Western Hills, Oregon, Ltd. v. Pfau

• Decision Date: 02 April 1973
• Citation: 508 P.2d 201,265 Or. 137,96 Or.Adv.Sh. 1461
• Parties: WESTERN HILLS, OREGON, LTD., a limited partnership, Respondent, v. Edward A. PFAU et al., Appellants.
• Court: Oregon Supreme Court

Page 201

508 P.2d 201

265 Or. 137

WESTERN HILLS, OREGON, LTD., a limited partnership, Respondent, v. Edward A. PFAU et al., Appellants.

Supreme Court of Oregon, In Banc.

Argued and Submitted Jan. 11, 1973.

Decided April 2, 1973.

Richard D. Barber, Salem, argued the cause for appellants. On the brief were DeArmond, Sherman & Barber, Salem.

Malcolm F. Marsh, Salem, argued the cause for respondent. On the brief were Clark & Marsh and Michael C. McClinton, Salem.

McALLISTER, Justice.

This is a suit to compel specific performance of an agreement to purchase real property. The plaintiff, the owner of the property, is a limited partnership. Defendants are members of a joint venture, formed for the purpose of purchasing the property from plaintiff and developing it. The trial court found that plaintiff was entitled to specific performance of the agreement, and entered its decree accordingly. Defendants appeal, contending that they were excused from performing by a failure of a condition contained in the agreement, and that the agreement is too indefinite to permit specific enforcement.

Plaintiff Western Hills owned a tract of approximately 286 acres in Yamhill County which it had listed for sale with a Salem real estate firm. Defendant Pfau, who is also a real estate broker, heard about this listing early in 1970. He contacted the other defendants, and they jointly submitted a proposal to purchase the property. Their original proposal was not accepted, but negotiations with Western Hills took place which culminated, on or about March 6, 1970, in the execution of the written agreement which is the subject of this suit. The agreement consists of a filled-in form entitled 'Exchange Agreement' together with several attached documents. Generally, it provides that in exchange for the Yamhill County property, defendants agreed to pay Western Hills $15,000 in cash, to convey to Western Hills four parcels of real property 'subject to appraisal and acceptance' by Western Hills, and to pay a balance of $173,600 on terms specified in the agreement. In addition to other terms not material to this appeal, the agreement provides:

'Closing of transaction is subject to ability of purchasers to negotiate with City of McMinnville as to a planned development satisfactory to both first and second parties within 90 days from date. A reasonable extension not to exceed 6 months to be granted if necessary.'

Defendants made preliminary proposals for a planned development to the McMinnville Planning Commission, but, although the Commission's reaction to these proposals was favorable, defendants abandoned their attempts to secure approval of a development plan. In September, 1970, defendant Pfau, who represented the other defendants in the transaction, met with some of the partners in Western Hills and notified them that defendants did not wish to go through with the purchase. Western Hills refused to release defendants from the agreement. This suit followed.

Defendants contend that their obligation to purchase the property never became absolute because the condition quoted above was never fulfilled. It appears from the evidence that defendants did not proceed with their application for Planning Commission approval of a planned development because they believed the development would be too expensive, primarily because city sewers would not be available to serve the property for several years. Immediate development would have required the developers to provide a private system of sewage treatment and disposal.

It also appears that at the time they executed the agreement, defendants knew that city sewers would not be available for some time. Defendants' initial offer of purchase included a proposal that the closing of the transaction be subject to satisfactory sewer development. This term was deleted from the final agreement; because, according to plaintiff's witnesses, the parties knew that sewers would not be available. Pfau testified that he agreed to the deletion of that term because he was led to believe that the provision for approval of a planned development accomplished the same thing.

The question is whether defendants were excused from performing their agreement to purchase the property because they never secured the city's approval of a 'satisfactory' planning development, when the evidence shows that they abandoned their application for an approved planned development because the expense of providing an alternative sewer system made the development financially unattractive. In Anaheim Co. v. Holcombe, 246 Or. 541, 426 P.2d 743 (1967) we considered an earnest money agreement which contained a provision making the purchaser's offer 'contingent on obtaining a loan of $25,000.' We held that when an agreement contains such a term, it imposes upon the vendee an implied condition that he make a reasonable effort to procure the loan. 246 Or. at 547, 426 P.2d 743. See, also, Aldrich v. Forbes, 237 Or. 559, 570, 385 P.2d 618, 391 P.2d 748 (1964). In the present case defendants had a similar duty, arising by implication, to make a reasonable effort to secure the city's approval of a planned development. As related above, defendants abandoned their attempt to secure the approval of the city Planning Commission in spite of that body's favorable reaction to their initial proposals. There was never any indication that defendants' plan was likely to be rejected.

The condition required, however, not only approval of a planned development, but of a development which was 'satisfactory' to the parties. When a contract makes a party's duty to perform conditional on his personal satisfaction the courts will give the condition its intended effect. See, generally, 3A Corbin on Contracts, 78--109, §§ 644--648; 5 Williston on Contracts (3d ed. 1961) 189--218, §§ 675A, 675B; Restatement of Contracts § 265. Discussing such contracts, this court said in Johnson v. School District No. 12, 210 Or. 585, 590--591, 312 P.2d 591, 593 (1957):

'* * * Such contracts are generally grouped into two categories:

'(1) Those which involve taste, fancy or personal judgment, the classical example being a commission to paint a portrait. In such cases the promisor is the sole judge of the quality of the work, and his right to reject, if in good faith, is absolute and may not be reviewed by court or jury.

'(2) Those which involve utility, fitness or value, which can be measured against a more or less objective standard. In these cases, although there is some conflict, we think the better view is that performance need only be 'reasonably satisfactory,' and if the promisor refuses the proffered performance, the correctness of his decision and the adequacy of his grounds are subject to review.'

The condition with which we are concerned in this case properly belongs in the first of these categories as it requires the exercise of the parties' personal judgment. There is no objective test by which a court or jury could determine whether a particular development plan ought to be 'satisfactory' to reasonable men in defendants' position. The condition is similar to that in Mattei v. Hopper, 51 Cal.2d 119, 330 P.2d 625 (1958) in which the purchaser's duty under a land sale contract was 'subject to Coldwell Banker & Company obtaining leases satisfactory to the purchaser.' In a suit by the purchaser to compel specific performance, the seller contended that because of this provision there was no mutuality of obligation. The court held that there was a valid contract. Discussing the two types of 'satisfaction' clauses, the court said:

'* * * 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. * * *

'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.' 330 P.2d at 627.

The condition in the present case is similar to that in Mattei in another respect as well. In that case as in this one the question of satisfaction was not concerned with the quality of the other party's performance. The court in Mattei held that the general rule was nevertheless applicable:

'* * * Even though the 'satisfaction' clauses discussed in the above-cited 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 * * *.' Id.

As in Mattei we are concerned in this case with a 'satisfaction' clause of the type requiring the exercise of personal judgment as to a matter which was not part of the other party's agreed performance. The test, as indicated, is the promisor's real, not feigned, dissatisfaction. See Johnson v. School District, supra, 210 Or. at 591, 312 P.2d 591.

It is clear from the authorities, however, that this dissatisfaction must be not only bona fide and in good faith, but also must relate to the specific subject matter of the condition. General dissatisfaction with the bargain will not suffice.

'* * * Where a promise is conditional, expressly or impliedly, on his own satisfaction, he must give fair consideration to the matter. A refusal to examine the * * * performance, or a rejection of it, not in reality based on its unsatisfactory nature but on fictitious grounds or none at all, will amount to prevention of performance of the condition and excuse it.' 5 Williston, op.cit....