Opinion ID: 1184357
Heading Depth: 3
Heading Rank: 2

Heading: Effect of the Parties' Failures of Performance

Text: The superior court took the view that a possibility of delay in performance had been contemplated by the parties, so that the appellees' failure to tender complete performance on the day of closing was no breach of the agreement. It also determined that Ficke could not terminate the right to purchase upon the appellees' inability to perform because through the period of delay he accepted benefits under the sale portion of the agreement. Thus, the superior court held Ficke equitably estopped to deny the appellees' right to purchase when they were finally capable of consummating the bargain. Ficke's contention is that time was of the essence under the contract with the effect that performance became due promptly upon the day of closing. The benefits he received from the appellees' attempts to perform, he argues, were due him regardless of whether he had terminated the appellees' right to purchase and reinstated the lease.
After thirteen days of trial, during which the history of this controversy was recounted in great detail, the trial court concluded: [P]rior to and at the time the parties entered into the June 5, 1970, Agreement ... both ... were in financial difficulties to the extent [that] the plans they had for developing and purchasing and selling the resort here in question and the related facilities were beyond their financial abilities. This finding is buttressed by the previous negotiations of the parties in connection with the development and purchase and sale of the property. I therefore find that both parties entered into this Agreement knowing of the financial instability of each other, both of them hoping that regardless of the financial difficulties of the other that through their combined efforts financing for the sale and purchase of this resort together with the building of additional condominiums could be accomplished within a reasonable time. Under the lapsed January, 1970, agreement, there had been two extensions permitting the airline to attempt performance until May, 1970. In the subsequent June agreement, there is nothing which makes prompt performance essential to the contract. [4] To the contrary, the superior court identified a portion of the agreement as showing an intent to proceed with the sale even if the airline were unable to perform at closing. [5] On these facts, we cannot say the court was incorrect in finding that performance on the day of closing was not intended by the parties.
When time is not the essence of a bargain, performance must still occur within a reasonable period. E.g., Leiter v. Handelsman, 125 Cal. App.2d 243, 270 P.2d 563, 568 (1954); 3A A. Corbin, Contracts § 716, at 366 (1960). Appellees were unable to perform until March, 1971. Whether this delay was unreasonable is a question the superior court never reached because it found Ficke estopped to argue the point by his receipt of benefits under the sale agreement. The court concluded that payments which the appellees made after Ficke had declared a breach and attempted to reinstate the lease were due him only under the terms of a sale, that if the lease was in effect the benefits should have been returned, and that their retention barred Ficke from also arguing that the right to purchase had been terminated. The benefits Ficke received included a $200,000 cash payment tendered when the parties entered escrow. [6] He was employed by the airline as a condominium developer at a salary of $500 per month. As an employee, he made extensive use of reduced airline fare privileges. He also enjoyed the benefit of payments by the appellees on loans and insurance on the property. Ficke's contention is that he was entitled to each of these benefits under the June agreement regardless of whether the sale or the lease portion of the contract was in effect. Cash payment. Under paragraph eight of the agreement, Ficke was authorized upon the appellees' default to retain the $200,000 as prepaid rent. The superior court found this paragraph to work a forfeiture and disregarded it in ordering specific performance. If the clause worked a forfeiture, Ficke was not entitled to retain the $200,000 payment after he had indicated his intention to treat the appellees as lessees. The language of the agreement giving him that right offers no protection; if the terms work a forfeiture, a party relies upon them at his peril and becomes vulnerable to equitable estoppel. Ficke argues, in general, that a fairly bargained-for provision of an agreement may not be disregarded even if it causes a forfeiture and, in particular, that paragraph eight does not work a forfeiture. We have previously held that a forfeiture need not be enforced by a court of equity when it orders an agreement performed. Moran v. Holman, 501 P.2d 769, 771 (Alaska 1972); McCormick v. Grove, 495 P.2d 1268, 1269 (Alaska 1972); Land Development, Inc. v. Padgett, 369 P.2d 888, 889 (Alaska 1962). The principle applies even though, as here, the provision was the product of hard bargaining between the parties. See Williams v. DeLay, 395 P.2d 839, 846 (Alaska 1964). Whether paragraph eight imposes a penalty requires comparison of the appellees' rights under the purchase agreement with their rights under the original lease, because it is evident that the parties did not contemplate that collapse of the sale would sever their underlying relationship as lessor and lessee. Without a penalty, breach of the June agreement would leave the appellees with rights and duties, aside from their obligation to respond in damages or by specific performance, equal to those in the original lease. There would be a forfeiture if, by breach of the purchase agreement, the appellees suffered a diminution of their rights under the original lease. Paragraph eight allowed Ficke, upon appellees' default, to reinstate the original lease with modifications and apply the $200,000 toward rent at a rate of $3,333 per month for sixty months. [7] During this period, Ficke's obligation to pay the balance of $76,000 due on his purchase of the land upon which the hotel had been built was to be suspended. In return, the airline was to hold an option to purchase the hotel at any time over the sixty month period for $1,200,000, an increase of approximately $260,000 over the contract sale price. The provisions crediting the cash payments to rent and preserving the option to purchase do not alone demonstrate that paragraph eight does not work a forfeiture. Breach of the agreement would cause a loss to appellees equal to the use value of the declining balance of the retained $200,000 over the sixty month period plus the use value of the suspended payments on Ficke's $76,000 land purchase obligation. As a benefit, the appellees would gain an option to immediately purchase the hotel for $1,200,000. This option could be said to have been more valuable than the option created by the original lease because it was exercisable immediately and at any time until the cash payments had been exhausted as rent, while the original option was not exercisable until 1978, ten years after the hotel had been constructed. Another potential benefit of the option in paragraph eight might have followed from the fixed price of $1,200,000. The original option set the price as the higher of the property's value at the time of construction or at the time the option would have become exercisable in 1978. [8] In order to conclude on appeal that the appellees are not penalized for their breach, there must be a showing that the gains and losses suffered by operation of paragraph eight are of equal value. Beyond pointing out that both the original lease and the paragraph eight lease contain options to purchase and that the latter returns the appellees' purchase payments as prepaid rent, Ficke has made no attempt to establish that equivalency. [9] As a result, we are unable to say that the superior court was clearly erroneous in concluding that a penalty would have been exacted by paragraph eight for the appellees' failure to complete the purchase. Applying the principle that a forfeiture, even if bargained for, need not be enforced by a court in equity, Ficke may not argue that he was entitled to retain the $200,000. Salary and travel benefits. Whether Ficke was entitled to his salary and travel privileges [10] turns upon whether his employment contract with the airline continued in effect after he had declared a breach of the agreement and attempted to terminate the appellees' right to purchase. Implicit in the superior court's finding that these were benefits available only from the purchase is a determination that there was no intention to pay a bonus price of $280,000 for construction of condominiums and thus no need for the appellant's employment as a condominium developer if the appellees were to remain merely lessees of the hotel. We believe this to be the correct analysis. There was testimony that the initial asking price for the property, well over $1,000,000, was reduced to $900,000 in the January, 1970, agreement when a provision for a contingent payment for the condominiums was added. In the June agreement this price structure was preserved, and a new paragraph eight increased the purchase price to $1,200,000 if the modified lease and option were reinstated. [11] In view of this price structure and the directly conflicting testimony on the employment issue, we find adequate support for the superior court's conclusion that the condominium construction terms and, therefore, Ficke's employment as an assistant to Buyer in the development of future condominiums were dependent upon the right to purchase the hotel. Once Ficke abandoned the sale and attempted to invoke the lease provisions of the agreement, he was obligated to refuse further salary payments and to no longer take the benefit of employee privileges. Instead, he continued to draw his salary and travel at reduced fares. Hotel payments. A final benefit Ficke received from the appellees as purchasers, to which he was not entitled as lessor, was payments on the loans, insurance and a sprinkler system for the hotel. The June agreement required Ficke to pay all interest accruing prior to May, 1970, and required the airline as purchaser to pay interest accruing thereafter. Following Ficke's declaration that the right to purchase had been terminated because of the appellees' delay, Resort paid interest of $16,546 overdue from November, 1969, to May, 1970, and $27,701 accruing from May to September, 1970. In March, 1971, Resort paid $15,509.28 to bring the interest current to February 28, 1971. [12] Resort had also assumed a note for the hotel sprinkler system and made payments totalling $6,600. Ficke's share of the hotel insurance for 1970 was paid by Resort as well as $7,233 beyond what Resort was obligated as lessee to pay for the year 1971. These benefits  the $200,000 cash payment, the salary and travel privileges, the loan and insurance payments  were conferred by the appellees as purchasers. Their receipt and retention by Ficke estops him to argue that the appellees' delay in performing the remainder of the obligations breaches the June agreement. See, e.g., Dubail v. Medical West Building Corp., 372 S.W.2d 128, 132 (Mo. 1963); West v. Peoples First Nat. Bank & Trust Co., 378 Pa. 275, 106 A.2d 427, 432 (1954).
The only instance of breach which the superior court found Ficke capable of asserting was the airline's failure to use its best efforts to secure registration of shares of its stock which were to be paid to Ficke upon construction of the condominiums. Neither Ficke nor the appellees object to this finding, but Ficke contends that it should not be characterized as a minor breach. The stock, escrow and registration arrangement was constructed by the parties to guarantee Ficke that the bonus payment of $280,000 would be available when the condominiums were completed. The airline promised to place 23,333 unregistered shares of its stock in escrow and use its best efforts to secure their registration in order that the shares could be sold and the proceeds, guaranteed by the airline to total $280,000, substituted in the escrow. Ficke argues that the parties' intentions included using the escrowed funds to support financing of the condominiums. In his view, the airline's failure to use its best efforts to register the stock was a material breach of the contract because it prevented him from securing financing with which to begin construction of the condominiums and earn the bonus payment. The superior court rejected Ficke's argument, and there is sufficient support in the record for the finding that we may not disturb it. The written agreement does not anticipate any use of the escrowed stock or substituted funds. [13] However, as in many other issues in this dispute, there was directly contradicting testimony. A witness for the airline testified no mutual consideration had been given to any necessity for registering the shares before construction of the condominiums could begin. [14] Ficke, on the other hand, testified that the airline knew the shares had to be registered in order to secure financing for the condominiums because one of its officers inquired of a bank whether unregistered shares could be put to such a use and related the bank's reply that they were worthless for that purpose. Looking to this contradiction and the silence of the written agreement, we are unable to say that the superior court was clearly mistaken in determining that the parties did not regard the best efforts covenant to be an inducing element of their bargain. Nor do we think that the breach of this covenant should bar specific performance in favor of the appellees. [15] Our review of the evidence has led us to the conclusion that the judgment of the trial court was not inconsistent with the clear weight of the evidence. [16] Accordingly, we affirm its decree.