Breach of Contract Containing Satisfaction Clause Law Elements and Defense

Definition

A contract that conditions one party’s performance upon his or her satisfaction is enforceable and not illusory or lacking in mutuality of obligation if the determination of such satisfaction is either (1) made according to a judicially discerned, objective standard of a reasonable person, or (2) controlled by good faith, regardless of reasonableness. (Steiner v. Thexton (2010) 48 Cal.4th 411; Mattei v. Hopper (1958) 51 Cal.2d 119, 122-23; Kadner v. Shields (1971) 20 Cal.App.3d 251, 258-59.)

Element 1: Satisfaction Clause in Contract

A satisfaction clause is a provision in a contract that makes one party’s performance conditional on his or her satisfaction as to the other party’s performance or as to the status of something involved in the contract. (Steiner v. Thexton (2010) 48 Cal.4th 411; Mattei v. Hopper (1958) 51 Cal.2d 119, 122-23; Kadner v. Shields (1971) 20 Cal.App.3d 251, 258-59.)

Choice of Test:

If a contract provision makes one party’s performance conditional on his or her satisfaction as to the other party’s performance or as to the status of something involved in the contract, the court will apply either an objective test or a subjective test to determine the appropriateness of this “satisfaction clause.” (Steiner v. Thexton (2010) 48 Cal.4th 411; Mattei v. Hopper (1958) 51 Cal.2d 119, 122-23; Kadner v. Shields (1971) 20 Cal.App.3d 251, 258-59.)

Which test is to be used in a given transaction is a matter of actual or constructive (legally presumed) intent of the parties. The distinction between the two tests is not meant to create a hard and fast line; the difference is one of degree. The choice can be settled by explicit language in the instrument. However, in the absence of a specific expression or a clear indication from the nature of the subject matter, the law prefers the less arbitrary standard of the reasonable man. (Steiner v. Thexton (2010) 48 Cal.4th 411; Mattei v. Hopper (1958) 51 Cal.2d 119, 122-23; Kadner v. Shields (1971) 20 Cal.App.3d 251, 258-59.)

If a contract is capable of two constructions, the court must choose the interpretation that will make the contract legally binding if such interpretation does not violate the intent of the parties. (Rodriguez v. Barnett (1959) 52 Cal.2d 154, 160.)

Validity of Contract:

When a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing. The lack of an express requirement of reasonableness or good faith does not mean the contract lacks sufficient legal consideration and mutuality of obligation. (Storek & Storek, Inc. v. Citicorp Real Estate, Inc. (2002) 100 Cal.App.4th 44.)

A satisfaction clause which required the buyers’ approval of termite and roof inspection reports was limited by the implied duty to use good faith and diligence and did not render the contract void for lack of mutuality. (McClain v. Octagon Plaza, LLC (2008) 159 Cal.App.4th 784; Converse v. Fong (1984) 159 Cal.App.3d 86, 90.)

A contract provision that leaves the price to be paid, or other performance to be rendered, to the will and discretion of one of the parties is generally not enforceable. However, a contract that permits one party to set or change the price charged for goods or services is not illusory, because that party has a duty of good faith and fair dealing. (Perdue v. Crocker Nat’l Bank (1985) 38 Cal.3d 913, 923 [bank’s signature card is a contract authorizing bank to impose insufficient funds charges subject to bank’s duty of good faith and fair dealing in setting or varying the charges].)

Element 2: Good Faith Dissatisfaction with Performance

The plaintiff’s determination must be in good faith and he must be genuinely dissatisfied with the other party’s performance of the contract or with the item that is subject to his approval, and not merely with the contract itself. (Storek & Storek, Inc. v. Citicorp Real Estate, Inc. (2002) 100 Cal.App.4th 44.)

Objective Test/Reasonable Person Standard:

The court uses the “reasonable person” standard to determine whether satisfaction has been received when a contract calls for satisfaction as to commercial value or quality, operative fitness, or mechanical utility; in such cases, dissatisfaction cannot be claimed arbitrarily, unreasonably, or capriciously. (Mattei v. Hopper (1958) 51 Cal.2d 119, 122-23.)

Under the “reasonable person” standard, a party’s determination of dissatisfaction may be unreasonable even if made in personal good faith. (Kadner v. Shields (1971) 20 Cal.App.3d 251, 262 [satisfaction clause in land sale contract allowing buyer to approve encumbrance on property was a condition precedent to buyer’s obligation to purchase the property, not a condition to existence of contract].)

Where a contract provides for performance in accordance with plans and specifications fixed by the contract, to the satisfaction of the owner or architect, and the contract is performed as required by the plans, the person whose judgment is invoked must accept the performance, and his mental condition as to satisfaction is immaterial. (Storek & Storek, Inc. v. Citicorp Real Estate, Inc. (2002) 100 Cal.App.4th 44.)

A satisfaction clause in a land sale contract giving the purchasers the right to have a well tested to determine the amount of water available was a contract condition subject to the reasonable person standard. (Lyon v. Giannoni (1959) 168 Cal.App.2d 336, 339 [buyers’ right to terminate contract if test results were not satisfactory did not merely create an option to purchase].)

The sufficiency of a performance bond under a satisfaction clause in a construction contract was to be determined by the objective reasonableness test. (Weisz Trucking Co. v. Emil R. Wohl Construction (1970) 13 Cal.App.3d 256, 262-63.)

Subjective Test:

A provision in a land sale contract that the buyer’s approval of reports and studies could be given or withheld in its “sole judgment and discretion” was valid, as the buyer had a duty to exercise its judgment in good faith. (Larwin-Southern Cal., Inc. v. JGB Inv. Co. (1979) 101 Cal.App.3d 626, 640.)

What constitutes bona fide dissatisfaction under a satisfaction contract is a question for the jury, and the jury’s role is limited to that; there can be no inquiry into whether the dissatisfaction was reasonable or whether there was “good cause” for the termination. (Pugh v. See’s Candies, Inc. (1988) 203 Cal.App.3d 743, 766.)

A contract requiring performance to the “satisfaction” of the employer was breached when the employer was dissatisfied in good faith, regardless of whether a reasonable man would or would not have been dissatisfied. The employer’s good faith determination of dissatisfaction was conclusive on the employee. (Crillo v. Curtola (1949) 91 Cal.App.2d 263, 271.)

Approval of Third Person:

Where work is to be done to the satisfaction of a third person, evidenced by a certificate to that effect, the production of such a certificate is a condition precedent to a right of action upon the contract. (Coplew v. Durand (1908) 153 Cal. 278, 279, 281.) However, where a contract required an architect to certify his satisfaction with the work, and the architect unreasonably refused to issue the certificate, the plaintiff was not required to produce the certificate as a condition to a breach of contract action. (Ibid.)

Remedies

 Compensatory Damages

The measure of damages for breach of contract is the amount which will compensate plaintiff for all detriment proximately caused by the breach or which, in the ordinary course of things, would be likely to result from the breach. (Cal. Civ. Code, § 3300.)

Restoration

Damages for breach of contract ordinarily include all amounts necessary to place plaintiff in same position as if breach had not occurred. (Applied Equip. Corp. v. Litton Saudi Arabia, Ltd. (1994) 7 Cal.4th 503, 515.)

Lost Profits

Future profits can be recovered to extent they can be estimated with reasonable certainty. (Sanchez-Corea v. Bank of America (1985) 38 Cal.3d 892, 907-08; Fisher v. Hampton (1975) 44 Cal.App.3d 741, 747. Lost profits are recoverable to extent they are natural and direct consequence of breach. (Brandon & Tibbs v. George Kevorkian Accountancy Corp. (1990) 226 Cal.App.3d 442, 457, 277; Postal Instant Press v. Sealy (1996) 43 Cal.App.4th 1704, 1709 [franchisee’s failure to make timely royalty payments to franchisor was not a “natural and direct” consequence of the breach because franchisor chose to terminate contract, thus losing entitlement of future royalty payments].)

Rescission and Restitution

Rescission and restitution are alternative remedies in action for damages where there has been repudiation or material breach of a contract, transfer of unique goods is involved, other remedies are inadequate, subject of contract still exists and interests of innocent purchasers for value and defendant’s creditors will not be unjustly affected. (Wong v. Stoler (2015) 237 Cal.App.4th 1375.)

Equitable Relief

Specific Performance

Specific performance is granted only when money damages are inadequate. (Palo Alto-Menlo Park Yellow Cab Co. v. Santa Clara County Transit Dist. (1976) 65 Cal.App.3d     121, 132-33.)

Injunction (Very Limited Availability)

Injunctive relief is largely within discretion of trial court, considering inadequacy of      damages to plaintiff, as well as harm to defendant. (Smith v. Mendonsa (1952) 108    Cal.App.2d 540, 543-44.)

Statute of Limitations

Generally, the limitations period is four years for written contracts (Cal. Civ. Proc. Code, §337, subd. (a)), and two years for oral agreements. (Cal. Civ. Proc. Code, §339, subd. (1)). A contract cause of action does not accrue until the contract has been breached. (Spear v. Cal. State Automobile Assn. (1992) 2 Cal.4th 1035, 1042.) The discovery rule may be applied to breaches of contract which can be, and are, committed in secret and, moreover, where the harm flowing from those breaches will not be reasonably discoverable by plaintiffs until a future time. (Gryczman v. 4550 Pico Partners, Ltd. (2003) 107 Cal.App.4th 1, 4-5.)

Affirmative Defenses

Unconscionability

Unconscionability is a contract defense. The unconscionability doctrine ensures that contracts, particularly contracts of adhesion, do not impose terms that are overly harsh, unduly oppressive, so one-sided as to shock the conscience, or unfairly one-sided. (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal.4th 899; Cal. Civ. Code, §1670.5.)

Unclean Hands

The doctrine of unclean hands is a defense available in both legal and equitable actions. (Jade Fashion Co., Inc. v. Harkham Industries, Inc. (2014) 229 Cal.App.4th 635, 653.)

Unilateral Mistake of Fact

To prevail on a unilateral mistake claim, the defendant must prove that the plaintiff knew that the defendant was mistaken and that plaintiff used that mistake to take advantage of the defendant: “Defendants contend that a material mistake of fact – namely, the defendants’ belief that they would not be obligated to install a new roof upon the residence – prevented contract formation. A unilateral mistake of fact may be the basis of relief. However, such a unilateral mistake may not invalidate a contract without a showing that the other party to the contract was aware of the mistaken belief and unfairly utilized that mistaken belief in a manner enabling him to take advantage of the other party.” (Meyer v. Benko (1976) 55 Cal.App.3d 937, 944.)

Bilateral Mistake

Where, as here, the extrinsic evidence is not in conflict, the determination of whether a mutual mistake occurred is a question of law. (Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 527.) “Ordinary negligence does not bar a claim for mutual mistake because ‘“[t]here is an element of carelessness in nearly every case of mistake . . . .”’ ‘Only gross negligence or ‘preposterous or irrational’ conduct will [bar] mutual mistake.’” (Thrifty Payless, Inc. v. The Americana at Brand, LLC (2013) 218 Cal.App.4th 1230, 1243.)

Duress

“Menace” is considered to be duress: “Under the modern rule, ‘“[d]uress, which includes whatever destroys one’s free agency and constrains [her] to do what is against [her] will, may be exercised by threats, importunity or any species of mental coercion. It is shown where a party ‘intentionally used threats or pressure to induce action or nonaction to the other party’s detriment.’”’ The coercion must induce the assent of the coerced party, who has no reasonable alternative to succumbing.” (In re Marriage of Baltins (1989) 212 Cal.App.3d 66, 84.)

Economic Duress

Different elements may apply if economic duress is alleged to avoid an agreement to settle a debt. (Perez v. Uline, Inc. (2007) 157 Cal.App.4th 953, 959-960.) The doctrine of economic duress can apply when one party has done a wrongful act which is sufficiently coercive to cause a reasonably prudent person, faced with no reasonable alternative, to agree to an unfavorable contract. The party subjected to the coercive act, and having no reasonable alternative, can then plead economic duress to avoid the contract. (CrossTalk Productions, Inc. v. Jacobson (1998) 65 Cal.App.4th 631, 644.)

Undue Influence

Undue influence consists of the use of excessive pressure by a dominant person over a servient person resulting in the apparent will of the servient person being in fact the will of the dominant person. The undue susceptibility to such overpersuasive influence may be the product of physical or emotional exhaustion or anguish which results in one’s inability to act with unencumbered volition. (Keithley v. Civil Service Bd. of the City of Oakland (1970) 11 Cal.App.3d 443, 451.)

Fraud

Fraud may be asserted as an affirmative defense: “One who has been induced to enter into a contract by false and fraudulent representations may rescind the contract; or he may affirm it, keeping what he has received under it, and maintain an action to recover damages he has sustained by reason of the fraud; or he may set up such damages as a complete or partial defense if sued on the contract by the other party.” (Grady v. Easley (1941) 45 Cal.App.2d 632, 642.)

Waiver

The waiver may be either express, based on the words of the waiving party, or implied, based on conduct indicating an intent to relinquish the right. Thus, “California courts will find waiver when a party intentionally relinquishes a right or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” (Wind Dancer Production Group v. Walt Disney Pictures (2017) 10 Cal.App.5th 56, 78.)

Statute of Limitations

Generally, the limitations period is four years for written contracts (Cal. Civ. Proc. Code, §337, subd. (a)), and two years for oral agreements. (Cal. Civ. Proc. Code, §339, subd. (1)). A contract cause of action does not accrue until the contract has been breached. (Spear v. Cal. State Automobile Assn. (1992) 2 Cal.4th 1035, 1042.) The discovery rule may be applied to breaches of contract which can be, and are, committed in secret and, moreover, where the harm flowing from those breaches will not be reasonably discoverable by plaintiffs until a future time. (Gryczman v. 4550 Pico Partners, Ltd. (2003) 107 Cal.App.4th 1, 4-5.)

Novation

“A novation is a substitution, by agreement, of a new obligation for an existing one, with intent to extinguish the latter. A novation is subject to the general rules governing contracts and requires an intent to discharge the old contract, a mutual assent, and a consideration.” (Klepper v. Hoover (1971) 21 Cal.App.3d 460.)