Citation. 51 Cal. 2d 119, 330 P.2d 625, 1958 Cal. 213
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P brought an action against D for breach of contract because D failed to convey to P real property in accordance with the terms of a deposit receipt.
Synopsis of Rule of Law.
An agreement made subject to the satisfaction of leases does not render a contract illusory or void it for lack of mutuality because of the requirement of good faith.
Facts.
Mattei (P) was a real estate developer. P planned to construct a shopping center adjacent to land owned by Hopper (D). P entered into an agreement with D for the purchase of D’s land. The parties reduced the agreement to writing. Under the terms of the agreement, P was required to deposit $1,000 of the total purchase price of $57,500, and was given 120 days to examine the title and consummate the purchase. At the expiration of 120 days, the balance of the purchase price was due and payable upon tender of a good and sufficient deed of the property sold. The agreement was made subject to Coldwell Banker & Co. obtaining leases satisfactory to the purchaser. P paid the $1,000 deposit. While P was securing the leases, D notified P that D would not sell P the land under the terms of the agreement. Satisfactory leases were obtained and P offered to pay the balance of the purchase price. D failed to tender the deed. P alleged a breach of contract and brought an action for damages. Jud
gment for D. P appealed.
Issue.
Is the satisfaction clause illusory or lacking in mutuality of agreement and thus an invalid consideration?
Held.
No. Judgment reversed.
When the parties attempt to make a contract where promises are exchanged as the consideration, the promises must be mutual in obligation. For the contract to bind either party, both must assume some legal obligation. If the satisfaction clause of the agreement leaves P free to perform or to withdraw from the agreement at P’s own unrestricted pleasure, the promise is illusory and provides no consideration.
A contract making the duty of performance conditional upon a party’s satisfaction seems to give that party wide latitude in avoiding any obligation under the agreement.
In contacts where the condition calls for satisfaction as to commercial value or quality, operative fitness, or mechanical utility, the standard of a reasonable person is used in determining whether satisfaction has been received. However, the factors in determining whether a lease is satisfactory to a lessor are too numerous and varied to permit the application of the reasonable man standard.
In this case, the satisfaction clause implies P’s duty to exercise his best judgment in good faith is an adequate consideration to support the contract. The standard of evaluating P’s satisfaction, good faith, prevents it from nullifying the consideration otherwise present in the promises exchanged.
Discussion.
The duty of good faith is a valid consideration in an otherwise illusory promise.
