Brief Fact Summary. In order to remedy certain valuation problems involving a sale of assets, two corporations executed a note. The meaning of one of the provisions in the note was at issue.
Synopsis of Rule of Law. "In determining whether a particular agreement makes an event a condition courts will interpret doubtful language as embodying a promise or constructive condition rather than an express condition. This interpretive preference is especially strong when a finding of express condition would increase the risk of forfeiture by the obligee."
Issue. Is the relevant provision in the contract a "condition or a promise or both?"
Held. The court concluded " 'it is doubtful' that the parties intended to create a condition." The court observed that a recent New York Court of Appeals decision gave guidance for interpreting if a given provision is a condition: "[i]n determining whether a particular agreement makes an event a condition courts will interpret doubtful language as embodying a promise or constructive condition rather than an express condition. This interpretive preference is especially strong when a finding of express condition would increase the risk of forfeiture by the obligee." The court also relied on comment d of Restatement (Second) of Contracts §227(2) (1981), which states "[t]he rule in Subsection (2) states a preference for an interpretation that merely imposes a duty on the obligee to do the act and does not make the doing of the act a condition of the obligor's duty. The preferred interpretation avoids the harsh results that might otherwise result from the non-occurrence of a condition and still gives adequate protection to the obligor under the rules … relating to performances to be exchanged under an exchange of promises. Under those rules … the obligee's failure to perform his duty has, if it is material, the effect of the non-occurrence of a condition of the obligor's duty. Unless the agreement makes it clear that the event is required as a condition, it is fairer to apply these more flexible rules. The obligor will, in any case, have a remedy for breach." The court observed, under the New York cases "it would seem that more explicit language than that used is required in order to achieve that result. For example, the interpretation would be much more clear if the critical clause of the last sentence of Section 4.2 read: 'and upon failure to surrender this Note [Benjamin's] obligation to pay any outstanding balance will terminate,' or 'be extinguished.' Instead, the note uses the language, 'in order to receive payment.' " Additionally, "[i]nterpreting Section 4.2 as promises to exchange performances is a far cry from interpreting it to provide that the failure to surrender the note causes New York Bronze to lose all rights to take an active role and enforce collection on the note through legal proceedings." The court recognizes that "the obvious purpose of the last sentence of Section 4.2 is to protect Benjamin from the risk that the note will fall into the hands of a third party who will in some way force Benjamin to pay twice."
Discussion. This case offers a good discussion of how courts decide whether something is a condition or a promise.