Mind & Motion entered into a real estate purchase contract (REPC) with Celtic Bank to buy a large piece of the bank’s foreclosed property. Although the county had approved plans to construct condominiums on the land, the former owner had not recorded the plats for the first phase of development, so the REPC required Celtic Bank to record the plats by a certain date. However, it also gave Mind & Motion sole discretion to extend the recording deadline as necessary to allow Celtic Bank enough time to record. It further provided that any extension of the recording deadline automatically extended the deadline to complete the transaction. After extending the recording deadline once, Mind & Motion declined to extend it a second time and sued Celtic Bank for breach of contract.
The district court granted summary judgment in Mind & Motion’s favor, concluding that the recording provision was unambiguously a covenant, not a condition. It then awarded Mind & Motion \($100,000\) in liquidated damages and more than \($200,000\) in attorney fees, as well as the return of Mind & Motion’s \($100,000\) earnest money deposit. On appeal, Celtic Bank argued that summary judgment was improper because the recording provision is unambiguously a condition.
CHIEF JUSTICE DURRANT … Covenants are mutual obligations the parties bargain for in their agreement, and the failure to perform them generally gives rise to remedies for breach of contract. Conditions, on the other hand, are events not certain to occur, but which must occur before either party has a duty to perform under the contract. In contrast to covenants, the failure of a condition relieves the parties of any performance obligations, and neither may seek remedies for breach….
We agree with the district court that the language of the contract lends itself to just one plausible reading—that the recording provision is a covenant, not a condition. Under our case law, although it is true that the fulfillment of a condition often hinges on the action of a third party, conditions are also typically phrased using explicitly conditional terms. Here, Celtic Bank is correct that its ability to meet the recording deadline depended on when county officials decided to approve its application. But the parties employed explicitly mandatory language to characterize the recording provision, while using explicitly conditional language elsewhere in the agreement. Based on these features of the REPC, we conclude that there is no plausible way to read the recording provision as anything other than a covenant….
Mind & Motion agreed to purchase the property from Celtic Bank in a real estate purchase contract executed May 25, 2010. The REPC … stated that Celtic bank was selling the property “AS RECORDED.” The agreement required Mind & Motion to deposit \($100,000\) in earnest money with an escrow agent, which was fully refundable if the property did not pass a buyer’s inspection. Mind & Motion could complete its inspections anytime within fifteen days after receiving notice that the property was substantially complete and that Celtic Bank had recorded the plat. The REPC also provided that Celtic Bank “shall record Phase 1”
and “agrees to complete recording of Phase 1” of the development by June 15, 2010. It further provided that Celtic Bank “will accomplish any necessary construction or repairs required to complete recording of Phase 1.” But it granted Mind & Motion “the sole discretion” to extend the deadline “as necessary to allow” Celtic Bank to record. If Mind & Motion extended the deadline, “the Evaluations and Inspection Deadline and the Settlement deadline” would be “automatically extended by the same amount of time.”…
The REPC also contained a “time is of the essence clause,” which provided that “[u]nless otherwise explicitly stated in this Contract,” performance must be completed “by 5:00 PM Mountain Time” on the applicable deadline. The clause also stated that “[p]erformance dates and times referenced herein shall not be binding upon title companies, lenders, appraisers, and others not parties to this Contract, except as otherwise agreed to in writing by such non-party.”…
In the event Mind & Motion defaulted, the REPC allowed Celtic Bank to keep the earnest money as liquidated damages. If Celtic Bank defaulted, Mind &
Motion would receive back its earnest money and could either sue to specifically enforce the contract or obtain \($100,000\) in liquidated damages….
Although Celtic Bank’s ability to meet the recording deadline hinged in large part on the approval of county officials, the parties couched the recording obligation in mandatory language while employing explicitly conditional language elsewhere in the REPC to describe other performance obligations. This shows that Celtic Bank and Mind & Motion, both sophisticated parties, knew how to draft a condition when they so desired. Accordingly, it is not plausible to read Celtic Bank’s duty to record the phase 1 plat as anything other than a covenant, and the REPC is therefore not facially ambiguous….
We … conclude that the only plausible way to read Celtic Bank’s recording obligation is as a covenant…. This is primarily because the obligation is phrased in explicitly mandatory terms despite the parties’ use of conditional language to characterize other performance obligations. For that reason, even though Celtic Bank could not control the precise timing of recordation, the language the parties employed cannot plausibly be read as creating a conditional obligation. Rather, the plain language of the agreement shows that Celtic Bank agreed to shoulder the same type of regulatory risk businesses routinely assume in such contracts….
In essence, covenants are the core bargained-for exchange of an agreement. They create specific legal duties, the violation of which gives rise to remedies for breach of contract. Conditions are different. “A condition is an event, not certain to occur, which must occur … before performance under a contract becomes due.”
CRITICAL THINKING:
What is the argument that the clause in question is a condition rather than a covenant? What additional facts might have led to a different outcome in this case?
ETHICAL DECISION MAKING:
What ethical norms are furthered by this decision? How?