Horizon Corp. v. Westcor, Inc.

Citations: 688 P.2d 1021; 142 Ariz. 129Docket: 2 CA-CIV 4883

Court: Court of Appeals of Arizona; September 27, 1984; Arizona; State Appellate Court

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Westcor, Inc. and Horizon Corporation entered into a real estate contract on April 3, 1978, involving the sale of 11 acres of land in Tucson. The agreement, consisting of escrow instructions and an addendum, is deemed a valid and binding contract, superseding any prior agreements. Key provisions include:

1. **Binding Agreement**: The document establishes a binding sale agreement with specific terms and conditions.
   
2. **Conditions for Purchase**: Westcor’s obligation to complete the purchase is contingent upon certain conditions, which are solely for Westcor’s benefit and can be waived by written notice. These conditions include:
   - Approval of zoning and site plans.
   - Securing commitments from major retail tenants.
   - Obtaining necessary financing for the shopping center development.

If any conditions are unmet by the close of escrow, Westcor may either rescind the transaction (resulting in the return of earnest money) or waive the condition and proceed with closing.

3. **Extension of Escrow**: Should the contingencies remain unmet by December 17, 1978, Westcor can extend the escrow on a month-to-month basis for up to six months by depositing $3,000 for each month, with these funds not contributing to the purchase price.

4. **Cancellation Procedures**: If either party fails to comply with the terms, they must provide written notice, allowing 13 days for compliance. If the other party does not comply, the instructions are canceled, and the escrow agent will return earnest money and any documents deposited, except those executed by both parties, which are retained.

Overall, the excerpt outlines the contractual obligations, conditions for purchase, potential extensions, and cancellation processes related to the real estate transaction between Westcor and Horizon.

Under the original agreement dated April 3, 1978, Westcor was responsible for approving the property's zoning and site plan. A subsequent addendum on April 12, 1978, required the Buyer to submit a preliminary land use plan within 60 days and to apply for rezoning within 90 days. The Buyer needed to secure letters of intent from major retail entities as a condition for extending the escrow closing. If financing was not secured by December 17, 1978, the Buyer agreed to actively seek financing during any extension.

The addendum was later revised to allow Westcor to rezone the entire 36 acres and to make a payment for the rezoning instead of an earnest deposit. Westcor applied for rezoning 11 acres but failed to achieve rezoning by the December deadline. A fourth addendum on February 20, 1979, extended the agreement until August 20, 1979, focusing on rezoning 10 acres to CB-1 and adjusting the sale price. During negotiations from December 17, 1978, to February 20, 1979, the parties continued to operate under the existing agreement, despite a thirteen-day notice requirement for termination, as acknowledged by Stan Abrams, Horizon's vice president.

By August 20, 1979, complications from surrounding landowner objections meant the property remained unrezoned. Abrams testified that, despite the addendum's expiration, he believed the parties were still functioning under its terms, and he had no discussions indicating the agreement was void or terminated.

Westcor actively pursued the rezoning of a property, indicating a strong interest in purchasing it contingent upon successful rezoning. The witness believed that completing the rezoning would benefit the company and was prepared to consummate the transaction based on the terms of an addendum after August 1979. The ongoing discussions and negotiations with Westcor continued post-August 1979, with the understanding that the escrow agreement remained open. Horizon and Westcor collaborated on the rezoning efforts, despite Westcor shouldering most of the costs.

During September and November 1979, they continued attempts to rezone the property, while in December, Westcor, with Horizon's knowledge, began efforts to acquire homes from neighboring property owners resisting the zoning application. A zoning hearing was scheduled for January 22, 1980; however, the parties decided to proceed cautiously, allowing for the application to be withdrawn if necessary due to political pressures. Ultimately, the rezoning application was not approved, but the board of supervisors referred it back to the planning commission for further review. 

The parties planned to wait until after the 1980 fall elections to resubmit their application. By this time, Westcor had invested over $50,000 in the rezoning efforts. The only outstanding condition preventing the contract’s consummation was the successful rezoning. Westcor and Horizon continued to work together, generating media support and engaging with tenants. To address objections from local landowners, Westcor developed new property plans featuring a Spanish architectural style. In March 1980, after Abrams was discharged from Horizon, Westcor briefed his successor, Donald C. White, on the rezoning strategy and the decision to delay further actions until after the elections.

White did not indicate that Horizon viewed the sale agreement as cancelled, nor did Westcor assert that the agreement remained in effect. Following a meeting on April 22, 1980, Westcor explored a joint venture with Horizon but ultimately decided against it. In August 1980, Westcor inquired about purchasing the entire 36 acres from Horizon on an "as is" basis but declined Horizon's offer. Unbeknownst to Westcor, Horizon was negotiating to sell the property to a third party during this time. Upon learning in October 1980 about Horizon's contract with the third party, Westcor sent a telegram to White, asserting that the escrow instructions remained valid and that Horizon could not proceed with the sale. Westcor then waived contingencies and deposited $200,000 into escrow for performance. Horizon subsequently initiated an action to quiet title, with Westcor counterclaiming for specific performance. The trial court ruled in favor of Horizon, finding that there was no valid contract due to illusory promises from Westcor, and that even if a contract existed, it expired on August 20, 1979. The court also concluded that a thirteen-day notice was not required for valid cancellation of the contract. Westcor disagreed with the conclusions of law and argued for specific performance. The court found Westcor's promises illusory because they were dependent solely on its discretion, lacking mutual obligation as defined in prior case law, including Shattuck v. Precision Toyota and Mattei v. Hopper, where contracts with satisfaction clauses were deemed enforceable.

California courts recognize two tests for the validity of satisfaction clauses in contracts. The first applies an objective standard of reasonableness when commercial value or quality is at issue. The second involves subjective factors, requiring the exercising party to adhere to an implied duty of good faith. The court emphasized that this duty is sufficient consideration for the contract, which is not illusory or lacking mutuality of obligation. In *Rodriguez v. Barnett*, the court upheld a land sale contract where the buyer's obligation was contingent on satisfaction with a subdivision map, stating that dissatisfaction must be genuine and not arbitrary.

In *Larwin-Southern Cal, Inc. v. J.G.B. Investment Company*, the court similarly affirmed that a satisfaction clause did not render the contract illusory, as the buyer's approval of various reports was subject to a good faith standard. The court referenced California Supreme Court cases to support its ruling. The Washington appellate case *Omni Group, Inc. v. Seattle-First National Bank* also followed this precedent, reversing a trial court's finding of an illusory contract based on a satisfaction clause. It was concluded that a contractor can condition their duty on personal satisfaction without invalidating the contract, provided the limitation is not excessive. Additionally, a buyer is expected to make a good faith effort to meet conditions, as recognized in *Nationwide Resources v. Massabni*.

The satisfaction clause in the contract between Westcor and Horizon is deemed subjective, requiring Westcor to act in good faith in exercising its approval or disapproval, thus making its contractual promises not illusory. The trial court concluded that Westcor failed to perform by not tendering performance by the deadline of August 20, 1979. However, Horizon's subsequent actions did not waive the requirement for timely acceptance, nor did they indicate the contract had expired. Instead, Horizon is estopped from claiming the contract expired, as its conduct involved working with Westcor and incurring expenses together. Consequently, the agreement could only be canceled according to its terms.

Horizon argued that the thirteen-day letter requirement was unnecessary for cancellation, citing Allan v. Martin, which differentiated between separate documents. However, in this case, the escrow instructions were integral to the contract itself. Similar to the O'Hare case, it was established that any party wishing to cancel must provide notice, reinforcing that the thirteen-day letter is essential for contract cancellation. Because the contract was valid when Westcor attempted performance, Horizon is entitled to specific performance. The trial court's judgment is reversed, directing a judgment in favor of Westcor, with Westcor entitled to attorney's fees on appeal, as supported by precedent. The amount of fees will be determined following Westcor's submission of costs.