From reader Ben King, general counsel of Jive Communications, I learned about a 2016 opinion of the Supreme Court of Utah, Mind & Motion Utah Investments, LLC v. Celtic Bank Corp., 2016 UT 6, 367 P.3d 994 (PDF here). The moral of this particular story is that if you want a contract provision to be interpreted as a condition, you had better make sure it’s worded as a condition. No surprise there. It also offers a reminder about the role of shall and when to use reasonable efforts.
THE OPINION
Here are the relevant details:
Mind & Motion entered into a contract with Celtic Bank to buy a piece of property the bank had acquired from a developer through foreclosure. Although the county had approved plans to construct condominiums on the land, the developer had not recorded the plans for the first phase of development. The contract stated that Celtic Bank “shall record Phase 1” and “agrees to complete recording of Phase 1” of the development by June 15, 2010.
The recording process required an applicant to obtain approval from different entities. 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 (in MSCDspeak, an obligation), not a condition. Consistent with the contract’s remedies for default, the district court 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 deposit.
On appeal, Celtic Bank argued that summary judgment was improper because the recording provision was unambiguously a condition. The Supreme Court agreed with the district court that the recording provision was an obligation, not a condition, because it was phrased in explicitly mandatory terms, as compared with conditional language used elsewhere in the contract.
The court acknowledged that even if Celtic Bank had complied with the county’s every demand, the county officials ultimately controlled the timing of recording—not Celtic Bank. But the court went on to hold that this wasn’t a case where government permits were difficult to obtain, and even if it were, the language of the agreement strongly indicated that Celtic Bank had assumed the risk that its application wouldn’t be approved before the recording deadline. According to the court, it followed that it wasn’t plausible to read the recording provision as a condition.
MY THOUGHTS
This case is interesting in a number of respects.
Expressing Conditions
This case serves as a reminder of a point I make in MSCD 3.266–.67: When faced with uncertainty over whether a provision is a condition or an obligation, a court would likely hold that it’s an obligation. That’s even more likely if you use just shall in the provision in question. So I have no sympathy for the bank, as the language at issue doesn’t remotely resemble one of the three ways of expressing a condition. The bank could have made sure to include language of policy expressing a condition—something like it is a condition to closing that. Or it could have used a conditional clause, using if or another subordinator. (Using language of obligation to express a condition, featuring must plus a to-clause, would be a less likely option in this context.)
The Role of Shall
It follows that this case also serves as a reminder that shall is a safe way to express obligations. Those who would like to have us get rid of shall keep mentioning how shall gives rise to so much litigation. One problem with that notion is that much of that caselaw is irrelevant, because it deals with an unfortunate feature of statutory drafting, the “discretionary” shall, meaning should. But beyond that, the relevant cases I encounter are consistent with the Mind & Motion opinion: courts accept that shall expresses obligations.
I wouldn’t want to draw broad conclusions from two court opinions, but it’s interesting that in the Lubbock County case I discussed recently in this post, the court considered something expressed using will and in effect decided that it expressed a condition. I have no way of knowing whether the outcome would have been different if the language at issue had used shall, given that the deal context was different and perhaps more susceptible to being interpreted as a condition. But shall appears to be a safe bet for expressing obligations, so I’m sticking with it. And that has the benefit of allowing me to use will and must to express other meanings.
So I sense that the tide is turning in favor of rehabilitating shall.
The Role of Agrees To
The Mind & Motion court also held that agrees to serves as another way to express obligations. But that doesn’t mean that I want to use agrees to for that purpose—I don’t, because I don’t want to use two verb structures to express the same meaning. Furthermore, agrees to is conducive to fights over whether you’re expressing language of performance or language of obligation; for more about that, see this 2007 post. So the heck with agrees to.
When to Use Reasonable Efforts
Even if the contract had made it clear that recording is a condition to closing, it would have made sense also to impose an obligation on the bank. That would have allowed the buyer to make sure that the bank didn’t sit on its hands and wait until the condition wasn’t satisfied. But even though the court held that it was enforceable, the flat obligation included in the contract didn’t make sense: because the bank didn’t have complete control, a reasonable efforts obligation would have made more sense.
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If you know of any caselaw that is inconsistent with these notions, I’d like to hear about it.
Two comments:
1/ I think the issue in the case would be more naturally phrased as whether Celtic Bank had one conditional obligation (to sell if it recorded the plat) or two unconditional obligations (to record the plat and to sell).
2/ The court is clearly of two minds about what a ‘condition’ is:
(a) ‘Utah law recognizes two different kinds of promises parties make in a contract, covenants and conditions’. (A condition is a kind of promise.)
(b) ‘Conditions … are events not certain to occur, but which must occur before either party has a duty to perform under the contract’. (A condition is an event not certain to occur.)
English law follows AWB’s description of Utah law, in that there are two kinds of condition, referred to in Chitty as (1) promissory conditions (breach of which entitle the innocent party to terminate, unlike the lesser category of obligation known as warranty), and (2) contingent conditions (eg conditions precedent). Whenever Ken refers to conditions, I have to remind myself that he means the latter category.
My categories are semantic, as my concern is conveying meaning clearly. Terms of art devised by judges are irrelevant to what I do.
Understood, but you make a distinction between condition and obligation when you say “When faced with uncertainty over whether a provision is a condition or
an obligation, a court would likely hold that it’s an obligation”.I don’t think the word “condition” has a single, clear, everyday meaning that is distinct from “obligation”.
I use the words in their semantics sense, and my recommendations regarding how you express conditions and obligations don’t get embroiled in terms of art, or at least no one has pointed me to anything suggesting that they do.
By ‘my categories are semantic’, I understand you to mean that the categories of contract language are categories of meaning and not form.
If so, then doesn’t the category to which a provision belongs depend on its meaning and not its form?
Compare two texts that mean the same thing:
(1) ‘It is a condition of payment that Widgetco deliver the Widgets timely’.
The form seems to be language of policy but the meaning is obligatory, namely, ‘The Buyer hereby assumes a duty to pay if Widgetco delivers timely’.
(2) ‘The Buyer is not required to pay unless Widgetco delivers timely’.
The form seems to language of discretion, but the meaning (with the help of the expectation of relevance) is obligatory: If Widgetco delivers timely, the Buyer will have a duty to pay.
So is the category to which a specimen of contract language belongs (if any) determined by semantic analysis or formal analysis?
Put otherwise, can a piece of contract language constitute an obligation semantically without being language of obligation?
Both of your examples seem to mistake a condition of payment – timely delivery – with an obligation to pay.
If there are no other conditions for payment then it would be the same as an obligation to pay, but there will always be other requirements, and so it becomes a necessary, but not sufficient, condition for payment.
Perhaps I rely too heavily on the ‘expectation of relevance’ for my examples to illustrate well what I’m driving at.
My attempted point is that Ken’s statement that ‘my categories are semantic’ seems to involve a paradox, as follows:
If two contract provisions have the same meaning (ie achieve the same drafting goal), but each provision belongs to a different category of contract language, how can the categories be ‘semantic’ categories)?
It would seem necessary that either the provisions have different meanings or they belong to the same semantic category.
This is an interesting case and an excellent post (and comments). To answer Ken’s mantra, “what should the drafter have done?”, the bank should have taken the possibility of slow-moving bureaucrats seriously. If something’s out of your control, it’s risky to agree to accomplish it. If the bank intended this to be a condition, they were very sloppy about it.