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Mattei v. Hopper
51 Cal. 2d 119 (Cal. 1958)
Spence, J.
Plaintiff brought this action for damages after defendant allegedly
breached a contract by failing to convey her real property in accordance with the terms of
a deposit receipt which the parties had executed. After a trial without a jury, the court
concluded that the agreement was "illusory" and lacking in
"mutuality." From the judgment accordingly entered in favor of defendant,
plaintiff appeals.
Plaintiff was a real estate developer. He was planning to construct a
shopping center on a tract adjacent to defendant's land. For several months, a real estate
agent attempted to negotiate a sale of defendant's property under terms agreeable to both
parties. After several of plaintiff's proposals had been rejected by defendant because of
the inadequacy of the price offered, defendant submitted an offer. Plaintiff accepted on
the same day.
The parties' written agreement was evidenced on a form supplied by the
real estate agent, commonly known as a deposit receipt. Under its terms, plaintiff was
required to deposit $1,000 of the total purchase price of $57,500 with the real estate
agent, and was given 120 days to "examine the title and consummate the
purchase." At the expiration of that period, the balance of the price was "due
and payable upon tender of a good and sufficient deed of the property sold." The
concluding paragraph of the deposit receipt provided: "Subject to Coldwell Banker
& Company obtaining leases satisfactory to the purchaser." This clause and the 120-day period were desired
by plaintiff as a means for arranging satisfactory leases of the shopping center buildings
prior to the time he was finally committed to pay the balance of the purchase price and to
take title to defendant's property.
Plaintiff took the first step in complying with the agreement by
turning over the $1,000 deposit to the real estate agent. While he was in the process of
securing the leases and before the 120 days had elapsed, defendant's attorney notified
plaintiff that defendant would not sell her land under the terms contained in the deposit
receipt. Thereafter, defendant was informed that satisfactory leases had been obtained and
that plaintiff had offered to pay the balance of the purchase price. Defendant failed to
tender the deed as provided in the deposit receipt.
. . .
. . . [T]he inclusion of this clause, specifying that leases
"satisfactory" to plaintiff must be secured before he would be bound to perform,
raises the basic question whether the consideration supporting the contract was thereby
vitiated. When the parties attempt, as here, to make a contract where promises are
exchanged as the consideration, the promises must be mutual in obligation. In other words,
for the contract to bind either party, both must have assumed some legal obligations.
Without this mutuality of obligation, the agreement lacks consideration and no enforceable
contract has been created. Or, if one of the promises leaves a party free to perform or to
withdraw from the agreement at his own unrestricted pleasure, the promise is deemed
illusory and it provides no consideration. Whether these problems are couched in
terms of mutuality of obligation or the illusory nature of a promise, the underlying issue
is the same -- consideration.
While contracts making the duty of performance of one of the parties
conditional upon his satisfaction would seem to give him wide latitude in avoiding any
obligation and thus present serious consideration problems, such "satisfaction"
clauses have been given effect. They have been divided into two primary categories and
have been accorded different treatment on that basis. First, in those contracts where the
condition calls for satisfaction as to commercial value or quality, operative fitness, or
mechanical utility, dissatisfaction cannot be claimed arbitrarily, unreasonably, or
capriciously and the standard of a reasonable person is used in determining whether
satisfaction has been received. . . . However, it would seem that the factors
involved in determining whether a lease is satisfactory to the lessor are too numerous and
varied to permit the application of a reasonable man standard as envisioned by this line
of cases. Illustrative of some of the factors which would have to be considered in this
case are the duration of the leases, their provisions for renewal options, if any, their
covenants and restrictions, the amounts of the rentals, the financial responsibility of
the lessees, and the character of the lessees' businesses.
This multiplicity of factors which must be considered in evaluating a
lease shows that this case more appropriately falls within the second line of authorities
dealing with "satisfaction" clauses, being those involving fancy, taste, or
judgment. Where the question is one of judgment, the promisor's determination that he is
not satisfied, when made in good faith, has been held to be a defense to an action on the
contract. Although . . . [prior] decisions do not expressly discuss the issues of
mutuality of obligation or illusory promises, they necessarily imply that the promisor's
duty to exercise his judgment in good faith is an adequate consideration to support the
contract. None of these cases voided the contracts on the ground that they were illusory
or lacking in mutuality of obligation. . . . Even though the "satisfaction"
clauses discussed in . . . [previous] cases dealt with performances to be received as
parts of the agreed exchanges, the fact that the leases here which determined plaintiff's
satisfaction were not part of the performance to be rendered is not material. The standard
of evaluating plaintiff's satisfaction -- good faith -- applies with equal vigor to this
type of condition and prevents it from nullifying the consideration otherwise present in
the promises exchanged.
. . .
We conclude that the contract here was neither illusory nor lacking in
mutuality of obligation because the parties inserted a provision in their contract making
plaintiff's performance dependent on his satisfaction with the leases to be obtained by
him.
The judgment is reversed.