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Illegality in the procurement and Illegality in Performance

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  1. Illegality in the procurement and Illegality in Performance • Sirkin v. Fourteenth Street Store, p.553 Promise to pay bonus (bribe) Buying Agent for Store Sirkin Promise to buy from Sirkin This Kx is illegal on its face: illegality in the subject matter

  2. Illegality in the procurement and Illegality in Performance (Sirkin v. Fourteenth Street Store) Promise to Sell goods Buying Agent for Store Sirkin Promise to buy and pay for goods This Kx is NOT illegal on its face—just a Kx for the sale of goods This is the Kx sued on

  3. (Sirkin v. Fourteenth Street Store) • Sirkin delivers the goods as promised, but Store refuses to pay. Sirkin sues, and Store repsonds that the Kx was unenforceable due to illegality. • What then, is the issue here? • Whether the Kx for the sale of goods between Sirkin and Fourteenth Store which was legal on its face and as to its subject matter was nonetheless unenforceable because it was procured by Sirkin by bribing the Store’s purchasing agent?

  4. (Sirkin v. Fourteenth Street Store) • Rule? • A Kx is unenforceable where, though legal on its face and not illegal as to its subject matter, is procured illegally. • What then, is the issue here? • Whether a Kx, legal on its face and legal as to its subject matter, is nonetheless unenforceable where it was procured illegally?

  5. (Sirkin v. Fourteenth Street Store) • What is the rationale behind the rule? • Refusing to enforce the Kx illegally procured discourages bribes to acquire Kx’s. • Recall that, where no action is available for breach of Kx, or where a Kx is unenforceable due to, for instance, the statute of frauds, the complaining party might still recover in a Restitution (Quasi-Kx) action. Wasn’t Fourteenth Store unjustly enriched? Shouldn’t Sirkin at least be able to recover the value of the benefit (the goods) conferred?

  6. (Sirkin v. Fourteenth Street Store) • Restitution is generally not available where a Kx is unenforceable due to illegality, whether in the subject matter or in the procurement. What is the rationale for denying restitution? • Were the party who procures a Kx illegally able to recover in restitution, there would be little disincentive to enter into illegal Kx’s. Rather, there would be incentive to enter into an illegal Kx, or procure a Kx illegally, as in the Sirkin case, knowing the worst outcome would be the return of the benefit conferred.

  7. Illegality in the procurement and Illegality in Performance McConnell v. Commonwealth Pictures, p.553 • Was the Kx between McConnell and Commonwealth Pictures illegal in its subject matter (on its face)? • Was the Kx procured illegally? Promise to pay $10K plus % Commonwealth Pictures Promise to get distribution rights McConnell No No

  8. Illegality in the procurement and Illegality in Performance (McConnell v. Commonwealth Pictures) • The court refuses to enforce the Kx due to illegality—where did the illegality occur? • The illegality is in the performance. The illegality is after Kx formation. • Doesn’t this open the door to the avoidance of Kx liability and, perhaps, unjust enrichment if a Kx legal on its face and not procured illegally is unenforceable where there is any illegality in the performance?

  9. Illegality in the procurement and Illegality in Performance (McConnell v. Commonwealth Pictures) • Consider this hypo: A agrees to deliver a package to B in exchange for B’s promise to pay $50. In delivering the package, B exceeds the speed limit and gets a ticket. Should the Kx be found unenforceable on the grounds that there was illegality after formation, i.e., illegality in the performance? See the opinion at p.554. • The court in McConnell qualifies the rule: the illegality in performance must be major (not minor or trivial) and must be directly connected to the obligation sued upon.

  10. Mitigating Doctrines: Recovery in Restitution • The general rule, as noted, is that Restitution is not available as an alternative to a Kx action where the Kx is unenforceable owing to Illegality. There are, however, exceptions: (1) Where the illegality is in the performance (alaMcConnell) and is collateral, i.e., not directly related to performance of the Kx (e.g., getting a speeding ticket while performing (in some jurisdictions, this likely won’t even bar recovery in Kx)

  11. Mitigating Doctrines: Recovery in Restitution • Exceptions: (2) In Pari Delicto Doctrine: Where the parties are not equally at fault (are not in pari delicto), the party less guilty can recover in Restitution (again, not on the Kx) from the more guilty party. For instance, where a party engages in an illegal gambling Kx and is cheated by the other, the party cheated can recover his losses in Restitution. Courts will not apply the doctrine to permit Restitution where the party seeking it has engaged in serious misconduct.

  12. Mitigating Doctrines: Recovery in Restitution • Exceptions: (3) Repentence: If a party to an illegal Kx withdraws within the time for repentance, he may recover in Restitution for the other for the value of any benefit conferred. For instance, a contestant who paid to fix a contest so she would win a prize may recover what she paid on repenting. The party need not literally repent; rather, a claim for Restitution constitutes the point of repentance.

  13. Mitigating Doctrines: Recovery in Restitution • Requirements for the Repentance Doctrine • The illegal purpose must not have been accomplished and can be avoided by allowing the plaintiff recovery in Restitution. • The illegality must not have been so serious and turpitudinous in itself that the court regards the very formation of the Kx in the first place as a substantial offense.

  14. (B) Judicially Created Public Policy: Hopper v. All Pet Animal Clinic, p.557 Promise to pay for work as vet Clinic Hopper Promise to Work Promise (covenant) not to compete • Terms of the covenant: • No small animal practice • Three years • Within 5 miles of Laramie

  15. (Hopper v. All Pet Animal Clinic) • Hopper is terminated and opens vet practice that competes with Clinic in violation of the covenant not to compete. • Clinic sues for Br/Kx, seeking damages and an injunction. The trial court granted the injunction, but found the damages claim too speculative. Both parties appealed. • Hopper argued that no-compete clause violated public policy.

  16. (Hopper v. All Pet Animal Clinic) • What, according to the court, is the general view with regard to covenants not to compete? • The are generally disfavored because they interfere with the right to work and suppress competition which operates to the disadvantage of the public. • Since such covenants are looked on with disfavor, what does that mean as a practical matter for the party seeking to enforce it? • The burden is on the employer to show the covenant is reasonable and is necessary to protect the employer’s business interests.

  17. (Hopper v. All Pet Animal Clinic) • Whether a covenant not to compete is enforceable thus entails a balancing of the legitimate business interests of the employer and the interests of the employee. • The court cites Re 2nd §188 which restates the majority approach, the so-called ‘Rule of Reason’. What are the three factors considered under that rule? See first full paragraph, p.558.

  18. (Hopper v. All Pet Animal Clinic) • What are the special interests of the Clinic in need of protection identified by the court? See last paragraph, p.558. • The employee’s (Hopper’s) interest must be considered against the employer’s interests: specifically, the covenant cannot work an ‘undue hardship’. Undue hardship would result where a covenant, unreasonable as to scope, duration, or geography, effectively prevents an employee from working. For instance, had the covenant in the case at hand restricted Hopper’s ability to practice for 50 years, she would have effectively been foreclosed from small animal practice in the area for what would likely be regarded an unreasonable period.

  19. (Hopper v. All Pet Animal Clinic) • The court concludes the covenant was reasonable in its geographic limits—no small animal practice within five mile of Laramie city limits. In concluding that the five-mile limitation was reasonable, the court distinguishes Cukjati v. Burkett (p.559), wherein the Texas court held a twelve mile geographic limitation was excessive. How did the court decide five miles was reasonable? • Apart from the reasonableness of the geographic limitation, what other fact about the location of the parties suggested no undue hardship was worked on Hopper by prohibiting small animal practice within five miles of Laramie?

  20. (Hopper v. All Pet Animal Clinic) • What about the duration of the covenant—three years? The court held that was too long: too long in what regard? • Three years was excessive in that it was unnecessary to protect the Clinic’s interest. One year was enough to accomplish that: why? See last paragraph, p.559. • The third factor to be considered in determining whether a no-compete clause violates public policy (in addition to the interests of the employer and employee) is the impact on the public. The court summarily determines the public would not be injured (in the form of detrimental reduction of competition) by the clause.

  21. (Hopper v. All Pet Animal Clinic) • In sum, a covenant not to compete is enforceable to the extent it is reasonable in scope, duration, and geographic limits. The covenant must impose only such limitations as are necessary to protect the employer’s legitimate business interests. After that, the covenant will still be unenforceable if it works an undue hardship on the employee or injures the public.

  22. Chapter 8: Performance and Breach, p.691 Section 1. Conditions • In bilateral Kx, parties exchange promises, one being consideration for the other, but each enters into Kx expecting, at some point, performance of the thing promised. Rules relating to performance are aimed at protecting that expectation. • First, expectations are protected by affording a claim for damages to the disappointed party when performance is not forthcoming, but also by allowing that party to suspend its own performance where the other fails to perform.

  23. (Chapter 8: Performance and Breach) Section 1. Conditions • Courts have relied on the concept of conditions in developing the rules relating to performance. A condition is an event that must occur before performance of a thing promised is due. For instance, in a Kx for insurance, the insurer is not obligated to perform until the loss contingency occurs(e.g., house burns down, etc.). Condition is defined in Re 2nd §224.

  24. (Chapter 8: Performance and Breach) • A condition may be beyond the control of the Kx’ing parties; that is, the condition could be an external event: “I promise to play tennis with you tomorrow if the sun is shining”. Here, the sun shining is an external event beyond the control of the parties. That event is a condition precedent to the duty to play tennis as promised. NOTE: that does NOT mean no Kx is formed—it means there is no duty to perform what was promised unless and until the condition precedent is met.

  25. (Chapter 8: Performance and Breach) • The condition may be a “Promissory” condition and within the control of the parties: “I promise to pay you $50 if you promise to wash my Jeep”. The duty to pay $50 (perform the thing promised) is subject to a promissory condition precedent—your promising to wash my Jeep. • Conditions, whether an external event or promissory, are of three types: Precedent, Subsequent, or Concurrent.

  26. (Chapter 8: Performance and Breach) • Condition Precedent: an contingency that must occur before there is a duty to perform the thing promised. Conditions Precedent are thus duty-creating: “I promise to mow your grass tomorrow if its sunny and warm”. If the tomorrow it proves to be sunny and warm, the condition precedent to my promised performance, mowing, has been met and the duty to mow arises. • Condition Subsequent: terminates a duty to perform: “I promise to mow your grass tomorrow unless it rains”. There is no condition precedent to my having to mow-it arises tomorrow without contingency. However, my extant duty to mow may be extinguished or terminated by a condition subsequent—it rains tomorrow. Unless and until it rains, I had a duty to mow your grass.

  27. (Chapter 8: Performance and Breach)Under the Restatement §224 et seq • The Restatement, in defining condition, abandons the terms condition precedent and condition subsequent. The concepts remain, but the terminology is changed. • Under the Restatement view, a condition refers to an event that must occur before the duty to perform arises (namely, a condition precedent), §224 • The concept of condition subsequent is, in §230, a “Duty Terminating Event” (namely, a condition which, if it occurs, terminates a duty to perform). Strictly speaking, then, under the Restatement view, a condition subsequent is not really a condition—it’s a duty terminating event.

  28. (Chapter 8: Performance and Breach)Under the Restatement §224 et seq • Events certain to occur are not conditions: thus, the mere passage of time does not constitute a condition—e.g., a promise to pay $50 at the end of 30 days is an unconditional promise. • As the concepts of condition precedent and condition subsequent are very much alive and well in the Restatement under new names, we will continue to refer to conditions precedent and subsequent. • We will discuss Concurrent Conditions in the materials on Constructive (Implied) Conditions.

  29. (Chapter 8: Performance and Breach)Express Conditions: “No Breach, Compliance” Luttinger v. Rosen, p.692 • The Seller endeavors to retain the Luttingers’ earnest money deposit: what are the Seller’s arguments? • In effect, the Seller is stating that he is entitled to retain the deposit because the Luttingers had breached, that is, they had failed to close and pay for the house.

  30. Express Conditions: “No Breach, Compliance” (Luttinger v. Rosen) • Were the buyers in breach? Assume the shoe were on the other foot; that is, assume that seller had sued the buyers to force them to close or pay damages. What would the buyers’ response have been?

  31. Express Conditions: “No Breach, Compliance” (Luttinger v. Rosen) 2. Kx Formation Kx for sale of house • Enforcement—No bars to Enforcement • Performance and Breach As plaintiff, seller would allege: “Breach by defendant, buyers, did not take and pay for the property”

  32. Express Conditions: “No Breach, Compliance” 4. Performance and Breach “Breach by defendant, buyers, did not take and pay for the property” When there is an allegation of breach, the party against whom breach is alleged has the opportunity to respond. There are several responses to breach we will consider. The first is, “No breach, compliance”. With this response, the responding party is declaring they are fulfilling the terms of the Kx.

  33. Express Conditions: “No Breach, Compliance” (Luttinger v. Rosen) • In the case, buyers did not, in point of fact, close on the house (take and pay for it as agreed in the Kx for sale). • The buyers’ response is they were in compliance owing to the express condition precedent to their having to perform, namely, their getting a 20 year mortgage at 8 ¼ %. Getting a mortgage from a bank on those terms was a condition precedent to their having to close on the property. That condition was not met, such that the buyers’ duty to perform never arose.

  34. Express Conditions: “No Breach, Compliance” (Luttinger v. Rosen) • What were the seller’s replies to the Luttingers’ response that they were in compliance? • The mortgage contingency clause was not a condition precedent. How does the court deal with this first argument? The court dispenses with the argument by providing a definition for condition precedent: a fact or event which the parties intend must exist or take place before there is a right to performance.

  35. Express Conditions: “No Breach, Compliance” (Luttinger v. Rosen) 2. The buyers didn’t apply for loans at all the banks in the area—that is, the buyers failed to use due diligence in securing a loan. The court disagrees: what facts convinced the court the buyers had used due diligence? 3. Even if the mortgage contingency clause was an express condition precedent, and even if the buyers used due diligence to secure a loan as described in the Kx for sale, the condition was satisfied (seller argues the trial court erred in finding the condition was not met). On what basis, according to the seller, was the condition precedent met? • Seller urges the condition was satisfied by seller’s offer to effectively make up the difference in the interest by providing financing to the buyer at the 8 ½ %, an offer the buyers refused. Sounds pretty good. Why didn’t the court buy it?

  36. Express Conditions: “No Breach, Compliance” (Luttinger v. Rosen) • See the language in the opinion, last paragraph, p.693, beginning, “In this case the language of the contract is unambiguous . . . .” What does that suggest regarding the level of compliance with express conditions to which parties have agreed in a Kx? Why might not the offer to finance have been satisfactory to the Luttingers? See Note 3, p.694. • Yeah, strict compliance.

  37. (Luttinger v. Rosen) • Effects of the failure of the condition: First, the Luttingers did not have to perform (close). Second, the condition having not been met, after a reasonable time their duty was discharged and they could treat the Kx as terminated. • Note 2: By definition, conditions are events not certain to occur; thus, there is some risk they might not be met (e.g., the Luttingers couldn’t get financing on the terms they wished even with due diligence). The condition allocated the risk that the Luttingers couldn’t get financing to the seller.

  38. Internatio-Rotterdan, Inc. v. River Brand Rice Mills, Inc., p.695 • Let’s simplify: IR was a buyer exporter shipping rice to Japan. River Brand was a processor/seller who agreed to sell rice to IR. • IR (buyer) was to ‘nominate’ (declare) the ships to carry the rice to Japan and notify River Brand (seller) after seller had allocated the rice totals between Houston and Lake Charles. • The language of the Kx required shipment in December 1952. Buyer was to give seller two weeks notice of shipping instructions. In order for seller to comply with the term of the Kx that required delivery in December, buyer would have had to give notice by December 17th; otherwise, seller could not deliver in the month of December.

  39. (Internatio-Rotterdan v. River Brand Rice) • Buyer hit a snag with in the form of export restrictions and could not designate the delivery particulars for the rice allocated to Houston. Thus, the buyer could not notify seller of Houston delivery details by December 17th. • When it did not receive delivery instructions for Houston on the 17thseller rescinded the Kx the next day. Meantime, the cost of rice, subject to radical fluctuation, had risen by 20%. Buyer sued seller for breach, not delivering the Houston rice.

  40. (Internatio-Rotterdan v. River Brand Rice) *Interlude:(B) Problems of Interpretation— promissory duty versus promissory condition, p.700 • Recall that conditions may be either events outside the control of the parties (e.g., I promise to play golf with you tomorrow if it reaches 85 degrees by ‘noon’), or events within the control of the parties, i.e., promissory conditions (e.g., “I promise to play golf with you tomorrow on condition that you buy lunch at the clubhouse first”. Internatio-Rotterdam v. River Brand Rice Mills involves an express promissory condition. • Promissory Condition versus Promissory Duty • Consider the following: “I promise to play golf with you tomorrow if you promise to buy lunch before we play”. If you agree, the latter creates a promissory duty for you to buy lunch which, if you fail to perform, entitles me to damages for breach of Kx. Ignoring for the moment the matter of Constructive Conditions, your buying lunch is not a condition precedent to my performance, playing golf. Thus, your failure to buy lunch might entitle me to Kx damages, but it does not excuse my playing golf—it is not a condition precedent to my playing.

  41. (Internatio-Rotterdan v. River Brand Rice) (Promissory Condition versus Promissory Duty) • Now assume this variation: “I promise to play golf with you tomorrow on condition that you buy lunch first”. Now, your buying lunch is not merely a duty; rather, it is an express condition precedent to my performance, playing. If you don’t buy lunch, my duty to play never arises. However, I am not entitled to damages as no promissory duty to buy lunch was created on that language. • Finally, I could make your buying lunch both a duty and a condition: “I promise to play golf with you tomorrow if you promise to buy lunch first, and your buying lunch is a condition of my playing”. On this language, there is a promissory duty to buy lunch, for the breach of which I might recover damages. In addition, your buying lunch is an express condition precedent to my having to play. If you don’t buy lunch, I am entitled to damages for the breach of duty and my performance, playing, never arises as the condition precedent to my having to play was not met.

  42. (Internatio-Rotterdan v. River Brand Rice) Kx Formation: Kx for the sale of rice Enforcement: no bars to enforcement Performance and Breach: P (Buyer/IR) alleges: “Breach by D, Seller (River Brand Mills), did not deliver the Houston Rice”. D’s (Seller’s) Response: “No breach, Compliance: my performance was subject to an express condition precedent—your providing shipping/delivery instructions by December 17th so that delivery could be completed within December as provided by the Kx”

  43. (Internatio-Rotterdan v. River Brand Rice) What are Buyer’s two replies (responsive arguments) to Seller’s No breach, compliance response? • The promissory obligation to provide two weeks notice of delivery details was not a condition. Rather, it was promissory duty for the breach of which seller might be entitled to damages. But Seller still was required to perform. • Does the court find the two-weeks notice requirement was a promissory condition or duty? On what basis? • The court finds the requirement to be a condition precedent to Seller’s performance, as the Seller could not possibly perform without the delivery instructions. See second full paragraph, p.696.

  44. (Internatio-Rotterdan v. River Brand Rice) (What are Buyer’s two replies (responsive arguments) to Seller’s No breach, compliance response?) • If giving instructions two weeks in advance of delivery was a condition of Seller’s performance, the condition was satisfied. We (Buyers) gave two weeks notice. What is the Seller’s responsive argument? • Seller argues that the condition required Buyer to provide notice by December 17th, such that Seller could deliver the Houston rice within the month of December as required by the Kx for sale.

  45. (Internatio-Rotterdan v. River Brand Rice) • Having found that the two-week notification requirement was an express, promissory condition of Seller’s performance (delivering the Houston rice), it remained for the court to interpret the condition: was Buyer required to give notice by December 17th for December delivery, or could Buyer give two weeks notice with Seller then obligated to deliver after December?

  46. (Internatio-Rotterdan v. River Brand Rice) • The court concludes that the condition required not just two weeks notice, but that Buyer provide the deliver instructions by December 17th such that Seller could deliver in the month of December. Notification to ship after the 17th did not meet the condition, such that Seller’s duty to deliver the Houston rice under the Kx never arose. Moreover, as the condition could never be met after the 17th, Seller could regard the Kx as terminated and rescind, as it did on the 18th. • Why did the court interpret the condition to require notification in time for delivery in December? See last paragraph, p.693-94.

  47. (Internatio-Rotterdan v. River Brand Rice) • The court seems to regard the two week notification requirement as creating a duty as well, such that the buyer’s failure to satisfy the condition would give rise to an action on behalf of the sellers for breach. The sellers did not, however, pursue that action, doubtless because they had profited significantly from the rise in price and could show no damages resulting from seller’s breach. • Note, p.71: Preference in Interpretation. The general rule is that in cases of doubt, courts prefer to find duty versus condition to avoid “harsh results”, i.e., where the condition is not met, one party is denied the other’s performance. See Note (2) Effect of Forfeiture, p. 706.

  48. Peacock Construction Co. v. Modern Air Conditioning, Inc., p.701 • The Kx between the general contractor and the sub provided that the general would not pay its subs until it had been paid by the owner. The owner did not pay and the general contractor did not pay its subs on the basis that the owner’s paying was an express condition precedent to its having to perform.

  49. (Peacock Construction Co. v. Modern Air Conditioning, Inc.) • The court says the clause is ambiguous: what is the ambiguity? That is, what are the two possible interpretations of the clause? • Payment by the owner could be interpreted as either a condition precedent to Peacock’s having to pay Modern Air Condition or as establishing the time for payment.

  50. (Peacock Construction Co. v. Modern Air Conditioning, Inc.) • According to the court, deciding which interpretation to assign the clause is a matter of deciding on the parties’ intent. The intent of the parties’ seems a question of fact—who should decide the question of what the parties intended? • Though the parties’ intent is a factual question, as it involves interpreting the Kx, it is a question of law for the court