Question

After lengthy telephone negotiations, Bernstein and Metal Manufacturers (MM) entered into an agreement whereby MM agreed to sell Bernstein 20,000 pounds of nickel cathodes at $4.60 per pound. To secure the deal, Bernstein promised to send MM a check for $20,000, which MM was to hold in escrow until the nickel cathodes were ready for shipment. About a month later, Bernstein sent a letter confirming the oral negotiations and enclosed a $20,000 check as a “good faith deposit”. Bernstein also indicated in his letter that the check was to be held in escrow awaiting preparation of the nickel cathodes. When MM attempted to deposit Bernstein’s $20,000 check in an escrow account, it was rejected by the bank because Bernstein had stopped payment on it. MM immediately ceased production of the nickel cathodes. Subsequently, Bernstein purchased 20,000 pounds of nickel cathodes on the open market at a price substantially higher than the price it had contracted to pay MM. Bernstein then sued to recover this difference in price. What argument does MM have to defend against Bernstein’s suit? Who will succeed?

Answer 1

Solution :

An Escrow is a financial arrangement wherein, a third party holds & regulates payment of funds required for the two parties involved. It basically is a transaction which tries to reduce uncertainty of not performing an obligation.

Here, in this case Bernstein had sent a letter confirming oral negotiations, wherein they had agreed that Bernstein will send a check of $20000 to MM which MM was to hold in escrow untill nickel cathodes were ready for shipment.Bernstein had also indicated in the letter that the check was to be held in escrow awaiting nickel cathodes preparation. Hence, the seller MM was responsible to not encash that check untill the nickel cathodes were ready for shipment. Subsequently when the MM deposited the check in the escrow account, it was rejected by bank because Bernstein had stopped payment on it. Due to such uncertainty occuring, MM ceased production of nickel cathodes. Thereafter, Bernstein purchased those goods in open market at a higher price and sued MM to recover the price difference.

Here, Bernstein had actually stopped payment initially which was duly deposited by MM in escrow. MM has the following arguments to defend against the suit :

1. The payment was stopped at the time of deposit of cheque in escrow hence he stopped production as a prudent thinking.

2. As per the agreement entered into, Bernstein had violated it.

3. That MM has actually acted on prudently as there was no certainty of contract to be performed and funds to be recovered after stop payment order. And also he has no security deposit to perform production and complete sale.. Hence, no obligation arised on his part to pay price difference.

Here, in this contract no money has been secured. Seller will always see for his safety by securing his receivables. Which was not made in this case. By stopping payment, buyer has actually given a sign that he is not performing further hence the question of paying price difference to the buyer does not arise.

MM will succeed.