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Conditions


From: Alexander Terekhov
Subject: Conditions
Date: Tue, 04 May 2010 16:08:40 -0000

RJack wrote:
[...]
> I find it interesting that in 2008 Judge Scheindlin found that an
> assertion of "condition" in a contract is interpreted to mean a
> "condition precedent":
> 
> n52 "Plaintiffs bring claims for "Contract Failure of Condition" against
> each defendant. The Court is not familiar with this term. I assume
> "Contract Failure of Condition" is a claim for breach of a condition
> precedent." Abu Dhabi Commercial Bank, et al. v. Morgan Stanley & Co.,
> et al., 1:2008cv07508, SDNY, (2008). Judge Shira A. Scheindlin.
> http://amlawdaily.typepad.com/AbuDhabi.pdf

The following is really nice summary on "conditions".

http://law.scu.edu/FacWebPage/Neustadter/contractsebook/main/commentary/Promises%20and%20condtions.html

"B.  Conditions.

     When talking about contracts, the parties to contracts, judges, and
other legal writers use the word "conditions" to express several
different concepts.  Pay careful attention to the context to determine
the intended meaning.  There are at least four different intended
meanings.   

Sometimes people refer to the "conditions of the contract" simply as
another way of saying the "terms (or the provisions) of the contract." 
A seller of a business may say to a prospective buyer:  "I'll sell for
$500,000 cash, plus a one year consulting contract at $50,000, with an
office on the premises, and those are my conditions, take it or leave
it."  The seller is really describing the promises that he will make and
what he expects in return even though the seller is using the word
"conditions."  
Sometimes people refer to a "condition to the contract," by which they
mean that a contract will not be formed absent the occurrence of an
event that is beyond the control of the parties to the contract.  For
example, if the Cheetahs and Paula Fernandez orally agreed that the
soccer agreement would be subject to approval by the Board of Directors
of the Los Robles Soccer Club (based on a conclusion that Paula
Fernandez was a qualified soccer trainer), the formation of the contract
would be subject to that condition of approval.  It may be difficult,
even somewhat artificial, to distinguish a condition to formation from a
condition to performance (discussed below).  The distinction is
important however because the parol evidence rule may bar introduction
of evidence offered to establish a condition to performance but will not
bar introduction of evidence offered to establish a condition to
formation (such as the condition that the Los Robles Soccer Club approve
the soccer trainer).   

Sometimes people use the word "condition" to refer to the manner of
accepting an offer to form a unilateral contract.  For example, in
describing the formation of a contract of insurance one might hear that
the insurance company offers to insure on condition that the purchaser
of the insurance policy pays premiums.  This is simply another way of
saying that the offer to insure made by the insurance company can be
accepted (thus forming a contract) by the action of the purchaser in
paying premiums.  Less frequently one might hear the word condition used
to describe the acceptance of an offer to form a bilateral contract:  "I
promise to sell you this grain when harvested on condition that you
promise to pay me $5.00/bushel."   This is another way of saying that
the offer to sell the grain can be accepted (thus forming a contract) by
the expression of commitment to buy at the stated price and time.

You will also hear the word "condition" used to refer to an event the
occurrence of which either triggers or discharges the duty of a party to
a contract to perform the obligations created by her promises.  Here, we
are speaking of a condition to performance of an obligation under a
contract that has already been formed, not a condition to formation. 
The ensuing discussion, most of the relevant literature, and our study
of conditions focuses on this use of the word.  

     1.  Express and implied conditions.   Like promises and like other
terms of a contract, events that condition performance of an obligation
may be described by oral or written language of the parties ("express
conditions") or may be implied from the circumstances ("implied
conditions" or "implied-in-fact conditions").  They may also be supplied
by default ("constructive conditions"), as we see when discussing
impracticability and frustration of purpose.  See Commentary.Discharge
by impracticability or frustration of purpose.     

     There are no express conditions in the soccer agreement, but one
can imagine several conditions to performance that the parties might
have included.  For example, the Description of Services might have
provided:  "Train U-16 girls select team (Los Robles Cheetahs) - soccer-
Tuesday & Thursday, approx. 4-6 p.m., weather permitting."  So drafted,
the trainer's obligation to train on a scheduled day would be discharged
in the event of lightning storms at the times scheduled for training. 
Once discharged, the trainer's failure to perform the discharged
obligation cannot be a breach of contract.  Typical language for the
expression of condition are phrases such as:  "if . . . . then . . . ;"
"provided that . . . ;" "on condition that . . . ;" "in the event that .
. . "  But, as suggested by the example above ("weather permitting"),
there are a variety of other ways to express conditions.  Of course,
even though the soccer agreement did not contain an express condition
referring to the weather, the condition would probably be implied from
usage of the trade, because soccer trainers invariably cancel training
in the event of lightning for the safety of the players.  Another
implied condition to the trainer's obligation to train the team through
the national championships (or is it an express condition?) is that the
Cheetahs first qualify to play in national championships.  

     An event that conditions performance is often labeled either a
"condition precedent" or a "condition subsequent."  A condition
precedent is an event that must occur before performance of an
obligation becomes due.  Its occurrence triggers the obligation.  A
condition subsequent is an event the occurrence of which discharges the
obligation.  Note that R.2d Contracts uses different terminology that
has not generally infiltrated the case law.  R.2d Contracts reserves the
word "condition" to identify what is more commonly identified as a
"condition precedent."  R.2d Contracts 224 provides: "A condition is an
event, not certain to occur, which must occur, unless its non-occurrence
is excused, before performance under a contract becomes due (emphasis
added)."   See also R.2d Contracts 225, 226.  R.2d Contracts 230 uses
different language, avoiding the word "condition" entirely, to identify
what is more commonly identified as a "condition subsequent."   R.2d 230
provides: "[I]f under the terms of the contract the occurrence of an
event is to terminate an obligor's duty of immediate performance or one
to pay damages for breach, that duty is discharged if the event
occurs."  Can you classify the condition "weather permitting" in the
soccer agreement? 

      One common example of a condition precedent is a condition of
satisfaction, such as in the following case:  A portrait artist promises
to paint a portrait of Bill Gates to be hung in the lobby of the
Microsoft office tower in which Bill works.  In exchange, Bill promises
to pay $5,000 for the portrait if satisfied with the rendering.  Bill's
promise to pay is subject to a condition precedent of satisfaction.  We
explore conditions of satisfaction in Kennedy Associates, Inc. v.
Fischer, in which a prospective financier balked on lending money to a
prospective borrower after inspecting the real property that was to
serve as collateral for repayment of the loan.     
     Conditions subsequent are less common.  R.2d Contracts offers this
illustration following R.2d Contracts 230:  "A, an insurance company,
insures the property of B under a policy providing that no recovery can
be had if suit is not brought on the policy within two years after a
loss.  A loss occurs and B lets two years pass before bringing suit. 
A's duty to pay B for the loss is discharged and B cannot maintain the
action on the policy."  Notice in this example that the "event" is the
failure of B to timely file suit and "event" is simply a convenient
shorthand for the non-occurrence of an event.  

     The distinction between conditions precedent and conditions
subsequent is important in some jurisdictions, vestigial in others.  In
some jurisdictions, rules of procedure governing pleading and persuasion
require that the party alleging injury from breach of contract by
another must plead the occurrence of any condition precedent to the
breaching party's obligation to perform and carry the burden of
persuasion (preponderance of the evidence) on that issue.  In contrast,
the party defending against an alleged breach of contract must plead the
occurrence of any condition subsequent claimed to discharge the duty of
performance and carry the burden of persuasion on that issue.  Some
jurisdictions do not allocate the burdens of pleading and persuasion in
this way; in such jurisdictions the distinction between conditions
precedent and subsequent has little if any consequence.  

     Recall that the consequence for the failure of a party to perform
an obligation created by an enforceable promise is the right of the
aggrieved party to compensatory money damages and, sometimes, a
discharge of the aggrieved party's duty to perform its own promises.  In
contrast, if an event that conditions performance of an obligation does
not occur, no party has a right to a remedy; the only consequence is
discharge of the obligation that is conditioned on the event.  In our
earlier example, if Bill Gates is not satisfied with the rendering of
his portrait, his obligation to pay is discharged, but he cannot hold
the artist responsible for breach of contract because the artist did not
promise that Bill would be satisfied.  However, sometimes a party will
make a promise (express or implied-in-fact) that a conditioning event
will occur.  In our soccer agreement, for example, the parties may have
agreed that the Cheetahs would pay for soccer training only if the
soccer trainer completed a licensing course and received a Class C
coaching license and the soccer trainer may have promised to complete
that course and receive that license.  If they had so agreed, the soccer
trainer would have promised that an event would occur.  In the words of
Professor Corbin, the trainer would have agreed to a "promissory
condition."  Failure of that event would give the Cheetahs a right to
compensatory money damages for breach of the promise and would also
discharge the Cheetahs from their obligation to pay under the contract.

     2.  Avoiding the impact of express or implied conditions.  The
consequence for non-occurrence of an event that conditions an obligation
in a contract is dramatic:  the conditioned obligation of a party is
entirely discharged, even when the event seems minor or the degree of
deviation from event seems minor.  Dove v. Rose Acre Farms, Inc.,
involving a law student who didn't get paid a substantial bonus for
summer work on an egg farm because of a two-day absence from work for
strep throat, is a particularly stark example.   Lawyers for obligees
therefore will advocate and courts may seize upon one of several
doctrinal devices to avoid that consequence.  

     A court may conclude that language suggestive of a condition is
ambiguous and justifies an interpretation that restricts the reach of
the condition or the discretion vested by the condition in one of the
parties.  Cases involving conditions of satisfaction are a common
example.  See, e.g., Kennedy Associates, Inc. v. Fischer and R.2d
Contracts 228.  Courts may also conclude that ambiguity justifies an
interpretation that language creates a promise rather than a condition
(breach of which gives a right to damages but does not necessarily
discharge the other party's duties of performance).  See, e.g., Howard
v. Federal Crop Insurance (insurer refuses to pay benefits to insured
tobacco farmer because farmer plowed damaged tobacco stalks before
inspection of damaged crop by insurer); New York Bronze Powder Co., Inc.
v. Benjamin Acquisition Corp. (buyer of assets of a business declines to
pay $350,000 still owing absent the seller's surrender of a promissory
note evidencing that debt) and R.2d Contracts 227.   In some cases, a
court may conclude that ambiguous language suggestive of condition
reflects the parties' expectation that performance of a duty will
normally follow an anticipated event but is not conditioned on the
occurrence of the event.  Cases involving payments by a general
contractor to a subcontractor "upon payment by the owner" (or similar
language) are a common example.  If the owner does not pay the general
contractor (because of insolvency, for example), the court will
generally construe the language as measuring the time at which the
general contractor is expected to pay the subcontractor rather than as a
condition to the duty to pay because it is generally most reasonable to
assume that the general contractor, not the subcontractor, assumes the
risk of the owner's non-payment.      

     A court may find the condition eliminated by mutual agreement of
the parties (modification) or, if the condition does not reflect a
material part of the agreed exchange, a court may find the condition
waived by the voluntary words or conduct of one of the parties.  
           .       
     A court may excuse a condition if the party whose obligation is
conditioned has breached or repudiated its own duty (such as an implied
duty of cooperation or an implied duty of best efforts) and that breach
or repudiation materially contributes to the non-occurrence of the
condition.  R.2d Contracts 245, 255.    Charter Oak Fire Insurance Co.
v. Color Converting Industries Co. considers this device but declines to
apply it under the circumstances of the case. 
     
     Finally, a court may outright excuse the occurrence of the event,
in effect rewriting the contract, if enforcing the condition would cause
forfeiture to the obligee that is disproportionate to the prejudice
suffered by the obligor resulting from failure of the condition.  See
R.2d Contracts 229, including Comment b to R.2d Contracts 229, and J. N.
A. Realty Corp. v Cross Bay Chelsea, in which the court rescues a
restaurant owner from its failure to timely exercise an option to renew
a lease of the restaurant premises.  

     3.  Constructive conditions of exchange.  The parties to a
bilateral contract, by definition, have exchanged promises of future
performance.  Those promises create an expectation of the actual
exchange of performances.  The parties may contemplate exchange of
performances concurrently (typical in a sale of goods or sale of real
property in which goods or the title to real property are to be tendered
for delivery concurrently with tender of the price), or the parties may
contemplate that performance by one party is to precede performance by
another (typical in a service contract in which service or at least some
portion of a service, such as painting a house or working for wages, is
to precede payment).  However, often the parties do not express any
temporal relationship between the obligations that each have undertaken
by their promises.   The soccer agreement does not do so.  It states the
obligation of Paula Fernandez to train and the obligation of the
Cheetahs to pay, but does not state that the obligation to pay is
conditioned upon the training or that the obligation to train and coach
is conditioned upon the obligation to pay.  

     At early common law, absent an expression of the relationship
between the promises of each party, courts construed promises of one
party as independent of promises of the other party rather than as
conditioned upon one another.  If one party breached a promise, the
other was entitled to damages but remained obligated to perform its own
promise because its promise was independent of the promise that had been
breached.  In Nichols v. Raynbred, Hob. 88, 80 Eng. Rep. 238 (King's
Bench 1615), Nichols promised to sell a cow to Raynbred for 50
shillings.  In suing Raynbred for the 50 shillings, the court held that
Nichols need not allege or prove that he delivered or was even prepared
to deliver the cow.  Of course Raynbred could sue Nichols for failure to
deliver the cow but that would be a separate action (now a
cross-complaint) because Raynbred's obligation to pay was independent of
(i.e. not dependent upon) the obligation of Nichols to deliver the cow. 
Even today, a court will construe some promises as independent of others
if that intention is clearly expressed or otherwise is consistent with
the overall purpose of the contract. 

      In most contracts, however, courts have long since departed from
the early view that promises in a bilateral contract are independent of
one another to conclude that performance of one or more of the promises
of one party is dependent upon the performance of one or more of the
promises of the other party.   In other words, performance by one party
of one or more promises is a condition to performance of a promise or
promises by the other party.  When this relationship is not expressed by
the parties the court constructs the condition.  We call the condition a
constructive condition of exchange.   However, unlike express conditions
or implied conditions, and unlike constructive conditions of
impracticability or frustration of purpose, the non-occurrence of which
will discharge the duties conditioned, the breach of a promise (i.e. the
non-occurrence of a constructive condition of exchange) will only
discharge a duty conditioned on performance of the promise if the breach
of the promise is material.  We explore the concept of material breach
further in other portions of the these materials.  

     The constructive condition of exchange may be a condition
concurrent or a condition precedent.  R.2d Contracts 233, 234 reflect
the common law rules that guide a court's determination of whether the
constructive condition is concurrent or precedent.  U.C.C. 2-507(1) and
2-511(1) state the rules for transactions in goods.  Under the
Restatement rules, in the soccer agreement, which says nothing about the
temporal relationship of the obligations, the obligation of the Cheetahs
to pay would be conditioned upon the performance by Paula Fernandez of
her obligation to train (although an immaterial breach of her obligation
to train, e.g. cutting a session short by five minutes, would not excuse
the obligation to pay).  Because the agreement calls for her to be paid
$100/training session, the Cheetahs would probably have to pay her $100
promptly after she completes each session.  Her continuing obligation to
train would in turn be conditioned upon that payment (although an
immaterial breach of the obligation to pay, e.g. $95 with a promise to
pay $105 the next time, would not excuse her obligation to continue with
the next training session).  

     Supplementary reading: Farnsworth 8.1-8.7."


regards,
alexander.

P.S. "I'm insufficiently motivated to go set up a GNU/Linux system 
so that I can do the builds."

Hyman Rosen <address@hidden> The Silliest GPL 'Advocate'

P.P.S. "Of course correlation implies causation! Without this 
fundamental principle, no science would ever make any progress."

Hyman Rosen <address@hidden> The Silliest GPL 'Advocate'

--
http://gng.z505.com/index.htm 
(GNG is a derecursive recursive derecursion which pwns GNU since it can 
be infinitely looped as GNGNGNGNG...NGNGNG... and can be said backwards 
too, whereas GNU cannot.)


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