Anticipatory Repudiation
Chapter 26: Anticipatory Repudiation
■ ■ ■
If one party to a contract decides not to perform under the contract, must the other party wait until the time for performance to either sue for breach or to make other arrangements to mitigate damages? No.
Anticipatory repudiation---equivalent to a breach of a contract before performance is due---occurs when a party unequivocally communicates an intention not to perform or, by actions, renders performance impossible by, for example, selling to a third party a unique item that is the subject of the contract. To constitute repudiation, the prospective non-performance must substantially impair the value of the contract to the non-repudiating party. Upon repudiation, the other parties to the contract may either wait a reasonable time for performance or treat the contract as breached and resort to their remedies. The other parties may also suspend further performance of their duties, whether they elect to treat the repudiation as a breach or merely wait a reasonable time before doing so.
The R2d outlines the common law of repudiation in sections 250 to 257. UNIDROIT articles 7.3.3 and 7.3.4 do the same in a more summary fashion. The Uniform Commercial Code codified the rules regarding anticipatory repudiation in sections 2--610 and 2--611 and the CISG does so in articles 71 to 73; both codes are substantially similar in this area.
The acts or statements that constitute sufficient unequivocal communication of an intention not to perform vary from case to case. It has been characterized as an overt communication of intention that renders performance impossible or demonstrates a clear determination not to continue performance. Performance need not be absolutely, utterly impossible. If a party states that it will not perform unless it receives a performance to which it is not entitled (or fails to provide adequate assurance of performance when that has been properly demanded under U.C.C. section 2--609), repudiation has occurred. After repudiation, the aggrieved party may immediately resort to any remedy provided the actions are undertaken in good faith.
An anticipatory repudiation can itself be retracted up to the moment that the repudiating party's next performance under the contract is due so long as the non-repudiating party has not yet cancelled the contract or materially changed his position or otherwise indicated that he considers the repudiation final. Retraction may be by any method that indicates 748 clearly to the other party that the previous repudiation is withdrawn and the party now intends to perform. A retraction must include any assurance of future performance justifiably demanded by the nonrepudiating party.
These are good, common sense rules that appear to provide a reasonable framework within which the parties can operate when one fears that one or more of the parties may not perform. The following cases trace the development of the doctrine and illustrate its modern application. This is another area where it is critical that the communications with the other side be handled in a coordinated, calculated fashion. It is all too easy for a party that thought it was the non-repudiating party to be characterized as the repudiating party because of overly hasty or inadequately documented actions. Lawyers should be thinking about creating an adequate record to stand on to support the claim that the other side anticipatorally repudiated.
Hochster v. De La Tour, Queen's Bench, 2 El. & Bl. 678, 118 Eng. Rep. 922 (1853)
[1]Lord Campbell C. J. now delivered the judgment of the Court. On this motion in arrest of judgment,1 the question arises, Whether, if there be an agreement between A. and B., whereby B. engages to employ A. on and from a future day for a given period of time, to travel with him into a foreign country as a courier, and to start with him in that capacity on that day, A. being to receive a monthly salary during the continuance of such service, B. may, before the day, refuse to perform the agreement and break and renounce it, so as to entitle A. before the day to commence an action against B. to recover damages for breach of the agreement; A. having been ready and willing to perform it, till it was broken and renounced by B. The defendant's counsel very powerfully contended that, if the plaintiff was not contented to dissolve the contract, and to abandon all remedy upon it, he was bound to remain ready and willing to perform it till the day when the actual employment as courier in the service of the defendant was to begin; and that there could be no breach of the agreement, before that day, to give a right of action. But it cannot be laid down as a universal rule that, where by agreement an act is to be done on a future day, no action can be brought for a breach of the agreement till the day for doing the act has arrived. If a man promises to marry a woman on a future day, and before that day marries another woman, he is instantly liable to an action for breach of promise of marriage; Short v. Stone (8 Q.B. 358). If a man contracts to execute a lease on and from a future day for a certain term, 749 and, before that day, executes a lease to another for the same term, he may be immediately sued for breaking the contract; Ford v. Tiley (6 B. & C. 325). So, if a man contracts to sell and deliver specific goods on a future day, and before the day he sells and delivers them to another, he is immediately liable to an action at the suit of the person with whom he first contracted to sell and deliver them; Bowdell v. Parsons (10 East, 359). One reason alleged in support of such an action is, that the defendant has, before the day, rendered it impossible for him to perform the contract at the day: but this does not necessarily follow; for, prior to the day fixed for doing the act, the first wife may have died, a surrender of the lease executed might be obtained, and the defendant might have repurchased the goods so as to be in a situation to sell and deliver them to the plaintiff. Another reason may be, that, where there is a contract to do an act on a future day, there is a relation constituted between the parties in the meantime by the contract, and that they impliedly promise that in the meantime neither will do anything to the prejudice of the other inconsistent with that relation. As an example, a man and woman engaged to marry are affianced to one another during the period between the time of the engagement and the celebration of the marriage. In this very case, of traveler and courier, from the day of the hiring till the day when the employment was to begin, they were engaged to each other; and it seems to be a breach of an implied contract if either of them renounces the engagement. This reasoning seems in accordance with the unanimous decision of the Exchequer Chamber in Elderton v. Emmens, which we have followed in subsequent cases in this Court. The declaration in the present case, in alleging a breach, states a great deal more than a passing intention on the part of the defendant which he may repent of, and could only be proved by evidence that he had utterly renounced the contract, or done some act which rendered it impossible for him to perform it. If the plaintiff has no remedy for breach of the contract unless he treats the contract as in force, and acts upon it down to the 1st June 1852, it follows that, till then, he must enter into no employment which will interfere with his promise "to start with the defendant on such travels on the day and year," and that he must then be properly equipped in all respects as a courier for a three months' tour on the continent of Europe. But it is surely much more rational, and more for the benefit of both parties, that, after the renunciation of the agreement by the defendant, the plaintiff should be at liberty to consider himself absolved from any future performance of it, retaining his right to sue for any damage he has suffered from the breach of it. Thus, instead of remaining idle and laying out money in preparations which must be useless, he is at liberty to seek service under another employer, which would go in mitigation of the damages to which he would otherwise be entitled to for a breach of the contract. It seems strange that the defendant, after renouncing the contract, and absolutely declaring that he will never act under it, should be permitted to object that faith is given to his assertion, and that an 750 opportunity is not left to him of changing his mind. If the plaintiff is barred of any remedy by entering into an engagement inconsistent with starting as a courier with the defendant on the 1st June, he is prejudiced by putting faith in the defendant's assertion: and it would be more consonant with principle, if the defendant were precluded from saying that he had not broken the contract when he declared that he entirely renounced it. Suppose that the defendant, at the time of his renunciation, had embarked on a voyage for Australia, so as to render it physically impossible for him to employ the plaintiff as a courier on the continent of Europe in the months of June, July and August 1852: according to decided cases, the action might have been brought before the 1st June; but the renunciation may have been founded on other facts, to be given in evidence, which would equally have rendered the defendant's performance of the contract impossible. The man who wrongfully renounces a contract into which he has deliberately entered cannot justly complain if he is immediately sued for a compensation in damages by the man whom he has injured: and it seems reasonable to allow an option to the injured party, either to sue immediately, or to wait till the time when the act was to be done, still holding it as prospectively binding for the exercise of this option, which may be advantageous to the innocent party, and cannot be prejudicial to the wrongdoer. An argument against the action before the 1st of June is urged from the difficulty of calculating the damages: but this argument is equally strong against an action before the 1st of September, when the three months would expire. In either case, the jury in assessing the damages would be justified in looking to all that had happened, or was likely to happen, to increase or mitigate the loss of the plaintiff down to the day of trial.
* * *
[2]Upon the whole, we think that the declaration in this case is sufficient. It gives us great satisfaction to reflect that, the question being on the record, our opinion may be reviewed in a Court of Error. In the meantime we must give judgment for the plaintiff.
Judgment for plaintiff.
Notes and Questions
1.The Hochster opinion, among other things, should make it plain how important paragraphs and headings can be in making text easily readable. The opinion featured neither and is not. Remember that when taking exams.
2.Hochster v. De La Tour is considered the seminal or ovular case for the doctrine of anticipatory repudiation. What two things does it allow a party to a contract to do upon the other party's repudiation?
751 3.At the time this case was decided, it was well accepted that courts didn't make law; they found it among the already-established rules. How does this court explain that anticipatory repudiation is not really a new rule, but just an application of well-established rules?
AMF, Inc. v. McDonald's Corp., United States Court of Appeals, Seventh Circuit, 536 F.2d 1167 (1976)
Cummings, Circuit Judge.
[1]AMF, Incorporated, filed this case in the Southern District of New York in April 1972. It was transferred to the Northern District of Illinois in May 1973. AMF seeks damages for the alleged wrongful cancellation and repudiation of McDonald's Corporation's ("Mc-Donald's") orders for sixteen computerized cash registers for installation in restaurants owned by wholly-owned subsidiaries of McDonald's and for seven such registers ordered by licensees of McDonald's for their restaurants. In July 1972, McDonald's of Elk Grove, Inc. sued AMF to recover the \$20,385.282 purchase price paid for a prototype computerized cash register and losses sustained as a result of failure of the equipment to function satisfactorily. Both cases were tried together during a fortnight in December 1974. A few months after the completion of the bench trial, the district court rendered a memorandum opinion and order in both cases in favor of each defendant. The only appeal is from the eight judgment orders dismissing AMF's complaints against McDonald's and the seven licensees. We affirm.
[2]The district court's memorandum opinion and order are unreported. Our statement of the pertinent facts is culled from the 124 findings of fact contained therein or from the record itself.
[3]In 1966, AMF began to market individual components of a completely automated restaurant system, including its model 72C computerized cash register involved here. The 72C cash register then consisted of a central computer, one to four input stations, each with a keyboard and cathode ray tube display, plus the necessary cables and controls.
[4]In 1967, McDonald's representatives visited AMF's plant in Springdale, Connecticut, to view a working "breadboard" model 72C to decide whether to use it in McDonald's restaurant system. Later that year, it was agreed that a 72C should be placed in a McDonald's restaurant for evaluation purposes.
752 [5]In April 1968, a 72C unit accommodating six input stations was installed in McDonald's restaurant in Elk Grove, Illinois. This restaurant was a wholly-owned subsidiary of McDonald's and was its busiest restaurant. Besides functioning as a cash register, the 72C was intended to enable counter personnel to work faster and to assist in providing data for accounting reports and bookkeeping. McDonald's of Elk Grove, Inc. paid some \$20,000 for this prototype register on January 3, 1969. AMF never gave McDonald's warranties governing reliability or performance standards for the prototype.
[6]At a meeting in Chicago on August 29, 1968, McDonald's concluded to order sixteen 72C's for its company-owned restaurants and to cooperate with AMF to obtain additional orders from its licensees. In December 1968, AMF accepted McDonald's purchase orders for those sixteen 72C's. In late January 1969, AMF accepted seven additional orders for 72C's from McDonald's licensees for their restaurants. Under the contract for the sale of all the units, there was a warranty for parts and service. AMF proposed to deliver the first unit in February 1969, with installation of the remaining twenty-two units in the first half of 1969. However, AMF established a new delivery schedule in February 1969, providing for deliveries to commence at the end of July 1969 and to be completed in January 1970, assuming that the first test unit being built at AMF's Vandalia, Ohio, plant was built and satisfactorily tested by the end of July 1969. This was never accomplished.
[7]During the operation of the prototype 72C at McDonald's Elk Grove restaurant, many problems resulted, requiring frequent service calls by AMF and others. Because of its poor performance, McDonald's had AMF remove the prototype unit from its Elk Grove restaurant in late April 1969.
[8]At a March 18, 1969, meeting, McDonald's and AMF personnel met to discuss the performance of the Elk Grove prototype. AMF agreed to formulate a set of performance and reliability standards for the future 72C's, including "the number of failures permitted at various degrees of seriousness, total permitted downtime, maximum service hours and cost." Pending mutual agreement on such standards, McDonald's personnel asked that production of the twenty-three units be held up and AMF agreed.
[9]On May 1, 1969, AMF met with McDonald's personnel to provide them with performance and reliability standards. However, the parties never agreed upon such standards. At that time, AMF did not have a working machine and could not produce one within a reasonable time because its Vandalia, Ohio, personnel were too inexperienced. After the May 1st meeting, AMF concluded that McDonald's had canceled all 72C orders. The reasons for the cancellation were the poor performance of the prototype, the lack of assurances that a workable machine was available 753 and the unsatisfactory conditions at AMF's Vandalia, Ohio, plant where the twenty-three 72C's were to be built.
[10]On July 29, 1969, McDonald's and AMF representatives met in New York. At this meeting it was mutually understood that the 72C orders were canceled and that none would be delivered.
[11]In its conclusions of law, the district court held that Mc-Donald's and its licensees had entered into contracts for twenty-three 72C cash registers but that AMF was not able to perform its obligations under the contracts. Citing Section 2--610 of the Uniform Commercial Code (Ill. Rev. Stats. (1975) ch. 26, § 2--610) and Comment 1 thereunder, the court concluded that on July 29, McDonald's justifiably repudiated the contracts to purchase all twenty-three 72C's.
[12]Relying on Section 2--609 and 2--610 of the Uniform Commercial Code (Ill. Rev. Stats. (1975) ch. 26, §§ 2--609 and 2--610),the court decided that McDonald's was warranted in repudiating the contracts and therefore had a right to cancel the orders by virtue of Section 2--711 of the Uniform Commercial Code. (Ill. Rev. Stats. (1975) ch. 26, § 2--711). Accordingly, judgment was entered for McDonald's.
[13]The findings of fact adopted by the district court were a mixture of the court's own findings and findings proposed by the parties, some of them modified by the court. AMF has assailed ten of the 124 findings of fact, but our examination of the record satisfies us that all have adequate support in the record and support the conclusions of law.
[14]Whether in a specific case a buyer has reasonable grounds for insecurity is a question of fact. Comment 3 to UCC § 2--609; Anderson, Uniform Commercial Code, § 2--609 (2d ed. 1971). On this record, McDonald's clearly had "reasonable grounds for insecurity" with respect to AMF's performance. At the time of the March 18, 1969, meeting, the prototype unit had performed unsatisfactorily ever since its April 1968 installation. Although AMF had projected delivery of all twenty-three units by the first half of 1969, AMF later scheduled delivery from the end of July 1969 until January 1970. When McDonald's personnel visited AMF's Vandalia, Ohio, plant on March 4, 1969, they saw that none of the 72C systems was being assembled and learned that a pilot unit would not be ready until the end of July of that year. They were informed that the engineer assigned to the project was not to commence work until March 17th. AMF's own personnel were also troubled about the design of the 72C, causing them to attempt to reduce McDonald's order to five units. Therefore, under Section 2--609 McDonald's was entitled to demand adequate assurance of performance by AMF.
[15]However, AMF urges that Section 2--609 of the UCC is inapplicable because McDonald's did not make a written demand of adequate assurance of due performance. In Pittsburgh-Des Moines Steel 754 Co. v. Brookhaven Manor Water Co., 532 F.2d 572, 581 (7th Cir. 1976), we noted that the Code should be liberally construed3 and therefore rejected such "a formalistic approach" to Section 2--609. McDonald's failure to make a written demand was excusable because AMF's Mr. Dubosque's testimony and his April 2 and 18, 1969, memoranda about the March 18th meeting showed AMF's clear understanding that McDonald's had suspended performance until it should receive adequate assurance of due performance from AMF (Tr. 395; AMF Exhibit 79; McD. Exhibit 232).
[16]After the March 18th demand, AMF never repaired the Elk Grove unit satisfactorily nor replaced it. Similarly, it was unable to satisfy McDonald's that the twenty-three machines on order would work. At the May 1st meeting, AMF offered unsatisfactory assurances for only five units instead of twenty-three. The performance standards AMF tendered to McDonald's were unacceptable because they would have permitted the 72C's not to function properly for 90 hours per year, permitting as much as one failure in every fifteen days in a busy McDonald's restaurant. Also, as the district court found, AMF's Vandalia, Ohio, personnel were too inexperienced to produce a proper machine. Since AMF did not provide adequate assurance of performance after McDonald's March 18th demand, UCC Section 2--609(1) permitted McDonald's to suspend performance. When AMF did not furnish adequate assurance of due performance at the May 1st meeting, it thereby repudiated the contract under Section 2--609(4). At that point, Section 2--610(b) permitted McDonald's to cancel the orders pursuant to Section 2--711, as it finally did on July 29, 1969.
* * *
JUDGMENT AFFIRMED.
Notes and Questions
1.The R2d contains a provision similar to U.C.C. § 2--609, R2d § 251, as does the CISG, article 71(3), and UNDROIT, article 7.3.4. These authorities do NOT require the demand for assurances to be in writing as the U.C.C. does.
2.Not all courts are this liberal when confronted with the explicit statutory requirement of a writing contained in U.C.C. § 2--609. In fact most are not, as many lawyers who have failed to follow the statutory requirements have found. Eastern Airlines won a \$25 million judgment against McDonnell Douglas on account of late deliveries of airplanes that put Eastern at a severe competitive disadvantage. The judgment was reversed because Eastern had not followed all the statutory formalities in giving McDonnell Douglas notice 755 that they had defaulted. Eastern Air Lines v. McDonnell Douglas Corp., 532 F.2d 957 (5th Cir. 1976). On the specific question of whether a demand for adequate assurance under Article 2 must be in writing, the majority of the courts that have addressed the issue have held that it must. The Illinois Appellate Court said: "The record contains no indication that [the buyer] at any time placed a demand for assurances of future performance on the part of [the seller] in writing, and a demand for assurances of future performance is ineffectual unless placed in writing." Bodine Sewer, Inc. v. Eastern Illinois Precast, Inc., 143 Ill. App. 3d 920, 97 Ill. Dec. 898, 493 N.E.2d 705, 1 UCC Rep. Serv. 2d 1480, 1489 (1986). U.C.C. § 2--609 is very explicit and should be followed mechanically in every case; unfortunately, commercial lawyers and clients, like police required to "Mirandize" their suspects, all too often fail to do so properly, with serious results.
Hope's Architectural Products, Inc. v. Lundy's Construction, Inc.
United States District Court, District of Kansas 781 F. Supp. 711 (1991)
Lungstrum, J.
Memorandum and Order
[1]This case presents a familiar situation in the field of construction contracts. Two parties, who disagreed over the meaning of their contract, held their positions to the brink, with litigation and loss the predictable result of the dispute. What is rarely predictable, however, (and what leads to a compromise resolution of many construction disputes when cool heads hold sway) is which party will ultimately prevail. The stakes become winner-take-all.
[2]Plaintiff Hope's Architectural Products (Hope's) is a New York corporation that manufactures and installs custom window fixtures. Defendant Lundy's Construction (Lundy's) is a Kansas corporation that contracted to buy windows from Hope's for a school remodeling project. Defendant Bank IV Olathe (Bank IV) is a national banking organization with its principal place of business in Kansas. Bank IV acted as surety for a statutory bond obtained by Lundy's for the remodeling project.4
[3]Hope's contends that Lundy's breached the contract to buy windows, entitling Hope's to damages in the amount of the contract price 756 of \$55,000.5 Hope's also contends that Bank IV wrongfully refused to pay Hope's on the bond when Lundy's breached the contract. Hope's has sued for breach of contract, and in the alternative, for recovery under the theory of quantum meruit. A trial to the Court was held December 4 and 5, 1991. Two issues emerged as pivotal to the resolution of this case: (1) when was delivery of the windows due, and (2) if delivery was late, could Hope's lawfully suspend performance and demand certain assurances, (including ultimately, a demand for prepayment in full) that Lundy's would not back charge for the late delivery under the authority of K.S.A. § 84--2--609? Because the Court finds that a determination of these issues leads to the conclusion that Hope's was the party in breach of this contract, the plaintiff's request for relief is denied.
I.Facts
[4]The following findings of fact are entered pursuant to Fed. R. Civ. P. 52. On June 13, 1988, defendant Lundy's entered into a contract with the Shawnee Mission School District as general contractor for the construction of an addition to the Rushton Elementary School. Lundy's provided a public works bond in connection with the Rushton project as required by K.S.A. § 60--1111 (1983). The purpose of the bond was to insure that Lundy's paid any outstanding indebtedness it incurred in the construction of the project. The statutory bond was secured through defendant Bank IV.
[5]Plaintiff Hope's is a manufacturer of custom-built windows. The initial contact between Hope's and Lundy's occurred through Mr. Richard Odor, a regional agent for Hope's in Kansas City. On June 29, 1988, Hope's contracted with Lundy's to manufacture ninety-three windows for the Rushton project. The contract price, including the cost of labor and materials for the windows, was \$55,000.
[6]Although the contract included a term pertaining to the time for delivering the windows, there is some controversy over the meaning of this provision. Even under the most favorable interpretation to Hope's, however, delivery was due twelve to fourteen weeks after Hope's received approved shop drawings from Lundy's on July 18. Thus, delivery was due no later than October 24, 1988.
[7]During the late summer and fall of 1988, several discussions took place between Hope's and Lundy's concerning when the windows would be delivered to the job site. Production of the windows was delayed by events that, according to the testimony of Mr. Odor, were not the fault of Lundy's. On September 27, 1988, Mark Hannah, vice president of Lundy's, wrote to Hope's requesting that installation of the windows begin by October 19, and be completed by October 26. On October 14 Hannah again wrote to 757 Hope's, threatening to withhold "liquidated damages" from the contract price if Hope's did not comply with these deadlines. Although there was no provision in the contract for liquidated damages, Hope's did not make any response to the October 14 letter.
[8]The windows were shipped from Hopes' New York plant to Kansas City on October 28. Delivery to the Rushton site was anticipated on November 4. On November 1, Hannah called Hopes' office in New York to inquire about the windows. He spoke to Kathy Anderson, Hopes' customer service manager. The substance of this conversation is disputed. Hope's claims that Hannah threatened a back charge of \$11,000 (20% of the contract price) for late delivery of the windows. Hannah testified, however, that although the possibility of a back charge was discussed, no specific dollar amount was mentioned. Hannah specifically denies that he threatened to withhold \$11,000 from the contract.
[9]After her conversation with Hannah, Anderson immediately informed Chris Arvantinos, vice president of Hope's, of the threatened back charge. Arvantinos called Hannah to discuss the back charge, but he does not recall hearing Hannah mention the \$11,000 figure. Arvantinos requested that Hannah provide assurances that Lundy's would not back charge Hope's, but Hannah was unwilling to provide such assurances.
[10]In a letter written on November 2, Arvantinos informed Hannah that Hope's was suspending delivery of the windows until Lundy's provided assurances that there would be no back charge. Hannah received this letter on the morning of November 3, shortly before Mr. Odor visited Hannah at Lundy's. Odor, who had spoken with Arvantinos about the back charge, issued a new demand that Lundy's had to meet before Hope's would deliver the windows. He gave Hannah an invoice for the full amount of the contract price, demanding prepayment before the windows would be delivered.
[11]Odor set out three ways that Lundy's could meet this demand: (1) payment of the contract price in full by cashier's check; (2) placement of the full contract price in an escrow account until the windows were installed; or (3) delivery of the full contract amount to the architect to hold until the windows were installed. All three options required Lundy's to come up with \$55,000 before the windows would be delivered. Hannah believed that the demand presented by Odor superseded the letter from Arvantinos he received earlier that morning.
[12]Hannah informed Odor that there was no way for Lundy's to get an advance from the school district at that time to comply with Hopes' request. The meeting ended, Lundy's did not prepay, and Hope's did not deliver the windows. On November 7, 1988, Lundy's terminated the contract with Hope's. Thereafter, Lundy's obtained an alternate supplier of the windows.
758 [13]On February 15, 1989, Hope's notified defendant Bank IV of Lundy's failure to pay the contract price and demanded payment from Bank IV on the public works bond. Bank IV refused to pay Hopes' claim. This action was filed by Hope's on March 20, 1989. Jurisdiction of the matter rests with this Court pursuant to 28 U.S.C. § 1332.
II.Discussion
[14]At the outset, the Court concludes that the Uniform Commercial Code (UCC) governs this transaction. Article 2 of the UCC applies to transactions in goods. K.S.A. § 84--2--102 (1983). The contract at issue in this case involved a mixed goods/services transaction. Whether the UCC applies to hybrid transactions such as this depends upon " 'whether their predominant factor, their thrust, their purpose, reasonably stated, is the rendition of service, with goods incidentally involved or is a transaction of sale, with labor incidentally involved.' " Systems Design & Management Information, Inc. v. Kansas City Post Office Employees Credit Union, 14 Kan. App. 2d 266, 270--71, 788 P.2d 878 (1990). If the UCC applies, it applies to all facets of the transaction. The transaction at issue in this case primarily involved a sale of windows, with installation and manufacturing services provided as an incidental component. Therefore, the UCC applies.
A.Plaintiff's Contract Claim Against Defendant Lundy's
[15]This case turns on the resolution of two central and interrelated issues: (1) when was delivery due under the contract, and (2) could Hope's lawfully demand the assurances it demanded from Lundy's under K.S.A. § 84--2--609 [UCC § 2--609]. If the demands for assurances were proper, then Hope's would have been justified in suspending its performance and withholding delivery and Lundy's failure to provide assurances and subsequent termination of the contract amounted to a total breach. If, however, the demands for assurances were not proper under [§ 2--609], then Hope's breached the contract by wrongfully withholding delivery of the windows and Lundy's was entitled to cancel the contract. The delivery date issue is addressed first because the matter of whether or not Hope's was already in breach for late delivery goes directly to the propriety of its demand for assurances.
1.Delivery Date
[16]Even under Hope's interpretation of the delivery term, delivery of the windows was not timely.6 At trial, Chris Arvantinos, Hope's vice president, testified that Hope's committed to deliver the windows twelve to 759 fourteen weeks after July 18, 1988, the day Hope's received approved shop drawings. This would make delivery due between October 10 and October 24. In fact, the windows did not arrive in Kansas City until November 4, fifteen and one-half weeks after July 18. Hope's claims that this delay was "immaterial" and did not excuse Lundy's from its duties under the contract. Hope's is unable to cite any controlling authority to support this argument, however. Moreover, this argument misses the point. Even if an "immaterial" delay did not excuse future performance by Lundy's, no performance was due from Lundy's until the windows were delivered to the job site, which never occurred.
[17]Hope's also argues, almost in passing, that the delay was caused by problems that were outside of its control, thus excusing Hope's from responsibility for the late delivery. Under a clause in the contract, Hope's disclaimed responsibility "for delayed shipments and deliveries occasioned by strikes, fires, accidents, delays of common carriers or other causes beyond our control . . ." (Plaintiff's exhibit 11, para. 3). During the course of production, Hope's experienced problems with its "bonderizing" and prime paint system, which resulted in a delay in production of approximately two weeks. (Defendants' exhibit 403). Hope's produced no evidence at trial, however, to show that this was a matter which was beyond its control. Moreover, it is interesting to note that Hope's did not contemporaneously seek from Lundy's any extension of the delivery date under this provision or notify Lundy's that it might result in a delay beyond October 24. It appears that reference to this clause is more of an afterthought born of litigation than a bona fide excuse for modifying the delivery date.
[18]Hope's also contends that a three to four day delay resulted when Lundy's asked for a change in the design of the windows to include "weep holes" after production had already begun. However, Hopes' representative, Odor, testified that nothing Lundy's did delayed Hopes' manufacturing. Moreover, even accounting for this delay, Hope's was a week late delivering the windows.
2.Section 2--609 Demand for Assurances
[19]The framework for judging demands for assurances under [§ 2--609] was set forth in LNS Investment Co., Inc. v. Phillips 66 Co., 731 F. Supp. 1484, 1487 (D. Kan. 1990):
To suspend its performance pursuant to [§ 2--609], defendant must (1) have had reasonable grounds for insecurity regarding plaintiff's performance under the contract, (2) have demanded in writing adequate assurance of plaintiff's future performance and (3) have not received from plaintiff such assurance.
[20]White and Summers note that what constitutes a "reasonable ground" for insecurity and an "adequate assurance" are fact questions. J. 760 White & R. Summers, Uniform Commercial Code § 6--2, at 236 (3d ed. 1988). Reasonableness and adequacy are determined according to commercial standards when, as is the case here, the parties are merchants. [U.C.C. § 2--609] K.S.A. § 84--2--609(2) (1983).
[21]Although nothing in the record indicates that Hope's expressly claimed any rights under [§ 2--609] during the course of this transaction, Hope's asserted at trial that the October 14 letter from Lundy's demanding delivery by October 16 and threatening liquidated damages gave Hope reasonable grounds for insecurity. Delivery was not due until October 24 under Hopes' version of the parties' agreement, and Lundy's had no right to demand performance early, let alone broach the withholding of liquidated damages. This letter might have justified a demand for assurances under [§ 2--609]. However, Hope's made no such demand after receiving the letter. Instead of invoking its rights under [2--609], Hope's chose not to respond at all to Lundy's threat of liquidated damages. This event merely came and went without any legal consequence.
[22]Hope's in effect invoked its rights under [§ 2--609] in response to Lundys' threat of a back charge during the November 1 phone conversations. Two separate demands for assurances were made in response to this threat. Initially, Chris Arvantinos demanded assurances that Lundy's would not back charge Hope's for the delayed shipment in a telephone conversation with Mark Hannah later in the day on November 1. Arvantinos memorialized this demand in a letter composed on that day and mailed on the second of November. In their telephone conversation, Hannah refused to provide assurances that Lundy's would not back charge Hope's.
[23]Hope's made a second demand for assurances on November 3, when Richard Odor presented Hopes' invoice to Hannah demanding payment in full. Thus, Hope's demanded assurances that it would not be back charged on November 1, and when that demand was refused, Hope's made a second demand on November 3. The Court finds that Hope's was not entitled to invoke [§ 2--609] on either occasion.
[24]When Hope's made its first demand for assurances on November 1, it was already in breach of the parties' agreement. Delivery of the windows was due by October 24, but the windows did not arrive in Kansas City until November 4. A party already in breach is not entitled to invoke section 2--609 by demanding assurances. United States v. Great Plains Gasification Associates, 819 F.2d 831, 835 (8th Cir. 1987); cf. Sumner v. Fel-Air, Inc., 680 P.2d 1109 (Alaska 1984) (2--609 does not apply after a breach has already occurred). To hold otherwise would allow a party to avoid liability for breaching its contract by invoking 2--609 to extract from the nonbreaching party an assurance that no damages will be sought for the breach. A nonbreaching party in need of prompt performance could be 761 coerced into giving up its right to damages for the breach by giving in to the demands in order to receive the needed performance. This Court refuses to endorse such a result.
[25]The assurances which Hope's demanded, moreover, were excessive. "What constitutes 'adequate assurance' is to be determined by factual conditions; the seller must exercise good faith and observe commercial standards; his satisfaction must be based upon reason and must not be arbitrary or capricious." Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1310 (5th Cir. 1985). "If the assurances he demands are more than 'adequate' and the other party refuses to accede to the excessive demands, the court may find that the demanding party was in breach or a repudiator." J. White & R. Summers, supra, § 6--2, at 236.
[26]Lundy's argues that Hopes' demand for assurances in the November 2 letter from Arvantinos was overly broad and unreasonable. The letter informed Lundy's that Hope's would not deliver the windows to the job site until it received assurances that it would not "be backcharged or otherwise held responsible for liquidated damages, delay charges or any extra costs on account of time of delivery of the windows." ((Plaintiff's exhibit 23) (emphasis added)). When this demand was made, the windows had not yet arrived in Kansas City. Therefore, the parties did not know at this time whether the proper quantity of windows had been shipped, whether the windows were the correct size, or whether they otherwise met Lundy's specifications. If there were any nonconformities in the shipment, there could have been another delay in the time of delivery while Hope's corrected the problem. Yet, Hope's demanded a blanket assurance that it would not be held responsible for any extra costs incurred because of "time of delivery of the windows." This demand was overly broad on its face and unreasonable under [§ 2--609].
[27]The assurances Hope's demanded on November 3 were also excessive. In his meeting with Mark Hannah, Richard Odor insisted that Lundy's prepay the contract price, deliver a cashier's check to the architect, or place the full contract price in an escrow account before the windows would be delivered. Yet, Lundy's never gave any indication that it was unable or unwilling to pay the amount it owed to Hope's when the windows were delivered and the bond stood as security for Lundy's obligation. Such a demand was unreasonable and amounted to a breach by Hope's. See Pittsburgh-Des Moines Steel v. Brookhaven Manor Water Co., 532 F.2d 572, 578--82 (7th Cir. 1976) (demanding under § 2--609 a personal guarantee of payment from a shareholder, or that other party escrow the entire amount of the contract price before it was due, absent any showing of an inability to pay, was unreasonable); Scott v. Crown, 765 P.2d 1043 (Colo. Ct. App. 1988) (demanding payment in full before it was due was unreasonable demand under § 2--609 and amounted to anticipatory breach). The payment terms under the contract were "Progress payments by the 10th of 762 each month covering 90% of the total value of materials delivered and installation performed during the previous month with final payment upon completion of our [Hopes'] work." (Plaintiff's exhibit 11.) By demanding prepayment, Hope's essentially attempted to rewrite this term of the contract. Pittsburgh-Des Moines Steel, 532 F.2d 572 at 578--82 (§ 2--609 may not be used to force a contract modification); Scott, 765 P.2d 1043 (same).
[28]Although Hope's contends that a threatened back charge of \$11,000 for a one week delay in shipment justified its demand for prepayment, the Court is not persuaded that Lundy's made any specific demand for \$11,000. The testimony on this issue was controverted, but only Kathy Anderson, Hopes' customer service manager, testified, in a perfunctory manner, that an \$11,000 back charge was threatened. Mark Hannah specifically denied making such a demand. Neither Chris Arvantinos nor Richard Odor testified to recalling receiving such a demand. There was also testimony at trial from one witness for Hope's that the threatened back charge was in the amount of \$5,000. The Court is not persuaded that Lundy's went beyond making unspecified threats of a back charge for possible damages it would incur because of Hopes' delay.
[29]By threatening to withhold damages from the contract price, Lundy's was merely exercising its rights under K.S.A. § 84--2--717 [UCC § 2--717] which entitles a buyer to deduct from the amount owing on the contract any damages from the seller's breach. Giving notice of its intention to avail itself of a legal right did not indicate that Lundy's was unwilling or unable to perform under the contract. Indeed, the very nature of the right invoked by Lundy's manifests an intention that it would continue performing and pay the contract price due, less damages caused by Hopes' delay. Thus, the demand for prepayment was unreasonably excessive when there was no indication that Lundy's would not pay Hope's when performance was due.
[30]Both Hopes' delay in delivering the windows and Hopes' excessive demands entitled Lundy's to treat Hope's as in breach and to cancel the contract, which it did on November 7, 1988. K.S.A. § 84--2--711 (1983) ("Where the seller fails to make delivery or repudiates . . . the buyer may cancel . . ."). Thus, Hope's is not entitled to recover under its claim for breach of contract.
* * *
B.Plaintiff's Quantum Meruit Claim
[31]Hope's also claims that it is entitled to compensation from Lundy's under the theory of quantum meruit. "Quantum meruit," which literally means "as much as he deserves," is a phrase used often in older cases to describe an equitable doctrine premised on the theories of unjust 763 enrichment and restitution. Black's Law Dictionary 1119 (5th ed. 1979). Recovery was allowed under this theory when a benefit had been received by a party and it would be inequitable to allow the party to retain it. E. Farnsworth, Contracts § 2.20, at 103 n.4 (2d ed. 1990). Instead of labeling it quantum meruit, courts today speak in terms of restitution. See Pioneer Operations Co. v. Brandeberry, 14 Kan. App. 2d 289, 789 P.2d 1182 (1990).
[32]To recover in restitution, a breaching plaintiff must have conferred a benefit on the nonbreaching party. See Walker v. Ireton, 221Kan. 314, 559 P.2d 340 (1977) (right to restitution limited to expenditures or services that benefitted disregard other party); Restatement (Second) of Contracts § 374 (1979). The burden is on the breaching party to prove the extent of the benefit conferred, and doubts will be resolved against him. Restatement (Second) of Contracts § 374 cmt. b (1977).
[33]In this case, Hope's conferred no benefit on Lundy's. The windows manufactured by Hope's were never used in the Rushton project, and the Court is not persuaded that the installation advice provided by Christiansen Steel Erection for Hope's improved the project. Hope's admits that the only labor it claims to have provided at the Rushton job site was consultation work performed by Christiansen Steel Erection, a company Hope's subcontracted with to install the windows. Mike and John Christiansen visited the job site on several occasions to advise Lundy's on how to prepare the window openings for installation. The advice they provided, however, related to the installation of windows that were never used on the project. When Lundy's canceled its contract with Hope's, it obtained an alternate supplier of a different type of windows. These windows did not require the same careful preparation of the window openings as the Hope's windows. Lundy's job foreman testified that the Christiansens' advice became moot when the alternate supplier was obtained. "[A] party's expenditures in preparation for performance that do not confer a benefit on the other party do not give rise to a restitution interest." Restatement (Second) of Contracts § 370 cmt. a (1977). Thus, because no benefit was conferred upon Lundy's, Hope's has no valid claim to restitution.
III.Conclusion
[34]After careful consideration of the facts and law, this Court holds that Hope's breached the contract in question. Therefore, defendant Lundy's was entitled to cancel its performance and defendant Bank IV was not obligated to pay Hope's under the statutory bond.
[35]IT IS THEREFORE ORDERED that plaintiff's claims for relief are hereby denied, and judgment is entered in favor of defendants.
764 Notes and Questions
1.Re-read the first paragraph of the opinion. As it indicates, situations very similar to that presented by the case are likely to come up in your practice.
2.What would have been the effect of the October 14 letter discussed in paragraph 7 if: (a) the contract did not require Hope's to meet those deadlines or (b) the contract did require Hope's to meet them?
Problem 26-1
Grower had a contract to deliver carrots to Soup Company for \$300 a ton. Because of a drought, Grower's crop was much smaller than usual. He still had enough carrots to perform his contract with Soup Company, but he didn't have many left over to sell on the open market. As a result, it looked as if he was going to suffer a loss for the year. Because of the drought, the market price for this type of carrot was \$450 a ton. If he could sell the carrots for \$450 a ton, he could make enough of a profit to keep his daughter in law school. He consulted with his daughter, who told him that the doctrine of impracticability relieved him of his obligations under the contract. Unfortunately, the daughter was wrong when she told her father he could get out of the contract on the basis of impracticability.
Grower called Soup Company's purchasing manager and told her that "on advice of counsel," he didn't have to perform, and he wouldn't perform if she didn't agree to amend the contract to raise the price to \$400 a ton. The purchasing manager told him, "We expect your carrots to be delivered in accordance with our contract. If not, we'll see you in court."
(a)Did Grower's threat constitute a repudiation?
(b)Does Soup Company have to take steps to mitigate its damages, or can it just wait to see if Grower delivers his carrots? See U.C.C. § 2--610.
(c)If there are no further communications between Grower and Soup Company and Grower delivers the carrots the day before the last day for performance under the contract, can Soup Company refuse to accept them? See U.C.C. § 2--611.
(d)If the purchasing manager decided that Grower probably wasn't going to perform and purchased substitute carrots from a farm in Brazil, is there any need to give Grower notice of this fact?
1[A motion in arrest of judgment was a motion to stay a judgment on the ground that it was clear from the record that the judgment was wrong.---Eds.]
2[\$20,385.28 in 1976 dollars is roughly the equivalent of \$90,000 in 2019 dollars using the CPI and the GNP Deflator.---Eds.]
3UCC § 1--102(1) provides that the Code "shall be liberally construed and applied to promote its underlying purposes and policies" (Ill. Rev. Stats. ch. 26, § 1--102(1) (1975)). [This provision is now section 1--103(a). The language has been changed slightly.---Eds.]
4[On a construction project, a person who supplies materials and is not paid is entitled to a materialman's lien on the property as security for any amounts owed it. If the property is owned by the government, the materialman's lien is not available. To give suppliers comparable protection, statutes provide that the contractor post a payment bond. This is in essence an insurance policy that assures that all of the materialmen will be paid. A materialman who is not paid has a cause of action against the issuer of the bond, which is why Bank IV is a defendant.---Eds.]
5[\$55,000 in 1991 is roughly the equivalent of \$101,000 in 2019 dollars using the CPI and the GNP Deflator.---Eds.]
6"Delivery" is defined by Black's Law Dictionary as "the act by which the res or substance thereof is placed within the actual or constructive possession or control of another . . . What constitutes delivery depends largely on the intent of the parties." Black's Law Dictionary 385 (5th ed. 1979). In this case, the parties bargained for more than mere shipment of the windows. Arvantinos testified that Hope's committed to delivering the windows to the job site between October 10 and October 24. Thus, delivery was to occur under the parties' agreement when the windows arrived in Kansas City and were available for installation at the Rushton job site.