Centex Corporation (Defendant) entered into an agreement with Dalton (Plaintiff) that included a $750,000 finder’s fee for Plaintiff. A government regulation went into effect that prohibited such payments and Plaintiff sued.
When government regulations make provisions of a contract illegal, the contract is impracticable and unenforceable.
Defendant was looking for thrift institutions to acquire. It hired Plaintiff to find appropriate institutions to buy and promised to pay him $750,000 if Defendant acquired the institutions Plaintiff found. Defendant sought approval for this provision from the Federal Home Loan Bank Board (Board). The Board initially approved it, but five days after Plaintiff and Defendant entered into their agreement, told Defendant that the finder’s fee was not allowed. Defendant did not tell Plaintiff of this change, but went ahead with the acquisition of the institutions that Plaintiff had found. The Board then adopted regulations prohibiting the payment of finder’s fees. When Defendant acquired the thrift institutions and refused to pay Plaintiff because of the new regulation, Plaintiff sued. The trial court entered summary judgment for the Plaintiff and the state appellate court affirmed. The Texas Supreme Court then granted review.
If a government regulation makes a provision of a contract illegal, is the contract enforceable?
(Gammage, J.) No. When government regulations make provisions of a contract illegal, the contract is impracticable and unenforceable. When a contract is based upon an assumption that an event will not occur, and then it does occur, preventing one party from performing under the contract, he no longer has a duty to perform. Here, the Board’s regulation was the event that occurred when the contract was based on the belief by both Plaintiff and Defendant that it would not. Defendant’s performance is therefore excused by the doctrine of impracticability. The performance is excused by the impossibility of performance that came with the change in law. It would not be appropriate to require an analysis of foreseeability and to therefore allocate the risk based upon which party was best in a position to foresee the change because whether foreseeable or not, Defendant is barred by law from paying the fee. Plaintiff did not plead quantum meruit as an alternative grounds for relief in the trial court, and so is barred from asserting that equitable claim now. The terms of the contract provided that Plaintiff would be paid only if the Board approved Defendant’s acquisitions of the thrifts, so Plaintiff’s argument that he had already performed by finding the institutions before the change in regulation fails. Plaintiff did not have the right to enforce the contract until the Board approved the acquisitions and, by that time, the regulations were in place. Reversed.
(Mauzy, J.) The majority decision acknowledges the injustice of this finding, but does not give Plaintiff equitable relief, providing Defendant with a windfall. Defendant knew of the change, but proceeded with acquiring the institutions Plaintiff found and did not tell Plaintiff of the coming change in regulation. Plaintiff may have been able to appeal the Board’s decision if he’d been promptly informed. Because Defendant continued with the purchases despite knowing of the change in regulation, it should bear the burden of the change, not Plaintiff. As a result of this decision, corporations and others in position to influence regulatory policy can escape their obligations through changed regulations. This court should remand the case and allow Plaintiff to assert an equitable claim.
The court here declines to adopt the risk allocation test that is found in Restatement (Second) of Contracts § 264 which says: “If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.” This gives the party seeking relief a presumption that both parties assumed the law would not change. The other party would then have to rebut this presumption. If the party seeking relief acted in bad faith or sought the law change (as the dissent hints that Defendant may have) relief will be denied.