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Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

Supp. To CHAPTER 3 ACCEPTANCE AND REJECTION OF OFFER

1-3 Corbin on Contracts Supp. to § 3.7

Supp. to § 3.7 Acceptance ''Subject to Approval'' by a Third Party

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(A) The following cases cite this section or its predecessor:

(1) Hubble v. O'Connor, 291 Ill. App. 3d 974, 225 Ill. Dec. 825, 684 N.E.2d 816 (Ill. App. Ct. 1997) . A standard form real estate purchase agreement contained an attorney disapproval clause providing that ''This contract is contingent upon the approval hereof as to form by the attorney(s) for Buyer and Seller within 5 Business Days after Seller's acceptance of this contract.'' The parties through their attorneys extended that period to 14 days and during that period the attorneys exchanged a series of faxed riders to the contract on a number of different issues. After the extended period had expired, the buyer's attorney declared he was dissatisfied with the contract, and argued that the attorney disapproval clause applied so his client was not bound.

The lower court had agreed with buyer's lawyer but this court reverses, announcing that the contract was formed upon its initial execution and once the disapproval period expired so too did the condition subsequent concerning attorney approval. The court quotes Corbin as saying ''an offer that states that it is subject to the approval of the attorneys of both parties creates a contract the moment it is accepted.'' The main volume contains those words but within a paragraph and a context indicating that such formation occurs when (but only when) the parties so intended, not ipso facto. Maybe these parties did intend for the contract to be formed upon execution, subject only to a grace period within which lawyer disapproval would discharge it. If so, fine.

But the court does not analyze the question of intention. It is possible that the court is saying that the use of this sort of standardized form manifests such an intention per se but the court does not make this clear. Indeed, the extensive subsequent dickering over terms tends to negate an intention to form a contract so the attention the court gives to that dickering does suggest that it was the form that manifested this intention rather than the actual conduct of the parties.

(2) Patel v. McGrath, 2007 Ill App. LEXIS 747 . McGrath accepted the Patels' offer to buy McGrath's real estate. The contract contained an attorney-approval clause allowing the attorney for either party to approve, disapprove or make modifications to the contract except modifications concerning the price, within five business days of the date of acceptance. Failure of the parties to agree on modifications within ten business days of the date of acceptance would nullify the contract and required the return of earnest money to the buyer. Within five business days, the Patel's attorney (PA) sent a letter to McGrath's attorney (MA) seeking modifications that did not relate to price and also stated that the modifications were not to be construed as a ''revocation of the current contract'' or as a ''counter-offer.'' The same day, MA sent a letter not only rejecting the modifications but disapproving the contract. The property was then re-listed at a substantial increase over the original listing price. The Patels sought specific performance of the contract which McGrath moved to dismiss. The trial court granted the motion to dismiss on the ground that PA's modifications amounted to a counter offer rejected by MA. On appeal, the court relied on Hubble v. O'Connor in find that a contract had been formed though it contained a condition subsequent allowing the parties to approve, disapprove or modify the contract through their attorneys within the time limits set forth (see the criticism of this analysis in § 6.10 of Supplement). Citing § 339, comment b, of the Restatement (Second) of Contracts, the court found that, since PA expressly stated that the modifications were not intended as a ''revocation'' or a ''counter-offer,'' they were mere suggestions or proposals which, if not accepted, would allow the existing contract to remain in effect. Though the terms ''counter-offer'' or ''revocation'' are normally used to describe operative events prior to the formation of a contract, the court found that their use in PA's letter was clearly designed to leave the extant contract in effect if these ''suggestions'' were rejected. MA, however, not only rejected the modifications but disapproved the contract without stating reasons for the disapproval. While the contract did not require either attorney to state reasons for disapproval, disapproval could not be based on the purchase price. The court held that the failure to state a reason and the subsequent relisting at a higher purchase price raised an issue of fact as to what role, if any, the purchase price played in MA's disapproval. Thus, the instant court held that the district court erred in dismissing Patel's complaint. A critique of the court's use of the ''condition subsequent'' concept to characterize the ''attorney-approval'' clause is found in § 6.10 of this supplement.

(3) Patel v. Burt Dev. Co., 261 Ga. App. 436, 582 S.E.2d 495 (2003) . Patel agreed to purchase property for $1,050,000. The contract under which he made the purchase, however, was subject to the condition that Patel receive the financing necessary to purchase and renovate the property. Patel was required to pursue such financing with due diligence and notify the seller (Burt) if he was unable to obtain the financing by the closing date. The closing date was later extended by an agreement requiring Patel to deposit additional earnest money. Patel neither notified the seller that he was unable to secure financing nor did he deposit the additional earnest money. The property was sold to another party for $850,000 and Burt brought this action to recover damages from Patel. Patel admitted that several lending institutions were willing to lend him sufficient funds but he rejected these opportunities because of the terms and conditions in such proposals. The trial court directed a verdict for Burt on the ground that Patel breached the contract by failing to obtain financing and notify Burt to that effect.

On appeal, Patel argued that the trial court erred in directing a verdict and the instant court agreed. The court cited a predecessor section of the Corbin supplement indicating that such facts disclosed a valid contract for the purchase and sale of the property subject to a condition precedent of obtaining financing to the duties of both parties to render their promised performances. The court, therefore, held that Patel's failure to give notice that he was unable to obtain financing could not render the contract fully enforceable if the condition of obtaining financing was not met. The court, however, manifested confusion in stating that, ''The contract was not binding on the parties until [Patel] obtained a loan, for not until the occurrence of that event did the contract have mutuality.'' This suggests a misanalysis of the buyer obtaining financing as a condition precedent to the formation of the contract. A contract for the sale of property conditioned on the purchaser obtaining financing, however, is binding from the moment the promises are exchanged. There is mutuality in that the seller must take the property off the market and the buyer has a good faith obligation to pursue financing.

The court then redeemed its analysis by recognizing the good faith obligation of the buyer to diligently seek financing which is typically implied in such contracts but was expressed in the contract before the court. The court held that if Patel failed to pursue his good faith obligation of obtaining financing, a directed verdict for the seller would be proper. If he did pursue that obligation diligently but failed to obtain the financing, there would be no breach of contract. Since the record indicated that Patel had opportunities to obtain the financing but rejected them, there was a material issue of fact as to whether Patel was reasonable in rejecting them in light of the broadly-worded contingency clause in the contract that did not include specific amounts or financing terms.

While the court finally arrived at a plausible analysis, it is important to clarify the respective obligations of the parties under such common contracts for the sale of real property subject to obtaining financing. The parties are bound to purchase and sell the property on the agreed terms. Their duties, however, are postponed until an event-a condition precedent-either occurs or does not occur. The event is the obtaining of financing. If that event occurs, the existing duties under the contract are activated. If the event does not occur, the duties are discharged. The buyer has an implied obligation (albeit in these facts, it was an express obligation) to diligently seek financing. This is a duty created by the buyer's implied promise to operate in good faith and to cooperate in an effort to fulfill the duties under the contract. The buyer's failure to perform his promise of notifying the seller that financing was not obtained is a breach for which the seller may recover damages. Under the facts of the instant case, such a breach appears to be immaterial.

(4) Synnex Corporation v. ADT Security Services, Inc., 2007 N.J. Super. LEXIS 256 (2007) . Where the contract provided, ''This Agreement is not binding unless approved in writing by an authorized Representative of ADT,'' the instant court held that ADT's performance of the contract by delivery and installation of a burglar alarm system constituted its acceptance of the contract despite the absence of a signature by an authorized Representative of ADT. Citing Corbin, the court recognized that a party may condition its acceptance of a contract upon approval of the ''home office'' or a higher level company official, but if that party indicates its unqualified acceptance in some other manner such as performance in accordance with a contract, the parties will be bound by the contract. This case is fully discussed at § 3.34 of the supplement.