Fry v. George Elkins Co.
162 Cal. App. 2d 256, 327 P.2d 905 (1958)
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Rule of Law:
When a party's contractual obligation is contingent upon the occurrence of a condition, that party has an implied duty to make a good faith effort to cause the condition to occur. The failure to make such an effort constitutes a breach of the contract.
Facts:
- On May 20, 1956, plaintiff Fry made a written offer to purchase a home from defendants Miller for $42,500, providing a $4,250 deposit.
- The offer was expressly conditioned upon Fry obtaining a $20,000 loan at 5% for a 20-year term.
- At the time of the offer, Fry was advised that banks were unlikely to approve such a loan but that Western Mortgage Company, the existing lender on the property, would likely do so.
- Fry applied for the specified loan at two banks where he was known, and both applications were rejected.
- The broker, the sellers, and Western Mortgage all informed Fry that a loan meeting his specified terms was available for him at Western Mortgage.
- Despite receiving loan applications and direct communication from Western Mortgage, Fry never submitted an application to that institution.
- Fry informed the broker's representative that he had lost all interest in the house and had changed his plans to go to Hawaii.
- Fry subsequently attempted to rescind the contract, citing his inability to obtain the required financing.
Procedural Posture:
- Plaintiff Fry sued defendants Miller in a trial court to recover a $4,250 deposit.
- The trial court found that Fry breached the contract by failing to make a good faith effort to obtain the required financing.
- The trial court awarded damages to the Millers out of the deposit and entered a judgment for Fry for the remainder, which was $937.50.
- Fry, as plaintiff-appellant, appealed the amount of the judgment to the intermediate appellate court, seeking the return of his full deposit.
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Issue:
Does a real estate buyer breach the implied duty of good faith when a purchase agreement is conditioned on obtaining a specific loan, and the buyer fails to apply for that loan from a readily available and suggested lender, instead only applying to lenders known to be unlikely to grant such a loan?
Opinions:
Majority - Fox, P. J.
Yes, the buyer breaches the implied duty of good faith. The court held that implicit in a contract condition is the obligation of the party who benefits from the condition to make a good faith effort to bring it about. Fry's failure to apply for a loan from Western Mortgage, after being told it was the most likely source and was ready to grant the loan, demonstrated a lack of good faith. The court found that applying only to banks, which he was advised would likely reject him, was not a sufficient effort. This conclusion was supported by evidence that Fry had changed his mind about the purchase, indicating his goal was not to secure the loan but to exit the contract. Therefore, his failure to pursue the available financing was a breach of his contractual obligation.
Analysis:
This decision reinforces the principle that conditional promises in a contract are not illusory and carry an implied duty of good faith and fair dealing. It clarifies that a party cannot engineer the failure of a condition precedent to escape contractual liability. For real estate transactions, this means a buyer with a financing contingency must make reasonable and diligent efforts to obtain the loan, which includes pursuing viable and suggested lending sources. The case establishes that a court can infer a lack of good faith from a party's failure to pursue likely avenues for fulfilling a condition, especially when coupled with evidence of a change of heart about the underlying deal.
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