Express Conditions
Chapter 23: Express Conditions
Read R2d § 224. There is no specific corollary in the UNIDROIT Principles.
If there is one contract law concept that is used everyday in the practice of law, it is express conditions. Express conditions, and their close relatives, events of default and remedies, are what put "teeth" in contracts and protect clients each step along the way as a deal progresses. The beauty of express conditions is their simplicity---properly drafted, they are like a club; crude, perhaps, but effective. If x, then y; if not x, then no y, [and then z].
To be effective, conditions must be carefully drafted and integrated into the rest of the contract. First, one must take care to clearly draft the condition so its terms are clear. Conditions generally trigger duties (found in clauses using the verb "shall") or rights (found in clauses using the word "may"). The reader of the contract must be able to determine when the condition is satisfied and, if it is satisfied or not, what consequences follow. Historically, conditions have not been favored by the law and have been strictly construed against the party attempting to rely on one, particularly if that party drafted the agreement. Thus, precise word choice is key.
In most contract negotiations, one party will seek to include many conditions, especially conditions to closing or to other points at which substantial rights are transferred or vest, and the other party will try to limit the number of conditions to the absolute minimum. For example, in a purchase and sale agreement like the one in the Introduction to this text, the seller will try to limit the conditions to closing to as few objective conditions as possible, such as any needed third party approvals and the lack of any prohibitory injunction or other adverse ruling by governing bodies. By doing so, the seller is seeking to lock the buyer into the deal and allow as little wiggle room as possible to avoid having the buyer back out (or threaten to do so unless they receive better terms and additional consideration).
The buyer, on the other hand, will want to build in as many conditions, and to keep these conditions as subjective and dependent upon the buyer's own judgment, as possible. By doing so, the buyer can more easily walk 640 away if due diligence1 reveals that things are other than as expected or, alternatively enjoy the opportunity to later renegotiate terms in exchange for a waiver of the condition. For example, buyers may seek to include the condition that due diligence will conclude with satisfactory results as judged by the buyer "in its sole discretion." This sort of condition can also be framed as "lack of material adverse change" condition to closing. See generally In re IBP, Inc. Shareholders Litig., 789 A.2d 14 (Del. Ch. 2001) (refusing to allow party to invoke a material adverse change provision to cancel merger and discussing case law regarding similar provisions). In such a clause it is important to define what "material" and "adverse" and even "change" means and who determines whether the condition has been met. To the extent that vagueness remains, it should be vagueness in favor of your client, not the other side.
Parties can waive and courts can ignore conditions. Contracts are often full of clauses providing that a party's failure to act or enforce a right or remedy shall not be deemed to be a waiver of that right, and that any waiver of a current right shall not be a waiver of any other right or a future incidence of the same right.
Thus, express conditions are some of the most important tools that lawyers use to protect their clients' interests. They are not foolproof, however, as a court must be willing to enforce them. The case that follows demonstrates how effective they can be when strictly enforced.
Dove v. Rose Acre Farms
Court of Appeals of Indiana 434 N.E.2d 931 (1982)
Neal, Judge.
[1]Plaintiff-appellant Mark Dove (Dove) appeals a negative judgment of the Decatur Circuit Court in favor of defendant-appellee Rose Acre Farms, Inc. in a trial before the court without the intervention of a jury.
We affirm.
Statement of the Facts
[2]The evidence most favorable to support the judgment and the facts found specially by the trial court are as follows. Dove had been employed by Rose Acre Farms, operated by David Rust (Rust), its president and principal owner, in the summers and other times from 1972 to 1979. The 641 business of Rose Acre was the production of eggs, and, stocked with 4,000,000 hens and staffed with 300 employees, it produced approximately 256,000 dozen eggs per day. Rust had instituted and maintained extensive bonus programs, some of which were for one day only, or one event or activity only. For example, one bonus was the white car bonus; if an employee would buy a new white car, keep it clean and undamaged, place a Rose Acre sign on it, commit no tardiness or absenteeism, and attend one management meeting per month, Rose Acre would pay \$100 per month for 36 months as a bonus above and beyond the employee's regular salary, to apply on payments. Any slight violation, such as being a minute late for work, driving a dirty or damaged car, or missing work for any cause, would work a forfeiture of the bonus. Other bonuses consisted of egg production bonuses, deed conversion bonuses, house management bonuses, and a silver feather bonus. This last bonus program required the participant to wear a silver feather, and a system of rewards and penalties existed for employees who participated. While the conditions of the bonuses varied, one condition existed in all bonus programs: during the period of the bonus, the employee must not be tardy for even a minute, and must not miss work any day for any cause whatever, even illness. If the employee missed any days during the week, he was sometimes permitted to make them up on Saturday and/or Sunday. Any missed work not made up within the same week worked a forfeiture of the bonus. These rules were explained to the employees and were stated in a written policy. The bonus programs were voluntary, and all the employees did not choose to participate in them. When a bonus was offered a card was issued to the participant stating his name and the terms and amount of the bonus. Upon completion of the required tasks, the card was attached to the pay sheet, and the bonus was added to the paycheck. Rust was strict about tardiness and absenteeism, whether an employee was on a bonus program or not. If an employee was tardy, his pay would be docked to the minimum wage, or he would be sent home and lose an entire day. A minute's tardiness would also deprive the employee of a day for purposes of seniority. As was stated in the evidence, bonuses were given for the "extra mile" or actions "above and beyond the call of duty." The purpose of the bonus programs and penalties was to discourage absenteeism and tardiness, and to promote motivation and dependability.
[3]In June 1979, Rust called in Dove and other construction crew leaders and offered a bonus of \$6,000 each if certain detailed construction work was completed in 12 weeks. As Dove conceded in his own testimony, the bonus card indicated that in addition to completing the work, he would be required to work at least five full days a week for 12 weeks to qualify for the bonus. On the same day Dove's bonus agreement, by mutual consent, was amended to ten weeks with a bonus of \$5,000 to enable him to return to law school by September 1. Dove testified that there was no ambiguity in the agreement, and he understood that to qualify for the bonus he would 642 have to work ten weeks, five days a week, commencing at starting time and quitting only at quitting time. Dove testified that he was aware of the provisions concerning absenteeism and tardiness as they affected bonuses, and that if he missed any work, for any reason, including illness, he would forfeit the bonus. The evidence disclosed that no exception had ever been made except as may have occurred by clerical error or inadvertence.
[4]In the tenth week Dove came down with strep throat. On Thursday of that week he reported to work with a temperature of 104 degrees, and told Rust that he was unable to work. Rust told him, in effect, that if he went home, he would forfeit the bonus. Rust offered him the opportunity to stay there and lay on a couch, or make up his lost days on Saturday and/or Sunday. Rust told him he could sleep and still qualify for the bonus. Dove left to seek medical treatment and missed two days in the tenth week of the bonus program.
[5]Rust refused Dove the bonus based solely upon his missing the two days of work. While there was some question of whether the construction job was finished, Rust does not seem to have made that issue the basis of his refusal. Bonuses to other crew leaders were paid. The trial court denied Dove's recovery and, in the conclusions of law, stated that Dove had not shown that all of the conditions of the bonus contract had been met. Specifically, Dove failed to work five full days a week for ten weeks.
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[6]Dove argues that the bonus agreement was implemented to (1) insure his presence on the construction site, and (2) cut the cost of construction through maximum production by workers. He next contends that Rose Acre got what it bargained for, that is, the completion of the project. He argues that he was present on the job, including the hours he worked late, at least 750 hours during the ten weeks, while regular working hours would amount to only 500 hours. Therefore, he concludes, there was substantial compliance with the agreement, and he should not be penalized because he failed to appear on the last two days because of illness. Rust disputes that Dove worked any significant amount of overtime.
[7]Investigation of authority in bonus situations reveals that a bonus arrangement is contractually enforceable where it is shown that an employee has done or has foregone something which he was not otherwise obligated to do or forego. However, Rose Acre does not contest the existence of a valid bonus contract. It defends its judgment on the grounds that the conditions designated in the contract were not fulfilled because Dove did 643 not work five days a week for ten weeks. It is stated in 56 C.J.S. Master and Servant sec. 98:
An employee is not entitled to a bonus until after the time stipulated in the contract for its payment, or until other conditions designated in the contract for its payment have been fulfilled, in the absence of evidence establishing a modification or waiver of the conditions, and unless the nonfulfillment is due to the employer's act or omission.
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[8]We are constrained to observe, in the case before us, that the bonus rules at Rose Acre were well known to Dove when he agreed to the disputed bonus contract. He certainly knew Rust's strict policies and knew that any absence for any cause whatever worked a forfeiture of the bonus. With this knowledge he willingly entered into this bonus arrangement, as he had done in the past, and he must be held to have agreed to all of the terms upon which the bonus was conditioned. If the conditions were unnecessarily harsh or eccentric, and the terms odious, he could have shown his disdain by simply declining to participate, for participation in the bonus program was not obligatory or job dependent.
[9]Contrary to Dove's assertion that completion of a task was the central element of the bonus program, we are of the opinion that the rules regarding tardiness and absenteeism were a central theme. Rust stated that the purpose of the bonus program was to discourage tardiness and absenteeism and to promote motivation and dependability. Indeed, some of the bonus programs such as the white car bonus and the silver feather bonus were apparently an effort on the part of Rust to establish among the employees an identity with Rose Acre and to create an esprit de corps. The direct tangible benefits to Rose Acre would be unmeasurable, and the burden upon the employees would be equally unmeasurable. Yet, Rust was willing to pay substantial bonuses in the implementation of his program, and the employees, including Dove, were quite as willing to take the money.
[10]No fraud or bad faith has been shown on the part of Rose Acre, and no public policy arguments have been advanced to demonstrate why the bonus contract should not be enforced as agreed between the parties. We are not at liberty to remake the contract for the parties.
Notes and Questions
1.Lest you have the impression that Rose Acre Farms is a small operation run by quirky Farmer Rust and that this sort of thing would never happen in a commercial operation, think again. Rose Acre Farms, Inc. began as a single-layer hen farm with 1,800 hens, and today is a highly integrated 644 table egg production system with multiple eight-layer hen farms and millions of hens. It is one of the largest egg producers in the United States. See Rose Acre Farms v. United States, 55 Fed. Cl. 643, 647 (2003).
2.Take a look at R2d § 229. Does that section suggest that the court should or could have reached a different result?
Howard v. Federal Crop Insurance Corp.
United States Court of Appeals, Fourth Circuit 540 F.2d 695 (1976)
Widener, Circuit Judge:
[1]Plaintiff-Appellants sued to recover for losses to their 1973 tobacco crop due to alleged rain damage. The crops were insured by the defendant-appellee, Federal Crop Insurance Corporation (FCIC). Suits were brought in state court in North Carolina and removed to the United States District Court. The three suits are not distinguishable factually so far as we are concerned here and involve identical questions of law. They were combined for disposition in the district court and for appeal. The district court granted summary judgment for the defendant and dismissed all three actions. We remand for further proceedings. Since we find for the plaintiffs as to the construction of the policy, we express no opinion on the procedural questions.
[2]FCIC, an agency of the United States, in 1973, issued three policies to the Howards, insuring their tobacco crops, to be grown on six farms, against weather damage and other hazards.
[3]The Howards (plaintiffs) established production of tobacco on their acreage, and have alleged that their 1973 crop was extensively damaged by heavy rains, resulting in a gross loss to the three plaintiffs in excess of \$35,000. The plaintiffs harvested and sold the depleted crop and timely filed notice and proof of loss with FCIC, but, prior to inspection by the adjuster for FCIC, the Howards had either plowed or disked under the tobacco fields in question to prepare the same for sowing a cover crop of rye to preserve the soil. When the FCIC adjuster later inspected the fields, he found the stalks had been largely obscured or obliterated by plowing or disking and denied the claims, apparently on the ground that the plaintiffs had violated a portion of the policy which provides that the stalks on any acreage with respect to which a loss is claimed shall not be destroyed until the corporation makes an inspection.
[4]The holding of the district court is best capsuled in its own words:
The inquiry here is whether compliance by the insured with this provision of the policy was a condition precedent to the recovery. 645 The court concludes that it was and that the failure of the insured to comply worked a forfeiture of benefits for the alleged loss.2
[5]There is no question but that apparently after notice of loss was given to defendant, but before inspection by the adjuster, plaintiffs plowed under the tobacco stalks and sowed some of the land with a cover crop, rye. The question is whether, under paragraph 5(f) of the tobacco endorsement to the policy of insurance, the act of plowing under the tobacco stalks forfeits the coverage of the policy. Paragraph 5 of the tobacco endorsement is entitled Claims. Pertinent to this case are subparagraphs 5(b) and 5(f), which are as follows:
5(b)It shall be a condition precedent to the payment of any loss that the insured establish the production of the insured crop on a unit and that such loss has been directly caused by one or more of the hazards insured against during the insurance period for the crop year for which the loss is claimed, and furnish any other information regarding the manner and extent of loss as may be required by the Corporation.
5(f)The tobacco stalks on any acreage of tobacco of types 11a, 11b, 12, 13, or 14 with respect to which a loss is claimed shall not be destroyed until the Corporation makes an inspection.
[6]The arguments of both parties are predicated upon the same two assumptions. First, if subparagraph 5(f) creates a condition precedent, its violation caused a forfeiture of plaintiffs' coverage. Second, if subparagraph 5(f) creates an obligation (variously called a promise or covenant) upon plaintiffs not to plow under the tobacco stalks, defendant may recover from plaintiffs (either in an original action, or, in this case, by a counterclaim, or as a matter of defense) for whatever damage it sustained because of the elimination of the stalks. However, a violation of subparagraph 5(f) would not, under the second premise, standing alone, cause a forfeiture of the policy.
[7]Generally accepted law provides us with guidelines here. There is a general legal policy opposed to forfeitures. When it is doubtful whether words create a promise or a condition precedent, they will be construed as creating a promise. The provisions of a contract will not be construed as conditions precedent in the absence of language plainly requiring such construction.
646 [8]Plaintiffs rely most strongly upon the fact that the term "condition precedent" is included in subparagraph 5(b) but not in subparagraph 5(f). It is true that whether a contract provision is construed as a condition or an obligation does not depend entirely upon whether the word "condition" is expressly used. However, the persuasive force of plaintiffs' argument in this case is found in the use of the term "condition precedent" in subparagraph 5(b) but not in subparagraph 5(f). Thus, it is argued that the ancient maxim to be applied ["expressio unis, exclusio alterus," in Latin.---Eds.] is that the expression of one thing is the exclusion of another.
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[9]The Restatement of the Law of Contracts states:
Section 261.INTERPRETATION OF DOUBTFUL WORDS AS PROMISE OR CONDITION.
Where it is doubtful whether words create a promise or an express condition, they are interpreted as creating a promise; but the same words may sometimes mean that one party promises a performance and that the other party's promise is conditional on that performance.
[The comparable provision in the Restatement (Second) is § 227. Read it carefully and make sure you understand what it means.---Eds.] Two illustrations (one involving a promise, the other a condition) are used in the Restatement:
2.A, an insurance company, issues to B a policy of insurance containing promises by A that are in terms conditional on the happening of certain events. The policy contains this clause: "provided, in case differences shall arise touching any loss, the matter shall be submitted to impartial arbitrators, whose award shall be binding on the parties." This is a promise to arbitrate and does not make an award a condition precedent of the insurer's duty to pay.
3.A, an insurance company, issues to B an insurance policy in usual form containing this clause: "In the event of disagreement as to the amount of loss it shall be ascertained by two appraisers and an umpire. The loss shall not be payable until 60 days after the award of the appraisers when such an appraisal is required." This provision is not merely a promise to arbitrate differences but makes an award a condition of the insurer's duty to pay in case of disagreement.
[10]We believe that subparagraph 5(f) in the policy here under consideration fits illustration 2 rather than illustration 3. Illustration 2 specifies something to be done, whereas subparagraph 5(f) specifies something not to be done. Unlike illustration 3, subparagraph 5(f) does not 647 state any conditions under which the insurance shall "not be payable," or use any words of like import. We hold that the district court erroneously held, on the motion for summary judgment, that subparagraph 5(f) established a condition precedent to plaintiffs' recovery which forfeited the coverage.
[11]From our holding that defendant's motion for summary judgment was improperly allowed, it does not follow the plaintiffs' motion for summary judgment should have been granted, for if subparagraph 5(f) be not construed as a condition precedent, there are other questions of fact to be determined. At this point, we merely hold that the district court erred in holding, on the motion for summary judgment, that subparagraph 5(f) constituted a condition precedent with resulting forfeiture.
[12]The explanation defendant makes for including subparagraph 5(f) in the tobacco endorsement is that it is necessary that the stalks remain standing in order for the Corporation to evaluate the extent of loss and to determine whether loss resulted from some cause not covered by the policy. However, was subparagraph 5(f) inserted because without it the Corporation's opportunities for proof would be more difficult, or because they would be impossible? Plaintiffs point out that the Tobacco Endorsement, with subparagraph 5(f), was adopted in 1970, and crop insurance goes back long before that date. Nothing is shown as to the Corporation's prior 1970 practice of evaluating losses. Such a showing might have a bearing upon establishing defendant's intention in including 5(f). Plaintiffs state, and defendant does not deny, that another division of the Department of Agriculture, or the North Carolina Department, urged that tobacco stalks be cut as soon as possible after harvesting as a means of pest control. Such an explanation might refute the idea that plaintiffs plowed under the stalks for any fraudulent purpose. Could these conflicting directives affect the reasonableness of plaintiffs' interpretation of defendant's prohibition upon plowing under the stalks prior to adjustment?
[13]We express no opinion on these questions because they were not before the district court and are mentioned to us largely by way of argument rather than from the record. No question of ambiguity was raised in the court below or here and no question of the applicability of paragraph 5(c) to this case was alluded to other than in the defendant's pleadings, so we also do not reach those questions. Nothing we say here should preclude FCIC from asserting as a defense that the plowing or disking under of the stalks caused damage to FCIC if, for example, the amount of the loss was thereby made more difficult or impossible to ascertain whether the plowing or disking under was done with bad purpose or innocently. To repeat, our narrow holding is that merely plowing or disking under the stalks does not of itself operate to forfeit coverage under the policy.
648 [14]The case is remanded for further proceedings not inconsistent with this opinion.
VACATED AND REMANDED.
Notes and Questions
1.This case illustrates an important principle of drafting: Never use different phrases to convey the same meaning. If you make even the smallest change, it may (in fact, it should) be interpreted as an indication you mean something different than what you meant when you used similar language in another part of the document.
2.An article on the front page of The Wall Street Journal on May 5, 2003, entitled Abuses Plague Crop Insurance, discussed the problem of fraud in the federal crop insurance program. A headline said the "system is proving easy to fool." It described one farmer alleged to have defrauded the government out of at least \$4 million.
3.Redraft Paragraph 5(f) to make sure the government doesn't have to pay if a farmer destroys the tobacco stalks.
On Transactional Practice
To understand how practicing lawyers use conditions to make sure their clients get what they bargain for, it helps to understand how large sales, mergers, and the like are actually structured. The best way to start is by understanding how a typical sale of a single-family home is handled.
A Typical Residential Real Estate Sale
The first step is for the buyer and the seller to enter into a contract for the purchase and sale of the property. The contract will have certain conditions precedent to the obligations of the parties. Because these contracts are usually drafted by real estate brokers or by unsophisticated lawyers, they will typically use language such as "this contract is subject to the following contingencies." The contract will then list conditions precedent such as the buyer obtaining a loan, the buyer selling her present home, inspections showing the property free from physical defects, termites, etc.
If the contract is well-drafted, it will label the conditions as "conditions precedent" rather than as "contingencies," and it will list separately those conditions that are conditions precedent to the buyer's obligation to purchase the property and those conditions that are conditions precedent to the seller's obligation to sell the property. This is the approach used in the Asset Purchase Agreement in the Introduction. It will also spell out 649 which conditions may be waived, by whom they may be waived, and how a waiver is to be documented. The contract should also say whose duty it is to make sure the conditions are satisfied and how that person can go about satisfying that duty.
A poorly-written contract might say:
This contract is subject to Buyer's ability to obtain satisfactory financing.
A thorough contract would say:
Buyer's obligation to purchase is subject to the condition precedent that within thirty days of the date of this agreement Buyer shall have obtained from a financial institution satisfactory to Buyer (in Buyer's reasonable discretion) a loan in an amount of not less than \$300,000 with a term of not less than 20 years, an interest rate of not more than 7% per annum, closing costs of not more than \$6,000 and other terms and conditions satisfactory to Buyer (in Buyer's reasonable discretion). This condition is solely for the benefit of Buyer and may be waived by Buyer. Within seven days after the date of this Agreement, Buyer shall make application to at least four financial institutions making loans of the type described above in the area in which the property is located. If Buyer shall fail to make such applications or fail to cooperate in the approval process, Buyer shall be deemed to have waived this condition.
The contract can go on in even more detail, but you get the idea. Exactly how much detail the contract will have will depend on a number of factors: how much money is involved, how much the client is willing to pay, how much detail the other parties to the transaction are willing to put up with, how much the parties trust each other, how much detail is customary in similar transactions in this particular area, etc.
Once the contract has been signed, the parties will open an escrow. An escrow is a transactional device for holding instruments, other documents, and money while the conditions are being satisfied. Essentially, to satisfy conditions, consideration, documents, instruments and the like are given to the escrow holder and, when all conditions to the "close of escrow" have been met, the escrow agent distributes the contents of the escrow to the appropriate parties. In a residential and estate transaction, the seller (or the seller's bank) gets the money and the buyer gets the deed to the house. In some parts of the country there are businesses that specialize in holding escrows. In others, persons involved in the deal may act as escrow holders.
Each party to the transaction will deliver money and/or documents to the escrow holder together with "escrow instructions," which are in reality themselves contracts between that party and the escrow holder. The 650 seller's escrow instructions will be the simplest. The seller will give the escrow holder a deed conveying the property to the buyer. The seller's escrow instructions will tell the escrow holder that the escrow holder may file the deed with the appropriate office (in effect transferring title to the property to the buyer) if the escrow holder holds a certain sum of money for delivery to the seller. (This sum will normally be the purchase price less the "closing costs" to be paid by the seller.) The buyer will deliver to the escrow holder the purchase price with instructions that the escrow holder may deliver that money to the seller when certain conditions spelled out in the escrow instructions have been satisfied. These conditions will be based on the conditions in the purchase agreement. For example, there might be a condition that the escrow holder has received a report from a licensed pest control operator showing that the property is free from termites. Alternatively, the condition might be phrased to require a letter from the buyer saying that the buyer has received satisfactory assurances that there are no termites. The sale contract will almost always provide that the seller is to deliver clear title to the property, free of any liens or encumbrances except those the buyer has agreed to. This may be implemented in the escrow instructions through a condition requiring the escrow holder to have a commitment from a title insurance company to issue an insurance policy in effect guaranteeing that the buyer will (upon recording of the deed) have that clear title to the property.
Often there will be mortgages involved, and that will complicate things a little more. Typically, the seller has a mortgage on the property and that mortgage will be paid off as part of the transaction. The holder of that mortgage will deliver to the escrow holder a document releasing the mortgage along with instructions telling the escrow holder that the escrow holder's right and duty to record the release (i.e., to make the release effective) are subject to the condition precedent that the escrow holder "is in a position" to pay the mortgage holder the money due it on the loan secured by the mortgage.
Similarly, the buyer will normally be borrowing money to buy the property, and that loan will be secured by a new mortgage to be recorded against the property. The new lender will deliver to the escrow holder the loan proceeds (the money), with instructions that it can pay them to the old lender and/or the seller, as appropriate, subject to the condition precedent that it is in a position to record the mortgage in favor of the new lender and that a title insurance company is in a position to guarantee the priority of the new mortgage.
When all of the conditions set out in everybody's escrow instructions have been satisfied, the escrow "closes." The escrow holder delivers all the money and documents to the appropriate places and has no more duties. This is where the phrase "to close a deal" comes from. Business people, particularly brokers, claim to have "closed" the deal when they have an 651 agreement with the other party, but lawyers know the deal isn't really done until the definitive deal documents have been signed, due diligence is complete, all of the conditions have been satisfied, the requisite filings have been made, and escrow has been closed. This reflects tension between lawyers and brokers. Brokers figure they're entitled to a commission as soon as they get the buyer and the seller to shake hands, while lawyers know that a lot of escrows never close because the buyer can't get financing or because an unknown toxic waste dump is found on the property, or for one of a hundred other reasons. Brokers see these things as "technicalities" conjured up by "deal-killing lawyers."
Bigger Deals
The "house closing," as this sort of transaction is often called, is the model for all sorts of large and complex business deals. For instance, when two corporations merge, they will go through the same process. There will be an initial contract where the heads of the two corporations agree to merge and there will be closing when all the conditions precedent in the initial agreement have been satisfied and the two companies actually become one. The initial agreement will often have (literally) dozens of conditions precedent to the closing and the parties' obligation to merge. These will include approval of the requisite percentage of shareholders of each corporation (as required by the by-laws or the corporate laws of the relevant jurisdiction), approval of governmental authorities, satisfaction of each corporation that the business and financial condition of the other is as was represented at the time they made the agreement, opinion letters from corporate attorneys to the effect that the merger is legal and has been validly documented, opinion letters from tax attorneys as to the tax consequences of the merger, etc. When both sides conclude that the conditions are satisfied or have been waived, they will have a ceremony called a "closing" in which the documents effecting the merger are signed and delivered. They call it a "closing" after the escrow closing, even though there may be no actual escrow. Often the closing is also a negotiating session in which business people and lawyers, short-tempered from lack of sleep, hammer out and document last-minute details.
652 Appeal of Edwin J. Schoettle Co.
Supreme Court of Pennsylvania 390 Pa. 365, 134 A.2d 908 (1957)
Benjamin R. Jones, Justice.
[1]This is an appeal from a judgment entered upon an arbitrator's award in a proceeding under the Act of 1957.3
[2]In June 1954 the Edwin J. Schoettle Co., a Pennsylvania corporation, and its six subsidiaries were available for purchase. Lester L. Kardon, interested in purchasing the company and five of its subsidiaries, opened negotiations for that purpose. The negotiations extended from June 24, 1954 to September 17, 1954, on which latter date the parties entered into a written agreement under the terms of which Kardon4 (hereinafter called the buyer) purchased all the issued and outstanding capital stock of Schoettle Co. and all its subsidiaries (hereinafter called sellers). The total purchase price set forth in the agreement of sale (excluding certain real estate) was \$2,100,000 of which amount \$187,863.60 was set aside under paragraph 11 of the agreement to be held by the Provident Trust Company of Philadelphia as escrow agent to indemnify the buyer against "the liabilities of sellers by reason of any and all provisions of this agreement."
[3]The present litigation arises from the fact that the buyer has presented a claim against the escrow fund for \$69,998.42 as a "liability" of the seller under the agreement. Payment of this claim having been disputed by the sellers, both parties, under the provisions of the agreement, submitted to arbitration and Judge Gerald F. Flood was selected as arbitrator. On October 26, 1956 Judge Flood, as arbitrator, and, after hearing, awarded to the buyer \$3,182.88.5 Buyer's motion to correct the arbitrator's award was dismissed by the Code of Common Pleas No. 6 of Philadelphia County and judgment was entered in the amount of \$3,182.88 in conformity with the arbitrator's award. From that judgment this appeal ensued.
[4]The resolution of this controversy depends upon the interpretation of certain portions of the 25-page written agreement of 653 September 17, 1954. The pertinent portions of this agreement are paragraphs 5(g), 9(a), 9(b), 9(c), 10(d), and 15, which read as follows:
5.Representations and Warranties.
Sellers represent and warrant as follows: [Emphasis supplied.]
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5(g)Absence of certain changes. Since June 30, 1954, there have not been (i) any changes in Company's or its subsidiaries' financial condition, assets, liabilities, or businesses, other than changes in the ordinary course of business, none of which have been materially adverse, and changes required or permitted hereunder; (ii) any damage, destruction, or loss, whether or not covered by insurance, materially and adversely affecting the properties or businesses of Company and its subsidiaries as an entirety; (iii) any declaration, or setting aside, or payment of any dividend or other distribution in respect of Company's capital stock or that of any subsidiary (except that prior to the date hereof, Company has declared and paid a dividend of Sixteen and Two Thirds Cents (\$0.16 2/3) per share on all issued and outstanding shares of its said capital stock), or any direct or indirect redemption, purchase, or other acquisition of any such stock; or (iv) any increase in the compensation payable or to become payable by Company or any subsidiary to any of their officers, employees, or agents, or any bonus payment or arrangement made to or with any of them.
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9.Conditions precedent.
All obligations of Buyer under this agreement are subject to the fulfillment, prior to or at the closing of each of the following conditions: [Emphasis supplied.]
(a)Financial condition at closing. As of the time of closing the financial condition of the Company and its subsidiaries in the aggregate shall be no less favorable than the financial condition shown on the statements of said corporations dated June 30, 1954 and warranted to be true and complete in paragraph 5(e) hereof.
(b)Representations and warranties true at closing. Sellers' representations and warranties contained in this agreement shall be true at the time of closing as though such representations and warranties were made at such time.
(c)Performance. Sellers shall have performed and complied with all agreements and conditions required by this agreement to be performed or complied with by them prior to or at the closing.
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10.Indemnification. Sellers shall indemnify and hold harmless Buyer, subject to the limitations of paragraph 11 hereof, against and in respect of:
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(d)Any damage or deficiency resulting from any misrepresentation, breach of warranty, or nonfulfillment of any agreement on the part of Sellers, or any of them, under this agreement, or from any misrepresentation in or omission from any certificate or other instrument furnished or to be furnished to Buyer hereunder;
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15.Survival of representations. All representations, warranties and agreements made by Sellers and Buyer in this agreement or pursuant hereto shall survive closing, subject to the provisions of paragraph 11 hereof.
[5]The buyer (appellant) contends that the financial condition on the date of purchase---September 17, 1954---was less favorable than that reflected in the company's financial statement of June 30, 1954 and, therefore, he is entitled to reimbursement out of the escrow fund for the amount of the deficiency. Sellers (appellees) deny any reduction in the financial condition and further argue that, even if there were any reduction, buyer has no right to reimbursement under the agreement unless such reduction resulted from occurrences outside the ordinary course of business or which caused a materially adverse change in the company's financial condition. Actually the buyer's position is that paragraph 9(a), supra, constituted a "warranty" on the sellers' part that the financial condition of the company and its subsidiaries was not less favorable than demonstrated by the financial statement of June 30, 1954 and, therefore, sellers having breached the warranty the buyer is entitled to claim the difference between the net worth on June 30, 1954 and September 17, 1954. On the other hand, sellers take the position that their engagement under paragraph 9(a) constituted a "condition" and not a warranty and the buyer had simply the right to refuse a consummation of the sale if the "condition" was not fulfilled; when the buyer elected to consummate the sale it waived the "condition."
[6]At the hearing before the arbitrator the buyer introduced certain evidence for the purpose of proving that it was the parties intent that the sellers would warrant that the financial condition of the company and its subsidiaries would be no less favorable on the date of closing than on June 30, 1954. Such evidence consisted of the original letter opening negotiations, a memorandum prepared by the Provident Trust Company 655 acting for the sellers, an interim draft of a proposed form of agreement containing interlineations and marginal notations made by one of buyer's counsel, an accountant's calculation reflecting the condition of the company and its subsidiaries from June 30 to the date of closing, together with an itemization of buyer's claim and accountant's report showing the financial condition of the company on June 30, 1954 and September 17, 1954. The buyer urges that a proper interpretation of this agreement requires a consideration of all this evidence in order to ascertain the parties' intent.
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[7]The language of the instant agreement is clear and unambiguous. The buyer's evidence would tend to prove that in the negotiations leading up to the integrated agreement it was intended that the sellers warrant the company's and its subsidiaries' financial condition, whereas the language of the agreement plainly expresses a contrary intent. The admission of such evidence would vary and change the language of the agreement and its exclusion was eminently proper under the circumstances.
[8]This written agreement was carefully and meticulously prepared by able and competent counsel after long and thorough negotiations. Each general paragraph of the agreement is headed by a title descriptive of the contents of each paragraph. Paragraph 5, entitled "Representations and Warranties", expressly states that the sellers "represented and warranted" fifteen separate and carefully spelled out factual situations. Paragraph 9, entitled "Conditions precedent" expressly states that "All obligations of buyer under this agreement are subject to the fulfillment, prior to or at the closing, of each of the following conditions." It is to be noted that included among the "conditions" was the financial condition of the company and its subsidiaries at the time of closing, that the fulfillment of the "conditions" was to take place not subsequent to but "prior to or at the closing" and that the buyer's obligations, not the sellers', were made subject to the fulfillment of the condition. This agreement, in distinct and indubitable language, distinguishes between such engagements on the sellers' part as constitute "Warranties" and such engagements as constitute "Conditions."
[9]Assuming, arguendo, that the company and its subsidiaries' financial condition was less favorable on September 17, 1954 than the financial condition shown on the statement dated June 30, 1954, what under this agreement was the buyer's remedy? The buyer claims that such fact constituted a breach of warranty which gave to him the right to recover the amount of the reduced net worth, while the sellers claim that the buyer had the choice on September 17, 1954 either to accept the situation or to refuse to proceed under the agreement.
[10]The buyer argues that it was impossible to ascertain at the date of closing whether or not the net worth of the company and its subsidiaries 656 had been reduced, and that only by an examination after date of closing could this fact be ascertained and, therefore, both parties must have intended that the buyer have a reasonable time after the date of closing to ascertain this fact. Such an argument not only finds no support in the wording of the agreement but, on the contrary, is in direct conflict with the express terms of the agreement. Such a contention would require that we read into the agreement that which is in direct variance with the clear and unambiguous language employed to express the parties' intent.
[11]In determining this controversy we have no need to draw a distinction between "warranties" and "conditions" generally---a field in which there is great confusion.6 The parties themselves to this agreement have by its express terms drawn a clear distinction between the sellers' obligations in the nature of warranties and their obligations in the nature of conditions and among the latter have included the financial condition of the company and its subsidiaries. Sellers made no representation or warranty concerning the financial condition.
[12]The arbitrator concluded that to construe paragraph 9(a) as creative of a promise for the breach of which the buyer could recover damages---i.e., a warranty---would be inconsistent with paragraph 5(g). With this conclusion we are in full agreement. The sellers in paragraph 5(g) represented and warranted, inter alia, that there had not been any changes in the financial condition of the company or its subsidiaries other than changes in the ordinary course of business, none of which had been materially adverse and were changes required or permitted under the agreement. Paragraph 9(a) covers an entirely different situation in that it referred to such changes in the financial condition of the company and its subsidiaries in the ordinary course of business which were materially adverse and not permitted under the agreement; if this situation arose the agreement specifically provided that the buyer was under no obligation to complete the purchase. A comparison of paragraph 5(g) with paragraph 9(a) clearly leads to this conclusion; to place upon paragraph 9(a) any other construction than that placed upon it by the arbitrator would amount to a redundancy.
657 [13]A resolution of the instant controversy depends entirely upon an interpretation of the language of this agreement. The language employed by the parties is manifestly indicative of that which was intended and the meaning of the agreement---free as it is of ambiguity and doubt---is to be determined by what the agreement states. The parties carefully and scrupulously delineated between the sellers' undertakings which were intended to be "warranties" and those which were intended to be "conditions." It is crystal clear that the undertaking under paragraph 9(a) was simply a "condition" and not a "warranty" and once the buyer elected to accept this agreement the provisions of paragraph 9(a) ceased to be operative and the buyer had no right to recover any damages.
[14]The judgment of the Court below is affirmed. Costs to be paid by appellant.
Notes and Questions
1.Suppose a provision in the construction contract in question had read: "The obligation of the general contractor to make payment to the subcontractor for any work is subject to the condition precedent that the general contractor shall have received payment for such work from the owner or the owner's agent." If the owner declared bankruptcy and did not pay the general contractor, would the general contractor have to pay the sub-contractor? See Gulf Construction Co. v. Self, 676 S.W.2d 624 (Tex. App. 1984). If you're not sure, how would you draft the provision to make sure it did? Or is that possible?
2.The conditions we've seen so far had to occur before a contract came into being or a duty became effective. These are called conditions precedent (pronounced "pre SEED n't"). They are by far the most common type of condition. But there is a second type of condition called a condition subsequent. If a condition subsequent occurs, a duty that is already in effect is discharged or modified. The case that follows illustrates this.
Gray v. Gardner
Supreme Court of Massachusetts 17 Mass. 188 (1821)
[1]ASSUMPSIT on a written promise to pay the plaintiff 5198 dollars, 87 cents, with the following condition annexed, viz., "on the condition that if a greater quantity of sperm oil should arrive in whaling vessels at Nantucket and New Bedford, on or between the first day of April and the first day of October of the present year, both inclusive, than arrived at said places, in whaling vessels, on or within the same term of time the last year, then this obligation to be void." Dated April 14, 1819.
658 [2]The consideration of the promise was a quantity of oil, sold by the plaintiff to the defendants. On the same day another note unconditional had been given by the defendants, for the value of the oil, estimated at sixty cents per gallon; and the note in suit was given to secure the residue of the price, estimated at eighty five cents, to depend on the contingency mentioned in the said condition.
[3]At the trial before the chief justice, the case depended upon the question whether a certain vessel, called the Lady Adams, with the cargo of oil, arrived at Nantucket on the first day of October, 1819, about which fact the evidence was contradictory. The judge ruled that the burden of proving the arrival within the time was on the defendants; and further that, although the vessel might have, within the time, gotten within the space which might be called Nantucket Roads, yet it was necessary that she should have come to anchor, or have been moored, somewhere within that space before the twelve following the first day of October, in order to have arrived, within the meaning of the contract.
[4]The opinion of the chief justice on both these points was objected to by the defendants, and the questions were saved. If it was wrong on either point, a new trial was to be had; otherwise judgement was to be rendered on the verdict, which was found for the plaintiff.
[5]Parker, C. J. The very words of the contract show that there was a promise to pay, which was to be defeated by the happening of an event, viz., the arrival of a certain quantity of oil, at the specified places, in a given time. It is like a bond with a condition; if the obligor would avoid the bond, he must show performance of the condition. The defendants, in this case, promise to pay a certain sum of money, on condition that the promise shall be void on the happening of an event. It is plain that the burden of proof is upon them; and if they fail to show that the event has happened, the promise remains good.
[6]The other point is equally clear for the plaintiff. Oil is to arrive at a given place before twelve o'clock at night.
[7]A vessel with oil heaves in sight, but she does not come to anchor before the hour is gone. In no sense can the oil be said to have arrived. The vessel is coming until she drops anchor, or is moored. She may sink, or take fire, and never arrive, however near she may be to her port. It is so in contracts of insurance; and the same reason applies to a case of this sort. Both parties put themselves upon a nice point in this contract; it was a kind of wager as to be quantity of oil which should arrive at the ports mentioned, before a certain period. They must be held strictly to their contract, there being no equity to interfere with the terms of it.
Judgment on the verdict.
659 Note
The next case presents a "void as against public policy" attack on a notice condition. It failed.
Inman v. Clyde Hall Drilling Co., Inc.
Supreme Court of Alaska 369 P.2d 498 (1962)
Dimond, Justice.
[1]This case involves a claim for damages arising out of an employment contract. The main issue is whether a provision in the contract, making written notice of a claim a condition precedent to recovery, is contrary to public policy.
[2]Inman worked for the Clyde Hall Drilling Company as a derrickman under a written contract of employment signed by both parties on November 16, 1959. His employment terminated on March 24, 1960. On April 5, 1960, he commenced this action against the Company claiming that the latter fired him without justification, that this amounted to a breach of contract, and that he was entitled to certain damages for the breach. In its answer the Company denied that it had breached the contract, and asserted that Inman had been paid in full the wages that were owing him and was entitled to no damages. Later the Company moved for summary judgment on the ground that Inman's failure to give written notice of his claim,7 as required by the contract, was a bar to his action based on the contract.8 The motion was granted, and judgment was entered in favor of the Company. This appeal followed.
[3]A fulfillment of the thirty-day notice requirement is expressly made a "condition precedent to any recovery." Inman argues that this provision is void as against public policy. In considering this first question we start with the basic tenet that competent parties are free to make contracts and that they should be bound by their agreements. In the 660 absence of a constitutional provision or statute which makes certain contracts illegal or unenforceable, we believe it is the function of the judiciary to allow men to manage their own affairs in their own way.9 As a matter of judicial policy the court should maintain and enforce contracts, rather than enable parties to escape from the obligations they have chosen to incur.10
[4]We recognize that "freedom of contract" is a qualified and not an absolute right, and cannot be applied on a strict, doctrinal basis. An established principle is that a court will not permit itself to be used as an instrument of inequity and injustice. As Justice Frankfurter stated in his dissenting opinion in United States v. Bethlehem Steel Corp., "The fundamental principle of law that the courts will not enforce a bargain where one party has unconscionably taken advantage of the necessities and distress of the other has found expression in an almost infinite variety of cases."11 In determining whether certain contractual provisions should be enforced, the court must look realistically at the relative bargaining positions of the parties in the framework of contemporary business practices and commercial life. If we find those positions are such that one party has unscrupulously taken advantage of the economic necessities of the other, then in the interest of justice---as a matter of public policy---we would refuse to enforce the transaction. But the grounds for judicial interference must be clear. Whether the court should refuse to recognize and uphold that which the parties have agreed upon is a question of fact upon which evidence is required.
[5]The facts in this case do not persuade us that the contractual provision in question is unfair or unreasonable. Its purpose is not disclosed. The requirement that written notice be given within thirty days after a claim arises may have been designed to preclude stale claims; and the further requirement that no action be commenced within six months thereafter may have been intended to afford the Company timely opportunity to rectify the basis for a just claim. But whatever the objective was, we cannot find in the contract anything to suggest it was designed from an unfair motive to bilk employees out of wages or other compensation justly due them.
[6]There was nothing to suggest that Inman did not have the knowledge, capacity or opportunity to read the agreement and understand it; that the terms of the contract were imposed upon him without any real freedom of choice on his part; that there was any substantial inequality in bargaining positions between Inman and the Company. Not only did he 661 attach a copy of the contract to his complaint, which negatives any thought that he really wasn't aware of its provisions, but he also admitted in a deposition that at the time he signed the contract he had read it, had discussed it with a Company representative, and was familiar with its terms. And he showed specific knowledge of the thirty-day notice requirement when, in response to a question as to whether written notice had been given prior to filing suit, he testified:
A.Well, now, I filed---I started my claim within 30 days, didn't I, from the time I hit here. I thought that would be a notice that I started suing them when I first came to town.
Q.You thought that the filing of the suit would be the notice?
A.That is right.
[7]Under these circumstances we do not find that such a limitation on Inman's right of action is offensive to justice. We would not be justified in refusing to enforce the contract and thus permit one of the parties to escape his obligations. It is conceivable, of course, that a thirty-day notice of claim requirement could be used to the disadvantage of a workman by an unscrupulous employer. If this danger is great, the legislature may act to make such a provision unenforceable. But we may not speculate on what in the future may be a matter of public policy in this state. It is our function to act only where an existence public policy is clearly revealed from the facts and we find that it has been violated. That is not the case here.
[8]Inman's claim arose on March 24, 1960. His complaint was served on the Company on April 14. He argues that since the complaint set forth in detail the basis of his claim and was served within thirty days, he had substantially complied with the contractual requirement.
[9]Service of the complaint probably gave the Company actual knowledge of the claim. But that does not serve as an excuse for not giving the kind of written notice called for by the contract. Inman agreed that no suit would be instituted "prior to six (6) months after the filing of the written notice of claim." If this means what it says (and we have no reason to believe it does not), it is clear that the commencement of an action and service of the complaint was not an effective substitute for the kind of notice called for by the agreement. To hold otherwise would be to simply ignore an explicit provision of the contract and say that it had no meaning. We are not justified in doing that.
* * *
The judgment is affirmed.
662 Note
In Vintage Rodeo Parent, LLC v. Rent-a-Center, Inc., No. CA 2018--0927--SG, 2019 WL1223026 (Del. Ch. Mar. 14, 2019), Vintage Capital Management (Vintage), a private equity firm, agreed to buy Rent-a-Center for \$15 per share, a total deal of about \$1.37 billion. Because Vintage owned a similar rent-to-own business, the deal would likely be subject to a lengthy antitrust review by the FTC. Thus, the parties agreed to include a provision in their agreement that if they could not close the deal by Dec. 17 (termination date), either party had the option to terminate the agreement at will. However, if the parties were still waiting for approval from the FTC, either party could extend the termination date by three months by providing the other party with notice to extend, before the termination date.
The agreement also included a provision that entitled Rent-a-Center to "a breakup fee." If Vintage chose not to extend the termination date and either party exercised their option to terminate the agreement, Vintage had to pay Rent-a-Center a \$126 million breakup fee.
Shortly after the parties signed the merger agreement, Rent-a-Center's business improved, and their stock price went up almost 50% from the \$15 per share price they agreed to sell to Vintage. Also, at this point, it was clear the merger would not have FTC approval by the termination date. After some discussion among Rent-a-Center Board members, they decided they wanted out of the deal. They also wanted to collect the \$126 million breakup fee from Vintage. For both to happen, Vintage or B. Riley Financial (Vintage's banker on the deal) would have to forget to send notice to extend the termination date to Rent-a-Center by the Dec. 17 deadline.
Unfortunately for Vintage, they forgot. Sure enough, Rent-a-Center terminated the agreement after Dec. 17 and requested their \$126 million breakup fee from Vintage. Vintage refused and filed suit against Rent-a-Center in Delaware court, arguing that the conduct of both parties in continuing to pursue the merger in good faith until the termination date was evidence that both parties wanted to extend the termination date. However, as the judge noted, that was not the parties' deal. The judge held that these two sophisticated parties, who had negotiated over this agreement, were bound by its terms:
Vintage was entitled to extend the End Date simply by sending Rent-a-Center notice of election to do so by a date certain, Vintage and B. Riley personnel, in the context of this \$1 billion-plus merger, simply forgot to give such notice. As one B. Riley principal messaged another, immediately upon learning of the failure of notice, "We are [prejudiced in the extreme]."
In practice, if you or your client signs a merger or other agreement, and the agreement explicitly says that the agreement will terminate unless you do certain things to extend it, you better do everything it says if you plan on extending it. Make a checklist of tasks you must accomplish by certain dates 663 and follow that checklist! Set reminders in your smartphone or on your computer, write them on a sticky note and put them on your desk or monitor, do whatever you have to do to ensure that nothing on your checklist slips your mind.
Clark v. West
Court of Appeals of New York 193 N.Y. 349, 86 N.E. 1 (1908)
[1]On February 12, 1900, the plaintiff and defendant entered into a written contract, under which the former was to write and prepare for publication for the latter a series of law books, the compensation for which was provided in the contract. After the plaintiff had completed a three-volume work known as "Clark & Marshall on Corporations," the parties disagreed. The plaintiff claimed that the defendant had broken the contract by causing the book to be copyrighted in the name of a corporation which was not a party to the contract, and he brought this action to recover what he claims to be due him, for an accounting and other relief. The defendant demurred to the complaint on the ground that it did not state facts sufficient to constitute a cause of action. The Special Term overruled the demurrer, but upon an appeal to the Appellate Division that decision was reversed and the demurrer sustained.
[2]Those portions of the contract which are germane to the present stage of the controversy are as follows: The plaintiff agreed to write a series of books relating to specified legal subjects. The manuscript furnished by him was to be satisfactory to the defendant. The plaintiff was not to write or edit anything that would interfere with the sale of books to be written by him under the contract, and he was not to write any other books unless requested so to do by the defendant in which latter event he was to be paid \$3,000 a year. The contract contained a clause which provided that "the first party (the plaintiff) agrees to totally abstain from the use of intoxicating liquors during the continuance of this contract, and that the payment to him in accordance with the terms of this contract of any money in excess of \$2 per page is dependent on the faithful performance of this as well as the other conditions of this contract. . . ." In a later paragraph it further recited that, "in consideration of the above promises of the first party (the plaintiff), the second party (the defendant) agrees to pay to the first party \$2 per page, . . . on each book prepared by the first party under this contract and accepted by the second party, and if said first party abstains from the use of intoxicating liquor and otherwise fulfills his agreements as hereinbefore set forth, he shall be paid an additional \$4 per page in manner hereinbefore stated." This was followed by a specification of the method and times of payment, in which it was agreed that: "When a 664 completed chapter or completed chapters amounting to not less than 125 pages, to be delivered, the second party shall pay to the first party \$2 per page, but he shall not be required to pay more than \$250 in any one month prior to the acceptance by him of a completed book. These advance payments are to be made as soon as the completed chapters are delivered as above stated, but if, after such delivery and payment, the manuscript shall not be regarded by the second party as satisfactory, no further payment shall be made until the first party shall have made the same satisfactory to the second party. All payments on account of parts of books are to be treated as payments on account, against the books previously completed and accepted. They are for accommodation of first party only. After the publication of any book or books prepared by the first party under this contract, he shall at the end of every six months be entitled to receive, and the second party agrees to pay him, an amount equal to one-sixth of the net receipts from the combined sales of all books which shall have been prepared by the said first party and published by the said second party under this contract, less any and all payments previously made, said first party and all money then due to the second party from the first party, until the amount of \$6 per page of each book shall have been paid, after which the first party shall have no right, title or interest in said books or the receipts from the sale thereof."
[3]The plaintiff in his complaint alleges completion of the work on Corporations and publication thereof by the defendant, the sale of many copies thereof from which the defendant received large net receipts, the number of pages it contained (3,469), for which he had been paid at the rate of \$2 per page, amounting to \$6,938, and that defendant has refused to pay him any sum over and above that amount, or any sum in excess of \$2 per page. Full performance of the agreement on plaintiff's part is alleged, except that he "did not totally abstain from the use of intoxicating liquor during the continuance of said contract; but such use by the plaintiff was not excessive and did not prevent or interfere with the due and full performance by the plaintiff of all the other stipulations in said contract." The complaint further alleges a waiver on the part of the defendant of the plaintiff's stipulation to totally abstain from to use of intoxicating liquors, as follows: "(12) That defendant waived plaintiff's breach of the stipulation to totally abstain from the use of intoxicating liquors during the continuance of said contract; that long prior to the completion of said manuscript on Corporation, and its delivery to and acceptance by the defendant, the defendant had full knowledge and well knew of plaintiff's said use of intoxicating liquor during the continuance of said contract, but nevertheless acquiesced in and failed to object thereto, and did not terminate the contract on account thereof; that with full knowledge of said breach by the plaintiff defendant continued to exact and require of the plaintiff performance of all the other stipulations and conditions of said contract, and treated the same as still in force, and continued to receive, 665 and did receive, installments of manuscript under said contract, and continued to make and did make payments to plaintiff by way of advancements, and finally accepted and published said manuscript as aforesaid; that at no time during the performance of said contract by the plaintiff did the defendant notify or intimate to the plaintiff that defendant would insist upon strict compliance with said stipulation to totally abstain from the use of intoxicating liquor, or that defendant intended to take advantage of plaintiff's said breach, and on account and by reason thereof refuse to pay plaintiff the royalty stipulated in said contract; that, on the contrary, and with full knowledge of plaintiff's said use of intoxicating liquors, defendant repeatedly avowed and represented to the plaintiff that he was entitled to and would receive said royalty payment, and plaintiff believed and relied on said representation, and in reliance thereon continued in the performance of said contract until the time of the breach thereof by the defendant, as hereinafter specifically alleged, and at all times during the writing of said treatise on Corporations, and after as well as before publication thereof, as aforesaid, it was mutually understood, agreed, and intended by the parties hereto that, notwithstanding plaintiff's said use of intoxicating liquors, he was nevertheless entitled to receive and would receive said royalty as the same accrued under said contract." The defendant's breach of the contract is then alleged, which is claimed to consist in his having taken out a copyright upon the plaintiff's work on Corporations in the name of a publishing company which had not relation to the contract and the relief asked for is that the defendant be compelled to account, and that the copyright be transferred to the plaintiff, or that he recover its value.
[4]The appeal is by permission of the Appellate Division, and the following questions have been certified to us: (1) Does the complaint herein state facts sufficient to constitute a cause of action? (2) Under the terms of the contract alleged in the complaint, is the plaintiff's total abstinence from the use of intoxicating liquors a condition precedent which can be waived so as to render defendant liable upon the contract notwithstanding plaintiff's use of intoxicating liquors? (3) Does the complaint herein allege facts constituting a valid and effective waiver of plaintiff's nonperformance of such condition precedent?
[5]Werner, J. (after stating the facts as above). The contract before us, stripped of all superfluous verbiage, binds the plaintiff to total abstention from the use of intoxicating liquors during the continuance of the work which he was employed to do. The stipulations relating to the plaintiff's compensation provide that if he does not observe this condition he is to be paid at the rate of \$2 per page, and if he does comply therewith he is to receive \$6 per page. The plaintiff has written one book under the contract known as "Clark & Marshall on Corporations," which has been accepted, published, and copies sold in large numbers by the defendant. 666 The plaintiff admits that while he was at work on the book he did not entirely abstain from the use of intoxicating liquors. He has been paid only \$2 per page for the work he has done. He claims that, despite his breach of this condition, he is entitled to the full compensation of \$6 per page, because the defendant, with full knowledge of plaintiff's nonobservance of this stipulation as to total abstinence, has waived the breach thereof and cannot now insist upon strict performance in this regard. This plea of waiver presents the underlying question which determines the answers to the questions certified.
[6]Briefly stated, the defendant's position is that the stipulation as to plaintiff's total abstinence is the consideration for the payment of the difference between \$2 and \$6 per page, and therefore could not be waived except by a new agreement to that effect based upon a good consideration; that the so-called waiver alleged by the plaintiff is not a waiver, but a modification of the contract in respect of its consideration. The plaintiff, on the other hand, argues that the stipulation for his total abstinence was merely a condition precedent, intended to work a forfeiture of the additional compensation in case of a breach, and that it could be waived without any formal agreement to that effect based upon a new consideration.
[7]The subject matter of the contract was the writing of books by the plaintiff for the defendant. The duration of the contract was the time necessary to complete them all. The work was to be done to the satisfaction of the defendant, and the plaintiff was not to write any other books except those covered by the contract, unless requested so to do by the defendant, in which latter event he was to be paid for that particular work by the year. The compensation for the work specified in the contract was to be \$6 per page, unless the plaintiff failed to totally abstain from the use of intoxicating liquors during the continuance of the contract, in which event he was to receive only \$2 per page. That is the obvious import of the contract construed in the light of the purpose for which it was made, and in accordance with the ordinary meaning of plain language. It is not a contract to write books in order that the plaintiff shall keep sober, but a contract containing a stipulation that he shall keep sober so that he may write satisfactory books. When we view the contract from this standpoint, it will readily be perceived that the particular stipulation is not the consideration for the contract, but simply one of its conditions which fits in with those relating to time and method of delivery of manuscript, revision of proof, citation of cases, assignment of copyrights, keeping track of new cases and citations for new editions, and other details which might be waived by the defendant, if he saw fit to do so. This is made clear, it seems to us, by the provision that, "in consideration of the above promises," the defendant agrees to pay the plaintiff \$2 per page on each book prepared by him, and if he "abstains from the use of intoxicating liquor and otherwise 667 fulfills his agreements as hereinbefore set forth, he shall be paid an additional \$4 per page in manner hereinbefore stated." The compensation of \$2 per page, not to exceed \$250 per month, was an advance or partial payment of the whole price of \$6 per page, and the payment of the two-thirds, which was to be withheld pending the performance of the contract, was simply made contingent upon the plaintiff's total abstention from the use of intoxicants during the life of the contract. It is possible, of course, by segregating that clause of the contract from the context, to give it a wider meaning and a different aspect than it has when read in conjunction with other stipulations; but this is also true of other paragraphs of the contract. The paragraph, for instance, which provides that after the publication of any of the books written by the plaintiff he is to receive an amount equal to one-sixth of the net receipts from the combined sales of all the books which shall have been published by the defendant under the contract, less any and all payments previously made, "until the amount of \$6 per page of each book shall have been paid, after which the first party (plaintiff) shall have no right, title, or interest in said books or the receipts from the sales thereof."
[8]That section of the contract, standing alone, would indicate that the plaintiff was to be entitled, in any event, to the \$6 per page to be paid out of the net receipts of the copies of the book sold. The contract, read as a whole, however, shows that it is modified by the preceding provisions, making the compensation in excess of the \$2 per page dependent upon the plaintiff's total abstinence, and upon the performance by him of the other conditions of the contract. It is obvious that the parties thought that the plaintiff's normal work was worth \$6 per page. That was the sum to be paid for the work done by the plaintiff, and not for total abstinence. If the plaintiff did not keep to the condition as to total abstinence, he was to lose part of that sum. Precisely the same situation would have risen if the plaintiff had disregarded any of the other essential conditions of the contract. The fact that the particular stipulation was emphasized did not change its character. It was still a condition which the defendant could have insisted upon, as he has apparently done in regard to some others, and one which he could waive just as he might have waived those relating to the amount of the advance payments, or the number of pages to be written each month. A breach of any of the substantial conditions of the contract would have entailed a loss or forfeiture similar to that consequent upon a breach of the one relating to total abstinence, in case of the defendant's insistence upon his right to take advantage of them. This, we think, is the fair interpretation of the contract, and it follows that the stipulation as to the plaintiff's total abstinence was nothing more nor less than a condition precedent. If that conclusion is well founded, there can be no escape from the corollary that this condition could be waived; and, if it was waived, the defendant is clearly not in a position to insist upon the forfeiture which his waiver was intended to annihilate. The forfeiture must 668 stand or fall with the condition. If the latter was waived, the former is no longer a part of the contract. Defendant still has the right to counterclaim for any damages which he may have sustained in consequence of the plaintiff's breach, but he cannot insist upon strict performance.
[9]This whole discussion is predicated, of course upon the theory of an express waiver. We assume that no waiver could be implied from the defendant's mere acceptance of the books and his payment of the sum of \$2 per page without objection. It was the defendant's duty to pay that amount in any event after acceptance of the work. The plaintiff must stand upon his allegation of an express waiver, and if he fails to establish that he cannot maintain his action.
[10]The theory upon which the defendant's attitude seems to be based is that, even if he has represented to the plaintiff that he would not insist upon the condition that the latter should observe total abstinence from intoxicants, he can still refuse to pay the full contract price for his work. The inequity of this position becomes apparent when we consider that this contract was to run for a period of years, during a large portion of which the plaintiff was to be entitled only to the advance payment of \$2 per page; the balance being contingent, among other things, upon publication of the books and returns from sales. Upon this theory the defendant might have waived the condition while the first book was in process of production, and yet, when the whole work was completed, he would still be in a position to insist upon the forfeiture because there had not been strict performance. Such a situation is possible in a case where the subject of the waiver is the very consideration of a contract (Organ v. Stewart, 60 N.Y. 413, 420), but not where the waiver relates to something that can be waived. In the case at bar, as we have seen, the waiver is not of the consideration or subject-matter, but of an incident to the method of performance. The consideration remains the same. The defendant has had the work he bargained for, and it is alleged that he has waived one of the conditions as to the manner in which it was to have been done. He might have insisted upon literal performance, and then he could have stood upon the letter of his contract. If, however, he has waived that incidental condition, he has created a situation to which the doctrine of waiver very precisely applies.
[11]The cases which present the most familiar phases of the doctrine of waiver are those which have arisen out of litigation over insurance policies where the defendants have claimed a forfeiture because of the breach of some condition in the contract, but it is a doctrine of general application which is confined to no particular class of cases. A "waiver" has been defined to be the intentional relinquishment of a known right. It is voluntary and implies an election to dispense with something of value, or forego some advantage which the party waiving it might at its option have demanded or insisted upon, and this definition is supported by many cases in this and other states. In the recent case of Draper v. Oswego Co. Fire R. 669 Assn, 190 N.Y. 12, 15, 82 N.E. 755, Chief Judge Cullen, in speaking for the court upon this subject, said: "While that doctrine and the doctrine of equitable estoppel are often confused in insurance litigation, there is a clear distinction between the two. A 'waiver' is the voluntary abandonment or relinquishment by a party of some right or advantage. As said by my Brother Vann in the Kiernan Case, 150 N.Y. 190, 44 N.E. 698: 'The law of waiver seems to be a technical doctrine introduced and applied by the court for the purpose of defeating forfeitures . . . While the principle may not be easily classified, it is well established that, if the words and acts of the insurer reasonably justify the conclusion that with full knowledge of all the facts it intended to abandon or not to insist upon the particular defense afterwards relied upon, a verdict or finding to that effect establishes a waiver, which, if it once exists, can never be revoked.' The doctrine of equitable estoppel, or estoppel in pais, is that a party may be precluded by his acts and conduct from asserting a right to the detriment of another party who, entitled to rely on such conduct, has acted upon it . . . As already said, the doctrine of waiver is to relieve against forfeiture. It requires no consideration for a waiver, nor any prejudice or injury to the other party." To the same effect, see Knarston v. Manhattan Life Ins. Co., 140 Cal. 57, 73 Pac. 740.
[12]It remains to be determined whether the plaintiff has alleged facts which, if proven, will be sufficient to establish his claim of an express waiver by the defendant of the plaintiff's breach of the condition to observe total abstinence. In the 12th paragraph of the complaint, the plaintiff alleges facts and circumstances which we think, if established, would prove defendant's waiver of plaintiff's performance of that contract stipulation. These facts and circumstances are that, long before the plaintiff had completed the manuscript of the first book undertaken under the contract, the defendant had full knowledge of the plaintiff's nonobservance of that stipulation, and that with such knowledge he not only accepted the completed manuscript without objection, but "repeatedly avowed and represented to the plaintiff that he was entitled to and would receive said royalty payments (i.e., the additional \$4 per page), and plaintiff believed and relied upon such representations, . . . and at all times during the writing of said treatise on Corporations, and after as well as before publication thereof as aforesaid, it was mutually understood, agreed, and intended by the parties hereto that, notwithstanding plaintiff's said use of intoxicating liquors, he was nevertheless entitled to receive and would receive said royalty as the same accrued under said contract." The demurrer not only admits the truth of these allegations, but also all that can by reasonable and fair intendment be implied therefrom. Under the modern rule, pleadings are not to be construed against the pleader, but averments which sufficiently point out the nature of the plaintiff's claim are sufficient, if under them he would be entitled to give the necessary evidence. Tested by these rules, we think it cannot be doubted that the 670 allegations contained in the twelfth paragraph of the complaint, if proved upon the trial, would be sufficient to establish an express waiver by the defendant of the stipulation in regard to plaintiff's total abstinence.
[13]The three questions certified should be answered in the affirmative, the order of the Appellate Division reversed the interlocutory judgment of the Special Term affirmed, with costs in both courts, and defendant be permitted to answer the complaint within 20 days upon payment of costs.
Cullen, C.J., and Edward T. Bartlett, Haigh, Vann, Hiscock, and Chase, J.J., concur.
Order reversed, etc.
Notes and Questions
1.In the fall of 1899, about four months before he entered into the contract in question, Mr. Clark was dismissed from his position as a law professor at Washington & Lee University, a position he had only had for a month or two. The university president explained that Professor Clark was "addicted to drinking beyond what would be proper in a college professor."
2.In the next case, the difficulty of administering contracts, conditions, and waivers of conditions in practice is illustrated. The best-laid contracts and plans can easily go awry.
Burger King v. Family Dining, Inc.
United States District Court, Eastern District, Pennsylvania 426 F. Supp. 485 (1977)
Memorandum and Order
Hannum, District Judge.
[1]Presently before the Court is defendant's motion for an involuntary dismissal in accordance with Rule 41(b), Federal Rules of Civil Procedure, advanced at the close of plaintiff's case. The trial is before the Court sitting without a jury.
[2]In bringing the suit plaintiff seeks a determination under the Declaratory Judgment Act, Title 28, United States Code § 2201, that a contract between the parties, by its own terms, is no longer of any force and effect. A request for declaratory relief is appropriate in a case such as this where the primary question is whether such a termination has occurred.
671 [3]Jurisdiction of the parties is based on diversity of citizenship in accordance with Title 28, United States Code § 1332(a).
Facts Established in Plaintiff's Case
[4]Plaintiff Burger King Corporation (hereinafter "Burger King") is a Florida corporation engaged in franchising the well-known Burger King Restaurants. In 1954, James W. McLamore, founder of Burger King Restaurants, Inc. (the corporate predecessor of Burger King) built the first Burger King Restaurant in Miami, Florida. In 1961 the franchise system was still relatively modest size having only about 60 or 70 restaurants in operation outside of Florida. By 1963, however, Burger King began to experience significant growth and was building and operating, principally through franchisees, 24 restaurants per year. It was also at this time that Burger King's relationship with defendant Family Dining, Inc., (hereinafter "Family Dining") was created.
[5]Family Dining is a Pennsylvania corporation which at the present time operates ten Burger King Restaurants (hereinafter "Restaurant") in Bucks and Montgomery Counties in Pennsylvania. Family Dining was founded and is currently operated by Carl Ferris who had been a close personal friend of McLamore's for a number of years prior to 1963. In fact they had attended Cornell University together in the late 1940's. It would seem that this friendship eventually led to the business relationship between Burger King and Family Dining which was conceived in the "Burger King Territorial Agreement" (hereinafter "Territorial Agreement") entered on May 10, 1963.
[6]In accordance with the Territorial Agreement Burger King agreed that Family Dining would be its sole licensee, and thus have an "exclusive territory," in Bucks and Montgomery Counties provided Family Dining operated each Restaurant pursuant to Burger King license agreements12 and maintained a specified rate of development. Articles I and II of the Territorial Agreement (Plaintiff's Exhibit P-2) are pertinent to this dispute. They provide as follows:
I
For a period of one year, beginning on the date hereof, Company will not operate or license others for the operation of any BURGER KING restaurant within the following described territory hereinafter referred to as "exclusive territory," to-wit:
The counties of Bucks and Montgomery, all in the State of Pennsylvania
672 as long as licensee operates each BURGER KING restaurant pursuant to BURGER KING restaurant licenses with Company and faithfully performs each of the covenants herein contained.
This agreement shall remain in effect and Licensee shall retain the exclusive territory for a period of ninety (90) years from the date hereof, provided that at the end of one, two, three, four, five, six, seven, eight, nine and ten years from the date hereof, and continuously thereafter during the next eighty years, Licensee has the following requisite number of BURGER KING restaurants in operation or under active construction, pursuant to Licenses with Company:
One (1) restaurant at the end of one year;
Two (2) restaurants at the end of two years;
Three (3) restaurants at the end of three years;
Four (4) restaurants at the end of four years;
Five (5) restaurants at the end of five years;
Six (6) restaurants at the end of six years;
Seven (7) restaurants at the end of seven years;
Eight (8) restaurants at the end of eight years;
Nine (9) restaurants at the end of nine years;
Ten (10) restaurants at the end of ten years;
and continually maintains not less than ten (10) restaurants during the next eighty (80) years.
Licensee and company may mutually agree to the execution of a restaurant license to a person other than the Licensee, herein, if such restaurant license is executed same will count as a requisite number as set forth in paragraph above.
II
If at the end of either one, two, three, four, five, six, seven, eight, nine or ten years from the date hereof, or anytime thereafter during the next eighty (80) years, there are less than the respective requisite number of BURGER KING operations or under active construction in the "exclusive territory" pursuant to licenses by Company, this agreement shall terminate and be of no further force and effect. Thereafter, Company may operate or license others for the operation of BURGER KING Restaurants anywhere within the exclusive territory, so long as such restaurants are not within the "Protected Area", as set forth in
673 any BURGER KING Restaurant License to which the Licensee herein is a party.
[7]The prospect of exclusivity for ninety years was clearly intended to be an inducement to Family Dining to develop the territory as prescribed and it appears that it had exactly this effect as Family Dining was to become one of Burger King's most successful franchisees. While Burger King considered Carl Ferris to be somewhat of a problem at various times and one who was overly meticulous with detail, it was nevertheless through his efforts which included obtaining the necessary financing and assuming significant risks, largely without assistance from Burger King, that enabled both parties to benefit from the arrangement.
[8]On August 16, 1963, Family Dining opened the First Restaurant at 588 West DeKalb Pike in King of Prussia, Pennsylvania. The second Restaurant was opened on July 2, 1965, at 409 West Ridge Pike, Conshohocken, Pennsylvania, and the third Restaurant was opened October 19, 1966, at 2561 West Main Street, Norristown, Pennsylvania.
[9]However, by April, 1968, Family Dining had not opened or begun active construction on a fourth Restaurant which, in accordance with the development rate, should have been accomplished by May 10, 1967, and it was apparent that a fifth Restaurant would not be opened by May 10, 1968, the date scheduled. On May 1, 1968, the parties entered into a Modification of the Territorial Agreement (hereinafter "Modification") whereby Burger King agreed to waive Family Dining's failure to comply with the development rate. (Plaintiff's Exhibit P-4.) There is nothing contained in the record which indicates that Burger King received anything of value in exchange for entering this agreement. However, McLamore testified that if the fourth and fifth Restaurants would be built nearly in compliance with the development rate for the fifth year he would overlook the year or so default in the fourth Restaurant. (N.T. 39). This attitude seems to be consistent with his overall view toward the development rate with respect to which, he testified, was "designed to insure the company of an orderly process of growth which would also enable the company to produce a profit on the sale of its franchises and through the collection of royalties that the restaurants would themselves produce." (N.T. 35.)
[10]The fourth Restaurant was opened on July 1, 1968, at 1721 North DeKalb Pike, Norristown, Pennsylvania, and the fifth Restaurant was opened on October 17, 1968, at 1035 Bustleton Pike in Feasterville, Pennsylvania.
[11]On April 18, 1969, Ferris forwarded a letter to McLamore pertaining to certain delays in site approval and relating McLamore's earlier statement that there would be no problem in waiving the development schedule for the sixth Restaurant. (Plaintiff's Exhibit P-5.) The letter expressed Ferris' concern regarding compliance with the 674 development rate. By letter dated April 26, 1969, from Howard Walker of Burger King, Ferris was granted a month extension in the development rate. (Plaintiff's Exhibit P-6.) With respect to this extension McLamore testified that "it never crossed my mind to call a default of this agreement on a technicality." (N.T. 47.)
[12]On October 1, 1969, the sixth Restaurant was opened at 1515 East High Street in Pottstown, Pennsylvania. The seventh Restaurant was opened on February 2, 1970, ahead of schedule, at 560 North Main Street in Doylestown, Pennsylvania.
[13]At this point in time Burger King was no longer a modest sized franchise system. It had became a wholly owned subsidiary of the Pillsbury Company and had, in fact, evolved into a complex corporate entity. McLamore was elevated to Chairman of the Board of Burger King and, while he remained the chief executive officer for a time, Arthur A. Rosewall was installed as Burger King's President. Ferris was no longer able to expect the close, one to one relationship with McLamore that had previously obtained in his dealings with the company. It seems clear that as a result Family Dining began to experience difficulties in its day to day operations with Burger King.
[14]One of the problem areas which arose concerned site selection. In a typical situation when a franchisee would seek approval for a building site an application would be submitted to the National Development Committee comprised of various Burger King officials. Based on Ferris' prior showing regarding site selection it could be expected that he would have little difficulty in obtaining their approval. In McLamore's view, Ferris was an exceptionally fine franchisee whose ability to choose real estate locations was exceptional. (N.T. 61.) However, in August, 1970, a Frankford Avenue location selected by Ferris was rejected by the National Development Committee. The reasons offered in support of the decision to reject are not entirely clear and it seems that for the most part it was an exercise of discretion. The only plausible reason, given Ferris' expertise, was that the site was 2.7 miles from another Burger King franchise operated by Pete Miller outside Family Dining's exclusive territory. Yet Burger King chose not to exercise its discretion in similar circumstances when it permitted another franchisee to build a Restaurant in Devon, Pennsylvania, approximately 3 miles away from an existing Family Dining Restaurant.
[15]In his August 25, 1970, memo to the Carl Ferris file McLamore observed that Burger King "had sloppy real estate work involved in servicing him and that (Burger King was) guilty of many follow up delinquencies." (Defendant's Exhibit D-7.) This was during a time, as Burger King management was well aware, where it was one thing to select a location and quite another to actually develop it. That is, local governing 675 bodies were taking a much stricter view toward allowing this type of development. It was also during this time, as McLamore's memo points out, Burger King realized that the Bucks-Montgomery territory was capable of sustaining substantially more Restaurants than originally thought.
[16]Amidst these circumstances, the eighth Restaurant was opened ahead of schedule on October 7, 1970, at 601 South Broad Street in Lansdale, Pennsylvania. And in December, 1971, Burger King approved Family Dining's proposed sites for two additional Restaurants in Ambler, Pennsylvania and Levittown, Pennsylvania.
[17]In early 1972, Arthur Rosewell became the chief executive officer of Burger King. At this time it also became apparent that the ninth Restaurant would not be opened or under construction by May 10, 1972. On April 27, 1972, in a telephone conversation with McLamore, Ferris once again expressed his concern to Burger King regarding compliance with the development rate. Burger King's position at that time is evidenced by McLamore's Memo to the Carl Ferris file dated April 28, 1972, wherein he provides that "Ferris' territorial arrangement with the company is such that he must have his ninth store (he has eight open now) under construction next month. I indicated to him that, due to the fact that he was in the process of developing four sites at this time, the company would consider he had met, substantially, the requirements of exclusivity." (Plaintiff's Exhibit P-7.) McLamore testified that at that time he had in mind a further delay of 3 to 6 months. (N.T. 55.)
[18]In April, 1973, Burger King approved Family Dining's proposed site for a Restaurant in Warminster, Pennsylvania. However, as of May 10, 1973, neither the ninth or the tenth Restaurant had been opened or under active construction.
[19]A letter dated May 23, 1973, from Helen D. Donaldson, Franchise Documents Administrator for Burger King, was sent to Ferris. (Plaintiff's Exhibit P-10.) The letter provides as follows:
Dear Mr. Ferris:
During a periodic review of all territorial agreements we note that as of this date your development schedule requiring ten restaurants to be open or under construction by May 10, 1973, has not been met. Our records reflect eight stores open in Bucks and/or Montgomery County, and one site approved but not manned.
Under the terms of your territorial agreement failure to have the required number of stores in operation or under active construction constitutes a default of your agreement.
If there are extenuating circumstances about which this office is not aware, we would appreciate your earliest advice.
676 [20]It is doubtful that the Donaldson letter was intended to communicate to Ferris that the Territorial Agreement was terminated. The testimony of both Rosewall (N.T. 187) and Leslie W. Paszat (N.T. 256), an executive of Burger King, who worked closely with Rosewall on the Family Dining matter indicates that even Burger King had not settled its position at this time. Ferris' letter dated July 27, 1973, to Rosewall (Defendant's Exhibit D-10), and Rosewall's reply dated August 3, 1973 (Plaintiff's Exhibit P-11) also fail to demonstrate any understanding that the Territorial Agreement was terminated.
[21]It seems that throughout this period Burger King treated the matter as something of a "hot potato" subjecting Ferris to contact with several different Burger King officials. Much of Ferris' contact with Rosewall was interrupted by Rosewall's month long vacation and a meat shortage crisis to which he had to devote a substantial amount of his time. Ultimately Paszat was given responsibility for Family Dining and it appears that he provided Ferris with the first clear indication that Burger King considered the Territorial Agreement terminated in his letter of November 6, 1973 (Plaintiff's Exhibit P-14). Burger King's corporate structure had become so complex that the question of who, when or where the decision was made could not be answered. The abrupt manner in which Burger King's position was communicated to Family Dining, under the circumstances, was not straightforward.13
[22]From November, 1973, until some point early in 1975, the parties attempted to negotiate their differences with no success. The reason for the lack of success is understandable given that Burger King from the outset considered exclusivity a non-negotiable item. It was during this period on September 7, 1974, that Family Dining began actual construction of the ninth Restaurant in Warminster, Pennsylvania.
[23]Several months before the instant litigation was begun Family Dining informed Burger King that it intended to open a ninth Restaurant on or about May 15, 1975, on Street Road, Warminster, Pennsylvania. In February, 1975, Burger King notified Family Dining that a franchise agreement (license) had to be entered for the additional Restaurant without which Family Dining would be infringing Burger King's trademarks. A similar notice was given in April, 1975, in which Burger King indicated it would retain counsel to protect its rights. Nevertheless Family Dining proceeded with its plans to open the Warminster Restaurant.
[24]In May, 1975, Burger King filed a complaint, which was the inception of this lawsuit, seeking to enjoin the use of Burger King 677 trademarks by Family Dining at the Warminster Restaurant. The Court granted a Temporary Restraining Order until a hearing on the complaint could be held. On May 13, 1975, the parties reached an agreement on terms under which the Burger King trademarks could be used at the Warminster Restaurant. Pursuant to the agreement Burger King filed an amended complaint seeking the instant declaratory relief. Subsequently and also pursuant to this agreement Family Dining opened its tenth Restaurant in Willow Grove, Pennsylvania, the construction of which began on March 28, 1975.
Discussion
[25]Family Dining raises several arguments in support of its motion pursuant to Rule 41(b). One of its principal arguments is that the termination provision should be found inoperative because otherwise it would result in a forfeiture to Family Dining. For reasons which have become evident during the presentation of Burger King's case the Court finds Family Dining's position compelling both on legal and equitable grounds and is thus persuaded that the Territorial Agreement should not be declared terminated. Under Rule 41(b) when a plaintiff in an action tried by the Court without a jury has completed the presentation of his evidence, the defendant, without waiving his right to offer evidence in the event the motion is not granted, may move for a dismissal on the ground that upon the facts and the law plaintiff has shown no right to relief. Inasmuch as termination is the only relief sought by Burger King, it follows that dismissal of the action is appropriate.
[26]In bringing this suit Burger King maintains that the Territorial Agreement is a divisible contract wherein Family Dining promised to open or have under active construction one new Restaurant in each of the first ten years of the contract in exchange for which Burger King promised to grant one additional year of exclusivity for each new Restaurant. This, to be followed by an additional eighty years of exclusivity provided the first ten Restaurants were built on time. In support Burger King relies on the opening language of Article I of the Territorial Agreement which provides that "(f)or a period of one year, beginning on the date hereof, Company will not operate or license . . ." It is thus argued that since Family Dining clearly failed to perform its promises the Court must, in accordance with the express language of Article II, declare the contract terminated. Burger King further argues that because Family Dining did not earn exclusivity beyond the ninth year, upon termination, it could not be found that Family Dining would forfeit anything in which it had an interest.
[27]Contrary to the analysis offered by Burger King, the Court considers the development rate a condition subsequent, not a promise, which operates to divest Family Dining of exclusivity. Where words in a contract raise no duty in and of themselves but rather modify or limit the 678 promisees' right to enforce the promise such words are considered to be a condition. Whether words constitute a condition or a promise is a matter of the intention of the parties to be ascertained from a reasonable construction of the language used, considered in light of the surrounding circumstances. It seems clear that the true purpose of the Territorial Agreement was to create a long-term promise of exclusivity to act as an inducement to Family Dining to develop Bucks and Montgomery Counties within a certain time frame. A careful reading of the agreement indicates that it raises no duties, as such, in Family Dining. Both Article I and Article II contain language which refers to ninety years of exclusivity subject to limitation. For instance, Article I provides in part that "(t)his Agreement shall remain in effect and licensee shall retain the exclusive territory for a period of ninety (90) years from the date hereof, provided that at the end of one, two. . . ." Failure to comply with the development rate operates to defeat liability on Burger King's promise of exclusivity. Liability, or at least Family Dining's right to enforce the promise, arose upon entering the contract. The fact that Burger King seeks affirmative relief premised on the development rate and the fact that it calls for a specified performance by Family Dining tend to obscure its true nature. Nevertheless, in the Court's view it is a condition subsequent.
* * *
[28]The question arises whether Burger King has precluded itself from asserting Family Dining's untimeliness on the basis that Burger King did not demand literal adherence to the development rate throughout most of the first ten years of the contract. Nothing is commoner in contracts than for a promisor to protect himself by making his promise conditional. Ordinarily a party would be entitled to have such an agreement strictly enforced, however, before doing so the Court must consider not only the written contract but also the acts and conduct of the parties in carrying out the agreement. As Judge Kraft, in effect, provided in Dempsey v. Stauffer, 182 F.Supp. 806, 810 (E.D. Pa. 1960), after one party by conduct indicates that literal performance will not be required, he cannot without notice and a reasonable time begin demanding literal performance.
[29]In the early going Burger King did not demand that Family Dining perform in exact compliance with the development schedule. It failed to introduce any evidence indicating that a change in attitude had been communicated to Family Dining. At the time of the Donaldson letter Family Dining's non-compliance with the development rate was no worse than it was with respect to the fourth and fifth Restaurants. The letter itself was sent by a documents administrator rather than a Burger King official and it seems to imply that the Territorial Agreement would not be terminated. Assuming that at some point between May and November, or even at the time of the Donaldson letter, Ferris realized literal performance would be required, the circumstances of this type of development are such 679 that Burger King was unreasonable in declaring a termination such a short time after, if not concurrent with, notice that literal performance would be required.
[30]Considerable time was consumed in negotiations between November, 1973, until shortly before suit although it appears that these efforts were an exercise in futility given Burger King's view on exclusivity. Moreover, it could be expected that Burger King would have sued to enjoin any further progress by Family Dining, during this lengthy period, just as it did when Family Dining attempted to get the ninth Restaurant under way. The upshot being that the hiatus in development from November, 1973, until active construction began on the ninth and tenth Restaurants is not fully chargeable to Family Dining.
[31]Based on the foregoing the Court concludes that Burger King is not entitled to have the condition protecting its promise strictly enforced.
[32]Moreover and more important, even though a suit for declaratory relief can be characterized as neither legal nor equitable, giving strict effect to the termination provision involves divesting Family Dining of exclusivity, which, in the Court's view, would amount to a forfeiture. As a result the Court will not ignore considerations of fairness and believes that equitable principles, as well, ought to govern the outcome of this suit.
[33]The Restatement, Contracts, sec. 3014 provides:
A condition may be excused without other reason if its requirement
(a)will involve extreme forfeiture or penalty, and
(b)its existence or occurrence forms no essential part of the exchange for the promisor's performance.
[34]Taking the latter consideration first, it seems clear that throughout the early duration of the contract Burger King was more concerned with a general development of the territory than it was with exact compliance with the terms of the development rate. Burger King offered no evidence that it ever considered literal performance to be critical. In fact, the evidence indicates quite the contrary. Even though McLamore testified that he never contemplated a delay of the duration which occurred with the ninth and tenth Restaurants, he felt a total delay of approximately 19 months with respect to the fourth and fifth Restaurants was nearly in compliance. On the basis of his prior conduct and his testimony considered in its entirety his comments on this point command little weight.
[35]Clearly Burger King's attitude with respect to the development rate changed. Interestingly enough it was sometime after Burger King realized Bucks and Montgomery Counties could support substantially 680 more than ten Restaurants as had been originally thought. It was also at a time after Rosewall replaced McLamore as chief executive officer.
[36]Burger King maintains that Ferris' conduct indicates that he knew strict compliance with the development rate was required. This is based on the several occasions where Ferris expressed concern over noncompliance. However, during the presentation of Burger King's evidence it was established that Ferris was an individual who was overly meticulous with details which caused him to be, in many respects, ignored by Burger King officials. Given this aspect of his personality and Burger King's attitude toward him very little significance can be attached to Ferris' expressions of concern. In short, the evidence fails to establish that either Burger King or Family Dining considered the development rate critical. If it eventually did become critical it was not until very late in the first ten years and in such a way that, in conscience, it cannot be used to the detriment of Family Dining.
[37]As previously indicated, the Court believes that if the right of exclusivity were to be extinguished by termination it would constitute a forfeiture. In arguing that by termination Family Dining will lose nothing that it earned, Burger King overlooks the risks assumed and the efforts expended by Family Dining, largely without assistance from Burger King, in making the venture successful in the exclusive territory. While it is true that Family Dining realized a return on its investment, certainly part of this return was the prospect of continued exclusivity. Moreover, this is not a situation where Burger King did not receive any benefit from the relationship.
[38]In making the promise of exclusivity Burger King intended to induce Family Dining to develop its Restaurants in the exclusive territory. There is no evidence that the failure to fulfill the time feature of this inducement was the result of any intentional or negligent conduct on the part of Family Dining. And at the present time there are ten Restaurants in operation which was all the inducement was intended to elicit. Assuming all ten were built on time Burger King would have been able to expect some definable level of revenue, a percentage of which it lost due to the delay. Burger King did not, however, attempt to establish the amount of this loss at trial.
[39]In any event if Family Dining were forced to forfeit the right of exclusivity it would lose something of incalculable value based on its investment of time and money developing the area, the significant risks assumed and the fact that there remains some 76 years of exclusivity under the Territorial Agreement. Such a loss would be without any commensurate breach on its part since the injury caused to Burger King by the delay is relatively modest and within definable limits. Thus, a
681 termination of the Territorial Agreement would result in an extreme forfeiture to Family Dining.
[40]In accordance with the foregoing the Court finds that under the law and based upon the facts adduced in Burger King's case, it is not entitled to a declaration that the Territorial Agreement is terminated. Therefore, Family Dining's Rule 41(b) motion for an involuntary dismissal is granted.
Notes and Questions
1.What was the condition involved in this case and what was the duty which arose or ceased if the condition occurred?
2.Suppose that in May, 1973, when the letter quoted in paragraph 19 was being written, you had been asked to give legal advice to Burger King. What would you have told them to do with Mr. Ferris?
Cantrell-Waind & Associates v. Guillaume Motorsports, Inc.
Court of Appeals of Arkansas 62 Ark. App. 66, 968 S.W.2d 72 (1998)
Sam Bird, Judge.
[1]Cantrell-Waind & Associates, Inc., has appealed from a summary judgment entered for appellee Guillaume Motorsports, Inc., in its action to recover a real estate brokerage commission. Because we agree with appellant that the circuit judge erred in his interpretation of the applicable law and because genuine issues of material fact remain to be tried, we reverse and remand.
[2]On August 1, 1994, appellee, represented by its president and sole stockholder Todd Williams, agreed to lease real property in Bentonville to Kenneth Bower and Kay Bower. The lease gave the Bowers an option to purchase and provided for the payment of a commission to appellant, the real estate broker in this transaction, as follows:
In the event of the exercise of this option within the first twenty-four (24) month period, ten per cent (10%) of the monthly rental payments shall apply to the purchase price. Thereafter, this credit shall reduce two per cent (2%) per year until the expiration of the original lease term hereof, to the effect that the credit will be eight per cent (8%) during the third year, six per cent (6%) during the fourth year, and four per cent (4%) during the fifth year. The sales
682 price shall be \$295,000.00. GUILLAUME MOTORSPORTS, INC., agrees [to] pay CANTRELL-WAIND & ASSOCIATES, INC., a real estate commission of \$15,200.00 upon closing of sale of the property under this Option to Purchase, provided the closing occurs within two (2) years from the date of execution of the Lease with Option to Purchase.
[3]The Bowers' attorney, Charles Edward Young, III, notified Williams in writing on April 23, 1996, that the Bowers chose to exercise the option to purchase, and that they anticipated closing at the earliest possible date. Young also sent a copy of this letter to Samuel Reeves, appellee's attorney. Soon after this, Williams approached Mr. Bower and offered to credit him with one-half of the appellant's \$15,200 commission if he would agree to delay closing until after August 1, 1996. Mr. Bower declined this offer.
[4]Ruth Ann Whitehead, a loan officer at the Bank of Bentonville, notified Mr. Bower on July 19, 1996, that the loan had been approved and that she awaited notification of a closing date. In his deposition, Young said that he attempted to set a July closing date on behalf of the Bowers but had been told by Ms. Whitehead, Reeves, and a representative of the title company that Williams had told them he would be out of the country in late July and unavailable for closing until after August 1.
[5]Young also said that he had asked Reeves if Williams would utilize a power of attorney for closing before August 1 but Williams refused. Williams did not leave the country and was in Bentonville July 22 through 25. Closing occurred on August 14, 1996, and the commission was not paid.
[6]Appellant filed a complaint against Guillaume Motorsports, Inc., on August 12, 1996, for breach of contract. Appellee moved for summary judgment on the ground that it was under no obligation to close the transaction before August 1. In support of its motion, appellee filed the affidavits of Ms. Whitehead and Mr. Carroll, who stated that, to their knowledge, a closing date was not scheduled before August 14, 1996.
[7]Appellee Williams also filed his affidavit stating that a closing date was not established before August 14, 1996, and that the Bowers had not demanded an earlier closing date. Further, he admitted: "While I did in fact approach Kenneth Bower with a proposal to reduce the purchase price if he would agree to establish a closing date after August 1, 1996, my offer was not accepted and no such agreement was made." He said although it would not have bothered him to put the closing off until after August 1, he did not think it was a "conscious decision" not to be available until after August 1.
[8]In a hearing on the motion for summary judgment, counsel for appellee argued that neither the corporation nor Williams was under any obligation to close prior to August 1. He contended there was no bad faith 683 to be inferred by the deliberate avoidance of a real estate commission that is keyed to a "drop-dead" date. He said the real estate broker agreed to the terms of the contract and was bound by it. Counsel pointed out the two separate terms used in the contract when referring to the option to purchase and the closing. The contract stated that to get the maximum discount in the purchase price the Bowers had to exercise the option before August 1, 1996. However, the clause referring to the commission stated that the transaction had to close by August 1. Counsel stated, "I believe my client had every right to do anything within his power, short of breaching his contract with this buyer, to see that this closing didn't occur earlier than that date so he would not owe the commission."
[9]In response to appellee's motion for summary judgment, appellant argued that appellee (by Williams) had a duty to act in good faith and that, in taking steps to prevent the transaction from closing before August 1, 1996, appellee had not acted in good faith. Appellant contended that all contingencies and requirements for the loan had been satisfied by July 19, 1996, and that Mr. and Ms. Bower had attempted to establish a closing date before August 1, but had been deliberately prevented from doing so by Williams's misrepresentations that he would be out of the country and unavailable to close until after August 1. Appellant attached as exhibits excerpts from the depositions of Ms. Whitehead, Mr. Young, Laura Tway (who assisted with closing), Mrs. Bower, Mr. Bower, Williams, and Mr. Carroll. Also attached was a copy of Mr. Young's May 28, 1996, letter to Mr. Reeves. In a supplemental response to the motion for summary judgment, appellant also requested summary judgment against appellee.
[10]In his order granting summary judgment, the judge stated that appellee had no obligation to appellant to arrange for a closing date that would have entitled appellant to a commission and said that the real estate commission was "clearly avoidable" by appellee.
[11]On appeal appellant argues that the trial court erred in ignoring Williams's prevention of a condition precedent as a material fact and that the trial court erred in granting summary judgment in appellee's favor. Appellant argues that, although appellee had no duty to insure that closing occurred before August 1, 1996, it did have a duty not to actively hinder or prevent the transaction from closing before that date. Appellee contends that the circuit court acted appropriately in refusing to extend its obligations beyond those created by the express terms of the contract and that Williams was under no obligation to make himself available for a closing date that would have entitled appellant to a commission.
[12]The term of the contract providing that a commission would be due appellant only if closing occurred before August 1, 1996, is a condition precedent. When a contract term leaves a decision to the discretion of one 684 party, that decision is virtually unreviewable; however, courts will become involved when the party making the decision is charged with bad faith.
[13]In Willbanks v. Bibler, 216 Ark. 68, 224 S.W.2d 33 (1949), the Arkansas Supreme Court held that "he who prevents the doing of a thing shall not avail himself of the nonperformance he has occasioned." Id. at 72, 224 S.W.2d at 35. See also Samuel Williston, The Law of Contracts sec. 677 (3d ed. 1961). This principle is expressed in 17A Am. Jur. 2d Contracts § 703 (1991):
One who prevents or makes impossible the performance or happening of a condition precedent upon which his liability by the terms of a contract is made to depend cannot avail himself of its nonperformance. Even more broadly, where a promisor prevents or hinders the occurrence, happening, or fulfillment of a condition in a contract, and the condition would have occurred except for such hindrance or prevention, the performance of the condition is excused and the liability of the promisor is fixed regardless of the failure to perform the condition. Moreover, while prevention by one party to a contract of the performance of a condition precedent excuses the nonperformance of the condition, it must be shown that the nonperformance was actually due to the conduct of such party; if the condition would not have happened whatever such conduct, it is not dispensed with.
[14]A party has an implied obligation not to do anything that would prevent, hinder, or delay performance.
[15]Comment b to section 225 of the Restatement (Second) of Contracts (1981) provides that the non-occurrence of a condition of a duty is said to be "excused" when the condition need no longer occur in order for performance of the duty to become due: "It may be excused by prevention or hindrance of its occurrence through a breach of the duty of good faith and fair dealing." The Restatement (Second) of Contracts sec. 205 (1981) states: "Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." This legal principle also applies to contracts providing for the payment of commissions to real estate agents. Accordingly, we hold that the circuit court erred in failing to recognize that a duty of good faith and fair dealing was included in this contract and, therefore, appellee was obligated to not deliberately avoid closing the transaction before August 1, 1996.
[16]Our above holding requires a determination of whether there is a genuine issue of material fact as to whether appellee's actions prevented or hindered the occurrence of the condition precedent. The burden of sustaining a motion for summary judgment is on the moving party. On appeal, we must view the evidence in the light most favorable to the non-moving party. It is our task to determine whether the evidentiary items 685 presented by the moving party in support of the motion left a material question of fact unanswered. Summary judgment is not proper where evidence, although in no material dispute, reveals aspects from which inconsistent hypotheses might reasonably be drawn and reasonable minds might differ. It is not the role of summary judgment to weigh and resolve conflicting testimony but to simply decide whether such questions exist to be resolved at trial. A summary judgment analysis does not evaluate evidence beyond the question of whether a dispute exists.
[17]Appellant presented evidence that all of the requirements for the transaction to close had occurred by July 19, 1996, and that Mr. and Ms. Bower were eager to close before August 1; that Williams was aware that closing could occur before August 1; and that Williams had stated to Ms. Whitehead that he would be unavailable to close the transaction until after August 1 because he would be out of the country. In his deposition, and in his answers to appellant's requests for admission, appellee Williams admitted that he was in fact in Bentonville from July 22 through 25 and that he did not leave the country.
[18]In its brief, appellant asserts that it was entitled to summary judgment. We note, however, that appellant did not move for summary judgment but simply requested such relief in the conclusion to its supplemental response to appellee's motion for summary judgment. Consequently, even if the trial court had applied the correct principle of law, and if appellant had properly moved for summary judgment, we could not agree that summary judgment was warranted. In his deposition, appellee Williams testified that he was ready, willing, and able to close and would have closed the transaction before August 1 if he had been contacted. He also stated that, although he was in Bentonville on July 22 through 25, he was not aware until the afternoon of the 25th that the Bowers wanted to close the transaction as soon as possible. In our opinion, genuine issues of material fact remained for trial. Accordingly, we reverse the circuit judge's entry of summary judgment for appellee and remand this case for trial.
Reversed and remanded.
Robbins, C.J., and Roaf, J., agree.
Western Hills, Oregon, Ltd. v. Pfau
Supreme Court of Oregon 265 Or. 137, 508 P.2d 201 (1973)
McAllister, J.
[1]This is a suit to compel specific performance of an agreement to purchase real property. The plaintiff, the owner of the property, is a limited 686 partnership. Defendants are members of a joint venture, formed for the purpose of purchasing the property from plaintiff and developing it. The trial court found that plaintiff was entitled to specific performance of the agreement, and entered its decree accordingly. Defendants appeal, contending that they were excused from performing by a failure of a condition contained in the agreement, and that the agreement is too indefinite to permit specific enforcement.
[2]Plaintiff Western Hills owned a tract of approximately 286 acres in Yamhill County which it had listed for sale with a Salem real estate firm. Defendant Pfau, who is also a real estate broker, heard about this listing early in 1970. He contacted the other defendants, and they jointly submitted a proposal to purchase the property. Their original proposal was not accepted, but negotiations with Western Hills took place which culminated, on or about March 6, 1970, in the execution of the written agreement which is the subject of this suit. The agreement consists of a filled-in form entitled "Exchange Agreement" together with several attached documents. Generally, it provides that in exchange for the Yamhill County property, defendants agreed to pay Western Hills \$15,000 in cash, to convey to Western Hills four parcels of real property "subject to appraisal and acceptance" by Western Hills, and to pay a balance of \$173,600 on terms specified in the agreement. In addition to other terms not material to this appeal, the agreement provides:
Closing of transaction is subject to ability of purchasers to negotiate with City of McMinnville as to a planned development satisfactory to both first and second parties within 90 days from date. A reasonable extension not to exceed 6 months to be granted if necessary.
[3]Defendants made preliminary proposals for a planned development to the McMinnville Planning Commission, but, although the Commission's reaction to these proposals was favorable, defendants abandoned their attempts to secure approval of a development plan. In September, 1970, defendant Pfau, who represented the other defendants in the transaction, met with some of the partners in Western Hills and notified them that defendants did not wish to go through with the purchase. Western Hills refused to release defendants from the agreement. This suit followed.
[4]Defendants contend that their obligation to purchase the property never became absolute because the condition quoted above was never fulfilled. It appears from the evidence that defendants did not proceed with their application for Planning Commission approval of a planned development because they believed the development would be too expensive, primarily because city sewers would not be available to serve the property for several years. Immediate development would have 687 required the developers to provide a private system of sewage treatment and disposal.
[5]It also appears that at the time they executed the agreement, defendants knew that city sewers would not be available for some time. Defendants' initial offer of purchase included a proposal that the closing of the transaction be subject to satisfactory sewer development. This term was deleted from the final agreement because, according to plaintiff's witnesses, the parties knew that sewers would not be available. Pfau testified that he agreed to the deletion of that term because he was led to believe that the provision for approval of a planned development accomplished the same thing.
[6]The question is whether defendants were excused from performing their agreement to purchase the property because they never secured the city's approval of a "satisfactory" planned development, when the evidence shows that they abandoned their application for an approved planned development because the expense of providing an alternative sewer system made the development financially unattractive. In Anaheim Co. v. Holcombe, 246 Or. 541, 426 P.2d 743 (1967) we considered an earnest money agreement which contained a provision making the purchaser's offer "contingent on obtaining a loan of \$25,000." We held that when an agreement contains such a term, it imposes upon the vendee an implied condition that he make a reasonable effort to procure the loan. In the present case defendants had a similar duty, arising by implication, to make a reasonable effort to secure the city's approval of a planned development. As related above, defendants abandoned their attempt to secure the approval of the city Planning Commission in spite of that body's favorable reaction to their initial proposals. There was never any indication that defendants' plan was likely to be rejected.
[7]The condition required, however, not only approval of a planned development, but of a development which was "satisfactory" to the parties. When a contract makes a party's duty to perform conditional on his personal satisfaction the courts will give the condition its intended effect. Discussing such contracts, this court said in Johnson v. School District No. 12, 210 Or. 585, 590--591, 312 P.2d 591 (1957):
Such contracts are generally grouped into two categories:
(1)Those which involve taste, fancy or personal judgment, the classical example being a commission to paint a portrait. In such cases the promisor is the sole judge of the quality of the work, and his right to reject, if in good faith, is absolute and may not be reviewed by court or jury.
(2)Those which involve utility, fitness or value, which can be measured against a more or less objective standard. In these cases, although there is some conflict, we think the better view is 688 that performance need only be "reasonably satisfactory," and if the promisor refuses the proffered performance, the correctness of his decision and the adequacy of his grounds are subject to review.
[8]The condition with which we are concerned in this case properly belongs in the first of these categories as it requires the exercise of the parties' personal judgment. There is no objective test by which a court or jury could determine whether a particular development plan ought to be "satisfactory" to reasonable men in defendants' position. The condition is similar to that in Mattei v. Hopper, 51 Cal. 2d 119,330 P.2d 625 (1958) in which the purchaser's duty under a land sale contract was "subject to Coldwell Banker & Company obtaining leases satisfactory to the purchaser." In a suit by the purchaser to compel specific performance, the seller contended that because of this provision there was no mutuality of obligation. The court held that there was a valid contract. Discussing the two types of "satisfaction" clauses, the court said:
However, it would seem that the factors involved in determining whether a lease is satisfactory to the lessor are too numerous and varied to permit the application of a reasonable man standard as envisioned by this line of cases. . . .
This multiplicity of factors which must be considered in evaluating a lease shows that this case more appropriately falls within the second line of authorities dealing with "satisfaction" clauses, being those involving fancy, taste, or judgment. Where the question is one of judgment, the promisor's determination that he is not satisfied, when made in good faith, has been held to be a defense to an action on the contract. . . .
330 P.2d at 627.
[9]The condition in the present case is similar to that in Mattei in another respect as well. In that case as in this one the question of satisfaction was not concerned with the quality of the other party's performance. The court in Mattei held that the general rule was nevertheless applicable:
Even though the "satisfaction" clauses discussed in the above-cited cases dealt with performances to be received as parts of the agreed exchanges, the fact that the leases here which determined plaintiff's satisfaction were not part of the performance to be rendered is not material. The standard of evaluating plaintiff's satisfaction---good faith---applies with equal vigor to this type of condition. . . .
Id.
[10]As in Mattei we are concerned in this case with a "satisfaction" clause of the type requiring the exercise of personal judgment as to a 689 matter which was not part of the other party's agreed performance. The test, as indicated, is the promisor's real, not feigned, dissatisfaction.
[11]It is clear from the authorities, however, that this dissatisfaction must be not only bona fide and in good faith, but also must relate to the specific subject matter of the condition. General dissatisfaction with the bargain will not suffice.
. . . Where a promise is conditional, expressly or impliedly, on his own satisfaction, he must give fair consideration to the matter. A refusal to examine the . . . performance, or a rejection of it, not in reality based on its unsatisfactory nature but on fictitious grounds or none at all, will amount to prevention of performance of the condition and excuse it.
5 Williston, op. cit. 203--04.
[12]As Corbin points out, although the promisor is under no duty if, in good faith, he is dissatisfied with a performance to be rendered to his personal satisfaction, nevertheless
[n]ot infrequently it is possible to prove that the defendant is satisfied in fact, that the work has been done exactly as he specified, and that his dissatisfaction is either with his own specifications or merely with having to pay money that he prefers to use otherwise . . .
3A Corbin, op. cit. 92.
[13]It is inherent in the requirement that dissatisfaction be bona fide and in good faith that the promisor cannot be allowed to base a claim of dissatisfaction on circumstances which were known or anticipated by the parties at the time of contracting. In the present case the evidence is clear that the defendants entered the agreement with full knowledge that city sewer service would not be immediately available and that their development of the property would have to include a sewage disposal system of some kind. The Brydon case is in point and its reasoning is persuasive. Although defendants were entitled under the contract to be the judges of their own satisfaction with any development plan that might be approved by the city, they should not be permitted to rely on the "satisfaction" clause in order to reject the contract because of an expense known and contemplated at the time of contracting. We hold, therefore, that defendants were not justified in abandoning their attempts to secure city approval of a development plan simply because of the expense of providing a sewer system which they knew when they entered the contract would have to be provided as a part of the development. Not having performed their duty to use reasonable diligence to obtain city approval of a development plan, defendants may not rely on the nonoccurrence of the condition. Anaheim Co. v. Holcombe, supra.
690 This contract was made after some negotiations between the parties. It cannot be a matter of doubt that both parties intended that the coal should be furnished from the plaintiff's mine. As a matter of course it was not expected that it should be equal in quality to that which came from the Big Vein Mines; and no just construction of the contract can give to it such a meaning. It was, however, to be satisfactory to the officers who were named. But this term of the contract did not give them a capricious or arbitrary discretion to reject it . . . Certainly they were not obliged to accept the coal, if they thought it was not fit for the uses contemplated by the contract; neither on the other hand would they be justified in rejecting it for the reason that it did not possess qualities, which at the time of the contract it was known by the parties that it did not possess. . . .
65 Md. at 220.
* * *
The decree of the trial court is affirmed.
PRACTICE TIP
This chapter has emphasized the need to think through the deal and draft express conditions to protect the client. Obviously, this can be overdone. "Overlawyering" takes the lawyers' time, wastes the clients' money, and carries with it the risk that one of the parties will get frustrated and walk away from the deal. It takes judgment, experience, and a good bit of intuition to know when it's best to hammer out all the details and when and if it's best to cover things generally and leave the details to be worked out when disputes arise. You don't want to be known as a deal-killer. On the other hand, it's a lot cheaper to resolve questions at the contract drafting stage.
A good example is the case of the aborted domed stadium in Buffalo. In an attempt to get a sports stadium that would revive the area's dying economy, Erie County entered into a contract with some real estate developers. The contract called for the developers to give the county land on which to build the stadium and for the county to build the stadium and lease it to the developers. The contract was only five pages long, and most of it dealt with the terms of the lease. As to the building of the stadium, it just said: "The county shall construct domed facilities comparable to the Houston Astrodome."
When the county put the construction contract out for bids, it discovered that it would cost \$72 million to get the stadium built instead of the \$50 million the county had budgeted. The county decided it didn't want a stadium that much. The developers sued, and because there were no conditions to the county's obligation, the county conceded the liability issue. The damages phase of the trial lasted 9 months, and the transcript was 25,000 pages long. The developers were awarded \$24 million in damages. The damage award was reversed on appeal because the trial court had misapplied New York's idiosyncratic version of the Hadley v. Baxendale test. A second trial awarded the developers \$6.5 million. This was reversed on appeal and the plaintiffs were able to recover only the money they actually expended in reliance and mitigation.
The litigation went on for 18 years, and it all could have been avoided if the lawyers had included a condition dealing with the rather obvious possibility that the stadium would cost more than anticipated. The case caption is Kenford Co. v. County of Erie. The most important appellate opinions are at 489 N.Y.S.2d 939, 493 N.Y.S.2d 234, 526 N.Y.S.2d 282, and 540 N.Y.S.2d 1.
Laurel Race Course, Inc. v. Regal Construction Co.
Court of Appeals of Maryland 274 Md. 142, 333 A.2d 319 (1975)
Levine, J., delivered the opinion of the Court.
[1]The dispute which has resulted in this appeal was spawned from the lofty but earnest ambition of appellant, Laurel Race Course, Inc. (Laurel), to build "the best [race] track in the United States." To the extent that it might not have fully attained such preeminence, it undoubtedly faults appellee, Regal Construction Company, Inc. (Regal), with whom it had contracted to rebuild its track. Its dissatisfaction with the quality of Regal's performance under that contract led to Laurel's refusal to pay a portion of the sum claimed for those services. As a consequence, Regal brought suit and, following a nonjury trial in the Circuit Court for Prince George's County (Bowen, J.), obtained a judgment against Laurel in the amount of \$67,276.17. This appeal followed.
[2]As the first step in its quest, Laurel, in March 1972, engaged an internationally renowned engineering firm, Watkins and Associates, Inc. (Watkins) of Lexington, Kentucky. Later that spring, Laurel and Watkins entered into a contract whereby the latter agreed to design a plan for the reconstruction of the Laurel track and the installation of a complete drainage system. Watkins had achieved success in designing such "all-weather" tracks for a number of racing courses throughout the world. In addition to preparing a design, a set of specifications and other similar documents, Watkins was to have personnel in attendance during the construction phase.
692 [3]In June 1972, Regal submitted a bid proposal for the construction work. In doing so, it agreed to perform "in strict accordance with the terms and conditions of the specifications and contract documents . . . and the plans . . . and do such other work incidental thereto as [might] be ordered by the Engineer, at the unit or lump sum prices quoted in the attached 'Bid Schedule.' " It also declared that it had "examined the site of the work and informed [it]self fully in regard to all conditions pertaining to the place where the work [was] to be done; [and] that [it had] examined the plans, specifications, and contract documents. . . ." It also agreed to "substantially complete all work on or before September 1, 1972, and to finish the job by September 15, 1972." This document and the contract itself expressly made time of the essence.
[4]After becoming the successful bidder, Regal executed the usual panoply of documents which regularly attend such transactions. Among them was the "General Conditions" which defined Watkins's status as the "Engineer." It was to "have general inspection and direction of the work as the authorized representative of the owner [Laurel]." It had "authority to reject work and materials which [did] not conform to the plans, specifications and contract documents, . . . [and to] decide all engineering questions. . . ." It was also charged with the duty to "interpret the meaning and requirements" of those documents and to "decide all disputes" that might arise thereunder.
[5]In order to "protect itself from loss," Laurel was permitted to withhold partial payments from Regal if the latter failed "to remedy defective work" and for "other causes which in the opinion of the Engineer would justify [Laurel] in withholding such . . . payments." In addition, the General Conditions allowed Laurel to "retain not less than [ten percent] of the amount [of each partial payment] until final completion and acceptance of all work covered by this contract." The General Conditions concluded with a guarantee by Regal of "all construction against defective materials, equipment and workmanship for a period of twelve months. . . ." This included a commitment to "replace such defective parts without cost to the Owner."
[6]Essentially, the work to be performed by Regal consisted of the rehabilitation of both the dirt and turf tracks, and the installation of a surface and underground drainage system, including proposed lakes, most of which was designed primarily to provide a "faster" track under "all-weather" conditions. The specifications detailed rather minutely the gradation requirements for the various materials to be used in the base, sub-base and cushion of the main track. In this connection, the specifications provided: "If any over-size rock, or other deleterious materials that could be harmful to a running horse, are incorporated within the base material during the storage, mixing, or hauling of the base soil, such harmful material shall be removed by the Contractor at his own 693 expense." With respect to the storm drainage system, the specifications provide that "[a]ll pipes shall be laid with ends abutting and true to line and grade," and that the "space between pipes shall be filled with a concrete mortar of proper consistency" as therein specified.
[7]Both the subbase and blended base materials were to "be paid for at the contract unit price in-place and compacted to the required density." Payment under the entire contract was to be made on a "unit price" basis, whereby the total amount to be paid Regal was to be determined by applying the unit prices contained in the bid proposal to the actual quantities "certified by the Engineer for the items enumerated in the Bid Schedule. . . ."
[8]The contract was dated July 3, 1972, and Regal apparently commenced its work shortly thereafter. Performance was neither substantially completed by September 1 nor fully completed by September 15. Regal professes to have substantially completed the work in accordance with the contract terms by September 25, and claims that it ultimately rendered complete performance. On September 28, 1972, after "turning over" the track to Laurel on the 25th, Regal received a "punch list" of 18 items requiring its attention. After Regal claimed in late November that it had remedied those deficiencies and therefore demanded payment in full, Watkins forwarded its recommendation that payment be withheld because:
During the construction of the base the Contractor permitted a large amount of rock and oversize material to become mixed with the clay and sand which were hauled from the source of supply and, in spite of repeated requests, did not make a reasonable effort to remove this material from the base while it was being placed . . . [I]t has been necessary for [Laurel's] crew to perform a large amount of maintenance work that would not have been required had the base been properly blended and compacted.
The condition of the track for the first three weeks resulted in justifiable complaints from the horsemen and could be traced directly to the failure of the Contractor to obtain adequate compaction and proper shaping of the inside ditch and drainage.
[9]Having received the recommendation from Watkins that payment of the balance due be retained, Laurel refused to pay the sum of \$110,931.91, representing the amount then claimed by Regal as the unpaid balance on the total contract amount of \$786,401.35. The latter brought suit for this amount plus interest in February 1973. By the time of the trial in April 1974, the amount claimed by Regal under the written contract had been reduced to \$49,648 plus interest because Laurel had made additional payments during the intervening period.
[10]In its declaration, Regal sought payment under two express contracts. For its first cause of action, it claimed the \$49,648 under the 694 original contract to which we have alluded. The other claim, amounting to \$42,657.48, was based on a verbal contract allegedly entered into during late December 1972, when a conference was held between the parties to resolve the impasse which had arisen. The essence of this claim is that Laurel agreed to pay Regal for such additional work as the latter would thereafter perform, provided it was not found to have been necessitated by defective or incomplete performance under the basic written contract. Regal claimed that it was entitled to recovery under this theory for additional work it subsequently had performed in the summer of 1973.
[11]At the trial, Regal's witnesses claimed that the blended soil base material which it had supplied not only had met the contract specifications, but also had been approved by Watkins, whose personnel had been present throughout the construction stage. With respect to the 24-inch pipe which had been installed as part of the drainage system, Regal conceded that it had become separated in some places and was "out of alignment both horizontally and vertically," but insisted that originally it had been "laid true to grade." It recognized the likelihood, however, that the bed supporting the pipe had not been properly reinforced, and that not all the joints had been mortared.
[12]In regard to the verbal contract, Laurel claimed at the trial that rather than an additional agreement, what had emerged from the December 1972 conference was a request by Regal for a further opportunity to comply with the specifications under the original contract. Laurel maintained that shortly after Regal "turned over" the track on September 25, 1972, stones were observed on the cushion of the track that had "worked up from the base." This was initially observed during the training season which had preceded the racing season. To assuage the horsemen, who were fearful of injuries to the horses and the jockeys, Laurel found it necessary to perform a considerable amount of work with its own employees and equipment. Laurel sought to recoup the expenses incurred for this labor and equipment by backcharging Regal. This claim also included a charge for Laurel equipment that was used by Regal in an effort to bring the track into conformity with the specifications.
[13]When Regal returned to the site in the summer of 1973, it did some additional work on the base of the track in the form of "remixing and reblending." Expert soil engineers employed by Watkins testified that these efforts had improved the quality of the track, but had not brought it into compliance with the specifications because of stones and excessive clay content. They pointed out that any stone greater than 3/8 of an inch was too large for a racetrack, and that such stones were "coming out of" the ten-inch soil base. The principal difficulty caused by the excessive clay content is that in rainy weather it expands and slows up the horses because it drains poorly. The witnesses acknowledged that they had observed the oversize stones in the material being installed by Regal in 1972, but were 695 repeatedly assured by the latter's construction superintendent, who said " 'I'll get them out.' " There had been testimony that during the construction stage, Regal employees were "out with buckets, they were handpicking [the stones]."
[14]The expert testimony on behalf of Laurel was that only the part of the 24-inch pipe which did not run under the track could be unearthed, but an inspection of that part indicated it had not been laid true to grade; that the joints were not closed tightly and had not been mortared; and the "lifting holes had not been plugged." Hence, the pipe had not been installed in accordance with the specifications and was not functioning correctly.
[15]At the conclusion of the trial, the court said with respect to the stones, "I hold everybody accountable for that: the contractor, the racetrack owner and the engineers." Thus, it refused to recognize the presence of the stones as a deviation from contract performance. In regard to the refusal of the engineer to furnish the certificate, the court found that "[Regal] had performed substantially all that [it] was asked or instructed to do"; and that the track was "substantially in conformance with what was expected." Hence, it allowed the entire balance claimed under the written contract---\$49,648. It also allowed \$12,724.01 for the work which Regal had allegedly performed pursuant to the verbal contract. The court refused to allow Laurel any amount for the back-charges, although they were not controverted by any evidence. In addition to the total principal sum of \$62,372.01, the court allowed Regal interest in the amount of \$4,904.16. A portion of this interest was on part of the judgment itself, and the remainder was on the sums which Laurel had paid during the period intervening between the filing of suit and the trial.
[16]In urging reversal, Laurel advances these arguments:
(1)That the trial court erred in overruling Laurel's demurrer to count I of the declaration in which Regal had sought recovery upon the written contract. The demurrer was bottomed on the failure to allege production of the engineer's final certificate---a condition precedent to Laurel's liability.
* * *
[17]Following the trial court's ruling on the demurrer, the case was tried on an amended declaration which included a claim under the written contract in count I and upon the oral contract in count II. At the trial, Laurel persisted in its contention, to no avail, that Regal failed to produce a certificate of the engineer as a condition precedent to liability under the written contract. As we have indicated, the same argument is pressed on appeal.
[18]Almost a century ago, our predecessors held in Gill v. Vogler, 52 Md. 663, 666 (1879), where work was "to be done . . . to the satisfaction of 696 the City Commissioner [of Baltimore]," and payments during the progress of the work were to be made only in accordance with his "monthly estimates," that those estimates were a condition precedent to recovery of such payments, absent bad faith or collusion.
[19]From that holding has emerged the general rule, followed uniformly by decisions of this Court, that where payments under a contract are due only when the certificate of an architect or engineer is issued, production of the certificate becomes a condition precedent to liability of the owner for materials and labor in the absence of fraud or bad faith. Apart from fraud or bad faith, the only other exceptions to this rule are waiver or estoppel.
[20]The durability of this rule may be more readily appreciated when one considers the emphasis with which it was enunciated by our predecessors. For example, in Lynn v. B. & O. R.R. Co., 60 Md. 404 (1883), Judge Miller said for this Court:
So, in the case before us, it was not enough that the jury might believe from the evidence that Legge unreasonably rejected the ice, or that he was grossly wrong in his judgment . . . ; they must go further, and actually infer and find fraud or bad faith. By this contract, which is perfectly lawful, the parties expressly agreed to submit the question whether the ice to be supplied was "good, clear, and solid," to the judgment of this third party, and his judgment, no matter how erroneous or mistaken it may be, or how unreasonable it may appear to others, is conclusive between the parties, unless it be tainted with fraud or bad faith. To substitute for it the opinions and judgments of other persons, whether judge, jury or witnesses, would be to annul the contract, and make another in its place.
60 Md. at 415.
[21]There is no question but that under subsection 24 of the General Conditions, payment of the "balance due . . . including the percentage retained during the construction period" is expressly conditioned upon production of the engineer's "Final Certificate."15 It is equally clear that the amount awarded by the trial court under count I of the declaration was the 697 alleged "balance due . . . including the percentage retained." Nor is there any contention advanced by Regal that any of the exceptions to the general rule---fraud, bad faith, waiver or estoppel---were established here.
[The court then rejected arguments that this was not a proper interpretation of the contract.---Eds.]
Notes and Questions
1.The litany continues: Time or another term is of the essence; Nonseverability; No amendment or waiver by conduct; All amendments and waivers must be in writing; Recitations that both parties have been represented by counsel, or at least had the opportunity to consult with counsel, have read the agreement and understand it. All these provisions are attempts by the parties to avoid having a court later refuse to enforce a condition by finding that is was waived by conduct, was unconscionable, would otherwise lead to a forfeiture, and the like. A determined court can generally find some way to excuse a failed condition should it choose to do so, and can often do so in a ruling that is so fact-based that it is largely immune on appeal, at least if counsel has done her job and presented the judge with an adequate record to protect the ruling. (Why are fact-based decisions more immune on appeal than purely legal determinations? Consider the applicable standards of review).
Counsel can best guard against this result by: (a) drafting the consequences of failure of a condition explicitly into the same provision, not just leaving it to the default and remedy provisions of the agreement, (b) employing good boilerplate to attempt to document the parties' intention that all the terms of the document be strictly construed, and (c) explicitly stating the reason that the condition was included and that it was a fundamental inducement for one or more of the parties to enter into the transaction. This is not foolproof, but it is a good start.
Clients, further, should be guided through the process of documenting waivers of conditions so that each waiver is as limited as possible and so that client conduct does not undo the results that would otherwise be obtained through careful drafting and contracting. The best lawyerly solution or structure can be undone by a client's subsequent actions, so designing a legal structure that is usable by the client is critical to its success.
2.When reviewing or analyzing conditions, focus on what is likely to occur if the condition is not met. Does the client have an appropriate course of action---or cause of action---to pursue under the terms of the contract? If not, one should be provided. Also, consider whether this test is met for the opposing party. If not, is it better for your client if this remains the case? Or is it better to attempt to fix the potential problem and fill the void? Answers to these last questions will vary enormously depending on the circumstances.
698 Lawyering Skills Problem
Your client is a trade organization of building contractors. You have been hired to draft a standard-form contract that contractors and their customers will use on building projects that are too small to make it economical for both of the parties to hire a lawyer to negotiate and draft on their behalf. The contract is to be between the owner and the contractor and is to cover such things as when various phases of the work are to be completed and when progress payments are to be made. The standard form contract has to be fairly evenhanded (i.e., it can't give the contractor an unfair advantage) because the people the contractors will be dealing with are sophisticated enough that they will not sign a one-sided contract. Explain how you would use express conditions to limit the risks to which the parties are exposed.
1"Due diligence" refers to the process by which the buyer and its agents (attorneys, accountants, building inspectors, etc.) investigate "with due diligence" the property that is being purchased or other aspects of the deal.
2The district court also relied upon language in subparagraph 5(b), infra, which required as a condition precedent to payment that the insured, in addition to establishing his production and loss from an insured case, "furnish any other information regarding the manner and extent of loss as may be required by the Corporation." The court construed the preservation of the stalks as such "information." We see no language in the policy or connection in the record to indicate this is the case.
3[In this case, be sure to distinguish between the date of the agreement (the court calls it the "purchase date") and the closing date, which is when the parties get together and exchange the money for the stock. Here, as in most business transactions, it's a critical distinction. The case is complex, so you'll need to make careful notes as you read.---Eds.]
4Kardon later assigned all his rights under the agreement to a new corporation, Edwin J. Schoettle Company, Inc., and it was this corporation which presented the claim against the escrow fund.
5The buyer's claim is based largely on the proposition that sellers had warranted the company's net worth. The amount allowed by the arbitrator---\$3,182.88---represented an error in computing state taxes, additional taxes and water rent. This amount is undisputed as a proper claim against the fund.
6Lord Abinger in Charter v. Hopkins, 4 M. & W. 399, has said "Two things have been confounded together. A warranty is an express or implied statement of something which the party undertakes shall be part of a contract; and, though part of the contract, yet collateral to the express object of it. But in many of the cases, some of which have been referred to, the circumstances of a party selling a particular thing by its proper description has been called a warranty, and a breach of such contract a breach of warranty, but it would be better to distinguish such cases as a noncompliance with a contract which a party has engaged to fulfill; as, if a man offers to buy peas of another, and he sends him beans, he does not perform his contract; but that is not a warranty; there is no warranty that he should sell him peas; the contract is to sell peas, and if he sell him anything else in their stead it is a non-performance of it. So, if a man were to order copper for sheathing ships---that is, a particular copper, prepared in a particular manner---if the seller sent him a different sort, in that case he does not comply with the contract; and though this may have been ranged under the class of cases relating to warranties, yet it is not properly so."
7The fact that Inman did not give written notice was not disputed.
8The portion of the contract with which we are concerned reads:
You agree that you will, within thirty (30) days after any claim (other than a claim for compensation insurance) that arises out of or in connection with the employment provided for herein, give written notice to the Company for such claim, setting forth in detail the facts relating thereto and the basis for such claim; and that you will not institute any suit or action against the Company in any court or tribunal in any jurisdiction based on any such claim prior to six (6) months after the filing of the written notice of claim hereinabove provided for, or later than one (1) year after such filing. Any action or suit on any such claim shall not include any item or matter not specifically mentioned in the proof of claim above provided. It is agreed that in any such action or suit, proof by you of your compliance with the provisions of this paragraph shall be a condition precedent to any recovery.
9Dr. Miles Medical Co. v. John D. Park & Sons, 220 U.S. 373, 411, 31 S.Ct. 376, 55 L.Ed. 502, 520 (1911) (Justice Holmes, dissenting).
10Baltimore & Ohio S. W. Ry. v. Voigt, 176 U.S. 498, 505, 20 S.Ct. 385, 44 L.Ed. 560, 565 (1900).
11315 U.S. 289, 327--28, 62 S.Ct. 581, 600, 86 L.Ed. 855, 877 (1942).
12Each restaurant is opened pursuant to a separate Burger King license agreement.
13[The lesson here is that the failure to look the person in the eye and say "there's a problem here" can have both business and legal consequences. If you can't do it, hire someone to do it for you.---Eds.]
14[The substance of this is now contained in § 229 of the R2d.---Eds.]
15In pertinent part, subsection 24 provides:
Upon notice that the work is ready for final inspection and acceptance, the Engineer shall make such inspection; and when he finds the work acceptable under the Contract and the Contract fully performed, he shall promptly issue a 'Final Certificate' over his signature stating in effect that the work provided for in the Contract has been satisfactorily completed and recommending its acceptance by the Owner.
The balance due the Contractor, including the percentage retained during the construction period, will then be paid to the Contractor by the Owner. This final payment will be made within sixty days after date of the Engineer's 'Final Certificate,' and said final payment shall evidence the Owner's acceptance of work unless it is accepted in writing prior to said final payment.