Session 11C

Textbook Extract

5. NON-OCCURRENCE OF A POST-FORMATION CONSTRUCTIVE CONDITION OF EXCHANGE

As we have seen, in every bilateral contract there are usually at least two obligations. Each party makesa promise to the other; if Epstein and Ponoroff agree that Epstein will sell Ponoroff his prizedcollection of road-kill recipes, Epstein has an obligation to transfer the recipes and Ponoroff has theduty to pay for them.

What’s the timing of each party’s performance? Does Epstein hold his recipes in one hand high in theair over Ponoroff’s head (Epstein’s taller, at least in physical stature) while extending the palm of hisother hand towards Ponoroff to accept the payment? Does Ponoroff adopt a like stature? In short, whohas to perform first and take the risk that the other will not honor his promise? And if the contractdoesn’t specify who does what when, is that an excuse for the non-performance by a party?

If the parties thought about it, conditions would be a nice way to order things. They would seem to betailor-made for regulating this type of exchange. The contract could say (as do contracts to buy airlinetickets, for example), that one party pays (performs) first, and then (and only then) after thatperformance, does the other side have to perform.

For some reason, many contracts don’t specify an order of performance. Shouldn’t the common law, ala Cardozo and Lady Lucy, imply such conditions? As we’ll see, it finally came around to that point,but it took some time. In the early case of Nichols v. Raynbred, Hobard 88, 80 Eng. Rep. 238 (K.B.1615), for example, the parties had agreed to buy and sell a cow. The plaintiff sued the defendant forthe price of the cow, some 50 shillings. The defendant defended on the basis that the plaintiff had neveralleged delivery of the cow.

Surprisingly, at least to us now, the court ruled for the plaintiff. It saw two independent promises, eachsupporting the other. As the parties had not provided directions as to who was to do what when, thecourt was not going to fill the void. Plaintiff won.

The law evolved after Nichols. By 1772 (157 years later), the Court of King’s Bench, speaking throughthe inestimable Lord Mansfield, switched gears. In Kingston v. Preston, 2 Douglas 689, 99 Eng. Rep.437 (K.B. 1773), a silk seller proposed to sell his business. The buyer agreed to pay the purchase priceover time, but also agreed to provide security for his promise to pay. Oh, and part of the deal was thatthe buyer was going to run the business out of the seller’s house. When time came to transfer the stockof the business, the buyer had not obtained adequate security, but, relying on Nichols, contended thatthere were two, independent promises: the seller’s to transfer the goods, and the buyer’s to givesecurity. One did not depend on the other. The buyer thus sued as plaintiff to force the transfer of thegoods (and the right to do business in the seller’s house).

Balderdash, said Lord Mansfield.1 “[I]t would be the greatest injustice if the plaintiff should prevail: theessence of the agreement was, that the defendant should not trust to the personal security of theplaintiff, but before he delivered up his stock and business, should have good security for the paymentof the money. The giving such security, therefore, must necessarily be a condition precedent.”2

1 Or whatever 18th Century expletive you choose.2 Another version of this case (there were no official reports back then) uses stronger language:

Thereafter, promises of payment by the buyer and of delivery by the seller came to be dependent uponeach other through the use of court-supplied assumptions called constructive conditions of exchange. Inthe next case, the contract does not supply express conditions regulating who does what when. Whatdoes the court do instead?

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QUESTIONS BEFORE THE CASE

1. When did Haight technically pay off his debt?

2. What is a “deed of trust”? What does it mean to “reconvey” such a deed?

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Brinton v. HaightIdaho Court of Appeals

125 Idaho 324, 870 P.2d 677, 25 UCC Rep.Serv.2d 485 (1994)

LANSING, Judge:

This is an action brought by respondents James R. Brinton and Patricia J. Brinton to recover on apromissory note and to foreclose a deed of trust which secures the note. The makers of the note, G.W.Haight and W. Dea Haight, appeal the district court's award of attorney fees and costs and ofprejudgment interest accrued after the Haights had tendered payment of the full balance owed on thenote. We conclude that the tender of full payment, made approximately seven months prior tocommencement of this action and twenty-six months before judgment, halted further accrual of intereston the note and precluded the assessment of costs and attorney fees against the Haights. Therefore, weremand for modification of the judgment.

I. Background

In 1983 the Haights purchased a parcel of real property from the Brintons. Part of the purchase pricewas payable in installments under terms of a promissory note in the amount of $64,500. The note wassecured by a deed of trust under which Pioneer Title Co., Coeur d'Alene ("Pioneer") was trustee and theBrintons were beneficiaries. By a separate agreement, Pioneer also was designated to act as escrowholder to receive payments on the promissory note and transfer such payments to the Brintons or theirassignee. About one week prior to November 9, 1990, the Haights telephoned Pioneer and asked the amount ofthe payoff balance on the note. On Friday, November 9, 1990, at approximately 12:00 p.m. Mr. Haightcalled Pioneer again, and informed a Pioneer employee that he would be coming in to pay the note thatday. Mr. Haight arrived at Pioneer at approximately 4:00 p.m. and, after being informed that the payoffamount was $53,272.80, began to write a personal check for that sum. Pioneer's escrow supervisorinformed Mr. Haight that Pioneer would not accept a personal check and required a cashier's checkinstead. Mr. Haight then left Pioneer's office but returned several minutes later with a cashier's check

It would be the most monstrous case in the world, if the argument on the side of Mr. Buller’s client was to prevail. It’sof the very essence of the agreement, that the defendant will not trust the personal security [the promise alone] of theplaintiff. A Court of Justice is to say, that by operation of law he shall, against his teeth. He is to let him into his houseto squander every thing there, without any thing to rely on but what he has absolutely refused to trust. This payment,therefore, was a precedent condition before the covenant of putting into possession was to be performed on the part ofthe defendant.

Jones v. Barkley, 2 Douglas 684, 99 Eng. Rep. 434 (K.B. 1781).

for the $53,272.80. He delivered the cashier's check to the escrow supervisor and requested delivery ofa trustee's reconveyance deed. The escrow supervisor stated that she could not immediately give areconveyance deed but that it would be ready the following business day. Finding it unsatisfactory toleave the cashier's check without receiving a reconveyance deed that would remove the encumbrancefrom his property, Mr. Haight then took back the check after it had been in the escrow supervisor'spossession for less than ten minutes.

Over the weekend, the Haights examined the escrow statement provided by Pioneer and determinedthat the quoted payoff balance included both a $20.00 "payoff fee" and a $28.00 "reconveyancecharge." The Haights concluded that neither the escrow agreement nor the deed of trust provided thatthe Haights were responsible for these charges and, therefore, they should not be required to pay them.3

On Tuesday, November 13,4 Mr. Haight delivered a letter to Pioneer regarding these fees and what heconsidered to have been the course of conduct to that time. In this letter, Mr. Haight asserted that it wasthe duty of the beneficiary to furnish a deed of reconveyance under Idaho law and, therefore, he wasnot obligated to pay the $28.00 reconveyance fee. He further believed himself obligated to pay onlyone-half of any escrow fees. In his letter Mr. Haight offered to pay to Pioneer by personal check$53,233.80 (principal and interest through November 9 plus $11.00 for escrow fees) if Pioneer wouldagree to reconvey the premises without the payment of the $28.00 fee. The letter also stated that thereconveyance need not be immediate but within the normal business practice of Pioneer and after thepersonal check cleared the payor bank. Mr. Haight also offered to pay the same amount by cashier'scheck, conditioned, however, upon simultaneous delivery of a deed of reconveyance. Apparently inresponse to this letter, an agent of Pioneer called Mr. Haight and discussed the matter. Although itappears that as a result of this conversation Pioneer agreed to waive the $20.00 payoff fee and $3.00 ofthe reconveyance fee, Pioneer insisted on receiving a $2.00 escrow fee and a $25.00 reconveyance feebefore executing a reconveyance.

On November 14, 1990, Pioneer sent a letter to the Haights explaining that the amount due on the notenow included additional interest accrued since November 9, 1990, at a rate of $15.639 per day, bringingthe balance to $53,318.63. Pioneer advised that when it received a cashier's check for this amount plusany further accrued interest, it would deliver escrowed documents in compliance with the escrowagreement, but that Pioneer would not prepare a reconveyance deed due to the Haights' refusal to paythe reconveyance fee. The letter further stated that Pioneer was resigning as trustee and thatappointment of a new trustee would be necessary in order to accomplish any reconveyance. The letterexpressed Pioneer's view that it was not responsible to make arrangements to collect the reconveyancefee.

The Haights thereafter made no payments on the note, although they assert they remained at all timesready, willing and able to remit the November 9, 1990, payoff amount. More than six months afterPioneer resigned, the Brintons appointed a successor trustee.

On June 10, 1991, the Brintons filed this action seeking a judgment for the unpaid principal balance ofthe promissory note plus interest accrued through date of judgment, and also requesting judicialforeclosure of the deed of trust. On January 6, 1993, following a court trial, the district court awarded

3 The deed of trust provided:

Upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrenderof the Deed and said note to Trustee for cancellation and retention and upon payment of its fees, Trustee shallreconvey, without warranty, the property then held hereunder. (emphasis added).

The deed of trust did not specify the amount of the fee that the trustee could charge nor which party was to pay it.4 Due to the Veterans' Day Holiday, the next business day after November 9, 1990 was Tuesday, November 13.

judgment for the full amount requested by the Brintons. The judgment included interest in the amountof approximately $12,200 that had accrued at the rate of $15.639 per day from the Haights' tender onNovember 9, 1990, through the date of judgment. The district court also awarded to the Brintons costsand attorney fees totalling approximately $5,000. The Haights have paid the judgment, but also broughtthis appeal, asserting that the award of interest accrued after November 9, 1990, and the award of costsand attorney fees were improper.

Thus has a $17,000 conflict grown from the inability of the Haights, Pioneer and the Brintons toresolve a disagreement over a $25.00 fee and three days' interest.

The Haights acknowledge that they are liable for the principal and interest accrued through November9, 1990. However, they maintain that when they offered to pay the full balance on November 9, 1990,they properly tendered the amount due and that such tender stopped the accrual of interest after thatdate. The Brintons respond that the Haights unreasonably conditioned their tender upon immediatereceipt of a deed of reconveyance and that they withdrew the tender when Pioneer could notimmediately comply.

The district court, ruling in favor of the Brintons, found that the Haights had placed an unreasonablecondition upon their tender and that Pioneer was never placed in effective control of the funds. Thecourt concluded that proper tender was never made and the Haights consequently were not excusedfrom payment of interest accruing after November 9, 1990.

On appeal, our inquiry is three-fold. First, was an adequate tender physically made by the Haights?Second, was the condition imposed by the Haights — contemporaneous delivery of a deed ofreconveyance — one upon which they could rightfully condition their tender? And third, if a validtender was made on November 9, 1990, was it subsequently kept good? ***

III. Analysis

A. Physical Tender

We begin with recognition that if the Haights made a proper tender of full payment on November 9 andkept the tender good, that tender discharged them from liability for interest accrued thereafter. Undercommon law, proper tender of the full amount of a debt, including then-accrued interest, terminates therunning of contractual interest. McClellan v. Davis , 45 Idaho 541, 550, 263 P. 1002, 1005 (1982) ;Machold v. Farnan, 20 Idaho 80, 89, 92, 117 P. 408, 411, 412 (1911); OSBORNE, NELSONWHITMAN, REAL ESTATE FINANCE LAW, § 6.5 at 385-386 (1979). RICHARD A. LORD, 1WILLISTON ON CONTRACTS § 21-12 (4th ed. 1990). ***

Therefore, the threshold issue in this case is whether the Haights made a proper "tender." Our SupremeCourt has defined "tender" as:

[T]he unconditional offer of a debtor to the creditor of the amount of his debt. This meansthe real amount of the debt as fixed by the law, and the purpose of the law of tender is toenable the debtor to relieve himself of interest and costs and to relieve his property ofencumbrance by offering his creditor all that he has any right to claim. This does not meanthat the debtor must offer an amount beyond reasonable dispute, but it means the amountdue, — actually due.

Dohrman v. Tomlinson , 88 Idaho 313, 318, 399 P.2d 255, 258 (1965) quoting Kelley v. Clark, 23 Idaho1, 12, 129 P. 921, 924 (1912). See also Wooten v. Dahlquist, 42 Idaho 121, 127, 244 P. 407, 409 (1926).

In Pollard Oil Company v. Christensen, 103 Idaho 110, 645 P.2d 344 (1982), our Supreme Courtfurther explained that the offer to pay must be accompanied by a manifest present ability to pay.

Tender implies the physical act of offering the money or thing to be tendered, but thiscannot rest in implication alone. The law requires an actual, present, physical offer; it is notsatisfied by a mere spoken offer to pay, which, although indicative of present possession ofthe money and intention to produce it, is unaccompanied by any visible manifestation ofintention to make the offer good.

Id. at 116, 645 P.2d at 350.

A treatise writer defines tender as "an offer to perform a condition or obligation coupled with thepresent ability of immediate performance, so that were it not for the refusal of cooperation by the partyto whom tender is made, the condition or obligation would be immediately satisfied." WALTER H.E.JAEGER, 15 WILLISTON ON CONTRACTS § 1808 at 418 (3d ed. 1972).

Here the Haights offered on November 9 to pay the full amount of the debt plus, unbeknownst to theHaights, a sum covering the subsequently disputed reconveyance fee. They demonstrated the presentability and intent to effectuate payment by presenting a cashier's check to Pioneer. Therefore, under theforegoing criteria, the Haights made an adequate physical tender of full satisfaction of the debt onNovember 9.

B. Condition Imposed on the Tender

The Haights' tender would be sufficient to preclude further accrual of interest unless the tender wasinvalidated by the Haights' express condition that the deed of trust be contemporaneously reconveyed.Accordingly, we must next determine how that condition affected the validity of the tender.

Although as a general matter a tender must be unconditioned, a party may attach as a condition thatupon which he or she has a right to insist. Woods v. Dixon, 193 Or. 681, 240 P.2d 520 (1952); Jaynes v.Heron, 46 N.M. 431, 130 P.2d 29, 33-34 (1942); Lowe v. Harmon, 167 Or. 128, 115 P.2d 297 (1941).Thus, where the parties' performances under a contract are due simultaneously, a tender may beaccompanied by a demand for performance. 5 WALTER H.E. JAEGER, WILLISTON ONCONTRACTS § 666A (3d ed. 1961); RESTATEMENT (SECOND) OF CONTRACTS § 238, cmt. b, §234 cmt. c, illus. 6 (1979). However, if the condition is improper, the tender is ineffective and thetenderee need not accept. 74 Am.Jur.2d Tender § 24 (1974).

In the instant case, the district court found that upon being informed that he could not receive a deed ofreconveyance on November 9, 1990, Mr. Haight requested the return of his cashier's check. The onlytestimony relating to the request for reconveyance by Mr. Haight on November 9, 1990, was that of Mr.Haight himself. He testified that after giving the check to the escrow supervisor, he inquired about areconveyance and, upon being told that one would not be available because there was no one presentlyin the office with authority to sign, he stated:

Well, if you're not prepared to give me my deed, I believe I'm entitled to the deed, and ifyou're not prepared to give it to me, then I want to take my check back. And when you calland tell me that the deed is ready, I will come down here and I will give you the check inexchange for my deed of reconveyance.

This testimony indicates that the condition imposed by Haight on his tender was one ofcontemporaneous exchange of the cashier's check for the deed of reconveyance. He did not withdrawthe tender upon learning that he would not receive the reconveyance immediately but, rather, madeclear that he would release the check as soon as the reconveyance could be delivered in exchange. Thisintent was confirmed by Mr. Haight's November 13 letter where he stated that he remained ready todeliver payment of principal, interest through November 9, and the undisputed escrow fees in exchangefor a reconveyance deed. Therefore, we must determine whether, by conditioning his tender uponsimultaneous delivery of a reconveyance deed, Haight caused the tender to be ineffective to terminatethe accrual of interest on the debt.

We note first that [under Idaho statutory law] the Haights were indisputably entitled to a deed ofreconveyance upon satisfaction of the note secured by the deed of trust. *** There remains a questionas to whether they could rightfully insist upon a contemporaneous exchange of their payment and thereconveyance deed, or whether the Haights were required to first make the payment and then wait toreceive the deed sometime thereafter. ***

This rule that tender of payment may be conditioned upon contemporaneous release of security for thedebt is merely an application of the general rule that:

Where all or part of the performances to be exchanged under an exchange of promises aredue simultaneously, it is a condition of each party's duties to render such performance thatthe other party either render or, with manifested present ability to do so, offer performanceof his part of the simultaneous exchange.

Restatement (Second) of Contracts § 238 at 223 (1979); see also Lord, 1 Williston on Contracts § 11-21at 407 (4th ed. 1990). On the subject of concurrent conditions, it is stated in Jaeger, 5 Williston onContracts § 666A (3d ed. 1961):

If two persons are bound to give concurrently, one a book and the other the price, neitherparty will be liable until performance has either been made or tendered by the other. Butthough the tender may be absolute, it need be only conditional, that is, subject to receivingconcurrent performance from the other side.

Accordingly, we conclude that a grantor of a deed of trust may condition a tender of full payment uponthe contemporaneous delivery of a deed of reconveyance, and that such condition does not vitiate thetender's effectiveness to terminate the accrual of interest.

The tenderer is not required to relinquish physical possession of the monies tendered without such acontemporaneous return of the collateral. If the law were otherwise, the right to make the tenderconditional would be annulled. Therefore, the district court's focus on the fact that Pioneer only had thecheck in its possession for approximately ten minutes and that Pioneer's internal policy required thatpayments be posted and numerous procedures followed before reconveyance would occur is incorrectfor, absent a reconveyance deed, Mr. Haight was not obligated to release the check to Pioneer at all.***

IV. Conclusion

A tender of payment sufficient to stop the running of interest was made by the Haights on Friday,November 9, 1990. The condition imposed by the Haights that Pioneer execute a deed of reconveyancesimultaneously with delivery of the check did not vitiate the tender. The Haights' subsequent refusal to

pay to Pioneer's charges for reconveyance did not act as a withdrawal of the tender made on November9, 1990.

This case is remanded with instructions to the district court to modify the judgment by deleting theaward of prejudgment interest accrued after November 9, 1990, and the award of attorney fees andcosts. The judgment as so modified is affirmed. Costs on appeal to appellants.

Walters, C.J., and Perry, J., concur.

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QUESTIONS AND NOTE

1. Questions about the facts of this case

1.1 What is the connection between Pioneer and Haight?

1.2 When did Haight make the tender? Did he intend to pay the disputed charges with thecashier’s check at that time?

1.3 Why did Haight care about the deed of reconveyance? Of what benefit was that to him?

2. Questions about the law

2.1 The court’s last quotation from Williston contains the following sentence: “But though thetender may be absolute, it need be only conditional, that is, subject to receiving concurrentperformance from the other side.” So you can have a conditional absolute? Does that make anysense?

2.2 As you might expect, the Uniform Commercial Code has something to say on this subject.Section 2-507(1) of the Uniform Commercial Code states:

Tender of delivery is a condition to the buyer’s duty to accept the goods and,unless otherwise agreed, to his duty to pay for them.

Section 2-511(1) of the Uniform Commercial Code states:

Unless otherwise agreed tender of payment is a condition to the seller’s duty totender and complete any delivery.

Does this set up concurrent conditions? See Comment 2 to Section 2-511.

3. Note

Is all performance concurrent? Of course not. When you fly, you always pay first, and fly later. Yourperformance comes first, and then the airline performs (if you’re lucky). Also, this is Contracts, thestudy of consensual obligations. The parties can always vary the order of performance in their contract.This was the issue in Pullman, Comley, Bradley and Reeves v. Tuck-It-Away, Bridgeport, Inc., 28 Conn.App. 460, 611 A.2d 435 (1992). There, the parties had entered into a valid contract to buy real property,but the buyer could not get its financing together. After postponing the closing several times, the buyerwas facing an immovable closing date without the money to close. If it did not close, it stood to lose a

substantial deposit. Just before the closing date, the buyer’s attorney found what he thought weredefects in title, and based on these alleged defects, the buyer tried to cancel the contract. The benefit ofcancellation is that the buyer would get its deposit back. Due to its cancellation, the buyer failed toshow up at the scheduled closing. So did the seller.

But the defects turned out to be either non-existence or immaterial. The buyer then pointed out that theseller didn’t show up at the closing either, and since the law was that each side’s performance was aconcurrent condition to the other’s performance, the seller’s failure to appear meant that the buyer’sobligation to pay never matured. The court, however, looked at the contract, and thought differently:“Here, paragraph 4 of the contract provided: “At the closing, on payment of the purchase price asprovided above, the seller shall deliver and the buyer shall accept, a full covenant Warranty deed ***”This language indicates that the parties agreed that the performances would not be renderedsimultaneously, but rather that [the buyer’s] duty to perform would be a condition precedent to[seller’s] obligation to tender and convey title.” Result? The contract required the buyer to show up firstand pay, and since it didn’t, it lost the case and it’s $100,000 deposit. Ouch.

4. You Be the Lawyer!

If you represented Pioneer, what type of clause would you put in the escrow agreement regardingtender of payment to avoid this type of silliness?

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EXPRESS V. CONSTRUCTIVE CONDITIONS

There is an interplay between implied condition designed to regulate the order of performance such asthe court found in Haight, and express conditions, which attempt to do the same. That interplay wasanalyzed in MXL Indus., Inc. v. Mulder, 252 Ill.App.3d 18, 623 N.E.2d 369, 191 Ill. Dec.124 (1993).There, a lease had an early termination clause; the tenant could leave early upon the condition that itpaid “all sums then due” plus four months’ rent. This is the clause:

(a) The term of this Lease shall be for a period of five (5) years commencing on the 1stday of March, 1987 and ending on the 29th day of February, 1992 (hereinafter referredto as ‘the term of this Lease’). Notwithstanding the foregoing provisions of thisSubsection 1 (a), at any time after the 29th day of February, 1988, Lessee may terminatethis Lease by paying to Lessor all sums then due pursuant to the provisions of this Leaseand an additional sum equal to four (4) months’ rent specified in Section 2 hereof. IfLessee exercises such right, the term of this Lease shall end on the date on which Lessorreceives such payment from Lessor [sic].

The tenant tried to exercise this option on February 28, 1988, by tendering $11,400, the amount of fourmonths’ rent (less a credit for a security deposit), and by vacating the premises. The landlord, however,correctly pointed out that one of the obligations of the lease were that, upon vacating the premises, thetenant was repaid certain damage. The parties debated the exact amount of this obligation for twomonths, and finally agreed it was $2,000. When the tenant sent a check for that amount along with acheck for four months’ rent, the landlord rejected it, contending that the tenant owed rent for the twomonths during which the parties negotiated the settlement. The tenant disagreed, and contended that ithad met the condition, or at least substantially met the condition, allowing it to terminate early by itsFebruary 28 tender. In response, the court said:

Illinois courts define a condition precedent as one which must be performed eitherbefore a contract becomes effective or which is to be performed by one party to anexisting contract before the other party is obligated to perform. *** The satisfaction of acondition is generally subject to the rule of strict compliance. *** Professor Willistonexplains, “‘since an express condition *** depends for its validity on the manifestedintention of the parties, it has the same sanctity as the promise itself. Though the courtmay regret the harshness of such a condition, as it may regret the harshness of apromise, it must, nevertheless, generally enforce the will of the parties.’” *** A partyseeking the benefit of a condition precedent, however, may waive strict compliance byconduct indicating that strict compliance with the provision will not be required. ***

Distinctly different, although analogous to the concept of a condition, are constructiveconditions of exchange. The concept of constructive conditions of exchange wasdeveloped by the courts in order to allow the court to supply terms under which aparties’ duties to perform are conditioned on the performance to be given in return. ***The purpose of constructive conditions of exchange is to play an integral role in assuringthe parties to a bilateral contract that they will actually receive the performance that theyhave been promised. *** A common application of the concept occurs when one partyseeks to justify its own refusal to perform on the ground that the other party hascommitted a breach of the contract. In sum, the doctrine serves the salutory purpose ofassuring each party to a bilateral contract that it will receive the promised returnperformance, and it expresses a judicial preference for dependent promises. ***

Because constructive conditions of exchange invoked the concept that one party’s dutyto perform was conditioned on the other party’s performance, the need arose toameliorate the rule of strict compliance ordinarily applied to express conditions. Asexplained by Professor Farnsworth, “the doctrine evolved that if one party’sperformance is a constructive condition of the other party’s duty, only ‘substantialperformance’ is required of the first party because that party can recover under thecontract.” (E. Farnsworth, Farnsworth on Contracts § 12, at 415 (1990).) Farnsworthfurther notes, however, that “the flexible requirement of substantial performance standsin sharp contrast to the requirement of strict compliance that protects a party that hastaken the precaution of making its duty expressly conditional.” (E. Farnsworth,Farnsworth on Contracts § 12, at 415 (1990).) Stated differently, the doctrine does notaddress substantial performance of a condition; rather, it focuses on substantialperformance by one party of its obligations arising out of an agreed exchange ofperformances. *** Accordingly, an express condition precedent, unless otherwiseexecuted, operates by agreement of the parties to define the satisfaction of a necessaryantecedent to a party’s performance under the contract and is subject to the rule of strictcompliance, unless such compliance is waived. In contrast, constructive or impliedconditions of exchange operate to regulate the parties’ course of performance and aresubject to the rule of substantial performance.

The court found that the clause, being drafted by the parties, required strict compliance, and held thatthe tenant’s $11,400 tender did not effectively terminate the lease. It was thus not only liable for theextra two months’ rent, but also for the total amount of contract damages for the rest of the term (sinceit vacated and treated the lease as terminated, when it in fact was not); an amount claimed to be inexcess of $230,000. And that was not all—because the tenant litigated the case and lost, it also woundup paying the landlord’s attorneys’ fees under the lease’s attorneys’ fees clause, and those fees werealleged to be in excess of $65,000.

2. WAIVER AND ESTOPPEL (AND RETRACTION)

In a sense, if modification or amendment5 is found, it is forever (or at least until the next modificationor amendment). An amendment restructures the parties’ rights under the contract. But what if there isnot change in future duties, just some non-response or some leniency fleetingly given? Say, forexample, that Ponoroff rents an apartment to Epstein. Epstein normally pays on time, but West is a littlelate this month with the royalty check, and so Epstein is a little short of funds. Epstein pays, but paysfive days late. That’s a breach; as set forth above, any variance from the specified performance set forthin the contract is a breach.

Assume, however, that Ponoroff tells Epstein: “Late once, buddy, I’ll overlook it. Late twice, andyou’re toast.” Has there been an amendment or modification of the contract? Not really; Epstein waslate without getting Ponoroff’s advance consent, and Ponoroff just decides, for once in his life, to be anice guy and let it slide. No real objective manifestation of an agreement; no offer; no acceptance, andlikely no consideration.

So does Epstein have to live with the breach hanging over his hang-dog head for the rest of the lease’slife? No. Such actions are covered by the concept of waiver (along with its cousin, estoppel), as setforth in the next case.

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QUESTIONS BEFORE THE CASE

1. What was Kamco’s non-performance? How many times did it breach the contract?

2. What were the consequences to On the Right Track of allowing waivers to occur?

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Kamco Supply Corp. v. On the Right Track, LLCSupreme Court of New York, Appellate Division, Second Department

149 A.D.3d 275, 49 N.Y.S.3d 721 (2017)

CHAMBERS, J.P.:This appeal presents a rare opportunity to consider the circumstances under which a party's conduct, inthe course of performing what may be described as a relational contract,6 may support an inference thata material right under the contract has been prospectively waived.

I.

5 By the way, we should have asked this earlier: What’s the difference between amending a contract and modifying it?6 The term "relational contract" was coined by the late Ian Roderick Macneil to describe the opposite of a discrete

transaction (see generally Ian R. Macneil, Relational Contract Theory: Challenges and Queries, 94 Nw UL Rev. 877[Spring 2000] ; Ian R. Macneil, Relational Contract: What We Do and Do Not Know, 1985 Wis. L. Rev. 483 [May1985/June 1985] ). A relational contract has also been described as "a contract that involves not merely an exchange, butalso a relationship, between the contracting parties" (Melvin A. Eisenberg, Why There Is No Law of RelationalContracts, 94 Nw UL Rev. 805, 816 [Spring 2000] ), as well as a contract that "creates a continuing relationship flexibleenough to adapt to changes of circumstance that could not have been fully anticipated when the contract wasnegotiated" (United States v. Moreland, 703 F.3d 976, 985 [7th Cir.] ). With its emphasis on trust, collaboration,reputation, and the ability to adapt in the face of changing circumstances, the relational contract has been extensivelystudied by economists, sociologists and game theorists, but thus far has generated little interest among lawyers (seegenerally Eisenberg, 94 Nw UL Rev. 805 ).

*** Southeastern Metal, Inc. (hereinafter SEM), and the *** plaintiff, On the Right Track, LLC(hereinafter OTRT), are, respectively, a licensee and sublicensee of a patented self-locking stud, track,and header partitioning system used in the construction industry and marketed as "Trakloc," which isowned by the third-party defendant Trakloc International, LLC (hereinafter TI).

In 2005, OTRT, SEM, and TI entered into two supply distribution agreements (hereinafter theagreements) with the *** Kamco parties. The agreements required the Kamco parties to purchase aminimum of 15 million linear feet of Trakloc by December 31, 2005. For the calendar year 2006, theagreements required the Kamco parties to purchase an annual minimum of 164.4 million linear feet ofTrakloc, and, in the course of satisfying that annual minimum purchase requirement, to purchase aminimum of 8 million linear feet of Trakloc in each month of 2006. The agreements also required theKamco parties to use their "best efforts" to market, sell, and distribute Trakloc within the relevantterritory and to increase sales volumes annually.

Each agreement also contained the following no-oral-waiver provision:

"19.2 Waiver. No waiver of any provision of this Agreement or any rights or obligations ofeither party hereunder shall be effective, except pursuant to written instrument signed bythe party or parties waiving compliance. This waiver shall be effective only in the specificinstance and the specific purpose stated."

The agreements were set to expire on December 31, 2006, but would be renewed automatically foradditional one-year terms as long as the Kamco parties met the minimum purchase requirements.

It is undisputed that the Kamco parties did not meet their annual minimum purchase requirement for2005, or any of their monthly minimum purchase requirements for 2006. According to SEM's records,the Kamco parties purchased only 1,565,406 linear feet of Trakloc in 2005, and only 2,064,263 linearfeet of Trakloc in 2006—just over 2% of the combined minimum annual purchase requirements for2005 and 2006. While SEM and OTRT periodically complained to the Kamco parties, mostly orally,about the low sales figures, the Kamco parties placed the blame on a number of problems outside theircontrol, including shipping, logistics, and pricing issues attributable to SEM.

In April or May 2006, Kamco Supply Corp.—the Kamco entity responsible for the New York market-approached OTRT about ending the relationship. By July 2006, the operating member of OTRTconceded that there was no "realistic possibility" that the Kamco parties would be able to meet theirannual minimum purchase requirement for 2006. At that point, Kamco Supply Corp. and OTRT agreedthat Kamco Supply Corp. would return $47,709.92 worth of Trakloc to SEM.

At no time up to that point, or even during the following several weeks, did anyone at OTRT or SEMever send the Kamco parties a notice of default regarding their failure to meet the minimum purchaserequirements, or a reservation of OTRT's and SEM's rights to seek damages for past breaches or requirestrict compliance with such requirements going forward. According to SEM's president, no defaultnotice was sent because there was no desire to terminate the agreements with the Kamco parties, asSEM and OTRT still felt that the best chance of success was to press ahead in the hope that sales mighteventually improve.

In November 2006, less than two months before the scheduled expiration of the agreements, KamcoSupply Corp. commenced this action against OTRT seeking to recover damages for breach of contract.OTRT asserted counterclaims, and, in a third-party action against the Kamco parties and TI, OTRT andSEM sought to recover substantial damages for the Kamco parties' failure to meet the minimumpurchase requirements under the agreements.

At the conclusion of a nonjury trial, the Supreme Court resolved the counterclaims and the third-partyaction in favor of the Kamco parties and against OTRT and SEM. The court found that the Kamcoparties had met their "best efforts" obligation under the agreements, and that finding is not challengedby OTRT and SEM on this appeal. While the court also found that the minimum purchase requirementswere binding, and that the Kamco parties had consistently failed to meet them, it concluded, in relevantpart, that OTRT and SEM had no right to sue for the breach. Specifically, the court found that theparties' course of performance supported the view that the Kamco parties' persistent and repeatedfailure to meet minimum purchase requirements was "a non-actionable mutual failure to live up toexpectations." As for the no-oral-waiver clause (see section 19.2 of the agreements, quoted in Part I,supra ), the court held that it was not dispositive, as "[t]he factual question of whether waiver occurredmay be determined by consideration of words or conduct."[OTRT and SEM appealed]

II.

The general principles relating to the law of waiver and estoppel in New York are well known.

"Once a contract is formed, the parties may of course change their agreement by another agreement, bycourse of performance, or by conduct amounting to a waiver or estoppel" *** Thus, "[c]ontractualrights may be waived if they are knowingly, voluntarily and intentionally abandoned," and "[s]uchabandonment may be established by affirmative conduct or by failure to act so as to evince an intentnot to claim a purported advantage" ***

A waiver, however, may be proved by "undisputed acts or language so inconsistent with [the party's]purpose to stand upon his [or her] rights as to leave no opportunity for a reasonable inference to thecontrary" ***

III.

In the context of relational contracts such as the subject agreements, where there are repeated occasionsfor performance over the course of months or years, the application of general principles of waiver andestoppel presents special difficulties, particularly when trying to gauge whether a waiver relates only toa contemporaneous or past obligation, or applies prospectively to executory obligations as well. Andwhen no-oral-waiver clauses are thrown into the mix, the analysis becomes even more complex (seegenerally David V. Snyder, The Law of Contract and the Concept of Change: Public and PrivateAttempts to Regulate Modification, Waiver, and Estoppel, 1999 Wis. L. Rev. 607 [1999] ).

In approaching this question, it is useful to recall that the roots of waiver lie firmly in equity, and are"designed to prevent the waiving party from lulling the other party into a belief that strict compliancewith a contractual duty will not be required and then either suing for noncompliance or demandingcompliance for the purpose of avoiding the transaction" (13 Richard A. Lord, Williston on Contracts §39:15 at 621 [4th ed. 2013] [footnotes omitted] ).

Where, as here, a contract provides, among other things, for the long-term supply of goods, UCC 2–2087 and 2–209 also come into play. Those sections read, in relevant part, as follows:

"2–208. Course of Performance or Practical Construction

"(1) Where the contract for sale involves repeated occasions for performance by either

7 [During the time periods relevant here, New York had not yet adopted Revised Article 1. Revised Article 1 moved thecourse of performance provisions from § 2-208 to § 1-303. Eds.]

party with knowledge of the nature of the performance and opportunity for objection to itby the other, any course of performance accepted or acquiesced in without objection shallbe relevant to determine the meaning of the agreement.

"(2) The express terms of the agreement and any such course of performance ... shall beconstrued whenever reasonable as consistent with each other; but when such construction isunreasonable, express terms shall control course of performance

...

"(3) Subject to the provisions of the next section on modification and waiver, such courseof performance shall be relevant to show a waiver or modification of any term inconsistentwith such course of performance."

"2–209. Modification, Rescission

"(4) Although an attempt at modification or rescission does not satisfy the requirements ofsubsection (2) or (3) [relating to certain requirements for a signed writing] it can operate asa waiver.

"(5) A party who has made a waiver affecting an executory portion of the contract mayretract the waiver by reasonable notification received by the other party that strictperformance will be required of any term waived, unless the retraction would be unjust inview of a material change of position in reliance on the waiver."

Under the above provisions, a party may, through its course of performance, waive a term of thecontract, either retrospectively (i.e., in connection with a past obligation or condition) or prospectively(i.e., in connection with an executory obligation). If the waiver applies prospectively, it may beretracted upon reasonable notice, unless such retraction would be unjust in view of a material change ofposition in reliance on the waiver ***

However, in the case of a waiver that is deemed broad enough to apply prospectively to an executoryobligation, the effect of such a waiver would arguably be broader than that of a mere election. Whereasan election to continue the performance of a contract despite the occurrence of a material breach wouldbar the right to terminate the contract based on that breach *** it would not preclude an action based ona subsequent breach *** By contrast, a prospective waiver of the breached provision would, unlesseffectively retracted in accordance with UCC 2–209(5), serve to bar an action based on a subsequentbreach of that provision ***

IV.

Applying the above principles to the facts at hand, we find that the record broadly supports the viewthat OTRT and SEM, by electing early on to continue the agreements despite the Kamco parties' breachof the 2005 annual minimum purchase requirement, waived their right to terminate the agreementsbased on that initial breach *** Contrary to the Kamco parties' contentions, however, we do not findthat such conduct, without more, evinced "a clear manifestation of intent" prospectively to waive anyof the 2006 monthly or annual minimum purchase requirements *** The same reasoning also applies tothe Kamco parties' continued failure, in early 2006, to meet the monthly minimum purchaserequirements. Such conduct can reasonably be understood as a waiver of the 2006 monthly minimumpurchase requirements as and when such obligations became due, but not as a prospective waiver ofexecutory minimum purchase requirements, including the 2006 annual minimum purchase requirement.

As time went on, however, and OTRT and SEM continued to accept, month after month, and withoutany formal reservation of rights or notice of default, the Kamco parties' continued failure to meetmonthly minimum purchase requirements, the situation eventually reached a tipping point where theconduct of OTRT and SEM became so inconsistent with an intent to enforce the remaining 2006minimum purchase requirements "as to leave no opportunity for a reasonable inference to the contrary"*** At that point, it can fairly be said that a prospective waiver occurred ***

We need not decide precisely when that tipping point happened in this case, as it is clear from therecord that it occurred well before OTRT and SEM first attempted formally to enforce their rightsunder the agreements by asserting counterclaims and the third-party action against the Kamco parties inNovember or December of 2006.

As early as July of 2006, OTRT had already conceded that there was no "realistic possibility" that theKamco parties would be able to meet their annual minimum purchase requirement for 2006, yet neitherOTRT nor SEM made any effort at that time to put the Kamco parties on notice of their default. On thecontrary, OTRT even agreed to allow Kamco Supply Corp. to return $47,709.92 worth of Trakloc toSEM—conduct that is so fundamentally at odds with an intent to enforce the 2006 annual minimumpurchase requirement that it would be difficult to characterize it as anything other than a prospectivewaiver of the annual minimum purchase requirement.

Moreover, by the end of 2006, the Kamco parties' cumulative purchases of Trakloc amounted to barelymore than 2% of the total minimum purchase requirements for 2005 and 2006, leaving a monumentalshortfall of 175,770,331 linear feet. At the same time, SEM had only negligible inventories of Traklocon hand, and its capacity to produce new product was limited to approximately 12 million to 18 millionlinear feet per month. Thus, even assuming that the Kamco parties had been willing to comply with the2006 annual minimum purchase requirement in November 2006, it is unreasonable to believe thatOTRT and SEM had the capacity to deliver such a large amount of Trakloc in less than two months'time.

For all of the above reasons, we find that the Supreme Court properly concluded that, by the end of2006, the affirmative conduct of OTRT and SEM over the previous weeks and months evinced anunmistakable intent to waive the remaining 2006 minimum purchase requirements, including the 2006annual minimum purchase requirement ***

Nor can the assertion of OTRT's and SEM's counterclaims and the third-party action against the Kamcoparties be construed as an effective retraction of their earlier waiver. "A waiver, to the extent that it hasbeen executed, cannot be expunged or recalled, but, not being a binding agreement, can, to the extentthat it is executory, be withdrawn, provided the party whose performance has been waived is givennotice of withdrawal and a reasonable time after notice within which to perform" (Nassau Trust Co. v.Montrose Concret Prods. Corp., 56 N.Y.2d 175, 184, 451 N.Y.S.2d 663, 436 N.E.2d 1265 [citationomitted]; see UCC 2–209[5] ). Under the facts presented, it would have been unjust to allow OTRT andSEM to retract their prior waiver within weeks of the deadline to meet the 2006 annual minimumpurchase requirement.

Finally, we agree with the Supreme Court that, under the facts presented, the agreements' no-oral-waiver provision (see section 19.2 of the agreements, quoted in part I, supra ) does not compel adifferent result. As explained above, the Kamco parties' persistent and repeated failure to meetminimum purchase requirements, coupled with OTRT's and SEM's continued acceptance of suchconduct without any reservation or protest until a few weeks before the expiration of the agreements(by which time it was, of course, too late to insist upon strict compliance with the terms of the

agreements), equitably estops OTRT and SEM from invoking the benefit of the no-oral-waiverprovision ***

The parties' remaining contentions either are without merit or need not be considered in light of ourdetermination.

Accordingly, the order is affirmed.

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QUESTIONS AND NOTE

1. Questions about the facts of this case

1.1 Why did Kamco sue in the first place? Didn’t it know it was in breach? Couldn’t itanticipate OTRT and SEM’s response?

1.2 Was there an explicit signed waiver by OTRT and SEM? Wasn’t that required by section19.2 of the agreement?

1.3 Assume, contrary to the facts, that the contract was set to expire 3 years after Kamco’slawsuit and counterclaims. Any different result?

2. Questions about the law

2.1 Is this court’s view, what is the definition of waiver?

2.2 Why did the court cite to U.C.C. § 2-209? What parts of that statute are helpful in resolvingthe dispute between the parties?

2.3 In the last paragraph, the court holds that OTRT and SEM were estopped from raising theno-oral-waiver clause. What is the court’s definition of estoppel that justifies this holding?

2.4 The court indicates that a waiver can be retracted, in part because it is not really a bindingagreement, but only as to “executory” obligations. What are those?

3. Notes

3.1 The court concludes that OTRT was “estopped” to rely on the no-oral-waiver clause. What’sthe difference between waiver and estoppel? As stated recently by the West Virginia SupremeCourt:

“Waiver is the voluntary surrender of a right; estoppel is the inhibition to assert aright which the law places on one as a consequence of his own conduct whichhas resulted in injury or detriment to another *** Waiver depends on what onehimself intends to d; estoppel depends rather upon what he caused his adversaryto do.” Northwestern Nat. Life Ins. Co. v. Ward, 56 Okla. 188, 155 P. 524, 527(1915). Waiver arises from the voluntary actions of the contract’s obligor alone;to create an estoppel, both the obligor and the obligee must act. 8 Corbin onContracts at § 40.1 ***

In summary, on the question of prejudice or detrimental reliance, the distinctionbetween the common law doctrines of estoppel and waiver is simple: estoppelrequires proof of prejudice or detrimental reliance; waiver does not. We thereforehold that the common-law doctrine of waiver focuses on the conduct of the partyagainst whom waiver is sought, and requires that party to have intentionallyrelinquished a known right. A waiver may be express or may be inferred fromactions or conduct, but all of the attendant facts, taken together, must amount toan intentional relinquishment of a known right. There is no requirement ofprejudice or detrimental reliance by the party asserting waiver.

Parsons v. Halliburton Energy Services, Inc., 237 W.Va. 138, 785 S.E.2d 844 (W.Va. 2016).

In Parsons, the issue was whether Halliburton had waived its contractual right to arbitration bydelaying its answer to a complain, and by leading plaintiff to think it would answer. Itresponded by moving to dismiss because Parsons had earlier agreed to arbitrate all disputes. Thecourt found for Halliburton, given the earlier stage of the proceeding. But would the case havebeen decided differently if the motion to dismiss was made just before a jury was to return itsverdict? Just before trial started? Just after a summary judgment motion was filed by theplaintiff? Just after the defendant filed a formal answer to the complain?

3.2 But although a waiver doesn’t require reliance, doesn’t a waiver almost always lead todetrimental reliance by the other side? To quote Corbin on Contracts:

Generally, the promisor’s waiver of a condition is followed by the promisee’ssubstantial change of position. At the very least, the promisee will be induced bythe waiver not to perform the condition, if the condition consists of some act orforbearance of the promisee. Thus, if a promisor’s duty to convey is conditionalon payment by a stated day, the promisor’s waiver of the condition may inducethe promisee to cease efforts to raise the money and to forbear to pay on the day.Here we have ample reason for an estoppel, or for the enforcement of a promisebecause of subsequent reliance.

8 Corbin on Contracts § 40.2 (2017). See also Restatement (Second) of Contracts § 84, cmt. b(1981) (“‘Waiver’ is often inexactly defined as ‘the voluntary relinquishment of a known right.’When the waiver is reinforced by reliance, enforcement is often said to rest on ‘estoppel.’”).

3.3 Courts disagree on the exact formulation of waiver. In Altman v. Munns, 82 N.C.App. 102,345 S.E.2d 419 (1986), for example, the parties had entered into a marital settlement agreementunder which the husband agreed to pay for the college tuition of the couple’s then-eight-year-old daughter. When college time came around, dad was not in great financial condition, and thedaughter wanted to go to a pricey private college. After some back and forth, mom testified thatshe “realized Louisburg College [where the couple’s daughter wished to go] was moreexpensive [than state college]. I felt sorry for Bob and therefore I agreed to pay one-half ofLisa’s college expenses.”

Well, Mom paid, but Dad didn’t. Mom sued Dad to be reimbursed for the entire amount of theyear’s tuition; after all, the marital settlement agreement did not specify any particular type ofcollege. Dad was in breach.

Dad defended, claiming Mom had waived at least half of his obligation. In assessing thiscontention, the court said:

A party may waive the breach of a contractual provision without consideration orestoppel where (i) the waving party is the non-breaching party; (ii) the breach isnot a total repudiation of the contract so that the non-breaching party continuesto receive some benefit of the contract; (iii) the innocent party is aware of thebreach; and (iv) the innocent party performs or accepts the partial performanceof the breaching party.

In this case, Mom paid the whole tuition (and guaranteed some loans). The court held that theseaffirmative acts, combined with her statements to Dad, constituted a waiver of the right toreceive 100% of Dad’s obligation; he had only to pay Mom 50%.

But … Daughter did not waive anything. She was, as we will see in Chapter 9, a third-partybeneficiary of the contract, which entitled her to sue her Dad if he didn’t pay (and she wasliable). As a result, the court let Mom off the hook for 50% of the obligation, but allowedDaughter to sue Dad for the whole amount.

Aside from the rough justice, how does the standard for waiver in Altman compare to thestandard articulated in Kamco?

4. You Be the Lawyer!

You represent OTRT and SEM. Kamco’s performance is abysmal—they are making only 2% of therequired sales. But your business contacts don’t want to rock the boat, because they think the marketmight turn. At the same time, they tell you: “We’re protected by the anti-waiver clause, right? We cansue them if this doesn’t work out, correct? We want you to reserve all our rights regardless.” What’syour answer? And if this request comes with two years left on the contract, what actions would yousuggest that they to “reserve their rights”?

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PROBLEM: THE CASE OF THE DRUNKEN LAW PROFESSOR

Professor Clark writes brilliant law prose. He’s also a drunk. West wants his output, but they want himto write it sober. West and Clark enter into a contract requiring Clark to write a treatise on corporations,for which they will pay Clark $6 a page if he abstains from all liquor while writing. If he doesn’t, thepay is $2 per page.

Clark delivers a crackerjack treatise on time and under budget. West sells a ton of copies. Theaccounting folks at West find out that Clark hit the bottle more than once during the writing of thetreatise. The check they write him is for $2 a page only.

Clark thinks the work is good, and sues for $6 a page. What result?

Would it matter if Clark’s editor knew he was drinking while he wrote, but did not tell accounting? Ifthe editor took Clark to dinner (something we hope all casebook editors do with their authors—hint,hint, West) and saw Clark sip a bit of sherry before dinner? If he consumed a bottle of wine duringdinner, and then left the table at the end saying, “Well, got to go write more of that blasted treatise.”Finally, what if Clark goes to his editor and says “I can’t write without hitting the sauce. Especially foronly $2 a page. You should get another author,” and his editor responds, “Don’t worry. Keep writing.We’ll work something out,” and Clark finishes the treatise on time.

It’s a real case. Clark v. West, 193 N.Y. 349 (1908).

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4. PREVENTION

This is how Willison on Contracts explains prevention as an excuse of a condition:

When a promisor prevents, hinders, or renders impossible the occurrence of a conditionprecedent to its promise to perform, or to the performance of a return promise, thepromisor is not relieved of the obligation to perform and may not legally terminate thecontract for nonperformance. Furthermore, the promisor may not invoke the otherparty’s nonperformance as a defense when it is sued on the contract. In short, under thedoctrine of prevention, when a party to a contract causes the failure of the performanceof the obligation due, it cannot in any way take advantage of that failure.

13. Williston on Contracts § 39:3 (4th ed. 2017 Supp.). That makes sense. You can’t prevent your ownliability from arising; that’s not what the parties bargained for (and it might be illusory if they did).

Here is an easy example of prevention: Epstein contracts to buy Ponoroff’s house on January 15th. Thecontract provides “Payment or other performance by Epstein is expressly conditioned on Epstein’sreceiving a loan from a financial institution of at least $1,000,000.” Notwithstanding his immensewealth from sales of this book, Epstein is unable to obtain a loan because each time he visits a financialinstitution, he is wearing his Spider-Man suit, muttering “With great power comes great responsibility.”Prevention, right?

Let’s be sure that we (you) understand the legal significance of “prevention” of the occurrence of acondition—of elimination of the excuse of non-occurrence of the condition. If Epstein does notperform—does not pay Ponoroff $1,000,000 for his house on January 15th—Ponoroff could recoverfrom Epstein for breach of contract. Epstein has no excuse—his excuse based on non-occurrence of theloan condition has been extinguished because the loan condition itself has been extinguished byEpstein’s “prevention.”

The next case is a more realistic example of prevention (albeit less memorable and much longer thanthe Epstein in a Spider-Man suit example).

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QUESTIONS BEFORE THE CASE

1. What was the subject matter of the contract?

2. What did SNAP argue regarding whether the condition to its performance had occurred?

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Cox v. SNAP, Inc.United States Court of Appeals, Fourth Circuit

859 F.3d 304 (4th Cir. 2017)

DIANA GRIBBON MOTZ, CIRCUIT JUDGE:

In this diversity action for breach of contract, SNAP, Inc. appeals from the grant of summary judgmentto Curtis Cox. The district court concluded that SNAP breached its contract with Cox by refusing torepurchase stock options the contract granted to him and awarded Cox $637,867.42 in damages, the fullvalue of his options plus interest. On appeal, SNAP argues that the contract itself did not conveyoptions to Cox but merely included an executory promise to issue those options, which SNAP never infact issued. SNAP also challenges the calculation of damages. For the reasons that follow, we affirmthe judgment of the district court.

I.

In 2006, SNAP, a Virginia corporation, sought to expand its business in the field of federal procurementby contracting with Curtis Cox, a Maryland resident and the president of C2 Technologies, anestablished government contracting firm. On January 12, 2006, the parties executed a memorandum ofunderstanding in which Cox agreed "to promote and market [SNAP] in exchange for obtaining anequity stake" in the company. For purposes of this appeal, there is no dispute that the memorandumconstitutes a binding contract.

Under the terms of this contract, Cox and C2 Technologies agreed to provide various forms ofassistance to SNAP. Among other things, they agreed to use their best efforts to help SNAP obtainspecific contracts, to consider SNAP for any potential leads, and to provide SNAP with approximately$240,000 worth of marketing support and assistance.

In return, the contract provides that "[o]n January 12, 2006," the same day the parties executed thecontract, SNAP "will issue a non-qualified stock option to Mr. Cox granting him the right to purchase308 shares, representing five (5%) percent of the total authorized shares of stock of [SNAP]." Thecontract announces SNAP's intention to execute a stock split, under which Cox's options wouldincrease proportionally. It gives SNAP the right to re-purchase Cox's options at any time after January1, 2008 and gives Cox the right to require SNAP to repurchase his options—a "put option"—any timeafter January 1, 2011. The repurchase price is payable to Cox "over a five-year period with interest atthe then current prime rate."

Cox attempted to exercise his put option on March 18, 2011 in a letter to SNAP President NavneetGupta. The parties discussed but never came to a resolution regarding Cox's request. On October 6,2015, Cox sent Gupta a second letter demanding that SNAP pay him the full value of his options. OnOctober 9, 2015, Gupta replied that "[SNAP] owes you nothing."

A month later, in November 2015, Cox filed suit for breach of contract against SNAP in Virginia statecourt. SNAP removed the case to the district court for the Eastern District of Virginia. After removal,Cox filed an amended complaint alleging breach of contract for failure to repurchase, breach ofcontract for failure to issue his options, and quantum meruit.

In August 2016, the parties filed cross-motions for summary judgment. SNAP contended that thecontract did not grant Cox any stock options but merely memorialized SNAP's promise to issue theoptions in the future. As such, issuing the options was a condition precedent to its obligation torepurchase those options from Cox. In support of its interpretation of the contract, SNAP relied on thefuture-tense language in the contract's key terms, particularly the phrase "will issue a non-qualifiedstock option" in paragraph 1, along with references to the "necessary documentation" SNAP wouldprepare after the parties executed the contract.

*** Cox argued that, under the prevention doctrine, SNAP waived any such condition precedent byrefusing to issue the stock options.

The district court granted summary judgment to Cox. The court reasoned that the plain language of thecontract showed that SNAP issued the stock options to Cox and that the contract did not require anyfurther steps as a condition precedent before those options issued. *** Applying the contract's formulafor calculating the value of Cox's options and the interest owed, the court awarded Cox a total of$637,867.42 in damages. SNAP timely noted this appeal. ***

II.

We turn first to liability. The parties dispute whether the contract itself conveyed stock options to Coxor merely obligated SNAP to issue those options at some point in the future.

If, as Cox maintains, the contract conveyed stock options to him, SNAP clearly breached the contractby refusing to repurchase them when Cox exercised his put option. For there is no dispute that Coxotherwise exercised his put option in accordance with the terms of the agreement, and SNAP has notpreserved any defense for its refusal to repurchase Cox's options.

However, SNAP maintains that the contract did not convey stock options to Cox. Rather, according toSNAP, in the contract it merely promised to issue stock options to Cox, and the contract therefore madethe issuance of stock options a condition precedent to SNAP's obligation to repurchase those options.SNAP contends that because it never issued those options, it never incurred the obligation torepurchase them from Cox. SNAP maintains that its refusal to issue the stock options was the onlyconceivable basis for Cox's lawsuit, and the limitations period for this claim expired well beforeNovember 2015, when Cox filed his initial complaint in state court. Thus, in SNAP's view, the statuteof limitations bars Cox's only potentially meritorious claim.

SNAP has taken a self-defeating position. Even if issuing the stock options was a condition precedentto SNAP's obligation to repurchase, SNAP has excused that condition by breaching its promise to issuethe options, and so the prevention doctrine dooms its case. Under the prevention doctrine, "if apromisor prevents or hinders fulfillment of a condition to his performance, the condition may bewaived or excused." Moore Bros. Co. v. Brown & Root, Inc. , 207 F.3d 717, 725 (4th Cir. 2000)(applying Virginia law) ; see also Restatement (Second) of Contracts § 245 (Am. Law Inst. 1981) ;Richard A. Lord, Williston on Contracts § 39:7 (4th ed.), Westlaw (database updated May 2017). Forthe prevention doctrine to apply, Cox need only show that SNAP materially contributed to the non-occurrence of the condition. See Moore , 207 F.3d at 725.

Virginia has recognized the prevention doctrine for many decades. In Parrish v. Wightman , theSupreme Court of Virginia adopted the following formulation of the rule:

Where a contract is performable on the occurrence of a future event there is an impliedagreement that the promisor will place no obstacle in the way of the happening of suchevent, particularly where it is dependent in whole or in part on his own act ; and, where heprevents the fulfillment of a condition precedent or its performance by the adverse party, hecannot rely on such condition to defeat his liability.

184 Va. 86, 34 S.E.2d 229, 232 (1945) (emphasis added) (quoting 17 C.J.S. Contracts § 468 [now §707] ). Under Parrish , the relevant inquiry is whether a condition precedent failed to occur "because ofany fault upon the part of the [promisor]." Id.

SNAP controlled whether the stock options issued, and, even under its own interpretation, it had acontractual obligation to issue those options. By refusing to do so, SNAP plainly forfeited its right torely on their issuance as an unfulfilled condition precedent to its obligation to repurchase Cox's options.When a condition in a contract fails to occur solely because a party breached one of its otherobligations in the very same contract, there is no doubt that the party caused the non-occurrence for thepurposes of the prevention doctrine. As the Restatement explains:

Where a duty of one party is subject to the occurrence of a condition, the additional duty ofgood faith and fair dealing imposed on him ... may require some cooperation on his part,either by refraining from conduct that will prevent or hinder the occurrence of thatcondition or by taking affirmative steps to cause its occurrence .... The rule stated in thisSection only applies, however, where the lack of cooperation constitutes a breach, either ofa duty imposed by the terms of the agreement itself or of a duty imposed by a term suppliedby the court . There is no breach if the risk of such a lack of cooperation was assumed bythe other party or if the lack of cooperation is justifiable.

Restatement (Second) of Contracts § 245 cmt. a (Am. Law Inst. 1981) (emphasis added). Thiscomports with the Supreme Court of Virginia's reasoning in Parrish that the implied agreement not toimpede the occurrence of a condition applies particularly when the occurrence or non-occurrence of thecondition depends entirely on the promisor's own conduct. See Parrish , 34 S.E.2d at 232.

***

SNAP *** argues that the prevention doctrine applies only when a party affirmatively obstructs acondition from occurring, not when it merely refrains from bringing the condition about. This assertedlimitation does not stand up to scrutiny. Indeed, the lone opinion on which SNAP relies is unreportedand bears no resemblance to the facts of this case. Charlie Norfolk Ctr. Assocs., L.P. v. NorfolkRedevelopment & Hous. Auth., 285 Fed.Appx. 80 (4th Cir. 2008). And it simply reiterates that "acondition precedent to a contract is excused when the promisor prevents or hinders the occurrence ofthe condition, and the condition would have occurred in the absence of such prevention or hindrance."Id. at 84 n.7 (emphasis added). Both the Supreme Court of Virginia and the Restatement have madeclear that a promisor prevents or hinders the occurrence of a condition when it wrongfully refuses tocooperate, either by actively interfering with the occurrence of a condition or by withholdingcooperation the promisor was obligated to give.

Accordingly, when a party materially contributes to the non-occurrence of a condition precedent byfailing to bring that condition about, the condition is excused if the party's inaction is wrongful underthe circumstances. Violation of a contractual duty is plainly wrongful for the purposes of the preventiondoctrine. See Restatement (Second) of Contracts § 245 cmt. a (Am. Law Inst. 1981). Here, evenassuming SNAP's reading of the contract is correct, there is no doubt that SNAP had an obligation tobring about the condition it now tries to hide behind. Because it refused to do so with no justification orexcuse, the prevention doctrine applies. See NLRB v. Local 554, Graphic Commc'ns Int'l Union , 991F.2d 1302, 1307–08 (7th Cir. 1993) (excusing a condition precedent that an international union approvea collective bargaining agreement because the local union failed to seek such approval).

Thus, even if we read the contract as merely incorporating a promise to issue stock options, SNAPcannot avoid liability to Cox. ***

IV.

For the foregoing reasons, the judgment of the district court is

AFFIRMED .

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QUESTIONS

1. Questions about the facts of this case

1.1 What is a stock option? When is a stock option valuable?

1.2 What was the condition that the court deemed waived?

2. Questions about the law

2.1 Do you want to listen to the oral argument in this case? [link here]. Spoiler alert: it did notgo too well for SNAP’s counsel.

2.2 The court states that SNAP’s argument is “self-defeating.” Is it right?

2.3 What does the court mean by citing Restatement § 245? What does the duty of good faithand fair dealing have to do with this contract?

3. You Be the Lawyer!

You represent SNAP, and the day after the contract in this case was signed, you ask the client whetherthey issued the stock options. The client just shrugs her shoulders, and says, “You’re the lawyer, ace.We know we promised to issue the options, but do we have to do anything more?” Answer he question.