Articles Posted in Contract

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A developer-buyer entered an agreement with a landowner to buy 10 acres after buyer pursued county approval for subdivision. The contract contained a contingency that the buyer was not obligated to do anything and could cancel the contract at any time.

The buyer pursued the subdivision, spending money for engineering and permits, and obtained a tentative map. The seller changed his mind and refused to close, and argued that the agreement was an option and, since it was not supported by consideration, it was revocable. The California Supreme Court disagreed, finding it was both an option and supported by consideration.

The court found classic features of an option: 1st, the seller held open an offer to sell for three years; 2nd, the buyer was able to accept the offer by waiving contingencies, but was not obligated to do anything, even if all contingencies were satisfied. The court rebuked an argument that real estate contracts often have contingencies, such as loan or inspection, that allow one party to withdraw, noting that withdrawal is allowed only if the contingency fails. Here the buyer could withdraw anytime.

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Under California law, “benefit of the bargain” damages for breach of a real estate contract is the difference between the actual value of what the plaintiff got and what he expected to receive. If Joe breaches his contract to buy a house from Sam for $100,000, and Sam later sells it for $80,000, Sam is entitled to damages of $20,000.

In a recent California decision parties contracted to buy & sell a commercial property, with environmental and financial contingencies in the contract. There was a problem with subsurface contamination, and it was unclear what the cleanup cost would be.

The buyer unexplainably released all financing contingencies, though they apparently did not have a firm commitment from the bank. The lender said they would not fund the loan due to the environmental contamination. The seller ended up selling to a third party for less, and in the process lost out on a 1031 exchange.

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In my previous post, I discussed a case where the parties had a “non- refundable” deposit in their real estate purchase contract, but the court refunded it anyway.

Liquidated damages are damages whose amount the parties agree during the formation of a contract for the injured party to collect as compensation upon a breach.

In addition to the forfeiture concern, the court also noted that to find that the seller was entitled to keep the deposit without regard to actual damages would essentially create a “liquidated damages provision. Among other problems with this view, the court noted that California Civil Code section 1677 requires a liquidated damages clause to be”separately signed or initialed by each party to the contract.” That was not the case here. But what does it take to enforce a clause liquidating damages in a real estate purchase contract?

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California law provides a convenient way for parties in a lawsuit who reach a settlement to allow the court to enforce the settlement agreement, even if the settlement will take years to perform.  Code of Civil Procedure section 664.6 provides that if parties to pending litigation agree in a signed writing to settle the case, the court may, on the motion of a party, enter judgment pursuant to the settlement, and retain jurisdiction to enforce it.

A losing defendant recently found out that the the key words in this code section  are “pending litigation.”  He had a large money judgment against him, and two years later the winning plaintiff was levying his bank account.  The parties entered negotiations for payment of the debt for less then the full amount of the judgment.  Ultimately the creditor continued to go after the money, and the defendant brought a motion under 664.6, claiming they had reached a settlement.

The court denied it, pointing out that the case already had ended in a judgment that was final.   There was no pending lawsuit. The law only allows one final judgment, and the only thing 664.6 allows is entering a judgment.  The court contrasted this situation with post-divorce child support matters- there, the judgment usually provides for “continuing jurisdiction,” meaning that this is not the final judgment.

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I have noted in a prior post how difficult it is to have a court review legal errors in an Arbitrator’s decision. A recent Federal Court Ninth Circuit decision nails the coffin closed under the Federal Arbitration Act.

The FAA provides that a court may vacate an award “where the arbitrators exceeded their powers.” Arbitrators exceed their powers when they express a “manifest disregard of law.” For this to be shown, court’s have concluded that it must be clear from the record that the arbitrator recognized the applicable law and then ignored it.’

In this case regarding a lawsuit between limited and general partners, the Arbitrator awarded the GP $1.5 million damages, plus $20 million in punitive damages.

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A recent California decision pitted homeowners against the contractor who was supposed to build their retirement home. The job didn’t get done, and the contractor was in for a big surprise.

The homeowners contracted with the defendant corporation to construct the home for them. California law requires a corporation holding a contractor’s license to designate a “responsible managing officer” or “responsible managing employee”, either of which must be actively engaged in the work of the corporation. The contractor here was a corporation; the qualifying license holder, Diani, was an absentee owner, on a mission in Peru for three years, and had turned over all operations to Terry (who handled the homeowners’ project.). Diani testified that he did not own any stock in the corporation, that he had given it all to Terry. Diani did not receive any compensation or profits from the corporation.

There were numerous disputes between the homeowner and Terry, and work was stopped. Terry recorded a mechanic’s lien against the property, and the lawsuit began.

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