Duty + Condition (Promissory condition) Customer pays $1000

Condition (Ordinary condition) House burns

Duty (promise)

Ins. Co. pays $100,000

Duty + Condition (Promissory condition) SC does work

Condition (Ordinary condition) Owner pays GC

Duty (promise)

GC pays SC

Sour Grapes. Merritt Hill Vineyards contracted to purchase a vineyard owned by Windy Heights Vineyard and paid Windy Heights a $15,000 deposit. The contract provided that, if the sale did not close, Windy Heights could keep the $15,000 as liquidated damages unless Windy Heights failed to satisfy the conditions specified in Section 3 of the contract. Section 3 listed as conditions precedent of Merritt Hills obligation to complete the purchase that Windy Heights obtain a title insurance policy and that Merritt Hill receive confirmation from Farmers Home Administration that the sale would not constitute a default of certain mortgages on the property. At the time of closing, Windy Heights had not obtained a title insurance policy and Merritt Hills had not heard from Farmers Home Administration, so Merritt Hills refused to close. When Windy Heights refused to refund the deposit, Merritt Hills sued for both the deposit and damages it suffered as a result of the sale not closing. Which side should prevail?

Sour Grapes. a) Merritt Hills should recover its deposit and any provable damages suffered. b) Merritt Hills should recover its deposit but not damages. c) Windy Hills should be entitled to keep the deposit but must pay Merritt Hills any damages it can prove that it suffered.

Sour Grapes. Interpreting the contract, the New York Court of Appeals held that the events at issue constituted conditions of Merritt Hills closing but not duties of Windy Heights. Consequently, because the condition failed, Merritt Hills was entitled not to close and to obtain the return of its deposit. However, since Windy Heights was not in breach of a duty, Merritt Hills could not collect damages it suffered as a consequence of not finalizing the purchase of the property. Merritt Hill Vinyards Inc. v. Windy Heights Vineyard, Inc., 460 N.E. 2d 1077 (N.Y.C.A. 1984).

The G.I.s Loan Contingency. In 1958, John DeFreitas agreed to buy Israel and Euphemie Cotes house for $16,720, with the following provision: This sale is subject to a G.I. Loan and in the event that said amount is not approved, the deposit will be returned in full. . . . It is further understood and agreed that should the G.I. appraisal be less than requested and should the sellers refuse to sell for the amount of said appraisal, then this contract becomes null and void seven days after the bank receives said statement of appraisal.

The G.I. appraisal was less than the stated purchase price of the house, and the Cotes refused to accept the lesser price. Nevertheless, DeFreitas obtained a conventional loan and wrote to the Cotes that he intended to complete the purchase at the agreed-upon price. The Cotes refused to go through with the transaction. Were they legally justified?

The G.I.s Loan Contingency. a) Yes, because an express condition of the sale was not satisfied. b) No, because the condition provided protection for the buyers, not the sellers.

The G.I.s Loan Contingency. The trial court instructed the jury that if the GI loan appraisal was less than the stated purchase price and the sellers would not accept that price, the contract was null and void. The Massachusetts supreme court found that this was error, and that the court should have instructed the jury that contract does not limit the buyer to obtain a G.I. Loan as the only means of financing the transaction and all that he is required to do is be able to raise the necessary consideration regardless of its source. DeFreitas v. Cote, 342 Mass. 474 (1961).

Paying for Nuclear Power. The Massachusetts Municipal Wholesale Electric Company (MMWEC)
pools the resources of small municipal utilities in order to purchase energy at lower cost than the utilities could obtain as individual entities. MMWEC entered contracts, called power sales agreements, with a number of Massachusetts and Vermont utilities in order to create a consortium and then, on behalf of that consortium, raised capital through the issuance of bonds in order to purchase a six percent interest in two nuclear power plants then being built in Seabrook, New Hampshire. Each of MMWECs power sales agreements contained an execution and delivery term, which provided that: This Agreement shall be effective upon execution and delivery of Power Sales Agreements by MMWEC and Participants whose Participants shares total 100%. Each of the power sales agreements also included a step up provision, which provided that, should one or more of the utilities in the consortium default on its obligations, the other members would be required to increase their participation pro-rata to make up the difference. After the power sales agreements had been signed and the bonds issued, the Vermont Supreme Court held that Vermont utilities, which owned 15% of the consortiums investment, lacked authority to enter into the power sales agreements. Consequently, the power sales agreements between MMWEC and those utilities were void. The MMWEC subsequently invoked the step up provision. Several Massachusetts utilities, including the Town of Danvers, brought suit, claiming that the power sales agreements (and, thus, the step up provision) never became binding because the condition precedent provided by the execution and delivery term was never satisfied. Should the utilities be excused from performing according to the step up provision?

Paying for Nuclear Power. a) Yes, because, with the Vermont contracts being void, there were never legal Power Sales Agreements executed by more than 85% of participant shares in the project. b) No, because the purpose of the step up provision was to protect bondholders from non-payment by power companies, which is exactly what happened when the Vermont contracts were voided.

Paying for Nuclear Power. The utilities argued that 100% of participant shares were never collected because the Vermont utilities PSAs were invalid. The Massachusetts supreme court said the intent of the parties to create a condition precedent must be clearly manifested, and there is no clear indication that the authority of each participant to enter into a PSA was meant to constitute a condition precedent to the existence of , or obligations under, all the PSAs. In interpreting the execution and delivery term narrowly, the court placed significant emphasis on the purpose of the PSAs to protect bondholders, and thus keep the cost of capital low for MMWEC. The court added that extrinsic evidence to prove that such a condition precedent existed was not relevant because the terms of the PSAs are reasonable clear. Massachusetts Municipal Wholesale Electric Co. v. Town of Danvers, 577 N.E.2d 283 (Mass. 1991).

The Sale of Corn. Morton entered into a contract to purchase corn from Lamb. Lamb was to deliver the corn to Morton at Shardlow, in the county of Derby (in the United Kingdom), one month from the date of the agreement. When Lamb failed to deliver the corn within that period of time, Morton brought suit. Lamb argued that Morton should not be permitted to recover because Morton had not tendered payment. Who should prevail?

The Sale of Corn. a) Morton, because Lamb was in breach by not delivering the corn. b) Lamb, because Lambs duty was conditional on Morton providing payment.

The Sale of Corn. In the 1797 case of Morton v. Lamb, Chief Judge Lord Kenyon held that delivery and payment were intended to be concurrent acts, and the plaintiff cannot recover without pleading that he had performed, or was ready to perform his part of the contract. He distinguished the concurrent performances called for by this contract from cases in which work done is a condition precedent of wages being paid. Judgment for defendant. Morton v. Lamb, 101 E.R. 890 (1797).

Gassed. Shaw leased a gas station from Mobil Oil Corporation under a contract that provided Mobil would provide Shaw with his gasoline requirements and Shaw would pay a specified price per gallon but not less than a minimum rental of $470. If the per gallon charges totaled less than $470 at the end of any given month, Shaw was to pay the deficiency promptly. As a consequence of oil shortages, the federal government in July 1973 limited the amount of gas Mobil could provide its lessees. Consequently, although Shaw requested an amount of gasoline that would have exceeded $470, Mobil delivered a lesser quantity, the contract price of which totaled less than $470. At the end of the month, Mobil demanded that Shaw pay the deficiency amount, and Shaw refused. For whom should a court rule?

Gassed. a) For Mobil, because the contract requires that Shaw pay a minimum of $470 and Mobil was not at fault for delivering less fuel than requested. b) For Shaw, because his duty to pay the deficiency amount is conditioned on Mobils provision of Shaws requirements.

Gassed. The Oregon Supreme Court ruled that Shaws duty to pay the minimum monthly amount is dependent, or conditional, on Mobils duty to deliver the amount of gasoline ordered. Whether or not Mobils duty to provide the gasoline is excused as a result of the government action, the condition of Shaws duty was not satisfied. Therefore, Shaw was not obligated to pay the deficiency amount. Shaw. v. Mobil Oil Corp. 535 P.2d 756 (Or. 1975).

Duty + Condition (promissory condition)

Duty (promise)

Customer pays back interest by 11/15

Bank forbears from calling note

The Angry Farmers. In 1997, Elda Arnhold and John Argoudelis agreed to sell 280
acres of farmland southwest of Chicago to property developer Ocean Atlantic Woodland Corporation. As the parties squabbled over attempts to renegotiate the price of the parcel and other provisions of the agreement, the agreed-upon closing date for the transaction slipped on several occasions, angering the sellers. The relationship between the parties continued to sour, and litigation ultimately commenced. In 2000, the parties settled the litigation by agreeing to certain substantive terms concerning the state of the property and the following provision concerning the closing of the sale: If Ocean Atlantic, for any reason whatsoever, fails to close on the property within 90 days from the execution of [the] settlement document, it shall forfeit any and all rights it may have to purchase the property. Ocean Atlantic soon after provided notice that it intended to close on January 24, 2001, one day before the 90-day period would expire. Ocean Atlantic failed to tender the purchase price on January 24 or January 25 because its lender demanded last-minute documentation. Performance was tendered on the afternoon of January 26, the day after the expiration of the 90-day period. The sellers refused to tender the property and notified Ocean Atlantic that the contract was terminated. Ocean Atlantic filed suit. Were the sellers excused from performing, or was Ocean Atlantic entitled to judgment?

The Angry Farmers. a) The Arnholds are excused because the condition in the contract was explicit and made clear than any delay in closing would constitute a forfeiture. b) The Arnholds are not excused because a one day delay was not a material breach.

The Angry Farmers. A magistrate judge found that the drop dead clause was an essential term of the parties original settlement agreement, and the 7th Circuit, applying Illinois law, agreed. The court also emphasized, however, that not only must the time of closing be of the essence, the breach of that clause must be material as to justify the other partys subsequent refusal to perform, based on the totality of the circumstances. Emphasizing the sellers desire for finality after being frustrated with the buyers inability or unwillingness to close the transaction, the court found substantial evidence to support the magistrates determination that the breach was material and thus the sellers were excused from closing one day later. Elda Arnhold and Byzantio LLC v. Ocean Atlantic Woodland Corp., 284 F.3d 693 (7th Cir. 2002).

Hotel Fire. The Milner Hotel, located adjacent to a West Virginia railroad yard,
contracted to provide rooms to the Norfolk and Western Railway Companys employees for a fixed price, with the railway guaranteeing occupancy of at least 60 rooms per night. The contract, which provided both parties with the right to terminate for any reason with 30-day notice, specified that the Milner was responsible for:
(d) Maintaining at all times good, clean, and sanitary conditions throughout the said hotel; (e) Observing and complying with all local, state, or federal laws and regulations pertaining to the operation of said hotel . . .

In March 1991, a fire broke out at the hotel. There was no structural damage, but the hotel suffered smoke damage from the flames and water damage from efforts to extinguish the fire. A post-fire inspection by the local fire department revealed numerous violations of fire and electrical codes, as well as the presence of crumbling, friable asbestos in several locations inside the hotel. The railway company then provided notice that it was terminating the contract, and it did not send any employees back to the hotel after the fire. The Milner sued for lost profits suffered during the 30-day period before the railways termination became effective. Who should prevail?

Hotel Fire. a) Milner, because any failures on its part to comply with regulations were not material breaches of its contract with the railroad. b) The railroad, because failure to comply with safety regulations are material breaches.

Hotel Fire. In an unreported per curium decision, the 4th Circuit Court of Appeals upheld the district courts grant of summary judgment for the railroad. The court rejected Milners argument that the code violations and asbestos were, at most, technical breaches of its agreement to maintain the hotel in good condition and to observe all applicable laws and regulations, called them serious safety defects. Milner failed in its obligation to demonstrate that it had not committed a [prior] material breach of the contract. Milner Hotels Inc. v. Norfolk and Western Railway Co., 19 F.3d 1429 (4th Cir. 1994).

A Misplaced Wall. Frank and Carol Jacobs entered into a contract with Eugene Plante, a builder, for the construction of a new house on a lot owned by the Jacobs family in Waukesha County, Wisconsin. The contract called for the builder to construct the house according to a stock floor plan and accompanying specifications. The Jacobs made periodic progress payments totaling approximately $20,000 during the course of construction, but they refused to make the final payment of more than $6,000, and the builder brought suit. The Jacobs identified a number of imperfections in the construction work but primarily stressed the fact that the builder had misplaced the wall between the living room and the kitchen, which resulted in the narrowing of the living room by more than one foot. The location of the wall was, in fact, inconsistent with the plans for the house. At the trial, the builder called as witnesses real estate experts who testified that the location of the wall would not affect the market price of the house. Were the Jacobs justified in withholding payment, or should the doctrine of substantial performance apply?

A Misplaced Wall. a) The Jacobs were justified because the misplacement of a wall is a visible and obvious construction defect. b) Plante is entitled to payment of the full price less any reduction in market price (even if that reduction is $0) because he substantially performed his obligations.

A Misplaced Wall. The Jacobs appealed from a trial court ruling for plaintiff Plante.
Plante v. Jacobs, 103 N.W.2d 296 (Wisc. 1960). The Wisconsin Supreme Court affirmed, finding that the builder substantially performed, notwithstanding the misplaced wall, and the Jacobs were thus not excused from performing, but were entitled only to subtract the value of defective performance from the full purchase price:
Substantial performance as applied to construction of a house does not mean that every detail must be in strict compliance with the specifications and the plans. Something less than perfection is the test of specific performance unless all details are made the essence of the contract. This was not done here. There may be situations in which features or details of construction of special or of great personal importance, which if not performed, would prevent a finding of substantial performance of the contract. In this case the plan was a stock floor plan. No detailed construction of the house was shown on the plan. There were no blueprints. The specifications were standard printed forms with some modifications and additions written in by the parties. Many of the problems that arose during the construction had to be solved on the basis of practical experience. No mathematical rule relating to the percentage of the price, of cost of completion or of completeness can be laid down to determine substantial performance of a building contract. Although the defendants received a house with which they are dissatisfied in many respects, the trial court was not in error in finding the contract was substantially performed.

The Late Notice. Dentist George Murphy ran his practice in an office leased from Hopmeadow Professional Center Associates. After Murphy terminated the lease, Hopmeadows insurer, Aetna Casualty and Surety Company, sued Murphy for alleged damage caused when Murphy dismantled his office. More than two years later, Murphy brought a claim against his liability insurance carrier, Chubb. Chubb moved to dismiss Murphys claim on the ground that he failed to satisfy the notice provisions of his policy which provided, in part, [i]n the event of an occurrence, written notice... shall be given by or for the insured to the company... as soon as practicable. Chubb has not alleged that Murphys delay has caused any harm. Should the court grant Chubbs motion to dismiss?

The Late Notice. QUESTION SLIDE

The Late Notice. ANSWER SLIDE

The Dulles Toll Road. Brown & Root, Inc. was the general contractor for the
construction of the Dulles Toll Road Extension, a 14-mile long private highway between Dulles Airport and Leesburg, Virginia. Brown & Root subcontracted a portion of the construction to Moore Brothers Company, and the subcontract included the following pay-when-paid provision: [P]ayment by Owner to General Contractor is a condition precedent to any obligation of General Contractor to make payment hereunder; General Contractor shall have no obligation to make payment to Subcontractor for any portion of the Sublet Work for which General Contractor has not received payment from Owner. Brown & Root realized that some of the project specifications provided to it by the toll roads owner, the Toll Road Investors Partnership II (TRIP) , and on which Brown & Root priced the job, were likely to be insufficient, which meant that future changes to the specifications (change orders) were likely. One of the likely changes was to the thickness of the concrete for the road. TRIP and Brown & Root, however, sought to convince lenders, who would potentially provide financing for the project, that the total project costs were predictable and not subject to escalation. Thus, TRIP and Brown & Root intentionally left out several items from the principal general contract (which the lenders would review before agreeing to provide financing). (continued on next slide)

The Dulles Toll Road. (cont) These omitted provisions included the procedures by which TRIP would submit change orders for a number of potentially costly changes, including concrete thickness, and the procedures by which Brown & Root would be entitled to increase its charges for the construction work. The provisions omitted from the principal contract were spelled out in a separate side agreement between TRIP and Brown & Root that was not provided to the lenders.
During construction, the State of Virginia required TRIP to increase the thickness of the roads concrete, and TRIP submitted the necessary change order, which, under the side agreement, entitled Brown & Root to increase the price charged. Brown & Root told its subcontractors, including Moore Brothers, to install the thicker concrete. The lenders, surprised by the claim for significant additional costs, however, refused to provide funds to cover the costs of the change order, leaving TRIP unable to make the payment.

Having not been paid for the change order, Brown & Root refused to pay Moore Brothers for its portion of the increased costs. Moore Brothers sued Brown & Root for payment. Is Moore Brothers entitled to collect?

The Dulles Toll Road. a) No, because the subcontract made clear that the Owners payment to Brown & Root was a condition of Brown & Roots duty to pay the subcontractors. b) Yes, because Brown & Roots conduct contributed to the inability of the Owner to pay Brown & Root.

The Dulles Toll Road. The 4th Circuit held that the pay-when-paid clause was valid, and payment by the Owner to Brown & Root was a condition of Brown & Roots payment to Moore Brothers. However, the court then found that Brown & Root contributed to the non-occurrence of the condition by misleading the lenders about the potential for costly design changes during the course of construction. Because Brown & Roots conduct hindered the fulfillment of the condition precedent, the prevention doctrine was properly invoked by the district court to waive the condition, making Brown & Root liable to Moore Brothers. Moore Bros. Co v. Brown & Root, Inc. 207 F.3d 717 (4th Cir. 2000).

The Salesmans Quota. Wesley Pearce sold insurance for ELIC Corporation and earned commissions based on his sales performance. A 1978 contract provided that, in addition to his regular commissions, Pearce would be entitled to receive an additional five percent of sales of a particular line of automotive insurance (the VIP commission) for each month in which his net sales of life and health insurance exceeded $67,500. Although Pearce did not meet this life and health insurance quota, ELIC paid him the VIP commission for all of 1978. In July 1979, ELIC wrote to him that his five percent VIP commission on $60,000 of automotive insurance sold through June 1, 1979, would be forthcoming, although it was never paid. In July 1980, ELIC wrote to Pearce and requested that he return the VIP commissions that had been paid for 1978, which ELIC claimed was actually an advance on VIP commissions that Pearce had not earned. Pearce sued for the unpaid 1979 commissions, and ELIC counterclaimed for the return of the 1978 commissions. How should the court rule?

The Salesmans Quota. a) ELIC should prevail because Pearce had not satisfied the condition precedent (and Pearce had reason to know of ELICs mistake). b) Pearce should win because ELIC waived the condition by its performance.

The Salesmans Quota. The jury returned a verdict for Pearce and awarded him $7800 in unpaid commissions. The Supreme Court of Nebraska affirmed We believe it is clear that there was a waiver by the defendant of the condition precedent relative to the quota requirement, both expressly and also by conduct, particularly by the reception of the benefits by the defendant and reception of the money paid to it by way of premiums and the commission paid thereon to the plaintiff for 1978. The waiver amounted to a modification of the previous contract to the extent that the condition was eliminated. Pearce v. ELIC Corp., 213 Neb. 193 (Neb. 1982).

The Housing Development. James Carrig, the owner of a parcel of land in

Watertown, Massachusetts, contracted for builder Gilbert-Varker Corporation to construct 35 houses on the parcel according to a set of plans and specifications. The contract specified which basic house plan would be used for each of the 35 lots, along with the basic price for each plan. Purchasers of the houses would be allowed to select variations on the standard house plans, and the contract also specified how much the builder would be paid for each of the various alterations or additions. The contract called for the houses to be built in groups of not less than ten. Progress payments would be made to the builder on each house when certain milestones were achieved, with final payment due 40 days after completion of the house. The builder constructed 20 houses and received progress payments on those houses but not the final payments. At that time, the builder claimed that it was losing money, and it refused to start work on the remaining 15 houses unless the owner agreed to an increase in the contract price. The owner refused and withheld the final payments on the 20 completed houses, and the builder never constructed the remaining 15 houses. The owner sued for the difference between the contract price of the 15 houses, which were not built, and the cost of hiring another builder to construct them ($9,935, according to the trial court). The builder countersued for the unpaid final payments on the first 20 houses ($3,143, according to the trial court). How should the court rule?

The Housing Development. a) The Builder materially breached, making the Owner entitled to withhold payment. b) The Builder performed its obligations concerning the first 20 houses, so it is entitled to receive all payments for those houses.

The Housing Development. The Massachusetts Supreme Court found that the contract was divisible. The contract covered the construction of thirty-five houses, the money for which was secured by a separate mortgage placed on each lot and from the sale of each house upon its completion. Payments to the contractor were made in installments as the construction of that house reached certain stages. Each house was treated as a unit. The sum of $132,928 named in the contract was nothing more than the sum total of the basic prices from the erection of thirty-five different houses The Court upheld the lower court award to the owner for damages related to the unbuilt houses, but reversed the lower courts holding that the builder was not entitled to the final payments due on the first 20 houses. Carrig v. Gilbert-Varker Corp., 314 Mass. 351 (Mass. 1943)

The Angry Farmers, Revisited. In preparing to purchase the sellers 280-acre parcel of farmland in the Chicago exurbs, plaintiff Ocean Atlantic Woodland Corporation spent $1.7 million over four years rezoning the property so that the property would be suitable for development, planning the subsequent development, conducting preliminary engineering studies, and marketing the property. Ocean Atlantic argued that termination of the contract for the sale caused a complete forfeiture of this investment and increased the value of the property to the sellers. Should Ocean Atlantic be awarded the value of the benefits its expenditures conferred on the sellers?

The Angry Farmers, Revisited. a) Yes. Even though Ocean breached, it is entitled to restitution to prevent the unjust enrichment of the Arnholds. b) No. The express condition of closing illustrates the parties intent that there would be a forfeiture if the condition failed.

The Angry Farmers, Revisited. The 7th Circuit held that, under Illinois law, the two important factors to consider are (1) whether the breaching party used reasonable efforts to perform and (2) whether they parties contemplated that a breach would lead to a forfeiture. It concluded that, by waiting to close until 1 day prior to the drop-dead date, Ocean Atlantic failed to use reasonable efforts to avoid breach. To the extent that the enforcement of the deadline results in a forfeiture, we hold that the [district] courts decision to effectuate the forfeiture clause was proper. Elda Arnhold and Byzantio LLC v. Ocean Atlantic Woodland Corp, 284 F.3d 693 (2002).

Rose 2d. Of Aberlone. T.C. Sherwood was interested in purchasing livestock and visited Hiram Walker, importer and breeder of Angus cattle, at Walkers farm. Walker told Sherwood to look over several cows being housed at another farm owned by Walker, but Walker warned Sherwood that they were probably barren, and would not breed. Sherwood went and viewed the cows and several days later expressed an interest in purchasing one named Rose 2d. of Aberlone. The parties agreed to the sale of Rose for 5.5 cents per pound, which was approximately 10% of what a breeding cow would cost. When Sherwood arrived to pick up Rose two weeks later, the Walkers refused to complete the exchange, claiming that in the intervening time period they had discovered that Rose, whom both parties believed to be barren, was actually with calf. Sherwood sued. Who should prevail?

Rose 2d. Of Aberlone. a) Walker, because he is entitled to rescission of the contract for mutual mistake. b) Sherwood, because Walker bore the risk that he was wrong about Roses ability to breed.

Rose 2d. Of Aberlone. The Michigan appellate court ruled for Sherwood, claiming that it made no difference whether Rose was barren or not. The Michigan Supreme Court reversed, holding that the Walkers were excused from performance on the ground of mutual mistake. The court said the key issue was whether the mistake went to the substance of the agreement. In finding that it was, it noted the large discrepancy between the value of a barren cow and a breeding cow. The mistake was not of the mere quality of the animal, but went to the very nature of the thing.She was not in fact the animal, or the kind of animal, the defendants intended to sell or the plaintiff to buy.The court should have instructed the jury that if they found that the cow was sold, or contracted to be sold, upon the understanding of both parties that she was barrenand that in fact she was not barrenthen the defendants had a right to rescind. The dissent claimed that the evidence suggested that sellers thought Rose would not breed but the buyer thought she could be made to breed, and that it turned out that the plaintiff was more correct in his judgment. Neither party knew the actual quality of the cow, and she was sold without condition. The dissent claimed the majority altered the contract by reading into it a condition that, if the defendants should be mistaken in their belief that the cow was barren[the]contract should be annulled. Sherwood v. Walker, 66 Mich. 568 (Mich. 1887).

A More Serious Injury. Henry Kruzich was seriously injured while working in a
mine when an ore bucket struck him in the head. Kruzich was permanently disabled and required home-care for a period of time. Old Republic Insurance Company, the mines insurer, accepted liability and reached a settlement that provided Kruzich with the needed care. However, the agreement excluded any future home-care expenses. Kruzich recovered from his head injury to some degree: although he remained permanently disabled, he did not require constant monitoring, and as a result, his wife was able to return to work. Nearly 16 years after the accident, Kruzich began suffering motor-skills deterioration. Doctors diagnosed him as having Parkinsons disease caused by the mine accident. Apparently, Kruzichs Parkinsons developed as a result of the mine trauma, but he did not actually have the disease at the time the settlement was reached. As the Parkinsons worsened, Kruzich once again required home-care and was afraid his wife would have to leave work to care for him. He filed a lawsuit seeking to rescind the settlement agreement under the doctrine of mutual mistake. Should the court grant rescission? Would it matter to your analysis if, unknown to both parties, Kruzich had the injury-triggered Parkinsons disease at the time of the settlement even though no clinically significant symptoms appeared for 16 years?

A More Serious Injury. a) Yes, because there was a mutual mistake concerning the severity of the injury. b) No, because Kruzich bore the risk that he would need more home care in the future than anticipated at the time of the settlement.

A More Serious Injury. The Supreme Court of Montana ruled against rescinding the contract. While substantial credible evidence does support the WCCs finding that Henrys Parkinsons disease was caused by his 1988 injury, it is undisputed that the Parkinsons disease did not exist when the parties entered into their settlement agreement. This Court has adopted the widely accepted rule that a failure to predict the future is not a mistake of fact as contemplated by the mutual mistake-of-fact doctrine. Kruzich v. Old Republic Ins. Co., 344 Mont. 126 (Mont. 2008).

A Zoning Restriction. In 1970, Northwestern Bell Telephone Co. convinced the City of Duluth to rezone its property from S (suburban) to M-1 (manufacturing) so that Northwestern Bell could build a distribution center, on the condition that only a single building could be built on the property. Years later, Northwestern Bell sold a portion of that property not containing the structure to Robert Eikill, who subsequently sold it to Jack Gartner for $40,000. Eikills real estate agent told Gartner that the property was zoned M-1, and all concerned believed this meant that Gartner could use the property for industrial purposes. Gartner made no independent investigation of the propertys zoning status. The standard form contract signed by both parties stated the sellers duty to deliver marketable title to said premises subject only to the following exceptions: (a) building and zoning laws, ordinances, State and Federal regulations.
A year after the purchase, Gartner learned that, because of the original restriction, he could not construct any buildings on the property. Useful only for agricultural or open-use purposes, the property was appraised at a value of $15,000-$25,000. Gartner sought rescission of the purchase on grounds of mutual mistake. Should he prevail?

A Zoning Restriction. a) Yes, Gartner should prevail because the ability to legally build on the property was a basic assumption of the contract for sale and the risk that construction was not permitted was not allocated to either party. b) No, Eikill should prevail because the risk that a property will turn out to be less valuable than the parties assumed is implicitly allocated to the buyer.

A Zoning Restriction. The Minnesota Supreme Court found that there was a mutual mistake with respect to the possible uses of the land and, although mistakes that go to the value of the thing conveyed are often risks assumed by the buyer, this is not necessarily the case when the parties did not consciously assume the risk or assented to the contract on the assumption that [a] factor is definitely established and that there is no risk. Upon finding that Gartner made reasonable inquiry concerning the propertys zoning status and had no reason to suspect that any []restriction prohibited the development of the property, the court reversed a lower court judgment for the Eikill and ordered rescission of the transaction. Garner v. Eikill, 319 N.W.2d 397 (Minn. 1982).

Arbitrate This. Blue Cross Blue Shield of Tennessee (BCBST), a health insurance corporation, purchased a Directors and Officers Liability Insurance Policy from BCS Insurance Company. BCBST submitted claims related to a recently settled lawsuit to BCS, and BCS refused to pay. The parties insurance contract called for arbitration in the event of this type of dispute, with the arbitrator to be chosen from a specified group of potential arbitrators. At this point in time, BCBST learned that virtually every potential arbitrator in the relevant pool had an inherent conflict of interest, which BCBST believed predisposed them to favor BCSs position. BCBST then claimed that it made a unilateral mistake in agreeing to the arbitration term in the contract on the ground that it did not know at the time of contracting that the potential arbitrators would be biased towards BCS. Assuming that all of the potential arbitrators at least appear to be biased, should the court grant BCBSTs motion to rescind the arbitration clause?

Arbitrate This. a) Yes, because BCBST made a mistake and BCS had reason to know of the mistake. b) No, because BCBST did not exercise due care in investigating the identity of the arbitrators.

Arbitrate This. The US District Court in Illinois held that it did not qualify under the unilateral mistake doctrine. Even if the arbitration agreement permits an appearance of partiality on the arbitration panel, the clause is not unconscionable Finally, BCBST cannot show that it exercised due care in the formation of the contract clause, and any unilateral mistake defense must fail as a result. There is no reason to believe BCBST could not have learned about the ownership of BCS when it entered into the Policy and therefore no basis for holding that BCBST exercised due care. Furthermore, if BCBST believed that the appearance of impartiality was material, it could have written this in to the contract. Blue Cross Blue Shield of Tennessee v. BCS Ins. Co. 517 F.Supp.2d 1050 (N.D. Ill. 2007).

Going Once, Going Twice, SOLD. Richard Limehouse and David Smith settled a property dispute in their real estate partnership by agreeing to sell the property at auction, although they each wanted to own the property individually. The two parties agreed that each would receive a 10% deposit from the auction purchaser, but only a 5% deposit if one of them obtained the property through the auction by making the highest bid. They also agreed that either of them could bid on the property through a surrogate.
On the day of the auction, only three people bid on the property: Smith, Gene Greeter (Limehouses attorney), and Ann Kazel, a real estate developer. When Kazel had the highest bid and Greeter had stopped bidding, Smith decided to let Kazel win the auction because he wanted the 10% deposit to which he would then be entitled, and he believed he could subsequently work out a deal with Kazel to purchase the property back from her. It turned out, however, that Kazel was bidding on behalf of Limehouse, who ended up with the property. Smith not only lost the property to his former partner, but he only received the 5% deposit. Smith quickly moved to rescind the sale based on his unilateral mistake that Kazel was bidding on her own behalf (rather than as Limehouses agent). Should the court grant Smiths motion?

Going Once, Going Twice, SOLD. a) Yes, because Smiths mistake was material. b) No, because Smiths mistake was due to his own negligence.

Going Once, Going Twice, SOLD. The court overturned a lower courts ruling granting rescission to Smith. The court held that Smith did not qualify under unilateral mistake because he was negligent. The fact that Smith either ignored or overlooked the fact that the third party could have been bidding for Limehouse is not sufficient to relieve him of his performance under the contracts because of unilateral mistake based on his own negligence and lack of foresight. Limehouse v. Smith 797 So.2d 15 (Fla.App. 2001).

Navy Fire. RNJ Interstate Corporation entered into a contract with the Navy to
renovate a building at the Naval Air Station in Glenview, Illinois. The contract provided for the government to make progress payments to RNJ during the renovation and included a Permits and Responsibilities clause, which provided:
The Contractor shall, without additional expense to the Government, be responsible for obtaining any necessary licenses and permits, and for complying with any Federal, State, and municipal laws, codes, and regulations applicable to the performance of the work. The Contractor shall also be responsible for all damages to persons or property that occur as a result of the Contractor's fault or negligence, and shall take proper safety and health precautions to protect the work, the workers, the public, and the property of others. The Contractor shall also be responsible for all materials delivered and work performed until completion and acceptance of the entire work, except for any completed unit or work which may have been accepted under the contract.

RNJ began work in September 1991, and the government made progress payments to RNJ as the work progressed. RNJ had completed more than half of the project when the building was completely destroyed by fire. RNJ demanded payment for the work completed prior to the fire (less the progress payments already made), and the government refused to pay. The parties agreed that the fire was the fault of neither and that the government had not accepted any portion of RNJ's work at the time of the blaze. In a lawsuit brought by RNJ, which party should prevail?

Navy Fire. a) The Navy should prevail, because the contract allocates the risk that the building will be destroyed before work is accepted to RNJ. b) RNJ should prevail because, although the contract allocates some risks to RNJ, the risk of destruction of the property under construction is not one of them, and reasonable parties would assume that RNJ would be entitled to payment for work done in such circumstances.

Navy Fire. RNJ argued that the destruction of the building made this case a classic
example of impossibility, which should excuse its duty to complete performance prior to being entitled to payment. The government conceded that RNJ was excused from its duty to complete the renovation but asserted that it had no obligation to make payments. The Federal Circuit affirmed a trial court ruling for the government on the ground that the contract expressly allocated the risk to RNJ:
In making its argument, RNJ seeks support in what it characterizes as the common law doctrine of impossibility. In fact, however, the common law doctrine is a default and does not apply where the parties have agreed, by the terms of their contract, to a different allocation of risks. In this case, we conclude that the contract between RNJ and the government allocated the risk of loss to RNJ prior to the acceptance of the work, and that the contract therefore bars any recovery by RNJ in this case.

The last sentence of the Permits and Responsibilities Clause states: The Contractor shall also be responsible for all materials delivered and work performed until completion and acceptance of the entire work, except for any completed unit or work which may have been accepted under the contract. That clause allocates all risks to the contractor until a specified event occurs.Both parties agree that acceptance never occurred; the risks therefore had not shifted from the contractor to the government when the building was destroyed by fire. RNJ Interstate Corp. v. U.S., 181 F.3d 1329 (Fed. Cir. 1999).

The Consumptive Fianc. In the early 1850s, Mr. Wright and Miss Hall became engaged to be married. Prior to the appointed date for the nuptials, Wright broke off the engagement, and Hall sued for breach of contract. Wright responded to Halls complaint by pleading that, after the two had become engaged, he was stricken with consumption, did and continued to suffer from frequent and severe bleeding from his lungs, and was unable to fulfill the commitments of marriage without placing his life in grave danger. Should Hall be entitled to judgment on the pleadings, or would the facts alleged by Wright, if proven, excuse his obligation to marry?

The Consumptive Fianc. a) Hall is entitled to judgment because, even if performance is physically impossible or impracticable, Wright must pay damages. b) Hall is not entitled to judgment, because Wright should be excused from performing if his illness was as serious as claimed.

The Consumptive Fianc. The four English judges divided. Judge Erle found that a contract to marry is assumed in law to be made for the purpose of mutual comfort, and the defendant should be excused if the circumstances are so changed as to make intense misery insteadthe probable result of performing the contract. Judge Wightman agreed, even conceding that the performance was not impossible, but only highly dangerous to the life of the person promising. Chief Judge Lord Campbell disagreed, finding that a man who undertakes a duty is bound to make it goodnotwithstanding any accidentbecause he might have provided against it by his contract. If performing the obligation is impossible, Wright may well pay damages. Judge Crompton opined that, at best, the facts would have allowed Wright to rescind the contract, but his failure to do so and provide notice to Hall (prior to the litigation) entitled Hall to a verdict.

Nuclear Power. In 1966, Florida Light & Power Company (FL&P) hired Westinghouse Electric
Corporation to construct a nuclear power plant. The contract gave FL&P the option, which could be exercised prior to the plant going into operation, to impose on Westinghouse the obligation to remove the irradiated [i.e., spent] fuel [after processing] and dispose of it as Westinghouse sees fit. In 1957, to spur development of civilian nuclear power, the U.S. Government issued a formal assurance that, if commercial reprocessing facilities did not become available, the government would provide reprocessing of spent nuclear fuel at government facilities. In 1966, when the contract between FL&P and Westinghouse was signed, the government was doing just this, and commercial reprocessing facilities were about to come on line. The parties expectation at that time was that, depending on FL&Ps choice, either FL&P or Westinghouse would have the reactors spent fuel reprocessed, and the economics of reprocessing were taken into account when setting the price at which Westinghouse would provide FL&P with nuclear power under the contract. In 1971, FL&P provided notice of its decision to exercise its option, thus requiring Westinghouse to dispose of the spent fuel. By 1975, however, increasing environmental regulation and concerns about possible environmental hazards associated with the reprocessing of spent nuclear fuel drove commercial reprocessors out of business, and the government stopped providing reprocessing services. Policymakers began to favor the previously discounted option of providing long-term storage for spent nuclear fuel rather than reprocessing the spent fuel. Westinghouse estimated that it would have earned an $18 to $20 million profit by reprocessing the FL&P reactors spent fuel, as it had contemplated, whereas obtaining long -term storage would cost it over $80 million, assuming that the government was to establish or certify a long-term storage facility. Westinghouse refused to take responsibility for removing the spent fuel from the reactor. FL&P sued for specific performance or, alternatively, money damages for breach, and Westinghouse defended by invoking common law impossibility and commercial impracticability under the U.C.C. Which side should prevail?

Nuclear Power. a) FL&P, because the contract provides FL&P with an option to impose a duty on Westinghouse to dispose of spent fuel. b) Westinghouse, because the availability of either commercial or government-provided spent fuel processing facilities was a basic assumption of the contract.

Nuclear Power. The 4th Circuit ruled for Westinghouse, finding the availability of means of reprocessing the spent fuel to be a basic assumption of the contract, as evidenced by the fact that reprocessing was available at the time, availability had been promised by the government, and no long term storage (the only other conceivable option) was available or contemplated at the time. The coupled with the huge difference in cost faced by Westinghouse make out a textbook illustration of the circumstances warranting the application of the doctrine of impracticability/impossibility of performance as a valid excuse for breach of contract. As a matter of law the promise of future storage in this case is not a reasonable alternative, so FL&P could not recover the cost of temporary and future permanent storage from Westinghouse. The court noted in closing In reaching this conclusion we are aware that in all probability Florida will be permitted to recover its costs from its ratepayers. [Is this relevant?] Florida Power & Light Co. v. Westinghouse Electric Corp, 826 F.2d 239 (4th Cir. 1987).

A Car Dealer in Wartime. In 1941, prior to the entry of the United States into World War II, Harold Murphy leased a lot in Los Angeles from Caroline Lloyd for the purpose of selling new cars. After the countrys entry into the war, wartime industrial production shifted toward military purposes, and the government restricted sales of cars to the small percentage of the population possessing preferential ratings of A-1-j or higher. These events made selling cars difficult and drastically reduced the profitability of Murphys business. Murphy repudiated the lease and defended against Lloyds subsequent lawsuit by arguing frustration of purpose. Is Murphy excused, or must he continue to pay Lloyd the lease rate for the lot?

A Car Dealer in Wartime. a) Murphy should be excused because the war and resulting government restrictions on car purchases were unforeseen. b) Murphy should not be excused because he assumed the risk that changing market conditions would affect profitability of his business.

A Car Dealer in Wartime. The Supreme Court of California denied Murphys excuse. Indeed, the conditions prevailing at the time the lease was executed, and the absence of any provision in the lease contracting against the effect of war, gives rise to the inference that the risk was assumed [by Murphy].The sale of automobiles was not made impossible or illegal but merely restricted and if governmental regulation does not entirely prohibit the business to be carried on the leased premises but only limits or restricts it, thereby making it less profitable and more difficult to continue, the lease is not terminated or the lessee excused from further performance. Lloyd v. Murphy, 25 Cal.2d 48 (1944).

The Bankrupt Football League. In 1974, The Birmingham Stallions of the World Football League signed Dallas Cowboys football star Larry Rayfield Wright to a contract obligating Wright to play for the Stallions for three years beginning in 1977. The Stallions paid Wright a $75,000 signing bonus at the time, with the rest of Wrights substantial salary to be paid between 1977 and 1979. After the contract was signed but before Wright joined the team, the World Football League went bankrupt and ceased to exist. The Stallions sued Wright for the return of the $75,000 signing bonus. Wright argued that he already provided consideration for the bonus by signing the contract, by forbearing from negotiating with other teams, and by allowing the Stallions to publicize his affiliation with the team. Wright also counterclaimed for the salary specified in the contract, which the Stallions never paid. Who should prevail?

The Bankrupt Football League. a) The Stallions should prevail, because league solvency was a basic assumption of the contract. b) Wright should prevail, because the risk of not being able to use Wrights services was allocated to the team.

The Bankrupt Football League. The federal district court ruled that the team was excused from paying the remainder of the contract: No clause is provided in the contract setting forth the parties rights in the event Alabama or the World Football League failed and there is no evidence of discussion concerning this possibility between the parties at any time. Further, the risk of bankruptcy was not expressly or impliedly allocated to either party. Alabama could not have reasonably foreseen such sudden demise of its team and the World Football League. Finally, it is undisputed that the dissolve of Alabamas team and the World Football League has made performance of the remaining unexecuted four-fifth of the contract impossible. Alabama Football Inc. v. Wright, 452 F.Supp. 182 (N.D. Tex. 1977).

Concrete Barriers. The Commonwealth of Massachusetts hired general contractor J. J. Paonessa Company for a highway improvement project. The contract included a standard provision allowing the government to eliminate (and not pay for) portions of work from the original job specifications that it later determined were unnecessary. Paonessa subcontracted to Chase Precast Corporation the job of supplying concrete barriers for the road median. There was no similar provision in the subcontract covering changes the government might later make to the project. Shortly after construction began, residents complained that concrete medians were being used to replace grassy strips between the two sides of the highway and filed a lawsuit against the Commonwealth to stop this improvement. Anticipating that the Commonwealth would issue a change order eliminating the concrete barriers, Paonessa told Chase to immediately stop building them. Paonessa paid Chase the contract price for the barriers already produced but refused to pay more. Chase sued and claimed that Paonessa breached its contract, entitling Chase to its expected profits on the remaining medians. Should Chase prevail?

Concrete Barriers. a) Yes, because Paonessa bore the risk that the government would change the project. b) No, because the risk of the government eliminating all concrete barriers from the median was unallocated by the contract.

Concrete Barriers. The trial court upheld Paonessas frustration defense. The Mass Supreme Court affirmed. It found that the lack of a change provision in the subcontracted did not indicate that Paonessa assumed the risk of government changes. Rather, because Chase had experience in government projects and was aware of the change provision in the general contract, the trial court could (and did) find that the subcontracted operated under the socalled unit price philosophy, in which contracted prices are paid for the work actually accepted. The court also could have (and did) find that the parties did not contemplate such a major change, and the risk remained unallocated. Chase Precast Corp. v. John J. Paonessa Co., 566 N.E.2d 603 (Mass 1991).

A Change in the Law. Charles Boley was charged with manufacturing

methamphetamine, which was a level 1 drug felony under Kansas law. He entered into a plea agreement with the state that called for Boley to plead guilty and for the prosecutor to request the court to depart downward from the sentencing guidelines for level 1 drug felonies and sentence Boley to 48 months in prison. Boley understood that the court could choose to ignore the prosecutors recommendation and that the plea was not contingent on the court actually sentencing him to 48 months. Boley pled guilty, the prosecutor recommended the downward departure, and the court did sentence Boley to 48 months. Shortly before the plea agreement was signed, an individual (McAdams) in an unrelated case challenged his sentence for manufacturing methamphetamine on the ground that this crime should be classified as a lower level felony, meaning that conviction would carry a shorter sentence. Ultimately, McAdams prevailed. Based on the McAdams precedent, Boley challenged his sentence as based on the wrong felony classification, and the court of appeals ruled in his favor and remanded his case for a new, shorter sentence, expected to be 17 to 19 months. The prosecutor then sought to rescind the plea agreement on the ground of frustration of purpose. How should the court rule on the prosecutors motion?

A Change in the Law. a) It should grant the motion, because the governments purpose was frustrated if the conviction under the plea would carry a substantially shorter prison term than both parties assumed. b) It should deny the motion, because the plea agreement was not based on a guarantee of any particular sentence by the court and because changes in the law are foreseeable.

A Change in the Law. The Kansas Court of appeals ruled that the states purpose in agreeing to the plea deal had been frustrated because the resulting 17-19 month sentence was a significant reduction from its intended purpose of achieving a 48 month sentence. The Kansas Supreme Court reversed, finding the states primary purpose of avoid[ing] a trial and the attendant risk of a not guilty verdict was achieved. The court also pointed out that the defendant would serve prison time and that neither party to the plea was guaranteed a specific sentence because the trial court could ignore the recommendations. The court also found that the risk of change in law was foreseeable because the McAdams sentenced had been appealed at the time of the plea, and that the prosecutor subsequently bore the risk of a change in law that it could have prevented by contract -- but did not -- by requiring Boley to agree not to not to challenge his sentence. State v. Boley, 113 P.3d 248 (Kan. 2005).