Rain City Guide

Terminating a Contract

Craig on 11 29, 2005

(This is a guest post by Craig Blackmon, an attorney in Seattle whose practice focuses on residential real estate — see www.lawofficeofcraigblackmon for more information. Please note that this post is not legal advice. You should consult an attorney for specific legal counsel.)

Last week, the Washington Appellate Court decided a case dealing with a buyer’s termination of a purchase and sale agreement. The case will not be published, and accordingly it has no precedential value for similar cases in the future. Nonetheless, the case does provide some interesting insight on the factors a buyer should consider before walking away from a purchase and sale agreement.

In Silvers v. Lee, the seller (Ms. Silver) and the buyers (Mr. and Mrs. Lee) entered into a standard MLS form purchase and sale agreement (the “PSA”). The buyers inspected the property, and after the inspection asked the seller to install electrical outlets in the garage. The seller agreed to do so. The seller had the work performed by a friend, a licensed electrician. Although the work was subsequently found to have been performed to code requirements, the electrician did not get a permit for the work, as required by law. The PSA required any work done by the seller to be performed in a “commercially reasonable manner.” In addition, pursuant to the PSA, the buyers had the right to reinspect and approve the completed work prior to closing.

The buyers decided to forgo the reinspection. Instead, they asked the seller to provide them with a receipt for the work. Because it had been done by a friend, the seller did not provide a receipt. Absent a receipt, the buyers terminated the contract. In their notice of termination, the buyers indicated that they were unconvinced that the work had been done properly as required by the PSA. Both parties claimed the earnest money, and a lawsuit followed shortly thereafter.

As the lawsuit developed, the buyers learned of the seller’s failure to obtain a permit for the work. Thus, the buyers alleged that the work could not have been done in a “commercially reasonable manner,” and accordingly they had a legal excuse for terminating the contract.

The Court disagreed. The Court noted that every contract imposes on the parties an implied duty of good faith and fair dealing. This duty requires a party to know of the legal excuse for canceling the contract at the time of the cancellation. The party cannot use after acquired knowledge as the cancellation’s basis. The Court also noted that, in interpreting any contract, it is a court’s responsibility to determine the parties’ intent. Here, based on the PSA, the parties clearly intended for the buyers to reinspect and approve the work prior to closing. This was the agreed method for approval or disapproval of the work at issue. Accordingly, the buyers’ post-termination discovery of the illegally performed electrical work did not provide the buyers with a legal excuse for terminating the contract.

The Court also noted that, as a general rule, one party may terminate a contract only if the other party has committed a “material breach” of the contract. A “material breach” occurs when the breach constitutes a “substantial or total failure” of the breaching party to live up to the party’s contractual obligations. Under the circumstances of this case, the seller’s failure to provide a receipt was not a material breach and therefore the buyers did not have the right to terminate the contract.

Finally, the Court commented on the fact that the PSA did not impose a duty on the seller to provide a receipt for the work at issue. Arguably, the implied duty of good faith and fair dealing required the seller to respond to a reasonable request from the buyers relating to whether the work was performed in a commercially reasonable manner. However, the buyers never informed the seller why they wanted the receipt until they indicated in the notice of termination. Absent such explanation for the request, the seller did not have a contractual duty to provide the receipt.

The case illustrates several factors that should be considered where a party is contemplating the termination of a purchase and sale agreement (other than where the contract clearly gives the party the right to do so, such as where a contingency is not satisfied). First, any termination must be based on knowledge known at that time. A party cannot rely on the subsequent discovery of additional information after the fact that would otherwise justify the termination. Second, the party should ensure that the other party has indeed committed a “material breach” of the contract. Absent a material breach, there may be no legal justification for terminating the contract. Third, where the termination is based on the seller’s failure to provide requested information, the buyer should ensure that the request for information was explained to the seller, including the specific basis for the request. The basis should be directly related to a contractual duty imposed on the seller by the PSA (in the case above, the request related to the seller’s duty to perform the work in a commercially reasonable manner).

The case provides one other lesson as well. Pursuant to the terms of the PSA, the prevailing party in any lawsuit was entitled to an award of attorney’s fees and costs. Thus, in addition to the $10,000, Ms. Silvers also will receive thousands of dollars from the Lees to compensate her for her expenses through trial and appeal. In other words, in their unsuccessful attempt to recover $10,000, the Lees spent much, much more.

About the Author: Craig Blackmon

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Craig is an attorney in Seattle whose practice is focused on residential real estate. His firm, in conjunction with his real estate brokerage, Washington Lawyers Realty (WaLawRealty.com), regularly assists people in buying or selling a home. As a lawyer, Craig provides better representation than an agent, and he does so for a lot less money. For buyers, Craig refunds 100% of the buyer's agent commission. For sellers, Craig assists with "for sale by owner" transactions, asisting those owners in marketing the home in a cost effective manner. In either case, Craig charges a low flat fee. You can reach Craig at 206.357.4222.