Mind & Motion Utah Investments LLC v. Celtic Bank Corp.
367 P.3d 994 (2016)
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Rule of Law:
A contractual provision using mandatory language, such as 'shall,' creates a covenant that imposes a duty to perform, even if performance is dependent on the action of a third party. Furthermore, a latent ambiguity cannot be created by a party's subjective testimony about their understanding of the contract's terms; it requires objective extrinsic evidence of a collateral matter that makes facially clear language ambiguous.
Facts:
- Celtic Bank acquired fourteen acres of real estate in Huntsville, Utah, through a foreclosure sale.
- The property was approved for condominium development, but the plat for the first phase had not been recorded, a necessary step for development which required approval from various county officials.
- On May 25, 2010, Mind & Motion entered into a Real Estate Purchase Contract (REPC) to buy the property from Celtic Bank.
- The REPC stated that Celtic Bank 'shall record Phase 1' of the development by a deadline of June 15, 2010.
- The contract also granted Mind & Motion 'the sole discretion' to extend the recording deadline.
- Celtic Bank failed to record the plat by the June 15 deadline because it had not yet secured all necessary approvals from county entities.
- Mind & Motion exercised its discretion to extend the recording deadline once, to July 26, 2010.
- Celtic Bank again failed to record the plat by the extended July 26 deadline, and Mind & Motion declined to grant a second extension.
Procedural Posture:
- Mind & Motion filed a breach of contract action against Celtic Bank in the district court (trial court).
- The district court granted partial summary judgment in favor of Mind & Motion.
- The court concluded the recording provision was an unambiguous covenant and awarded Mind & Motion damages and attorney fees.
- Celtic Bank, as the appellant, appealed the district court's summary judgment ruling to the Utah Supreme Court.
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Issue:
Does a real estate contract provision stating a party 'shall record' a plat by a specific date constitute a covenant, the breach of which gives rise to damages, or a non-binding condition precedent that relieves the parties of their obligations if not met, especially when performance depends on third-party government approval?
Opinions:
Majority - Chief Justice Durrant
Yes, the provision constitutes a covenant. The contract's use of explicitly mandatory language ('shall record,' 'agrees to record') establishes a binding promise, not a condition. This interpretation is strengthened by the fact that the parties used explicitly conditional language ('is conditioned upon') in other sections of the REPC, demonstrating they knew how to create a condition when they intended to. While performance depended on the actions of county officials, a party can contractually assume the risk of a third party's failure to act; the mandatory language shows Celtic Bank assumed the risk of failing to obtain the necessary approvals by the deadline. Furthermore, the contract contains no latent ambiguity, as Celtic Bank's proffered evidence consists only of its officers' subjective understanding of the agreement, which is inadmissible to create an ambiguity where objective evidence of a collateral matter is required.
Analysis:
This decision reinforces the paramount importance of precise language in contract drafting, solidifying the distinction between mandatory terms that create covenants ('shall') and conditional terms that create conditions ('if,' 'provided that'). It clarifies that parties who promise to secure governmental approvals are generally held to have assumed the risk of delays or failure, a crucial principle for real estate and development contracts. The court also significantly narrows the application of the latent ambiguity doctrine, requiring objective, verifiable evidence of a collateral matter rather than allowing parties to introduce self-serving, subjective testimony to create ambiguity in otherwise clear terms. This holding promotes contractual certainty and discourages parties from attempting to escape clear obligations through litigation.
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