Mattei v. Hopper
51 Cal.2d 119 (1958)
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Rule of Law:
A contract is not illusory or lacking in mutuality of obligation when performance by one party is conditioned on that party's subjective satisfaction, as the law imposes a duty to exercise that judgment in good faith, which constitutes adequate consideration.
Facts:
- Plaintiff, a real estate developer, planned to build a shopping center on a property adjacent to land owned by the defendant.
- After negotiations, plaintiff and defendant executed a written deposit receipt for the sale of defendant's property for $57,500.
- The agreement required the plaintiff to deposit $1,000 and gave him 120 days to consummate the purchase.
- The contract included a clause stating it was 'Subject to Coldwell Banker & Company obtaining leases satisfactory to the purchaser.'
- This clause was intended to allow plaintiff to secure tenants for his proposed shopping center before being finally committed to the purchase.
- Before the 120-day period expired and while plaintiff was securing leases, defendant's attorney informed plaintiff that defendant would no longer sell the property under the agreed terms.
- Subsequently, plaintiff informed defendant that satisfactory leases had been obtained and he was ready to pay the balance of the purchase price.
- Defendant failed to tender a deed for the property.
Procedural Posture:
- Plaintiff sued defendant in the trial court for damages arising from an alleged breach of contract.
- Following a trial without a jury, the trial court concluded the agreement was 'illusory' and lacked 'mutuality.'
- The trial court entered a judgment in favor of the defendant.
- Plaintiff, as appellant, appealed the judgment to the present court.
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Issue:
Does a contract clause making a real estate purchaser's performance conditional on obtaining leases 'satisfactory' to him render the contract illusory and unenforceable for lack of consideration?
Opinions:
Majority - Spence, J.
No, a contract clause making a purchaser's performance conditional on obtaining 'satisfactory' leases does not render the contract illusory. Such clauses are enforceable because the promisor's duty to exercise their judgment in good faith provides adequate consideration and ensures mutuality of obligation. The court distinguished between two types of satisfaction clauses: those governed by an objective 'reasonable person' standard (for commercial value or mechanical utility) and those governed by a subjective 'good faith' standard (for matters of fancy, taste, or judgment). The evaluation of commercial leases involves numerous factors requiring personal judgment, placing this clause in the second category. The implied duty to exercise this judgment in good faith prevents the promise from being arbitrary or illusory. The court disapproved of contrary reasoning in Lawrence Block Co. v. Palston and Pruitt v. Fontana, which incorrectly suggested that such clauses are illusory without an objective standard.
Dissenting - McComb, J.
The judgment was dissented to without a written opinion.
Analysis:
This decision solidifies the enforceability of subjective satisfaction clauses in California contract law, confirming they are not void for lack of mutuality. The court affirmed that the implied covenant of good faith and fair dealing is sufficient consideration to support a contract where one party's performance is conditioned on their personal judgment. By disapproving dicta from prior appellate cases that suggested an objective standard was always necessary, the court provided greater certainty for parties in complex commercial transactions, particularly in real estate development, where such contingency clauses are common and necessary.
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