con 3

A large shipping company and a manufacturer form a contract under which the shipping company is to move a cargo of industrial equipment 5,000 miles by sea from the United States to another country overseas. On the day before it is to depart, military hostilities erupt between the destination country and a neighboring country. The neighboring country has blocked the commercial ports of the destination country. Unless it attempts to pass the blockade, the shipping company cannot make its delivery. Hence, the shipping company delays the shipment for the manufacturer. Alleging that the shipping company is in breach of its contract, the manufacturer demands that the shipping company pay compensation for damages caused it by its failure to transport the cargo. As its reason for nonperformance, the shipping company cites the blockade. If the manufacturer sues the shipping company for breach of contract, the shipping company's best defense lies with which doctrine? (A) Impracticability (B) Unilateral mistake (C) Mutual mistake (D) Frustration of purpose

Rationale: Issue: This problem requires students to distinguish between the defenses of mistake and the changed circumstances defenses of impracticability and frustration of purpose. Rule: Restatement (Second) of Contracts § 261 provides that "Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary." "Impracticable" is defined as an extreme and unreasonable difficulty, expense, injury, or loss. Analysis: Here, the unforeseen/unanticipated/unknown event—the blockade resulting from a state of hostility between two nations—arose after the parties formed their contract. Both mutual mistake and unilateral are therefore inapplicable. The mistake defense pertains to a mistake of fact existing at contract formation. Since the two nations were not in conflict at the time of contract formation, Choices B and C would not be effective defenses for the shipping company. Of the two changed circumstances defenses, impracticability is better than frustration of purpose. Impracticability focuses on whether performance has become extremely and unreasonably more difficult, expensive, risky, or injurious. Frustration of purpose focuses on whether the principal purpose of the contract has somehow became meaningless. (Restatement (Second) of Contracts § 265 gives a useful illustration of frustration: "2. A contracts with B to print an advertisement in a souvenir program of an international yacht race, which has been scheduled by a yacht club, for a price of $10,000. The yacht club cancels the race because of the outbreak of war. A has already printed the programs, but B refuses to pay the $10,000. B's duty to pay $10,000 is discharged, and B is not liable to A for breach of contract.") Here, the issue is the difficulty of the performance. By running the blockade, the shipping company would be taking on an extreme and unreasonable amount of risk, putting its employees and ships at risk of harm and injury. Consequently, Choice A is the best answer. In contrast, the principal purpose of the contract—i.e., shipping the goods to the destination country—has not become meaningless because of the blockade. There is still a purpose to be achieved in that the manufacturer still needs to move its products from the United States to the destination country. Therefore, Choice D is not correct.

A contractor is under contract to construct a large recreational area for a hotel. In order to fulfill her obligations, the contractor must secure the services of subcontractors. The contractor asks five separate plumbers to "bid on" the plumbing components of the project. The contractor expected the bids to be in a range from $1.5 million to $2.3 million. From four of the plumbers the contractor receives offers ("bids") for: (1) $2 million, (2) $2.1 million, (3) $1.96 million, and (4) $1.98 million. The fifth plumber determines to make a bid of $1.7 million, but in writing the bid, the plumber's clerk, by simple error, writes "$170,000". On receiving that plumber's bid, the contractor writes to the plumber stating, "We accept your bid/offer." When the plumber discovers its error, the plumber tells the contractor that he wishes not to perform the work. The contractor insists on holding the plumber to his bid. Can the plumber rescind the contract? (A) Yes, because the contractor has not yet relied on the bid (B) Yes, because the contractor had reason to know of the plumber's mistake (C) No, because the contractor accepted the plumber's offer (D) No, because a party always bears the risk of its own negligence

Rationale: Issue: This problem tests on the doctrine of unilateral mistake. Rule: Restatement (Second) of Contracts §153 provides, "Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake..., and (a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake." Analysis: This fact pattern illustrates the classic problem of a clerical error made by one party. The mistake relates to a basic assumption of the contract, i.e., the price. The mistake has a material effect on the plumber since it would result in the plumber receiving one tenth of what he expected. Furthermore, the contractor would unjustifiably benefit from the mistake. Unilateral mistake differs from mutual mistake by imposing an additional requirement under either Restatement (Second) of Contracts § 153(a) or (b). On these facts, the contractor would be charged with knowledge of the mistake. The error is said to be a "palpable mistake." Four other plumbers made bids, all of them within the same monetary "ballpark." The fifth plumber seemed to make a bid that was exponentially lower than the other bids. the contractor expected the bids to be in a certain range and the fifth plumber's bid was well below it. Given these facts, the knowledge element of Restatement (Second) of Contracts § 153(b) would be met in this case. Consequently, Choice B is correct. Choice A is a poor answer choice. Even if the contractor had relied on the bid, it is unlikely that a court would enforce the contract. Since the contractor knew that a mistake was made, it would not be reasonable for the contractor to take action to her detriment by relying on the bid. Choice C is incorrect. While the contractor did accept plumber's offer, the mistake allows the plumber to rescind the contract. Choice D overstates the risk bearing rules. A party does not always bear the risk of its own negligence. There are excusable mistakes that are allowed, such as the one illustrated here. Moreover, courts might allocate the risk to one party "on the ground that it is reasonable in the circumstances to do so." Restatement (Second) of Contracts § 154(c). Here, the contractor knew about the mistake, yet tried to take advantage of it by accepting the offer. In this case, a court would not allocate the risk to the plumber because the result would be unreasonable, unjust to the plumber, and a windfall to the contractor.

A bank made a loan of $10 million for ten years to a business that manufactures and sells small recreational boats. The loan agreement contains the following condition subsequent. "It shall be a condition subsequent to the Bank's obligation to make the loan that on or before March 15 of each year, Borrower shall deliver to Bank written proof of insurance covering the inventory and work in progress of Borrower. In the event this condition subsequent is not satisfied, the Bank's obligation to continue the loan shall terminate and the Borrower shall repay the loan within 10 days of notice by the Bank." For the first five years of the ten-year loan period, the business never delivered the proof of insurance to the bank. The bank never requested the proof. Each year the bank met with the business on April 1 to review the loan and never stated that the condition was not fulfilled. In the sixth year, the bank sends a notice to the business demanding repayment claiming the condition subsequent quoted above has not been met. Which of the following statements is most likely to be true with respect to whether the bank's obligation to loan the $10 million for ten years is discharged? (A) The condition subsequent of delivering proof of insurance has not been satisfied and the bank's duty is discharged. (B) Since the insurance proof was never provided, the bank's duty to lend the money never arose. (C) Because the bank interfered with the satisfaction of the condition by not informing the business that the information had not been received, the bank cannot use the failure of the condition to discharge its duty. (D) The bank is estopped from invoking the condition to discharge its duty since its repeated failure to object to the failure of the business to satisfy the condition implies an intention not to enforce the condition.

Rationale: The question tests the understanding of conditions subsequent and the excuse of a condition by estoppel. The condition quoted is a condition subsequent. Such a condition is a fact or event that must occur after performance begins but which discharges the already begun performance. A condition precedent, in contrast, must be met before performance begins. Thus, answer B is incorrect because it treats the condition as a condition precedent. Although interfering with a condition will excuse its satisfaction, there is no evidence the bank interfered with the condition. It merely did not remind the business of its duty. This is not interference or frustration. If the bank had changed its address or refused to receive mail from the business that might constitute frustration of the condition, but no such facts are stated and therefore Answer C is incorrect. Here the bank's failure to object to the non-satisfaction of the condition for five years and its meeting with the borrower to discuss the loan every year shortly after the condition was due to be satisfied most likely suggests the bank is estopped from exercising its right to demand the past due proofs of insurance. It was reasonable for the business to believe on these facts that the bank did not intend to enforce this condition. Therefore, answer D is the best choice. Because answer A does not take account of the likely waiver/estoppel possibility it is not the best choice.

A husband and wife were planning a party to celebrate their 50th wedding anniversary on June 1. They decided to hold the party on the remote beach where they were married. The couple entered into a written contract with a band to play music at the party for five hours at the rate of $500 per hour, for a total of $2,500. On June 1, the day of the anniversary, a heavy rain started to fall after one hour. In the last 100 years, it has only rained once on June 1. The couple paid band only $500. Assume that the band sues the couple for the remaining $2,000. Which of the following arguments most helps the husband and the wife? (A) It was unforeseeable that it would rain on June 1. (B) Rain is an "Act of God." (C) It was a basic assumption of the contract that it would not rain on June 1. (D) The husband, wife, and the band made a mutual mistake about what the weather would be like on June 1.

Rationale: Answer C is the best answer. This question asks you to evaluate various arguments that would go to elements of a changed circumstances defense. Note that the question is not asking you if the defense would be proven, but which argument would be best. First, we can eliminate Answer D because it suggests the defense of mutual mistake. The type of mistake in a mutual mistake defense must be a mistake of fact existing at contract formation. Here, both parties made a mistake as to a prediction of what would happen in the future. Therefore, Answer D is incorrect. Second, while "rain" is certainly an "act of God" as that term is normally construed, that alone does not make it a good argument. In other words, it does not address whether or not the parties thought that it would not rain. Therefore, Answer B is not the best argument. Third, we can also eliminate Answer A. Whether or not an event is foreseeable might be of importance in a changed circumstances analysis; however, many events are foreseeable. It is not necessarily the foreseeability of the event but that both parties assumed that it would not occur. This leaves us with Choice C as the best answer. Although rain might have been foreseeable, it would help the husband and wife most if it could be proven that a basic assumption of the contract was that it would not rain. Note that the answer choice also incorporates a specific element of the changed circumstances defenses—i.e., a "basic assumption."

A seller contracted to sell his home to a buyer for $500,000. The contract contains a clause that states, "Buyer's obligation to purchase this home is expressly conditioned on the City granting on or before March 31, a petition to rezone the Property for a two-family home." the buyer included this condition because she wants to convert the large home into two units, live in one, and rent the other. She submitted an application for rezoning but a few weeks later discovered a nicer property on the other side of town that she believes she can buy for a better price. It is also already zoned multifamily. She wants to get out of her contract with the seller, but the quoted condition is the only one still unfulfilled. She has an old friend who is chair of the zoning board. She invites him to lunch and explains she is no longer interested in the zoning change and would be very grateful if her friend could get the zoning board to deny her request. Her friend says the board was going to approve the request at the next meeting but if she would rather it be denied it can be arranged. After the board denies the zoning request on March 31, the buyer sends the seller a letter terminating the contract due to the failure of the condition. Is the buyer's obligation to purchase the seller's house excused due to a failure of condition? (A) Yes, the change of zoning was an express condition and courts require express conditions be strictly fulfilled. (B) Yes, Since the buyer cannot control the zoning board's decision, she is able to use the failure of the condition to her advantage. (C) No, the condition is void as being too ambiguous. (D) No, the fulfillment of the condition is excused because the buyer interfered with and frustrated its fulfillment by asking her friend to refuse the zoning change.

Rationale: Failure of a condition to be met will result in the conditional performance not becoming due. Courts will usually strictly enforce an express condition requiring its perfect fulfillment. Yet, courts will excuse conditions and require performance in several circumstances. Therefore, answer A is not correct because it fails to note that although strictly enforced, conditions can be excused. When the party whose performance is conditioned frustrates the satisfaction of that condition, the condition will be excused. Here the buyer used her influence with her friend to persuade the zoning board to deny the rezoning and thus not satisfy the condition. As a result, the buyer cannot now claim no duty to perform due to the failure of that condition. Answer D is correct. Although to be a condition on one's promise, the event or circumstance constituting the condition must not be in the total control of the promisor, the fact that the promisor cannot definitively frustrate the condition without assistance is not relevant to the excuse of frustrating the condition. Answer B is incorrect. There is nothing to suggest that the condition is ambiguous, and if it were, a court could resolve the ambiguity by a principle of interpretation. Answer C is incorrect.

An owner wants to build his dream house according to a set of plans designed in a particular architectural style called mid-century modern. The design of the house was considered to be a work of art in and of itself. While interviewing builders, the owner expresses how important it is that the construction be perfect. The owner enters into a contract with a builder to construct the house. Under the terms of the contract, the builder has ten months to complete the house, and would be paid progress payments while the structure was being built. The final payment of $100,000 would only be paid upon a condition that "the owner is honestly satisfied with the artistic merit of the construction of the completed building." The builder completed the house in nine months making sure that he followed the architectural plans. The owner inspected the work and expressed honest dissatisfaction with the artistic merit of the construction of the completed building. The owner demanded that certain parts of the house be redone or the builder would not be paid the final installment. The builder brought in experts in mid-century modern design who stated that the house substantially conformed to the style; however, the owner still insisted that certain work be redone. The builder refuses to redo the work and sues for breach of contract. Has the owner breached the contract with the builder by refusing to remit the final payment? (A) Yes, because the builder completed the building within the ten-month time period (B) Yes, because the satisfaction condition should be waived since the owner was presumptively unreasonable (C) No, because the builder is bound by the owner's good faith opinion (D) No, because the builder did not follow the architectural specifications

Rationale: Issue: This problem requires students to resolve the outcome of a dispute where the contract includes a satisfaction clause. Rule: A clause in a building contract that requires the owner to be satisfied with the work is valid and enforceable. Normally, the owner must accept performance if the work would be satisfactory to the reasonable person. As with all contracts, the owner must be operating in good faith. However, where the satisfaction involves matters of aesthetics, the standard is subjective. A party may reject performance without regard to reasonableness so long as the judgment is made honestly and in good faith. See Myers v. Western Realty & Constructions, 130 Ariz. 274 (1981). Analysis: The contract subjects the owner's obligation to make the last payment to a satisfaction clause: honestly satisfied with the artistic merit of the construction of the completed building. Here, there is proof (in the form of the builder's experts) that a reasonable person would find that the structure conforms with the architectural style. However, aesthetic matters are inherently subjective. Therefore, a satisfaction clause concerning aesthetics is judged by whether the decision was made honestly and in good faith. Since the owner was honestly dissatisfied, the owner has not breached by withholding the payment. Choice C is correct. Choice A has the wrong conclusion, though it makes a correct statement of facts—that the the builder completed the building within the ten-month time period. However, completion in the time frame alone was not enough to trigger the duty to pay the final payment. The owner had to be satisfied and he was not. Choice B also has the wrong conclusion and applies the wrong standard—the reasonable person standard—which does not apply when it is a matter of aesthetics. Choice D is wrong because it misstates the facts. The the builder followed the architectural specifications.

Meteorologists predict that a spectacular meteor shower will be visible at a certain city in the desert. A person lives 900 miles from the city, and in order to see the meteor shower, she makes plans to travel there with her children. She contacts a hotel in the city. The hotel has raised its rates significantly for the event. She tells the hotel manager that she is making the reservation in order to see the meteor shower. The manager responds, "Yes, we understand; why else would you travel 900 miles to the desert?" The person makes a non-cancelable reservation at the hotel. One day before she is to begin her travel, meteorologists correctly predict that on the night of the meteor shower, a violent storm will fully obscure the city's skies so to make the spectacle invisible. She abandons her plans to travel and wants to cancel her obligation with the hotel; however, the hotel refuses. If she sues to avoid her duty under the contract and wins, what would be the best rationale for such outcome? (A) It would be impossible for her to perform the contract. (B) Both parties made a material mistake when they formed the contract. (C) It is extremely more expensive for her to perform the contract. (D) The principal purpose of the contract is substantially frustrated.

Rationale: Issue: This problem tests on a student's ability to distinguish between the changed circumstances defenses of impossibility, impracticability, and frustration of purpose. Rule: Restatement (Second) of Contracts §265 provides, "Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary." Analysis: Here, the focus is on an event that occurred after contract formation—the violent storm that obscured the meteor shower. This fact triggers the changed circumstances doctrine. There was a basic assumption by both parties that a spectacular meteor shower would be visible in the city on a certain date. The principal purpose of the contract was to view the shower, as she informed the hotel manager of her purpose, and the manager's acknowledgement of her purpose. The violent storm was a supervening event that both parties assumed would not occur. The call of the question asks for the best rationale for a court decision that relieves she of her duties. Given that the unanticipated event negates the principal purpose of the contract, the correct answer is Choice D—i.e., that the contract is substantially frustrated. Choice B is wrong because it focuses on the mutual mistake doctrine. To apply mutual mistake, the mistake must be a mistake of fact existing at contract formation. Here, there was only a prediction (i.e., an opinion) that the city would be a good place to view the meteor shower on a certain date. Therefore, the mistake doctrine would not apply. Choice A is wrong because it is not literally impossible for she to perform the contract. Her duty is to pay for the room. Nothing in the facts suggests that the violent storm makes it impossible for her to do so. Likewise, Choice C is also wrong. Choice C uses the phrase "extremely more expensive to perform the contract." This suggests the related doctrine of impracticability. Impracticability might also discharge a party's performance duties under Restatement (Second) of Contracts §261. The comment to the Restatement defines impracticability as an "extreme and unreasonable difficulty, expense, injury, or loss...." Here, the event of the storm would not have made it any more expensive for she to perform her obligation (to pay for the hotel room).

An elderly woman had a large collection of hats, numbering over 1,000. Sometimes, she sold a few of her hats to earn a little money; however, she mostly collected. The woman was famous locally for her collection and was an acknowledged expert on the subject of hats. She often told her nephew—the sole heir to her estate—that he should be sure to take care of the hats when she died, because the hats were quite valuable. However, the nephew thought his aunt was just sentimental about her collection. When the woman died, the nephew decided to sell the hats. He could have hired an expert to help him price the hats, but instead looked at some random receipts of hat purchases, which his aunt had made in the last year of her life, and based on those receipts, priced each of the hats in the range of $25 to $100. At the hat sale, a neighbor, who knew nothing about hats, came across a finely woven straw hat in pristine condition. He liked the hat, but found the price of $75 to be a little too expensive. He was able to negotiate the price down to $50. The neighbor later learned that the hat was a particular type of Panama hat that took three months to weave and was worth $25,000. When the nephew heard that the hat was worth $25,000, he tried to return the $50 to the neighbor in exchange for the return of the hat; however, the neighbor refused. The nephew sued the neighbor to rescind the agreement. Who will prevail in this lawsuit? (A) The nephew wins, because the neighbor had reason to know of the nephew's mistake. (B) The nephew wins, because the contract would be unconscionable if it were enforced. (C) The neighbor wins, because the widow would likely be considered a merchant and should have kept better records for her nephew. (D) The neighbor wins, because nephew was consciously ignorant of the true value.

Rationale: Issue: This problem tests on the doctrine of mutual mistake. Rule: Restatement (Second) of Contracts § 152(1) provides, "Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake...." Analysis: In this problem, the nephew will try to assert the defense of mistake. Whether nephew tries to assert mutual or unilateral mistake, he will likely lose. The nephew bore the risk of the mistake by not investigating the value of the hats. Here, both parties at contract formation made a factual mistake about a basic assumption of the contract, i.e., the worth of the hat. The mistake has a material effect on the transaction in that the nephew is deprived of the full value and the neighbor experiences a windfall. However, these facts illustrate a situation where the courts will likely shift the risk to the seller. Under Restatement (Second) of Contracts § 154, the nephew was "aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient." In other words, the nephew was consciously ignorant of the value of the hats. His aunt had told him the hats were valuable and he had an opportunity to hire an expert to value the collection, but did not do so. For these reasons, the correct answer is Choice D. Choice A suggests that the nephew wins under the doctrine of unilateral mistake. If the mistake was unilateral, then the party asserting the defense would need to prove an additional element that either (a) the effect of the mistake would make contract enforcement unconscionable or (b) the other party had reason to know that there was a mistake. Choice A is wrong because it incorrectly states that the neighbor had reason to know of the mispricing. The neighbor was as ignorant about the value as the nephew was. Choice B states that the contract would be unconscionable. Under these facts, the term "unconscionability" could refer to the defense of unconscionability or the use of unconscionability as an element of unilateral mistake. For the unilateral mistake defense, courts tend to interpret this element as being "substantively unconscionable." Here, there is such a wide difference in value that it shocks the conscience; thereby, qualifying as unconscionable. However, Choice B has the wrong result since the nephew bore the risk of the mistake by not investigating the value when he had been informed that the hats were valuable. As to the defense of unconscionability, the nephew would have to prove not only substantive unconscionability but also procedural unconscionability. Procedural unconscionability deals with unfairness in the bargaining process, such as an inequality in bargaining power or the imposition of unfair surprise by one party on the other. Nothing in the facts suggests any procedural unconscionability. The nephew was in control of the pricing and, if anything, was in a superior bargaining position as the seller. Choice C is a distractor. The problem states that the widow was an expert in hats and had both bought and sold hats. This qualifies her as a merchant under UCC § 2-104. Should she have kept better records for her nephew? Perhaps. However, the statement is not relevant to the legal issue. The widow has passed away, and the nephew is the seller of the goods. Thus, Choice C is also incorrect.

A seller owns a truck with an engine that won't start. Her mechanic advises her that the engine is broken and must be replaced. The seller then offers the truck for sale at a price of $1,000, whereas a usable truck of the same type, variety, and age would command a price of $15,000. On April 1, a buyer expresses interest in purchasing the truck and asks the seller why her asking price is so low. The seller explains that the truck's engine is inoperable and needs replacement. The buyer and his mechanic examine the truck. The mechanic advises the buyer, "the engine is no good, but the truck is otherwise in great condition. It's easily worth $1,000. Replace the engine for $8,000 and you'll have a good deal." By signed writing, the seller and the buyer form a contract under which the buyer is to pay the seller $1,000, with the seller to convey the truck to the buyer, the actual payment and transfer (the "closing") to occur on May 1. Then, on April 30, the seller discovers that the engine is easily repairable with the replacement of a single $2 part. The seller contacts the buyer: "It turns out this engine is fine. The truck is worth far more than $1,000. Our deal is off. I won't be at the closing tomorrow." The buyer objects and insists they go through with the transaction. Is the seller entitled to rescind the contract? (A) Yes, because under the defense of non-disclosure the buyer has a duty to disclose that the seller made a material mistake as to the worth of a good (B) Yes, because the seller does not bear the risk of a mutual mistake since she relied on an expert's opinion (C) No, because courts do not inquire into the adequacy of consideration (D) No, because sellers presumptively bear the risk, regardless of consulting experts

Rationale: Issue: This problem tests on the doctrine of mutual mistake. Rule: Restatement (Second) of Contracts §152(1) provides, "Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake...." Analysis: Here, each party manifests to the other a certain belief that the engine is inoperable which affects the worth of the vehicle. However, both parties have the facts wrong. The engine can be repaired inexpensively. The mistake has a material effect since the seller would be selling a valuable truck at a very low price, and the buyer would be getting the truck at an incredible bargain. Neither expected this outcome. Hence, these parties were mutually mistaken as to a fact material to the seller's willingness to form the contract. The seller is entitled to rescind it provided that the seller did not bear the risk of the mistake. Under Restatement (Second) of Contracts § 154, one way that a party bears the risk of the mistake is through conscious ignorance. If the seller had not consulted with an expert as to why the truck was not running, then the seller might have to bear the risk of the mistake. However, the seller did consult her mechanic—an expert—and did not rely on her own uninformed opinion. In fact, more than one mechanic thought the engine needed to be replaced. Since both mechanics made the same mistake, we can reasonably conclude that the seller did not bear the risk of the mistake under Restatement (Second) of Contracts §154. Choice B is correct. Choice A misconstrues the facts. This is a mutual mistake problem. the buyer is also mistaken about the facts and does not know that a mistake was made at contract formation. The phrase "had reason to know of the mistake" is from the Restatement (Second) of Contracts §153(b), which covers a unilateral mistake. If the mistake was unilateral, then the seller would need to prove an additional element that either (a) the effect of the mistake would make contract enforcement unconscionable or (b) the other party had reason to know that there was a mistake. The additional elements are unnecessary here since the mistake was mutual. Even if it was a unilateral mistake, the seller could probably rescind since the mistake was so substantively unconscionable. That said, Choice A would be wrong since the buyer did not know of the mistake. Choice C states a well-known rule but has the wrong conclusion. It is true that courts leave valuation questions to the parties; however, the adequacy of consideration rule also states that gross inadequacy (as is the case here) is an indication that there might be a voidability defense such as fraud, duress, or mistake. Choice C is incorrect. Choice D overstates the risk bearing rules. The seller may rely on experts in order to avoid the risk of making a mistake.

A company in the business of office cleaning has a contract with a corporation that is concerned about being environmentally friendly. The term of the contract is structured in six-month increments for a total of five years. One provision requires the cleaning company to be certified every six months, by an independent environmental group, indicating that the cleaning company only uses environmentally safe ("green") cleaning products. If the cleaning company gives the corporation a copy of the certification every six months, then the contract automatically renews for another six months, up to a total of five years. If the cleaning company does not provide a certification at any given six-month mark, then the contract is terminated early. In the first year, the cleaning company provided the corporation with the certifications. In the second year, the corporation told the cleaning company it no longer needed to get the certifications, as the corporation knew the cleaning company was using "green" products. As a result, the cleaning company did not seek the certifications. In the third year, just after the certification was due, the corporation informed the cleaning company that the contract was terminated since the cleaning company failed to get the required certification. Cleaning company brings a breach of contract claim against the corporation. Which party will most likely win? (A) The corporation, because of the non-occurrence of a condition (B) The corporation, because the cleaning company did not substantially perform its duty to get the certification (C) The cleaning company, because it detrimentally relied on a promise to waive the condition (D) The cleaning company, because otherwise it will experience disproportionate forfeiture

Rationale: Issue: This problem tests students on the ways in which a condition may be excused. Rule: A duty or right that is conditioned upon the occurrence of some event or act shall not arise unless the condition either occurs or is excused. Some ways in which a condition may be excused include: 1) avoidance of disproportionate forfeiture, 2) express waiver of a condition, 3) estoppel on a promise to waive a condition, 4) wrongful hindrance by the party with the conditional duty to perform. Analysis: Here, the contract contains an express condition. If the cleaning company provide the corporation with its "green" certification every six months, then the contract automatically renews for another six months up to five years. In the third year, the condition did not occur. The company failed to get certified; therefore the contract does not renew unless the condition has been excused. The cleaning company does in fact have an excuse in estoppel on a promise to waive the condition. The corporation's statement to the cleaning company that it was not necessary to get the certification was a promise to waive the condition. As a result, the cleaning company did not seek the certification—relying on the corporation's promise through forbearance. The corporation should have reasonably expected the cleaning company to forbear since the corporation essentially told them not to seek the certification. Consequently, the corporation should be estopped from using the non-occurrence of the condition as a rationale for not renewing the contract. Choice C is the correct answer. Choice A is incorrect because it has the wrong conclusion. Although there was the non-occurrence of a condition, the condition was excused. Choice B is incorrect for the reasons above and because it uses the incorrect language (substantial performance) surrounding express condition. Choice D is not the best choice. Although the cleaning company will certainly experience a loss of revenue if the contract is not renewed, the forfeiture exception is crafted for a slightly different situation. Comment (d) to Restatement (Second) of Contracts § 229 states, "'forfeiture' is used to refer to the denial of compensation that results when the obligee loses his right to the agreed exchange after he has relied substantially, as by preparation or performance on the expectation of that exchange." Here, the facts don't show reliance in terms of preparation for performing the next six months of actual performance. The cleaning company is just denied the opportunity to perform. The better answer is Choice C.

A businessperson was actively negotiating to purchase a car dealership. Although the negotiations had not finished, he wanted to make sure that he had salespeople ready to work at the dealership if the negotiations were successful. On March 1, the businessperson entered into a written and signed employment agreement with a prospective employee that provided the following: "If the businessperson is successful in purchasing a car dealership by May 1, then the parties agree that the businessperson will employ the prospective employee, and she will work for him, for two years as a salesperson at the salary described below." The contract included all of the other relevant terms for an enforceable employment agreement. Which of the following best characterizes the sentence in the contract that starts, "If the businessperson is successful in purchasing a car dealership by May 1"? (A) A condition subsequent that terminates the businessperson's obligation to hire the prospective employee (B) A condition precedent to the businessperson's obligation to hire the prospective employee (C) A condition concurrent that applies equally to both parties' obligations (D) A promise that can be enforced if the businessperson purchases the car dealership within a reasonable time after May 1

Rationale: Issue: This problem tests students on their ability to distinguish between different types of conditions. Rule: A duty or right that is conditioned upon the occurrence of some event or act shall not arise unless the condition either occurs or is excused. A condition precedent is an event that must occur before the duty or right arises. A condition subsequent is an event that terminates a duty or legal right. A condition concurrent is a situation where each parties' obligation is dependent on the other occurring at the same time. Analysis: Here, the duty to hire the prospective employee is subject to a condition, i.e., an event, that the businessperson purchase a car dealership by May 1. If that event occurs, then the businessperson has an absolute duty to hire the prospective employee. If the event does not occur, then the businessperson has no obligation to hire the prospective employee. This is a condition precedent; therefore, Choice B is correct. Choice A is incorrect because the sentence would only be a condition subsequent if there were some event that occurs which cuts off an existing duty; here, there is no such existing duty. (An example of a condition subsequent in an employment contract might be if, in a contract for a fixed period, the employee is absent more than some set number of days, then the employer may terminate employment early. The set number of absent days is a condition subsequent that cuts off the employer's duty to employ the individual.) Conditions concurrent is a situation where each parties' obligation is dependent on the other occurring at the same time. This is not the situation here. The successful purchase of the dealership is independent of any act by the prospective employee; therefore, Choice C is incorrect. Choice D is not the best answer. Here, the more likely interpretation is that the purchase of the dealership must happen by May 1 if the employment contract is going to be effective. The whole point of conditions is that the event must occur exactly to the terms.

A tenant has rented office space from a landlord for the last ten years. The tenant recently made substantial improvements to the office space at its own expense with the knowledge and approval of the landlord. Under the terms of the lease, the tenant has an option to renew the lease for another ten years at a specified rent; however, the tenant's right to renew is conditioned on the tenant giving the landlord written notice of its intent to renew six months before the lease expires. Seven months before the lease expires, the landlord sends the tenant an email which states, "This is a reminder that you have to provide us with written notice six months before your lease expiries if you intend to renew for another ten years. If we don't hear from you by the deadline, then we will assume that you are not interested and we will find another tenant." The tenant receives the email but forgets to reply and does not give notice by the six-month deadline. Five months before the lease is set to expire, the landlord advertises the office space as being available for rent. The advertisement describes the office space as including the many improvements the tenant made at its own expense. The tenant sees the advertisement and immediately provides the landlord with notice of its intent to renew the lease. However, the landlord rejects the tenant's notice because he can lease the space for a higher rent. The tenant brings a lawsuit seeking specific performance of the option agreement. The parties stipulate that the six-month notice provision was a condition and that the condition did not occur. If a court rules in favor of the tenant and excuses the non-occurrence of the condition, then it is probably because of the doctrine of: (A) avoidance of disproportionate forfeiture. (B) express waiver of a condition. (C) estoppel on a promise to waive a condition. (D) wrongful hindrance by the party with the conditional duty to perform.

Rationale: Issue: This problem tests the different ways in which a condition may be excused if the condition did not occur. Rule: Restatement (Second) of Contracts § 229 provides, "To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange." Analysis: There are a number of ways in which courts excuse conditions, but only Choice A presents a doctrine that applies to these facts. The tenant might indeed suffer a disproportionate forfeiture if the condition is not excused, since the tenant recently made substantial improvements to the office space at its own expense, and likely made those improvements because it intended to renew the lease. The landlord was aware of the improvements. The landlord is not harmed by excusing the condition since the landlord has not yet leased the premises to another party. Choice A is the correct answer. Choice B is incorrect because the facts do not show that the landlord said anything or did anything that would have waived the condition. A waiver is a relinquishment of a legal right that a party has under an agreement. The contractual right stays in place, but the party chooses to not enforce it. However, an express waiver would require the landlord to tell the tenant that it was not going to enforce the notice provision. Here, the landlord clearly stated that it wanted to hold the tenant to the six-month notice provision. Choice C is incorrect for the same reasons. The landlord is not estopped because he never promised to waive the condition. Choice D is also incorrect because the facts do not show that the the landlord in any way hindered the tenant in performing the condition. The opposite is true. The landlord even sent a reminder about the six-month notice requirement.

A homeowner resides in an area frequently subject to electrical power failure and wants to install a "back-up" generator. He visits an electrical supply store that is run by an electrician, bringing with him a professionally drawn electrical wiring diagram of his home that also shows the electrical usage of all appliances and other devices in the home. Showing the diagram to the electrician, the homeowner expresses his wish to install in his home a generator that in case of power outage will provide electrical power, fully, to all his lights and appliances. "Then, the outage won't affect my home in any way," the homeowner says. The electrician shows the homeowner a generator packaged in the manufacturer's box. "Here's one," the electrician says. The homeowner purchases the the generator, and has it professionally installed in his home. Three months later, the homeowner's neighborhood suffers a power outage. The homeowner turns on the generator, but it fails to fully power his home. The homeowner revisits the electrician and tells him that the generator does not serve his purpose. Truthfully and accurately, the electrician responds, "The manufacturer makes a limited warranty that for one year the generator will be free of defects in design and manufacture. It's in the box; that's our warranty. But, I want to look at the generator. Let's go to your home." The electrician accompanies the homeowner to his home and tests the generator. Truthfully and accurately, the electrician says, "It's working just as it should. It's not defective. The manufacturer does not warrant that the product will fully power your home with these appliances. I'm afraid you have no recourse." Does the homeowner have recourse? (A) No, because the owner is subject to the maxim, "caveat emptor" (B) No, because the manufacturer's written warranty is limited to freedom from defect (C) Yes, because the electrician sold the homeowner the generator with a warranty of its merchantability (D) Yes, because the electrician sold the generator warranting that it was fit for the homeowner's particular purpose

Rationale: Issue: This problem tests the implied warranty of fitness for a particular purpose. Rule: UCC § 2-315 Implied Warranty: Fitness for Particular Purpose Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified ... an implied warranty that the goods shall be fit for such purpose. Analysis: Unless, by "exclusion" she expressly provides otherwise (UCC § 2-316) a merchant who sells a good warrants that it is "merchantable." That means it is of a quality (a) that ordinarily characterizes that same form of good as it is sold throughout the relevant industry, and (b) that renders it suitable to the usual ordinary purposes for which reasonable persons use it. (UCC § 2-314(2)) The Code recognizes, also, a warranty of "fitness for a particular purpose." UCC § 2-315 provides, "Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is ... an implied warranty that the goods shall be fit for such purpose." That warranty of fitness for a particular purpose applies to this case. The homeowner went to an electrician to rely on her skill and expertise. The homeowner told the electrician of his reasons for wanting a generator and provided the electrician with a professionally drawn electrical wiring diagram of his home that also showed the usage of electricity from the various appliances and other devices in the home. The electrician then led him to the product, saying "Here's one." Under the UCC, the electrician warranted that that generator would be fit for the purpose the homeowner described. For these reasons, Choice D is correct. Choice A is incorrect. "Caveat emptor" ("buyer beware") is a common law maxim meaning that a seller makes no implied warranty as to the good he sells. The principle applies where a statutory warranty does not, as for instance, when a nonmerchant casually sells his bicycle, computer, or automobile. Such a seller—if not an expert—makes no implied warranties. The electrician is a merchant and makes both implied and express warranties, so the phrase is not relevant. Choice B is incorrect because the limited warranty in the box does not disclaim the implied warranties under the UCC. Under UCC § 2-316, the exclusion of an implied warranty of fitness must be conspicuous. The section provides an example that states, "Language to exclude all implied warranties of fitness is sufficient if it states, for example, that 'There are no warranties which extend beyond the description on the face hereof.'" Here, the language of the manufacturer's warranty only states that there is a limited warranty and provides what is covered. No exclusion is mentioned. Choice C is not the correct answer. It has the right conclusion but the wrong reasoning. The sale of this product does include the implied warranty of merchantability. However, the product does appear to be performing well enough to be merchantable. One standard for merchantability is that the product is fit for the ordinary purposes for which such goods are used. The electrician checked the generator out and confirmed it was working as expected. Therefore, there is no breach of the warranty of merchantability.

A customer visits a dealership that sells propeller aircraft. He examined several models and eventually settled on a particular aircraft. The sales agent gave him a one page "Model Information Sheet" that described the aircraft. The sheet claims that the "occupancy of the plane is 12-16" and the "takeoff distance is 1,800 ft." The customer was given the "Model Information Sheet" before he signed the agreement to purchase, and he read the entire sheet. The local airport near his home has a shorter-than-average runway and so he was pleased that the takeoff distance was only 1,800 ft. Since the document listed the needed takeoff distance, he never asked the sales agent about it. Ther customer also needed a plane with the capacity of 16 people as he had plans to take a group that size on several outings. The contract he signed to buy the plane made no mention of any warranties and did not represent the capacity or takeoff distance. When he tried to take off from his local airport, they would not clear him to take off with that plane because they claimed he needed 2,055 feet to take off. After several calls to the aircraft manufacturer's engineers, he confirmed that this was indeed the minimum takeoff distance, and the Model Information Sheet was in error. Will the customer likely succeed in a breach of warranty action against the dealership? (A) Yes, the plane is not fit for the particular purpose of the customer (shorter takeoff distance) and dealership is therefore in breach of the warranty of fitness for a particular purpose. (B) Yes, dealership breached an express warranty about the takeoff distance. (C) No, the contract to purchase did not include any warranties and therefore no warranties, express or implied, were given. (D) No, the customer never communicated his particular purpose to the sales agent at dealership and therefore no warranty of fitness for a particular purpose was given.

Rationale: The Uniform Commercial Code provides for the inclusion of express warranties (§2-313) and implied warranties (§2-314 and §2-315). To create a warranty of fitness for a particular purpose under §2-315 the seller must "have reason to know" of the particular purpose of the buyer. There are no facts in the question that indicate that dealership knew of the particular purpose of a shorter takeoff distance. Thus, there is likely no breach of a warranty for fitness for a particular purpose and Answer A is incorrect. Although answer D correctly states that no warranty for fitness for a particular purpose was given, there are other warranties that are possible and so answer D is not the best answer. UCC §2-313 lists several methods for creating an express warranty. Subpart (1)(b) states that "[a]ny description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description." The Model Information Sheet contains a description of the takeoff distance for the aircraft. As the customer read and relied upon this description it became part of the basis of the bargain. Therefore, dealership breached the express warranty as to takeoff distance and it is likely the customer would succeed on this claim. Answer B is therefore the best answer. Answer C is not the best choice because §2-313 does not require the use of the word "warranty" or for it to be included in the contract to purchase. Providing the description is sufficient to create the warranty.

A buyer enters into a signed and written contract to purchase a rowboat from a the seller, who is a dealer in rowboats. The written purchase agreement, drafted by the seller, was 30 pages long. Near the end of the agreement in an unmarked paragraph with no heading the following language appeared, "The sale of the rowboat is subject to a limited warranty that it will not leak for 30 days after purchase. All other warranties—express and implied—are disclaimed." When the buyer tried to use the rowboat, he discovered that it did not leak—as promised. However, the rowboat did tip over very easily. In the trade, rowboats are supposed to be very stable and not tip over easily. The rowboat was so unstable, it was virtually useless as a boat. If the buyer brings a breach of contract suit, which of the following describes the likely result and best rationale? (A) The seller wins because the seller limited both express warranty and implied warranties in writing. (B) The seller wins under the doctrine of caveat emptor. (C) The buyer wins because the seller's disclaimer of implied warranties was not conspicuous and did not mention "merchantability." (D) The buyer wins because this was an adhesion contract with an imbalance in bargaining power.

Rationale: The correct answer is C. UCC §2-314 provides that every contract for the sale of goods by a merchant carries an implied warranty of merchantability unless that warranty is disclaimed under UCC 2-316. UCC 2-316 states, "to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous." A dealer of goods (here, boats) is a "merchant" under the UCC, so the implied warranty of merchantability applies. The dealer did not properly disclaim the warranty properly the disclaimer was not conspicuous (it was hidden at the end without a heading) and did not mention the word "merchantability." The implied warranty of merchantability is breached if the goods are not fit for the ordinary purposes for which such goods are used. A boat that easily tips is not fit for the ordinary use; therefore, Answer C is the best answer. Answer A is incorrect given that the implied warranty of merchantability exists in every contract for the sale of goods by a merchant. Answer B is wrong since the warranty was not properly disclaimed. Answer D has the right result but the wrong reasoning. Even if the contract is an adhesion contract, that alone does not provide grounds for rescinding the transaction.

A certified public accountant enters into a contract with a pet services company to audit their financial statements for the past three years. The pet services company needs the audit to be completed by March 31 and in accordance with Generally Accepted Auditing Standards. It needs such an audit by this date to fulfill its obligations under a loan agreement with its bank. The contract signed by the accountant and the pet services company contains the following term: "the accountant covenants and promises to complete the audit in accordance with Generally Accepted Auditing Standards on or before March 31 and the accountant agrees that it is a condition of the pet services company's obligation to pay the accountant the audit fee of $100,000 that the accountant fully and completely perform this obligation in full." The accountant ends up taking on more work than she can handle and does not complete the audit until April 5. The audit report states: "Due to the limitations of time, this audit was not conducted in accordance with all Generally Accepted Auditing Standards" and then goes on to list the standards with which the audit did not comply. Ignoring whether or not any excuses exist, what is the pet services company entitled to do in response? (A) The pet services company can sue for damages for breach of contract by the accountant but must pay the agreed audit fee since the accountant substantially performed her obligations. (B) The pet services company can withhold payment of the audit fee since a condition to that obligation has not been fulfilled but cannot seek damages for any harm caused by the accountant's failure to meet the condition. (C) The pet services company can withhold paying the audit fee since the conditions to its obligation to pay are not fulfilled and it can seek damages caused by the accountant's breach of the contract. (D) The pet services company has no legal recourse since a condition and promise cannot be combined in this way and are therefore ineffective.

Rationale: The quoted provision is a "promissory condition." It is a contractual promise of the accountant to complete the audit in a specified manner by a specified date, the performance of which promise is an express condition to the obligation of the pet services company to pay the audit fee. Failure to fulfill a condition relieves the party whose obligation is subject to such condition from the duty to perform the conditional promise. Breach of the promise in the promissory condition gives rise, like any claim for breach of contract, to a right to damages. Only answer C contains both of these consequences. Answers A and B each contain only half of this conclusion and are therefore not the best answers. The reference to "substantial performance" in answer A is inappropriate because this doctrine only applies to constructive conditions and the condition in this agreement is express. Answer D is incorrect since promises can serve as express conditions as well as promises.

A graduate has invited a music star to her graduation party (they are distant relatives). In order to impress the star, she wants to have him picked up at the airport in a stretch limousine to make a good impression. She hires a driver (who owns and operates a small limousine service) to perform this task. Because she wants to make a good impression, she includes several conditions in the contract to provide limousine transportation from the airport to the graduation. One of the conditions of the graduate's obligation to pay for the service is that "the driver must be dressed in a black suit and wear a chauffer's cap at all times during the provision of the services." This requirement is clearly listed as "a condition of the graduate's obligation to pay for the Services." Two weeks before the graduation the graduate calls the driver and says "I changed my mind about the black suit and chauffer cap. You can wear whatever you want, and I will not hold you to that condition." The driver replied: "Are you sure? It is no big deal since I already own the suit and hat." She repeated what she had said before. Two days later she called the driver again and says: "I rethought the suit and hat. I think it will make an important impression. I need you to comply with that condition." Is wearing the black suit and chauffer's hat a condition that must be fulfilled at the time of the ride for the graduate's duty to pay to arise? (A) Yes, the graduate effectively reinstated the condition in this case, and it must be satisfied. (B) Yes, once conditions are included in a contract they must be satisfied even if one party no longer desires them to be. (C) No, the graduate explicitly waived this condition. (D) No, the driver justifiably relied upon the graduate's first call stating he did not need to wear the suit and hat.

Rationale: This is a contract for service and so the common law applies. Restatement (Second) of Contracts §84 states that a party can waive a condition to that party's obligation. The section does not use the word "waiver" but refers to "a promise to perform all or part of a conditional duty under an antecedent contract in spite of the non-occurrence of the condition." The Section goes on to list several exceptions. One is relevant to this question. "If such a promise is made before the time for the occurrence of the condition has expired and the condition is within the control of the promisee . . . the promisor can make his duty again subject to the condition by notifying the promisee . . . of his intention to do so if (a) the notification is received while there is still a reasonable time to cause the condition to occur under the antecedent terms or an extension given by the promisor; and (b) reinstatement of the requirement of the condition is not unjust because of a material change of position by the promisee. . ." Applying this section to the problem, the graduate can revoke her waiver (make her duty conditional again) because there is still time for the condition to be satisfied (the time for performance has not arrived) and the driver has not changed his situation due to the earlier waiver of the condition. He is ready and able to perform the duty that is a condition. If he had sold the suit and hat thinking he did not need it, then he may have changed position. Thus, answer A is correct. Answer B is incorrect since parties are always free to waive conditions to their own duties. Answer C is incorrect because it fails to account for the freedom of parties to reinstate a condition. Answer D is incorrect because in the facts of the question the driver does not do or refrain from doing anything after the initial waiver of the condition.

A driver enters into a contract with a traveler who travels weekly for work to drive her to the airport on Monday morning and pick her up at the airport on Thursday evening. The contract is for two years, and the traveler agrees to pay the driver $50 a week for both trips. Eight months into the performance of the contract the price of gasoline rises to $15 a gallon, a price which was not expected by either party. Together with paying the tolls that the contract obligates the driver to pay, the cost of gasoline now results in the driver losing money each week as his cost to make the two trips is $55 and he is only paid $50 by the traveler. The driver informs the traveler that he will no longer perform since his whole purpose "was to make some extra money" and since it seems like the price of gas is not declining ,"I just cannot continue losing this money each week." Is it likely a court would find the driver has an excuse for his non-performance? (A) Yes, since both parties were mistaken about their predictions of the price of gasoline, the driver is excused due to mutual mistake. (B) Yes, since the driver's purpose in entering into the contract was to make some extra money and that purpose is entirely frustrated by the cost of gas, his performance is excused. (C) No, there is no intervening event that makes the driver's performance impractical and the purpose of the contract is not frustrated. (D) No, a contract's purpose must be frustrated at the time of making the contract for an excuse to exist and the price of gas changed after the contract was formed.

Rationale: This problem tests application of the excuse of frustration of purpose which is addressed in Restatement (Second) of Contracts §265. That section makes clear that "[w]here, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary." The section contemplates a frustration of purpose that occurs after a contract is formed and thus answer D is incorrect. Mistakes of fact are mistakes made about facts existing at the time of the formation of the contract. Mistakes about predictions of future events are not relevant to the doctrine of mutual or unilateral mistake and therefore answer A is incorrect. The very purpose of the actual performance must be frustrated in order for the defense of §265 to apply and comment a. states, "It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss." If a contract merely becoming economically unattractive were sufficient, every party that enters into a bad bargain would be able to avoid enforcement. the driver contracted to bear the risk of gasoline prices rising as they agreed to a fixed price contract for the term. Answer B is therefore incorrect and answer C is correct.

A couple co-owns a home on which they have a contract of insurance with an insurance company. The home was severely damaged by a hurricane. The insurance company admits that the hurricane damage was an insurable loss but claims the homeowners failed to fulfill a condition of the insurance company's obligation to pay that required the homeowners to notify the insurance company of the loss within 30 days of the event. The relevant provisions of the contract state: "3. Conditions and Obligations. It is an absolute and express condition of the obligations of the insurance company to pay any claim that Homeowner has paid when due all premiums due on the policy before the insured loss occurred. Homeowners promise to notify the insurance company of any loss or damage within 30 days of any event giving rise to such loss or damage." The homeowners have never missed a premium payment. Is a court likely to rule that the insurance company does not have to pay the claim (you can assume no special laws regulating insurance contracts apply)? (A) Yes, the homeowners failed to fulfil an express condition to give notice within 30 days and so the insurance company's performance is not due. (B) Yes, the homeowners failed to substantially perform their obligation to give notice. (C) No, the homeowners complied with half of the obligations in this section and therefore the condition is substantially performed. (D) No, a court likely will interpret the promise to notify the insurance company as a mere promise that is not a condition to paying the claim.

Rationale: This problem tests the interpretation of contracts to distinguish a promise from a condition. A court would likely interpret section 3 of the contract to contain one condition (paying premiums) and one promise (to notify the insurance company). The two are contained in separate sentences and only the first states that it is an express condition of the insurance company's obligations. The language in no way states that the promise to notify is a condition. Although courts will strictly enforce express conditions, they will typically resolve ambiguity in drafting in favor of a provision being a promise and not a condition. The problem is similar to the facts in the case of Larry K. Howard v. Federal Crop Insurance Corp., 540 F. 2d 695 (4th Cir. 1976), in which the court interpreted an insurance contract provision that included promises in the same section as express conditions as promises only since the language did not clearly state performance of the promise was a condition. Answer A incorrectly concludes the promise to give notice is an express condition and is therefore not the best answer. Substantial performance relates to a constructive condition that a party perform all promises before the other party must perform. The question revolves around whether or not the promise to notify is an express condition and therefore substantial performance is inapplicable. Answers B and C are therefore incorrect. Only answer D states what a court is likely to do on these facts—interpret the promise as not being a promissory condition—and is therefore the best answer.