Opinion ID: 555106
Heading Depth: 2
Heading Rank: 4

Heading: Upgrade Option

Text: 18 The last and most complex issue entails a similarly fact-intensive inquiry into whether the upgrade arrangement constitutes a true option or, rather, an integral and enforceable provision of the original contract. Illinois courts generally hesitate to enforce options unless the option holder has clearly availed itself of the right by performing all conditions precedent to its exercise. See, e.g., Southwest Forest Indus., Inc. v. Sharfstein, 482 F.2d 915, 924 (7th Cir.1972) (Illinois law is particularly adamant in requiring that option contracts be strictly construed and that an option be considered exercised only if the person holding the opting power adheres exactly to the conditions precedent to its effective consummation.). This particular care probably reflects the potential for unfairness when allowing an option holder to benefit from an agreement by which it could not have been bound. Reasoning that Davis failed to comply strictly with the condition precedent to exercise of the option by repudiating the contract, the district court accordingly excluded evidence of the losses Diasonics would allegedly have sustained had it performed the upgrade. 5 19 If the upgrade were a virtual certainty, however, the expenses of conveying a highfield/spectroscopy system that Diasonics avoided as a result of Davis' breach should certainly figure in the lost profits damage calculus. Davis presented some evidence to suggest that the upgrade provision, though couched in option terminology, was actually an integral part of the original bargain. 6 20 Courts are often forced to divine the true meaning of such ambiguous arrangements. In Joseph v. Wilson, 57 Ill.App.3d 212, 14 Ill.Dec. 831, 372 N.E.2d 1110 (1978), for example, the Illinois Appellate Court engaged in essentially the same inquiry, determining whether an agreement allowing an employee to purchase shares of stock constituted an option to purchase contingent upon employment or an outright contract of sale. Even the name which the parties may ascribe to such an agreement is not conclusive, the court declared, construing the language of the contract in light of the surrounding circumstances. Id. at 216-17, 14 Ill.Dec. at 834; 372 N.E.2d at 1113. Because the contract guaranteed the plaintiff the right to purchase stock valued at five dollars per share for only 20 cents per share, the court held that the agreement must have contemplated some additional consideration, namely the plaintiff's continued employment. Cf. Restatement (Second) of Contracts Sec. 240 (contract is divisible only if it can be divided into corresponding pairs of part performances in such a way that a court may treat the parts of each pair as agreed equivalents). 21 Courts perform an almost identical task in the myriad cases where they must gauge whether an agreement constitutes a sale or a lease for the purpose of secured transactions law. In In re AAA Machine Co., 30 B.R. 323 (Bankr.S.D.Fla.1983), for example, the court compared the option price to the original purchase price and the fair market value of the property to determine whether the contract was a true lease or a security agreement. The court reasoned that, when the option allows purchase of the property for purely nominal consideration, the only economically sensible course for the lessee is to exercise its power to purchase at the end of the lease term. The court recognized that under such circumstances the lease in reality functions as a security agreement. See also In re United Nesco Container Corp., 47 B.R. 230 (Bankr.E.D.Pa.1985) (construing lease containing option to purchase computer equipment worth between $5,000 and $10,000 for only $1 as a sale); In re Duprat, 28 B.R. 109 (Bankr.D.C.Vt.1983) (construing lease-purchase agreement for trailer as a contract of sale because the agreement provided that lessee would pay for all repairs, park rent, taxes and insurance, expenses which are ordinarily the responsibility of the owner). 22 Attempting to realize the true intentions of the parties does not require us to engage in abstract calculations of theoretical probabilities. Avoiding the thicket of academic economics, we opt for a pragmatic approach. Only when the evidence demonstrates a substantial likelihood that the option would have been exercised and persuasively establishes the value of the option should that value figure in the calculation of damages. Cf. Unique Systems, Inc. v. Zotos Int'l, Inc., 622 F.2d 373, 379 n. 6 (8th Cir.1980) (refusing to allow recovery of lost profits when probability that defendant would have exercised option to purchase additional units was too speculative). 23 Without more evidence, it is impossible to determine whether Davis' upgrade option should enter into the calculation of Diasonics' lost profits. Certain principles may be distilled from a number of diverse contract interpretation cases to guide in this inquiry. Upon remand, the district court should determine the probability that the option would have been exercised by examining the following non-exhaustive set of factors: 24 (1) the importance of the option to the original bargain, 25 (2) the relationship between the option's value and the additional $700,000 Davis was required to pay, and 26 (3) the relationship between the value of the MRI Davis contracted to buy and the original contract price. 27 If the original contract price was inflated and the additional $700,000 essentially nominal in relation to the value added to the MRI by the upgrade, then both parties may have understood that the only economically rational course available to Davis was to purchase the upgrade. Under such circumstances, Davis would probably have exercised its option. But if the additional $700,000 even roughly approximated the value added to the MRI by the upgrade, Davis may well have chosen not to exercise the option.