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Author Topic: K Hypo  (Read 651 times)

joshdelight

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K Hypo
« on: November 05, 2004, 04:27:40 PM »
An agreement was formed for the sale of real property for $8,500 with $100 to be paid at the time of the formation and the balance of $8,400 to be paid at the settlement.  The $100 was paid as required.  The writing contained the following provision: "in the event that the buyer *cannot* make the settlement, he may cancel this agreement without any further liability on his part, and the deposit money returned." 

The buyer sought to make settlement, but the seller refused to perform.  What result?

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As I see it, the issue is whether the language of the agreement constitutes a freedom of termination on behalf of the buyer such that the buyer suffers no detriment for his promise to purchase; or, in other words, whether the language of the agreement shows a "mutuality of obligation" (consideration) such that the seller's refusal to perform constitutes a breach of K.

In this case, since the conditional language uses the word "cannot," this is forms a K with a term that conditions full performance on the buyer's ability to pay at the time of settlement.  This therefore is not a "free pass" giving the buyer a freedom of termination, and therefore forms a K.

If the language of the agreement had said "will not," than this would give the buyer a freedom of termination, and there would not be any detriment to the buyer in accepting the seller's offer. Consideration fails, and therefore no K.

Does anyone have any other interpretations?
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jeffjoe

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Re: K Hypo
« Reply #1 on: November 06, 2004, 04:41:42 PM »
I agree the word cannot binds the buyer.  You could argue that the buyer might choose not to seek financing for the settlement, but I think the courts would uphold the contract on the basis that the buyer is required to make a good faith effort to obtain financing.
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Wild Jack Maverick

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Re: K Hypo
« Reply #2 on: November 06, 2004, 06:20:51 PM »
It does seem that the buyer's obligation to perform depends wholely on his ability to perform. The contract states 'cannot' and not 'will not.'
However, it is not stated that his ability to perform depends solely upon his ability to raise the funds for the purchase. The buyer's ability to perform might depend upon other unexpected occurances which could affect his ability to perform on any pre-determined date of performance.

Since there is not shown any circumstances that the seller could refuse to perform, it would also seem that the seller is in breach. However, the seller could argue that his refusal is the reason that the buyer cannot make settlement, in which case the buyer is not liable and would be entitled to the refund of his money.
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jeffjoe

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Re: K Hypo
« Reply #3 on: November 06, 2004, 09:52:27 PM »
"make settlement" seems to say pay the money.  either he has it or he gets it.
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Wild Jack Maverick

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Re: K Hypo
« Reply #4 on: November 07, 2004, 01:18:52 PM »
jeffjoe,
I am not placing any other interpretation on the phrase 'make settlement.' I agree that it means to 'settle', to complete the contract, or in stated case, to make payment for the property.

I am saying that in the event that buyer procures the funds with which to make settlement, then cannot complete the deal because of some other reason, (i.e. buyer is in car accident or has heart attack the day of settlement, or must leave town, or seller refuses settlement etc), he is released from the terms of the contract. In the real world, quite possibly seller did not really want to sell but agreed to the contract with the belief that buyer would not have the money for settlement.
We could dissect the contract, word for word, but unfortunately, joshdelight provided only a phrase.  :)
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jeffjoe

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Re: K Hypo
« Reply #5 on: November 07, 2004, 03:52:11 PM »
Granted, but sometimes it hinges on a single phrase.
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kristin1644

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Re: K Hypo
« Reply #6 on: November 12, 2004, 08:04:40 PM »
This is actually a very appropriate hypo since we are currently writing a memo on similar facts. 

The question is whether a termination clause with a condition subsequent is binding if the occurrence of the condition is within the control of the party with the power to terminate. (basically whether the buyer made an illusory promise making performance on the part of the buyer completely optional, and therefore does not constitute consideration.)  When jeffjoe said that the buyer has to make a good faith effort to obtain financing he was correct.  This means that the buyer actually has to try to obtain financing, and while he is trying, even if it is for one millisecond, he is bound to the contract. 

If I were actually given these facts as a test question, I would probably also talk about the fact that the $100 deposit created an option contract so that the seller couldn't revoke the offer while the buyer was attempting to obtain financing.  But there doesn't seem to be any worry here from anyone that the seller is in breach...

duma

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Re: K Hypo
« Reply #7 on: November 14, 2004, 12:58:37 PM »
Here is my answer... and thanks for the practice:

To answer this question, we must first ponder the offer and the following acceptance. The offer was to pay the $8500, but the acceptance of that offer would be not just be accepting the offered price of $8500. An acceptance must comply with the terms of the offer (R2C§58). The offeror wanted there to be a payment of $100. This was part of the terms of the acceptance.

The offer was accepted by the payment of the $100. Much to the surprise of this seller, this payment of could have created an irrevocable offer.

An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer (R2C§25). Because the buyer accepted the offer, and made the payment of $100, he created the option contract that could not later be revoked by the seller.

However, it seems as though the seller is considering the term “in the event that the buyer cannot make the settlement, he may cancel this agreement…” to make the contract invalid, regardless if there was an option contract. This creates another issue; did the statement of the offer allow the seller to also get out of the contract?

The addition of this statement in the contract is one that would imply good faith in dealing. Every contract imposes upon each party a duty of good faith and fail dealing in its performance and its enforcement (R2C§205). The offer was one in which implied good faith that the buyer would exercise in determing if he could still make the final payment. Here, the good faith was in regard to the ‘conditional’ term. A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due (R2C§224). There was an implied obligation to use good faith in this conditional term, that being the buyers ability to pay. That facts do not say in what regard it may be determined that the buyer could not pay, but an example would one where the buyer could not obtain a loan.

The addition of this conditional term will not make a contract invalid. Also, the term was applicable to the buyer only, “in the event that the buyer…” Therefore, this is an enforceable contract that the seller could not revoke. The buyer, in using good faith, could escape “..liability on his part..” if he could not make the settlement. The final conclusion, the seller must follow the contract and comply with the terms by selling the land for the remaining $8400.