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.
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.
This case is interesting in a number of respects.
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.
If you know of any caselaw that is inconsistent with these notions, I’d like to hear about it.