North American Graphite Corp. v. Allan
1950 U.S. App. LEXIS 3099, 87 U.S. App. D.C. 154, 184 F.2d 387 (1950)
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Rule of Law:
When a contract specifies that payment for a debt is due upon the occurrence of a future event, such as a business becoming profitable, that provision is construed as setting a convenient time for payment rather than a condition precedent to payment, unless the contract's language clearly and unambiguously indicates otherwise. If the specified event is prevented from occurring, payment becomes due within a reasonable time.
Facts:
- North American Graphite Corporation hired Allan for engineering and supervisory services to rehabilitate a graphite mine.
- Initially, Allan offered his services for $5,000, with the remainder payable 'when mill is ready for operation.'
- North American Graphite Corporation counter-offered, and the parties agreed in writing that the final $4,000 would be payable at a rate of $500 per month 'to commence as soon as the plant is in successful operation, profitably processing and selling commercial grade graphite.'
- The corporation's letter explained the modified payment term was because 'large expenditures... make it imperative that disbursements for services be delayed until the plant is producing income.'
- Allan performed substantially all of the services required under the contract.
- North American Graphite Corporation then terminated Allan's services in violation of the contract.
- Subsequently, the corporation abandoned the mine rehabilitation project entirely, and the plant never achieved successful operation.
Procedural Posture:
- Allan sued North American Graphite Corporation in the U.S. District Court for breach of contract.
- Prior to trial, Allan amended his complaint to add a count in quasi-contract for the value of his services.
- The case was tried before a jury, which returned a verdict in favor of Allan for $4,000.00.
- The District Court entered a judgment on the jury's verdict.
- North American Graphite Corporation, the defendant, appealed the judgment to the U.S. Court of Appeals for the D.C. Circuit.
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Issue:
Does a contract clause stating that the balance of a fee is payable 'as soon as the plant is in successful operation, profitably processing and selling commercial grade graphite' create a condition precedent to the obligation to pay, or does it merely set the time for payment?
Opinions:
Majority - Fahy, Circuit Judge
No, this clause merely sets the time for payment. The court held that the obligation to pay was absolute, not contingent upon the successful operation of the mine. The court's reasoning is based on interpreting the parties' intent. First, the project was known to be speculative, and if the parties intended a contingent fee, they would have used clearer language. Second, any ambiguity in the contract is construed against the drafter, North American Graphite Corporation. Third, the corporation's own letter stated the purpose of the clause was to 'delay' payment until income was produced, not to make payment conditional. Because the corporation's abandonment of the project made the specified time of payment impossible, the $4,000 payment became due within a reasonable time after abandonment.
Analysis:
This decision establishes an important interpretive rule for contracts where payment is tied to future business success. It creates a default presumption that such clauses relate to the timing of payment, not the existence of the payment obligation itself. This protects service providers who perform their duties from losing their right to payment simply because the other party's venture fails or is abandoned. The ruling forces parties who wish to create a truly contingent payment obligation (a condition precedent) to do so with explicit and unambiguous language, thereby promoting clarity in contractual drafting.
