Contract Formation

Allen v Cedar Real Estate Group, LLP, 236 F3d 374 (7th Cir 2001).

Facts: Thomas Allen, of Indiana, made a written offer to Cedar Real Estate Group, LLP, of Iowa (Cedar), to purchase a 6.2-acre lot in Lake County, Indiana. The property had previously been used as a trucking terminal and contained five underground fuel storage tanks. The trucking company removed four tanks and filled the last with concrete. Allen's offer to Cedar contained standard boilerplate contract provisions concerning the sale. However, Allen added a page entitled "Further Conditions." The page contained the following language: "This offer to purchase is subject to the purchaser's approval of the following: purchaser's review of Environmental Disclosure Document ... an Environmental Audit ... Cost not to exceed $5000 and to be split on a 50/50 basis between purchaser and seller."

Cedar made a counteroffer with no relevant changes, and Allen accepted. Allen reviewed the environmental disclosure documents and ordered an environmental audit to determine the status of the property. The audit revealed the property was contaminated and recommended further actions to determine clean up costs. Allen sent a memorandum to Cedar indicating that he would close on the property within thirty days of receiving an "acceptably clean" environmental report. He further stated that Cedar had all responsibility for preparation of a final environmental report. Cedar hired a contractor to estimate the clean up costs and discovered the costs would be much higher than anticipated.

After failed negotiations over the division of clean up costs, Cedar notified Allen that they were considering selling to other parties. Allen advised Cedar that a binding contract existed between the parties, and he would resist any sale to another party. Cedar informed Allen that they were terminating the agreement. Allen filed suit in federal district court. The district court granted summary judgment for Cedar, holding that Allen's approval of the environmental audit was an unsatisfied condition precedent to the existence of a contract. Allen appealed.

Holding: The appellate court affirmed the summary judgment. A contract was never formed because Allen inserted the language making his "offer to purchase subject to ... approval" of the environmental report. Contracts must be interpreted to give effect to the intention of the parties at the time the contract was made. Courts do this by examining the language that the parties used to express their rights and duties. The language Allen used created a condition precedent that needed to be fulfilled for the contract to be formed. It showed his intent to make an offer only on the condition that he received an acceptable environmental report. If he did not approve the report, there was no offer and, therefore, no contract.

The court held that he did not approve the report. After receiving the results of the environmental audit, Allen sent a memorandum stating that he would close on the property after an "acceptably clean" report, indicating the he had not approved of the results of the first audit. He then stated that preparing a final report was the responsibility of Cedar. After this communication, no agreements were reached. A condition precedent in a contract that solely benefits one party may be waived by that party. However, the party must expressly waive the condition. There is no evidence that he waived the condition. Allen inserted the language conditioning his offer on an acceptable report, and this condition was not met or waived. Therefore, no contract was formed. The court upheld the decision of the district court.

EDITOR'S NOTE: Under Illinois law, a condition precedent to the formation of a contract will not be found unless the intent to create such a condition precedent is clear from the plain language of the agreement. Catholic Charities of Archdiocese of Chicago v Thorpe, 318 Ill App 3d 304, 741 NE2d 651, 251 Ill Dec 764 (1st D 2000). Illinois courts appear to have a stricter standard for finding a condition precedent to the formation of a contract. In this case, the court could find that the language Allen used did not create such a condition because the language did not specify how his lack of approval would affect the agreement to sell the property.

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