Slides · Class 36

By the end of class, you can

Apply R2d § 224 to a fact pattern and distinguish a condition from a promise.
Classify a closing-conditions clause as condition precedent, subsequent, or concurrent and explain the consequence of each classification.
Apply R2d § 229 to a forfeiture risk and decide whether a court will excuse the condition.

Today

Floor. ~40 min: R2d § 224 + the condition/promise distinction + Morrison. The doctrine the next class assumes you have covered.

Target. ~75 min: Floor + classification (precedent/subsequent/concurrent) + promissory conditions (Internatio-Rotterdam) + waiver, excuse & forfeiture (R2d § 227) + synthesis.

R2d § 224: Condition Defined

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

Condition vs. promise: the controlling distinction

A condition (R2d § 224) is an event, not certain to occur, that must occur before a duty becomes due — unless excused. A promise (R2d § 2) is a commitment to act; breaking it is a breach.

The consequences split sharply:

Fail a condition → the duty it qualifies never comes due. No breach. No damages. The party is simply discharged.
Break a promise → breach. The injured party may recover damages.

Contractor will build "if Buyer secures financing." Buyer's loan falls through. The financing is a condition of the contractor's duty — the contractor need not build, and no one is liable. But if the buyer had also promised to apply in good faith and did not, that promise-breach is actionable even though the condition failed.

Signal words for an express condition: "if," "provided that," "on condition that," "unless," "until."

R2d § 225: Effects of the Non-Occurrence of a Condition

(1) Performance of a duty subject to a condition cannot become due unless the condition occurs or its non-occurrence is excused.

(2) Unless it has been excused, the non-occurrence of a condition discharges the duty when the condition can no longer occur.

(3) Non-occurrence of a condition is not a breach by a party unless he is under a duty that the condition occur.

R2d § 226: How an Event May Be Made a Condition

An event may be made a condition either by the agreement of the parties or by a term supplied by the court.

Express vs. implied; precedent, concurrent, subsequent

Conditions classify on two independent axes.

By source:

Express — stated in the contract ("if," "provided that"). Demands strict compliance: an express condition not fully satisfied means the duty does not arise (Dove v. Rose Acre Farms — bonus forfeited for missing two days under a perfect-attendance condition).
Implied — inferred from the contract's nature (implied-in-fact) or imposed by courts for fairness (implied-in-law); often satisfied by substantial performance.

By timing:

Condition precedent — must occur before a duty arises (the default; most conditions). Buyer must give shipping instructions before Seller must ship.
Condition concurrent — both perform simultaneously (delivery against payment in a sale of goods).
Condition subsequent — an event that terminates an existing duty (rare; e.g., an insurance clause cutting off coverage if no claim is filed in time).

Conditions taxonomy

Conditions are classified on two axes simultaneously; Kingston is a condition precedent by timing and constructive by source; both axes apply to the same condition.

Kingston v. Preston

2 Doug. 689, 99 Eng. Rep. 437 (K.B. 1773)
Court of King's Bench

Rule. Covenants in a contract are mutual and dependent where the performance of one is in the nature of a condition precedent to the performance of the other. Where dependent covenants exist, a party need not perform until the other has performed or tendered performance.

Morrison v. Bare

2007-Ohio-6788 (Ohio Ct. App. Dec. 19, 2007)
Ohio Court of Appeals, Ninth District

Rule. A condition is not the same as a promise. The non-occurrence of a condition discharges the duty that the condition qualifies but is not itself a breach. A buyer to whom a condition has failed cannot insist on a renegotiated price; the buyer's options are to walk away or to waive the condition and proceed.

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

259 F.2d 137 (2d Cir. 1958)
United States Court of Appeals for the Second Circuit

Facts. Buyer contracted to buy rice for December shipment, "two weeks' call" — Buyer was to give shipping instructions (naming the port and vessel) at least two weeks before the delivery deadline. December delivery was of the essence. Buyer failed to give instructions by December 17, the last date that left Seller two full weeks within December. Seller rescinded as to the Texas portion. When the market price of rice rose, Buyer (who would have to cover at the higher price) sued Seller for non-delivery.

Holding. Seller could rescind. Buyer's notice of shipping destination was a condition precedent to Seller's duty to ship — Seller literally could not deliver "free alongside ship" without knowing the vessel and port. December delivery being of the essence, the deadline was firm; Buyer's failure to give timely notice discharged Seller's duty.

Rule (promissory condition). A single term can be both a promise and a condition — a "promissory condition." Buyer promised to give notice (so its promise to order was not illusory) and Seller's duty to ship was conditioned on receiving that notice. Buyer's failure was thus both a breach and a non-occurrence of a condition; Seller, fully covered by reselling at the higher price, sued on neither — but was entitled to rescind on the failed condition.

R2d § 227: Standards of Preference; Avoiding Forfeiture

(1) In resolving doubts as to whether an event is made a condition of an obligor's duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee's risk of forfeiture, unless the event is within the obligee's control or the circumstances indicate that he has assumed the risk.

(2) Unless the contract is of a type under which only one party generally undertakes duties, when it is doubtful whether

(a) a duty is imposed on an obligee that an event occur, or

(b) the event is made a condition of the obligor's duty, or

the first interpretation is preferred if the event is within the obligee's control.

(3) In case of doubt, an interpretation under which an event is a condition of an obligor's duty is preferred over an interpretation under which the non-occurrence of the event is a ground for discharge of that duty after it has become a duty to perform.

Failure of a condition: waiver, excuse, and forfeiture

When a condition fails, the gated duty is discharged — sometimes harshly. Three doctrines soften that result:

Waiver. A party may voluntarily give up a condition that benefits it — often by continuing to accept performance with knowledge the condition was not met. A non-material condition can be waived even without new consideration.
Excuse to avoid forfeiture (R2d § 227, § 229). A court may excuse the non-occurrence of a condition where strict enforcement would cause disproportionate forfeiture — a fully-performing party losing the deal over a technical, non-material lapse — unless the condition was a material part of the exchange.
Preference against conditions (§ 227). Where it is doubtful whether words create a promise or an express condition, courts prefer the reading that reduces the obligee's risk of forfeiture — usually a promise.

J.N.A. Realty v. Cross Bay Chelsea: a tenant missed a lease-renewal deadline but had sunk \$40,000 into the premises and built substantial goodwill. The forfeiture was grossly disproportionate to the "mere venial inattention," so equity could excuse the late notice — absent prejudice to the landlord.

Worked example: the mortgage contingency

Facts. Buyer signs a purchase contract for a house with a clause: "This contract is contingent on Buyer obtaining a mortgage loan of at least $400,000 at a fixed rate not exceeding 7% within 30 days." Buyer applies; rates have moved to 8.5%. Buyer cannot obtain financing at the specified rate. Buyer notifies Seller and demands return of the deposit.

Question. Is Buyer entitled to the deposit back? What about Seller, can Seller sue for breach?

Answer. The mortgage clause is a condition precedent to Buyer''s duty to close. The condition (obtaining qualifying financing) did not occur. Under R2d § 225(1), Buyer''s duty to close never came due. Under § 225(3), failure of the condition is not breach unless Buyer also had a duty to obtain the financing. Most mortgage contingency clauses include an implied duty of good faith and reasonable effort to apply (R2d § 205), but a 1.5% rate increase is not Buyer''s fault. Buyer is discharged; deposit returns.

Drafting subtlety: if the clause read "Buyer agrees to obtain a mortgage..." it would be both a condition and a promise. Most modern clauses make the contingency a condition only, to protect the buyer.

Stretch: the satisfaction clause (Morin v. Baystone)

Facts. Owner hires Contractor to construct an addition to its commercial plant. Contract provides: "All work shall be subject to Owner''s satisfaction, and Owner''s decision on matters of artistic effect shall be final." Contractor erects the aluminum siding; Owner''s rep rejects it because viewed from an acute angle in bright sun the finish appears non-uniform. Contractor sues for the balance.

Question. Is the owner-satisfaction condition met by the owner''s actual dissatisfaction, or by what a reasonable person in the owner''s position would think?

Answer. R2d § 228 supplies the default: when "it is practicable to determine whether a reasonable person in the position of the obligor would be satisfied," the reasonable-person standard applies. Reserved for two cases: (1) commercial-quality matters (objective standard); (2) personal-aesthetics/fancy matters (subjective good-faith standard).

Industrial siding for a Chevy plant is commercial quality despite the ''artistic effect'' label. The reasonable-person standard applies. A reasonable owner viewing siding from normal angles would be satisfied. Contractor wins. (Posner, Morin Bldg. Prods. v. Baystone Constr., 717 F.2d 413 (7th Cir. 1983).)

The deeper point: even ''subjective'' satisfaction clauses are policed by good faith. Courts will not let a satisfaction condition swallow the obligor''s consideration.

Stretch: practice problem

Stretch problems from the chapter.

Problem 19.1. Renewal of a Restaurant Lease. See casebook Chapter 19.

Problem 19.2. Financial Satisfaction. See casebook Chapter 19.

Walk through the analysis on the board. Hit the rule, the elements, the line of authority, the answer.

Class summary

Rules. R2d § 224 (condition defined), § 225 (effects of non-occurrence), § 226 (how made), § 227 (preference against forfeiture).

Cases. Kingston v. Preston (mutual dependent covenants) · Morrison v. Bare (condition ≠ promise) · Internatio-Rotterdam (promissory condition).

Punchline. Classify the term first — condition, promise, or both — because that choice dictates the consequence: a failed condition discharges a duty (no liability); a broken promise is a breach (damages). Express conditions demand strict compliance, but courts will excuse a non-material one to prevent disproportionate forfeiture.

Open question. Conditions are binary — they either occur or they fail. But contractors finish 99% of the work; should that count as the condition occurring? Next class: the substantial-performance doctrine and Jacob & Youngs.

Next time

Next class: Conditions cont. + Substantial Performance setup

_Performance & Breach_ · Feb 18

Read Internatio-Rotterdam v. River Brand Rice Mills and preview Jacob & Youngs v. Kent. A buyer's notice of shipping destination was both a promise to the seller and a condition of the seller's duty to ship. Can a single contract term do double work, and what happens when the notice comes late? Come ready to answer. You may be called.

Class 36: Conditions