Performance, Conditions & Good Faith — Contracts

You sign a contract to buy a house for $420,000. One clause says your duty to close is conditioned on obtaining a thirty-year mortgage at a fixed rate no higher than 6% by March 1. Rates spike. You apply to four lenders, and the best offer is 7.25%. On February 28 you tell the seller you cannot close. The seller, who had taken the house off the market and turned down two other offers, sues. Are you in breach?

No. Not even close. The financing condition failed, so your duty to close never became due, and nobody owes damages because an event did not happen. Now change one detail in that story, and the same buyer loses. This episode is about which detail, and about the whole machinery behind it.

Here is the route. First, the line between a promise and a condition, and why it decides everything. Then where conditions come from, and the two very different standards they are judged by. Then what happens when a condition simply fails. Then the list of excuses that rescue it. Then satisfaction clauses. And finally good faith, what it does and what it cannot do.

Start with the distinction the whole topic hangs on. A promise is a commitment to do or not do something. Break it, and you are in breach, so you owe damages. A condition is not a commitment at all. It is an event, not certain to occur, that must occur, unless it is excused, before a party's performance becomes due. A trigger, not an obligation.

The reason the line matters is the consequence of failure. If a condition simply does not happen, that is not a breach. The other side's duty just never becomes due, and once the event can no longer occur, that duty is discharged. Nobody pays. That is your house buyer. She applied in good faith, the rate never appeared, and her duty to close never arose.

So how do you tell them apart? Read the words. If, only if, provided that, unless, until, subject to. Those signal a condition. Promises, agrees, shall, warrants. Those signal a promise. And when the language is genuinely doubtful, courts break the tie by reading it as a promise. Why? Because conditions cause forfeiture, and the law dislikes forfeiture.

Here is one way that buyer loses. Rewrite her clause as Buyer shall obtain financing. Now it is a promise, and failing to get the loan can itself be a breach. Same facts, opposite result, one word. And a single clause can be both at once. Contractor shall complete the work by Friday is a promise to finish on time and also a condition of the owner's duty to pay.

Now, where conditions come from, because the source controls the standard. An express condition is stated by the parties in their own words, and it must be strictly, literally satisfied. An implied-in-fact condition is understood from conduct and circumstances, and it is treated the same way. A constructive condition is supplied by the court, and it is judged by substantial performance.

Strict for express. Substantial for constructive. That split decides a huge share of performance questions. The big ones are the constructive conditions of exchange. Each party's substantial performance of its own side is a condition of the other party's duty. Try one. A homeowner hires a contractor to build a deck for $15,000.

The contract says the contractor shall build according to the attached plans, and that final payment is due only after the homeowner's structural engineer signs off in writing. The deck is finished with one minor gap in the railing spacing. The engineer, swamped, has signed nothing. Two obligations, two standards. Which is which?

Building the deck is the contractor's own performance, a constructive condition, so substantial performance governs. The railing gap is a partial breach, offset in damages. The engineer's sign-off is an express condition. Only after, in writing. Strict compliance. So final payment is not due until that writing exists, or the condition is excused.

Conditions are also sorted by when they operate. A condition precedent must occur before the duty arises, like financing before closing. Concurrent conditions arise when two performances are due at once and each conditions the other. A condition subsequent discharges a duty that already exists. And that split allocates the burden of proof.

The plaintiff proves a condition precedent occurred or was excused. The defendant proves a condition subsequent. So an insured who sues for benefits and offers no evidence of the required physician's certification loses on that record. That burden was the plaintiff's.

Then the order of performance. When one performance takes a period of time and the other is instantaneous, the one that takes time goes first. Build the house, then get paid. A developer who demands the full $25,000 before writing a line of code has it backwards. Where both performances can happen at once, they are concurrent, and each side must tender.

Tender means actually offering your own performance. A buyer turns up at the seller's garage and demands the vintage motorcycle he agreed to buy for $18,000, but brings no cash, no check, no offer. Is the seller in breach for keeping it? No. Showing up is not tender. Until the buyer offers the money, the seller's duty never becomes due.

And remember the only two routes from a failed condition to a breach. The party promised the event, or the party prevented it. A farmer whose orchard falls short of a 10,000 bushel trigger after a late frost did neither. He delivers nothing and owes nothing.

Which brings us to excuse. Express conditions are unforgiving. A duty can evaporate because someone missed a deadline by a day. So the law excuses conditions, meaning the conditioned duty becomes absolute even though the event never happened. Learn the whole list. Waiver. Estoppel. Wrongful prevention or hindrance. Failure to cooperate. Disproportionate forfeiture. Impracticability. The other party's material breach or repudiation. And election.

Waiver first. The voluntary giving up of a known condition by the party it protects. A condition that is not a material part of the agreed exchange, a minor timing or procedural requirement, can be waived with no new consideration. A homeowner who says do not worry about the five-day rule on the lien waiver cannot revive it later.

A material condition is different. You cannot give away the heart of the bargain for free, so waiving it takes consideration or reliance. And a waiver given in advance can be retracted. Reasonable notice, while there is still time to comply, and no reliance yet, and the condition is back on.

Estoppel is waiver's cousin, and it runs on reliance. The protected party signals the condition will not be required, the other side reasonably and detrimentally relies, and the condition is gone. A fire policy requires a sworn proof of loss within sixty days. The insurer's own adjuster tells the owner not to bother. The owner relies, the deadline passes, and the claim cannot be denied on that ground.

Now the second way that house buyer loses. Prevention. A party whose own duty is conditional may not wrongfully prevent or hinder the condition from occurring. Take a developer who signs to buy a lot subject to securing a construction loan. He finds a better parcel across town, never submits an application, and lets the clock run out. The condition failed. It is also excused.

You cannot sabotage the trigger and then hide behind the fact that it never fired. The interference is usually a breach of good faith too. Same for a seller who quietly refuses to sign the closing documents so the sale collapses, then tells the broker no commission is owed because no sale closed. Prevented, excused, pay the broker.

Third, disproportionate forfeiture, the court's main escape hatch from a harsh express condition. Under § 229, a court may excuse a condition to the extent that non-occurrence would cause a forfeiture out of all proportion. The limit is that the condition must not have been a material part of the agreed exchange.

Picture a tenant with a below-market option to buy, exercisable only if the tenant is not in default, who has sunk $200,000 into improvements. Then the prior month's rent goes out a day late, cured the moment it is noticed. Losing the option over that is forfeiture out of all proportion, punctual rent was not the heart of the bargain, and a court can excuse it.

Fourth, impracticability. Under § 271, if a condition becomes impracticable and it was not a material part of the exchange, non-occurrence is excused where enforcing it would cause forfeiture. Final payment on a custom yacht is conditioned on a certificate from one named marine surveyor, who then dies. An equally qualified surveyor certifies instead. Payment is due.

Fifth, election. After a condition fails, a party who chooses to proceed waives it. A wholesaler's duty to pay is conditioned on delivery by six in the morning. A shipment lands three hours late. The wholesaler takes the produce, resells all of it at a profit, then two weeks later refuses to pay. Too late. It elected to go forward.

Satisfaction clauses next, and they look like a trap door. Payment due when the owner is satisfied. Could a party simply announce dissatisfaction and walk? No, because the subject matter picks the standard. Commercial quality, mechanical fitness, operative utility? Objective. The condition is met if a reasonable person in that party's position would be satisfied. Courts prefer that wherever the subject allows.

A mechanic overhauls a fleet engine for $6,500, payable when the company is satisfied. It starts every time and passes every test, and the fleet manager still says he is not satisfied. Objective standard, so the company pays anyway. But personal taste, aesthetics, individual judgment? Subjective. A novelist commissions an $8,000 portrait and honestly feels it does not capture her. No payment is due, whatever the critics say.

Even the subjective test is policed. A shop owner privately tells a friend her new neon sign looks amazing, then tells the sign maker she is not satisfied, because a competitor has offered one for less. Feigned dissatisfaction is a pretext, so the condition counts as satisfied. Same where a third party certifies. An architect who withholds a certificate in bad faith excuses the condition.

Last piece. Every contract carries an implied obligation of good faith and fair dealing in its performance and enforcement. It is a floor you cannot fully contract around. Its job is to stop a party from destroying the other side's right to the fruits of the deal, by dishonesty, by abusing discretion, or by refusing to cooperate. Under the Uniform Commercial Code, § 1-304 imposes it on every duty.

And § 1-201(b)(20) defines it. Honesty in fact, which is subjective, plus the observance of reasonable commercial standards of fair dealing, which is objective. Here is the current-law point. The revision of Article 1 extended that objective prong to all parties. It used to reach only merchants. Most states have enacted the unified definition, and that is the modern majority rule.

Now the limits, which matter as much as the content. Good faith governs performance and enforcement, not negotiation. As a rule there is no duty to bargain in good faith, and either side can walk away before a contract is formed. A supplier who abandons talks under a nonbinding letter of intent has breached nothing.

And good faith cannot override express terms. A franchise agreement that expressly lets the franchisor open outlets anywhere, in its sole discretion, means what it says. But discretion is not a blank check. A publisher with sole discretion over the print run who sets it at 50 copies to punish an author has abused that power. Good faith constrains discretion. It does not erase it.

Good faith does its most concrete work where a contract leaves one side discretion over quantity. In a requirements contract the quantity is what the buyer actually needs, measured in good faith. And § 2-306(1) bars a demand unreasonably disproportionate to a stated estimate or to prior experience. A cafe chain that uses about 10,000 pounds a year cannot demand 90,000 to resell at a profit.

A word on authorities. This episode named no cases, and that is deliberate. NextGen questions hand you a clause and ask whether a duty is due or a party is in breach. They will not ask you for case names. What you heard comes from the Restatement (Second) of Contracts and the Uniform Commercial Code.

There, § 224 and § 225 define conditions, § 229 is the forfeiture valve, § 271 covers impracticability, and § 205 states good faith. If you keep only three things, keep these. A condition is a trigger, and its failure is not a breach. Strict for express conditions, substantial performance for constructive ones. And good faith polices discretion but never rewrites express terms.

Now the traps, straight from the examiners' favorites. One. Treating a failed condition as a breach. Non-occurrence owes no damages unless a party promised the event or blocked it. Two. Applying substantial performance to an express condition. Express means strict and literal, so close enough fails, subject only to the § 229 forfeiture valve.

Three. Forgetting good faith's limits. It cannot override express terms, and it does not govern pre-contract negotiations. Four. Assuming a subjective satisfaction clause lets a party escape for any reason. Dissatisfaction must be honest, and a pretext counts as satisfaction.

Five. Reversing the burdens. The plaintiff proves a condition precedent, the defendant proves a condition subsequent. Six. Letting a party benefit from a condition it wrongfully prevented. And one note on exam craft. This topic is starred, which means memorize-level. Expect no provided statute, so the definitions and the excuse list need to be recall-ready, cold.

Time for the quick check, and this one comes straight from the BARGO question bank. A commercial tenant's lease grants an option to renew, provided the tenant gives written notice by certified mail at least ninety days before the term expires. Ninety-five days out, the tenant emails a renewal notice. The landlord concedes it received and read the email that same day. But market rent has since risen, so the landlord refuses to honor the renewal.

Assume no excuse applies. Is the renewal effective under the express condition? Option one. Yes, because the landlord received actual, timely notice of the intent to renew. Option two. Yes, because email is a commercially reasonable substitute for certified mail. Option three. No, because an express condition must be strictly and literally satisfied. Pause here if you want a moment.

The answer is option three. Notice by certified mail within a set time is an express condition, and an express condition must be strictly and literally satisfied. Actual notice and substantial compliance are not enough without an excuse. The tenant used email, so the condition failed. Options one and two are the tempting no harm done answers, and the strict-compliance rule is exactly what rejects them.

Those theories rescue a party only through an excuse, waiver or the anti-forfeiture doctrine, and this question removed excuse from the table. There are thirty plus more questions on this topic alone, each option explained.

Five things to take away. One. A condition is a trigger, not a promise, and its non-occurrence is not a breach unless a party promised the event or prevented it. Two. Express conditions demand strict, literal compliance, while constructive conditions ask only for substantial performance.

Three. When the language is doubtful, courts read it as a promise, because the law hates forfeiture. Four. Know the excuse list cold. Waiver, estoppel, prevention, failure to cooperate, disproportionate forfeiture, impracticability, the other side's material breach, and election.

Five. Satisfaction turns on subject matter, objective for commercial and mechanical work, subjective for taste, and a pretext always counts as satisfaction. Good faith runs through all of it, but it fills gaps and polices discretion. It never rewrites the deal.

Which is why our house buyer walks away clean and the developer who never picked up the phone does not. Same clause. Different conduct. That is the whole topic in one line. Next time, UCC Performance & Warranties.

Practice this topic with more than 2,900 exam-style questions, free to start, at nextgenbargo.com. This episode is for education and exam preparation only, not legal advice, and we are not affiliated with or endorsed by the NCBE or any bar examining authority.