Forman v. Benson
446 N.E.2d 535, 112 Ill. App. 3d 1070 (1983)
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Rule of Law:
When a contract clause making performance subject to one party's approval is inserted as a personal concession, that party's decision is judged by a subjective standard of personal satisfaction, but this judgment must be exercised in good faith and not as a pretext for rejecting the contract for other reasons.
Facts:
- Eric Forman, a chiropractor, made a written offer to purchase commercial real estate from Art Benson for $125,000, to be paid via an installment contract over 10 years.
- Benson expressed concern about Forman's creditworthiness, as Benson would be financing the purchase himself.
- To address Benson's concern, a handwritten clause was added to the contract stating: 'Subject to seller’s approving buyer’s credit report, oral on March 24, 1981, and written when ready.'
- Benson then signed the agreement, and Forman paid $1,000 in earnest money.
- Forman's realtor provided Benson with a favorable oral credit report, followed by a written report, a personal financial statement, and a bank letter. Benson initially stated the report 'looks real good.'
- Over the next several weeks, Benson requested additional financial documents from Forman, including tax returns.
- During this period, the parties discussed increasing the purchase price and interest rate of the contract.
- On May 14, 1981, approximately seven weeks after signing the agreement, Benson formally rejected Forman's credit and instructed his realtor to return the earnest money.
Procedural Posture:
- Eric Forman sued Art Benson in the circuit court of Lee County, Illinois (a court of first instance), seeking specific performance of the real estate contract.
- The trial court found in favor of Forman, ruling that Benson's rejection of Forman's credit was unreasonable and that Benson had waived his right to reject by delaying and attempting to renegotiate.
- The trial court entered a decree ordering specific performance of the contract.
- Art Benson, as the appellant, appealed the trial court's decision to the Appellate Court of Illinois, Second District.
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Issue:
Does a seller breach a real estate purchase agreement by rejecting the buyer's credit report under a subjective satisfaction clause if the rejection is not made in good faith, but is instead a pretext to renegotiate the contract's terms?
Opinions:
Majority - Justice Hopf
Yes, a seller breaches a real estate purchase agreement when he rejects the buyer's credit report under a subjective satisfaction clause if the rejection is not made in good faith. Satisfaction clauses concerning financial matters are typically judged by an objective reasonableness standard, but when the clause is added as a personal concession to one party, a subjective standard of personal judgment applies. Here, the clause was added to ease defendant Benson's specific concerns, so the subjective standard is appropriate. However, this personal judgment must be exercised in good faith. The evidence shows that Benson attempted to renegotiate the purchase price and interest rate after receiving Forman's credit information. This attempted renegotiation demonstrates that Benson's rejection was not based on a genuine dissatisfaction with Forman's credit, but was a pretext for seeking better terms, which constitutes bad faith and a breach of the contract.
Dissenting - Justice Lindberg
No, the seller did not breach the agreement because no contract was ever formed. The clause requiring the seller's approval of the buyer's credit report was a condition precedent to the seller's acceptance of the offer. Since Benson never approved the credit report, the condition was not fulfilled, and his acceptance was never given. Without unequivocal acceptance, a binding contract never came into existence. Therefore, concepts of good faith and reasonableness are inapplicable, as there was no contract to breach. The seller's discussions about a different price during this period were part of the ongoing negotiation process before a final contract was formed, not evidence of bad faith.
Analysis:
This case clarifies the framework for interpreting satisfaction clauses in Illinois contract law. It establishes that the context of the negotiation can shift the standard from objective reasonableness to subjective satisfaction, particularly if the clause is a personal concession. More significantly, the ruling reinforces the implied covenant of good faith and fair dealing, demonstrating that even a party with subjective discretionary power cannot exercise it arbitrarily or for pretextual reasons. This decision limits a party's ability to use a satisfaction clause as a 'get out of jail free card' and warns that a court may scrutinize their subsequent actions, such as attempts to renegotiate, to determine their true motives.
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