Opinion ID: 529944
Heading Depth: 2
Heading Rank: 1

Heading: The Contractual Question

Text: 19 We turn first to EAC's claim that the district court, as a result of an incorrect interpretation of the consulting agreement, erroneously held that EAC's obligations to Cross continued after EAC's 1982 letter of termination. The consulting contract provided that EAC was not liable for the payment of [Cross'] fees if [EAC did] not receive the full payment of debt service under the terms of the Wraparound Note and Mortgage. On the basis of that language, EAC argues that Cross should have been entitled to its annual fees only if Goodwalk made all of its payments to EAC in a timely manner. Thus, argues EAC, Goodwalk's chronically delinquent payments gave EAC sufficient grounds in April 1982 to refuse to pay any further fees to Cross. On our review of the facts herein, however, we agree with the district court that the parties did not intend to require Cross to ensure that Goodwalk made every monthly payment in a timely manner, so long as Goodwalk made its payments in full for any given year. Since the district court specifically found that Goodwalk made full payments on its debt from 1982 to mid-1986, and that finding is not clearly erroneous, we affirm the district court's holding that EAC's obligations to Cross survived EAC's attempted termination in April 1982. 20 We turn, then, to EAC's obligations to Cross for the years 1985-1988. The district court found that the parties' original intent was for EAC to pay Cross an annual fee in each of those years if Goodwalk made its full debt service payments. Since the parties thus intended their obligations to arise and be met on a year-by-year basis, we will weigh each year's obligations separately. See Restatement (Second) of Contracts Sec. 240 (1981) [hereinafter Restatement ]; 3A A. Corbin, Corbin on Contracts Sec. 695, at 284-85 (1960). 21 Both sides to this appeal agree that Goodwalk's full payment of its debt service obligations was a condition precedent to EAC's obligation to Cross. See Restatement, supra, Sec. 226. In 1985, that condition precedent was met when Goodwalk made full debt service payments to EAC. We therefore affirm the district court's holding that, with the condition precedent met for 1985, EAC was obliged to pay Cross its fee for 1985 of $17,545. 22 The fees due Cross from EAC for 1986-1988 pose a thornier problem, however, because Goodwalk made only partial payments in 1986 and made no payments at all in 1987 and 1988. Normally, EAC would not have been required to pay any fees for those years, since the condition precedent--Goodwalk's full payment on its debt to EAC--was not met in any of the three years. However, the district court found that EAC in effect waived the condition precedent by bringing the foreclosure action in Washington state court. The district court held that, since settlement of the foreclosure action in 1986 made impossible the performance of the condition precedent by Goodwalk, EAC was fully obliged to pay Cross' annual fees even though Goodwalk was no longer making any payments to EAC. 23 It is true that a condition precedent may be excused if the party whose performance is predicated on that condition somehow blocks its occurrence. It is a well settled and salutary rule that a party cannot insist upon a condition precedent, when its non-performance has been caused by himself. Young v. Hunter, 6 N.Y. 203, 207 (1852); see, e.g., Spanos v. Skouras Theatres Corp., 364 F.2d 161, 169 (2d Cir.) (in banc), cert. denied, 385 U.S. 987, 87 S.Ct. 597, 17 L.Ed.2d 448 (1966); Kooleraire Serv. & Installation Corp. v. Board of Educ., 28 N.Y.2d 101, 106, 268 N.E.2d 782, 784, 320 N.Y.S.2d 46, 48 (1971); McIntosh Ready Mix Concrete Corp. v. R.D. Battaglini Corp., 36 A.D.2d 561, 562, 317 N.Y.S.2d 692, 695 (3d Dep't 1971); 3A A. Corbin, supra, Sec. 767. The doctrine is purely one of waiver; active conduct of the conditional promisor, preventing or hindering the fulfillment of the condition, eliminates it and makes the promise absolute. Amies v. Wesnofske, 255 N.Y. 156, 163, 174 N.E. 436, 438 (1931). 24 It is clear, however, that a condition precedent is not automatically waived simply because the conditional promisor blocks the condition precedent. There are, after all, some cases in which some sort of prevention or interference is contemplated by the parties as quite proper and within the privileges of the promisor. 3A A. Corbin, supra, Sec. 767, at 545. Thus, it was not enough that EAC made impossible the performance of the condition precedent; for the condition precedent to have been excused herein, EAC, the conditional promisor, must have blocked the condition through a breach of the duty of good faith and fair dealing. Restatement, supra, Sec. 225 comment b. 25 Courts applying New York law repeatedly have recognized the duty of good faith and fair dealing, the  'implied obligation to exercise good faith not to frustrate [a] contract[ ] into which [one has] entered.'  Lowell v. Twin Disc, Inc., 527 F.2d 767, 770 (2d Cir.1975) (quoting Grad v. Roberts, 14 N.Y.2d 70, 75, 198 N.E.2d 26, 28, 248 N.Y.S.2d 633, 637 (1964)); see Filner v. Shapiro, 633 F.2d 139, 143 (2d Cir.1980) (citing Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163, 167 (1933)); see also Restatement, supra, Sec. 205; Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith, 94 Harv.L.Rev. 369, 379 (1980). Since the duty of good faith and fair dealing is implied in every contract, contracting parties' fields of discretion under a contract are bounded by the parties' mutual obligation to act in good faith. See Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d 918, 923 n. 8 (2d Cir.1977). The boundaries set by the duty of good faith are generally defined by the parties' intent and reasonable expectations in entering the contract. See Restatement, supra, Sec. 205 comment a (good faith performance emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party); Burton, supra, at 371. 26 To determine whether EAC breached its duty of good faith by bringing the 1983 Washington foreclosure action, and thus waived the condition precedent to its payment of annual fees to Cross, we therefore must examine whether the parties herein reasonably contemplated such an interference with the condition precedent. While determining the parties' original contemplation in this regard can often raise knotty questions of fact and require remand to the district court, see DAL Constr. Corp. v. City of New York, 108 A.D.2d 892, 893, 485 N.Y.S.2d 774, 775 (2d Dep't 1985); Burton, supra, at 389, the record herein is sufficiently well developed that we do not require further findings on this question, and our task becomes largely one of contractual interpretation, see, e.g., Sobiech v. International Staple & Machine Co., 867 F.2d 778, 782 (2d Cir.1989) (discussing broad appellate review of the mixed questions of law and fact that arise in contractual interpretation). 27 In attempting to construe the contracting parties' intent fairly and reasonably, see Farrell Lines, Inc. v. City of New York, 30 N.Y.2d 76, 83, 281 N.E.2d 162, 165, 330 N.Y.S.2d 358, 362 (1972), we must consider (among other things) the specific language of the contract, and the context within which that contract was formed, see New York Bank for Savings v. Howard Cortlandt St., Inc., 106 A.D.2d 496, 498, 482 N.Y.S.2d 836, 838 (2d Dep't 1984); Janos v. Peck, 21 A.D.2d 529, 535, 251 N.Y.S.2d 254, 261 (1st Dep't), aff'd, 15 N.Y.2d 509, 202 N.E.2d 560, 254 N.Y.S.2d 115 (1964). The contracts between EAC and Goodwalk, upon which the EAC-Cross consultancy agreement rested, specifically made reference to EAC's right to seek acceleration in the event of default. Moreover, Cross and Goodwalk themselves seem clearly to have anticipated an early foreclosure that would terminate the arrangement. Although the payments on the debt technically were supposed to stretch from 1978 to 2016, Ira Smith (the President of Cross) testified that he structured the arrangement so that there would be a cash flow for only 10 years, and Barry Smith (general partner of Goodwalk) acknowledged in response to interrogatories in the Washington action that the partnership planned to default and trigger a foreclosure as early as 1987. Thus, the record clearly shows that the possibility of a foreclosure action was within the reasonable contemplation of the parties from the outset. Furthermore, the record reveals that Goodwalk conceded in later bankruptcy proceedings that EAC's foreclosure action was justified because the debt service on the Note [to EAC] ... had not been paid to [EAC by Goodwalk] in accordance with and pursuant to the terms of the Note and Mortgage. See Third Modified Amended Plan of Reorganization, In re Goodwalk Assocs., No. 84-B-11762 (Bankr. S.D.N.Y. Aug. 20, 1986); cf. Restatement, supra, Sec. 205 comment e (pretended dispute can constitute breach of duty of good faith). 28 In sum, EAC's foreclosure action was within the reasonable expectations of the parties. Since the foreclosure action did not constitute a breach of EAC's duty of good faith and fair dealing, that action and the resulting settlement did not excuse the condition precedent to EAC's obligation to Cross, namely, Goodwalk's annual payments on its debt to EAC. And because that condition precedent was neither excused nor fulfilled in 1986, 1987 and 1988, EAC's obligations to pay Cross never became due in those years. See Restatement, supra, Sec. 225. The district court erred, therefore, in awarding Cross its fees for those years, and we remand to the district court for entry of a modified judgment so as to award Cross its fees only for 1985, and not for 1986-1988.