Conditions: what must happen before a duty is due

Stamford, Connecticut, the early nineteen seventies. A couple contracts to buy a house for eighty five thousand dollars and pays a deposit of eight thousand five hundred. The contract is subject to and conditional upon the buyers obtaining first mortgage financing on said premises from a bank or other lending institution in an amount of forty five thousand dollars for a term of not less than twenty years and at an interest rate which does not exceed eight and a half per cent per annum.
The buyers promise to use due diligence in seeking that mortgage, and the contract says that if they fail and give notice in time, the deposit comes back and the contract ends. Their lawyer, who knows the local lenders, applies to the one bank in the area that will lend forty five thousand on a single family house. The bank commits, but at the prevailing rate at closing, not less than eight and three quarters. Above the ceiling.
The buyers give notice and ask for the deposit. The sellers' lawyer offers to make up the difference between the bank's rate and eight and a half for the whole twenty five years, by an arrangement he does not define. The buyers say no. The sellers keep the deposit. The buyers sue.
So here is the question. The buyers had a contract to buy. They did not buy. And yet they want their deposit, and they say nobody broke anything. Is that possible? Think about it before I go on, because it introduces an idea we have not needed until now. A duty that never came due.
And now the question I keep asking. What exactly did these people promise each other? The sellers promised to sell. The buyers promised to buy, if they could get a certain mortgage, and to try in good faith to get it. That little word if is the whole module. Everything before today was about whether a promise exists and what it means. Today is about when a promise has to be kept.
Here is the first line for the board. A condition is an event, not certain to occur, which must occur before performance under a contract becomes due. If the event does not occur, the duty conditioned on it never arises. Nobody has broken a promise. There is simply nothing to perform.
Second line. A condition is not a promise. A promise is something a party undertakes to do, and its breach gives damages. A condition is something that has to happen, and its non-occurrence gives nothing, it just switches the duty off. The same event can be both, as it is today. The buyers promised to try for the mortgage, and getting it was a condition of their duty to buy.
Third line. Express conditions are enforced strictly. Close does not count. Eight and three quarters is not eight and a half. But because strict enforcement can cost a party everything he has done, courts prefer, where the words leave room, to read a doubtful clause as a promise or as fixing the time for performance rather than as a condition. The Restatement says so in section two twenty seven, and the second case today shows it.
Now the case. Luttinger against Rosen, Supreme Court of Connecticut, nineteen seventy two. The sellers made two arguments. First, no due diligence. The buyers applied to one bank.
The court answered from the findings. The buyers' attorney was fully informed as to the conditions and terms of mortgages being granted by various banks and lending institutions in and out of the area and that the application was made to the only bank which might satisfy the mortgage conditions of the contingency clause at that time. Then the sentence to keep. The law does not require the performance of a futile act.
Second, the sellers said the condition had been met, or as good as met, because they had offered to fund the difference. The court defined the term. A condition precedent is a fact or event which the parties intend must exist or take place before there is a right to performance. If the condition precedent is not fulfilled the contract is not enforceable.
And it applied the words. In this case the language of the contract is unambiguous and clearly indicates that the parties intended that the purchase of the defendants' premises be conditioned on the obtaining by the plaintiffs of a mortgage as specified in the contract.
Since the plaintiffs were unable to obtain a forty five thousand dollar mortgage at no more than eight and a half per cent from a bank or other lending institution, the condition precedent to performance of the contract was not met and the plaintiffs were entitled to the refund of their deposit.
The sellers' offer? Any additional offer by the defendants to fund the difference in interest payments could be rejected by the plaintiffs. It was not what the condition described. The condition named a bank, an amount, a term and a rate. A private subsidy from the sellers, on undefined terms, was none of those things, and the buyers were entitled to hold to the event they had bargained for.
Notice what the buyers got. Not damages. Their deposit, and their freedom. They were never in breach, because the duty to buy never came due. And the sellers were not in breach either. The contract simply ended, as its own terms said it would. That is what a condition does.
Now the second case, and the preference against conditions. Florida, nineteen seventies. Peacock Construction was building a condominium project. It subcontracted the heating and air conditioning to one firm and a rooftop swimming pool to another. Both subcontracts said Peacock would make final payment within thirty days after the completion of the work included in this sub-contract, written acceptance by the Architect and full payment therefor by the Owner.
Both subcontractors finished. Nobody found any deficiency in their work. The owner went bankrupt and never paid Peacock. Peacock refused to pay the subcontractors, and its argument was today's first line. Full payment by the Owner is a condition. It did not occur. So the duty to pay never came due.
The Supreme Court of Florida, in Peacock Construction against Modern Air Conditioning, nineteen seventy seven, read the clause the other way. The contractual provisions in dispute here are susceptible to two interpretations. They may be interpreted as setting a condition precedent or as fixing a reasonable time for payment. And the court chose, as a matter of law, the second, joining what it called the majority view in this country.
Here is the reason. That intent in most cases is that payment by the owner to the general contractor is not a condition precedent to the general contractor's duty to pay the subcontractors. This is because small subcontractors, who must have payment for their work in order to remain in business, will not ordinarily assume the risk of the owner's failure to pay the general contractor.
The court did not forbid the other reading. There is nothing in this opinion, however, to prevent parties to these contracts from shifting the risk of payment failure by the owner to the subcontractor. But in order to make such a shift the contract must unambiguously express that intention. And the burden of clear expression is on the general contractor. The subcontractors were paid.
Put the two cases side by side. In Connecticut the words said subject to and conditional upon, and the event was one the buyers could not control, and the court enforced the condition to the letter.
In Florida the words said within thirty days after full payment by the Owner, and the court read them as a timing clause, because a true condition would have put a risk on the party least able to bear it, and the words did not clearly say so. Words that clearly make an event a condition are enforced. Words that might, are read against forfeiture.
Now let's change one fact. The Luttinger buyers' lawyer applied to one bank, was refused the rate, and stopped, although three other banks in the county were lending forty five thousand on houses that month. Do the buyers get the deposit? Choose an answer before I go on.
Most people say yes, because the condition still did not occur. But the buyers made a promise as well as taking the benefit of a condition. They promised due diligence. A party who prevents a condition from occurring, or fails to make the effort he promised, cannot rely on its non-occurrence.
If the sellers can show that a diligent buyer would have found the mortgage, the buyers are in breach of their promise to try, and the deposit is in play. Luttinger turned on a finding that further applications would have been futile. Take that finding away and the case turns with it.
Change one fact again. The Peacock subcontracts said, the subcontractor assumes the risk that the Owner may fail to pay, and shall be paid only if and when the Owner pays the Contractor. Choose.
Now Peacock wins. The Florida court said exactly this. The parties may shift the risk if the contract unambiguously expresses that intention. Those words are unambiguous. They name the risk, say who bears it, and use if and when, not within thirty days after. The preference against conditions is a rule for doubtful words. It does not rewrite clear ones.
Change one fact a third time. The Luttinger sellers had put their funding offer in writing, definite and secured, guaranteeing the buyers an effective rate of eight and a half for twenty five years. Choose.
This one is argued, and the argument is the point. The condition named financing from a bank or other lending institution. A seller's subsidy is not that, however definite, and the buyers were entitled to reject it, as the court said.
But a court might ask whether the purpose of the condition, an affordable loan, was fully served. Most courts would still hold the buyers to the event they described, because a condition is enforced as written and the buyers may have had reasons, such as resale or refinancing, for wanting a bank loan at that rate and nothing else.
Here is what people get wrong here, and why it is tempting. The first mistake is calling the non-occurrence of a condition a breach. Nobody breaks anything when a condition fails. The duty switches off. Damages are the wrong question. The second mistake is reading every if as a condition. Ask who bears the risk if the event fails, and whether the words clearly put it there. If they do not, the court will read the clause as a promise or a timing term.
The third mistake is the reverse. Thinking a clear condition can be satisfied by something nearly as good. Eight and three quarters is not eight and a half, and a seller's subsidy is not a bank. Express conditions are strict, and the party who wants strictness gets it.
Here is the rule, in one breath. A condition is an event that must occur before a duty comes due, and if it does not occur the duty never arises and no one is in breach, so an express condition is enforced strictly, but doubtful words are read as a promise or a timing term rather than a condition, especially where a condition would forfeit one party's performance for a risk the other is better placed to bear. Now, five questions.