Traversing the Law-Good faith and fair dealings.
As we continue to traverse the law in all of its vastness, it is amazing how often the same themes repeat themselves. Even though the state governments and the federal government all enact their own laws and fulfill the roles of dual sovereignty, certain areas of the law receive relatively consistent treatment, as we have seen with property law.
Other, seemingly diverse areas of the law are treated almost the same--contracts and deeds, for example. In this column I will focus on contract law, and will follow up on the similarities with deed law in a future column.
In addition to consistent treatment (relatively speaking), the lessons to be learned from the law seem to run along well-worn paths. One such lesson, which will once again be demonstrated by our case-in-chief, is that the professional service provider (land surveyor, engineer, etc.) must take responsibility for knowing the law as it pertains to his or her area(s) of practice. If you plan to depend upon the legal system to dispense justice, or on your attorney to know the law, you could be heading for great disappointment.
As I have already mentioned and as you no doubt know for yourself, the law is huge. We have about 230 years of it in this country and another 1,500 years of English common law on top of that. It can literally be compared to an ocean and your little case is just a small rowboat cast upon the waves. Although the tides may be somewhat predictable, the uncertainty of the wind, the waves and the weather require a knowledgeable hand to guide your small craft to safety. Your attorney, who may possess great knowledge in certain ports, may be completely inept in unfamiliar waters. Your knowledge of the law, especially as it pertains to your practice, may be the only thing between you and disaster.
The AgreementOur case-in-chief, Hunter v. Wilshire Credit, 2005, although not specifically a land surveying case, is a great contract case and the lessons learned are easily transferable to the issues we encounter. Hunter wished to purchase a home; this is truly the stuff American dreams are made of. Hunter made an offer to purchase the home on Oct. 7, 2002, with an expiration date of Oct. 9, 2002. The expiration date came and went without an acceptance. Two days later, on Oct. 11, 2002, the agent for the owner presented Hunter with an “Addendum to Purchase Agreement,” referring to and purporting to amend Hunter’s original offer. Hunter signed the addendum. At this point in time, Hunter but not the owner, Wilshire Credit, has signed both the original offer and the addendum.
On Nov. 4, 2002, the owners’ agent approached Hunter once again, this time with an unsigned document titled “Real Estate Purchase Contract Counter Offer & Addendum.” The reasoning given by the real estate agent for the necessity of this document was “in order to set the closing up.” (Is anyone other than me getting a sinking feeling in his or her stomach?) Hunter signed the “Counter Offer.” This document contained, among other provisions, that:
If Wilshire defaulted under the terms of the “Contract or this Addendum, [the Hunters] shall be entitled to the return of the Earnest Money Deposit as [their] sole and exclusive remedy.”
Closing Date/Time of Essence: Closing to occur on or before: 11/20/02 ... Seller shall have the right, in Seller’s sole discretion, to extend the closing date or to void the Contract if; [sic] Seller determines that it is unable to convey good and insurable title to the Property by a reputable title insurance company at the regular rates.
Acceptance: This counter offer is made subject to Sellers Senior Management approval and shall not become a binding Contract until signed by Seller. Seller reserves the right to continue to offer the herein described property for sale and accept any other offer acceptable to Seller prior to full Senior Management approval.1
On Nov. 13, 2002 at 3:00 p.m., Wilshire acknowledged the receipt of the purchase agreement (Hunter’s original offer). At 3:05 p.m., Wilshire signed the addendum and at 3:30 p.m., Wilshire signed the counteroffer.
Closing was originally set for Nov. 18, 2002. Hunter wasn’t supposed to move in prior to the closing, but being the anxious and happy new home buyer, Hunter moved in and started making improvements to the property. The closing didn’t occur as scheduled because the “survey to determine the boundary lines wasn’t complete.” What actually happened was that Wilshire apparently knew that it had problems with the title. There were various judgments and liens on the property, and the survey revealed encroachments on the boundary. In other words, Wilshire couldn’t close without curing these encumbrances on the property. In accordance with the counteroffer, Wilshire gave notice that the sale wouldn’t close and attempted to return Hunter’s earnest money as the only remedy for default.
Whose Agreement Was it Anyway?What do you do now if you’re Hunter? He’s not only financially invested in the property--he’s emotionally invested as well. He’s moved the family in and made improvements. Hunter hires an attorney and sues Wilshire and the real estate agent. Somehow, he leaves the surveyor out of it but we won’t complain too loudly. Hunter claims that Wilshire breached the purchase agreement and addendum and, therefore, under the terms of those agreements, Hunter is entitled to specific performance and reimbursement of expenses due to the breach. Wilshire claims the only enforceable contract is the counteroffer and, as a result, Hunter is only entitled to the return of his earnest money as his damages.
In analyzing the case, the court first enters into a discussion of contract basics:
The requisite elements of a valid contract include: an offer and an acceptance, consideration, and mutual assent to terms essential to the formation of a contract. Here, on October 7, 2002, the Hunters offered Wilshire $118,900 to purchase a house. The Hunters’ offer expired on October 9, 2002. On October 11, 2002, Wilshire presented the unsigned addendum to James Hunter, and he signed it. On November 4, 2002, James Hunter received and signed the counteroffer, which, most notably, limited the Hunters’ remedies. On November 13, 2002, Wilshire first acknowledged receipt of the purchase agreement (which had by that time expired), signed the addendum, and signed the counteroffer, in that order.2
In other words, the only two documents that meet the basic requirements of a contract are the addendum and the counteroffer. Whereas the original purchase agreement may have had other remedies specified in the case of default, or no remedies at all, in which case standard contract remedies apply,3 the counteroffer had a specific remedy--the return of the earnest money. The court also made note of the order in which the events occurred.
An offer that expires does so unless the parties do something to resurrect it. Wilshire acknowledged receiving the purchase offer, but so what? “An unsigned contract cannot be enforced by either of the parties, however completely it may express their mutual agreement, if it was also agreed that the contract should not be binding until signed by both of them.”4 Wilshire never signed the purchase agreement and even if it had, the document was expired by its own terms.
As far as the addendum and the counteroffer (so to speak) are concerned, they specified new terms and conditions and, as the court noted, spelled out the specific and only remedy available to Hunter in the event of default. And whose offers are these, anyway? These were both offers made by Hunter, even though Wilshire prepared them. By specifying, as Wilshire did, that acceptance was subject to “Senior Management approval”5 and further, by sending them over to Hunter unsigned, Wilshire effectively turned Hunter’s act of signing them and returning them to Wilshire, no matter how titled (i.e., “Addendum” or “Counter Offer”) into original offers to Wilshire, which Wilshire accepted on Nov. 13 at 3:05 and 3:30 p.m., respectively. “When one party solicits and receives an … expression of agreement from another, clearly specifying that there is to be no contract until … assent by some officer or representative of the solicitor, the solicitation is not itself an offer. It is a request for an offer.”6
Entertaining Hunter’s argument that his original offer to purchase was somehow enforceable, the court noted that, “even if we were to conclude, as the Hunters argue, that the purchase agreement and the addendum were legally binding, we would nonetheless conclude that the counteroffer governs the parties’ rights. When parties execute successive agreements and the two agreements cover the same subject matter and include inconsistent terms, the later agreement supersedes the earlier agreement.”7 This is known as the battle of the documents.
How does this apply to your business practice? Imagine that your client signs your contract and then calls you and says, “Hey, my insurance carrier requires that you sign my contract. It’s no big deal; I signed yours. I’ll fax it over. Sign it and send it back, will you?” Deal or no deal? No deal! If there are any conflicting terms in the two contracts, your client’s contract will win over yours if it was the last document signed.
Covenant of Good Faith and Fair DealingsWhat do good faith and fair dealing have to do with all of this? Let’s recap. Wilshire knew or should have known that it had problems with the title on this property. Believe me, you don’t get judgments against you and liens on your property without notice of such things. Wilshire receives the original offer from Hunter but never signs it. Under the guise of an addendum to this original offer, Wilshire sends over the real contract, which Hunter signs. Realizing that its problems were too big to clear up and quite possibly having a survey in its hands showing boundary encroachments indicating that additional property would have to be purchased to clear the encroachments, or possibly that the house would have to be moved, Wilshire sends over another document titled “Real Estate Purchase Contract Counter Offer” purporting to need Hunter’s signature “in order to set the closing up.” This second part of what would ultimately become the valid contract between the parties specifies and limits Hunter’s remedies.
Even though not argued by Hunter’s attorneys, the court took special interest in pointing out that:
The Hunters do not allege in their complaint or on appeal that Wilshire presented the counteroffer because the title binder identified defects in the title to the property, nor do they allege that Wilshire breached the implied covenant of good faith and fair dealing when it presented the counteroffer on the same day the insurer issued the title binder. There is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the rights of the other party to receive the fruits of the contract; ... in every contract there exists an implied covenant of good faith and fair dealing. Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”8
So the Hunters win in the end, right? Wrong. Our judicial system is an advocacy system pitting one party against the other. The parties themselves must make the arguments, pro and con. Even though the state supreme court in this case recognized that the argument had not been made and that Wilshire had in fact breached the covenant, Hunter was given no relief on this point.
What Went Wrong?The first thing that went wrong with this case is the same thing that can go wrong with your case. Hunter got emotionally involved and began performance (moved in) before he had a contract. This locked him into a bad position. Instead of simply taking his earnest money back and moving on with life, he felt the need to fight it out. In addition, Hunter didn’t understand contract law. I’m hearing what you’re saying: “Hunter is just an ordinary citizen attempting to purchase property.” That’s correct and that’s fine for Hunter, but not for you. Professional service providers need to understand the law as it applies to their practice, and that includes contracts.
So replacing you for Hunter, what went wrong? You got emotionally involved and jumped the gun on the project. You spend a lot of money and effort on the project just to have the client back out. What else went wrong? You don’t understand contract law and you hired an attorney with equal or less understanding. Additionally, you lost the battle of the documents. Even if your original offer had been accepted, the client’s later offers (which weren’t offers at all) that came over in the guise of an addendum and counteroffer, defeated your original agreement. What was your final mistake? You and your attorney failed to recognize the chink in Wilshire’s armor, the covenant of good faith and fair dealings. This could have afforded you some if not complete relief.
So what should we have learned from this? Don’t get emotional over these issues. Keep your cool and hire an attorney well versed in contract law. Standard contract remedies will apply unless specific remedies are expressed in the contract. This is true for the covenant of good faith and fair dealings as well. It is implied in every contract unless the matter is specifically covered in the contract.9 If you’re not happy with standard contract remedies, have your own contract that covers these issues the way you want to handle them. Take a cue from Wilshire’s playbook, and limit your liability through contract language. Finally, keep yourself abreast of the law just because you are a professional; it simply comes with the territory and is necessary for self-preservation.