Opinion ID: 1283985
Heading Depth: 1
Heading Rank: 2

Heading: consideration for the westons' promises

Text: The trial court concluded that RMC's promises were illusory and, that there being no bargained for consideration received by defendants in exchange for their promises, the contract was unenforceable. We disagree with the trial court's conclusion. The law does not enforce all promises. For a promise to be legally enforceable, it must be supported by consideration. Manwill v. Oyler, 11 Utah 2d 433, 436, 361 P.2d 177, 178 (1961); 17 C.J.S. Contracts § 71 (1963). Consideration is an act or promise, bargained for and given in exchange for a promise. Simmons v. California Institute of Technology, 34 Cal.2d 264, 272, 209 P.2d 581, 586 (1949); See Colorado National Bank of Denver v. Bohm, 286 F.2d 494, 496 (9th Cir.1961). Promises made by a party pursuant to a bilateral contract to do an act or to forbear from doing an act that would be detrimental to the promisor or beneficial to the promisee may constitute the consideration for the other's promise. Sugarhouse Finance Co. v. Anderson, Utah, 610 P.2d 1369, 1372 (1980); Allen v. Rose Park Pharmacy, 120 Utah 608, 613, 237 P.2d 823, 825 (1951). For the mutual promises of the parties to a bilateral contract to constitute the consideration for each other, the promises must be binding on both parties. Meurer Steel Barrel Co. v. Martin, 1 F.2d 687, 688 (3d Cir.1924). When there exists only the facade of a promise, i.e., a statement made in such vague or conditional terms that the person making it commits himself to nothing, the alleged promise is said to be illusory. An illusory promise, neither binds the person making it, 1 Corbin on Contracts § 145 (1963), nor functions as consideration for a return promise. Id. at 628. Thus, if RMC's contractual promises are illusory, as the Westons contend, the Westons' promises would not be supported by consideration. In arriving at its conclusion that RMC's promises were illusory and therefore not consideration for the Westons' promises, the trial court focused on RMC's right to terminate the contract stated in paragraph 16 of the contract. Reservation of an absolute and unconditional power to terminate an executory contract in which the mutual promises of the parties provide the sole consideration renders the contract unenforceable because there is no mutuality of consideration or, as is sometimes said, no mutuality of obligation. Barton v. Bechtel Corp., 253 F. Supp. 288, 294 (N.D. Cal. 1965); Naify v. Pacific Indemnity Co., 11 Cal.2d 5, 76 P.2d 663, 667 (1938); Eaton Factors Co. v. Bartlett, 24 Conn. Supp. 40, 186 A.2d 166, 168 (1962); Midwest Management Corp. v. Stephens, Iowa, 291 N.W.2d 896, 912-13 (1980); 1 S. Williston, The Law of Contracts § 105, at 418 (3d ed. 1957); 17 Am.Jur.2d Contracts § 496 (1964); 17 C.J.S. Contracts § 100(6), at 806-07 (1963). The promisor, by reserving an arbitrary right to terminate the contract, can unilaterally negate his promises. Thus, a negatable promise does not constitute consideration for a return promise for an executory contract. If, however, one party reserves the right to terminate a contract upon the occurrence of a condition subsequent, the contract is not unenforceable ab initio for lack of mutuality of consideration. Pease v. Brown, 186 Cal. App.2d 425, 8 Cal. Rptr. 917 (1960); Vitagraph Inc. v. Liberty Theatres Co., 197 Cal. 694, 242 P. 709 (1925); Omni Group, Inc. v. Seattle-First National Bank, 32 Wash. App. 22, 645 P.2d 727 (1982); 1A Corbin on Contracts § 265 at 536 (1963); 1 S. Williston, The Law of Contracts § 105, at 418-19 (3d ed. 1957); 17 C.J.S. Contracts § 100(6), at 809 (1963). RMC's right of termination in paragraph 16 is conditioned on the occurrence of a condition subsequent: the determination that there is not sufficient promise of minerals of commercial value... sufficient to justify the further expenditures of time or money by THE COMPANY. However, that determination is to be made in the sole discretion of RMC. Notwithstanding the breadth of that power, it may not be exercised capriciously or in bad faith. The Westons' argument that the literal meaning of sole discretion confers an arbitrary power to avoid all obligations under the contract is without merit. The law generally imposes a duty to perform contractual obligations in good faith. E.g., Leigh Furniture and Carpet Co. v. Isom, Utah, 657 P.2d 293, 311 (1982); Rio Algom Corp. v. Jimco, Ltd., Utah, 618 P.2d 497, 505 (1980); W.P. Harlin Construction Co. v. Utah State Road Commission, 19 Utah 2d 364, 431 P.2d 792, 793 (1967). Thus, an implied covenant of good faith forbids arbitrary action by one party that disadvantages the other. See W.P. Harlin Construction Co. v. Utah State Road Commission, supra, 431 P.2d at 793. Accordingly, courts endeavor to construe contracts so as not to grant one of the parties an absolute and arbitrary right to terminate a contract. Midwest Management Corp. v. Stephens, supra, 291 N.W.2d at 913; Miller v. O.B. McClintock Co., 210 Minn. 152, 297 N.W. 724, 729 (1941); Fulcher v. Nelson, 273 N.C. 221, 159 S.E.2d 519, 522 (1968); 1 S. Williston, The Law of Contracts § 105, at 418-19 (3d ed. 1957); 17 Am.Jur.2d Contracts § 496 (1964). In Richard Bruce & Co. v. J. Simpson & Co., 40 Misc.2d 501, 243 N.Y.S.2d 503 (1963), the contract entered into by the parties included a provision that read, [T]he Underwriter shall have the right to terminate this Agreement at any time ... if prior to the effective date the Underwriter, in its absolute discretion, shall determine that market conditions or the prospects of the public offering are such as to make it undesirable or inadvisable to make or continue the public offering hereunder. The court opined that the provision granted the underwriter only a discretion based on fair dealing and good faith and held that the clause did not render the underwriter's promise illusory and the contract unenforceable. Similarly, in Blish v. Thompson Automatic Arms Corp., 30 Del. Ch. 538, 64 A.2d 581, 597 (1948), the court held that although an underwriting contract gave the underwriter the right to cancel the contract if, in its absolute judgment, the offering was impractical or inadvisable, the term absolute judgment contemplated a judgment based upon sincerity, honesty, fair dealing and good faith, not one evidencing caprice or bad faith. Accordingly, the court rejected the claim that the contract was invalid because it lacked mutuality. The validity of a stock subscription agreement was scrutinized in Midwest Management Corp. v. Stephens, supra, 291 N.W.2d 896, where the contract contained a clause permitting Midwest to cancel the agreement at any time if, among other reasons, that party in its sole discretion determined any representation made by the buyer to be incorrect. The court stated, Even though the contract purports to leave the determination of one of the conditions to the `sole discretion' of Midwest, we do not believe that such discretion could be exercised arbitrarily. Midwest would have had to exercise that discretion in a reasonable manner on the basis of fair dealing and good faith. 291 N.W.2d at 913. In summary, the reservation by a promisor of a power to cancel upon the occurrence of some event not wholly controlled by the promisor himself does not render his promise illusory or the contract invalid. Even if the promisor is himself to be the judge of the cause or condition, he must use good faith and an honest judgment. 1A Corbin on Contracts § 165, at 86-87 (1963). See also Smith, Batchelder & Rugg v. Foster, 119 N.H. 679, 406 A.2d 1310 (1979) (provision in written employment contract permitting employer to terminate the contract if dissatisfied with employee's work did not render employer's promise illusory because of implicit requirement that employer, in good faith, be dissatisfied with employee's work, when and if termination option was exercised); City of Bowling Green v. Knight, 216 Ky. 838, 288 S.W. 741, 742 (1926) (sewer construction contract authorizing city engineer to cancel contract at any time he decided work not progressing satisfactorily held to imply a requirement that engineer exercise his option in good faith and on reasonable grounds; engineer could not arbitrarily or capriciously exercise judgment); R.J. Cardinal Co. v. Ritchie, 218 Cal. App.2d 124, 32 Cal. Rptr. 545 (1963) (right to terminate contract for cause or good cause meant upon reasonable grounds assigned in good faith; it did not permit the party having power to invoke clause to do so at his pleasure and did not confer an arbitrary and absolute power to cancel); J. Calamari & J. Perillo, Contracts § 4-16 (2d ed. 1977). On the authority of the above precedents, we hold that paragraph 16 of the contract did not give RMC an arbitrary, unfettered right to unilaterally terminate its contract with the Westons. RMC's right to terminate was circumscribed by the requirement that it exercise it in good faith, in this case, only on a reasonable belief that the commercial and mineral value of the property would not justify further performance on the contract. None of the cases cited by the Westons involved contracts reserving to either or both parties a right to terminate the contract at will, either on occurrence of a condition subsequent or otherwise. Three of the cases support propositions with which we are in agreement: that where the promisor retains an unlimited right to decide the nature or extent of his performance, the promise is illusory and too indefinite for legal enforcement, Davis v. General Foods Corp., 21 F. Supp. 445 (S.D.N.Y. 1937), and that consideration is an act or promise bargained for and given in exchange for a promise, Simmons v. California Institute of Technology, 34 Cal.2d 264, 209 P.2d 581 (1949); Colorado National Bank of Denver v. Bohm, 286 F.2d 494 (9th Cir.1961). In reference to the first proposition, we believe that the promises embodied in paragraph 12, clauses (a) through (h), are reasonably specific and amenable to judicial interpretation. Certainly they do not approach the nebulous character of the alleged promise in Davis. In regard to the second proposition, the obligations of the respective parties are adequately set forth in paragraphs 5 and 12 of the contract. The Westons cite Simmons and Colorado National Bank to emphasize that the minimal tasks performed by RMC would not make the contract enforceable, because the tasks were not what were bargained for. With that much we agree. However, as the Westons also state, The Westons bargained for Resource Management Company's promise to perform consulting and management services for them. Id. at 30. Because we do not share the Westons' view that the termination provision rendered RMC's promises to consult and manage illusory, we need not, and do not, look any further than the promises of RMC to find consideration for the Westons' counterpromises. The Westons also rely on Interchange Associates v. Interchange, Inc., 16 Wash. App. 359, 557 P.2d 357 (1976), wherein defendants promised to serve as directors for ten years or until their earlier resignation. Analogizing defendants' promise to a reservation of an unconditional right to terminate the contract, the court held the contract invalid. Id. at 358-59 (emphasis added). As we have noted above, however, we are of the opinion that paragraph 16 of the contract in this case did not afford RMC the right to unconditionally terminate the contract. Finally, it should be noted that the Westons twice cite Williston, as quoted in other opinions, to argue for the conclusion that this contract is invalid. Considered in context, however, Williston may be read to support the counter proposition. Williston is first quoted as stating: One of the commonest kinds of promises too indefinite for legal enforcement is where the promisor retains an unlimited right to decide later the nature or extent of his performance. This unlimited choice in effect destroys the promise and makes it merely illusory. 1 S. Williston, The Law of Contracts § 43, at 140 (3d ed. 1957) (footnotes omitted), quoted in Davis v. General Foods Corp., supra, 21 F. Supp. at 446. In illustrating the point, however, Williston goes on to state in the next sentence: Thus an agreement to pay such wages as the employer wishes is invalid, though an agreement to pay such wages as the employer considers right and proper is not too uncertain, since performance of such a promise does not leave the promisor free to do as he may choose. He must in good faith make an honest estimate of what is proper. 1 S. Williston, supra, § 43, at 140-41 (emphasis added, footnotes omitted). Specifically with respect to the reservation of a termination right in a contract, Williston explains two paragraphs later that [i]f one party to an agreement reserves an unqualified right to cancel the bargain, no legal rights can arise from it while it remains executory. Williston, supra, § 43, at 143 (emphasis added). Thus, a promise is made illusory and a contract rendered invalid, according to Williston, by the reservation in one of the parties of an unqualified right of termination. Also cited is Williston's view, [t]hat a promise which in terms reserves the option of performance to the promisor is insufficient to support a counter-promise is well settled.... An agreement wherein one party reserves the right to cancel at his pleasure cannot create a contract. 1 S. Williston, supra, § 105, at 417-18 (3d ed. 1957), quoted in Interchange Associates v. Interchange, Inc., supra, 557 P.2d at 359. [6] In the next sentence, however, Williston states: Since the courts, however, do not favor arbitrary cancellation clauses, the tendency is to interpret even a slight restriction on the exercise of the right of cancellation as constituting such legal detriment as will satisfy the requirement of sufficient consideration; for example, where the reservation of right to cancel is for cause, or by written notice, or after a definite period of notice, or upon the occurrence of some extrinsic event, or is based on some other objective standard. 1 S. Williston, supra, § 105, at 419-20 (emphasis added, footnotes omitted). The trial court, in branding RMC's promises illusory, also attached secondary significance  though it is not clear from the findings of fact and conclusions of law how much  to the last sentences of paragraph 12 and paragraph 30. The final sentence of paragraph 12 declares: It is expressly understood that the extent and scope of geological evaluations and the preparation of attendant materials, shall be at the sole discretion of [RMC], and the failure of [RMC] to make any specific, detailed study or evaluations of the real properties covered by this Agreement, except as herein provided, shall not be the cause for termination by [the Westons]. Unquestionably, this provision limits the potential usefulness of the promised preliminary geological survey to the Westons. It does not, however, make RMC's promises and obligations illusory and thus render the contract invalid. First, the provision leaves intact six of the eight promises (those embodied in paragraph 12(c) through (h)), made by RMC. The six remaining promises impose upon RMC a legal detriment; thus there remains adequate consideration to support the Westons' promises. Second, the phrase except as herein provided, reasonably interpreted, does not extinguish the obligations expressed in 12(a) and (b), but only limits them. A party may expressly limit his obligations under a contract, yet not render his obligations illusory and the contract invalid. See Mandel v. Liebman, 303 N.Y. 88, 100 N.E.2d 149 (1951). Especially where the economic interests of the parties are aligned (the more valuable the preliminary reports in enabling the Westons to acquire better lease terms, the greater RMC's share under the contract), it does not seem unreasonable for limits to be placed on the one party's obligations. In similar fashion, paragraph 30 limits the expenditures required of RMC except as specified in paragraph 12 above. Both provisions have the effect of limiting RMC's obligations to those embodied in paragraph 12(a) through (h). They do not, however, extinguish those promises and obligations. Hence, the promises are not illusory.