused by impossibility. COMMERCIAL IMPRACTICABILITY The doctrine of commercial impracticability would similarly be of no avail to A to excuse performance. First, the doctrine is available in commercial settings: A had never drilled a well before, and B wanted the water for drinking (although also for her farm). The impracticability doctrine also requires that performance would be so economically burdensome that it would be wasteful for the obligations to be performed. Here Art was willing to continue performance without any “additional further payment,” and water was eventually found at 300 feet on only a second drilling, so the doctrine would not excuse A’s performance. ANTICIPATORY REPUDIATION If A breached the contract by anticipatory repudiation, B could legitimately go to Carlos for completion. If A completely, unequivocally repudiated the contract, B’s further obligations under the contract would be excused. But A did not so repudiate: he merely said he could not promise the contract’s completion by July 1. This expression of doubt could not alter his obligation to perform by July 1, and he was not insisting that B modify their contract, since Betty refused to let him start another well. B had to wait until July 1 to see if he breached. Because A was willing to continue his performance, B was still bound by the contract: her performance was not excused. B’S REFUSAL A covenant “implied in fact” in all contracts is the cooperation of the obligee in receiving an obligor’s performance. A’s further performance was excused when this condition arose by B’s refusal to let Art start another well: breach of this covenant sets up a condition, which, unsatisfied, excuses his further performance. But B’s refusal constitutes breach of the contract on her part, so that B should be unable to collect damages from A if his anticipatory repudiation is not found. BREACH IF ART BREACHED If Art did breach the contract by anticipatory repudiation because he said he couldn’t guarantee completion by July 1, B would be entitled to damages based on gaining the benefit of her bargain. She bargained for a well drilled at $10 a foot, and 300 feet of drilling were required. Thus she paid a total of $8,000 to A and Carlos, and would have paid $3,000 if nothing had gone awry. If Art breached, her action in going to Carlos may be proved to be reasonable to gain her bargain and she could collect $5,000 from A.
HADLEY V. BAXENDALE B would only be able to collect the additional $15,000 from A if such loss to the apple crop was foreseen by Art at the time they entered into the contract, under the rule of Hadley v. Baxendale. Because A never dilled before and B was talking about drinking water rather than crops, such damages should probably be found not to have been within the reasonable expectations of A and B when they entered into the contract. QUASI-CONTRACT Finally, if Art’s conduct was not an anticipatory breach and B breached the contract, Art should have a good claim under the contract for his work at $10 a foot, or for restitution for the reasonable value of his services (in quasi-contract) at $12 a foot.
RIGHTS It is fairly clear from the facts given that an effective contract has been formed so as to bind the parties. Betty asked Art to drill a well; Art laid out price and the maximum depth to which he could drill. Then Betty asked for a guaranteed completion date and Art agreed, asking for an advance. Betty paid the advance – thus manifesting her intent to be bound by all of the terms of the parties. Sufficient consideration is present since both parties incurred a legal detriment. CONTRACT TERMS The real issue in this case involves the terms of performance and attempt at performing by Art. By the terms of the agreement, upon receipt of his advance, Art was to commence drilling a well for Betty up to a depth of 600 feet. He was to complete performance by June 1. Any balance was payable on completion. IMPOSSIBILITY Art began performance and at 200 feet of depth he hit rock and his drill bit broke. The facts state that the accident was unavoidable. This raises the doctrine of impossibility. A performance under a contract is excused if the performance becomes objectively impossible, if no one in the world could complete the performance. From the facts given, it appears that drilling a well at this exact site is objectively impossible since the broken drill was unavoidable. Betty may claim that this does not render the performance impossible since Art could move and drill on a different site. The problem, though, is that Art cannot complete a new drill hole until July 1, a month after the deadline in the old contract. Art will argue that the broken drill is a temporary impossibility and thus he should be allowed to continue his work. The modern trend among courts (and under the U.C.C., although that doesn’t govern here) is to allow a reasonable time to “cure ” performance if the time element in the contract is not crucial to the parties. Either under this doctrine or the doctrine of temporary impossibility, absent a showing of time being a crucial element of the contract, Art would be given an opportunity to reasonably complete his performance. MATERIAL ALTERATION? It must, of course, be determined whether or not time is truly of the essence to Betty. If time was of the essence so as to constitute a material alteration of the contractual agreement, then Betty may rescind the contract based on impossibility of performance, or she may attempt to rescind based on a mutual mistake of fact as to the ability to complete performance at the chosen site, and the court may try to unwind the transaction as far as possible, probably refunding to Betty $1500 as the difference in the agreed value of A’s services and what Betty paid. Betty may also try to show that Art had assumed the risk of not being able to complete performance at a given site. This would be especially helpful to Betty if she can show that Art picked the site to drill. (If Betty picked the site, she may have assumed the risk of impossibility ). If the court finds that Art assumed the risk, which is common in building contracts, then it must once again determine if this breach of the time element is a material one or not. This is based on a consideration of the time element and whether failure to meet this element will impair Art’s ability to substantially perform. The original agreement guarantees a June 1 completion, but the well is only for drinking (as per the January conversation, which is admissible here since there is no written agreement by which to trigger the parole evidence rule). There are no facts that support the need for a June 1 completion. TIME OF THE ESSENCE Courts have held “time is of the essence ” clauses inoperative where the clause was not supported by the facts. It is likely that the courts would not stringently enforce this June 1 completion date. If it is determined that there has been no material breach, either by the doctrine of temporary impossibility, or the finding of non-material breach due to non-importance of the date, then Art has a right to go and complete performance. It is an implied-in-fact condition, however, that he have access to the land on which he is to drill. Betty has refused to let Art begin performance again. Her prevention of satisfaction of the implied-in-fact condition will excuse Art from any further performance. It will effectively put Betty in breach. EXCUSE This is the likely outcome of a court’s resolution of the dispute. Art’s performance will be excused due to Betty’s prevention of Art’s performing – drilling the new well. This is a prevention of an implied-in-fact condition precedent to Art’s performance, which excuses the performance. DAMAGES If Art is found to have breached the contract due to a failure to conform to a “material provision as to time,” then Betty can sue for damages under this breach. COVER DAMAGES The starting point for Betty is the cost of “cover”. The cost of obtaining substitute performance – here being the $4,500 paid to Carlos less the price she would have had to pay to Art for the job. This later figure would be $10 per foot times 300 feet which is where Art would have struck water. Betty would recover $4,500 less $3,000, or $1,500. Included in this is a refund of $500 from Art since he promised a refund. Betty will argue she should get more since Art said he wouldn’t charge her for the useless hole, but Art would argue and the court would probably find that Art’s statement was made as a condition of his continuing performance. HADLEY v. BAXENDALE Betty would probably claim her loss as a result of the crop failure. This is an incidental damage. Damages in contract must be caused by the breach, must be foreseeable as per Hadley v. Baxendale, certain and unavoidable. Although the damages here may be certain and unavoidable, there are serious problems with causation and foreseeability. CAUSATION The causation is extremely remote here, although Betty may claim that but for Art’s non-performance she would have had water for her crops. The greater problem is foreseeability. Under Hadley, contract damages must be those that a reasonable person would foresee or those damages that would be foreseen by communication by the innocent party to the breaching party. FORESEEABILITY There is no way to have foreseen that the County dam would fail, leaving Betty with no irrigation water. More important, Betty told Art that the water was for drinking, so he was not on notice of any special facts: quite to the contrary since Betty specifically said the well was for drinking water. Betty would fail on her claim for these special damages from crop loss. If Art did not materially breach the contract and Betty prevented his performance, then the court would excuse Art and try to rescind the contract. Since the court can’t rescind the contract to the starting point, they would likely give Art payment in the agreed-upon amount of his services, $2,000, and would ask him to refund the rest to Betty. This is the likely outcome. The court may, if it finds Betty in breach, give Art the profit he would have made on the contract, “the benefit of his bargain,” but this is not as likely as awarding him the value of services rendered with only the small refund to Betty.
Maker manufactures printing presses. News, a publisher of a local newspaper, had decided to purchase new presses. Rep, a representative of Maker, met with Boss, the president of News, to describe the advantages of Maker’s new press. Rep also drew rough plans of the alterations that would be required in the News pressroom to accommodate the new presses, including additional floor space and new electrical installations, and left the plans with Boss. On December 1, Boss received a letter signed by Seller, a member of Maker’s sales staff, offering to sell the required number of presses at a cost of $2.4 million. The offer contained provisions relating to the delivery schedule, warranties, and payment terms, but did not specify a particular mode of acceptance of the offer. Boss immediately decided to accept the offer, and telephoned Seller’s office. Seller was out of town, and Boss left the following message: “Looks good. I’m sold. Call me when you get back so we can discuss details.” Boss next telephoned Pressco and rejected an outstanding offer by Pressco to sell presses to News similar to those offered by Maker. Using the rough plans drawn by Rep, Boss also directed that work begin on the necessary pressroom renovations. By December 4, a wall had been demolished in the pressroom and a contract had been signed for the new electrical installations. On December 5, the President of the United States announced a ban on imports of foreign computerized heavy equipment. This removed from the American market a foreign manufacturer that had been the only competitor of Maker and Pressco. That afternoon, Boss received a telegram from Maker stating, “All outstanding offers are withdrawn.” In a subsequent telephone conversation, Seller told Boss that Maker would not deliver the presses for less than $2.9 million. A telephone call by Boss to Pressco revealed that Pressco’s entire output had been sold to another buyer.
- Was Maker obligated to sell the presses to News for $2.4 million? Discuss.
- Assume Maker was so obligated. What are News’ rights and remedies against Maker? Discuss
I. Was Maker Obligated to Sell Presses to News for $2.4 Million?
SALE OF GOODS The Uniform Commercial Code (UCC ) governs contracts for the sale of goods. Here the presses are goods, so the UCC, taken from the common law of contracts, would govern this transaction. The UCC has special rules applicable to merchants ; because Maker is in the business of selling and thus is in the business of buying printing presses, both are merchants, so the Special Merchant Rule, if applicable, would govern as well. CONTRACT FORMATION A. Was There an Offer and Acceptance ? An offer is a manifestation by one party of a potential intent to contract. There is no indication in the facts that Maker’s Rep or Boss made an offer to the other in their conversation. Those conversations appear instead to have involved mere sharing of information and expression of general intent.
DEFINITE TERMS The letter from seller received on December 1 was an offer, however, it specified the quantity of goods to be sold (the only indefinite term) and also other material terms, including price ($2.4 million) delivery, warranties and payment terms. ACCEPTANCE Boss’s telephone call to seller was intended to be an acceptance. The offer did not specify the mode of acceptance so under the UCC it could be accepted by any reasonable means, including a telephone call. The telephone call occurred a reasonable time after the offer (in fact, immediately). The issue is whether Boss’s telephone message was clear enough to constitute a valid acceptance. “Looks good” is probably not enough, but “I’m sold” indicates acceptance. “Call me…so we can discuss details” may suggest that details were not agreed on and Maker could argue that it would not have understood Boss’s call as indicating an acceptance because of that phase. However, under the UCC there is nothing inconsistent about unequivocal acceptance of an offer coupled with discussion of missing terms or even prepared for different terms. Makers sale contracts are agreed upon with details unspecified or to be negotiated. On balance, a court would probably find that News had unequivocally accepted Maker’s offer in the telephone message. DEFENSES TO FORMATION Maker might argue that there was no condition for the agreement, but News’ acceptance of the offer amounted to an agreement to pay $2.4 million, and that promise to pay Maker was condition. Maker will also argue that the agreement failed to satisfy the Statute of Frauds. STATUTE OF FRAUDS Contracts for the sale of goods for more than $500 implicate the Statute of Frauds. The statute can be satisfied by a writing (or certifying) by the party to be charged reflecting the contract. Here, Maker made a written offer, signed by seller, its appointed representative, setting out the materials terms of the contract. The written, signed offer will itself probably satisfy the Statute of Frauds. DETRIMENTAL RELIANCE Even if it does not, News took action in reliance on the contract that would satisfy the Statute of Frauds. News rejected Pressco’s offer to sell presses. Here importantly, it began work to renovate its pressroom to accommodate the presses, including demolishing a wall and signing a contract for electrical work. Significantly, that renovation work was based on plans that Maker had given to News. The renovations are unambiguously attributable to this contract between News and Maker. Accordingly, the Statute of Frauds will be considered satisfied. ATTEMPTED REVOCATION Maker’s attempt to revoke its offer came on December 5, after News accepted and began its renovations. An offer cannot be revoked after it is accepted, or after the offeree takes action in reasonable reliance on the offer. Therefore, there was a contract between Maker and News for the sale of the presses for $2.4 million, and on the other terms of the December 1 offer, and Maker was obligated to sell them for $2.4 million.
II. RIGHTS AND BREACHES OF NEWS
ANTICIPATORY REPUDIATION Per the telephone conversation after the telegram, Maker told News that Maker would not deliver the presses for less than $2.9 million. This statement unequivocally repudiated Maker’s obligation under the contract to sell them for $2.4 million, and was therefore an anticipatory repudiation (because the time for delivery had not arrived). A buyer can respond to the seller’s anticipatory repudiation by waiting to see if the seller performs notwithstanding the repudiation, or by declaring the contract is breached and suing for the breach, or by rescinding the contract. Here, News would be only advised to declare a breach and sue, because of the justifiable long lead time for installing the presses. DAMAGE REMEDIES When a seller breaches and the buyer does not have the funds, the buyer can recover damages by (a) the difference between the cost of obtaining replacement (“cover”) funds from another source and the contract price, or (b) if the buyer does not choose to cover, the difference between the market price of the funds at the time and place of delivery and the contract price. Here, that difference may be $500,000 if Maker’s offer represents the market price. CONSEQUENTIAL DAMAGES In addition, News could recover its consequential damages – those damages that would have been foreseeable to a reasonable person at the time of the contract or that were brought to the seller’s attention. There is no evidence of any such damages here. Finally, News would recover its incidental damage, such as the cost of finding cover funds. Punitive damages are probably not available. RESTITUTION If the seller has been unjustly enriched as a result of the breach, the buy may be able to recover the amount of the benefit conferred on the seller. There is no indication here that Maker has been unjustly enriched, except that it will be able to sell the presses for more money. Because the presses have not already been identified in the contract (which was made only a few days before the breach ) News would be unable to recover the funds or obtain a similar in-kind restitution. SPECIFIC PERFORMANCE To obtain specific performance of the contract, News will have to establish several elements: 1. Qualifying of Legal Remedy. News can obtain specific performance only if its legal remedies are inadequate. Here, News may not be able to find an alternative source for the presses, because Pressco, Maker’s only competitor, has sold its entire output. If the damage that News could recover would not be adequate; for example, if News existing presses need to be replaced, News may satisfy this requirement. 2. Definitions. A court will only order specific performance of a contract that is sufficiently definite. Breached contracts that are sufficiently definite for legal remedies do not satisfy the equitable standard. Here, however, the contract (based on the December 1 offer ) specifies quantity, price, delivery schedule, warranties and payment terms. Assuming that the specifications of the presses themselves are also contained (or unaccepted by reference) in the contract, this will be sufficiently definite. 3. Feasibility. A court rule also must grant specific performance where doing so is not feasible. For example, if the decree would be too difficult to draft, or if extensive inventory would be replaced, the court will declare to grant specific performance. Here there is no evidence of any unfeasibility. The court could fashion an order requiring performance according to the terms of the contract and News could be counted on to advise the court of any compliance. 4. Liability. Traditionally, courts will grant specific performance only if it was available with both parties at the time of the contract. Modern courts will grant it if the court can be secure that the plaintiff will perform the obligation if the defendant is ordered to perform it. The court would have that security here (and the liability test would also be met). 5. Defenses. As an equitable remedy, specific performance is subject to equitable defenses and an unclean hand or laches. None of these seem to apply here.