Tuesday, 02 July 2013 09:50
By Gina Helou
The contract specifically provided that, as part of the purchase agreement, the buyers would pay, in certain increments, $659,000 in deposits, or 20% of the purchase price. The construction company was permitted to either place the funds in escrow or use the money toward the construction of the villa. After over two years of construction, the company sent a letter to the buyers setting a closing date, at which time the final balance would be due and owing. The buyers discovered, however, the company had not obtained the certificate of occupancy, which was a precondition for closing. The buyers immediately responded with a letter, informing the company that they were terminating the purchase contract because the construction company had not performed pursuant to the contract. The buyers demanded the return of their payments and stated that the agreement had become illusory.
An illusory agreement is one where the performance may become optional or impossible. This permits the other party not to perform or pay because the contract may be void. The construction company never responded to the buyers’ letter and did not return the buyers’ payments. The company was finally able to obtain the certificate of occupancy after approximately three months of the closing date. The buyers sued based on the construction company’s potential inability to perform.
The Arizona Supreme Court looked at the buyers’ actions as an “anticipatory repudiation” of the contract, which occurs when a contracting party clearly indicates to the non-breaching party (i.e., the company in this case) that he/she does not intend to perform the obligations (e.g., making a final payment) under the contract. The court stated that an anticipatory breach can both excuse performance of the non-breaching party and it can give rise to a claim for damages. The court held that the company would have to prove that it was “reading, willing, and able” to perform under the contract in order to recover damages in a suit against a repudiating party. The company argued that it did not have to show it was “ready, willing, and able” because the contract called for the forfeiture of the “earnest money” in the event the buyers breached.
In analyzing this argument, the court turned to the terms of the contract and the intent of the parties. The court determined that despite the wording of the payments as “earnest money,” it was clear that the payments were, in fact, progress payments. The court reasoned that earnest money is normally held by a neutral third-party and not used by a construction company to finance the construction. The court found that the payments in this case were immediately available to the company to use “for costs related to the development of the [villa].” Thus, the court reasoned that the company would still have to prove they were “ready, willing, and able” to perform under the contract at the time the buyers stated they were terminating the contract.
The court ultimately held additional evidence was required to determine whether the company could have performed under the contract if the buyers had not terminated the contract. The court remanded the case back to the lower court to determine the facts in accordance with its opinion.
If the construction company cannot provide evidence in the lower court that it was “ready, willing, and able” to perform its duties under the contract, then it will have to repay the buyers the full amount of the down payment—$659,000.00. This case highlights the importance of drafting clear contractual terms and adhering to them throughout the course of performance. If a party to a contract indicates a clear intention to not continue to fulfill their obligations under the contract, then the non-breaching party will have to prove that they were capable of performing upon receipt of the notice. Also highlighted in this case is the need to keep good records to support any potential claim.