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XI.

Termination of Contract
A. Upon Performance
Obligations are taken seriously and are to be performed. An obligation is
extinguished upon its proper and complete performance, because the creditor
has no right to anything more.
What constitutes full performance?
The obligation must be performed
according to the criteria set forth in the contract or by law, or according to the
principles of good faith and reasonability1.
An obligor does not have the right to perform his obligation in parts unless so
provided by agreement or by law.
Performance is a matter of proof. There is no magic incantation which the
parties must recite to terminate the contract upon performance; there is no
legal requirement for the parties to write up a statement that the performance
has been fully rendered.

B. Upon Expiration Of Term


An obligation may be extinguished upon the expiration of a term. This is
actually a subset of the principle that obligations extinguish upon performance,
but it is worth considering separately.
Example: Company A grants Company B a one month license to use certain
proprietary software.
Upon the expiration of the month, Company As
obligations cease.
Upon the expiration of the term, the obligation simply is extinguished. All that
was called for has been performed.
If the contract has does not have a termination date, the contract can be
terminated by either party at will (without regard to cause) at any time upon
reasonable notice given to the other party.
Principles of European Contract Law
6:109: Contract for an Indefinite Period
A contract for an indefinite period may be ended by either party by giving
notice of reasonable length.

E.g., Lithuanian Code 6.37.3.

Lietuvos Civilinis Kodeksas


6.199
straipsnis.
Sutartis
neapibrtam
terminui
Neapibrtam terminui sudaryt
sutart bet kuri alis gali nutraukti
apie tai per proting termin i
anksto spjusi kit al, jeigu
statymai ar sutartis nenumato ko
kita.

Lithuanian Civil Code


6.199. Contract for an Indefinite
Period
A contract for an indefinite period may
be ended by either party by giving
notice of reasonable length, unless
otherwise
provided
by
law
or
agreement.

The corrollary of this rule is that if a contract does set a term of expiration, it
may not be terminated in such a manner before that date (unless otherwise
provided for in the agreement).
Example: Parties enter into a ten-year contract. After five years, one party
gives the other reasonable notice that it is terminating the agreement. This
termination is not effective and indeed is a material breach.
Example: Parties enter into a contract. The contract is silent as to the period it
has been entered into. It does state that a party may terminate the contract at
will upon six months notice. A party does give such notice. The contract will
then terminate with the expiration of the period.

C. Upon Mutual Agreement


It is evident that the parties have a right to end their obligations by agreeing to
do so. As stated in 1134 of the French Civil Code, [a]greements may be
revoked only by mutual consent . If the parties discharge their duties by
mutual agreement, they are said to have rescinded the contract.
See
Rescission, p.Error: Reference source not found.

D. Release
Both under Anglo-American law as well as Continental law, a release by the
creditor of the debtor's obligation acts to discharge it completely. In England as
well as in some U.S. states, the release must be under seal to be effective. 2 The
provision of the Lithuanian Civil Code are illustrative.

The reader is cautioned to note that in the United States, unless the release is under seal
(which is unlikely) a release, to be valid, must be supported by new consideration. See Accord
and Satisfaction, p. Error: Reference source not found.

Lithuanian Civil Code


6.129. Releasing the Debtor from Performance of the Obligation
1. An obligation is discharged when the creditor releases the debtor from his
duty to perform it or states that the obligation does not exist, if the
release from the performance of the duty does not prejudice the rights of
third parties to the property of the creditor.
2. The release must be iterated clearly and unambiguously. It can be for
consideration or gratuitous.
3. The release acts to discharge the obligation completely, except in cases
where the creditor clearly provides that it is to discharge only part of the
duty of performance.
5. An offer to release a duty of performance in return for consideration which
is addressed to the debtor is considered to be accepted if the debtor does not
reject it without undue delay.

E. Unilateral Withdrawal
The parties may agree during the formation of the contract that one or both of
them can withdraw from a contract if he so chooses. This is called in French
law a clause de ddit. In practice it is coupled with an earnest money clause
(see infra).
Example: A landlord and a tenant agree on Day One that, beginning in six
months, the tenant shall rent certain premises from the landlord.
The
agreement contains both an earnest money provision and a clause de ddit,
allowing the tenant to change his mind. Thus, if the tenant changes his mind,
the landlord keeps the money paid under the earnest money provisionbut the
landlord cannot successfully sue the tenant for damages caused by the
tenants backing out of the contract.

F. Upon Material Breach


In principle, a creditor is entitled to exactly what the debtor obligated himself
to do. If, then, a performance by the debtor falls short of 100% perfect, the
debtor is in breach and, in principle, the creditor does not have to perform his
own obligation; this is because the creditors performance is said to be
conditioned upon the performance of the debtor. This is what is meant by the
phrase concurrent conditions of exchange.
Traditionally courts denied restitution to the party in breach. In 1824 the
Supreme Judicial Court of Massachusetts proclaimed, It will not admit of the
monstrous absurdity, that a man may voluntarily and without cause violate his
agreement, and make the very breach of that agreement the foundation of an
action which he could not maintain under it. Stark v. Parker, 19 Mass. 2 Pick.
267, 275 1824. Courts also opposed restitution because it would impose on
the injured party both an obligation different from the one for which that party
had bargained and the burden of proving damages resulting from the breach.

They preferred to deny to the defaulting employee recovery for the benefit
conferred on the injured employer by part performance and to deny the
defaulting purchaser recovery for the benefit conferred upon the injured vendor
by part payment.
In an historic opinion, the Supreme Court of New Hampshire in the year 1834
forcefully stated the opposite view in Britton v. Turner. Britton, who had agreed
to work for Turner for a year for $120, left his service without cause after less
than ten months and sued for the value of the work done. The court pointed
out that, under the traditional view, the forfeiture a party suffers on its breach
increases as the partys performance continues, so that the party who
attempts performance may be placed in a much worse position that he who
wholly disregards his contract. In addition, the injured party might receive a
windfall since that party may receive much more, by the breach of the
contract, than the injury which he has sustained by such breach. The court
concluded that if a party actually receives labor, or materials, and thereby
derives a benefit and advantage, over and above the damage which has
resulted from the breach of the contract by the other party, the law
thereupon raises a promise to pay to the extent to the reasonable worth of
such excess. 8 N.H. 481, 487, 492 Since then, this liberal view has become
widely accepted.
This view is now the law in all Western jurisdictions as well as Russia. The
Lithuanian code sets forth the applicable rules explicity, while the Russian code
does so implicitly.
Thus the general rule is that a debtor must perform his obligation perfectly.
See, e.g., Russian Civil Code 408.1.
A subsidiary rule is that if a debtor has performed his obligation substantially
but not exactly as promised, although the debtor is indeed in breach, this
substantial performance will preclude the other party from terminating the
contract. This in turn means that the non-breaching party will have an
absolute duty to perform. The non-breaching party will be able to offset their
own performance for the damages done by the breaching party.
Example: Henry agrees to put aluminum sideing upon the outer walls of
Esthers house, including all of the windowsills, for $5000. Note that since the
contract does not otherwise specify, this sum would be payable only upon
completion of the performance. Henry does a workmanlike job, but he misses
a windowsill on an upper floor. Esther calls another firm and determines that it
would cost $100 for the windowsill to be covered with aluminimun sideing. Can
Esther terminate the contract and not pay Henry anything? No, because it is
clear that Henry has substantially performed, and therefore Esthers duty to
pay the consideration has arisen. Nevertheless, Esther can assert a setoff
against Henry for breach of her promise and reduce the amount of her
obligation. Note that Henry, because of his substantial performance, has a
right to the full amount contracted-for minus the monetary equivalent of her
breach.

Thus, if a party can prove it has substantially performed, it is entitled to the full
price, minus the monetary equivalent of the damages.
In some cases, the condition must occur exactly as the parties contemplated it
before a duty to perform matures. If the parties have expressly stated a
condition in the contract or the court imposes an impliedin-fact condition, the
condition must be completely satisfied. This is another way of saying that not
every contract contemplates a possibility of substantial performance.
Example: Ben promises to buy Sams house if Ben obtains financing of 80%
of the purchase price, with interest no greater than 8%. If, after reasonable
efforts to secure financing, Ben can only find financing for 75% of the purchase
price at 8%, or can only find 80% financing at 8.125%, Ben will not be obligated
to perform.
As stated by T. Antony Downs (Textbook on Contract p. 275), the payment
obligation is a strict obligation, so that in theory the exact amount must be
made available unconditionally and in legal tender (English case: Betterbee v.
Davis 1811 3 Camp 70. See Lithuanian Civil Code 6.217.2.2, 6.314.4.
If a breach is willful it will be treated as material, whereas if the same non- or
faulty performance had been merely negligent (non-willful), it would have been
treated as a less-than material breach.3
This principle, for example, is
enunciated in the Lithuanian Civil Code at 6.222.1.
Example: Henry agrees to put aluminum sideing upon the outer walls of
Esthers house, including all of the windowsills, for $5000. Henry does a
workmanlike job, but he purposely leaves a windowsill on an upper floor
uncovered, stating that they will never notice. Esther calls another firm and
determines that it would cost $100 for the windowsill to be covered with
aluminimun sideing, but that if it had not been discovered, there would have
been a serious risk of rain damage. Henry has materially breached the
contract and forfeits the $5000.
Study Note: While a material breach will allow a creditor to lawfully terminate
the contract, he does not have to do so. He may simply offset the amount of
damage from his own performance.

There is some movement away from this position. See Restatement 2 nd, 374.

Restatement 2nd of Contracts 234


2 Except to the extent stated in subsection 1, where the performance of
only one party under such an exchange requires a period of time, his
performance is due at an earlier time than that of the other party, unless
the language or the circumstances indicate the contrary.
Comment e: Where the performance of one party requires a period of
time and the performance of the other party does not, their performance
cannot be simultaneous. Since one of the parties must perform first, he
must forego the security that a reqauirement of simultaneous performance
affords agaisnt disappointment of his expectation of an exchange of
performances, and he must bear the burden of financing the other party
before the latter has performed. Of course the parties can by express
provision mitigate the harshness of a rule that requires that one completely
perform before the other perform at all.
Thus, it is evident that the doctrine of material breach will have its greatest
affect upon construction contracts and upon other contracts in which
performance by one party must be performed as a condition precedent of the
other partys performance.
Example: Company X agrees to construct a building for Company B in
exchange for a certain sum of money. If Company X constructs two-thirds of
the building and then materially breaches the contract, Company B is justified
in terminating the contract. Since Company Bs performance, the payment, of
the money was conditioned (as a default provision of the code) upon the full
performance of Company X, Company B does not have to pay any money to
Company A. Company B will also get to keep the two-thirds of the building
constructed, since the courts will not award restitution in the event of a
material breach. (Regarding the issues of restititution and termination, see the
section on Methodology of Termination for Material Breach below at p. 6.)
Note on Terminology:
The EPCL uses the term fundamental breach instead of material breach, but
the meaning is the same.

G. Methodology of Termination For Material Breach


All of the legal systems we are examining are in accord: if there is a material
breach, the contract can be terminated. There are, however, two entirely
different regimes. One is prospective: it treats the contract as having been in
force and then terminated. The other is essentially retrospective: essentially
the contract is thought of as being rescinded ab initio. It is easy to see that
this second type of approach would result in a code wherein the general rule
would be that a contract can be terminated (rescinded) only by a judge and not
by a party, since rescission and a settlement of equities (restitution) is a
complicated matter4.
4

Its real difficulty lies in relation to third parties. If a good was transferred to the debtor, and if
the contract is treated as rescinded, then title would immediately vest in the creditor.

Retrospective Systems:
Some systems influenced by the French model are retrospective in this sense.
The general rule is that only the court can terminate a contract; a party can
terminate the contract only if this is provided for by the contract itself. (Note
that in practice the vast majority of contracts contain such a provision.)
Thus, the 1964 Civil Code of (occupied) Lithuania 5 and the 1964 Civil Code of
the Russian Soviet Federated Republic both followed the French model. The
present-day Russian civil code continues to do so (406 and 450).
Example: A contract is silent as to termination for material breach. Under
French law as well as Russian law, in the event of material breach the
aggrieved party must apply to the court for termination (rescission); it cannot
terminate the contract by serving notice. If, however, the contract states that
the parties can unilaterally terminate the contract for material breach (without
a court proceeding) then they may do so.
In cases where the parties are to perform their obligations in instalments,
restitution will be given only prospectively. Thus in a contract of rental with
monthly payments, restitution would be only prospective.
If however the parties are to perform their obligations over time, but the court
holds that the contract is one of the entirety, then restitution will be given
retrospectively, almost as if there had been no contract formed. In certain
cases this can result in over-compensation to the aggrieved party.
Example: Father pays 1000 Fr to Company X which agrees to teach Fathers
Son how to drive, with the teaching to continue until Son passes the requisite
exams to obtain his licence. Company X materially breaches the contract after
having given a complete course of instruction to Son, subsequent to which Son
failed the drivers exam and demanded more lessons. The court found that this
contract was not one of instalments. Thus the Father received full restitution
(the full 1000 Fr), and he has a claim for damages. France: Cass.civ. 1re, 13
January 1987. (Other systems would merely give the father a claim for
damages.)
The difference between regular nullity and this type of rescission is that the
aggrieved party has a right to obtain damages and may enforce a penalty
clause.
Prospective Systems:
In the English and American legal systems, however, termination is
prospective. Hence the general rule is that a party can terminate a contract for
material breach on its own, without the need for a court order.
5

1964 Civil Code of (occupied) Lithuania 312, 313 (rent); 262 (purchase-sale); 371 (nonpaying rental).

Additionally, since the termination is prospective, the termination does not act
to re-vest the ownership of property which has been transferred to the debtor
by the aggrieved party. The aggrieved party ordinarily only has a right to sue
for the (unpaid) purchase price.
Thus, if services have been provided by the breaching party, if there has not
been substantial performance, he is not entitled to any recovery. If services
were rendered by the aggrieved party, the aggrieved party has an action for
damages, or may recover the value of the services rendered (quantum meruit).
In the case of money paid by the aggrieved party: since the general rule is that
damages are rewarded, an aggrieved party will be able to recover the amount
paid only in the total absence of consideration. (This does not mean the
aggrieved party cannot obtain an award for damages.)
The Principles of European Contract Law have also adopted this prospective
regime.
Principles of European Contract Law
9:303: Notice of Termination
(1) A party's right to terminate the contract is to be exercised by notice to
the other party.
(2) The aggrieved party loses its right to terminate the contract unless it
gives notice within a reasonable time after it has or ought to have become
aware of the non-performance.
(3) (a) When performance has not been tendered by the time it was due,
the aggrieved party need not give notice of termination before a tender
has been made. If a tender is later made it loses its right to terminate if it
does not give such notice within a reasonable time after it has or ought to
have become aware of the tender.
(b) If, however, the aggrieved party knows or has reason to know that the
other party still intends to tender within a reasonable time, and the
aggrieved party unreasonably fails to notify the other party that it will not
accept performance, it loses its right to terminate if the other party in fact
tenders within a reasonable time.
From 2001, with the advent of the new Civil Code, this is also the Lithuanian
position.
Civil Code of Lithuania
6.218.1 In cases provided for under 6.217 [i.e., in the vast majority of
cases] the aggrieved party can terminate the contract unilaterally, without
court action. The other party must be given the time period for notice of
termination set forth in the contract, and if the contract does not set forth
any such period, then the period will be 30 days.
The Lithuanian code has an unusual time-delay built into its system of
termination which diverges from the European Principles (and also from

American law), wherein when in the case of material breach, a party terminates
the contract by giving notice to the other party, the contract nevertheless
remains in effect until expiration of a time period set out in the contract or for
thirty days. Only after this delay is the contract is terminated. In other words,
the notice of termination, once served upon the other party, goes into effect
upon the expiration of the time set out in the contract or in thirty days.
Example. Lithuanian law: A contract between Moneypenney and Goodnight
provides that, in the case of material breach, notice of termination must be
given forty days in advance. Moneypenney commits a material breach.
Goodnight serves a notice of termination upon Moneypenney. The termination
goes into effect after forty days.
Note: Because of the doctrine of non adimpleti contractu (the defense of nonexecution), Goodnight can withhold her performance from the time of
Moneypennys breach. The delay built into the statute is in order to allow a
contract to be cured (see our section on Cure at p.44 and our section on
Termination for Delay immediately below at p.9). This rule is set out as well in
the Lithuanian Civil Code 6.209.2.
Note: In the case of anticipatory repudiation (see p.18), no notice is required.
Termination for Delay
The Principles of European Contract law set out a very interesting section on
termination for delay. The underlying idea is that a delay is not usually a
material breach; time is not usually of the essence. By use of this section, time
can be made to be of the essence, and therefore any uncertainty as to the
materiality of the delay can be avoided.
Example: A contract calls for the debtor to provide a service by a certain date.
The debtor is late. The creditor would like to terminate the contract for
material breach. But it may not at all be clear that the delay in truth
constitutes a material breach. Therefore if he does terminate the contract, he
may very well himself be committing a material breach.
The Principles of European Contract Law addresses this problem as follows:

Principles of European Contract Law


8.106: Notice Fixing Additional Period for Performance
(1) In any case of non-performance the aggrieved party may by notice to
the other party allow an additional period of time for performance.
(2) During the additional period the aggrieved party may withhold
performance of its own reciprocal obligations and may claim damages, but
it may not resort to any other remedy. If it receives notice from the other
party that the latter will not perform within that period, or if upon expiry of
that period due performance has not been made, the aggrieved party may
resort to any of the remedies that may be available under chapter 9.
(3) If in a case of delay in performance which is not fundamental the
aggrieved party has given a notice fixing an additional period of time of
reasonable length, it may terminate the contract at the end of the period of
notice. The aggrieved party may in its notice provide that if the other party
does not perform within the period fixed by the notice the contract shall
terminate automatically. If the period stated is too short, the aggrieved
party may terminate, or, as the case may be, the contract shall terminate
automatically, only after a reasonable period from the time of the notice.
The Civil Code of Lithuania reproduces 8:106 in part. Instead of referring,
however, to the non-performance of an obligation, the code refers to the nonperformance of a contract, which is not really the same thing. At any rate, the
applicable sections can be translated as follows:
6.209
Papildomas
terminas
sutariai vykdyti
1.
Jeigu
sutartis
nevykdyta,
nukentjusi alis gali ratu nustatyti
proting papildom termin sutariai
vykdyti ir praneti apie tai kitai
aliai.
3. Jeigu termino praleidimas nra
esminis sutarties paeidimas ir
nukentjusi alis nustat proting
papildom termin, tai pasibaigus
iam
terminui
ji
gali
sutart
nutraukti. Jeigu papildomas terminas
nustatytas neprotingai trumpas, tai
jis turi bti atitinkamai pailgintas.
Nukentjusi alis savo praneime dl
papildomo termino gali nurodyti, kad
sutartis bus vienaalikai nutraukta,
jeigu kita alis jos nevykdys per
nustatyt papildom termin.

Civil Code of Lithuania


6.209 Additional Time Period For
Performance
1. If the agreement has not been
performed, the aggrieved party
can set an additional and
reasonable time period for its
performance by giving written
notice to the other party.
3. If the tardy performance was not
material, and if the aggrieved
party did set a reasonable
additional time period for its
performance, then at the end of
this period it can terminate the
contract. If the additional time
period was unreasonably short,
then it must be lengthened. The
aggrieved party in its notice
setting the additional time period
can state that the contract will be
unilaterally terminated if the
other party does not perform it
during the additional time period.

In both the Principles and the Lithuanian Code, the effect of the additional time

period allows the aggrieved party to set a condition which, if not fulfilled, is
clearly a material breach.
Note that the Principles are explicitthe aggrieved party may provide in its
notice that unless the wrongdoer performs within the additional time period
that the contract will terminate automatically. Here the Lithuanian code
diverges from the European Principles. Unfortunately this greatly undercuts
the utility of the article in question, since in every case the Lithuanian
aggrieved party will have to terminate the contract according to the general
provisions regarding terminationmeaning that it will have to provide notice of
termination, which will come into effect only upon the expiration of the time
period set forth in the contract or in thirty days.6

This second waiting period poses interesting questions regarding the power of cure: see p.44.

Case # 1

Jacob & Youngs v. Kent


New York: Court of Appeals (1921)
230 N.Y.239
Note: The New York Court of Appeals is the highest court in the State of New
York.
CARDOZO, J. The plaintiff built a country residence for the defendant a cost of
upwards of $77,000, and now sues to recover a balance of $3,483.46,
remaining unpaid. The work of construction ceased in June, 1914, and the
defendant then began to occupy the dwelling. There was no complaint of
defective performance until March, 1915. One of . the specifications for the
plumbing work provides that
All wrought-iron pipe must be well galvanized, lap welded pipe of the
grade known as "standard pipe" of Reading manufacture.
The defendant learned in March, 1915, that some of the pipe, instead of being
made in Reading, was the product of other factories. The plaintiff was
accordingly directed by the architect to do the work anew. The plumbing was
then encased within the walls except in a few places where it had to be
exposed. Obedience to the order meant more than the substitution of other
pipe. It meant the demolition at great expense of substantial parts of the
completed structure. The plaintiff left the work untouched, and asked for a
certificate that the final payment was due. Refusal of the certificate was
followed by this suit.
The evidence sustains a finding that the omission of the prescribed brand of
pipe was neither fraudulent nor willful. It was the result of the oversight and
inattention of the plaintiffs subcontractor. Reading pipe is distinguished from
Cohoes pipe and other brands only by the name of the manufacturer stamped
upon it at intervals of between six and seven feet. Even the defendant's
architect, though he inspected the pipe upon arrival, failed to notice the
discrepancy. The plaintiff tried to show that the brands installed, though made
by other manufacturers, were the same in quality, in appearance, in market
value, and in cost as the brand stated in the contract that they were, indeed,
the same thing, though manufactured in another place. The evidence was
excluded, and a verdict directed for the defendant. The Appellate Division
reversed, and granted a new trial.
We think the evidence, if admitted, would have supplied some basis for the
inference that the defect was insignificant in its relation to the project. The
courts never say that one who makes a contract fills the measure of his duty by
less than full performance. They do say, however, that an omission, both trivial
and innocent, will sometimes be atoned for by allowance of the resulting
damage, and will not always be the breach of a condition to be followed by a
forfeiture. Spence v. Ham, 163 N.Y. 220, 57 N.E. 412, 51 L.R.A. 238; Woodward
v. Fuller, 80 N.Y. 312; Glacius v. Black, 67 N.Y. 563, 566; Bowen v. Kimbell, 203

Mass. 364, 370, 89 N.E. 542, 133 Am. St. Rep. 302. The distinction is akin to
that between dependent and independent promises, or between promises and
conditions. Anson on Contracts (Corbin's ed.) 367; 2 Williston on Contracts,
842. Some promises are so plainly independent that they can never by fair
construction be conditions of one another. Rosenthal Paper Co. v. Nat. Folding
Box & Paper Co., 226 N.Y. 313, 123 N.E. 766; Bogardus v. N.Y. Life Ins. Co., 101
N.Y. 328, 4 N.E. 522. Others are so plainly dependent that they must always be
conditions. Others, though dependent and thus conditions when there is
departure in point of substance, will be viewed as independent and collateral
when the departure is insignificant. 2 Williston on Contracts, 841, 842;
Eastern Forge Co. v. Corbin, 182 Mass. 590, 592, 66 N.E. 419; Robinson v.
Mollett, L.R., 7 Eng. & Ir. App. 802, 814; Miller v. Benjamin, 142 N.Y. 613, 37 N.E.
631. Considerations partly of justice and partly of presumable intention are to
tell us whether this or that promise shall be placed in one class or in another.
The simple and the uniform will call for different remedies from the multifarious
and the intricate. The margin of departure within the range of normal
expectation upon a sale of common chattels will vary from the margin to be
expected upon a contract for the construction of a mansion or a "skyscraper."
There will be harshness sometimes and oppression in the implication of a
condition when the thing upon which labor has been expended is incapable of
surrender because united to the land, and equity and reason in the implication
of a like condition when the subject-matter, if defective, is in shape to be
returned. From the conclusion that promises may not be treated as dependent
to the extent of their uttermost minutiae without a sacrifice of justice, the
progress is a short one to the conclusion that they may not be so treated
without a perversion of intention. Intention not otherwise revealed may be
presumed to hold in contemplation the reasonable and probable. If something
else is in view, it must not be left to implication. There will be no assumption of
a purpose to visit venial faults with oppressive retribution.
Those who think more of symmetry and logic in the development of legal rules
than of practical adaptation to the attainment of a just result will be troubled by
a classification where the lines of division are so wavering and blurred.
Something, doubtless, may be said on the score of consistency and certainty in
favor of a stricter standard. The courts have balanced such considerations
against those of equity and fairness, and found the latter to be the weightier.
The decisions in this state commit us to the liberal view, which is making its
way, nowadays, in jurisdictions slow to welcome it. Dakin & Co. v. Lee, 1916, 1
K.B. 566, 579. Where the line is to be drawn between the important and the
trivial cannot be settled by a formula. "In the nature of the case precise
boundaries are impossible." 2 Williston on Contracts, 841. The same omission
may take on one aspect or another according to its setting. Substitution of
equivalents may not have the same significance in fields of art on the one side
and in those of mere utility on the other. Nowhere will change be tolerated,
however, if it is so dominant or pervasive as in any real or substantial measure
to frustrate the purpose of the contract. Crouch v. Gutmann, 134 N.Y. 45, 51, 31
N.E. 271, 30 Am. St. Rep. 608. There is no general license to install whatever,
in the builder's judgment, may be regarded as "just as good." Easthampton
L.&C. Co., Ud., v. Worthington, 186 N.Y.407, 412, 79 N.E. 323. The question is
one of degree, to be answered, if there is doubt, by the triers of the facts

(Crouch v. Gutmann; Woodward v. Fuller, supra), and, if the inferences are


certain, by the judges of the law (Easthampton L.&C. Co., Ltd., v. Worthington,
supra). We must weigh the purpose to be served, the desire to be gratified, the
excuse for deviation from the letter, the cruelty of enforced adherence. Then
only can we tell whether literal fulfillment is to be implied by law as a condition.
This is not to say that the parties are not free by apt and certain words to
effectuate a purpose that performance of every term shall be a condition of
recovery. That question is not here. This is merely to say that the law will be
slow to impute the purpose, in the silence of the parties, where the significance
of the default is grievously out of proportion to the oppression of the forfeiture.
The willful transgressor must accept the penalty of his transgression. Schultze
v. Goodstein, 180 N.Y. 248, 251, 73 N.E. 21; Desmond-Dunne Co. v. FriedmanDoscher Co., 162 N.Y. 486, 490, 56 N.E. 995. For him there is no occasion to
mitigate the rigor of implied conditions. The transgressor whose default is
unintentional and trivial may hope for mercy if he will offer atonement for his
wrong. Spence v. Ham, supra.
In the circumstances of this case, we think the measure of the allowance is not
the cost of replacement, which would be great, but the difference in value,
which would be either nominal or nothing. Some of the exposed sections might
perhaps have been replaced at moderate expense. The defendant did not limit
his demand to them, but treated the plumbing as a unit to be corrected from
cellar to roof. In point of fact, the plaintiff never reached the stage at which
evidence of the extent of the allowance became necessary. The trial court had
excluded evidence that the defect was unsubstantial, and in view of that ruling
there was no occasion for the plaintiff to go farther with an offer of proof. We
think, however, that the offer, if it had been made, would not of necessity have
been defective because directed to difference in value. It is true that in most
cases the cost of replacement is the measure. Spence v. Ham, supra. The
owner is entitled to the money which will permit him to complete, unless the
cost of completion is grossly and unfairly out of proportion to the good to be
attained. When that is true, the measure is the difference in value.
Specifications call, let us say, for a foundation built of granite quarried in
Vermont. On the completion of the building, the owner learns that through the
blunder of a subcontractor part of the foundation has been built of granite of
the same quality quarried in New Hampshire. The measure of allowance is not
the cost of reconstruction. "There may be omissions of that which could not
afterwards be supplied exactly called for by the contract without taking down
the building to its foundations, and at the same time the omission may not
affect the value of the building for use or otherwise, except so slightly as to be
hardly appreciable." Handy v. Bliss, 204 Mass. 513, 519, 90 N.E. 864, 134 Am.
St. Rep. 673. Cf. Foeller v. Heintz, 137 Wis. 169, 178, 118 N.W. 543, 24 L.R.A.
(N.S.) 321; Ob-eriies v. Bullinger, 132 N.Y. 598, 601, 30 N.E. 999; 2 Williston on
Contracts, 805, p. 1541. The rule that gives a remedy in cases of substantial
performance with compensation for defects of trivial or inappreciable
importance has been developed by the courts as an instrument of justice. The
measure of the allowance must be shaped to the same end.
The order should be affirmed, and judgment absolute directed in favor of the
plaintiff upon the stipulation, with costs in all courts.

MCLAUGHLIN, J. I dissent. The plaintiff did not perform its contract. Its failure to
do so was either intentional or due to gross neglect which, under the
uncontradicted facts, amounted to the same thing, nor did it make any proof of
the cost of compliance, where compliance was possible.
Under its contract it obligated itself to use in the plumbing only pipe (between
2,000 and 2,500 feet) made by the Reading Manufacturing Company. The first
pipe delivered was about 1,000 feet and the plaintiff's superintendent then
called the attention of the foreman of the subcontractor, who was doing the
plumbing, to the fact that the specifications annexed to the contract required
all pipe used in the plumbing to be of the Reading Manufacturing Company.
They then examined it for the purpose of ascertaining whether this delivery
was of that manufacture and found it was. Thereafter, as pipe was required in
the progress of the work, the foreman of the subcontractor would leave word at
its shop that he wanted a specified number of feet of pipe, without in any way
indicating of what manufacture. Pipe would thereafter be delivered and
installed in the building, without any examination whatever. Indeed, no
examination, so far as appears, was made by the plaintiff, the subcontractor,
defendant's architect, or any one else, of any of the pipe except the first
delivery, until after the building had been completed. Plaintiffs architect then
refused to give the certificate of completion, upon which the final payment
depended, because all of the pipe used in the plumbing was not of the kind
called for by the contract. After such refusal, the subcontractor removed the
covering or insulation from about 900 feet of pipe which was exposed in the
basement, cellar, and attic, and all but 70 feet was found to have been
manufactured, not by the Reading Company, but; by other manufacturers,
some by the Cohoes Rolling Mill Company, some by the National Steel Works,
some by the South Chester Tubing Company, and some which bore no
manufacturer's mark at all. The balance of the pipe had been so installed in the
building that an inspection of it could not be had without demolishing, in part at
least, the building itself.
I am of the opinion the trial court was right in directing a verdict for the
defendant. The plaintiff agreed that all the pipe used should be of the Reading
Manufacturing Company. Only about two-fifths of it, so far as appears, was of
that kind. If more were used, then the burden of proving that fact was upon the
plaintiff, which it could easily have done, since it knew where the pipe was
obtained. The question of substantial performance of a contract of the
character of the one under consideration depends in no small degree upon the
good faith of the contractor. If the plaintiff had intended to, and had, complied
with the terms of the contract except as to minor omissions, due to
inadvertence, then he might be allowed to recover the contract price, less the
amount necessary to fully compensate the defendant for damages caused by
such omissions. Woodward v. Fuller, 80 N.Y. 312; Nolan v. Whitney, 88 N.Y. 648.
But that is not this case. It installed between 2,000 and 2,500 feet of pipe, of
which only 1,000 feet at most complied with the contract. No explanation was
given why pipe called for by the contract was not used, nor that any effort
made to show what it would cost to remove the pipe of other manufacturers
and install that of the Reading Manufacturing Company. The defendant had a
right to contract for what he wanted. He had a right before making payment to

get what the contract called for. It is no answer to this suggestion to say that
the pipe put in was just as good as that made by the Reading Manufacturing
Company, or that the difference in value between such pipe and the pipe made
by the Reading Manufacturing Company would be either "nominal or nothing."
Defendant contracted for pipe made by the Reading Manufacturing Company.
What his reason was for requiring this kind of pipe is of no importance. He
wanted that and was entitled to it. It may have been a mere whim on his part,
but even so, he had a right to this kind of pipe, regardless of whether some
other kind, according to the opinion of the contractor or experts, would have
been "just as good, better, or done just as well." He agreed to pay only upon
condition that the pipe installed were made by that company and he ought not
to be compelled to pay unless that condition be performed. Schultze v.
Goodstein, 180 N.Y. 248, 73 N.E. 21; Spence v. Ham, supra; Steel S.&E.C. Co. v.
Stock, 225 N.Y. 173, 121 N.E. 786; Van Clief v. Van Vechten, 130 N.Y. 571, 29
N.E. 1017; Glacius v. Black, 50 N.Y. 145, 10 Am. Rep. 449; Smith v. Brady, 17
N.Y. 173, and authorities cited on page 185, 72 Am. Dec. 442. The rule,
therefore, of substantial performance, with damages for unsubstantial
omissions, has no application. Crouch v. Guimann, 134 N.Y. 45, 31 N.E. 271, 30
Am. St. Rep. 608; Spence v. Ham, 163 N.Y. 220, 57 N.E. 412, 51 L.R.A. 238.
What was said by this court in Smith v. Brady, supra, is quite applicable here:
I suppose it will be conceded that every one has a right to build his house,
his cottage or his store after such a model and in such style as shall best
accord with his notions of utility or be most agreeable to his fancy. The
specifications of the contract become the law between the parties until
voluntarily changed. If the owner prefers a plain and simple Doric column,
and has so provided in the agreement, the contractor has no right to put in
its place the more costly and elegant Corinthian. If the owner, having
regard to strength and durability, has contracted for walls of specified
materials to be laid in a particular manner, or for a given number of joists
and beams, the builder has no right to substitute his own judgment or that
of others. Having departed from the agreement, if performance has not
been waived by the other party, the law will not allow him to allege that he
has made as good a building as the one he engaged to erect. He can
demand payment only upon and according to the terms of his contract,
and if the conditions on which payment is due have not been performed,
then the right to demand it does not exist. To hold a different doctrine
would be simply to make another contract, and would be giving to parties
an encouragement to violate their engagements, which the just policy of
the law does not permit. (17 N.Y. 186, 72 Am. Dec. 442).
I am of the opinion the trial court did not err in ruling on the admission of
evidence or in directing a verdict for the defendant.
For the foregoing reasons I think the judgment of the Appellate Division should
be reversed and the judgment of the Trial Term affirmed.
Order affirmed, etc.

Exercises
1.

2.

3.

4.

5.

Acme Programming, Inc., is hired to create a computer program for


Purchaser Corporation in exchange for monetary consideration.
The
contract between the two entities requires that Acme not incorporate any
pre-existing software of whatever type into the final product. It further
states that Purchaser shall pay one-half of the total amount due upon
presentation by Acme of the first half of the programming. Acme performs
half of the requisite programming, transfers this half to Purchaser, and
Purchaser pays Acme as provided for under the contract. Acme owns a
piece of programming, called the X Factor, which would fit beautifully into
the program that they are producing for Purchaser. In an effort to cut costs,
Acmes Chief Executive Officer, Mr. Frank, orders that the X Factor be
incorporated into the finished product.
The finished program works
perfectly. It is rejected by Purchaser, however, upon their finding out that
indeed it incorporates the X Factor. Purchaser terminates the contract.
What result?
Joes Bookkeeping Service, Inc. agrees to perform general bookeeping
services for Petes Big Corporation in exchange for monetary consideration,
to be payable on a monthly basis. There is no expiration date set for the
contract. Pete is the Chief Executive Officer of Petes Big Corporation.
Although Joes Bookeeping Service, Inc. is providing adequate service, Pete
would like to cancel the contract and give it to his nephew, Junior, who has
just graduated college with an accounting degree. What is your advice?
Corporation A and Corporation B are small corporations. They enter into
an agreement and each party performs their obligations. Corporation As
Chief Executive Officer asks you whether they need to sign a document
attesting that each has performed their obligations under the contract
satisfactorily. This question is of some concern for Corporation A, since they
have thousands of such contracts each year. What is your advice?
Corporation X and Corporation Z have entered into a bilateral contract
whose term is to expire five years from the present date. The contract
expressly provides that either party can terminate the contract at their
discretion upon ten days notice to the other party. Some months after the
formation of the contract the Chief Executive Officer of Corporation X calls
you. In order to continue to perform its obligations under the contract for
the next twelve months, Corporation X must immediately purchase certain
supplies in bulk from a third party supplier. This will require the expenditure
of a significant amount of money. The CEO wants to know, however, if there
is any way legally to guarantee that Corporation Z will not terminate the
contract, leaving Corporation X with a large amount of supplies and no use
for them. What would be your advice?
Jonas Jonaitis agreed to write a computer program for Petras Ponaitiss
business, to be completed in six months. After completing half of the
program, Jonaitis demanded that Ponaitis pay him one-half of the promised
fee. Ponaitis refused, and Jonaitis quit writing the program and told Ponaitis

that he would write no more. Ponaitis hired another programmer to write


the program. Jonaitis sued Ponaitis. What result? 7 MORE ON DELAY,
TERMINATION, EFFECT

C. Anticipatory Repudiation
Principles of European Contract Law
9.304: Anticipatory Non-Performance
Where prior to the time for performance by a party it is clear that there will
be a fundamental non-performance by it the other party may terminate the
contract.
Lietuvos Civilinis kodeksas 6.219I anksto numatomas sutarties
nevykdymas
alis gali nutraukti sutar, jeigu iki
sutarties
vykdymo
termino
pabaigos i konkrei aplinkybi ji
gali numanyti, kad kita alis paeis
sutart i esms.

Civil Code of Lithuania


6.219 - Anticipatory Breach:
A party can terminate a contract if,
prior to the completion of the
contract, concrete facts would allow
the party to conclude that the other
party will commit a material breach.

General Rule: An innocent party may terminate a contract because of an


anticipatory breach of the other party.
We have seen that a party that has not performed his contractual obligation
can be forced to do so or to pay money damages. What, however, happens if a
party to a contract, at a time prior to the time specified for his performance,
indicates by word or deed that he shall not perform his obligation? Must the
other, non-breaching, party wait until the time scheduled for performance and
only then sue for damages?
No. In such a case, the non-breaching party may terminate the contract at
once, because the other party has materially breached the contract in
anticipation (prior to) of its performance. This is the doctrine of anticipatory
repudiation (otherwise known as anticipatory breach).
A repudiation may be manifested by word or by act. If by word, the words must
unambiguously and unequivocally express the wrongdoers intention to breach.
The breach concerned must be a material one, and it must be one which is
directly communicated by one party to another.
Example: Were having problems. Im worried that we wont get the project
done by the time agreed in the contract. This does not constitute anticipatory
breach as it is an expression of doubt.
But
7

Adapted from a problem in Crandall Whaley, Cases, Problems, and Materials on Contracts, 2 nd
Ed. (Boston: Little, Brown, and Co., 1993.

Example: The contract calls for Builder to construct a building and calls for
periodic payments. Owner tells Builder that there will be no more money for
him after December 15. This is an anticipatory repudiation.
Example: Builder goes to a party where Owner is not in attendance. While
there, he states to witnesses that he does not intend to comply with the
requirements of the contract with Owner.
This is not an anticipatory
repudiation, because Builder has not communicated it to Owner directly.
Good Faith: Good faith is not a defense. Therefore if a party mistakenly
asserts a right it does not have, or demands a performance which is not in the
contract, while threatening not to perform unless its demands are satisfied, this
will be considered anticipatory repudiationeven if done in good faith.
Example: X mistakenly believes it has the right to have a certain computer
program called Program WWW installed as part of the purchase price of the
computers it has purchased. X tells the Seller that Unless you install Program
WWW in all of these computers we are cancelling the deal. X has repudiated.
Repudiation by Conduct
A wrongdoers voluntary action which renders him prospectively unable to
perform can also be an anticipatory repudiation.
Example: Owner enters into a contract by which he obligates himself to lease
certain premises to Lessee One by Day Ten. On Day Five Owner leases the
premises to another lessee for one year. Even though Owner could conceivably
come to an agreement with the other lessee to rescind or cancel their
agreement and then perform without breach, nevertheless Lessee One is
justified in treating this as an anticipatory breach because satisfactory
performance by the Owner is so unlikely.
Anglo-American law and Continental law both distinguish between anticipatory
repudiation that is a result of voluntary action and a partys apparent inability
to perform that is not a result of his voluntary action.
Example: If John has agreed to plow Farmers fields on March 10 th, but Johns
tractor is destroyed on March 5th, there is no repudiation of the contract. John
may still be able to perform by replacing the lost equipment before the March
10th date for performance.
Thus, if an anticipatory breach is verbal or caused by the voluntary actions of
the party, it is the general rule that the non-breaching party has the right to
terminate the contract immediately, without the need to give advance notice to
the breaching party (the notice would allow the breaching party to give
adequate assurance of his performance). The Lithuanian Civil Code treats of
the matter in a separate section, 6.219, from the general case, which does
require such advance notice. The separate section does not require notice to

be sent, and at any rate the notice would be superfluous, by definition.


Notably, the French jurisprudence also dispenses with the requirement of
notice in such cases.8
The CISG treats of the question of notice more obliquely. It requires the nonbreaching party (in cases of non-verbal repudiation or prospective inability to
perform) to inform the other that the non-breaching party intends to terminate
the contract; in such a case, should the other party assure the non-breaching
party that it does intend to terminate the contract, the non-breaching party
would not be able to terminate the contract.
CISG
72 straipsnis

CISG
Article 72

(1) Jeigu iki sutarties vykdymo


datos tampa aiku, kad viena i ali
padarys esmin sutarties paeidim,
kita alis gali pareikti apie sutarties
nutraukim.

(1) If prior to the date for


performance of the contract it is
clear that one of the parties will
commit a fundamental breach of
contract, the other party may
declare the contract avoided.

(2) Jeigu leidia laikas, alis,


ketinanti
pareikti apie sutarties
nutraukim, privalo nusisti proting
praneim kitai aliai tam, kad
suteikt
jai
galimyb
pateikti
pakankam garantij, kad ji vykdys
savo prievoles.

(2) If time allows, the party


intending to declare the contract
avoided must give reasonable notice
to the other party in order to permit
him to provide adequate assurance
of his performance.

(3) Ankstesniojo punkto reikalavimai (3)


The
requirements
of
the
netaikomi, jeigu kita alis pareik, preceding paragraph do not apply if
kad ji nevykdys savo prievoli.
the other party has declared that he
will not perform his obligations.
French Law:
If a party makes manifest his intent to breach, it is true that the French
jurisprudence dispenses with the requirement of notice (mise en demeure) in
such cases9. But nevertheless where an obligation is due only upon the
occurence of a certain event (like a date), then performance cannot be claimed
before that event occurs10 and the innocent party cannot claim damages or
have the contract rescinded before that occurrence. It is therefore sometimes
asserted that the doctrine of anticipatory breach is unknown in French law.
8

FLOC p. 238 fn.29.

FLOC p. 238 fn.29.

10

For a discussion of mis en demeure, see infra at p.___. See also John Bell, et al., Principles of
French Law. Oxford University Press 1999 at p.337.

Netherlands Law:
Anticipatory breach is known in Netherlands law.
6.83 Default commences without the formality of putting into default:
... c. Where the creditor must conclude from a communication by the
debtor that the latter will fail in the performance of the obligation.
6.80.1 The consequence of non-performance take effect even before the
claim is exigible:
a. if it is certain that performance without failure will be impossible;
b. if the creditor must conclude from a communication by the debtor
that the latter will fail in performance ... .

D. Assurance
Sometimes, however, a partys conduct, while shaking the confidence of the
other party that the obligation will be performed, falls short of being clearly a
repudiation. This brings us to the matter of assurance.
Principles of European Contract Law
8:105: Assurance of Performance
(1) A party who reasonably believes that there will be a fundamental nonperformance by the other party may demand adequate assurance of due
performance and meanwhile may withhold performance of its own
obligations so long as such reasonable belief continues.
(2) Where this assurance is not provided within a reasonable time, the
party demanding it may terminate the contract if it still reasonably believes
that there will be a fundamental non-performance by the other party and
gives notice of termination without delay.
***

Lietuvos Respublikos Civilinis


Kodeksas
6.219.
I
anksto
numatomas
sutarties nevykdymas
alis gali nutraukti sutar, jeigu iki
sutarties
vykdymo
termino
pabaigos i konkrei aplinkybi ji
gali numanyti, kad kita alis paeis
sutart i esms.
6.220. Patvirtinimas apie tinkam
vykdym
1.
alis,
kuri
atsiveldama

aplinkybes tikisi, kad kita alis gali i


esms paeisti sutart, turi teis i
pastarosios
alies
pareikalauti
patvirtinti, kad i sutart vykdys
tinkamai. alis gali sustabdyti savo
sutartini prievoli vykdym tol, kol
kita sutarties alis patvirtina, kad ji
sutar tikrai vykdys tinkamai.
2. Jeigu io straipsnio 1 dalyje
nurodyto patvirtinimo alis negauna
per proting termin, ji gali sutart
nutraukti.

Civil Code of Lithuania


6.219 Anticipatory Repudiation
A party can terminate a contract if,
prior to the completion of the
contract, concrete facts would allow
the party to conclude that the other
party will commit a material breach.
6.220. Assurance
1.If a party has reasonable cause to
believe that the other party may
commit a material breach, then the
party has the right to demand that
the
other
party
provide
an
assurance of that it will perform the
contract satisfactorily. A party may
suspend its own performance until
such time as the other party has
provided
assurance
of
its
satisfactory performance.
2. If a party does not receive such
an assurance as provided for under
subsection 1 above in a reasonable
time, it can terminate the contract.

Netherlands Civil Code


6.80.1 The consequence of non-performance take effect even before the
claim is exigible:
c. if the creditor has good reasons to fear that the debtor will fail in
the performance and the debtor does not comply with a written
warning indicating those reasons and requesting the debtor to
confirm that he is willing to perform his obligation within a
reasonable time period specified in that warning.
Assurance
Various codes, including the UCC, provide that, under certain circumstances, a
party may demand an assurance from the other party that it intends to perform
its obligation. In such an instance, the party demanding the assurance may
suspend its own performance until such time as he receives the assurance; if
no assurance is forthcoming within a reasonable time, he may terminate the
contract.
The applicable UCC provisions appear to have been meant to deal with the
problem of the prospective, non-volitional (apparent) inability to perform, in
that a party really should be required to give notice of his intention to
terminate the contract unless assurance is received, since by definition the
apparent inability to perform is only apparent, not unequivocal. The Lithuanian

and Netherlands civil codes are in accord. Thus if a partys prospective


inability to perform is less than a voluntary repudiation, neither under the UCC,
nor the CISG, nor the Lithuanian or Netherlands codes will a party have the
right to terminate the contract without first seeking assurance from the other
party.
Example. The obligor (debtor) states in writing that it shall not perform under
any circumstances. Under Lithuanian Civil Code 6.219, the obligee (party notin-breach, i.e., the creditor), can terminate (cancel) the contract at once. Note
that notice is not required. Note also that the obligee MAY request assurance.
Example. The obligee, Company A, learns that the obligor has taken on some
extra work for third parties, and therefore Company A begins to doubt whether
the obligee can perform its obligation to the obligee (Company A). Since this
(the taking on of extra work) is less than an unequivocal voluntary
renunciation, then, under Netherlands Civil Code 6.80.1, the obligee
(Company A) may not terminate (cancel the contract) at once. It may only
demand assurance. If the assurance is not made within a reasonable time, or if
it is not commercially reasonable, then the obligee (Company A) has the right
to cancel the contract. Note that notice would not be required.
There is, however, a practical problem that one should look out for. If a party
does indeed voluntarily repudiate a contract (by, let us say, an unequivocal
statement), and if the non-breaching party then elects to request an assurance
instead of terminating the contract, and if then the putative wrongdoer does
issue an assurance, then the matter rests on the reasonability of the
assurance. If it is not in good faith, the court should determine that the
aggrieved (innocent) party (the party which had requested the assurance) did
nevertheless have a right to terminate the contract. This would be a direct
result of the general requirement of good faith.
Table of Permutations11
Unequivocable
Demand
for Non-breaching
verbal
assurance not party
may
renunciation =
necessary
terminate
at
reasonable
once.
belief that party
will not perform
11

Lithuanian Civil Code is here abbreviated at the LT Civil Code.

Unequivocable
verbal
renunciation =
reasonable
belief that party
will not perform
Voluntary
act
leading
to
reasonable
belief
that
wrongdoer will
not perform

IF Demand for And


If
assurance
wrongdoer
12
made
provides
reasonable
assurance-Under CISG a
demand
for
assurance
must be made
IF
time
permits; under
LT Civil Code
and UCC no
such demand
is necessary

Voluntary
act Under CISG a
leading
to demand
for
reasonable
assurance
belief
that must be made
wrongdoer will IF
time
not perform
permits; under
LT Civil Code
and UCC no
such demand
is necessary

12

the --then
the
nonbreaching party may
not terminate the
contract.

Under LT Civil
Code and the
UCC the nonbreaching party
has the right to
terminate
at
once.
Under CISG the
non-breaching
party has the
right to terminate
if
adequate
assurance is not
received
within
30 days
If a demand is
made under any
of
the
three
codes described,
under
these
circumstances, if
a
reasonable
assurance
is
given, then--

--the non-breaching
party
may
not
terminate
the
contract

This eventuality is commented upon in Official Comment 2 to 2-611 of the UCC.

Reasonable
belief that the
wrongdoer
may not be able
to perform, not
result
of
a
voluntary act

Reasonable
belief that the
wrongdoer
may not be able
to perform, not
result
of
a
voluntary act

Party
seeking
assurance
actually has no
reasonable
basis to believe
the
wrongdoer
will not be able
to perform

Under LT Civil
Code and the
UCC,
a
demand
for
assurance
must
be
made.
Under CISG, a
demand
for
assurance
must be made
IF
time
permits
Under LT Civil
Code and the
UCC,
a
demand
for
assurance can
be made.
Under CISG, a
demand
for
assurance
must be made
IF
time
permits
In
all
3
systems, if an
assurance is
demanded

If a demand is
made under any
of
the
three
systems
described, under
these
circumstances, if
a
reasonable
assurance
is
given, then

--the non-breaching
party
may
not
terminate
the
contract

If a less than
commercially
reasonable
assurance
is
given (under the
UCCas between
merchants)

Then the party that


had demanded the
assurance has the
right to terminate
the contract (the
unreasonableness of
the assurance being
a material breach)

And
if
assurance
given

no Party
having
is demanded
assurance will be in
material breach if he
terminates
the
contract as a result
of their having been
no assurance given

Case # 2

Marek v. McHardy
Louisiana: Supreme Court (1958)

234 La. 841; 101 So.2d 689


McCaleb, Justice.
Plaintiff, a physician specializing in roentgenology, brought this suit to recover
damages in the sum of $124,585.35, allegedly sustained as a consequence of
defendants' breach of contract to give him a 10% interest in a partnership to
be formed for the practice of medicine. Primarily, he prays for a specific
performance of the partnership agreement which, for reasons hereinafter
pointed out, could not be granted but the principal demand stated in the
petition is for damages in the amount claimed and, as a second alternative, for
recompense on a quantum meruit.
To plaintiff's original petition, defendants, who are Drs. G. Gordon McHardy and
Donovan C. Browne, interposed numerous exceptions among which was an
exception of no cause of action and a plea of liberative prescription. Plaintiff
then filed a lengthy supplemental and amended petition with exhibits attached
thereto and, after a hearing on defendants' objections, all exceptions were
referred to the merits. However, the trial judge, believing the claim to be
prescribed by the three-year prescription provided by Article 3538 of the Civil
Code, sustained defendants' plea and dismissed the suit. Plaintiff has appealed
and defendants, following two unsuccessful attempts to have the appeal
dismissed (see Marek v. McHardy, 231 La. 505, 91 So.2d 773 and 233 La. 835,
98 So.2d 207), answered, reurging their exception of no cause of action and
praying for an affirmance of the judgment below.
An examination of the original and supplemental petitions, in connection with
three certain letters which exhibit the contract between the parties, reveals the
following well-pleaded facts: Sometime prior to February 19, 1948, Doctors
McHardy and Browne, who were engaged in the practice of medicine as
partners, contemplated expansion of their organization by forming a medical
group to operate a clinic for the general practice of medicine. To this end,
defendants acquired real estate to be used for the clinic and sought to obtain
the services of various specialists to join them in their practice of internal
medicine, the combined operation to be known as the "Browne-McHardy
Medical Group".
During this time, plaintiff was practicing his specialty of radiology at the Mayo
Clinic in Rochester, Minnesota. He was contacted by telephone by Dr. McHardy,
who sought to enlist his services and have him join the planned group of
physicians. Following this solicitation, Dr. McHardy wrote plaintiff a letter on
February 19, 1948 in which he stated that he and Dr. Browne were forming a
medical diagnostic group which was to include two other internists, a neuropsychiatrist and a radiologist, who would have charge of the X-ray Department;
that they were renovating the ground floor of the old Carol Hotel in New
Orleans and would have a full complement of general X-ray equipment on
hand; that they were desirous of having plaintiff take charge of this department
and would pay him $8,000 per year for the first three years with a percentage
interest at the beginning of the fourth year "which percentage in the business

and equipment will have been purchased by the three years of service the
individual has dedicated to the group". Plaintiff was requested by Dr. McHardy
to give his reaction to this offer as early as possible.
Following receipt of this letter, further telephonic conversations were had
between plaintiff and Dr. McHardy, culminating in a letter written by the latter
to plaintiff on March 23, 1948, stated to be a confirmatory letter "which we will
each consider equivalent to a contract". The terms of this contract were that
plaintiff was to join the Browne-McHardy Medical Group as a roentgenologist on
October 1, 1948 and as a salaried member of the organization for 36 months,
the yearly salary being $8,000 with the understanding that, at the end of each
year, an evaluation of the financial structure of the organization would be
reviewed to consider the possibility of an increase of the salary. It was further
provided in the letter that "Beginning October 1, 1951, having completed
thirty-six months of your contract with us as specified, it is agreed that
thereafter you will be a participating partner to the extent of ten percent in all
income, equipment and accounts payable to the Browne-McHardy Medical
Group. This partnership agreement drawn up in the proper form will be
completed on October 1, 1951 at which time it goes into effect". On March 27,
1948 plaintiff accepted the proposition in writing and stated in his letter that
"My wife and I are looking forward to October when we will come home to New
Orleans to live."
On October 1, 1948, plaintiff joined the group and remained in its service for
some 34 months when, according to his allegations, he was informed by Dr.
McHardy that the defendants had no intention of granting him a one-tenth
interest in the medical enterprise on October 1, 1951 but that, instead, he
would have to buy this interest from them. Plaintiff asserts that his expectancy
of being made a partner constituted a material part of the consideration for the
three years employment and that, except for this promise, he would not have
worked at the salary paid by defendants.
[The court first addressed a question concerning whether the action was barred
by a three year statute of limitation for actions based on the services provided
by medical doctors. The court decided the matter was governed by the
general statute of limitation and hence the action was maintainable.]
We pass on to a consideration of the exception of no cause of action which was
referred to the merits by the trial judge and which has been reurged by
defendants in their answer to the appeal. This exception is founded on several
legal propositions which will be hereinafter discussed.
At the outset, it is appropriate to point out that, although plaintiff initially prays
for a specific performance of the partnership feature of the contract, it is plain
from a consideration of the alleged facts and the nature of the obligation that
the case is not one in which a specific performance could or should be ordered.
Whereas, Article 1926 of the Civil Code provides that, on the breach of any
obligation to do or not to do, the obligee is entitled to damages or, at his
option, to a specific performance of the contract in cases which permit it, the
following Article 1927 limits the remedy in ordinary cases of breach of contract,

declaring that the party aggrieved is entitled only to damages unless this
would be inadequate, in which instance specific performance may be granted if
the defaulting party has the power of performing the contract. Manifestly, in a
case like this involving personal services coupled with a promise of the obligees
to make the plaintiff their business partner, the court would not order the
exceptional relief of a specific performance. See Snyder v. Wilder, 146 La. 811,
84 So. 104. Hence, plaintiff's remedy is for dissolution of the contract (see
Articles 2046 and 2047 of the Civil Code) and for the damages (Articles 1926
and 1927) he has occasioned by defendants' breach. This relief he has prayed
for and we think he would be entitled to it if he is able to sustain the wellpleaded allegations of his petitions.
Defendants contend that plaintiff states no cause of action for these alleged
damages for a number of reasons. They specify, first, that the alleged promise
for the formation of a partnership was too vague and indefinite to support its
enforcement in that, among other things, no provision was made for the
duration of the partnership.
We find no merit in this postulation. The contract evidenced by McHardy's letter
of March 23, 1948 is clear and concise, constituting a valid working agreement
supported by adequate consideration. The omitted details, which defendants
assert were essential, were such matters as hours, days off, vacations, sick
leave, retirement and plans depending on contingencies such as death or
retirement of partners, all of which were susceptible of agreement or controlled
by law without need for stipulation. In any case, subsequent failure to reach an
agreement as to these details would not be destructive of the legal
effectiveness of defendants' promise and bar an action by plaintiff for the
damages he is able to prove he suffered as a consequence of the breach.
The next contention of defendants that their offer was never accepted by
plaintiff is without basis in view of the letter of March 23, 1948 which
denominates it as a contract. This letter contains succinct statements of a prior
verbal understanding reached by the parties and the agreement was later
placed in execution, apparently in good faith, when plaintiff came to New
Orleans and took charge of defendants' radiology department.
We also find untenable defendants' next argument that the latter of March 23,
1948 was intended to be a contract only insofar as the three years employment
was concerned and that the mention of the partnership was only by way of a
proposal which would be negotiated after three years if both parties were still
interested. The letter itself refutes this proposition as it states that " having
completed thirty-six months of your contract with us as specified, it is agreed
that thereafter you will be a participating partner to the extent of ten percent
".
Defendants further contend that plaintiff is not entitled to damages because
the petitions show that he is admittedly in default. They say that plaintiff was
bound under the contract to complete his three years of employment in order
to entitle him to a 10% interest in the partnership and yet, according to his own
allegations, he left his employment on August 10, 1951, or before the end of

the 36-month period. Closely connected with this contention is defendants'


claim that they have not been put in default and their breach, if any, was
merely passive.
Plaintiff alleges that the reason why he did not continue his performance for
the full thirty-six months is that defendants informed him that they were not
going to make him a partner in accordance with their promise and, therefore, it
would have been vain and useless for him to continue to perform as the
expectancy of being made a partner constituted a material part of the
consideration for his three years employment and that, except for this
expectancy, he would not have agreed to work for the salary paid by
defendants.
Thus, the allegations of plaintiff's petition present the question of whether or
not a party to a commutative contract in Louisiana may discontinue his
performance when the other party notifies him that the contract will be
repudiated. In other words, is the doctrine of anticipatory repudiation entitled
to recognition in this State? If so, then defendants' claim that they have not
been placed in default has no substance as the alleged unjustified repudiation
by defendants of their promise is to be regarded as an active violation, of their
obligation rendering them amenable to damages from that moment without the
necessity of being placed in default. See Articles 1931 and 1932 of the Civil
Code.
Under the common law, a breach of a contract before the time of performance
allows the injured party to sue for damages immediately. 12 Am.Jur. Verbo
Contracts, Sections 391, 401; Williston on Contracts, Revised Edition, Section
1296, et seq., especially Section 1314; Restatement of the Law of Contracts,
Section 959, et seq. It is generally recognized, however, that, the repudiator
may retract his repudiation unless the promise, in relying on the repudiation,
has changed his position to such an extent that subsequent performance is
impractical, in which case the injured party may, nevertheless, recover
damages. Corbin, op. cit. Sections 977, 978.
In Section 1337A of Williston on Contracts, Rev.Ed., it is said that "There seems
no recognition of any doctrine of anticipatory breach in the civil law until within
comparatively recent times." A reference is made to the views obtaining in
France and also in Germany where there are certain variations. The conclusions
of Mr. Williston are founded on the difference in the civil law system's first
choice of remedy in actions ex contractu, it being observed that damages are
the rule at common law and specific performance the exception, whereas the
reverse is true of the civil law. See also comment "Anticipatory Repudiation in
Louisiana", 7 Tulane L.Rev. 586.
While Mr. Williston may be correct that the civil law, as obtaining in France,
accords a specific performance as its first choice of remedy, this is not the rule
in Louisiana - for, as we have above pointed out, Article 1927 of the Civil Code
plainly declares that the breach of an obligation to do or not to do entitles the
party aggrieved in ordinary cases only to damages. See Article "The Implied
Resolutory Condition for Non Performance of a Contract", 12 Tulane L.Rev. 376-

400 and 509-533. It is only where damages would not furnish adequate
compensation and the defaulting party has the power of performing the
contract, that specific performance will be allowed in the absence of a special
statute authorizing this relief, such as Article 2462 of the Civil Code, as
amended, dealing with an agreement to sell. (It is to be noted that Article
1927 is not contained in the Code Napoleon and the jurisprudence construing
the Article is that specific performance has never been favored in our law. See
Pratt v. McCoy, 128 La. 570, 54 So. 1012 and the many authorities cited
therein.)
On the other hand, Articles 2046 and 2047 of the Civil Code provide that in
every commutative contract there is a resolutory condition to take effect if
either party does not perform and, in cases where there is a willful breach, the
contract is resolved only by suit in which the court may, in its discretion, allow
a further time for performance. These Articles, we think, have no effect on
Article 1927, declaring that damages are the rule and specific performance the
exception, as this Article establishes the ordinary remedy accorded by law,
whereas Articles 2046 and 2047 refer to the judicial discretion which may be
exercised after a hearing where the defendant is pleading for a chance to
perform.
From all of this we deduce that an anticipatory breach of contract is actionable
in Louisiana. Whether the contract will be resolved depends upon the facts and
circumstances of each particular case. Accepting as true the allegations of fact
in the case at bar, we are of the opinion that plaintiff was legally justified in
treating the contract breached when he was informed by defendants in August
of 1951 that they would repudiate their promise to include him as a partner on
October 1, 1951 and, therefore, he was not required to continue in their service
until October 1st as a condition precedent to the assertion of a claim for
damages. The question of whether plaintiff's discontinuance of performance in
August of 1951 deprived defendants of the right to retract their repudiation and
perform the contract is a matter of defense and does not affect the cause of
action stated by plaintiff. Obviously, this would be a matter of importance only
if it is shown on the trial that defendants were willing to perform their promise
on the due date.
Finally, defendants' argument that no contract came into being until the writing
of a partnership agreement, is without merit for the reasons stated above. The
letter of March 23, 1948 is a complete contract containing an executory
promise of a 10% interest in the partnership. No new written agreements were
absolutely essential to carry into effect the covenants contained therein.
The exception of no cause of action is not well taken and should have been
overruled.
The judgment appealed from is reversed and the case remanded for further
proceedings consistent with the views herein expressed.

Case # 3

Pittsburgh-Des Moines Steel v. Brookhaven Manor Water Co.


USA: 7th Circuit (1976)
532 F.2d 572
Before Clark, Associate Justice, and Cummings and Pell, Circuit Judges.
Associate Justice Tom C. Clark, United States Supreme Court, Retired, is sitting
by designation.
PELL, Circuit Judge.
This is an appeal by the Pittsburgh-Des Moines Steel Company (hereinafter
PDM) from the district court's entry of a judgment notwithstanding the verdict
against PDM on its complaint for repudiation of contract and for Brookhaven
Manor Water Company (hereinafter Brookhaven) on its counterclaim for breach
of contract and from the district court's subsequent adjudgment of damages.
The questions raised on appeal are whether the district court erred in entering
judgment notwithstanding the verdict in favor of Brookhaven on the liability
issue and whether error was committed in the district court's subsequent
assessment of damages against PDM.
The record discloses the following series of events. On July 24, 1968, PDM, a
designer, fabricator, and engineer of steel products, submitted a proposal to
Brookhaven for the construction of a one-million-gallon water tank for
$175,000. The original proposal incorporated, as terms of payment, 60 percent
upon receipt of materials in PDM's plant, 30 percent upon completion of
erection, and 10 percent upon completion of testing, or within 30 days after the
tank had been made ready for testing. The original terms were not satisfactory
to Brookhaven's president, Irving Betke, and were subsequently changed. The
altered payment term provided that 100% of the contract price was due and
payable within 30 days after the tank had been tested and accepted. The
altered proposal was signed and accepted by Brookhaven on November 26,
1968.
Sometime during the following month Norman Knuttel, PDM's district manager
who had prepared and signed the original and revised proposals, talked to a
representative of the Arbanas Construction Company which company had
contracted with Brookhaven for the construction of the tank foundation. Knuttel
was informed that Brookhaven had received a loan from Diversified Finance
Corporation. Although this information as to the receipt of the loan was
incorrect, Brookhaven had negotiated with Diversified for a loan for the
purpose of the construction which negotiation continued into the following
year. Under date of January 3, 1969, PDM's credit manager wrote Diversified
with a copy to Betke which letter in part was as follows:
"[W]e hereby request a letter assuring that $175,000,00 for payment of
the referenced project will be held in escrow and fully committed to

payment to us upon completion of referenced elevated tank. "As a matter


of good business we are holding this order in abeyance until receipt of
such notification."
The contract contained no provision for escrow financing. Brookhaven, through
Betke, took no action upon the receipt of the copy of the letter. Subsequently,
after further correspondence and meetings, resulting primarily from
Brookhaven's not having secured a planned loan of $275,000.00 from
Diversified Finance, PDM's credit manager sent an air mail, special delivery
letter to Betke, dated March 19, 1969, which suggested that Betke "mail us
your personal guarantee of payment of $175,000.00 as per the contract, to
protect us in the interim between now and the time your loan is completed."
While the contract specified the payment of the amount mentioned no later
than 30 days after completion of the tank, it was silent as to any reference to a
personal guarantee by Betke. The letter concluded as follows:
"Upon receipt of such guarantee, we could immediately set in motion our
shop fabrication which would result in earlier completion of your new tank.
"When your loan is completed we will still require a letter of instructions to
be forwarded from you to your bank, or other financial institution which
extends this loan, that $175,000.00 is to be held in escrow for
disbursement only to Pittsburgh-Des Moines Steel Company in accordance
with our contract."
The construction of the water tower was scheduled to begin on April 15, 1969.
A crew had been scheduled for the site three months previously, and a crew
was ready to appear there on April 15, 1969. As matters transpired, however,
the tank was never installed at Brookhaven's site. On March 31, 1969, Betke
sent PDM Comptroller Harry Kelly his personal financial statement, but he did
not send PDM his personal guarantee for the loan. After Betke failed to provide
his personal guarantee of the $175,000.00 contract price, PDM took no further
steps toward performance.13
On April 22, 1969, Kelley, PDM SecretaryTreasurer Tom Morris, PDM Sales Manager Dwight Long, and Betke attended a
meeting on the Brookhaven premises. Although the record reveals somewhat
inconsistent versions of the details of that meeting, it appears that Morris told
Betke that PDM would complete the fabrication of the tank and deliver it to the
job site within a matter of weeks but that Betke replied that he had no need for
the tank until the following year.
Further efforts to implement the contract broke down completely after April 22,
1969. Brookhaven's installation of the reinforced concrete foundation for the
13

Footnote in original:The record indicates that as of April 22, 1969, the foundation, the
construction of which was the obligation of Brookhaven, had been completed and two-thirds of
the required tankage parts, which were the obligation of PDM, had been fabricated. However, it
is also noted that as late as March 19, 1969, PDM had written Betke that upon the receipt of
the guarantee, the shop could immediately set in motion fabrication. It is not clear whether
PDM did anything to dispel the clear inference to Betke that there would be no fabrication, or at
least further fabrication, until the guarantee had been received.

tank had been accomplished at a cost to it of $18,895. Subsequent to the


March meeting, Brookhaven purchased additional land and developed two wells
which provided an adequate water supply. Brookhaven later sold all its assets,
including both equipment and land, to the City of Darien. At the trial of the
damages issue, an expert in demolition testified that the cost of removing the
reinforced concrete foundation would be about $7,000. On the basis of this
testimony, which was proffered upon the legal theory that Brookhaven had a
right to recover the cost of the removal, the district court found that the total
amount of damages sustained by Brookhaven was the sum of $25,895.00 and
entered judgment in its favor for that amount.
II. Claimed Bases of Liability
Under the contract as executed, into which prior negotiations had been
merged, Brookhaven's performance of its principal obligation to pay the
purchase price was not due until after the completion of construction.
Nevertheless within a period of time shortly more than one month after the
contract became effective, PDM was requesting that a prospective lender of the
funds to Brookhaven should hold the entire $175,000.00 in escrow. This was
not a request that a lending institution give a letter of intent or otherwise
confirm that it would make a particular loan when the payment became due
after completion of construction. Instead the letter explicitly would, if honored,
have required Brookhaven to complete all necessary loan papers and to
arrange for the consummation of the loan, the proceeds of which would then be
held by Diversified for some months until the work was completed. It is no
answer to say that perhaps Brookhaven could have arranged for the escrowed
fund to have been invested in some safe, readily liquidable form which might
offset in part at least the loss to Brookhaven resulting from having to pay
interest on money already borrowed. PDM having purported to agree not to ask
for progress payments during the course of construction, more than half of
which would have been due before the first act took place by PDM on the
construction site, it now was substituting another requirement clearly beyond
any requirement contemplated in the contract which would not have put the
purchase price in hand but would nevertheless have it where it could be
available for the picking at the appropriate time. The contract is silent as to any
right of PDM to insist Brookhaven provide any such guarantee during the period
before completion of construction. Further, PDM made it quite clear that it was
"holding this order in abeyance until receipt of" notification that the money was
being so held. We find no basis for an inference that at this time Brookhaven
was not ready, willing and able to perform its obligations under the contract
nor that it would not be able to pay when it owed. The fact that there had been
negotiations for a loan of money that would not be needed for some months,
which negotiations had not come to fruition, does not support such an
inference. Two months after the letter to Diversified, PDM reaffirmed its lack of
retreat from the position of requiring assurance that the money would be
forthcoming.
PDM argues that its position was in accordance with Section 2-609 of the
Uniform Commercial Code (UCC) enacted into law in Illinois as Ill.Rev.Stat. ch.
26, sec. 2-609. That section which "creates a new contract enforcement

procedure for the situation where one party feels insecure as to the other's
performance" reads in pertinent portion as follows:
"Right to Adequate Assurance of Performance. (1) A contract for sale
imposes an obligation on each party that the other's expectation of
receiving due performance will not be impaired. When reasonable grounds
for insecurity arise with respect to the performance of either party the
other may in writing demand adequate assurance of due performance and
until he receives such assurance may if commercially reasonable suspend
any performance for which he has not already received the agreed return.
"(2) Between merchants the reasonableness of grounds for insecurity and
the adequacy of any assurance offered shall be determined according to
commercial standards.
"(4) After receipt of a justified demand failure to provide within a
reasonable time not exceeding 30 days such assurance of due
performance as is adequate under the circumstances of the particular case
is a repudiation of the contract."
"There is no evidence in the record that defendant's finances or ability to pay
changed in any way after the contract was accepted on November 26, 1968 or
that plaintiff had any objective grounds to feel insecure. Plaintiff began
inquiring about defendant's financing soon after the contract was signed, but
no adverse information was found. Ultimately plaintiff refused to erect the
fabricated parts of the tank, but it showed no justification for this."
The question [] is whether PDM's actions subsequent to the execution of the
contract were within the protection provided by 2-609. We hold that they
were not.
The performance to which PDM was entitled was the full payment of the
purchase price within a specified time after the completion of the tank. While
we have a substantial question as to whether PDM made a written demand as
required by the statute, in keeping with our concept that the UCC should be
liberally construed, we do not desire to rest our decision on a formalistic
approach. Letters were written which conveyed what PDM wanted done before
they would pursue their obligations under the contract. The fundamental
problem is that these letters, if they be deemed to be in the nature of a
demand, demanded more than that to which PDM was entitled and the demand
was not founded upon what in our opinion was an actuating basis for the
statute's applicability.
We do not construe 2-609 as being a vehicle without more for an implied term
being inserted in a contract when a substantially equivalent term was expressly
waived in the contract. The something more to trigger applicability of the
statute is that the expectation of due performance on the part of the other
party entertained at contracting time no longer exists because of "reasonable
grounds for insecurity" arising. We find that PDM's actions in demanding either
the escrowing of the purchase price or a personal guarantee lacked the

necessary predicate of reasonable grounds for insecurity having arisen. The


contract negates the existence of any basis for insecurity at the time of the
contract when PDM was willing to wait 30 days beyond completion for
payment. The fact that Brookhaven had not completed its loan negotiations
does not constitute reasonable grounds for insecurity when the money in
question was not to be needed for some months. Reasonable business men
prefer in the absence of some compulsive reason not to commence paying
interest on borrowed money until the time for the use for that money is at
hand. The credit manager's January letter that the order was being held in
abeyance until receipt of notification of escrowing was based upon a "matter of
good business," but not upon any change of condition bearing upon
Brookhaven's ability to discharge its payment obligation under the contract.
With regard to the later request for a personal guarantee, it is not uncommon
for an individual to decline assuming obligations of a corporation in which he is
a shareholder. Indeed, the use of the corporate device frequently has as a
principal purpose the limitation on individual exposure to liability. If an
unfavorable risk in dealing with a corporation exists at contracting time, good
business judgment may well indicate that an assurance be secured before
contracting that there will be individual shareholder backup. None of this
occurred and the record is silent as to any reasonable grounds for insecurity
arising thereafter.
It is true that one officer of PDM testified that the company did not send a crew
because we questioned whether we might be paid for the project "at that
time." Some more objective factual basis than a subjective questioning, in our
opinion, is needed to demonstrate reasonable grounds for insecurity. Likewise,
another PDM officer testified that it was the company's normal and regular
procedure not to erect a structure "until we have reason to believe that the
funds to pay for the structure are available." The time of which he was
speaking was a time at which there was no contractual requirement that the
funds be available. The funds were only required to be available after
completion of installation. He testified further that the normal procedure was
not to erect until satisfactory arrangements were made. None of this
subjectively normal procedure was imposed as a provision in the contract
which in view of the withdrawn provision for progress payments showed
reasonably to Brookhaven that not only payment, but arrangements for
payment, would not be necessary until after completion.
We, of course, would not deprive PDM of resort to 2-609 if there had been a
demonstration that reasonable grounds for insecurity had arisen. The proof in
that respect was lacking. The comptroller and supervisor of PDM's credit
department testified that he had access to all of the credit information that the
company had regarding Brookhaven, that he had reviewed that information,
and that he was unaware of any change in the financial condition of
Brookhaven between November of 1968 and the end of 1969. Finally, we note
that despite the professed subjective questioning in April as to whether PDM
might be paid, the credit manager as early as January had said that the job
would be held in abeyance until arrangements had been made for escrowing
and a month after the questioning, the questioning officer had offered to
proceed with construction in exchange for an interest in Brookhaven, an

unlikely course if Brookhaven were financially in a questionable condition.


There was also testimony with the same inference that PDM was not fearful of
Brookhaven's financial stability or ability to pay in connection with PDM lending
to Brookhaven the amount involved at an interest rate of 9 1/2% which rate
was then unacceptable to Brookhaven. If the buyer was unable to pay for the
performance of the contract, it is difficult to see that it was better able to pay a
promissory note. We do not fault Brookhaven for its rejection of various
proposals advanced by PDM each of which amounted to a rewriting of the
contract in the absence of a proper 2-609 basis. The fact, if it were a fact, that
Brookhaven may not have had a large amount of cash lying in the bank in a
checking account, not an unusual situation for a real estate developer, does not
support the belief that it, as a company with substantial assets, would fail to
meet its obligations as they fell due. Section 2-609 is a protective device when
reasonable grounds for insecurity arise; it is not a pen for rewriting a contract
in the absence of those reasonable grounds having arisen, particularly when
the proposed rewriting involves the very factors which had been waived by the
one now attempting to wield the pen. The situation is made no more
persuasive for PDM when it is recalled that that company was the original
scrivener.
Brookhaven's request to put off the contract for a year clearly came after
PDM's repudiation of the contract and was indicative of nothing more than that
Brookhaven was willing to undertake a new arrangement with PDM a year
hence. Pursuant to 2-610 of the UCC, Brookhaven was entitled to suspend its
own performance by virtue of the anticipatory repudiation by PDM and to resort
to available remedies, including damages pursuant to 2-711 of the Code.14
For the reasons hereinbefore set out the judgment of the district court is
Affirmed.
CUMMINGS, Circuit Judge (concurring).
Although I agree with the result reached in the majority opinion, I differ with the
reasoning. Reasonable men could certainly conclude that PDM had legitimate
grounds to question Brookhaven's ability to pay for the water tank. When the
contract was signed, the parties understood that Brookhaven would obtain a
loan to help pay for the project. When the loan failed to materialize, a prudent
businessman would have "reasonable grounds for insecurity." I disagree that
there must be a fundamental change in the financial position of the buyer
before the seller can invoke the protection of UCC 2-609. Rather, I believe
that the Section was designed to cover instances where an underlying
condition of the contract, even if not expressly incorporated into the written
document, fails to occur. See Comment 3 to UCC 2-609. Whether, in a specific
14

Footnote in original: [W]e find no merit in PDM's argument that even if its January action
could be construed as an anticipatory repudiation under 2-610, its subsequent actions
demonstrated a retraction of the anticipatory repudiation pursuant to 2-611. That section
requires a clear indication to the aggrieved party "that the repudiating party intends to
perform." PDM only made it clear throughout that it intended to perform if Brookhaven gave
assurances not required of it legally or contractually.

case, the breach of the condition gives a party "reasonable grounds for
insecurity" is a question of fact for the jury.
UCC 2-609, however, does not give the alarmed party a right to redraft the
contract15. Whether the party invoking that provision is merely requesting an
assurance that performance will be forthcoming or whether he is attempting to
alter the contract is a mixed question of law and fact, depending in part upon
the court's interpretation of the obligations imposed on the parties. In this case,
PDM would have been assured only if significant changes in the contract were
made, either by receiving Betke's personal guarantee, by attaining escrow
financing or by purchasing an interest in Brookhaven. The district court could
properly conclude as a matter of law that these requests by PDM demanded
more than a commercially "adequate assurance of due performance."

Note:
Both the Uniform Commercial Code and the Lithuanian Civil Code require
A. That the party demanding assurance have a reasonable basis to believe
that the other party will breach the agreement.
B. That the party demanding assurance has a right only to demand
assurance and therefore has no right to demand further guarantees of
performance.
The UCC is explicitly requires that the assurance be commercially reasonable;
however, the same result would be reached under the Lithuanian Civil Code as
a function of the requirement of good faith and the fact that the assurance
must in some reasonable way overcome a reasonable fear of the innocent
party.
Exercises
1. Placidus and Fromo enter into a contract pursuant to which Fromo is to
perform certain services within 60 days of the date of signing. Placidus is
told by a fortune-teller that Fromo will not perform the services. Placidus
demands assurance from Fromo. Fromo does not provide any assurance.
Placidus terminates the contract.
A. What can Placidus recover from Fromo?
B. Can Fromo recover from Placidus?
C. Who committed the material breach? When and how?
2. Placidus and Fromoenter into a contract pursuant to which Fromo is to
perform certain services within 60 days of the date of signing. Several days
after the formation of the contract, Fromo says to Placidus, Ive been
having headaches. I dont think Ill be able to finish the project on time.
Placidus terminates the contract.
A. What can Placidus recover from Fromo?
15

TK: Emphasis added.

B. Can Fromo recover from Placidus?


C. Who committed the material breach? When and how?
3. Placidus and Fromo enter into a contract pursuant to which Fromo is to
perform certain services within 60 days of the date of signing. Several days
after the formation of the contract, Fromo says to Placidus, Ive been
having headaches. I dont think Ill be able to finish the project on time.
Placidus returns home and then the next day demands an assurance of
Fromo. Fromo does not provide an assurance.
A. What can Placidus recover from Fromo?
B. Can Fromo recover from Placidus?
C. Who committed the material breach? When and how?
4. Placidus and Fromo enter into a contract pursuant to which Fromo is to
perform certain services within 60 days of the date of signing. 45 days later,
the parties meet and Fromo states, Placidus, Frankly, Ive always hated your
guts and theres no way Im going to perform those services. Placidus
terminates the contract.
A. What can Placidus recover from Fromo?
B. Can Fromo recover from Placidus?
C. Is there a requirement of notice of intent to terminate? Under which
statutes?
D. Who committed the material breach? When and how?
4. Placidus and Fromo enter into a contract pursuant to which Fromo is to
perform certain services within 60 days of the date of signing. 45 days
later, the parties meet and Fromo states, Placidus, frankly, Ive always
hated your guts and theres no way Im going to perform those services.
Placidus waits a day and then demands an assurance from Fromo. Fromo is
very sorry for his words and provides an adequate assurance. Placidus
terminates the contract.
A. What can Placidus recover from Fromo?
B. Can Fromo recover from Placidus?
C. Is there a requirement of notice of intent to terminate? Under
which statutes?
D. Did Fromos assurance have any legal effect?
E. Who committed the material breach? When and how?
5. Placidus and Fromo enter into a contract pursuant to which Fromo is to
perform certain services within 60 days of the date of signing. Placidus
knows that Fromo has to obtain a loan to be able to perform the services.
45 days after the date of signing Placidus learns that Fromos application for
a loan has been turned down by a bank. Placidus demands an assurance
from Fromo. Fromo states that he will perform as contracted. Placidus
terminates the contract.
A. What can Placidus recover from Fromo?
B. Can Fromo recover from Placidus?
C. Is there a requirement of notice of intent to terminate? Under
which statutes?
D. Did Fromos assurance have any legal effect?

E. Who committed the material breach? When and how?


6. Placidus and Fromo enter into a contract pursuant to which Fromo is to
perform certain services within 60 days of the date of signing. Placidus knows
that Fromo has to obtain a loan to be able to perform the services. 45 days
after the date of signing Placidus learns that Fromos application for a loan has
been turned down by a bank. Fromos firm is well-established. Placidus
terminates the contract.
A. What can Placidus recover from Fromo?
B. Can Fromo recover from Placidus?
C. Who committed the material breach? When and how?
7. Placidus and Fromo enter into a contract pursuant to which Fromo is to
perform certain accounting services within 60 days of the date of signing. 40
days later, Fromo fires all of his workers. Placidus terminates the contract.
A. Is it impossible for Fromo to perform the contract?
B. What can Placidus recover from Fromo?
C. Can Fromo recover from Placidus?
D. Who committed the material breach? When and how?
8. Placidus and Fromo enter into a contract pursuant to which Fromo is to
perform certain accounting services within 60 days of the date of signing. 40
days later, Fromo fires all of his workers. Placidus demands assurance. Fromo
responds, saying, Ah, I think Ill have new employees by then. Placidus
terminates the contract.
A. Is it impossible for Fromo to perform the contract?
B. What can Placidus recover from Fromo?
C. Can Fromo recover from Placidus?
D. Who committed the material breach? When and how?
9. Placidus and Fromo enter into a contract pursuant to which Fromo is to
perform certain quite ordinary accounting services within 60 days of the date of
signing. 30 days later an earthquake destroys Fromos place of business and
all of Fromos computers. Placidus immediately terminates the contract.
A. Is it impossible for Fromo to perform the contract?
B. What can Placidus recover from Fromo?
C. Can Fromo recover from Placidus?
D. Was notice of intent to terminate necessary?
E. Has a material breach been committed? When and how?

D. Cure

Principles of European Contract Law


8.104 - Cure by Non-Performing Party
A party whose tender of performance is not accepted by the other party
because it does not conform to the contract may make a new and
conforming tender where the time for performance has not yet arrived or
the delay would not be such as to constitute a fundamental nonperformance.

Lietuvos Civilinis kodeksas


6.208 vykdymo trkum
paalinimas
1. Sutart paeidusi alis gali
savo
sskaita
paalinti
vykdymo trkumus, jeigu:
1) ji be nepateisinamo
udelsimo pranea kitai aliai
apie
vykdymo
trkum
paalinimo bd ir laik;
2) nukentjusioji alis neturi
teisto intereso atsisakyti nuo
vykdymo trkum paalinimo;
3)
vykdymo
trkum
paalinimas
yra
atliekamas
nedelsiant;
4) vykdymo trkum paalinim
pateisina konkreios aplinkybs.
2. Kitos alies pareikimas apie
sutarties
nutraukim
nepanaikina teiss paalinti
vykdymo trkumus.
3.
alis,
gavusi
tinkam
praneim
apie
pasilym
paalinti vykdymo trkumus,
negali gyvendinti savo teisi,
kurios yra nesuderinamos su
sutarties vykdymu tol, kol
nepasibaigs
terminas,
nustatytas
vykdymo
trkumams paalinti.
4. alis gali sustabdyti savo
prievoli vykdym tol, kol kita
alis nepaalins
vykdymo
trkum,
bei
reikalauti
nuostoli atlyginimo.
5. alis privalo bendradarbiauti su
vykdymo trkumus alinania alimi
vis trkum alinimo laikotarp.

Lithuanian Civil Code


6.208
Cure
Of
Improper
Performance
1.
The party in breach can,
at its expense, cure its breach if:
1)
the party, without undue
delay, gives notice to the other
party regarding the method and
time of cure of improper
performance;
2)
the injured party does not
have a rightful interest in
refusing the cure;
3)
the cure is accomplished
without delay;
4)
concrete facts justify the
cure of improper performance
2.
The notification by the
other party about the termination
of the contract does not destroy
the right to cure the improper
performance. [Note: Under LT law
there is usually a period of time
between notice of termination and
the coming into effect of the
termination.]
3.
A party, having gotten a
proper offer to have the improper
performance
cured,
cannot
exercise its rights which are in
conflict with the performance of
the contract until the end of the
term during which the cure is to be
accomplished.
4.
A party can stop the
performance of its obligations until
the other party does not effect the
cure, and can demand the
reimbursement of damages.
5.
A party must cooperate
with the party which is curing its
improper performance during the
entire period of cure.

Louisiana Civil Code


2610. Cure of Nonconformity
Upon rejection of nonconforming things by the buyer, the seller may cure
the nonconformity when the time for performance has not yet expired or
when the seller had a reasonable belief that the nonconforming things
would be acceptable to the buyer. In such a case the seller must give
reasonable notice of his intention to cure to the buyer.
Uniform Commercial Code
2-508. Cure by Seller of Improper Tender or Delivery; Replacement
1. Where any tender or delivery by the seller is rejected because nonconforming and the time for performance has not yet expired, the seller
may seasonably notify the buyer of his intention to cure and may then
within the contract time make a conforming delivery.
2. Where a buyer rejects a non-conforming tender which the seller had
reasonable grounds to believe would be acceptable with or without
money allowance the seller may if he seasonably notifies the buyer
have a further reasonable time to substitute a conforming tender.
The concept of Cure evolved from considerations of the termination of
contracts for material breach. It was called forth specifically by this sort of
situation: a material breach is committed innocently prior to the final time by
which performance must be rendered. The breaching party offers to cure its
breach, to make its performance acceptablebut the non-breaching party
refuses to accept this cure, terminates the contract, and sues for damages.
The breaching party seeks to defend against the court action by arguing that,
while it may be liable for some limited amount of damages due to its faulty
initial performance, that it should have been allowed to cure its performance;
indeed, it would argue, its right to cure a faulty performance was breached by
the other party.
As E. Alan Farnsworth has written, [a]lthough the concept of cure was known
before the Uniform Commercial Code, the Code must be credited with giving a
seller of goods a clear right to cure and with popularizing the word cure in this
context.16 But the UCC provision in question governs only sales contracts,
whereas the European Principles, however, incorporate a right of cure into
every type of contract.
The right of cure, then, is a power in the debtor to erase the effects of his
breach; upon exercise by the debtor of the right to cure, the justification for the
creditors defensive non-performance disappears.
The effect is that the
creditor now must perform, whereas he otherwise would have been justified in
withholding performance (and eventually terminating the contract) due to the
debtors breach.
The right of cure as set forth in the European Principles does appear to be the
law in England and Scotland. The law of the majority of other nations of
16

Alan Farnsworth, Contracts 3rd Ed. Aspen Law and Business: New York (1999). p.587-590.

continental Europe have some form of the right of cure, but these are,
generally speaking, limited to certain contracts; this is true as well for Russian
law.
Almost nowhere is the matter addressed in the general terms found in the
European Principles. For instance the Dutch require the debtor, in order to cure,
to contemporaneously offer payment for damages, and debtors right to cure
ends upon notification from the creditor that he is claiming damages instead of
performance.
New Netherlands Civil Code
6.86 The creditor may refuse performance offered after the beginning of
the default, so long as the offer does not also comprise the payment of
damages which have, in the meantime, become due, as well as of costs.
6.87
To the extent that performance is not already permanently
impossible, the obligation is converted into one to pay damages by
equivalence where the debtor is in default and the creditor notifies him in
writing that he claims damages instead of performance.17
Under Russian law, the buyer of goods is under a duty to notify the seller of the
non-conformity of transferred goods if the non-conformity is remediable, in
which case the seller has a right to remedy its performance. See Russian Civil
Code 475.
Under French law ( 1184), a delai de grce may be granted by the court to a
debtor: this is a last chance to perform. This formerly applied only to judicial
resolution (termination), but pursuant to a 1994 amendment is applicable to
unilateral termination provided by contract (1244-3).
This, however, is quite different from the right of cure contemplated by the
European Principles. Although the European Principles set forth a general right
of cure, [c]ure is not always possible, as in the case of a singer who fails to
show up on the night of the opera. 18 In such a case, the time of performance
has passed.
Thus, under the Principles and American law, a party may cure their faulty
performance up until the time for performance has actually arrived, or even if it
has, if the delay is immaterial. This is a right of the debtor and it may not be
defeated by a purported termination by the non-breaching party.
Example: (European Principles and American law): The contract specifies a
service is to be rendered by the 15th day of the month. The service provider
does not tender his performance until the 16 th. The court may find that the
delay, upon the particular circumstances, is immaterial 19, in which case the
debtor has cured his faulty performance (he will be liable only for moratory
17

P.P.C.Haanappel, Ejan Mackay. New Netherlands Civil Code: Patrimonial Law. Kluwer:
Deventer, Boston (1990, 1997) p.264.
18

Farnsworth, p. 587 at footnote 1.

damages). Usually, if a contract specifies that performance by a certain date is


a condition of the other partys performance, the courts will enforce this clause
and hence cure beyond that date would be impossible. Note that in this
example, performance by a certain date was not explicitly a condition of the
other partys duty of performance.
But it should be noted that under the European Principles, if a breach is truly
material (past the time for performance and where delay is material), there is
no delay period allowed during which a performance can be cured. This is
quite different from the French system, which in all such cases allows a delai de
grce.20 Of course, this is within the discretion of the trial court.
Lithuanian Law:
Under Lithuanian law, there are two separate rules pertaining to this situation.
The first rule has to do with late performance. If the performance is deficient
due to being late, the rule is that the creditor must first notify the debtor that it
is withholding its own performance due to the debtors breach, and the creditor
must specify an additional time period during which the debtor can cure his
breach. Only if the debtor does not cure the breach during this additional time
period can the creditor terminate the contract. See 6.217.3. (Unfortunately,
this section does not specify that the creditor can terminate the contract at
once21, and therefore the next article applieswhich specifies that notices of
termination come into effect only after the expiration of the date set forth in
the contract, or in thirty days, meaning that there is yet another time period
prior to the actual termination of the contract. In such a case, however, it is
unlikely that a court would allow a debtor to cure in this second waiting period
since the time period or term for performance has passedbut in these
circumstances the waiting period has no utility and unnecessarily places the
creditor in a position of not being sure in this second waiting period whether he
has the right to refuse the tendered cure.)22
19

Netherlands Civil Code 6.39: Where a term for performance has been set, it is presumed
only to prevent the obligation from being claimed earlier. P.P.C.Haanappel, Ejan Mackay. New
Netherlands Civil Code: Patrimonial Law. Kluwer: Deventer, Boston (1990, 1997)
20

It is interesting to speculate whether the curious delay period in the Lithuanian code between
notice of termination and effective termination is not an attempt at establishing a general
period of cure, somewhat like a genericdelai de grce. But it is not co-terminous with the
period allowed for cure, and thus its purpose is difficult to discern.
21

The corresponding section of the European Principles does indeed specify that in the case of
delay, the aggrieved party may give notice to the defaulting party, setting an additional time
period for performance, and if the performance is not rendered during that period, the
aggrieved party can consider the contract terminated at once. See 8.106.3.
22

Lithuanian Civil Code. 6.217.3. When a period for performance has expired, the aggrieved
party can terminate the contract, if the other party does not perform it during an additional
period of time. 6.218.1. In cases provided for under 6.217 the aggrieved party can
terminate the contract unilaterally, without court action. The other party must be given the
time period for notice of termination set forth in the contract, and if the contract does not set
forth any such period, then the period will be 30 days.

For most other material breaches (except as provided for by contract and in
cases of anticipatory repudiation) the termination will go into effect only after
thirty days or after the period provided for under the contract. This diverges
significantly from both American law and the European Principles, in which a
termination is operative immediately. During this period, if cure is possible, the
debtor (the party in breach) has the right to cure its performance; notification
of termination does not obviate the right of the debtor to cure ( 6.208.2). In
this regard, if the creditor (the aggrieved party) does not accept the tendered
cure, it itself is now in material breach of the contract.
Example: (Under Lithuanian law): A contract specifies a service is to be
rendered by Day 90. On Day 30 the debtor-service provider renders the
service, which is materially deficient. On Day 31 the creditor serves notice of
termination, which is to go into effect after 10 days as provided for by contract.
On Day 36 the debtor notifies the creditor that it intends to cure its
performance by Day 50. The creditor must accept the cure and the notice of
termination is without effect. Note that the original term for performance was
90 days and that the tendered cure is within that period and that it was the
performance, not the delay, which was material.
Example: (Under Lithuanian law): The contract specifies a service is to be
rendered by the 15th day of the month. Assuming under the circumstances that
time was not of the essence, on the 16 th sets an additional ten day period for
the performance. The debtor does not tender performance during this time
period. The creditor notifies the debtor of termination which is to go into effect
in 30 days. The debtor tenders within these 30 days. The creditor refuses
acceptance. The court should rule that the debtors right of cure had lapsed.
Note that it is conceivable, under certain circumstances, that the debtors
power to cure could lapse prior to the expiration of the time period set by the
notice of termination. It is unfortunate that the Lithuanian code is not specific
in terms of the fair possibility of cure: that is, for instance, the PECL states
outright that cure is possible "where the time for performance has not yet
arrived or the delay would not be such as to constitute a fundamental nonperformance." (8.104). This same idea is a fundamental part of the legal
concept of cure, but we do not know if it is to be read into the Lithuanian code,
which only has a provision stating that the promissee can refuse a tender if he
has a legitimate interest in doing so. This is not quite the same thing; the
Lithuanian code states a principle, but leaves the matter to the judge, whereas
the PECL and other codes make this a question of law.
American Law and the European Principles:
What exactly will constitute an effective cure? This is not described in the UCC
nor in its official comments. Clearly, the offer to cure itself must not be
defective: it cannot seek to impose upon the non-breaching party any costs,
such as shipping23. When the problem is easily repairable and minor, an offer
to repair the product will be sufficient. But a party may well be justified in
23

See Farnsworth, p. 588 fn. 6.

refusing to accept an offer to repair or adjust a product if the product is new,


expensive, and when the repair would be a major one. For example, in one
well-known case, Zabriskie Chevrolet, Inc. v. Smith, 240 A.2nd 195 1968, the
New Jersey Supreme Court held that a buyer who purchased a new automobilie
was entitled to rescind the contract when the seller attempted to cure a defect
in the transmission by substituting a transmission from another vehicle on the
showroom floor. The court referred to the buyers shaken faith to justify the
decision. 24
Exercises:
1. Apply Dutch law. A contract sets forth a date for performance. The debtor
tenders performance two days late, but does not tender moratory damages
or other costs. The creditor refuses to accept the performance. The debtor
sues. What result?
2. A professor enters into a contract to deliver a speech on Saturday. He does
not show up for the lecture. The next day he offers to give the speech the
next Saturday.
The aggrieved party does not accept this offer and
terminates the contract. The professor sues. What result?
3. A company enters into an obligation to deliver 10,000 t-shirts with a certain
design printed on them by the 15th of March. The purchaser intends to give
them away over the next few months. The company tenders the t-shirts on
the 17th day, but the purchaser does not accept them. The t-shirt company
sues for damages. What result?
4. A company enters into an obligation to perform certain services. The
contract specifies that the services are to be performed within 30 days. The
company tenders performance on day 20. The client (purchaser, obligee)
immediately informs the company that the performance as rendered is
fundamentally deficient. The client also immediately serves notice of
termination. The very next day the company offers to cure its breach; the
breach is relatively easily curable. The client refuses to accept the cure.
The company-obligor sues for damages. What result?
5. A company enters into an obligation to perform certain services. The
contract specifies that the services are to be performed within 30 days. The
company tenders performance on day 30. The client (purchaser, obligee)
immediately informs the company that the performance as rendered is
fundamentally deficient. The client also immediately serves notice of
termination. The very next day the company offers to cure its breach; the
breach is relatively easily curable. The client refuses to accept the cure.
The company-obligor sues for damages. What result?
6. A company enters into an obligation to perform certain services.
24

The

Charles L. Knapp and Nathan M. Crystal, Problems in Contract Law 3rd ed. Little, Brown & Co.
USA 1993 p.1165.

contract specifies that the services are to be performed within 30 days. The
company tenders performance on day 20. The client (purchaser, obligee)
immediately informs the company that the performance as rendered is
fundamentally deficient. The client also immediately serves notice of
termination. The very next day the company offers to cure its breach. The
cure would necessitate completely re-performing the service: the services
were for an audit, and the accountants doing the work were found to be
imposters not having the educational qualifications they had claimed to
have had. The company makes assurances that other accountants will be
assigned to the job. The client does not accept the tendered cure. The
company sues. What result?

Case # 4

Continental Forest v. White Lumber


Supreme Court of Oregon (1970)
256 Or. 466; 474 P.2d 1
SLOAN, J.
This is an action by plaintiff for the alleged wrongful breach of a contract for
the sale by plaintiff to defendant of 20 carloads of plywood. The contract was
an installment contract as defined by ORS 72.6120 (1) (UCC 2-612(11)): see
appendix to this decision. The carloads of plywood were to be shipped by
plaintiff to Gainesville, Georgia.
The first carload arrived in Gainesville, Georgia, on January 4, 1967. Defendant
concluded that this car did not meet the specifications of the contract. On
January 17, 1967, defendant served notice on plaintiff of its intent to cancel the
contract because of the failure of the first carload to conform to specifications.
Defendant alleged that a substantial amount of the plywood was too thin. In
the meantime, plaintiff had already shipped the second and third carloads, as
per the contract. The second carload arrived at Gainesville, Georgia, while the
third carload was stopped enroute after the cancellation.
After the cancellation the parties agreed to an inspection of the first two
carloads of plywood to be made in accordance with the U.S. Products Standard
PS 1-66, which was, as mentioned, a part of the agreement. The standard for
conformance to specifications provides that a variance of 5 per cent from
specifications is allowable. A variance above 5 per cent, however, permits the
buyer to reject the nonconforming plywood but does not allow a cancellation or
rejection of the entire shipment. The inspection of the first carload disclosed a
variance of 9 per cent. The second carload was within the 5 per cent tolerance.
Defendant paid for the first carload without deduction for the deviation from
the specifications but refused to pay for any of the other cars. The last two
carloads were sold to other buyers.

As a result of defendant's attempted cancellation of the entire contract, plaintiff


brought this action to recover his damages. In an action tried without a jury,
the trial court made extensive findings of fact in favor of plaintiff and judgment
was entered accordingly. Defendant appeals.
The record submitted to this court is unique in that it contains only the findings
of fact and conclusions of law of the trial court. It is defendant's contention that
certain language used by the court, in its findings and conclusions, will not
support the judgment.
Subsection 2 of ORS 72.6120 permits the buyer to reject an installment "which
is nonconforming if the nonconformity substantially impairs the value of that
instalment and cannot be cured ." On the other hand, subsection 3 permits
the buyer to reject the entire contract if the nonconformity or default in respect
to one or more of the installments "substantially impairs tge value of the whole
contract
The trial court's specific findings with respect to delivery, testing, and other
specific facts relating to the conformance of the shipments from plaintiff to
defendant, would sustain a conclusion that this was a nonconformity as defined
in subsection 2 of the statute and could be cured. However, in a conclusionary
finding of fact made by the trial court, the court found "such breach as to
thickness in the plywood contained in the first car constituted a material
breach and entitled the defendant to request assurance that future shipments
would conform to the contract. The second inspected did so conform." And, as
a conclusion of law, the trial court stated "the failure of the first car to meet the
specifications of the contract constituted a material breach of the contract and
allowed defendant to request further reasonable assurances of performance."
Defendant's entire argument on appeal is based upon the findings and
conclusions just quoted. It is defendant's contention that, particularly in respect
to the conclusion of law just quoted, the trial court's language that failure "to
meet the specifications of the contract constituted a material breach of the
contract" was the equivalent of the requirements of subsection 3 of the statute,
to wit: the nonconformity substantially impaired the value of the whole contract
and was, therefore, a breach of the whole. Taken out of the total context,
without regard to the other specific findings of what actually occurred in this
situation, defendant's contention appears to have merit. However, the total
findings and the facts set forth therein lead to the inevitable conclusion that
the ambiguity in the trial court's findings must be resolved to mean that the
nonconformity only impaired the value of the first installment and, more
importantly, that the nonconformity could be "cured."
Authority relating to the application of subsections 2 and 3 of this section of the
code is scarce, but the existing authority conforms to the following statement
found in 3 Duesenberg & King, Bender's Uniform Commercial Code Service,
14-02 (3)(i) pages 14-25:
"As far as any nonconforming installment is concerned, the buyer may
only reject if there is substantial impairment regarding the value of that

installment and when the substantial impairment cannot be cured. Thus,


it is clear that three things are necessary for a buyer to be able to reject
an installment.
Assuming that the nonconformity exists, the
nonconformity must impair the value of that installment and such
impairment must be substantial; the third element is that the defect giving
rise to the nonconformity cannot be cured."
In regard to a situation in which the buyer may claim a violation of subsection
3, the authors at pages 14-27, 28 state:
"Some matters are clear from this section. If there is a minor breach which
is curable by the seller, the installment must be accepted and the buyer
cannot cancel the contract. He would be entitled, however, under Section
2-609 to demand adequate assurance of performance."
Peters, Remedies for Breach of Contracts, 1963, 73 Yale L J 199, at 225, states:
"The section is reasonably clear at the extremes. If the breach is trivial and
curable, the buyer must accept the installment and cannot categorically refuse
further installments."
Paragraph 5 of the official comments to this section of the code states: "Cure of
nonconformity of the installment in the first instance can usually be afforded by
an allowance against the price ."
1. The parties in this instance do not dispute that the word "cure" includes
price deduction for nonconformity. Therefore, we are not required to decide
what other methods of cure may have existed or should be required. The trade
standards adopted by the parties provide that the buyer may reject that part of
the shipment which is more than 5 per cent below grade and "shall accept the
balance of the shipment as invoiced." The necessary implication is that the
rejected plywood need not be paid for but does not allow a total rejection.
Thus, by adopting the trade standards, the parties also bargained for a
reduction in price as a method of cure.
2. The parties dispute the applicability of ORS 72.6090. Defendant argues that
the trial court apparently based its conclusions in part, on the requirements of
the latter section and if so, that the assurances provided for and permitted by
ORS 72.6090 are not applicable to the given case. Plaintiff argues to the
contrary.
We consider it unnecessary in this case to decide the extent to which the
assurances and provisions of ORS 72.6090 relate to ORS 72.6120. As above
stated, we are satisfied that the actual facts found by the trial court and
included within his finding of fact, which are not disputed, demonstrate that
this was actually a minor deviation from conformity and curable within the
meaning of subsection 2 of ORS 72.6120.
The judgment is affirmed.
APPENDIX TO THE OPINION

72.5080 Cure by seller of improper tender or delivery; replacement. (1) Where


any tender or delivery by the seller is rejected because nonconforming and the
time for performance has not yet expired, the seller may seasonably notify the
buyer of his intention to cure and may then within the contract time make a
conforming delivery.
(2) Where the buyer rejects a nonconforming tender which the seller had
reasonable grounds to believe would be acceptable with or without money
allowance the seller may if he seasonably notifies the buyer have a further
reasonable time to substitute a conforming tender. [1961 c.726 72.5080]
72.6090 Right to adequate assurance of performance. (1) A contract for sale
imposes an obligation on each party that the other's expectation of receiving
due performance will not be impaired. When reasonable grounds for insecurity
arise with respect to the performance of either party the other may in writing
demand adequate assurance of due performance and until he receives such
assurance may if commercially reasonable suspend any performance for which
he has not already received the agreed return.
(2) Between merchants the reasonableness of grounds for insecurity and the
adequacy of any assurance offered shall be determined according to
commercial standards.
(3) Acceptance of any improper delivery or payment does not prejudice the
aggrieved party's right to demand adequate assurance of future performance.
(4) After receipt of a justified demand failure to provide within a reasonable
time not exceeding 30 days such assurance of due performance as is adequate
under the circumstances of the particular case is a repudiation of the contract.
[1961 c.726 72.6090]
72.6120 "Instalment contract"; breach. (1) An "instalment contract" is one
which requires or authorizes the delivery of goods in separate lots to be
separately accepted, even though the contract contains a clause "each delivery
is a separate contract" or its equivalent.
(2) The buyer may reject any instalment which is nonconforming if the
nonconformity substantially impairs the value of that instalment and cannot be
cured or if the nonconformity is a defect in the required documents; but if the
nonconformity does not fall within subsection (3) of this section and the seller
gives adequate assurance of its cure the buyer must accept that instalment.
(3) Whenever nonconformity or default with respect to one or more instalments
substantially impairs the value of the whole contract there is a breach of the
whole. But the aggrieved party reinstates the contract if he accepts a
nonconforming instalment without seasonably notifying of cancellation or if he
brings an action with respect only to past instalments or demands performance
as to future instalments. [1961 c.726 72.6120]