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(Part II) Sticky Situations & Solutions: Morris the Manufacturer

breach of contract

As this is a continuation of my last article, I recommend you re-read it so you have full command of the facts, by clicking here.

Disclaimer: The following information does NOT constitute legal advice and is only for general educational purposes. Each situation is different and specific legal issues usually require additional research and investigation, so do not rely on this article to address a particular legal issue; use this as a starting point to gain a general understanding.

Intermission Recap

However, if you’re not gonna do that, then you should know we talked about how Morris the Manufacturer contracted with Acme LLC, (Carl Crafty’s company) to manufacture thumb drives instead of DVDs. Morris had some substantial upfront costs for retooling but expected to make some seriously fat stacks of cash with the new product to offset costs.

Unfortunately, Morris had trouble making the deadline, Carl panicked - and thanks to Angie Angel (who received a finder fee) - found another producer (who also was cheaper), and Morris was left with serious retooling expenses and no orders. Morris hired Able Attorney who sued Carl. We ended off by discussing the service issues (i.e. actually delivering the lawsuit to the proper person).

Today, we will assume that the service of Morris’s lawsuit was successful (see last month for a full discussion of those issues) and that Carl has to defend against the actual lawsuit.

Act 3[1]: Broken Promises

Scene 1: He Said / He Said

Morris’s main beef with Acme (and thus Carl) is that Carl broke his promise to Morris; Carl was not going to pay Morris to make thumb drives. In legal terms we call this “breach of contract.”[2]

In a mutually signed writing, on January 2, 2015, Carl had promised to purchase 200,000 thumb drives at $2/each or $400,000 by the end of the year. However, after the contract signing, there was at least one conversation where Morris originally told Carl he would deliver the thumb drives by April 30, 2015, but Carl said he needed them by March 28th or Carl would lose his buyer. Morris assured Carl that Morris would be ready on or around March 28th. Turns out, near the last minute, Morris actually was able to meet the March 28 deadline (by Morris spending more of his own money to retool faster - think overtime) but it was too late! Carl had panicked, and went with another (and cheaper) producer that Angie Angel found (for a fee).

Morris says he had a deal, spent money on reliance on it, and Carl was obligated to follow through, at least until it was proven Morris could not deliver. Carl says he had no choice and would have lost his buyer without switching producers. But what exactly was the deal and who broke it? Let’s look just a bit deeper into the original facts.

Scene 2: The Written Word

In contract disputes, courts typically first will look to the plain language of the contract.[3] The problem is that many times, unsophisticated parties don’t put it all in writing. Even savvy experienced business executives often just do handshake deals. Sometimes, companies that have a daily heavy traffic in contracts (like import / export firms) will send a few emails back and forth confirming their understanding, before or after a contract, or even as the “contract,” itself. So, you get a situation where maybe an importer says they want to ship 100 units at $1,000 each and the exporter agrees and they may or may not have standard terms attached, or they may say use the “standard” ones, whatever that means.

These emails, especially in New York, often are recognized as binding understandings and agreements, at least as much as anything else written on paper.[4] So, an exchange of emails very well could result in a contract, but one without many terms attached to it other than price and delivery date. Then again, this email exchange as contract, is not a sure thing. For instance, if there were emails sent back and forth, but a formal agreement later was executed, those emails could be precluded as evidence of representing any kind of terms or understandings. Why?

Emails prior to an agreement could have been “merged” into the final product of the later more formal agreement, i.e. “merged” in the sense that whatever understandings those emails supposedly represented either were incorporated if present in the contract or rejected if not incorporated. This is especially true if the contract contains what’s called a “Merger Clause” (a.k.a. “Integration Clause”).[5]

This Merger Clause often is found in the “boring” boilerplate language.[6] Look, I won’t kid you - that boilerplate stuff *is* boring - even to lawyers - but it’s important. If you have contracts, you have that boilerplate language. Read it. Please. Know what you’re in for. Incidentally, why *before* and not after? The emails after *might* be construed as a later amendment of the earlier agreement. That said, sometimes contracts, in themselves, limit in what manner or to what extent, they can modified.

Well, here, we have a plain written contract. “By December 31, 2015, Carl will order 200,000 thumb drives and pay $2/each.” That was it. Yikes.

Scene 3: Hello, Is There Anyone Out There?

But … what about the subsequent conversations (which could have been in person or maybe by phone) between Morris and Carl?

That’s a problem. It’s been said “an oral contract is as good as the paper it’s written on.” (insert laugh track). But, seriously, let’s break down this issue step by step. What was said? And, *when* was it said? The contract was signed January 2, 2015. After then, Morris said he could ship by April 30, 2015. Carl said he needed delivery by March 28, 2015. Morris then said he would get it done by then or “nearly around then.” Actually, re-reading the original example, I find I was not super clear on when this conversation took place.

If it took place before or even during the consummation of the written contract, then these verbal understandings might be barred by the Parol Evidence Rule, as being outside the understanding of the parties.[7] This rule works along with the Merger Clause of the contract, if any, as above. What is this funny sounding rule? “Parol” is a French word meaning oral, as opposed to written, understandings.[8] The rule basically means that courts don’t like to rely on alleged (or even recorded) conversations, particularly when then they contradict actual written words of an agreement, although a court might permit them under some circumstances, such as if they clarify something that was unclear in the contract.[9]

If the calls took place after the contract was signed, it’s a bit more dicey because one side could argue that those conversations were meant verbally to amend the previously written contract, which is theoretically possible[10] - unless, the contract says it can only be amended in writing[11] (which, actually is a very common boilerplate provision - see, there goes that boilerplate stuff again - read it!). Therefore, whether to include the phone calls in the court’s analysis could go any which way and could be decided either as a matter of law and/or fact (law: is the verbal communication even permitted to be considered? / fact: is the alleged conversation “credible,” i.e. is the person alleging it lying or telling the truth?).[12]

Let’s say for a minute, these calls are permitted as evidence. What then? Carl will argue that Morris committed to delivering on or about March 28, 2015, but couldn’t possibly make the deadline and therefore Carl was free to search for another producer. What about the “nearly around then”? What that means is anyone’s guess. Given the context of their conversation, a court might insert its judgment as what would be considered “commercially reasonable” given the issues of timing concerning them both.[13]

“Commercially Reasonable” in terms of timing, could means seconds or months, depending, but I suspect in such a case, it would be a few days maximum or no days at all if Carl’s buyer was prepared to walk after the 28th. Let’s say that’s true. So … in theory, the conversations are accepted as part of the contract understanding, and Morris agreed to commit to delivery by or very close to March 28, 2015, to which … seemingly … Carl assented.

Scene 4: Anticipatory Breach

(a.k.a. I’m Dumping You Before You Dump Me)

otherwise known these days as “Ghosting”[14]

Things were rolling along, ok. Not great. But ok. Carl is already skittish because Morris claims he will make his deadline, but doesn’t sound real sure; in fact, Morris only committed to coming in “around” on time. By March 17th, Morris realizes it’s hopeless as is, and he is forced to spend significant money of his own (another 50,000 smackeroos) to grease the wheels of progress, but he is successful and is ready to manufacture and ship the thumb drives by March 23rd. Unfortunately, Morris did not have an opportunity to inform Carl everything was ok before Carl panicked and signed another contract with another (cheaper) producer on March 24th.

Carl essentially renounced or “repudiated” his contract with Morris, by breaching in “anticipation” that Morris would fail to be ready to perform.[15] Generally, speaking, this is not an acceptable excuse. It also often permits the other party (Morris) to sue immediately for damages.[16] However, sometimes, a party that commits an anticipatory breach can do so and essentially get away with it, because the breacher only did so when it became clear the other party would not be able to perform.[17]

However, this way of going about doing things is absolutely fraught with peril and there are huge risks that the party repudiating / breaching party (Carl) will face. For instance, Carl could face severe monetary damages to Morris. And, Carl could be stuck paying for an order for thumb drives from BOTH producers, thereby ordered twice as many as Carl wanted. Wait, Jeff, are you telling me that Morris can sue Carl for the full price of their contract, and Carl is stuck honoring the other contract? Yuppers. That’s exactly what I’m saying could happen (*could* not *definitely will* but could happen). Can’t Carl call the second producer back on March 25th and tell him he made a mistake? Sure, maybe the producer will let him off the hook, but … the other producer is under no requirement to do so, even if Carl is forced to keep his order with Morris.

Where Carl might have missed the boat on this one is that he should have demanded an “adequate assurance” from Morris.[18], which he was entitled to do under New York’s Uniform Commercial Code. Failure to receive a timely and “commercially reasonably” assurance could potentially mean that it was Morris who breached the contract! (and not Carl). Of course, things could get messy, because who is going to decide what is or isn’t commercially reasonable? The point behind this provision is to encourage parties to communicate and work out their differences as soon as possible, rather than ignore the issue, take unilateral action and resort to the court.[19]

Final Thoughts

So, service has been upheld, and we got to see some of the really complicated issues that need to be explored in the actual litigation. Was there a contract? What was in it? Were there prior or subsequent communications about the contract? Were any of them considered part of the contract or not? Did someone think those communications were part of the contract, even though *legally* they were not? Could the parties have handled this better? Who is at fault? Is anyone at fault?

Next time we pick this up will be to discuss third party liability and piercing the corporate veil, so stay tuned…


Citation Web Links Now Enabled! Try Them...

(you may need to hover on top of the title or the actual citation number; try moving around the cursor until you see the little "hand")

[1] We ended the last article on Act 2.

[2] The failure to perform a contract constitutes a breach of contract. Brushton-Moira Cent School District v. Fed H. Thomas Assoc, 91 NY2d 256 (1998).

[4] A series of emails can constitute a contract. Forcelli v. Gelco Corp., 109 AD3d 244 (1st Dept. 2013); Williamson v Delsener, 59 AD3d 291, 291 (1st Dept. 2009) (“e-mails exchanged between counsel, which contained their printed names at the end, constitute signed writings (CPLR 2104) within the meaning of the statute of frauds."); Brighton Inv., Ltd. v Har-Zvi, 88 AD3d 1220, 1222 (3rd Dept. 2011) (“an exchange of e-mails may constitute an enforceable contract, even if a party subsequently fails to sign implementing documents, when the communications are sufficiently clear and concrete to establish such an intent”).

[5] A “Merger Clause” is a provision in a contract that declares it to be the complete and final agreement between the parties. Such a provision in a contract is treated as proof that no varied or additional conditions exist with respect to the performance of the contract except those that are in the writing. It may also be called an integration clause.

[6] Boilerplate is slang for provisions in a contract, form or legal pleading which are apparently routine and often preprinted. The term comes from an old method of printing.

[10] Delyanis v. Dyna-Empire, Inc., 465 F.Supp 2d 170 (E.D. N.Y. 2006); Spencer Trask Software and Information Services LLC v. RPost Intern, Ltd., 383 F.Supp 2d 428. (S.D.N.Y. 2003).

[11] Wisdom Import Sales Co., LLC v. Labatt Brewing Co., Ltd., 339 F.3d 101 (2d Cir. 2003).

[12] Ambiguity is usually a question of law, determined in a motion for Summary Judgment, though whether a mutual intent to be bound exists can be a mixed question of law and fact. The question is to be decided by the court if determinable from language employed in a written instrument, otherwise it is to be decide by the finder of facts. Four Seasons Hotel v. Vinnik, 127 A.D.2d 310 (1st Dept. 1987).

[13] While the duration of a contract should be definite, where no time is agreed upon for its completion, the contract must be completed within a reasonable time under all circumstances. Savasta v 470 Newport Assoc., 82 NY2d 763, 765 (1993).

[14] “Ghosting” The act of suddenly ceasing all communication with someone the subject is dating, but no longer wishes to date. This is done in hopes that the ghostee will just "get the hint."

[15] Anticipatory Breach: When a party to a contract repudiates (reneges on) his/her obligations under that contract before fully performing those obligations. This can be by word ("I won't deliver the rest of the goods" or "I can't make any more payments") or by action (not showing up with goods or stopping making payments).

[16] American Capital Access Svc. v. Muessel, 28 A.D. 395 (1st Dept. 2006).

[17] Stern v. McKee, 70 AD 142 (1st Dept 1902).

[18] N.Y. U.C.C. §2-609 Right to Adequate Insurance.

[19] “The Right to Assurance of Performance Under §UCC 2-609 and 2nd Restatement of Contracts §251: Toward a Uniform Rule of Contract Law.” Fordham Law Review, Vol. 50, Issue 6 (1982), p.1296 (quoting from an 8th Cir. decision, Hawkinson v. Johnston, 122 F.2d 724 (1941) “When there is a dispute it is far better … for the individuals and for society, that the rights and obligations between them should be promptly and definitely settled.”).


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