Citation. 351 Md. 8, 716 A.2d 230 (Court of Appeal of Maryland, 1998)
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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."
On March 15, 1990, the New York Bronze Powder Company, Inc. ("New York Bronze") entered into an agreement with Benjamin Acquisition Corporation ("Benjamin"). Pursuant to the agreement, Benjamin agreed to purchase from New York Bronze, all the assets of Benjamin F. Rich Company ("Rich") for $4.5 million. Benjamin also agreed to assume certain of Rich's liabilities. Shortly before the closing scheduled on April 30, 1990, Benjamin became concerned about the valuation of certain of Rich's assets. Benjamin's concerns were alleviated when the parties entered into an Amendment of the purchase agreement ("Amendment No. 1"). Section 3 of Amendment No. 1 allowed for $350,000 of the purchase price to be deferred, and required Benjamin to execute a non-negotiable note to New York Bronze in that amount. Pursuant to Section 3 of Amendment No. 1, Benjamin was to retain an accounting firm to create an audited balance sheet of Rich. Benjamin was required to use its best efforts to deliver the audited balance sheet to New York Bronze by June 14, 1990. If the audited balance sheet evidenced that Rich was worth less than $4.5 million, then Benjamin was entitled to a "dollar for dollar credit against the $350,000 deferred purchase price." For some reason, the accounting firm never completed its audit and Benjamin never paid off the note. New York Bronze sued Benjamin for failure to pay the note. An issue arose as to whether §4.2 on the Note, which reads as follows was a promise or a condition: "Payments of any portion of the principal of this Note shall be made by check drawn on a United States commercial bank and shall be mailed by registered mail, return receipt requested, on or prior to the date on which such payment is due, to the Noteholder at the address set forth in the Purchase Agreement. If the date on which any payment hereunder is due is not a Business Day, then such payment shall be due on the next succeeding Business Day. The Noteholder shall be required to surrender this Note for cancellation upon the maturity or prepayment in full of this Note in order to receive payment."
Is the relevant provision in the contract a "condition or a promise or both?"
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."
This case offers a good discussion of how courts decide whether something is a condition or a promise.