Western Hills, Oregon, Ltd. v. Pfau

Brief Fact Summary.

Members of a joint venture agreed to purchase a certain piece of property from a limited partnership.  A provision in the parties' agreement conditioned the joint venture's acceptance on the "ability of purchasers to negotiate with City of McMinnville as to a planned development satisfactory to both first and second parties."

Synopsis of Rule of Law.

When "a party's duty to perform [is] conditional on his personal satisfaction the courts will give the condition its intended effect."

Facts.

The Plaintiff, Western Hills, Oregon, Ltd. (the "Plaintiff"), a limited partnership, was the owner of a piece of property.  The Defendants, Pfau and other (the "Defendants"), the members of a joint venture, purchased the property from the Plaintiff for development purposes.  The purchase was memorialized in an "Exchange Agreement".  The purchase was made "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."  At the time the agreement was signed, the Defendants knew the city would not be developing the sewer system for a while.  The Defendants made certain preliminary proposals to the city for a planned development, but abandoned the plans because the development would be too expensive due to the cost of privately constructing the sewers.  The city's Planning Commission reacted favorably to the preliminary plans.  The Plaintiff sought specific performance of the agreement and the Defendant argued that since the condition was not satisfied they did not have to perform.  The trial court held for the Plaintiff.

Issue.

"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' planning 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?"

Held.

The court observed that the Defendants had a duty "arising by implication to make a reasonable effort to secure the city's approval of a planned development." The court observed that the Defendants' abandoned their attempt to get approval from the Planning Commission although the Planning Commission initially reacted positively.  The court then observed that the contingency was more than just the approval of the planned development, but also "a development which was 'satisfactory' to the parties."  When "a party's duty to perform [is] conditional on his personal satisfaction the courts will give the condition its intended effect." 
•    The court, relying on [Johnson v. School District], observed there were two categories of cases involving this type of condition.  "(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 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."
•    The court then recognizes that the condition in this case concerns the first category and requires an exercise of personal judgment.  Also, that satisfaction is "not concerned with the quality of the other party's performance."  The test is "the promisor's real, not feigned, dissatisfaction."  Additionally, this satisfaction "must be not only bona fide and in good faith, but also must relate to the specific subject matter of the condition."  Further, 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."
•    The court also recognizes the Defendants entered into the agreement knowing fully well that the city would not immediately provide a sewer system and that they would have to provide some type of sewage system.  The court then found that "[a]lthough 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."  As such, the 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."

Discussion.

It is very interesting to read this case alongside [Van Iderstine Co., Inc. v. Barnet Leather Co., Inc.] and [Largent Contracting, Inc. v. Great American Homes, Inc.], to see how other courts interpret conditions.