E.I. Du Pont de Nemours Powder Co. v. Schlottman
218 F. 353 (1914)
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Rule of Law:
When a contract includes a contingent payment that depends on a condition within one party's control, a promise to allow that condition to be tested in good faith is implied. If that party's actions make it impossible for the condition to occur, they cannot use the failure of the condition to escape their obligation and may be liable for damages.
Facts:
- In July 1908, Grubb was negotiating to sell the Pittsburgh Fuse Company to the Du Pont Powder Company.
- On July 20, 1908, Du Pont's president, T. C. Du Pont, sent Grubb a letter promising an additional $25,000 in stock if, after operating the company for one year, Du Pont judged the property to be worth $175,000 and it met certain production criteria.
- On July 24, 1908, the parties executed a formal agreement for the sale of the Fuse Company to Du Pont for $150,000 in Du Pont stock.
- Grubb delivered the Fuse Company stock, and the Du Pont Company transferred its stock to Grubb as agreed.
- The Du Pont Company operated the fuse plant for approximately six months.
- Before the one-year period concluded, the Du Pont Company sold the plant to a third party.
- The new owner dismantled the plant, making the one-year performance test described in the letter impossible.
Procedural Posture:
- The plaintiff, as assignor for Grubb, sued the Du Pont Powder Company in a federal trial court.
- At the conclusion of the trial, both parties moved for a directed verdict.
- The trial court judge directed a verdict in favor of the plaintiff for $25,000.
- The defendant, Du Pont Powder Company, appealed the trial court's judgment to the U.S. Circuit Court of Appeals.
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Issue:
Does a contract conditioning an additional payment on the outcome of a one-year performance test, to be conducted by the buyer, create an implied promise by the buyer to operate the business for that one-year period to allow the test to occur?
Opinions:
Majority - Ward, Circuit Judge
Yes, a contract conditioning a future payment on a performance test creates an implied promise to conduct that test. The court held that the letter and the formal sale agreement should be read together as one contract. This agreement implicitly included a promise by the Du Pont Company to operate the plant for one year to allow the specified valuation test to occur; this implied promise was part of the consideration for Grubb's sale of the stock. Because Du Pont made performance of this test impossible by selling and allowing the plant to be dismantled, the plaintiff is not left without a remedy. When a party prevents a condition for valuation from occurring, the value may be determined by other means, and the plaintiff can recover damages in money.
Analysis:
This decision reinforces the doctrine of implied covenant of good faith and fair dealing, ensuring that a party cannot exploit a condition precedent to evade a contractual duty. It establishes that courts can infer promises necessary to give effect to the parties' intentions, even if not explicitly stated. The case is significant for applying the 'prevention doctrine,' where a party who prevents a condition's fulfillment is treated as if the condition occurred. This allows the non-breaching party to prove damages through alternative means, such as by showing the 'quantum valebat' (what it is worth), rather than being denied recovery entirely.
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