Americans are too litigious.[2] Every small spat seems to end up in the courthouse where it drains judicial resources, takes far too long to resolve, and leaves all involved unhappy. So goes the common refrain, and there is probably some truth to it. What this view ignores, however, is that many disputes never reach the courthouse.[3] In a wide spectrum of controversies, a typical reaction to trouble is to attempt to remedy the situation privately through the exercise of "self-help."[4] The term "self-help" refers to private actions taken by those interested in the controversy to prevent or resolve disputes without official assistance of a governmental official or disinterested third party.[5] The misperception of the unduly litigious nature of Americans could be minimized if more explicit recognition were given to self-help, a practice already prevalent in our law.
The situations in which self-help may be invoked and the actions which may be taken are as varied as human imagination and ingenuity. A few common examples of self-help include the withholding of rent by a tenant when the leased premises are not suitably maintained and repossession of goods when payment for them is not timely rendered. [page 841]
The richness of self-help and its prevalence in all types of dealings pose intriguing questions about the relationship between these extra-judicial actions and our legal system. Some of the issues that warrant attention include: What self-help mechanisms are currently used? Which of these, if any, does society deem appropriate? Does the law have a role to play in prohibiting our encouraging such actions? If self-help is undertaken privately without recourse to the state or other neutral arbiters, will formal recognition and incorporation of such action into legal structures have any impact on individuals' behavior? Will recognition of self-help enhance our laws? To what extent has that recognition taken place?
Despite a long history,[6] to date there has been little discussion of self-help as a unified theme, although there are indications that this is changing.[7] This Article adds to the limited consideration of the area and concentrates attention on this rich field. The focus of the Article is on the role of self-help in American commercial law, with specific reference to contract law. Self-help in this area includes any actions taken by either contracting party to limit the harm caused by defective performance, to attempt to preserve the contract, and to prevent non-justified termination of the contract.[8] With this broad definition of self-help, it is evident that the range of self-help responses when problems arise in contractual relations is vast. If we are to have a proper understanding of the universe of contract law, the self-help portion of that universe must be explored.
This Article provides a thorough examination of self-help in contract law. It concentrates on two major sources of contract doctrine -- Article 2 of the Uniform Commercial Code ("UCC")[9] and the Restatement (Second) of Contracts ("Restatement").[10] Additionally, this Article identifies provisions of those authorities that implicitly or explicitly authorize self-help and describes their operation and [page 842] the relative benefits and risks attendant to their use.[11] Many of these provisions are not controversial in operation, but have been improperly understood as self-help mechanisms. The Article then focuses on a less widely accepted self-help mechanism -- the doctrine of adequate assurances.[12] The doctrine of adequate assurances authorizes self-help so that a party encountering difficulty in a contract can keep a contract together or at least protect itself from being deemed the breaching party [13] Close examination of adequate assurances as a self-help device highlights the degree to which self-help is an integral element of contractual behavior.
As this Article will show, self-help plays a vital role in contract law. The UCC and the Restatement go far in sanctioning the use of self-help but do not explicitly refer to the desirability (or understandability) of self-help, nor provide an underlying rationale. Attention to these issues is critical and will serve several purposes. First, it will provide guidance to those wishing to engage in self-help about what actions the law will permit. The choice to exercise self-help requires a party to make judgments as to its suitability. The better informed those judgments are the better off individual parties, and society as a whole, will be. To that end, this Article proposes one concrete addition to the self-help universe that would aid parties invoking self-help-the inclusion of a Nachfrist provision.[14]
Second, this proposal is particularly timely in light of the current proposed revisions to the UCC to challenge the use of self-help.[15] This challenge will require judicial (or other types of official) consideration of self-help. A careful consideration of the area will aid those determining whether a particular action is permitted.
Finally, understanding the role self-help currently plays in commercial relations will enhance our view of its place in contract doctrine and help determine how our laws should treat it. Although some view self-help as "extra-legal,"[16] it influences and is influenced by our legal structure. To understand and structure our laws properly these influences need to be considered. [page 843]
A. History of Self-Help
Self-help of some kind has always been with us. In the early stages of civilization self-help was a common remedy [17] Under a Hobbesian view, in the state of nature man's right of self-preservation included the right to do what was necessary both to protect one's life and to expand one's liberty .[18] Prior to the existence of legal institutions to dictate rules of behavior and state authorities to enforce them, all social relations were a form of self-help.[19] Unchecked self-help had great potential to produce violence and unfairness since it tended to favor the strong over the weak.[20] In the medieval era prior to the emergence of strong nation states, "each local count or baron had a group of armed vassals at his disposal, and self-help was a standard means of enforcing the law."[21] As society developed and legal systems arose to order relations, the need to restrain the use of violent kinds of self-help led to "a stringent prohibition of informal self-help" in the twelfth and thirteenth centuries.[22] The law was not sophisticated enough -- to differentiate between non-violent, potentially permissible actions and violent, prohibited actions.[23] Self-help was viewed as "an enemy of law, a contempt of the king and his court."[24] A blanket ban on all self-help was the most effective means to prohibit unwanted activity.[25]
Prohibition of self-help measures did not mean, however, that the unwanted activity disappeared, any more than legal prohibition of alcohol meant people quit drinking. Human nature being what it [page 844] is, individuals continued to seek to avoid and correct perceived injury as quickly and directly as possible. As legal systems evolved, society confronted the reality that self-help was common.[26] The law correspondingly became more accepting about permitting self-help.[27]
The American system, paralleling the English system, evolved over time to recognize that nonviolent self-help could be a rational, effective solution to disputes.[28] Rather than have the law out of step with reality, perpetuating an inefficient system, American law expanded to recognize and incorporate increasing numbers of self-help actions into its framework, although continuing to reject most uses of physical force.[29]
B. Self-Help Today: An Uneasy Fit
Given the long history of self-help in our society and its frequent use, it seems curious that the topic generates little commentary. What might explain the paucity of writing is its uneasy fit within traditional legal analysis. Self-help when used without challenge does not depend on formal invocation of the legal system. Our traditional approach towards contract doctrine is to consider actions occurring within a legal framework, an approach which shuts out parts of self-help. Because the law indirectly influences the decision to rely on self-help in the first instance, that decision may not be carefully considered in a system that focuses in large part on judicial actions.
There are moves afoot to broaden the theoretical perspective of contract law to include analysis of various forms of self-help. These efforts treat self-help as "extra-legal" action rather than as an [page 845] element of our legal framework.[30] While any further study of the area is desirable, it is an error to believe that it requires a radical change in perspective on contract theory. Although self-help is non-judicial, it is not extra-legal and does not lie outside the "shadow of the law."[31] Self-help is a party's immediate reaction to a perceived problem. That reaction, however, does not occur in a vacuum.
In most cases, parties have some understanding of legal rights. That understanding guides the determination to use self-help; a party that uses self-help does so with the backdrop of the legal system in mind. For example, a seller facing breach by a buyer who refuses to pay may exercise self-help by terminating further deliveries. The seller does not seek official recognition of its decision to stop delivery; it simply uses self-help to protect its interests. The decision to do so is made with some understanding of legal rights, even if those rights are not expressly relied on, Self-help is no different from many examples of social ordering that take place under the "shadow of the law," influenced by but not explicitly invoking the legal regime. Therefore, self-help properly belongs in traditional contract doctrine analysis.
This is made more evident when the use of self-help is challenged in an official action. It is then that statutes creating standards for the invocation of self-help and judicial interpretation of them are implicated directly, and we are back on familiar terrain where traditional analysis is comfortable.
Trotting out a tired cliché: Rather than view self-help as beyond the shadow of the law, it is better to observe it as part of law's seamless web. Self-help is both incorporated in formal legal rules and used outside that formal structure. A proper understanding of self-help requires consideration of its framework in all contexts. "Pure" self-help, steps taken without resort to official action, influences and is influenced by official treatment of the doctrine. Thus, self-help must be analyzed as a coherent, unified doctrine.
With self-help understood as one important part of contract doctrine, it is worth considering the advantages and disadvantages of its use to the parties specifically, and the judicial system generally. [page 846] Since alternative responses are available to parties why would parties choose to invoke self-help?
C. Self-Help: Advantages and Disadvantages
Parties frequently choose self-help remedies. This suggests that there are real or perceived benefits in self-help that motivate parties to elect it. One major factor enhancing the likelihood that a party will engage in self-help is the immediacy of the action. Parties can act quickly in response to problems if they can avoid seeking judicial remedy or other third-party intervention, both of which typically involve delay. For instance, repossession of goods for nonpayment gives the seller the control over the goods without waiting for external authorization. This avoids delays in dealing with the goods, which could frustrate a seller's interests and cause real psychological harm. Moreover, self-help action is more certain in its immediate result. A party waiting for judicial determination of rights and obligations may not be able to take protective action prior to decision since the outcome of the judicial process is uncertain. Although a party may have to pay for its decision to exercise self-help, its use produces an immediate result that is certain. Such certainty does not exist in the judicial domain.
Additionally, self-help may also reduce later evidentiary problems. If the seller resells the repossessed goods, questions of their value can be minimized. Self-help can also be a cheaper alternative than resorting to official action.[32] Although the cost-benefit analysis may change if the use of self-help is later challenged, at the time of exercise, self-help enables the party invoking it to avoid transaction costs associated with formal proceedings.[33]
Other factors influencing a party's decision to use self-help are more subtle and include psychological components of control and autonomy.[34] A central tenet of contract law is freedom of contract; the ability of parties to form and govern their own relations. Inherent in that ability are feelings of power and control. Exercising self-help furthers the feeling of control. When difficulties arise parties can fight their own battles, rather than relying on a third party to do so. Self-help initially limits those involved in the relationship to its original members. Although involvement of a third party by a judicial or other determination may allow one party to prevail in its interpretation of the agreement, it does so at some psychic cost to the party "forced" to seek assistance.
The desire to maintain individual control over the terms of the relationship goes hand-in-hand with another intangible incentive to [page 847] use self-help -- dislike or distrust of the courts.[35] Self-help enables the parties to keep their affairs private, out of the reach of interfering official bodies. The value of maintaining the integrity of business relations free from external meddling cannot be stated with certainty but could understandably lead a party to favor self-help. In some cases, distrust of formal process may also influence the decision to use self-help because avoidance of the legal system is seen as a good unto itself.[36] By independently remedying problems, parties perceive themselves as less confrontational and more reasonable than if they ran to court.[37]
These factors lead individual parties to engage in self-help, but it is worth considering whether self-help serves a greater interest as well. Our laws should encourage behavior that benefits society as a whole, not behavior that serves individual needs at a cost to everyone else. Happily, societal advantages to self-help suggest its use should be encouraged. Since self-help enables parties to resolve problems without third party intervention, it frees judicial resources for use in other areas. Better allocation of resources not only enhances the efficiency of our system, but also may help counter the perception that Americans are litigation-happy.[38]
Self-help may also encourage societal efficiency by helping to correct power imbalances inherent in our judicial system.[39] There are many barriers facing individual consumer-plaintiffs deciding whether to pursue a formal claim.[40] These barriers include, among others, costs associated with finding a lawyer and bringing the case into the judicial process.[41] If the only available recourse for these parties is official action, some meritorious claims may not be brought. By shifting the burden of invoking official action to the "stronger" party, self-help may tip the balance toward a "weak" party who is currently reluctant to pursue a claim because of these [page 848] impediments.[42] This helps protect the individual parties to a particular action and the broader category of those who might otherwise be harmed if bad behavior was left unchecked due to inaccessibility of official processes.
Furthermore, self-help benefits all parties by facilitating an exchange of information at the time of contract formation. One view of contract law finds that future exchange will occur only to the extent that our laws foster "[o]rganic solidarity ... a solidarity of unlikes."[43] "A belief in future interdependence is unlikely to endure ... if future prospects are seen as so lacking in mutuality ... that the believer envisages deterioration into conflict or separation rather than cooperation."[44] Self-help empowers parties to protect their interests. In its ideal use, it encourages parties to cooperate, rather than seek often costly third party intervention. Believing that your contractual partner will work to keep the agreement together enhances the appeal of entering into agreements for future exchange. By encouraging future exchange, self-help furthers "society's interest that each economic unit shift its resources whenever this would be efficient."[45]
Even when self-help is used to terminate a contract, rather than to keep it together, it strengthens and encourages contract law generally.[46] As noted, "the social institution of contract remains workable in part because the potential promisemaker knows that he has options; he will always have a way out. To remain civilized, contract must be tolerable; its tendency for insatiable demands must be controlled."[47] Self-help retains options to promisemakers and thus encourages entry into commercial relations.
Additionally, self-help encourages communication between parties at all stages of their relationship.[48] This communication assists the parties in establishing with more certainty what is truly important to them. As relationships evolve circumstances may change. [page 849] Encouraging communication of changes can help preserve deals. In all but rare cases preserving deals is more efficient than breaking them.[49] A coherent and properly applied self-help doctrine should increase overall efficiency by enabling the parties -- who have the best information about the relationship -- to amend or alter it as they see fit. If a third party is forced to determine what changes or alterations are appropriate, not only will much time and energy be required, but the decision-maker may not possess full information or may substitute general principles for the specific intent of the parties involved.
When self-help is properly used it is advantageous to all. However, ambiguities exist that create risks for a party deciding whether to exercise self-help. A party who chooses to use self-help must make unilateral decisions about the status of its contractual relations. As is discussed later in this Article, those actions may have future repercussions if challenged by the party against whom self-help is invoked.[50]
Furthermore, self-help cannot work miracles. When problems do arise, parties may be unwilling to communicate or may be willing to communicate but not to budge from their positions. Although self-help ideally encourages cooperation, there will be situations where it is not forthcoming. Then self-help demands individual decision-making in areas where judgment is not unclouded.
Additionally, depending on the point at which self-help is exercised, it may create ill-will between parties, rather than a sense of cooperation and solidarity. A party against whom a self-help remedy is exercised may not be enthralled with the other party's choice. The ill-will may simply cause bad feelings between the parties or may lead to a formal action challenging the appropriateness of using self-help. Due to the serious implications of self-help actions (such as termination), the potential animosity it engenders between parties, and the fact that self-help actions can always be challenged, there will always be residual uncertainty facing a party deciding whether the use of self-help is permitted. Self-help presents a useful avenue to reduce confusion over parties' expectations and their respective valuation of performance components, but it cannot eliminate doubt entirely.
In addition to this disadvantage to individual use of self-help, the argument that it is efficient on a societal level can be questioned. Self-help can always be challenged by the party against whom it is used, and full enforcement of a self-help remedy often [page 850] requires judicial involvement.[51] In many cases, the use of self-help is only the first step toward effecting a complete remedy. When self-help includes actions that inflict costs on the party invoking it, that party will often seek recovery of those costs in an official action. However, both the timing of the action and the possibility that self-help can preclude the need for third party action suggests that self-help does enhance efficiency, although that benefit should not be overstated.
All of these factors suggest that a party facing difficulties in a commercial relationship exercises a rational choice about the use of self-help. However, it is likely that the decision is not carefully considered at all. Efficient or not, risky or not, parties will use self-help. Human behavior is often highly impulsive, based on an individualized sense of what is right or just in a given situation. A party who believes it has been wronged by the other party may not stop to rationally consider options. The wronged party may simply take self-help action without any conscious recognition of what it is doing. The decision to take self-help action is based on an implicit belief that the law will support its action, but may not be the result of careful consideration.
This reflexive use of self-help is neither an advantage nor a disadvantage, but it does suggest a need for care in structuring the laws governing the doctrine. The law plays an important role in this setting by serving as a cultural backdrop, indirectly communicating legitimacy and models.[52] Therefore, it should support reflexive behavior when it achieves the outcome most beneficial to society as a whole and not just to the individual parties at issue. The law should acknowledge that self-help will occur and devise methods of dealing with such situations.
D. How the Law Should Deal With Self-Help
How should contract law deal with self-help? Several options are possible. First, the law could be silent, neither permitting nor prohibiting self-help. This approach would relegate self-help to what some call the "nonjudicial domain" of contracting behavior.[53] In that domain, legal doctrine may "exercise[] a subtle influence" but does not control.[54] Parties would be free to exercise self-help but would do so with no guarantee (apart from business practice)[55] and [page 851] with no method of calculating the potential cost of their choice to use such measures if it is later challenged.[56]
A second approach would be to adopt contract laws banning the use of self-help entirely by requiring judicial action to determine contractual rights and obligations.[57] This approach has the advantage of signaling the parties in advance that certain actions will not be acceptable and eliminates the risk of wrongful exercise of self-help. The cost of this "protection," however, is great because it denies the parties the advantages of self-help.[58] The necessity of judicial action may also increase overall costs.[59] Even if parties include in their contracts a term stipulating conditions upon which termination is allowed, the court must pass on whether the condition occurred.[60] Moreover, it is doubtful whether a flat out prohibition on self-help would prevent parties from resorting to it. Instead, prohibition is likely to increase the costs to the parties of making the choice to engage in self-help.
Finally, the law could attempt to create guidelines concerning the suitability of various types of self-help responses. This approach would recognize the inevitability of self-help and would accommodate the tendencies of parties to engage in it. Although self-help may be viewed as an extra-legal action, and therefore not affected by whatever law may be created, that view ignores the porous relationship between "formal" law and extra-legal behavior.[61] A self-help law that reflects and sets criteria for actions likely to be taken by contractual parties would influence and guide those parties as they determine their best courses of action. Better information about possibilities and penalties, even if not perfect, drives better decisions. Carefully considered and articulated laws would also help courts that may later be called on to assess the correctness of decisions made -- recognizing that even the best drafted statute is always subject to interpretation.
Of these options, American contract law generally adopts the last approach. Although statutes and other guiding principles [page 852] [62] may not specifically call actions "self-help," many such responses are envisioned. Two major sources of guidance for parties and courts are Article 2 of the UCC [63] and the Restatement.[64]The success of these sources in promoting appropriate self-help is mixed. The UCC, which attempts "to simplify, clarify and modernize the law governing commercial transactions"[65] and "to permit the continued expansion of commercial practices,"[66] does the better job of defining boundaries between permissible and impermissible action, although there is room for improvement. Through its inclusion of self-help provisions, the UCC fulfills its function as "a document whose thrust is not so much to put law on the statute books as it is to coerce courts into looking for law in life."[67]
The Restatement does not handle the topic as successfully. This results in different standards applicable to self-help depending in part on the type of contract at issue rather than the harm sought to be remedied.[68] This distinction should not be relevant. Self-help can (and does) play an important role in all types of commercial contracts, and this role must be recognized. More explicit provisions could be added to our guiding contract sources and those provisions that do exist could be supported more consistently. Self-help principles should be identified, analyzed, and applied in all contracts to which it is relevant in the non-goods context, thus further strengthening all areas.
Expanded recognition of and support for self-help in the commercial context is entirely in keeping with its history. Contract law is evolutionary and the use of self-help has gained increasing acceptance over time. Broadening its scope would simply continue this pattern. To gain a sense of the role self-help has played and can playas a unified theory, let us examine some of the types of self-help found in commercial settings.
II. TYPES OF SELF-HELP MECHANISMS IN CONTRACT LAW
While there are many different types of commercial self-help, they can be grouped into two general categories -- cooperative and non-cooperative. Cooperative self-help is bilateral invocation of a [page 853] particular action -- it is dependent upon mutual agreement of the contracting parties.[69] Non-cooperative self-help is unilateral action by a contracting party without the consent or over the
objections of the other.[70] A. Cooperative Self-Help In some sense, all of contract law is an exercise of self-help.[71] The process of establishing private
contractual relationships is an attempt by individual parties to articulate rights, responsibilities, and
objectives with respect to a given interaction. If all goes smoothly, the contract plays out as
intended and no disputes arise. In that perfect situation, parties achieve their respective goals
without resort to official assistance -- a pure example of self-determination. This ideal scenario is rare,
however, as cautious contractual parties know. Therefore, parties may engage in self-help -- as
defined herein -- and take action to protect their interests in anticipation of perceived problems.
Because such remedial steps are undertaken in order to preserve a contract upon breach, or to
minimize the impact of a perceived breach, they are self-help -- albeit only under a very broad
definition of the term.[72] Parties may seek to protect their interests, at the outset, through careful
negotiating and drafting of provisions to govern behavior should problems arise. Both the inclusion
of these provisions and many of the actions they authorize are self-help.[73] 1. Contract formation
Self-help at the point of contract formation may take several forms.
First, the parties may agree to include terms that authorize one party to take certain actions
in response to a failure of performance by the other.[74] For instance, parties may agree that
a buyer may withhold payment if performance is delinquent.[75] Another common contractual
provision is a liquidated damages clause where parties agree on a fixed amount to become
due in the event of [page 854] non-performance.[76] These self-help mechanisms do little to prevent a failure from occurring but remove
the need to have a post-breach determination of remedies. Another more subtle form of self-help in the pre-contract phase is inclusion in the agreement of protective measures, which operate throughout the life of the contract rather than only upon breach.
These are intended to build into the contract additional incentives to avoid breach. Examples of
these protective self-help measures are numerous, but can generally be placed into four
categories.[77] The first is "hostage taking", where one party takes something of value to the other
to hold until the conclusion of the transaction.[78] This helps ensure contractual performance because
the cost of nonperformance is the sacrifice of the hostage.[79] The second mechanism is demanding collateral.[80] Collateral differs from hostage taking in that a
party demands something of value to it (rather than to the other party) to hold during the pendency
of the contract.[81] Although securing collateral does not ensure contractual performance, it does
guarantee that if performance is not delivered, then some value (that of the collateral) is
delivered.[82] The third protective technique is "hands-tying." This involves a party taking action that will increase
costs to it; if it breaches the contract.[83] These costs attach upon breach, even if the other party
takes no action.[84] Thus, hands-tying encourages performance by the party whose hands are tied
by raising the cost of non-performance. The automaticity of hands-tying differentiates it from
hostage taking in that the hostage taker must act to secure the hostage and perhaps to recognize
any value from it upon breach.[85] Hands-tying, [page 855]
however, imposes its costs without need for any action by the non-breaching party apart from securing the mechanism as part of the contract terms. The final category is union.[86] Union is an attempt to encourage contractual performance by
supporting the development of "sympathy, affection or love" between the parties.[87] Union may
be seen in communities that establish guiding norms of behavior on the understanding that
subordinating their own welfare to that of the community serves everyone.[88] Therefore, community
influences serve to preserve contractual relations. To ensure access to each of these protective types of self-help mechanisms, parties should include
them in their agreement formally or informally. Experience shows, however, that many contracts
contain no specific reference to any kind of self-help device. Their absence may be the result of
several factors. First, parties may believe that the cost of negotiating the inclusion of the devices
exceeds their perceived utility. Because the backdrop of official action exists, parties may feel
adequately protected without explicit self-help authorization. For instance, the cost of negotiating
over collateral can be avoided if the parties feel that a judicial remedy will provide adequate
compensation after a breach. Second, strategic and timing concerns may compel parties to forgo self-help mechanisms. The
relative bargaining power of the parties may make it difficult to insist upon self-help mechanisms
at the outset. At times, the need to conclude an agreement quickly may impel a bare-bones
contract. In all of the above situations the parties have some knowledge of the risks they are taking
by not explicitly including protective measures, but determine that the risks are acceptable. Alternatively, it is possible that protective measures are not included in a contract because the
parties genuinely do not foresee difficulty. The outset of a contractual relationship tends to be
characterized by goodwill and high hopes. In that setting, self-help authorization may not occur to
either party or may occur to only one party. In either case, it may not be discussed. Many strategic
reasons may underlie a decision not to discuss potential problems. For instance, a party may fear
that acknowledging the possibility of future problems will make it seem distrustful or wary at what
should be a high point in the contractual relationship. For any or all of these reasons, self-help may
not be incorporated formally into a contract. The absence of explicit provisions does not imply that
self-help may not still play an important role at a later stage. [page 856] 2. Actions during the pendency of a contract
Another form of cooperative self-help, relevant
at a different point in the relationship, is modification. Modification enables parties to
respond to changes arising during the course of their relationship.[89] In order "to accommodate the parties' need for flexibility," modification permits parties to re-negotiate
and continue their relationship without external interference.[90] Modification is a form of self-help -- in its broad sense of permitting parties to respond to problems
arising in executory contracts because it may operate to preserve contracts and help avoid the need
for the official intervention that night otherwise be necessary. It differs from full performance [91] because in seeking modification the parties acknowledge that absent alteration of terms one or both
could wind up in breach. When both parties seek the modification they are exercising self-help
cooperatively. By agreeing to a new deal, the parties retain control over their relationship and set
its terms and conditions free from third-party intervention. Modification may be less than fully cooperative if only one party seeks it. Frequently during the life
of a contract;, one party wants to change its obligations in light of changed circumstances, arguing
it cannot (or will not) perform under the original agreement. Modification in these cases then
involves self-help by one party (in seeking the changes) that can then lead to several possible
outcomes.[92] If the other party willingly accepts the request/demand for modification, a
cooperative bilateral self-help modification results. If the other party seemingly accepts the
modification request/demand, the contract may continue in the modified form. However, the other
party may bring a later action to challenge the modification.[93] Finally, the other party may flatly
reject the request/demand for modification, leading to a possible breach of the original contract.[94] [page 857] A difficulty with the doctrine of modification is determining the appropriate response to a
request/demand for change. Some commentators argue that a duty to negotiate in good faith over
new terms is implied in every contract,[95] but not all agree.[96] While this is not the place to join that
debate, it does seem that recognition of such a duty would greatly strengthen the position of self-help. It would support increased communication between parties and encourage each to act to
preserve its interest in the contract to the fullest extent possible. Whether purely cooperative or the result of one party's instigation, modification is self-help that
must involve both parties to be successful.[97] In this respect, it is similar to the inclusion of explicit
terms in the contract authorizing the use of self-help. Unlike these situations are those occasions
when self-help is invoked solely by only one party to the contract often over the strenuous
objections of the other, a situation I term non-cooperative self-help. B. Non-Cooperative Self-Help
Self-help is used in a non-cooperative way when there is no specific contractual authorization to engage in it, and one party simply does so unilaterally.
Whether self-help is appropriate in this context depends on the complex interrelationship
of contract doctrines governing parties' rights and obligations. The first critical principle in
this puzzle is the doctrine of "constructive conditions." 1. The doctrine of constructive conditions
At one time in the common law, a party to a
contract faced with the prospective or actual inability of the other party to perform was [page 858] forbidden to use self-help.[98] The party facing breach ("PFB") was required to deliver its
performance regardless.[99] The promises exchanged as part of the contracting process were
considered independent.[100] For example, if A promised to paint B's house and B promised to pay
A for the painting, B could seek performance from A at the time set by their agreement even if B
did not pay. B was not permitted to exercise self-help in refusing to pay for services not yet
rendered, nor was A permitted to take any action other than seeking judicial remedy in an action
to compel performance.[101] Once the contract was made, the parties were bound by their
promises regardless of the behavior of the other party. This odd (to modern eyes) state of affairs continued until 1773 when the case of Kingston v.
Preston [102] established the doctrine of constructive conditions [103] In that case, plaintiff agreed
to work in defendant's silk business with the understanding that he (and defendant's nephew) would
purchase the business from defendant at the end of one year.[104] Plaintiff was to pay for this
purchase in monthly installments of £250 and promised to provide at or before the closing "good
and sufficient security" to be approved by defendant.[105] When the closing date arrived, defendant,
who apparently had a change of heart about the transaction, claimed that he was not obligated to
turn over the business to plaintiff in light of plaintiffs failure to provide the required security.[106] Under the law of the time, defendant should have lost his claim. His obligation to deliver title to the
business was considered independent of plaintiffs obligation to provide security.[107] Therefore, [page 859] plaintiff's failure to perform (assuming that there truly was a failure [108]) did not justify defendant's refusal to perform. Lord Mansfield, speaking for the King's Bench, firmly rejected the existing rule, finding it would
work the "greatest injustice."[109] In place of the notion of independently enforceable promises,
Mansfield endorsed what is known as the doctrine of constructive conditions,[110] This doctrine
holds that unless specific language or context indicates otherwise, mutual promises in a bilateral
contract are constructively conditional upon each other.[111] When parties are to perform at the
same time, their promises to perform
"are mutual conditions to be performed at the same time; and, in these, if one party was ready, and
offered, to perform his part, and the other neglected, or refused, to perform his, he who was ready,
and offered, has fulfilled his engagement, and may maintain an action for the default of the other;
though it is not certain that either is obliged to do the first act."[112]
In other words, the promises exchanged are not independent, and the failure of one party to fulfill his obligation justifies the other party in refusing to perform.[113] With respect to our house painting contract, B would be justified in refusing to pay A upon A's refusal to paint the house.
Finding performance obligations to be conditional and mutually dependent was an early step toward recognizing a party's right to exercise self-help.[114] Under the doctrine of constructive conditions, a party is no longer required to perform in response to defective or non-performance and then seek a remedy in the courts. Instead, the party is permitted to protect its interests through non-performance. Self-help non-performance (in the appropriate case) is clearly a superior outcome to what would result absent the doctrine of constructive [page 860] conditions. Not requiring A to perform in light of B's nonperformance recognizes A's expectations of the contract and enables A to act independently to protect itself. Permitting A to withhold performance limits the harm caused by B's breach by allowing immediate response by A who is then free to seek alternative arrangements. It also potentially reduces overall costs by removing the need for A to institute official action to recover the value of its performance.[115] Giving A the option to withhold performance upon B's failure to perform thus encourages both the most efficient and the most logical result.
The implicit authorization given self-help through recognition of constructive conditions in the Kingston decision has greatly expanded over time. While still not explicitly acknowledged as self-help provisions, numerous statutes attempt to clarify when and what self-help remedies are permissible [116] Courts routinely address parties' arguments on the issue, although they typically fail to identify self-help for what it is.[117]
Despite this implicit recognition of self-help, difficulties in a proper understanding of the topic persist. These stem in part from the centrality to self-help of two problematic terms: substantial performance and material breach. It is inescapable that necessary to the doctrine of constructive conditions and to every statute authorizing self-help are the corollary notions of substantial performance and material breach. Difficulty in defining these terms plagues many areas of contract law, including self-help. What follows is by no means an attempt to resolve the definitional dilemma (a topic on which much ink is spilled [118]). Rather, it simply aims to lay out the framework of the analysis of these terms so that their role in self-help is understandable. [page 861]
2. Substantial performance
Constructive conditions premise one party's performance obligations on the other party's.[119] This approach is an important piece in the puzzle of contract law but by no means resolves all issues of conditioning performance. Assume that parties' performance obligations are construed to be conditional. Thus, B's promise to pay A for the house painting job is conditioned on A's painting the house. The next question is when the condition necessary to compel performance is fulfilled. What performance by A will be sufficient to trigger a return duty of performance by E? If A paints all of the house except the back door frame, must B pay? What if A paints the entire house but uses the wrong color? How grave must a deviation from contract terms be to cause the non-occurrence of the constructive condition of exchange?
A strict application of the doctrine of constructive conditions might require full performance by A of all terms prior to triggering return performance obligations by B.[120] It would not matter why A failed to paint the back door frame, nor would the relative value to B of having that portion of the task completed be important. Absent full compliance with contract terms by A, B incurs no obligation. This interpretation of the doctrine would result in A suffering forfeiture of the value of the work completed.[121] Regardless of the amounts expended and regardless of the reasons for the deviation, A receives nothing.
The unfairness of this outcome and the move away from a rule that would favor forfeiture became apparent quickly. Soon after handing down the Kingston decision crystallizing the doctrine of constructive conditions, the same court faced the potentially harsh results that a strict application of that doctrine imposes. In Boone v. Eyre,[122] the court recognized what became known as the doctrine of "substantial performance."[123] This doctrine decreases the risk of forfeiture inherent in constructive conditions by stipulating that "if one party's performance is a constructive condition of the other party's duty," substantial compliance will be enough to trigger that duty.[124] Minor deviations from contract terms do not cause the nonoccurrence of the constructive condition of exchange. Therefore, while a party that substantially performs will be entitled to return performance, it must compensate the other for the harm (if any) [page 862] caused by the deviation [125] Thus, our house painter who omits the rear door frame can demand the amount due under the contract, less an offset for the cost of painting the door frame, if painting the rest of the house constitutes substantial performance of the contract.
What then is "substantial" performance? This is clearly a critical question as it determines the life or death of the contract. If a party substantially performs, contractual obligations continue. If not, obligations expire. Clearly there is great need for precise definition, but unfortunately, that need has yet to be filled. Although the concept of substantial performance is simple to state in general terms, it is difficult to nail down. Determining' whether performance is "substantial" requires a fact-specific test based on the expectations of the parties.[126] As stated by Justice Cardozo, the relevant inquiry is what the parties deemed to be important or trivial: "Where the line is to be drawn ... cannot be settled by a formula .... The question is one of degree."[127] If non-compliance runs merely to a trivial matter, then performance will be deemed substantial and the constructive condition of exchange satisfied [128] If, however, it runs to an "important" element of the agreement, return performance will not be due.[129]
This approach does little to clarify a standard. It is often possible to characterize the non-compliance either way. In our house painting example one could argue that the omission of the rear door frame from the paint job has little overall impact on the appearance of the house and could not reasonably be considered important. Conversely, one could argue that houses are painted to satisfy aesthetic motives and any deviation from perfection fundamentally undermines the purpose of the contract. Under this view, B expected and is entitled to receive precisely the paint job for which it contracted.[130] No authoritative test exists for establishing with certainty when performance will be found substantial. Indeed, the waters of this area are further muddied by the corollary rule that a non-performing party who does not substantially comply may be found to be in material breach of contract.[131]
3. Material breach
Material breach may be thought of as the antithesis of substantial performance, because a party in material breach has not [page 863] substantially performed.[132] Its performance does not fulfill the constructive condition of exchange and the return performance of the other party is not due. If there was a precise definition of material breach we would not need to worry about the lack of a definition for substantial performance. As the antithesis of material breach, substantial performance could simply be defined as everything other than material breach. Not surprisingly, as with substantial performance, no such precise definition exists. Instead, the materiality of breach is an issue that "is always ... a question that must be determined relatively to all the other complex factors that exist in every instance. The variation in these factors is such that generalization is difficult ...."[133] Whether non-performance is serious enough to excuse the other party's performance obligations often boils down to "whether on the whole it is fairer" to permit that outcome.[134]
The vague nature of material breach and the persistent impression that "no one has any idea what the damn thing[] mean[s]"[135] cause difficulties for parties seeking to exercise self-help. As discussed below, many self-help remedies recognized by statute are authorized only if the other party is in material breach when self-help is invoked. Lack of definitional clarity leaves a party wishing to invoke self-help, in light of what it considers to be material breach, in an awkward position. If its characterization of the problem is incorrect, it may itself be found to be the party in breach. This is a heavy burden to place on the "innocent" party. That burden could be lightened, however, through proper understanding and application of self-help standards.
While many commercial statutes and guidelines implicitly permit (and even encourage) self-help, they do so without explicit recognition of its role. This has, to date, caused self-help to be under-appreciated and under-examined. The following discussion explicitly sets forth important provisions of United States commercial law concerning self-help.
III. SELF-HELP UNDER THE UCC AND THE RESTATEMENT
A. General Concepts
Expanding recognition of self-help does not require revamping all of contract law. Our statutes, case law, and guiding principles currently incorporate and support many self-help remedies. However, our treatment of self-help is not entirely consistent. As the [page 864] following discussion demonstrates, strong support for self-help is found in Article 2 of the UCC, where numerous provisions authorize its use.[136] The UCC, however, is directly applicable only to certain contracts for the sale of goods.[137] Outside the sale of goods context self-help is also recognized and authorized in the Restatement.[138] These provisions are not as helpful as those in the UCC and, of course, are not law.[139] Because the Restatement is not a statute, courts are free to ignore its dictates and may disallow the use of self-help despite Restatement pronouncements, citing lack of precedent or authority.
Inconsistent interpretation and application of the self-help doctrine undermines its utility and weakens the structure of contract law. Self-help should be recognized in all contexts. A self-help doctrine consciously and deliberately formed to be consistent with the goals and objectives of contract law helps parties make efficient decisions and helps courts avoid second guessing parties' intentions. Our law is certainly capable of including meaningful self-help provisions, but there has been little attempt to develop these provisions as part of a unified scheme. This discussion rectifies that problem, focusing on the UCC and the Restatement.
1. Basic framework
To understand the general framework of self-help in this context, it is helpful to divide situations where a party may desire to exercise self-help into two categories referred to by Professor Farnsworth as dispute-related and performance-related.[140] To understand these terms, assume that a two-party contract is still executory and that one party (the PFB) believes the other has or will materially breach the contract. Also assume that the parties did not include contractual provisions authorizing self-help.
The first situation where self-help is relevant arises when the PFB wants to exercise self-help to fashion a remedy for an existing total material breach (dispute-related self-help)[141] The PFB will consider the contract terminated and take steps to protect its interests as fully as possible. The second situation where self-help plays an important role is when the PFB is uncertain about the other [page 865] party's continued ability or desire to perform.[142] Because the existence of a total material breach may not be clear, the PFB cannot be confident that it is entitled to treat the contract as terminated. A PFB in this situation needs to clarify the status of the contract if possible (performance-related self-help).
The UCC and the Restatement currently recognize the role of self-help in these areas although their approaches to its use are different [143] The discussion below sets forth an overview of the ways self-help is currently recognized by each source as a tool to craft remedies upon breach in advance of judicial action. It then focuses on the use of self-help as a vehicle to clarify obligations when the status of the contract is called into question.
2. Self-help actions to fashion remedies upon breach
When a party faces a breach it believes is total and material, a natural impulse may be to seek to terminate the contract. If the other party is not living up to the terms of the deal, it is tempting to cut one's losses and run [144] Although a natural reaction, unilaterally terminating a contract upon breach by the other party is the most drastic form of self-help available. It extinguishes any hope of continuing the relationship, thereby eliminating any remaining unfulfilled expectations of the contract. At times, this may be an appropriate, if not the only available, outcome. There may be no value in attempting to preserve the relationship.
It is important, however, to limit the use of this remedy so that the PFB does not treat the breaching party unfairly. A PFB does not act with unclouded perspective. Snap decisions about termination may prove ill-advised for the PFB by causing it to be considered the party in breach. Such decisions may also unduly penalize the potentially breaching party if its defective performance could be remedied and the contract continued without great cost to the PFB. Contract law is not punitive law, and self-help should operate in this area to prevent this result and help protect each party's interests.
How self-help can protect the parties requires consideration of those interests that, while as unique as the parties themselves, fall into two general groups. The first group is the interest in present performance [145] When the breach arises at the time performance is due, the PFB's interest in receiving the promised performance is [page 866] clearly impaired.[146] This is a commonly recognized interest, and few dispute that such an essential. interest must be protected in every case of breach, as receiving performance is generally the primary purpose for entering into the contract.[147]
If the breach occurs prior to the time when performance is due, the second interest of the PFB -- the interest of future performance -- is harmed.[148] Each party has an interest in and places value on its feeling of security that performance will be delivered when promised.[149] This interest in future performance enables contracting parties to "have confidence in the word of another 'to set up and to stabilize small-scale schemes of cooperation'."[150]
The interest in future performance is as important as the performance itself.[151] It underlies all of contract behavior by encouraging the "organic solidarity"[152] necessary to compel parties to enter into and maintain relations calling for future exchange. Absent organic solidarity -- a feeling that; the parties are equally vested in the deal -- conflict may replace cooperation.[153] Contracts depend on cooperation and a sense of solidarity, and recognizing the interest in future performance properly values these elements.
The PFB is not the only party with interests, however. Bearing in mind the non-punitive nature of contract law, the breaching party may also deserve some protection. The breaching party often has an interest in performing as much of the contract as originally agreed as possible rather than having a substitute step in. How much weight this interest should be given will vary, but it should always be considered. Even assuming a material breach, the breaching party may have a claim that it can (and should be entitled to) rectify its deficient performance. Self-help should encourage due consideration of all interests underlying the contract. Self-help should protect the PFB by enabling it to receive what it contracted for (whether from the breaching party or from a third party), and should prevent the PFB from precipitously terminating the contract resulting in total sacrifice of the breaching party's interest in correcting performance. [page 867]
B. Article 2 of the UCC
Careful analysis of the UCC [154] shows that it; does an admirable job of balancing the various interests involved when a PFB wants to terminate the contract because it believes its expectations will not be fulfilled. The UCC provides strong support for self-help in contracts for the sale of goods. It does not explicitly label its provisions as authorizing self-help, but it does permit parties to take many actions without official intervention. The first provision to consider is section 2-601 of the UCC.
1. Protecting a buyer who is the PFB
a. UCC section 2-601: the perfect tender rule.
UCC section 2-601 [155] sets forth the perfect tender rule, which permits a buyer to exercise self-help when the seller breaches.[156] Section 2-601 authorizes a buyer in a contract for goods to terminate the contract unilaterally "if the goods or the tender of delivery fail in any respect to conform to the contract."[157] On first reading, it appears that the UCC authorizes this response summarily, permitting any minor deviation from contract specifications to justify unilateral termination. Why should the PFB be given this right?
Consider the position of the PFB. At the time performance is due, the seller does not deliver or delivers non-conforming goods. This non-performance prevents fulfillment of the PFB's interest in present performance: it does not receive that which it contracted for. Allowing unilateral termination under the perfect tender rule frees the PFB to fulfill that interest elsewhere. Thus, the perfect tender rule of the UCC strongly supports the use of self-help termination. Working in conjunction with this provision, other sections of the UCC authorize self-help actions by the PFB to protect its interest in addition to termination [158] Many include as predicate for their use (whether explicitly stated or not) a breach of the perfect tender rule, as shown in the case of "cover". [page 868]
b. UCC section 2-712: cover.
One post-termination remedial action is "cover," which is authorized by UCC section 2-712.[159] Cover is a self-help remedy that enables a buyer who does not receive conforming goods to purchase substitute goods without the need to have a third party confirm that the buyer is entitled to do so.[160] Cover, which must be used in good faith and without unreasonable delay,[161] protects the PFB's interest in present performance. Cover adds to buyer protection by explicitly authorizing self-help at the time of the breach.[162] Although further non-self-help action may be needed to recover the amounts due for a cover purchase, the remedy permits immediate action.[163] Section 2-712 measures a buyer's damages as the difference between the actual cover price and the contract price.[164] In most cases, the amount should put the buyer in the same economic position that performance would have.[165]
The self-help remedy of cover needs statutory authorization because it is not provided for by the doctrines that dictate when a party may terminate its own performance under the contract. Constructive conditions, material breach, and substantial performance speak only to when A is entitled not to perform in response to nonperformance by B.[166] The self-help remedy of cover goes much further; not only may A not perform under its contract with B, but A may go beyond that contract to protect its interests. Absent authorization of cover, A would be faced with uncertainty as to what actions it could take at the time of B's breach. A could simply terminate the contract, sue B for damages and then use those damages to procure substitute goods. That response, however, ignores A's need for immediate performance. For example, if A needs the one hundred widgets to make a machine operational and B fails to deliver them on time, terminating the contract and waiting for a damage recovery from B might cause great injury to A. With or without [page 869] statutory authorization, A is likely to purchase substitute widgets as quickly as possible.
Inclusion of cover in the UCC marks "a significant departure from the prior law"[167] and demonstrates the UCC's strong support for self-help. The clear authorization makes cover a relatively low risk action for the party invoking it. Due to the perfect tender rule, it is relatively easy for the PFB to conclude that goods are nonconforming [168] Upon making that determination, the PFB may engage in cover as authorized by section 2-712 without fear of serious repercussions. If it is later determined that cover was not appropriate, the PFB will not recover for any extra costs but will suffer no other ill effect. The low-risk of engaging in cover does not mean its use is entirely free from controversy,[169] but it does provide assurance to the PFB. Other uses of self-help, such as deduction of damages, pose greater risk for the PFB.
c. UCC section 2-717: deduction of damages.
An additional self-help remedy available to a buyer who is the PFB is deduction of damages from the contract price under UCC section 2-717.[170] This section extends the common law remedy of set-off and permits a buyer, upon notice to seller, to "deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract."[171] The buyer is permitted to effect the deduction without a determination by a third party that such action appropriate.[172]
Deduction of damages, like cover, shows strong support for self-help. It is even possible that section 2-717 will enable some disputes to be resolved exclusively through self-help, if the seller acquiesces in the buyer's deduction. This is not an unimaginable scenario: A seller may concede the breach, and if the deduction in price is reasonable, it will be cheaper and more efficient to resolve the issue simply between the contracting parties and avoid third party intervention.
However, it is highly likely that a seller will not be agreeable to such a deduction. Faced with a reluctant seller, deduction of damages poses somewhat greater risk to the PFB than does cover. Unlike cover, which protects relatively certain rights of the PFB (the [page 870] right to have conforming goods [173]), section 2-717 permits deduction of damages from amounts due based on any perceived breach.[174] Thus, the PFB must first make a judgment that a breach both sufficiently serious and of the type that warrants invoking section 2-717 has occurred. Potential risk for the PFB in this context is determining whether the breach for which deduction is sought was of the same contract under which amounts remain due: Section 2-717 is not a general set-off provision permitting a buyer to adjust its continuing obligations, but is limited to amounts due under the same contract.[175] In addition, the PFB must make a unilateral decision about the proper amount to withhold. Each of these decisions puts the PFB at risk if the act of deduction is later challenged by the other party. Despite the risks inherent in the self-help remedy of deduction of damages, parties do and will invoke the remedy. Section 2-717 again demonstrates the general approach of the UCC of incorporating into a statute those actions parties are likely to engage in. Rather than fight against self-help, the UCC works to rationalize its use.
d. Other UCC self-help provisions.
The UCC continues its support through the authorization of several additional self-help remedies for the PFB. Although these remedies are likely to arise less frequently than cover and deduction of damages, their presence in the UCC is further evidence of the UCC's support of self-help. The additional remedies include identification and recovery of the goods to the contract,[176] revocation of acceptance,[177] and resale of goods in the buyer's possession upon a rejection or justifiable revocation of acceptance [178] The level of risk to a PFB in choosing to exercise the first two remedies on this list is low; each simply protects [page 871] the PFB's present interest in ways that cause the least possible harm to the other party's interest. The third self-help mechanism identified-the resale of goods in buyer's possession [179] -- is analogous to section 2-712 resale and leaves somewhat more room for doubt for the PFB about the suitability of its actions. Despite the varying levels of risk involved, each of these sections authorizing self-help by a buyer demonstrates the consistent support given to the doctrine by the UCC. Thus, support also extends to the seller.
2. Protecting a seller who is the breaching party
The perfect tender rule,[180] cover,[181] deduction of damages,[182] and other provisions [183] described above aid a buyer faced with defective performance by a seller. They authorize significant self-help actions for the buyer, starting with unilateral termination and incorporating many subsequent protective steps. Although a PFB who invokes these mechanisms faces some risk that its decision will be found unwarranted, in general the effect is beneficial to the buyer. So powerful are these provisions that operating alone, they would perhaps unfairly protect a buyer facing breach at the expense of the breaching seller.
Consider the perfect tender rule, which holds that regardless of the severity of the nonconformity, the buyer may terminate unilaterally upon receipt of deficient goods [184] The breaching party is given no opportunity to protect its interest in performance. On one level, this seems fair. A breach giving rise to the perfect tender rule typically occurs at the time performance is due, so why should the breaching seller's interests matter at that point? The seller had an opportunity to protect itself through proper performance but failed to do so. Denying any protection to the breaching party has severe consequences, however. To understand the potential scope of the UCC perfect tender rule, assume a contract for the sale of goods provides that the seller is to sell one hundred widgets to the buyer for $1000, delivery due June 1st. On June 1st, the seller delivers ninety-five widgets and states that the remaining five will be available in two days. Because the seller's tender of delivery fails to precisely conform to the contract terms, section 2-601 authorizes the [page 872] buyer to use the self-help remedy of unilateral termination [185] Thus, the breaching seller could potentially be denied all of its interest under the contract despite its efforts to comply with the terms to the degree possible.
If the perfect tender rule worked in such a draconian fashion it would create the potential for harsh treatment of the breaching party and might result in forfeiture. Our breaching widget maker might be able to sell the ninety-five widgets elsewhere, but often would not be able to, leaving it with useless goods [186] To mitigate this outcome, the UCC includes limitations on the perfect tender rule which reduce the availability of unilateral termination to the PFB.
a. Cure under UCC section 2-508.
Unilateral termination under the perfect tender rule is self-help that protects a buyer facing breach. Its converse is self-help that protects a seller who is the breaching party by enabling it to take action to correct its performance and preserve the contract. By authorizing self-help for the breaching party the UCC attempts to balance each party's interests and avert precipitous breach by the PFB. Cure is the primary UCC mechanism protecting a breaching seller.
To mitigate the impact of UCC section 2-601's perfect tender rule, UCC section 2-508 gives a breaching seller the ability to render unilateral termination inappropriate.[187] Cure is self-help because it enables a party to take action independently to remedy a breach which, absent cure, would subject that party to liability [188] Cure meliorates the perfect tender rule by giving the breaching party an opportunity to protect its interests by correcting defective performance. If successful, cure results in suitable delivery, and the perfect tender rule is not applicable.[189] [page 873]
The UCC's explicit recognition of cure in section 2-508 gives statutory substance to a common business practice.[190] Section 2-508 permits a seller who delivers non-conforming goods to cure in two situations [191] The first situation involves a buyer who rejects goods when the time for performance has not yet expired.[192] If the seller gives notice of intention to re-tender, the seller may cure by making a conforming delivery within the contract term.[193] Simply, the seller is given the opportunity to fulfill the constructive condition of exchange during the pendency of the contract.[194] If cure is successful within that time period, no total material breach occurs and termination of some or all of the contract is not permitted.
Although some commentators may not find the authorization of cure to be particularly interesting, it is a vital self-help remedy and limits the reach of the perfect tender rule. Without the seller's ability to cure defective performance during the contract term, the buyer could terminate the agreement immediately upon any defective delivery. Cure tips the scales back a bit toward protecting the seller who intends to perform (and demonstrates that intent by giving notice) but who unknowingly or inadvertently fails to do so satisfactorily on the first try.
It is fair for the buyer to give the seller a second chance to perform for two reasons. First, the buyer's interest in future performance will be protected by the requirement that the seller give notice of its intent to cure.[195] Second, cure takes place at or prior to the time performance is due under the contract, so the buyer's interest in present performance is also fulfilled. Self-help cure in this context thus protects all parties' interest in a salutary result.
The second situation where cure is permitted under section 2508 is when the time for performance is due or past due and the buyer rejects goods that "the seller had reasonable grounds to believe would be acceptable with or without money allowance."[196] In that case, "the seller may if he seasonably notifies the buyer have a [page 874] further reasonable time to substitute a conforming tender."[197] Permitting cure after the time for performance is due gives the breaching party a second chance to complete the constructive condition of exchange and avoid being found in material breach. This is a more significant authorization of self-help. It greatly enhances the ability of the breaching seller to protect itself, which raises the question of why self-help should be authorized to give the seller a second chance.
Although it may seem that allowing cure after the time performance is due overly favors the breaching seller's interest, in fact it operates to protect both parties' interests in the contract to the fullest degree possible. Once the need for cure of this type exists, complete and immediate satisfaction of the origional contract is not possible for the PFB because performance is already past due.[198] In most cases, however, the PFB will still want to complete the contract with the original party. Assuming that the buyer reasonably believes the seller will effectuate an appropriate cure, the efficient choice is to continue the original contract and avoid the costs of locating and negotiating with an alternative party. Properly effected, cure protects the PFB's interest in future performance with the original party. It also satisfies the interest of the breaching party in being the entity to complete the task. The net result is completion of the original contract -- albeit after delay -- without incurrence of the additional transaction costs associated with third-party involvement.
Cure is a useful self-help remedy under the UCC, but like the perfect tender rule, it must be placed in context. Cure will not always be available. First, the breaching party must have reasonably believed that the original delivery would be acceptable. The UCC does not state specifically what constitutes "reasonable grounds" for forming that belief.[199] However, the official comment to section 2-508 does offer some guidance, suggesting that "reasonable grounds can lie in prior course of dealing, course of performance or usage of trade as well as in the particular circumstances surrounding the making of the contract."[200]
Despite some uncertainty as to when and how cure may be properly effected, it is a low-risk, self-help action. In the worst case scenario, an attempt at cure will not be recognized and the seller [page 875] will be found in breach. Because the seller would be in this position absent the attempt to cure, the cost of attempted avoidance is simply the cost of the re-tender. Given the great potential for avoiding breach that cure affords, there is little reason not to attempt cure if seller believes it has a reasonable chance of success. The UCC through its authorization of cure permits a seller in breach to exercise self-help when doing so is rational and efficient.[201] It also approves of self-help by a seller in other contexts.
3. Protecting a seller who is the PFB: resale under UCC section 2-706
The above discussion considers the use of self-help by either party when the buyer is the PFB. Clearly, there are times when the buyer breaches the contract and the seller is the PFB. A buyer may breach by, among other actions, wrongfully rejecting goods [202] or failing to make payment when due. Just as the UCC authorizes self-help when the buyer is the PFB, it also extends recognition of self-help to situations where the seller is the PFB.
One important self-help remedy available to a seller faced with a breaching buyer is resale under UCC section 2-706.[203] Pursuant to this section, if a buyer wrongfully rejects a delivery of goods, the seller has the right to treat the contract as terminated.[204] The seller may then resell the goods and recover from the buyer the difference in the price received upon resale and the contract price.[205] Self-help thus operates through resale to protect the Seller's interest in present performance. Of course, this protection will be fully realized only when a seller engaging in resale resorts to non-self-help action to force the breaching buyer to remit the difference (unless the breaching buyer voluntarily pays over the amounts due).[206]
As with cover, resale is a low-risk use of self-help. Even assuming the seller mischaracterizes the buyer's action -- making its act of resale a breach of contract -- the cost of that mischaracterization is relatively low. The seller could either supply substitute goods in fulfillment of the contract terms or remit the difference in [page 876] contract price and market price, plus perhaps some amount to compensate for delay. Because of the low-risk involved with resale it is appealing to a seller facing breach. UCC authorization of resale, without need for official intervention, is further evidence of the UCC's support for self-help.
While resale is the most important self-help remedy permitting a seller to terminate and protect its interests upon a buyer's breach, the UCC authorizes several other actions.[207] The availability of each of these remedies is premised on a wrongful rejection or revocation of acceptance by the buyer, or a failure to make timely payment.[208] Each applies "to any goods directly affected and, if the breach is of the whole contract, then also with respect to the whole undelivered balance."[209] The actions authorized include withholding delivery of goods,[210] stopping delivery by a bailee,[211] and identification of goods to the contract.[212] These are each fairly low-risk, self-help actions and each authorizes the seller facing breach to take immediate action to protect its interests.
Absent the UCC, a seller would need to obtain official authorization to alter its performance under the contract. It is not reasonable to assume that a seller facing breach will be willing to wait for such authorization. If the buyer does not pay (and non-payment is not justified), the rational response is immediate termination of delivery and other protective steps. Thus, the UCC's authorization of self-help responses for the seller who is the PFB is realistic and logical.
Through all of the provisions discussed in this section the UCC demonstrates strong support for self-help actions to fashion remedies upon breach. It authorizes practices in which commercial parties will likely engage and attempts to define reasonable standards for such actions. Although the UCC is not a perfect guide, it does an admirable job. As a dominant source of contract law the UCC goes far in approving of and supporting self-help. Another important commercial source -- the Restatement (Second) of Contracts -- is less successful in this effort. [page 877]
C. The Restatement (Second) of Contracts
The Restatement provides another potential source for guidance as to when self-help should be authorized for a party attempting to fashion a remedy upon breach.[213] Regrettably, it is a far less useful guide in this regard than the UCC. Explicit consideration of self-help is expressly excluded from the Restatement's chapter on remedies.[214] Despite this exclusion, implicit acknowledgment of, and support for, self-help does exist within the Restatement. However, perhaps because it is not openly acknowledged as an element of the law, self-help is not as carefully considered in the Restatement as it is in the UCC. The following overview highlights those sections of the Restatement that parallel the self-help provisions of the UCC, available to either party in response to a breach by the other.
1. Protecting a buyer who is the PFB
The Restatement begins it's treatment of the effect of performance and non-performance with a statement that sounds similar to the UCC's perfect tender rule. Restatement section 235(2) provides that "[w]hen performance of a duty under a contract is due any nonperformance is a breach."[215] Thus, comparable to the perfect tender rule, any deviation from the contract terms will constitute defective performance.[216] Where the Restatement differs from the UCC is in its attempt at defining appropriate responses to such defective performance.[217]
Restatement section 237 attempts to articulate a rule for the effect on the PFB of a failure to render performance by the other party. It states that "it is a condition of each party's remaining duties to render performances ... [so] that there be no uncured material failure by the other party to render ... performance due at an earlier time."[218] This section is a formal acknowledgment of the doctrine of constructive conditions and grants the PFB the right to terminate unilaterally the contract if the time for performance is [page 878] past and the breach is material.[219] How is the PFB to know if defective performance rises to the level of materiality?[220] Although section 235 makes any deviation from the contract a breach, the import of that deviation must be judged under section 241.
Section 241 lists five "circumstances significant in determining whether a failure is material."[221] These circumstances are admitted to be "imprecise and flexible" making their application uncertain."[222] The lack of certainty places great risk on a PFB who wants to exercise self-help termination and subsequent protective steps. The provision places the burden on the "innocent" (presently non-breaching) party to make a critical determination about contractual status. If that determination "is later found to have been incorrect, the PFB then becomes the breaching party and is subject to all penalties ascribed to that status. Thus, attempts at defining material breach when deciding whether to engage in self-help are difficult at best.[223]
For purposes of understanding the support given self-help in the Restatement, it should be recognized that the lack of certainty may reduce the effectiveness of self-help remedies. The PFB may go ahead and terminate the contract unilaterally despite the risks inherent in that action, but the possibility of challenge by the potentially breaching party will be eater. While it may not be possible to have a precise equivalent to the perfect tender rule in non-goods contracts, stronger support for the right of the PFB to terminate upon deviation from contract terms would be more in keeping with actual contractual behavior.
The Restatement is also deficient in its consideration of what self-help actions a PFB who terminates unilaterally may take. There is no authorization for such responses anywhere in the [page 879] Restatement. The only reference to their existence is contained in the introductory note to chapter sixteen on remedies, which states that the work does not "deal with the extent to which a party to a contract is empowered to protect himself or to obtain satisfaction by methods not involving recourse to a court, such as deducting damages that he claims from the price that he owes."[224] No explanation for the omission is provided. The failure to include clear provisions governing dispute-related, self-help responses weakens both the Restatement and a doctrinal approach toward self-help. This omission is unnecessary as shown by the ability of the Restatement's drafter to include self-help authorization in other contexts.
2. Protecting a seller which is the breaching party
Despite its failure with respect to certain dispute-related actions the Restatement does sanction some uses of self-help. Specifically, it recognizes a right to cure similar to that granted under UCC section 2-508.[225] Section 237 states that the duty to perform depends on there being "no uncured material failure by the other party to render ... performance due at an earlier time."[226] This recognizes that while the contract is executory a breaching seller has the opportunity to remedy defective performance. Thus, in the case where time for performance is not yet due,[227] Cure under the Restatement should operate in a similar fashion to cure under UCC section 2-508 and will aptly protect the parties' interests.
Cure when performance is past due is available under the Restatement but its use is less clear than under the UCC. The first difficulty in applying the Restatement rule on cure stems from the requirement that the failure be material.[228] The second problem lies in determining how long the PFB must give the other party to effect a cure. Under section 237, the PFB is justified in suspending performance upon material breach, but may not treat its performance obligations as discharged until after some unspecified period of time.[229] Section 242 sets forth "circumstances significant in determining when remaining duties are discharged."[230] These circumstances include, among others, the likely harm to the PFB caused by delay and the extent of forfeiture the breaching party will suffer if termination is permitted.[231] These are clearly case-specific guidelines [page 880] and do not provide strong comfort to the PFB considering termination.
Cure under the Restatement is fraught with uncertainty and thus riskier than cure under the UCC.[232] The "innocent" PFB must first determine whether the non-performance is material. Next, the PFB must determine how long it should remain in limbo about whether its expectations will be fulfilled. It may not be possible to have absolute certainty on either of these issues, but the unwillingness of the Restatement to encourage self-help by providing a rational framework under which the parties may operate is a problem.
The UCC and the Restatement both contemplate the use of self-help to fashion remedies upon breach. They do so with varying degrees of success in reducing the risk to the party seeking to invoke the dispute-related self-help actions. Each of these sources also provides for performance-related self-help through its incorporation of provisions authorizing parties to take actions to clarify the status of the contract.
IV. SELF-HELP ACTIONS TO CLARIFY THE STATUS OF THE CONTRACT
During the pendency of a contract a party may at times be uncertain of its status. It may have reason to believe the other party will not perform or that its
performance will be deficient. These doubts erode the PFB's feeling of confidence in the
relationship, undermining its interest in future performance. To protect that interest, a PFB may
seek to clarify the status of the contract. It may seek clarification directly from the other party or
indirectly from others with knowledge of the transaction or of the status of the other party.
ultimately, the PFB must evaluate what may be ambiguous information about whether the other
party will perform as required. If the PFB concludes that the other party will not perform, it can
then terminate its performance unilaterally. If the PFB is correct in its assessment that the other
party will not satisfy the constructive condition of exchange, the PFB need not continue its [page 881] performance. Termination in that circumstance will not subject the PFB to liability for breach. [233] If it is wrong, however, the PFB may be the party in total breach and subject to attendant liability .[234] This is a difficult position for the PFB. It has a strong interest in the security of future
performance but must make the critical, high-rise decision about termination faced with imperfect
knowledge. What role does (or should) self-help play in these situations? For many years, the law provided little guidance on how a PFB should behave if it had reason to
doubt that the other party would perform. The PFB was permitted to take action only when its
belief was based on a positive statement of inability or unwillingness to perform by the other party
or on an affirmative act by that party rendering performance impossible.[235] Rarely does the
potentially breaching party clearly signal its inability to perform. More typically, the PFB faces a
situation that gives it pause with regard to the other party's willingness or ability to complete
performance, but it cannot know with certainty what the eventual outcome will be. In that situation,
the common law provided little help. Strict application of the doctrine of constructive conditions
does not address the difficulty. Until the time for performance is due, no protection is available. "At
common law, one party to a contract might suffer considerable and justifiable anxiety about the
other party's willingness or ability to perform and yet have no legal basis for canceling the contract
or for procuring additional assurances from the other party."[236] This unfortunate gap in the law left parties in an uncomfortable and unrealistic position. A party
might make a polite "request" for assurances but the other party would be under no obligation to
respond. Something more was needed to protect the PFB's interest in future performance and
enable it to take action in response to perceived problems during the pendency of a contract.
Relatively late in the development of United States contract law, a right to seek adequate
assurances as a self-help action was approved in both the UCC and the Restatement. A. UCC Section 2-609: The Right to Seek Adequate Assurances
UCC section 2-609[237]
establishes the right to exercise self-help by seeking adequate assurances and explicitly recognizes and [page 882] values a party's interest in future performance.[238] Specifically, comment one to UCC section 2-601
acknowledges the importance of "a continuing sense of reliance and security that the promised performance will be forthcoming."[239] To protect that interest, section 2-609 allows the PFB to
seek an adequate assurance of performance when it has reasonable grounds for insecurity
regarding the other party's willingness or ability to perform.[240] While the PFB awaits assurance,
it is authorized to suspend its performance under the contract.[241] If adequate assurances are not
received in a reasonable time, the PFB is justified in treating the failure to provide assurance as a
total material breach.[242] In section 2-609, the UCC recognizes that the interest in future
performance is so important that present harm to it fundamentally undermines the value of the
contract. When the interest in future performance is jeopardized significantly by uncertainty, the
PFB is justified in terminating the contract unilaterally. Section 2-609 is a powerful statutory incorporation of self-help. When properly applied, it
operates to the advantage of both parties and is an efficient mechanism for preventing breach or minimizing total cost if breach is inevitable.[243] In the ideal situation, seeking adequate assurances
helps the PFB in one of two ways. First, if the other party fails to provide assurances, the PFB has
solid authority to terminate the contract. Absent the request and non-response, the PFB would
have no justification to terminate unless the other party was already in total material breach
which, as discussed, is often difficult to determine.[244] If the other party does provide adequate
assurance, the PFB's interest in future performance is restored and it can confidently carry on with
the contract.[245] Thus, section 2-609 [page 883] approves self-help to reduce uncertainty to the PFB when the status of the contract is unclear. Giving the PFB a right to seek adequate assurances also helps the potentially breaching party.
Often that party may be unaware that the PFB has serious concerns about its performance. By
seeking assurances the PFB gives notice of its perception of problems. Upon such notice, the
potentially breaching party can take steps to either clarify that the PFB is mistaken or to remedy
problems that do exist. Demanding assurance that performance will be forthcoming thus forces both
parties to assess the status of the contract and to communicate their understanding to each other.
Assurances encourage organic solidarity between parties by ensuring that each remains vested in
the contract.[246] Finally, adequate assurances protect the benefit of the bargain by recognizing the importance of the interest in future performance and thereby promote commercial certainty.[247] 1. Remaining uncertainties under UCC section 2-609 Although section 2-609 has many benefits, it is not a perfect self-help remedy. It is a high-risk
decision for a PFB to elect to seek assurances with the potential for serious consequences if the
decision to do so was not justified.[248] This risk is present, because as with the other self-help
remedies authorized by the UCC, a demand for adequate assurances is permitted only in certain
situations. If a PFB seeks assurances and suspends performance when not authorized to do so,
its suspension may cause it to be in total material breach and liable to the other party. Therefore,
it is necessary to consider when the right to seek assurances arises. At the threshold, a party seeking adequate assurances (who may be either buyer or seller) must
first have "reasonable grounds" to doubt that the other party will perform adequately.[249] This
raises two concerns. First, what is the nature of the problem giving rise to the insecurity? Second,
how certain is the existence of the problem? The first concern requires determining the significance of the problem with performance. Will any
event that might impair future performance of the contract terms justify the PFB in seeking assurances? [page 884] Imagine a contract for the purchase of the ever-famous widgets. These are special widgets
requiring special components. Buyer learns that seller is having difficulty procuring the components
because of credit problems with the supplier. Does that justify buyer in seeking assurance? What
if buyer knows seller receives the components via UPS and also knows UPS is on strike? Same
result? The UCC does not provide a clear answer to these questions; it only states that the party seeking
assurance must have a concern about performance. Section 2-609 does not require that the
concern be one that if realized, would cause the other party to be in material breach.[250] This would
seem to allow the PFB to seek assurances for any perceived problem, a position that is consistent
with the purpose underlying the section.[251] If adequate assurances are to protect the PFB's
interest in future performance, any concern that harms that interest justifies action. In the above example, if it appears that the widget seller will be unable to complete the contract because it
cannot receive the needed component, the PFB's loss of confidence is the same regardless of the
reason for noncompliance. Section 2-609 recognizes this and provides that if the PFB acts in good
faith,[252] out of genuine concern for the other party's performance capability, it may properly seek
assurances. The second concern relating to a PFB's invocation of section 2-609 requires consideration of the
likelihood that future performance will not occur. How certain must the PFB be to have reasonable
grounds to doubt forthcoming performance? If, in our widget example, buyer hears of seller's credit
problems from a competitor of seller, does that justify invoking section 2-609? The seriousness of
the perceived problem is apparent -- if seller cannot obtain the components it cannot fulfill the
contract. We must question, however, whether it is fair for buyer to have the triggering perception
at all. What constitutes "reasonable grounds" for insecurity for the PFB? The PFB must guess about
the other party's ability to perform based on information that may not be fully reliable. How
informed a guess is required? As Corbin notes, "[p]roof of the past is often difficult enough;
foresight of the future, however vital it may be to our lives and fortunes, may be almost
impossible."[253] What glimmerings of doubt warrant concern sufficient to trigger a right to seek
assurances? Once again, the UCC does not resolve this question clearly. Instead, section 2-609 states that "[b]etween merchants the reasonableness of grounds for insecurity ... shall be determined according [page 885] to commercial standards."[254] Analysis of section 2-609 suggests that "reasonable grounds" means
"that it is probable, but not certain, that performance will not be rendered."[255] The drafters of the
UCC were aware that the choice of such vague language poses problems,[256] but concluded that
the "reasonable grounds" question is too fact-specific to be resolved by a definite standard.[257] Leaving the definition of "reasonable grounds" to be determined by case-specific analysis increases
the PFB's risk of utilizing this form of self-help. Some of this uncertainty is reduced, however, by
section 2-609's reference to commercial standards.[258] Our widget purchaser will have some
knowledge of the source of its information and can make a judgment based on its business sense
about how to proceed. It will also be encouraged by section 2-609 to consider how other
merchants in similar situations would proceed. This need for reflection upon commercial realities,
coupled with the limitations of reasonableness and good faith, put some obligation on the PFB to
be reasonable in seeking adequate assurance. Thus, section 2-609 creates a viable framework for
a PFB to exercise self-help when it is worried about receiving all of what it bargained for under the
contract. If the PFB concludes that it has reasonable grounds to seek assurances, the issue of how the other
party should respond arises. Section 2-609 does not specify what qualifies as "adequate
assurances" in response to a demand.[259] This is a critical concern for both parties. If assurances
are adequate, the contract continues. On the other hand, a failure to give appropriate assurances
in a timely fashion is a repudiation of the contract by the breaching party, and the PFB is free to
treat the contract as terminated.[260] Therefore, the party charged with breach must know how to
respond to protect its interests in the contract. [page 886] Additionally, the PFB would like to know with certainty when it can properly treat a non-response
as a repudiation, because if the PFB acts precipitously, it becomes the party in breach.
Unfortunately, the UCC, once again, does not establish a clear standard. It states that the
determination as to the adequacy of assurances received "is subject to the same test of factual
conditions" as is the question of whether assurances may be sought.[261] At times, a mere promise
that performance will occur may suffice, while other cases may require that verbal assurance be
accompanied by other remedial action including, among other things, replacement and repair.[262]
Our widget seller may believe that a phone call informing buyer that an alternate source of supply
is available will suffice, but seller cannot be certain that the buyer will concur. Despite the uncertainty created, leaving section 2-609's standard open is sensible. The multitude
of possible bases for uncertainty suggests a corresponding multitude of appropriate responses. It
would be virtually impossible to articulate a bright line test suitable for all situations. Any attempt
to do so would also lessen the self-help nature of the action. The underlying purpose of self-help in this context, coupled with the requirement of good faith,[263]
reduces the likelihood of opportunistic behavior in several ways. First, we assume that a potentially
breaching party will act in good faith to provide the best assurance it can. We further assume that
in most cases the PFB is seeking assurance to protect its interest in future performance. That
interest underlies a desire to have the contract completed rather than a desire to wiggle out of the
agreement. Properly invoked, the PFB's demand for assurances is a genuine effort to clarify
contractual relations, not a frivolous attempt to harass the other party. The PFB is interested in
gaining its expectations in the most cost-effective, efficient way possible -- through communication
with the other party. While the potential for abuse of the remedy exists, it generally would not
behoove the PFB to invest time and money seeking assurances based on frivolous concerns.[264]
Experience shows that fears that parties would abuse the provision by making demands based on unreasonable worries are wlfounded.[265] If the potentially breaching party provides assurance sufficient to restore [page 887] the PFB's confidence that performance will be forthcoming when due, the PFB is unlikely to reject
that assurance as unreasonable. Although the possibility always exists that a PFB may act
opportunistically, it should not prove to be typical behavior. B. Requirements of UCC Section 2-609 Promoting Certainty 1. Writing requirement
Although section 2-609 does not resolve all uncertainties, it does
contain some specific guidelines for parties wishing to engage in self-help through seeking
adequate assurances. First, it requires that the demand for adequate assurances be in writing.[266] This places a slight burden on the PFB's ability to exercise self-help. The PFB
is not free to simply pick up the phone and demand assurances, but must go through a more
formal process. This may appear inconsistent with the UCC's general philosophy of
recognizing common business practices.[267] Certainly we can expect that a PFB would like
the freedom to demand assurances orally and in practice may do so more readily than
seeking them in writing. However, requiring a writing may benefit the PFB. Remember that the usual reason for seeking assurances is that the PFB believes, but is not certain,
that there is a problem with the other party's performance. The PFB's need for assurances strongly
suggests that the uncertainty is one-sided. The doubt on the PFB's part may stem from its unique
view of the relationship. The party potentially in breach may have an entirely different understanding of events and therefore be genuinely unaware that any concerns exist. The PFB's doubt may also
come from information received from a third party.[268] In the absence of direct communication
between the PFB and the other party, the other party may have no reason to believe that any problems exist. In all of the above situations, requiring that the demand for assurance be in writing demonstrates
the gravity of the PFB's doubts and gives the other party unambiguous notice that the PFB believes
there are serious concerns about the status of the contract. In addition, the formality of a writing
reduces the likelihood for casual, frivolous demands for assurances and reduces the chances that
the demand will not be properly understood. It is easy to imagine a [page 888] phone call where a PFB expresses concerns, believing that it is making a demand for assurances.
These concerns may not be understood as a demand by the other party, however, if it is genuinely
unaware of any difficulty. While not eliminating entirely interpretive problems, a writing requirement
reduces the chances for confusion and provides objective evidence of what has transpired between
the parties. Finally, it should be noted that the writing requirement of section 2-609 may be treated by courts
as defining an ideal. In some cases the concern is clear and justified oral demand will be accepted
if it is communicated properly.[269] This result is in keeping with the idea that the UCC attempts
to guide the use of self-help, but always acknowledges commercial realities. 2. Thirty day requirement
The clearest requirement established by section 2-609 is that the assurances sought must be given within thirty days of the receipt of the demand.[270] As with
the writing requirement, pure self-help proponents might argue that a statutorily imposed
time limit is inappropriate. Parties should be free to define the length of time they are willing
to wait for assurances, just as they are free to determine when to seek assurances initially
and what type of assurances will be satisfactory. However, it is again easy to view the requirement as beneficial to the PFB. Without a statutorily-mandated tune period, the PFB would have to decide for itself how long it should wait prior to
considering the failure to respond a total material breach justifying termination of the contract. Such
an uncertain decision would increase the risk involved in invoking section 2-609. By creating a
bright-line test applicable to all contracts, the UCC benefits the PFB by reducing the chance that
an ill-considered decision about how long to wait for assurances will cause it to be the party in
breach. Under section 2-609, if the thirty day time period expires and adequate assurances are not
received, the PFB is free to consider the contract repudiated and take further actions to protect
its interests in the agreement.[271] Finally, the thirty day requirement is [page 889] not insurmountable.[272] Parties retain the ability to modify this time period by agreement.[273] Section 2-609 is a strong recognition of the utility of self-help. It permits parties to act
independently to protect their present and future interests in the contract. While section 2-609
cannot eliminate uncertainty or entirely remove the possibility for opportunistic behavior, it
encourages efficient results. It requires communication between the parties and does an admirable
job of encouraging organic solidarity by forcing articulation of concerns.[274] The UCC is not alone
in its incorporation of this important self-help mechanism. The ability to utilize the performance-related, self-help action of seeking assurances is also found in the Restatement. C. Restatement Section 251: When a Failure to Give Assurance May be Treated as a Repudiation As discussed, the UCC does a good job of informing a PFB how it may clarify its obligations with
regard to continuation of the contract. What happens to a PFB when its contract is not governed
by the UCC? At common law there was no right to seek adequate assurances [275] and the first
Restatement of Contract; did not authorize such action.[276] Over time, a broader recognition of
an interest in future performance in all contracts developed. In response, the drafters of the Restatement (Second) of Contracts included a new section 251
creating an avenue for a PFB to seek assurances of performance.[277] This section operates in a
similar fashion to the UCC provision and is at times referred to as its "direct descendant."[278]
Under section 251, as under UCC section 2-609, a PFB is encouraged to clarify the status of the
relationship and to communicate its concerns to the other party. Because the two sections are
closely related, much of the analysis of UCC section 2-609 is applicable to section 251.[279] However, even direct descendants [page 890] vary from their ancestors in some respects. The following discussion examines the variations between section 251 and UCC section 2-609 and how they affect the self-help nature of the
adequate assurances remedy. 1. No writing requirement One difference between section 251 and UCC section 2-609 is the form a demand for assurances
must take. Section 251, unlike UCC section 2-609,[280] does not require that demand to be in
writing. The commentary to section 251 states "[a]lthough a written demand is usually preferable
to an oral one, if time is of particular importance the additional time required for a written demand
might necessitate an oral one."[281] The absence of a writing requirement makes the Restatement's
authorization of this self-help response more readily available to a PFB because it eliminates one
hoop it must jump through.[282] However, it is doubtful that this difference between the Restatement
and the UCC makes much of an impact in practice. Courts interpreting UCC section 2-609 do not
necessarily construe the writing requirement strictly, and demands typically will be made in writing
regardless of an obligation to do so.[283] 2. No set time period
A more significant difference between UCC section 2-609 and
Restatement section 251 is that section 251 does not set a time period in which the
demanded assurances must be received.[284] Instead, section 251 requires only that
assurances be received within a "reasonable time" and states that "[w]hat is a 'reasonable time' within which to give assurance ... will also depend on the particular circumstances."[285]
Not establishing a precise time requirement brings the Restatement approach closer than the
UCC to authorizing pure self-help, but at the same time increases the PFB's risk.[286] [page 891] Under section 251, when a PFB concludes it has waited a sufficient length of time to receive
assurances that are not forthcoming, it may then treat the contract as repudiated.[287] If its
conclusion is later determined to be incorrect, the PFB may be found in breach. 3. "Reasonable grounds"
A final difference between the two provisions authorizing the
seeking of adequate assurances is the threshold set for when assurances may be demanded.
The Restatement requires that the PFB have "reasonable grounds ... to believe that the
[other party] will commit a breach by non-performance that would of itself give the [PFB]
a claim for damages for total breach."[288] The UCC, on the other hand, simply requires
insecurity "with respect to the performance"[289] of the other party. Thus, section 251
authorizes the PFB to seek assurances in a more limited category of problematic
performance situations.[290] It is possible "that one party could have reasonable grounds for
insecurity simply because the other party had threatened a breach that would not constitute a material breach, and thus would have grounds under [section] 2-609 but not under
[section] 251."[291] The Restatement's more stringent requirement that performance must be so deficient as to
constitute a total, material breach has two negative effects on the use of self-help. First, it reduces
the availability of self-help, discouraging full communication until problems elevate to a fairly serious
level. Second, it increases the risk to the PFB by forcing the PFB to characterize the legal import
of the other party's action prior to demanding assurance. A PFB must decide whether the
anticipated difficulty is sufficiently serious to constitute a material breach before acting to protect
its interests. [page 892] As the discussion of material breach shows,[292] this determination is fraught with uncertainty.
Seeking assurances is meant to help a party confronting uncertainty reduce its risk, not to add
additional burdens to that party. The Restatement's position fundamentally undermines the
effectiveness of a self-help provision designed to encourage communication between the parties
and needlessly limits the availability of the remedy.[293] Apart from these differences, the two provisions on adequate assurances are essentially the same
in content. They are not the same in application, however. A demand for adequate assurances may
move beyond the self-help realm if it is challenged in an official action. Judicial reaction to the
remedy is mixed. Cases brought under the UCC section 2-609 must accept the availability of the
remedy (because it is statutorily authorized), although the courts may conclude that it was not used
properly.[294] Acceptance of a right to seek assurances in non-UCC cases, where no statute
mandates its availability, is not as universal. In a 1993 study of the adequate assurances doctrine,
Professor Gregory Crespi considers judicial treatment of section 251. He notes that while many
courts adopt the doctrine in non-UCC cases, "there are a number of other post-UCC cases in
which courts have declined to incorporate the adequate assurances doctrine into the common law
of their jurisdiction."[295] Courts declining to adopt the doctrine rarely state principled reasons for
rejecting the right to seek adequate assurances.[296] [page 893] This reluctance demonstrates a lack of awareness of the utility of self-help when parties are
uncertain of the status of their contractual relations. There is no principled reason to differentiate
between goods (subject to the UCC) and non-goods (non-UCC) contracts when considering the
need for security as to future performance.[297] The need to protect an interest in future
performance is equally important in each. Permitting parties in any type of contract to seek
assurances furthers communications and enhances the chances that a contract will stay intact.[298]
Denying this self-help action in non-UCC cases prevents United States contract law from being
fully consonant with the underlying objectives and goals of contracting parties. As the overview of
the UCC and Restatement provisions demonstrates, our law can accommodate and support the
use of self-help. Recognition and careful consideration of self-help as a cohesive doctrine would
help parties reduce their uncertainty about what actions are appropriate and reduce the risk of
taking protective actions. Additionally, courts reluctant to "change the law"[299] might begin to
understand that authorizing self-help is not a change at all, but instead judicial recognition of a long-standing practice. V. SELF-HELP IN ACTION: STANLEY GUDYKA SALES CO. v. LACY FOREST PRODUCTS CO. A. The Facts
It is easy to assert in the abstract that a particular doctrine or approach would be helpful, but it is often more useful to consider its practical application. The following
discussion explores an actual case where a proper understanding of self-help principles
might have protected the parties' interests but did not. [page 894] Stanley Gudyka Sales Co. v. Lacy Forest Products Co.[300] presents the all too common story of a good relationship gone sour. Stanley Gudyka owned and operated Stanley Gudyka Sales
("Gudyka"), a lumber company.[301] Lacy Forest Products ("Lacy") was in the same line of
business.[302] In July of 1981, the parties orally agreed that Gudyka would work for Lacy as an
independent contractor.[303] All customers were to pay Lacy directly who would then compensate
Gudyka by paying him a comnrission.[304] The parties were to split all profits from Gudyka's sales equally, and Lacy was to pay Gudyka a monthly salary until such time as the commissions due to
Gudyka from Lacy exceeded the advances.[305] After approximately fifteen months, this
arrangement was modified to allow Gudyka to collect payment directly from one customer on the
understanding that he would then forward fifty percent to Lacy.[306] Some three months later, the
parties formalized their agreement in writing and included a clause permitting either party to
terminate the contract for just cause upon thirty days notice.[307] Over the next six months, Gudyka received checks totaling $5,839.82 from the customer
authorized to pay him directly, but he failed to remit Lacy's fifty percent.[308] Lacy was aware
that Gudyka was receiving payment on this account and inquired several times about monies
due.[309] Gudyka was apparently evasive, replying that he did not know how much had been
received and never paying over any monies.[310] After a visit from a Lacy employee in May,
Gudyka finally acknowledged that money was due and stated that he would make payment directly
.[311] When Lacy did not receive payment by June, it sent Gudyka a "Termination Notice"
("Notice"), informing him that Lacy considered his actions of failing to notify and failing to pay
amounts due sufficiently serious to provide just cause to terminate the contract.[312] The Notice
stated, "The partners of Lacy ... feel very strongly that you really had no intention of reimbursing [us]
for [our] share of this commission .... From a personal standpoint, we are all extremely disappointed
in your actions on this matter, and our unanimous decision to terminate is final."[313] Along with the
Notice, Lacy sent Gudyka a check for all amounts [page 895] due him, offset by the amounts due Lacy in commissions.[314] Gudyka then sued Lacy, claiming
that the termination was without just cause.[315] The trial court ruled that Lacy had terminated the
contract without just cause and awarded damages to Gudyka.[316] B. Self-Help Implications
Before considering the judicial treatment of the case, let us
understand it in the context of self-help doctrine. Upon Gudyka's nonperformance by failure
to remit amounts due, Lacy became the PFB. Lacy then had to decide the gravity of the
breach -- was it sufficiently serious to constitute a material breach stultifying unilateral
termination of the contract? How should Lacy make the risky decision as to the magnitude
of the breach? On one hand, the disputed amount was not large in terms of the overall
value of the contract,[317] and thus might be viewed as an immaterial breach. However,
Lacy's uncertainty about Gudyka's performance undermined its "continuing sense of reliance
and security[,] ... an important feature of the bargain."[318] Long term sales and service
contracts are entered into because each party believes that the other will perform well and
honestly; the two are to some degree joint ventures in the undertaking. If Gudyka was not
fulfilling one portion of the bargain, how could Lacy know that Gudkya was not taking other
steps to undermine other elements of the relationship? Thus, the harm caused by Gudyka's
behavior runs both to present performance and to Lacy's continuing interest in future
performance. Characterized in this way, Lacy's loss of confidence in Gudyka could easily be
seen as a material breach. It is precisely these difficult characterizations of the legal import
of non-performance that self-help enables parties to avoid. Self-help should reduce the risk
to parties confronting a breach of uncertain magnitude by giving them alternatives to all-or-nothing decisions. Because of the difficulty of characterization of the breach, Lacy did not simply terminate the
contract.[319] Instead, it used the appropriate self-help remedy available to a party that needs to
clarify its obligations with regard to continuation of the contract. Lacy, through repeated inquiries,
sought adequate assurances from Gudyka.[320] These inquiries, seeking either performance or assurance [page 896] that performance would be forthcoming, are precisely what the doctrine of adequate
assurances envisions.[321] The inquiries put Gudyka on notice that Lacy considered the matter of
non-payment important and that there was trouble in the relationship. Gudyka was then in a
position to protect his interest in the contract by remitting the money or by authorizing Lacy to
effect an offset. He chose not to do so, instead repeatedly telling Lacy that he would pay but taking
no steps to do so.[322] This further undermined Gudkya's credibility and diminished Lacy's
confidence in the relationship. Upon Gudkya's repeated failure to provide adequate assurances,
Lacy took the final self-help action of termination and broke free from an arrangement that was no
longer fulfilling its expectations but only after giving Gudyka ample time to prevent this result.[323] C. The Court's Inadequate Application of Self-Help
Self-help in this relationship kept the
contract together while the performance obligations were unclear, encouraged
communication between the parties, and protected each party's interest in the contract to
the fullest extent possible. Unfortunately, the court's treatment of self-help was flawed. Although the court showed awareness of the self-help doctrine in contract law,[324] it failed
to apply the doctrine properly. Rather than properly analyzing whether either UCC section
2-609 or Restatement section 251 applied [325] to Lacy's termination, the court found Lacy
in breach of contract for terminating Gudyka without just cause.[326] In determining that Lacy was in breach, the court explicitly put the self-help doctrine into play. It
recognized that the "doctrine of conditions" allows a party to a contract to terminate the contract
as a "self-help remedy."[327] However, the court then proceeded to undercut the doctrine in several
ways. Starting from the act of termination, the court determined that this remedy "is only available where termination is in proportion to the 'need' for accountability [page 897] from the breaching party, and where the breach is material rather than 'insignificant'."[328] The district court concluded that under this standard Lacy's loss under the contract was not
sufficiently serious to justify its act of termination.[329] In making this decision, the district court
looked only at Lacy's interest in present performance. The court apparently only considered Lacy's
immediate economic interest in the contract, noting that the amount owed to Lacy by Gudyka was
insignificant compared with amounts Lacy owed Gudyka.[330] On a dollar basis this is an accurate
characterization, but it ignores other non-economic interests, including Lacy's interest in future
performance. For example, the court dismissed without meaningful consideration Lacy's claim that
it suffered a "loss of trust" in Gudyka justifying its termination decision.[331] With no value given to the interest in future performance, the court determined that there was no
justification for termination because the failure to remit was not a material breach.[332] Why did the
. court fail to include the cost of the loss of security in future performance in its calculation of the
magnitude of Gudyka's breach? Some of the fault may lie with Lacy's lawyers, who apparently
failed to convince the court that the loss of security in future performance was a serious harm to
their client.[333] Poor lawyering should not prevent a court from proper application of self-help
doctrine, however. The right to seek adequate assurances recognizes the value of future
performance in every contract and demands that when that interest is impaired it must be included
in an assessment of the materiality of breach. Furthermore, the court should have considered the type of contract involved. The contract was
ongoing, one in which each party depended on the efforts of the other for success. Each party had
a significant interest vested in the other party's present and future behavior.[334] While it is certainly
"proper to consider proportionality in assessing the availability of [self-help],"[335] a court must be
sure to include all interests in the equation. It may be true that the dollar amounts owed by Gudyka
were small, but its non-performance made a statement about its attitude toward the contract.
Despite [page 898] Lacy's repeated inquiries, Gudyka refused to treat the matter seriously and this attitude
understandably caused Lacy alarm. The contract at issue required a high level of trust and
commitment on each side, factors that Gudyka seemed unwilling or unable to fulfill. This factored
heavily into Lacy's calculation of the severity of Gudyka's non-performance and its conclusion that
non-payment was an indicator of future material breach, justifying Lacy in seeking assurances and
terminating the contract when they were not received. The Stanley Gudyka court undermined self-help doctrine by limiting the interests a party is entitled
to seek to protect its economic concerns. It also gave short shrift to the doctrine of seeking
adequate assurances, a remedy Lacy argued unsuccessfully that it had properly invoked.[336] As
previously discussed, the doctrine of adequate assurances is designed to give parties incentive to
communicate their concerns when problems with ]performance arise. Lacy was concerned about
Gudyka's non-performance and communicated this to Gudyka repeatedly.[337] The court
acknowledged these communications but did not treat them as a demand for assurances. Instead
it stated that "Lacy never expressed any urgency about the matter and let it drag on for six months,
thereby condoning [Gudyka's] lackadaisical attitude toward the matter."[338] In effect this was
a determination that Lacy failed to make a sufficiently clear demand for assurances. This
determination is hard to support on the facts and shows the court's lack of appreciation for self-help. Lacy clearly asked about the amounts in question, even going so far as sending an employee
to discuss the matter with Gudyka.[339] There are two possible arguments that these actions did not trigger a duty to respond in Gudyka.
First, under UCC section 2-609, the demand for assurances must be in writing.[340] However, as
noted above, this requirement is not strictly construed.[341] Further, this contract would likely be
covered by the Restatement provision on adequate assurances, which does not require a
writing.[342] The second possible argument that Lacy's actions were not suitable demands for assurance is that
its statements did not unequivocally require assurance of payment.[343] Even assuming that no clear
demand was made (the reported decisions of the case do not [page 899] quote the precise language used), the underlying rationale of self-help suggests that Lacy's actions
were precisely what the law should support. There is no doubt that Gudyka understood from
Lacy's inquiries that Lacy was demanding payment or proof that payment would be forthcoming.
If the court wanted to create more certain guidelines as to the form a demand must take it could
have done so. Instead, the court undermined the utility of self-help by failing to support Lacy's
appropriate behavior. Instead of analyzing whether proper demand for adequate assurances was made, the court found
that Lacy was in breach because it failed to give Gudyka notice of and an opportunity to cure its
breach.[344] This simply does not square with the facts. It seems incredible to conclude there was
inadequate notice and opportunity to cure, since Lacy repeatedly communicated its concerns and
gave Gudyka months to remedy the deficient performance. Lacy did not demand more than was
due under the contract nor impose unreasonable limits on Gudyka's ability to rectify the problem.
Lacy attempted to exercise self-help that would permit each party to have its contractual
expectations fulfilled. By disallowing these actions neither party gained the benefit of the contract. Why was the court reluctant to sanction self-help? In part, the problem may arise from the court's failure to understand the mechanics of self-help as
a cohesive doctrine. Although the court did lend support to the idea of self-help,[345] it failed to
recognize the doctrine in situations where a party seeks to protect its future interest in performance
by clarifying the status of the relationship before a total breakdown occurs. In fairness to the Stanley Gudyka court, it is not alone in its reluctance to accept self-help as a
unified doctrine.[346] This common reluctance is in part due to the lack of clarity found in United
States laws on self-help in the commercial context. Even the UCC, which strongly supports self-help, does not identify it as such, nor does it explain or reference the interrelationship between
various self-help actions. Similarly, the Restatement authorizes self-help but does not do so
explicitly or in a carefully considered manner. Thus far, [page 900] there is little judicial or academic focus on self-help with the result that its role in contract relations
is undervalued. This should not be so. As previously mentioned, self-help can and does play a vital role in
commercial relations. This role is the same regardless of the subject matter of the contract. The
UCC's approach should be extended to all areas of contract law and more explicit recognition of
self-help as a cohesive doctrine should be given. Openly applying self-help uniformly in all areas of contract law would serve several purposes. It would encourage parties to engage in self-help as
its appropriateness becomes more certain. Clarity of treatment aids parties in making informed
decisions that benefit all concerned. Uniform application of self-help would also guide courts,
helping to prevent incorrect post-hoc assessments of contracts by keeping the focus on the disputes
between interested parties. This is not to suggest that an expanded and conscious application of the UCC approach to self-help would eliminate all uncertainty from this area of contract law. As the overview section
indicates, even when the UCC sanctions self-help, parties making determinations about
performance obligations still face risk of a "wrong" decision. We could perhaps go further. As
recognition of the value of encouraging self-help grows and its prevalence is noted, the doctrine
should grow. One useful extension of the doctrine could come from including in American contract
law a version of self-help permitted under the Vienna Sales Convention. With the UCC currently
under revision, it is timely to consider such an addition. Self-help doctrine as articulated in United States law even when appropriately understood and
applied cannot fully eliminate all uncertainty. A PFB making the decision to invoke self-help enters an arena that is dimly lit. A provision that could shed some light on the issue and enhance the self-help doctrine is found in
the United Nations Convention on Contracts for the International Sale of Goods.[347] The Convention [page 901] provides an interesting avenue to reduce some of the remaining uncertainties to parties seeking to clarify the status of their contract through its inclusion of a "Nachfrist" provision.[348] This
provision, modeled on German law,[349] enables the buyer to a contract for the sale of goods to
set an additional final period for performance if the schedule set forth in the contract cannot (or will not) be met.[350] During this additional time period, which must be of "reasonable length,"[351] a
buyer may not resort to any remedy for breach of contract.[352] Thus, under the Nachfrist provision, a buyer is not permitted to suspend performance during the additional time period but
may later recover damages caused by the delay.[353] If the seller has still not performed at the end
of the additional time period, the buyer may be entitled to declare the contract "avoided"
(terminated).[354] If the seller has failed to deliver, avoidance of the contract is automatic upon the
buyer's declaration.[355] If the failure involved any other obligation, it must constitute a "fundamental
breach" of the contract for the buyer's declaration of avoidance to be proper. [356] The Nachfrist provision is comparable to the right to seek adequate assurances,[357] but it goes
further in reducing the risks to a PFB of invoking self-help. Because performance may not be [page 902] suspended during the additional time period,[358] the PFB need not face the risk of a wrongful
suspension. Granted, this may disfavor the PFB by forcing continued performance in the face of
inevitable breach, but that inevitability of breach may justify setting a short additional time period
for performance and so minimize the harm.[359] Requiring continued performance by the PFB reduces the chance that it will be found in breach
at least during the extended time period. Requiring continued performance by the PFB during the
additional time period also furthers the underlying goal of keeping contracts together. It protects
the other party, who has a continuing interest in the PFB's performance, assuming that it intends
to complete its contractual obligations. If performance is rendered during the additional time period
the contract stays intact and each party's expectations are fulfilled. Nachfrist also reduces the risk of the PFB becoming the party in breach by stipulating that
performance is required within the additional time period, rather than assurances of
performance.[360] Although parties may argue over whether performance so tendered complies with
the contract terms, there is less room for uncertainty than exists in determining the effect of
purported assurances.[361] As useful as the Nachfrist provision is, its, application is limited.[362] The provision is only used in
contracts for the sale of goods subject to the Vienna Sales Convention.[363] More importantly, the
Nachfrist provision only permits a party to automatically declare the contract terminated at the
expiration of the additional time period when the breach is the non-delivery of goods.[364] If the
failure is to any other performance problem, termination is allowed only if the failure is a
"fundamental breach."[365] "Fundamental breach," as defined by the Convention, [page 903]
"results in such detriment to the other party as substantially to deprive him of what he is entitled to
expect under the contract, unless the party in breach did not foresee and a reasonable person of
the same kind in the same circumstances would not have foreseen such a result."[366]
The terminology "fundamental breach" is new with the Convention; it has no parallel in any national law. It is a phrase "not fraught with history. It is a fresh legal concept, born from compromise and ... open to interpretation, when it comes to applying the two tests: substantial detriment and unforeseeability."[367] Exhaustive research into the legislative history of the provision indicates that the determination of what is a substantial detriment "is no longer left to the judges' sole and sovereign appreciation, but tied to the expectations of the injured party,"[368] while the unforeseeability element "simply serves to eliminate unreasonable persons."[369]
These definitions suggest that fundamental breach could be interpreted more broadly than material breach.[370] Explicit recognition of the expectations of the injured party could be read to include protection of the interest in future performance such that an impairment of that interest would constitute grounds for avoidance. This expansive interpretation would then justify automatic termination of the PFB's interest if future performance was materially impaired. So interpreted, inclusion of Nachfrist into American self-help doctrine would broaden the availability of self-help.
Making such an inclusion should not prove difficult. A logical introductory step would be inclusion of the provision in the revised UCC.[371] From that springboard, the general sanction of self-help could be extended beyond contracts for the sale of goods. The Nachfrist provision would be a valuable addition to the universe of authorized self-help, because it is carefully structured to serve the underlying principles of protecting each party's interests, encouraging communication, and preserving contracts when possible. It sensibly limits the need for after-the-fact evaluations by third parties and gives the parties who are in the best position to define and protect their interests the ability to do so.
Critics of an expanded use of Nachfrist could argue that it would permit a PFB to convert any trivial breach into a fundamental one and thereby encourage unduly the avoidance of contracts. This result is unlikely for several reasons. First, just as recognition [page 904] of a right to seek adequate assurances did not. lead to widespread abuse of the practice,[372] it is unlikely that approval of the Nachfrist approach would have a deleterious effect. If a PFB invokes Nachfrist to point out trivial defects in performance, the other party could simply remedy them.
Second, expanded use of Nachfrist would be bounded by good faith and reasonableness.[373] Truly trivial defects would not justify its use, and its availability should not readily, encourage harassment by the PFB. Instead, Nachfrist encourages clarity in contracts. It asks the PFB to plainly state what it believes is happening in the relationship and why it has concerns. The other party then has the opportunity to respond, either by correcting performance or by indicating that it does not view the importance of the problem in the same light. These decisions are best made by the parties, if possible. An expanded Nachfrist applicable in all contracts will enable all parties to have the first shot at it.
To see how an expanded Nachfrist could strengthen American self-help doctrine, let us revisit Stanley Gudyka.[374] In that case, the court did not permit self-help (through termination) by Lacy (the PFB) because it failed to properly value the PFB's interest in future performance and failed to recognize the role of seeking adequate assurances. The defective performance in the case concerned Gudyka's failure to remit commission amounts to Lacy in a timely manner. Uncertainty arose over the seriousness of this breach and the harm it caused Lacy. If an expanded Nachfrist provision applied in this case, the level of uncertainty could be reduced.
Using a Nachfrist approach, Gudyka's nonpayment would permit Lacy to protect its expectations in the contract by establishing and notifying Gudyka of an additional time period in which Gudyka must remit amounts due. This is similar to requesting adequate assurances from Gudyka but places a higher burden on Lacy. As the PFB, Lacy, who may choose to terminate the contract, must clearly establish the outside deadline for performance.[375] This signals to Gudyka that Lacy considers the nonpayment important as a statement of Gudyka's attitude toward their relationship and informs Gudyka that failure to remit will lead to contract termination. Thus, the use of Nachfrist clarifies the PFB's belief about the current status of the contract and provides a definite time frame in which the other party can respond. [page 905]
For Gudyka, provision of this information would enable it to make a calculated decision as to whether to remedy its defective performance. It can take simple steps to preserve the relationship by paying or authorizing set-off of the amounts clue. Or, if Gudyka believes Lacy's characterization of the problem and invocation of Nachfrist is wrong, it can do nothing. If it chooses this route Lacy will terminate at the expiration of the additional time period. That termination will be considered justified if the non-payment was a fundamental breach. Lacy's characterization of the breach would be given deference by the court, but would be limited by the requirement of good faith. Therefore Lucy's statements that it doubted Gudyka's commitment to the contract (that its interest in future performance was impaired) would serve as justification for Lacy's terminating the contract if made in good faith.
Finally, Gudyka may be encouraged to take a middle course. If it is not certain of the severity of non-payment Gudyka may re-open dialogue with Lacy, knowing that it has a finite time to resolve the problem without third party interference. When Nachfrist leads to this result it shows its real value as a tool to enhance communications and to preserve the organic solidarity of the contract.
This expanded self-help remedy does not leave a party in Gudyka's position defenseless. If Gudyka truly believed that the non-payment was immaterial, it could behave precisely as it did and do nothing. Its task would then be to convince the court that Lacy did not act in good faith, that the non-payment truly was of no concern, and that Lacy was trying to capitalize on a small transgression to get out of the contract. The effect of an expansive Nachfrist provision is to give the PFB a presumption that the nonperformance was a material breach and to shift the risk of mischaracterization to the breaching party. If use of Nachfrist is premised on good faith, it seems appropriate to place the burden on the breaching party, especially because that party will receive notice that the problem purportedly matters greatly to the PFB.
This assumes the worst case Nachfrist scenario where its invocation is challenged in court. Things may never reach this point. It is very likely that Gudyka, upon being notified by Lacy that it must perform within the additional time period, would either choose to perform or would open negotiation about alternatives if performance was not possible. The likely result "of permitting an expanded application of self-help by using Nachfrist in this non-goods contract would be to keep the contract together. This is the true value supporting self-help. Because Nachfrist encourages communication between the parties and enables them to provide notification of perceived problems, it increases the chances that contracts will remain intact and that each party will have its expectations fulfilled. [page 906]
American contract law has come a long way from the days of total prohibition of self-help. Both the UCC and the Restatement (Second) of Contracts contain provisions authorizing its use. There are signs that the legal community is beginning to recognize the importance of self-help.[376] These are positive steps but more progress is needed. Self-help needs analysis as a cohesive, unified doctrine. Statutes authorizing self-help do not do so explicitly or coherently and are interpreted and applied unevenly. Academic commentary tends to concentrate on theoretical questions concerning where in the "domain of contract" self-help properly belongs. This is fascinating analysis, but offers little guidance to contracting parties seeking to invoke self-help.
Current statutes provide guidance with varying degrees of success. The UCC does an admirable, if incomplete, job, but it is only directly applicable to contracts for the sale of goods. The Restatement, which applies to all contracts, is less successful in its treatment of self-help. One relatively easy step toward enhancement of self-help would be to apply the UCC approach to all contracts. Self-help is equally valuable in goods and non-goods contracts, and consistent application of it would benefit all concerned.[377]
Other approaches would also strengthen self-help. Inclusion of a Nachfrist provision in Article 2 of the UCC would increase availability of information about a party's expectations, encourage rational and efficient contract behavior, and comport with the efforts of the current revision of that Article. Inclusion of a Nachfrist provision is not a radical departure from current doctrine. It simply extends the recognition that when performance problems arise, "the parties should be encouraged to communicate with each other and seek to resolve them without outside intervention."[378] This communication enables the parties to protect their interests under the contract (including the interest in future performance that may be missed by a court) to the fullest extent possible.
Self-help plays a critical ]ole in contract behavior. Its presence should be recognized and care taken to ensure that laws regulating it encourage appropriate behavior. Laws can serve as both a reflection of commercial practices and a structure for the refinement and development of those practices. If our law of self-help is to achieve this goal, the area must receive continued attention and support. [page 907]
FOOTNOTES
* Assistant Professor of Law, University of Denver College of Law.
1. 2 FREDERICK POLLOCK & FREDERIC WILLIAM MAITLAND, THE HISTORY OF ENGLISH LAW 574 (2d ed. 1968).
6. See infra Part I.A
9. U.C.C. §§ 2-101 to -708 (1995).
10. RESTATEMENT (SECOND) OF CONTRACTS (1981). 11. See infra Part III.
12. See infra Part IV.
13. See infra Part V.
16. See infra note 30 and accompanying text. 19. See infra note 30 and accompanying text. 21. Rubin, supra note 7, at 40. 22. 2 POLLACK & MAITLAND, supra note 1, at 169.
25. See id. Pollack and Maitland state: 27. See id. at 2.
31. Rubin, supra note 30, at 114-25. 38. See supra notes 2-3 and accompanying text. 43. IAN R. MACNEIL, THE NEW SOCIAL CONTRACT: AN INQUIRY INTO MODERN
CONTRACTUAL RELATIONS 91 (1980). 44. Id. at 92.
45. E. ALLAN FARNSWORTH & WILLIAM F. YOUNG, CASES AND MATERIALS ON CONTRACTS 20 (5th ed. 1995). 47. Id.
49. See Rosett, supra note 46. at 109 (describing the effects of contract breach). 50. See generally infra Parts II-III. 53. For an in-depth discussion of the "nonjudicial domain," see Rubin, supra note 30. 58. See supra notes 32-49 and accompanying text.
59. See supra text accompanying notes 40-41. 61. See supra notes 30-31 and accompanying text.
63. U.C.C. §§ 2-101 to -708 (1995). 64. RESTATEMENT (SECOND) OF CONTRACTS (1981).
65. U.C.C. § 1-102(2)(a).
69. See infra Part II.A
71. See supra note 8 and accompanying text.
72. See supra note 8 and accompanying text. 74. See Rubin, supra note 30, at 126 (referring to such terms as "dispute-oriented"). 80. See id. at 15-18.
81. See id. at 16.
86. See id. at 20-23.
90. Id. at 61.
92. See Narasimhan, supra note 89, at 67-70 (discussing various outcomes).
98. See supra notes 22-25 and accompanying text. 99. See MARVIN A CHIRELSTEIN, CONCEPTS AND CASE ANALYSIS IN THE LAW
OF CONTRACTS 107 (2d ed. 1993). 100. See id.
104. See Kingston, 99 Eng. Rep. at 437.
107. See supra text accompanying notes 100-01. 109. Kingston, 99 Eng. Rep. at 438. 110. See CHIRELSTEIN, supra note 99, at 107.
112. Kingston, 99 Eng. Rep. at 438. 116. For a discussion of the UCC provisions, see infra Parts III.B, IV.A A condition is customarily an undertaking on one side to do something (Thing One) which, by its
terms, is made a condition to the performance of some corresponding obligation (Thing Two) by
the other party, as where the latter agrees to do Thing Two if the former shall carry out Thing One.
Id. at 461. 120. See 2 FARNSWORTH, supra note 113, § 8.12, at 414.
122. 126 Eng. Rep. 160 (KB. 1777). 124. 2 FARNSWORTH, supra note 113, § 8.12, at 415. 127. Jacob &Youngs, Inc. v. Kent, 129 N.E. 889, 891 (N.Y.1921).
128. See 2 FARNSWORTH, supra note 113, § 8.12, at 417.
131. See 2 FARNSWORTH, supra note 113, § 8.16, at 442. 133. 3A ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS § 704, at 318-19 (1960). 135. Andersen, supra note 118, at 1076. 137. See U.C.C. § 2-102 (limiting the scope of the UCC to "transaction[s] in goods"). 138. See infra Parts III.C, IV.B. 140. 2 FARNSWORTH, supra note 113, § 8.17, at 445-46.
141. See Andersen, supra note 118, at 1123-24. 143. See infra Parts III.B-C, IV.A-B. 145. See Andersen, supra note 118, at 1095. 146. See id.
148. See id. at 1096-97.
150. Id. at 1096 (quoting JOHN RAWLS, A THEORY OF JUSTICE 346 (1971)). 153. See MACNEIL., supra note 43, at 92. 155. U.C.C. § 2-601 (1995).
158. See, e.g., id. § 2-712 (authorizing "cover" as an alternative to termination). 161. See id. § 2-712(1).
163. See id. § 2-712 (1)-(3).
167. 1 WHITE & SUMMERS, supra note 165, § 6-3, at 297.
168. See supra Part III.B.1.a. 170. U.C.C. § 2-717.
173. See id. § 2-712.
180. See supra Part III.B.1.a.
181. See supra Part III.B.1.b.
182. See supra Part III.B.1.c.
183. See supra Part III.B.1.d. 184. See supra notes 155-57 and accompanying text. 189. See U.C.C. § 2-508(1)-(2). 192. See U.C.C. § 2-508(1) (1995).
198. Of course, a subsequent damage award will, in theory. compensate the PFB for this harm. 204. See U.C.C. § 2-706.
208. See id. §§ 2-702 to -705.
210. See id. §§ 2-702(1), -703(a), -705(1).
211. See id. §§ 2-703(b), -705(1). 215. RESTATEMENT (SECOND) OF CONTRACTS § 235(2). 218. RESTATEMENT (SECOND) OF CONTRACTS § 237. 219. See id. § 237 cmt. a.
221. Id. § 241 (quoting the title of section 241). Section 241 provides: (a) the extent to which the injured party will be deprived of the benefit which he reasonably
expected;
224. RESTATEMENT (SECOND) OF CONTRACTS ch. 16 introductory note at 99. 225. Id. § 237. For a discussion of cure under the UCC section 2-508, see supra Part III.B.2.a. 226. RESTATEMENT (SECOND) OF CONTRACTS § 237. 227. Note that the Restatement section 237 does not exactly address such a situation. 228. See supra notes 218-23 and accompanying text. 229. RESTATEMENT (SECOND) OF CONTRACTS § 237 & cmt. a.
230. Id. § 242 (quoting the title of section 242).
231. See id. Section 242 states: (a) those stated in § 241;
232. See supra notes 199-201 and accompanying text. 233. See 2 FARNSWORTH, supra note 113, § 8.23, at 488.
236. James J. White, Eight Cases and Section 251,67 CORNELL L. REV. 841, 841 (1982). 239. Id. § 2-609 cmt. 1.
246. See supra text accompanying notes 43-44.
249. See U.C.C. § 2-609(1) (1995). 252. See id. § 1-203 (imposing a duty of good faith).
253. 6 CORBIN, supra note 133, § 1260, at 36. 256. See 1 WHITE & SUMMERS, supra note 165, § 6-2, at 286.
258. U.C.C. § 2-609(2).
266. See U.C.C. § 2-609(1).
270. U.C.C. § 2-609(4).
274. See supra text accompanying notes 43-45.
275. See Campbell, supra note 247, at 1296. 276. Instead, the first Restatement provided: RESTATEMENT OF CONTRACTS § 280 (1932). However,
the PFB had no avenue by which to seek clarification of the other party's intentions. See id. 277. RESTATEMENT (SECOND) OF CONTRACTS § 251 (1981).
278. See White, supra note 236, at 841. 280. See supra Part IV.A.1.
281. RESTATEIENT (SECOND) OF CONTRACTS § 251 cmt. d.
284. See supra Part IV.A2.
285. RESTATEIENT (SECOND) OF CONTRACTS § 251 cmt. e.
287. RESTATEMENT (SECOND) OF CONTRACTS § 251(2).
289. U.C.C. § 2-609(1).
291. White, supra note 236, at 860. It is important to note here that UCC section 2-609 does not
permit a party faced with a non-material breach to use a failure to give assurances as the basis of
a claim for damages for total breach. U.C.C. § 2-609 cmt. 1. Section 2-609 contemplates that
assurances may be provided in any way that is "adequate" when the breach is immaterial and the
remaining performance obligations are being met. Id. § 2-609 cmt. 5. In this situation, the PFB is
not justified in terminating the contract. Authorizing the PFB to seek assurances when faced with
a non-material breach simply encourages timely, full communication.
293. Professor White believes that, in practice, this difference may not be significant. He states: White, supra note 236, at 860. It may be true that the grounds will be comparable, but the burden placed on the PFB is not. 295. Crespi, supra note 243, at 191. In addition, the New York Court of Appeals recently accepted the following certified question
from the Court of Appeals for the Second Circuit: "Does a party have the right to demand
adequate assurance of future performance ... of a contract governed by New York law, where the
other party is solvent and the contract is not governed by the U.C.C.?" Norcon Power Partners,
L.P. v. Niagara Mohawk Power Corp., 110 F.3d 6, 9 (2d Cir.), certifying questions to 681
N.E.2d 1293 (N.Y. 1997). This presents an important opportunity for New York to recognize the doctrine. 300. 915 F.2d 273 (7th Cir.1990).
302. See id.
303. See id. at 274-75.
305. See id.
306. See id.
307. See id.
308. See id.
309. See id.
310. See id.
311. See id.
312. See id.
314. See id. at 276.
315. See id.
319. See Stanley Gudyka, 915 F.2d at 275.
321. See U.C.C. § 2-609; RESTATEMENT (SECOND) OF CONTRACTS § 251.
322. See Stanley Gudyka, 915 F.2d at 275. 324. See Stanley Gudyka, 915 F.2d at 276. 326. See Stanley Gudyka, 915 F.2d at 277.
328. Id. (citing Casio,.Inc. v. S.M.&R. Co., 755 F.2d 528, 532 (7th Cir. 1985)).
333. See id. at 277 (finding Gudyka's "loss of trust" argument to be without merit). 334. See id. at 274-75 (setting forth the mutually dependent relationship).
336. See id. at 276.
338. Stanley Gudyka Sales Co. v. Lacy Forest Prods. Co., 621 F. Supp. 772, 773 (N.D. Ill.
1985). 339. See Stanley Gudyka, 915 F.2d at 275. 340. U.C.C. § 2-609(1) (1995); see supra Part IV.B.1.
341. See supra note 269 and
accompanying text. 342. RESTATEAIENT (SECOND) OF CONTRACTS § 251 (1981); see supra Part IV.C. 344. See id. at 277.
345. See id. at 276-77.
A similar provision also appears in the International Institute for the Unification of Private Law
(UNIDROIT) Principles. See UNIDROIT PRINCIPLES art. 7.1.5 (1994) (providing for an
"[a]dditional period for performance" with notice). 349. See TREITEL, supra note 26, at 327-34 (discussing Nachfrist under German law). 350. See Vienna Sales Convention, supra note 347, art. 47(1).
352. See id. art. 47(2).
354. Id. art. 49(1)(b).
356. Id. art. 49(1)(a). Although there is little judicial authority interpreting what constitutes a
"fundamental breach," there is some suggestion that the mere act of invoking Nachfrist suggests
to a court that the breach was fundamental. In Roder Zelt-und Hallenkonstruktionen GmbH II.
Rosedown Park Pty Ltd. (1995) (visited Oct. 28, 1998)
<http://cisgw3.law.pace.edu/cases/950428a2.html>, the seller claimed possession of goods when
the buyer failed to make payments. The court found that the buyer was in breach of contract
because interest payments were overdue, but that the breach was not fundamental "in the absence
of notice to perform under Art. 63." Id. This outcome suggests that if Nachfrist is properly used,
the seller's characterization of the breach as fundamental would receive greater deference. 358. See supra text accompanying note 353.
360. See Vienna Sales Convention. supra note 347. art. 47(1).
363. See supra note 347.
364. See Vienna Sales Convention. supra note 347. ari.49(1)(b).
365. Id. art. 49(1)(a); see also supra note 356. 367. BIANCA ET AL.) supra note 359) at 210.
370. For a discussion of the interpretation of material breach) see supra Part II.B.3. 371. The revised UCC is still in draft form, so additional changes are still a possibility. 378. RESTATEMENT (SECOND) OF CONTRACTS introductory note ch. 10 (1981). For a long time law was very weak, and as a matter of fact it could not prevent self-help of the
most violent kind. Nevertheless, at a fairly early stage in its history, it begins to prohibit in
uncompromising terms any and every attempt to substitute force for judgment. Perhaps we may
say that in its strife against violence it keeps up its courage by bold words. It will prohibit utterly
what it cannot regulate. Id.
In determining whether a failure to render or to offer performance is material, the following
circumstances are significant:
(b) the extent to which the injured party can be adequately compensated for the part of that benefit
of which he, will be deprived;
(c) the extent to which the party failing to perform or to offer to
perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking
account of all the circumstances including any reasonable assurances;
(e) the extent to which the behavior of the party failing to perform or to offer to perform. comports
with standards of good faith and fair dealing. Id. In determining the time after which a party's uncured material failure to render or to offer
performance discharges the other party's remaining duties to render performance under the rules
stated in §§ 237 and 238, the following circumstances are significant:
(b) the extent to which it reasonably appears to the injured party that
delay may prevent or hinder him in making reasonable substitute arrangements;
(c) the extent to which the agreement provides for performance without delay, but a material failure
to perform or to offer to perform on a stated day does not of itself discharge the other party's
remaining duties unless the circumstances, including the language of the agreement, indicate that
performance or an offer to perform by that day is important. Id.[I]f one promisor manifests to the other that he cannot or will not ... perform ... or that, though able to do so, he doubts whether he will ... perform[,] ... the other party is justified in changing his position, and if he makes a material change of position he is discharged from the duty of perform[ance]. ...
Section 251 instructs the court to determine not whether there has been material breach, but only
whether the grounds under consideration give [the PFB] basis for believing that a material breach
will occur .... In short, one suspects that the reasonable grounds for insecurity ... will work out to be
the same ....
Pace Law School
Institute of International Commercial Law - Last updated June 27, 2006
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