Contracts II outline – Professor Maggs Contract Interpretation

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Diminished Expectation of Future Return Performance

  1. Insecurity and Insolvency

    1. Buyer and Seller’s Remedies for Insecurity/Insolvency

      1. If a party has reasonable grounds for feeling insecure about the other party’s performance, they may demand adequate assurance the other party will perform and suspend performance until receipt of assurance

        1. 2-609(1)- when you make a contract, you not only promise to perform, but also implicitly promise not to impair the other person’s expectation you will perform

        2. Standard for insecurity? very low: just a report from an apparently reliable source

        3. If no adequate assurance is given? 2-609(4): after receipt of demand for assurance, failure to provide assurance w/in a reasonable time, not to exceed 30 days, is repudiation of the contract (treated as a breach- recover thru ordinary means)

        4. CPMT v. Panama Canal- PC chartered tugboat from CPMT- option to purchase boat w/clear title; PCC heard CPMT had 3rd mortgage, wasn’t making payments on 1st mortgage from broker, said it’d w/hold payment until receipt of assurance; Held- PCC’s feeling of insecurity and request for assurance reasonable (didn’t have to exercise due diligence to find out if info true); PCC had a right to suspend performance

      2. Seller’s remedies upon discovering buyer’s insolvency

        1. refuse to deliver except for cash (even if contract requires otherwise), 2-702(1)

        2. stop delivery (even if title has passed)

          • 2-401(2)- when title passes from seller to buyer:

          • 2-705- requirement of notice to stop deliver, but notice to buyer not required

        3. reclaim goods already delivered, 2-702(2); seller must make reclaim for goods w/in 10 days (10 day period does not apply if buyer misrepresented solvency in writing w/in 3 mos. before contract was made)

          • what if buyer has sold them to another? 2-702(3) seller may still recover them unless they were bought in good faith

      3. Definition of insolvency, 1-201(2):

        1. have ceased to pay debts

        2. have ceased to pay debts as they are due (may not have defaulted yet, but won’t be able to pay debts as they come due)

        3. meet definition of insolvency under federal bankruptcy law: if your assets exceed your liability (total amount of $ you owe)

    2. Buyer’s or Seller’s Repudiation

      1. ways to repudiate

        1. by language or conduct

          • i.e. common to call and repudiate by saying you’ll only perform if contract terms are changed

          • Ducks ex.- Motion Pix finds out that Robles leased the WW2 Duck to someone else; Motion may cover immediately, even before performance is due; Motion does have a duty to mitigate

        2. by not providing assurance

      2. retraction of a repudiation- buyer may retract a repudiation unless the seller treated it as final / took action in reliance

      3. permitted responses to a repudiation

        1. may immediately resort to any remedy that is available for breach

        2. await performance, for a commercially reasonable amount of time

      4. Oloffson v. Connor- Coomer to sell corn, 2 installments; repudiates; Oloffson proceeded as if no repudiation, then tried to charge Coomer $ to cover on each date of installment; Held- upon repudiation, Coomer could wait a commercially reas. time (here, none) or cover immediately; why? clear repudiation, easy to contract w/another; trade custom to pay diff. btw contract/market price date of repudiation

    1. Cancellation of Installment Contracts

      1. Seller’s Remedies when buyer breaches w/respect to one installment:

        1. recover price of accepted goods (whether 1 or several installments)

        2. suspend future deliveries until buyer provides adequate assurance

        3. cancel remainder of contract if breach “substantially impairs the value of the whole”

          1. “breach of the whole”: when a nonconformity substantially impairs value of the whole contract; whole contract should not be cancelled lightly

            • if only seller’s security is impaired, seller has a right to demand assurance, but not to cancel whole contract

      2. Buyer’s Remedies when seller breaches w/respect to one installment:

        1. accept installment and seek damages

        2. reject installment and seek damages (if breach substantially impairs value of installment and cannot be cured)

        3. suspend future payments until seller provides adequate assurance

        4. cancel remainder of contract if breach substantially impairs the value of the whole

          1. i.e. if 1st breach suggests there will be future breaches that can’t be cured

          2. Graulich Caterer v. Hans Holterbausch- Graulich to provide microwavable meals for World Fair exhibit; 1st 2 installments not as warranted, Hans cancelled entire contract; Held- subst. impairment of whole contract, ok to cancel; time was of the essence, no time to wait for cure

          3. Midwest Mobile Diagnostic v. Dynamics- Midwest to buy 4 trailers from Dynamics; 1st couldn’t be certified by MRI co. and wasn’t ‘attractive’; Held- grounds to cancel entire contract b/c 1st had substantial impairment and needed all 4 w/in period of time

        5. perfect tender rule does not apply in installment contracts; can only reject if there hasn’t been substantial performance; defects in prior installments are cumulative in effect

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