Citation. 62 Ark. App. 66, 968 S.W.2d 72 (Court of Appeals Arkansas, 1998)
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Brief Fact Summary.
A real estate transaction failed to close within a certain amount of time, and as a result, a corporation lost out on a commission. The corporation sued and argued that the transaction not closing by the cut off date was an act of bad faith.
Synopsis of Rule of Law.
"Every contract [including those for the payment of commissions to real estate agents] imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement."
The Appellee in this matter was Guillaume Motorsports, Inc. (the "Appellee"). On August 1, 1994, the Appellee represented by its president and sole stock-holder Todd Williams ("Mr. Williams") agreed to lease real property to Kenneth and Kay Bower. The lease included an option to buy the property and provided for the Appellant, Cantrell-Wiand & Associates, Inc. (the "Appellant") to receive a commission. The relevant provisions read: "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 price shall be $295,000.00. GUILLAUME MOTORSPORTS, INC., agrees [to] pay CANTREL-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." Mr. Williams was informed in writing on April 23, 1996 that Kenneth and Kay Bower wished to exercise the option to purchase the property. The Appellee's attorney also received this letter. The closing occurred on August 14, 1996, and the commission was not paid. The Appellant filed a breach of contact suit against the Appellee on August 12, 1996. The Appellee filed a summary judgment motion and argued it was under no affirmative obligation to close prior to August 1, 1996. The trial judge held, "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."
Can a condition be excused if one party "prevent[s] or hind[ers] [ ] its occurrence through a breach of the duty of good faith and fair dealing[?]"
Yes. "[T]he 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." The court observed first that the term granting the Appellant the right to a commission was a condition precedent. Specifically, the transaction had to occur before August 1, 1996 for the Appellant to receive the commission. The only way a court will become involved in case like this, is if there is a charge of bad faith. The court observed, "[a] party has an implied obligation not to do anything that would prevent, hinder, or delay performance." According to Comment b to section 225 of the Restatement (Second) of Contracts (1981)(the "Restatement"), a condition may be excused if one party "prevent[s] or hind[ers] [ ] its occurrence through a breach of the duty of good faith and fair dealing." Pursuant to §205 of the Restatement, "Every contract [including those for the payment of commissions to real estate agents] imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement."
This case offers an interesting discussion of how a good faith requirement is read into all contracts, including contracts for real estate commissions.