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OVERVIEW OF ATTORNEY REVIEW CASES
by Joseph R. Fortunato, ATG Member Attorney

EDITOR'S NOTE: This article originally appeared in the October 2007 issue of the ISBA Real Property Newsletter and is reprinted here with permission from the author and the editor of the original publication.

Contract forms have contained clauses described variously as "Attorney Approval," "Attorney Modification," "Attorney Disapproval" and "Attorney Review." While the rights afforded the attorney differ, all such clauses shall be discussed herein in general terms as "Attorney Review" clauses unless otherwise noted.

A. Olympic Restaurant v Bank of Wheaton (2nd D 1993), 251 Ill App 3d 594, 622 NE2d 904, 190 Ill Dec 874

The Attorney Review clause stated: "The parties agree that their respective attorneys may review and make modifications, other than stated purchase price, mutually acceptable to the parties, within ten (10) business days after the date of the contract acceptance. If the parties do not agree and written notice thereof is given to the other party within the time specified, then this contract will become null and void, and all monies paid by the Purchaser will be refunded. IN THE ABSENCE OF WRITTEN NOTICE WITHIN THE TIME SPECIFIED HEREIN, THIS PROVISION WILL BE DEEMED WAIVED BY ALL PARTIES HERETO AND THIS CONTRACT WILL BE IN FULL FORCE AND EFFECT."

Each attorney made modifications; neither side accepted the other's modifications. The trial court granted summary judgment to the Seller, finding that the letters exchanged between the attorneys constituted counteroffers, neither of which was ever accepted by the other party. The court ruled that the agreement was not binding because there was no valid offer and acceptance. The Appellate Court affirmed, stating "under long-settled contract principles, the letters amounted to counteroffers, which operated as rejections of the original agreement and proposals for new agreements. The court citedLoeb v. Gray(1985), 131 Ill App 3d 793, 799, 86 Ill Dec 775, 475 NE2d 1342 ("an acceptance requesting modification or containing terms that vary from those offered constitutes a rejection of the original offer and becomes a counter-proposal which must be accepted by the original offeror before a valid contract is formed.") (Emphasis added).

B. Groshek v Frainey (1st D 1995), 274 Ill App 3d 566, 654 NE2d 467, 211 Ill Dec 5

The Attorney Approval clause provided in pertinent part: "It is agreed by and between the parties hereto as follows: that their respective attorneys may approve or make modifications, other than price and dates, mutually acceptable to the parties. Approval will not be unreasonably withheld, but if within five (5) business days after the date of acceptance of the contract it becomes evident that agreement cannot be reached by the parties hereto, and written notice thereof is given to either party within the time specified, then this contract shall become null and void, and all monies paid by the Purchaser shall be refunded."

Purchasers' attorney disapproved the contract but did not state in writing a specific reason. The Appellate Court held that: (1) the contract allowed purchaser's attorney to reject the contract without proposing modifications, and (2) purchaser's attorney was not required to state his reasons for disapproving the contract. CitingWilliston on Contracts, paragraph 6:13 at 104-18 (4th ed.1991), the court stated that a contract which contains an Attorney Approval clause is appropriately construed as a qualified or conditional acceptance of the terms of that contract. Invocation of the clause triggers a rejection of the contract and, at times, a counteroffer. Conditional acceptance occurs when a party to an agreement imposes as a condition of the bargain the favorable opinion of his lawyer. The court cited with approval of theOlympic Restaurantcase and previous cases on the subject. The court also stated that an attorney was not required to state reasons for disapproval of a contract pursuant to an Attorney Review or Attorney Approval clause in a contract because the attorney's right to disapprove is a wholly proper exercise of his or her judgment, limited only by good faith.

C. Hubble v O'Connor (1st D 1997), 291 Ill App 3d 974, 684 NE2d 816, 225 Ill Dec 825

The "Attorney Disapproval" clause within the agreement states in pertinent part: "This contract is contingent upon the approval hereof as to form by the attorney(s) for Buyer and Seller within five Business Days after Seller's acceptance of this contract. Unless written notice of disapproval is given within the time period specified above, then this contingency shall be deemed waived and this contract will remain in full force and effect. If written notice of disapproval is given within the time period specified above, this contract shall be null and void and the earnest money shall be returned to the Purchaser."

In this case, held the court, the contract became final and binding when the agreed-upon extension of the approval date expired without disapproval, even though the parties were exchanging suggestions for modifications of the contract throughout the approval period. The court found the "mirror image" rule not relevant because the case did not involve a question of contract formation. The court stated a "counteroffer rejects an offer only when made before a contract is formed (emphasis added by the court). The court also stated that simply because a communication discusses the possibility of a modification does not necessarily mean that the communication is a demand for modification, citing the Restatement (Second) of Contracts, sec.39, Comment b.

The determining factor inHubblewas that once the contract came into existence, the only question regarding its enforceability was whether one of the attorneys would disapprove it within the stated disapproval period. The disapproval clause was unambiguous and the court agreed with the sellers that the purchasers' attorney never timely disapproved the contract.

D. McKenna v Smith (1st D 1998), 302 Ill App 3d 28, 704 NE2d 826, 235 Ill Dec 253

The Appellate Court agreed with the lower court that the attorney for the Seller did not act in bad faith in disapproving an agreement pursuant to an Attorney Review clause contained in the contract. The decision is interesting from the stand point of the breadth of the authority allotted to the attorney on the issue of good faith.

E. Terry v. Cafferata (Second D 2004 apparently an unpublished decision - ed.)

The Attorney Review clause provided: "The Parties agree that their respective attorneys may approve or make modifications to this contract, other than stated purchase price, within five (5) business days after the Date of Acceptance. If the parties do not reach agreement on any proposed modification and written notice is given to the other Party within the time specified, this contract shall be declared null and void and earnest money refunded to Buyer upon written direction of the Parties to Escrowee."

The attorneys for the respective parties exchanged correspondence. The buyers' attorney stated that he withheld approval pending the resolution of certain matters. His letter was never signed or returned by sellers. Sellers' attorney wrote a letter addressing many of the issues raised by buyer's attorney but buyer's attorney did not sign and return the letter tendered by seller's attorney. Thereafter, buyer sought mortgage financing and the seller ordered title. Nine minutes prior to the scheduled time for closing, buyer's attorney sent a letter to seller's attorney's office via facsimile stating that the issues in the Attorney Review letter had never been resolved to his client's satisfaction and that he had not received a copy of the title commitment.

The trial court held that a contract which contains an Attorney Review clause operates as conditional acceptance of the terms of the contact. The trial court found that the buyer's attorney's letter triggered the Attorney Review clause, rejected the contract, and constituted a counteroffer. The trial court found no evidence of bad faith on the part of the buyers' attorney. The trial court also found that the sellers' attorney's letters did not accept the terms of the counter offer but proposed modifications and constituted another counter offer.

The Appellate Court found that an acceptance conditioned upon the modification of terms constituted a rejection of the original offer and became a counter offer that the original offeror must accept before a valid contract is established. The court acknowledged the authority of the Groshek decision that a contract which contains an Attorney Approval clause is a qualified or conditional acceptance of the terms of the contract and, citingOlympic Restaurant, stated that the disapproval by an attorney within the time specified by the clause allows the parties to get out of the agreement. The court found no waiver because it was clear that there had never been agreement reached by the attorneys for the parties pursuant to their respective Attorney Review letters.

Patel v McGrath

(374 Ill App 3d 378, 2007 WL 1933968, 2nd D 2007)
This is a case where prospective buyers of real estate sued the seller, seeking specific performance of a contract. The Attorney Review clause provided as follows: "The respective attorneys for the Parties may approve, disapprove or make modifications to this contract, other than stated Purchase Price, within five (5) business days after the Date of Acceptance. Disapproval or modification of this contract shall not be based solely upon stated Purchase Price. Any notice of disapproval or proposed modifications by any party shall be in writing. If within ten (10) business days after the Date of Acceptance written agreement on proposed modifications cannot be reached by the Parties, this contract shall be null and void and earnest money refunded to Buyer upon the written direction of the Parties to the Escrowee. If written notice is not served within the time specified, this provision shall be deemed waived by the Parties and this contract shall remain in full force and effect."

Within the five (5) business day period, the buyer's attorney sent a letter to the seller's attorney requesting modifications requiring the seller to furnish a survey in not less than five (5) business days before closing, allowing the buyer to terminate the contract and receive refund of earnest money in the event of title problems and requesting a warranty from Seller that there were no senior citizen exemption or freeze associated with the taxation of the real estate. The letter further stated as follows:

 

Please be advised that the above modification should not be construed as a revocation of the current contract, nor should they be construed as a counteroffer. Should the foregoing be acceptable, kindly have the Sellers sign or sign on their behalf, in the space provided below and return an executed copy to my attention.

On the same day the seller's attorney sent a letter rejecting the modifications and disapproving the contract without explanation. The property was then relisted for $1,800,000, after previously having been listed for $1,299,000. The next day (and presumably within the first five (5) business days after the Date of Acceptance - the opinion is not clear on that point) the buyers' attorney sent a letter to sellers' attorney accepting their rejection of the buyers' proposed modification and demanding specific performance of the contract.

The trial court found that the contract was effectively canceled by the action on the part of the sellers' attorney, dismissed the complaint with prejudice, and denied buyers' motion seeking a temporary restraining order and injunction. The trial court noted that the proposed modifications did not concern price and found that, regardless of how it was described, the letter from the buyers' attorney constituted a counteroffer that was not accepted by the sellers.

On appeal the buyers argued that the letter that their attorney had sent was not a counteroffer and that there was an issue of material fact whether, in violation of the contract, sellers' attorney disapproved the contract based solely on purchase price.

Analysis of the Patel Decision
The opinion written by Justice O'Malley of the Second District focused almost entirely upon the effect of the letter written by the buyers' attorney characterizing the "modifications" that were not to be construed as a counteroffer. In the initial analysis, it appears that the court needed only to address the issue of the effect of the letter written by the sellers' attorney in disapproving the contract, due to the fact that the property was very quickly listed for an amount in excess of $500,000 greater than the original listing price. The opinion, when analyzed, can be construed as holding that an issue of fact arose as to whether the sellers, by their attorney's action, acted in good faith. Had the court stopped at that point, a lot of anguish and consternation regarding the effect of the cautionary (some might say "conditional") language contained in the letter by the buyer's attorney could have been avoided. Instead, we are left with the dictum that has been widely discussed and disseminated as if it were the actual holding of the case, which dictum, in this author's opinion, will be widely misunderstood and misinterpreted.

A review of the salient language in the Attorney Review clause of the contract between the parties is instructive. The clause in question provides authority to the attorneys for their respective parties to do one of three things during the five business days after the date of acceptance: the attorney may approve, disapprove, or make modifications to the contract (other than stated purchase price).

The right to approve:While often overlooked, the right to approve the contract was inserted by the drafters of the contract to provide an opportunity for buyers in a multiple-offer situation to quickly notify the seller that the contract would not be modified by counsel, therefore making that buyer's contract much more desirable than others that may be subject to extensive modification.

The right to disapprove:The right to disapprove a contract by an attorney for one of the parties to a contract has been discussed in detail with regard to the earlier cases. Nothing in thePateldecision affects that right, other than the fact that the good faith of the attorney in making the disapproval was called into question.

The right to make modifications (other than stated purchase price):The court suggests that the right should be characterized as one to suggest, rather than to make, modifications. This author believes the court misses the point that a modification, suggestion, or proposal made by an attorney while invoking the Attorney Review clause (emphasis added) constitutes a counteroffer. It is undisputed that an attorney can suggest an amendment to a contract that would not constitute a counteroffer. However, an attorney making such a suggestion for modification that is not intended to be a counteroffer should not, in the opinion of this author, do so pursuant to the authority granted in the Attorney Review clause. For one thing, no such authority is granted to the attorney in the clause. The language is clear - the attorney may approve, disapprove, or make modifications to the contract. The language inserted by the drafters of the contract that the attorney may "make modifications" (rather than "propose modifications," as suggested by thePatelcourt) was designed to make clear that any attempt by an attorney to modify the contract pursuant to the authority granted in the Attorney Review clause would constitute a counter- offer which, if not accepted by the other party, would render the contract null and void. The drafters intended to follow existing case law on the subject when reaching this decision. The courts in many Attorney Review cases characterize a proposal under the authority of an Attorney Review clause as a counteroffer; hence, the better practice would entail suggesting an "amendment" or a "change" that would not constitute a counteroffer if made without the invocation of the Attorney Review clause and the powers therein granted to the attorney.

In the experience of this author, as well as many other attorneys who practice in this area of the law, it is quite common for an attorney to invoke the powers provided in the Attorney Review clause in an attempt to change the contract and to try to protect the client in the event that the changes are not granted. The result is a means of providing for the contract to remain in effect if the client so desires, whether or not the change is adopted, or, in other instances, the cancellation of the contract if the client desires this result as well. In effect, such language amounts to a "trial balloon" which allows the party to decide, once a response is made, whether or not to proceed with the transaction. Such requests to modify the contract, while characterizing the suggestion as something other than a counteroffer, are often coupled with a statement that the proponent attempts to either approve or disapprove the contract if the suggestion by the proponent is not accepted. Further, such right to either approve or disapprove is often invoked after the expiration of the initial five (5) business day period after the Date of Acceptance, after the time period allowed by the contract to either approve or disapprove the contract pursuant to the Attorney Review clause.

In thePatelcase, the buyers, once their proposal to modify the contract was rejected, agreed that their proposal would be rejected and they then (again, presumably, within the time allotted by the Attorney Review clause) elected to approve the contract. Had they not done so, it is not certain that the court would have arrived at the same conclusion that the buyers were within their rights to characterize their proposed "modifications" (their term) as something other than counteroffers.

The portion of the opinion that is the most unsettling to this author, and technically unnecessary to the conclusion arrived at by the court, was the characterization of the Attorney Review clause as not a conditional acceptance of the contract, as described by the opinion in theOlympic Restaurantcase, but rather a condition subsequent to the contract. The court cited the Restatement (Second) of Contracts for authority for this position. The court quoted theHubbledecision as follows: "Simply because a communication discusses the possibility of modification does not necessarily mean that the communication is a demand for modification." The court, however, ignored the fact that the "communication" in thePatelcase was made pursuant to the authority granted to the attorney in the Attorney Review clause. The communication made pursuant to the Attorney Review clause suggests that the communication, and the proposal contained therein, may be grounds for disapproval of the contract or further modification if the suggestion is not adopted as part of the contract. The court acknowledged that the buyers approved the contract after their initial "suggestions" were rejected. However, the danger lies in the fact that the buyers could have just as easily disapproved the contract if the suggestions they made had been accepted. ThePateldecision provides no guidance to the practitioner as to the effect of the "suggestions" other than to state that "if McGrath does not agree to the modifications, then the "current" contract, expressly not having been revoked, remains in effect." Later, the court explained: "because the letter proposing the modifications expressly stated that it was not a revocation or a counteroffer, the 'current contract' remained in effect."

Must such a conclusion be reached? If the "suggestion" of the buyers' attorney was not accepted, what would prevent the attorney for the buyer from rejecting the contract prior to the expiration of the fifth business day after the Date of Acceptance? The "suggestion" initially made by the buyers' attorney did not constitute, in the opinion of the court, the exercise of one of the three available powers granted to the attorney under the Attorney Review clause. Therefore, it would appear that the power to disapprove the contract remained available to the attorney, subject only to the exercise of good faith. Therefore, we are left with the very real possibility that if such a "trial balloon" is not accepted by the other party, the proponent may, within the time periods provided by the contract, disapprove the contract or, for that matter, make actual modifications to the contract.

In response, counsel for the opposite party could suggest to his or her client that the "suggestion" should be ignored and no response be given, on the basis that such a "suggestion" could not constitute a modification of the contract which would give rise to a counteroffer and the resulting termination of the contract. However, there is potential for confusion in the minds of practitioners as to the legal effect of such "suggestions." Counsel would likely address rather than ignore such "suggestions."

ThePatelcourt interprets the Attorney Approval clause as a "condition subsequent" to the entry into a contract. However, the Restatement (Second) of Contracts describes, at Section 224, a condition as "an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due." The comment to this section states that "condition" is used in this section of the Restatement to note an event which qualifies a duty under a contract. Later, in subsection (e) of this section, the Restatement provides:

Parties sometimes provide that the occurrence of an event, such as the failure of one of them to commence an action within a prescribed time, will extinguish a duty after performance has become due, along with any claim for a breach. Such an event has often been called a "condition subsequent," while an event of the kind described elsewhere in the section has been called a "condition precedent." This terminology is not followed here. Since a "condition subsequent," so-called, is subject to the rules on discharge…and not to the following rules on conditions, it is not called a "condition" in this Restatement. Occasionally, although the language of an agreement says that if an event does not occur a duty is extinguished, "discharged" or "terminated" it can be [seen] from the circumstances that the event must ordinarily occur before performance of the duty can be expected. When a court concludes that, for this reason, performance is not to become due unless the event occurs, the event is, in spite of the language, a condition of the duty.

Illustrations given after the comment do not describe situations such as the situation in the case at bar. Simply stated, the analysis and description of the Attorney Review clause as constituting a "condition subsequent" is not supported by the reasoning of the Restatement (Second) of Contracts. It is also a significant break from the holdings of prior case law on the subject.

ThePatelcourt strains to describe its obvious break from the reasoning of theOlympic Restaurantcase as consistent with the reasoning, defending its rationale with the assertion that the reasoning ofOlympic Restaurant"does not compel a different result." The court inOlympic Restaurantheld that the proposals made by the attorneys for their respective parties and written notices of disapproval constituted a rejection of the contract and a counteroffer. ThePatelcourt states that "despite its purported reliance on the mirror image rule, the court (inOlympic Restaurant) held that the buyers' letter was a rejection of the original contract and a counter- offer." This is an implicit recognition of the well-established rule that "[a] counteroffer rejects an offer only when made before a contract is formed" (emphasis added by the court). Without explanation, thePatelcourt states: "We recognize inOlympic Restaurantthat, from a buyers' point of view, the contract had been formed, the buyer rejected the contract and the buyer then proposed a counteroffer to the seller." ThePatelcourt does not explain why inOlympic Restaurantthe contract "was formed" and then "rejected" by the buyer with the subsequent counteroffer to the seller, while ignoring its earlier argument that the proposal to modify contract could only be made before the contract was formed. Finally, out of apparent frustration, thePatelcourt states "we decline to followOlympic Restaurant, however, to the extent that it relies on the mirror image rule to effectively frustrate use and implication of an Attorney-Review provision in a contract." Interestingly, the court does not describe how the mirror-image rule would frustrate the use of the Attorney Review clause, the purpose for which was aptly described in a New Jersey court in the case of Indoe v. Dwyer as follows:

The purpose of such an Attorney Approval clause is to provide the Purchaser or Seller with the opportunity of obtaining legal advice with respect to the transaction, and its value lies in the fact that the contract may be canceled upon receiving such advice. Parties to a real estate transaction are entitled to the benefit of the judgment of a trusted counselor, and an approval contingency is designed to accord this right to those who, for some reason, enter into a purchase and sale agreement before reviewing the matter with their attorney [sic]." Indoe, 176 N.J. Super.at 601, 424A.2d at 460.

How then can thePatelcourt describe the effect of the mirror image rule to "effectively frustrate use and implementation of an Attorney-Review provision in a contract"? The "mirror image rule" would apply to those instances when the parties were so determined to modify the contract that they invoked the authority of the Attorney Review clause to do so. Those who consider their proposals to be of less significance need only float such "trial balloons" as did the attorney in thePatelcase. However, the confusion will arise because of the invocation of the Attorney Review clause in the floating of such "trial balloons." Such practice seems unnecessary and will give rise to further confusion until the practice abates. As indicated previously, what is of greater concern to this author is the proposal of such a "trial balloon" coupled with the attempted retention of the right to disapprove or modify the contract if the "trial balloon" is not adopted as part of the contract.

As a result of thePateldecision, we are left with the following unresolved issues:

• The letter from the buyers' attorney failed to express that if the proposals made were not accepted, the buyer intended to accept or approve the contract as drafted; the attorney could just as easily have disapproved the contract. The letter failed to elect one of the choices allowed the attorney pursuant to the Attorney Review clause, and the attorney for the seller (correctly, in my opinion) interpreted the proposal made pursuant to the authority of the Attorney Review clause to be a modification.

 

• The Patel court ignored the fact that the "suggestion" made pursuant to the Attorney Review clause could have been deemed ineffective because it was not authorized by the Attorney Review clause.

 

• The Patel court ignored the fact that the "suggestion" for a change in the contract made pursuant to the Attorney Review clause constituted a modification of the Attorney Review clause, which modification would have to be accepted by the seller in order to become part of the contract.

 

• The Patel court ignored the fact that when the seller failed to accept the buyers' modification made pursuant to the Attorney Review clause, that modification could not be withdrawn, because the authority granted to the attorney by the Attorney Review clause does not provide for the withdrawal of a modification, nor does elementary contract law.

Jennings v Baron

(2007 WL 2190080, 2nd D 2007)
In this case, involving the Multi-Board Residential Real Estate Contract 3.0, the Attorney Review clause provided as follows: "The respective attorneys for the Parties may approve, disapprove, or make modifications to this contract, other than stated Purchase Price, within five (5) business days after the Date of Acceptance. … Any notice of disapproval or proposed modification(s) by any Party shall be in writing. If within ten (10) business days after the Date of Acceptance written agreement on proposed modification(s) cannot be reached by the parties,this contract shall be deemed null and void and earnest money refunded to Buyer upon written direction of the parties to Escrowee. If written notice is not served within the time specified, this provision shall be deemed waived by the parties and this contract shall remain in full force and effect." (Emphasis in original).

Sellers' attorney sent a letter proposing modifications to the contract, which modifications the buyers' attorney accepted. The buyers' attorney proposed a modification dealing with the inspection report and a modification that provided that the property appraise at a value not less than the purchase price. The seller did not respond in a timely fashion to the proposal on the part of the buyer. Thereafter, after the tenth business day after the Date of Acceptance, buyers' attorney sent a letter to sellers' attorney declaring the contract null and void. Sellers' attorney objected, stating that the content of the buyers' attorney's letter dealt only with items of routine maintenance that were specifically excluded under the contract and further indicated that certain items in the nature of routine maintenance would be addressed.

Seller sought to enforce the terms of the contract and, after trial, judgment was entered in favor of the seller. The trial court found that the buyer did not validly terminate the contract, reasoning that the buyers' attorney's letter did not state a deadline for response and that the proposed modifications were requested to be completed before closing, which was scheduled after ten business days from the date of the letter.

The appellate court reversed the decision of the trial court. The court agreed with the buyers that the "proposed modifications" dealt with new matters specifically excluded from the original contract, citing the request that the contract be amended to provide that the property appraise to the full purchase price. They therefore declined to address the issue of whether the repair requests were "proposed modifications." The court determined that the failure of the parties to agree in writing to the proposed modification of the mortgage contingency clause rendered the contract null and void. The court also indicated that the contract did not require the buyers to provide a deadline for response in their request to modify the contract, because the contract already contained the deadline for reaching written agreement - ten business days after the Date of Acceptance of the contract.

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