United States Court of Appeals
For the First Circuit
No. 00-1526
ADRIA INTERNATIONAL GROUP, INC.,
CRISWELL ASSSOCIATES, L.L.C.,
Plaintiffs, Appellants,
v.
FERRÉ DEVELOPMENT, INC.,
ANGOLA INVESTMENT, INC.,
MAR CHIQUITA DEVELOPMENT CORP., et al.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Juan M. Pérez-Giménez, U.S. District Judge]
Before
Lynch and Lipez, Circuit Judges,
and García-Gregory, District Judge.*
Mark S. Priver, with Santiago F. Lampon-González and Ohashi &
Priver on briefs, for appellants.
Etienne Totti-del Valle, with Totti & Rodríguez Díaz on briefs,
for appellees.
March 2, 2001
* Of the District of Puerto Rico, sitting by designation.
LIPEZ, Circuit Judge. This case involves a failed real-
estate transaction, the defendants’ refusal to return a $100,000
deposit given by the plaintiffs for an option to buy a valuable Puerto
Rico beach-front property owned by the defendants, and the plaintiffs’
lawsuit for breach of contract. On summary judgment, the district
court awarded the $100,000 deposit to the defendants. The plaintiffs
appealed. We reverse and remand for a trial because of the ambiguity
of the agreement between the parties.
I.
Plaintiffs Adria International Group, Inc. and Criswell
Associates, L.L.C. are real-estate developers who hoped to build a
luxury hotel, condominium units, and golf course on a piece of land on
Puerto Rico's north coast known as the Mar Chiquita property. Mar
Chiquita was owned by the defendants, Ferré Development, Inc., Angola
Investment, Inc., and Mar Chiquita Development Corp. On June 6, 1996,
the parties signed a Deed of Option to Purchase the property.
The deed established a purchase price of $7.5 million for
Mar Chiquita. The plaintiffs agreed to pay this amount if they were
successful in obtaining bond financing from the Puerto Rican government
during the time periods specified in the deed. The deed provided for
three separate option periods. The first period, described in Article
Third (b) of the deed as the "Initial Option Period," gave the
-2-
plaintiffs a 90-day right to purchase in exchange for a $100,000
deposit to be held in escrow. This period could be extended for an
additional 60 days at no additional cost to the plaintiffs.
Article Third (c) of the deed provided for a Second Option
Period. It stated that for an additional $100,000, the plaintiffs
"shall have the right, at any time prior to the expiration of the
Initial Option Period, to extend the Option for an additional term of
ninety (90) days to commence on the day after the termination of the
Initial Option period (hereinafter referred to as the 'Second Option
Period.')" In parallel terms, Article Third (d) of the deed provided
for a Third Option Period in exchange for an additional $150,000
deposit.
After signing this agreement on June 4, 1996, the plaintiffs
engaged Smith Barney to help them raise the equity they needed to
qualify for government bond financing. They also met with
representatives of Puerto Rico’s tourism department seeking a needed
endorsement from the Tourism Development Fund for issuance of the
bonds. On September 4, 1996, the initial 90-day option period provided
for in Article Third (b) of the deed expired. Adria International and
Criswell Associates extended their option to buy for 60 more days until
November 4 at no additional cost, as Article Third (b) allowed, because
the defendants had not resolved a lawsuit that was clouding Mar
-3-
Chiquita’s title. The litigation soon ended, and plaintiffs received
notice of the relevant judgment on September 20.
Over the course of the fall, it became clear that Adria
International and Criswell Associates were $6 million short of the
equity they needed to secure the bond financing. The Tourism
Development Fund said it would not guarantee the shortfall without the
backup guarantee of another funding source. Without the help of Smith
Barney, the plaintiffs contacted various parties, including
professional golfer Chi Chí Rodriguez, in hopes of finding such a
guarantor. According to the plaintiffs, Rodriguez committed to send
them $200,000, half of which would replace the plaintiffs’ deposit for
the Initial Option Period and half of which would serve as
consideration for the Second Option Period.
The plaintiffs hoped to receive the money from Rodriguez by
November 4, the day on which the Initial Option Period expired, but the
money did not arrive in time. Instead, María Luisa Fuster Zalduondo
of the plaintiffs' law firm, McConnell Valdés, wrote a letter on
November 4 to the defendants' lawyer, José Fuentes Agostini, confirming
that the plaintiffs would deliver the $100,000 deposit for the Second
Option Period the following day. The defendants orally agreed to meet
on November 5 to receive delivery of the second $100,000. Because
November 5 was Election Day, the parties then agreed to meet on
November 6.
-4-
The November 6 meeting was held at the offices of McConnell
Valdés. In attendance were Ricardo Hernández-Morales, the general
manager of defendant Ferré Development Inc.; José Fuentes, the
defendants' lawyer; William T. Criswell, IV, representing plaintiffs
Adria International and Criswell Associates; and Harry O. Cook and
Samuel Céspedes, the plaintiffs' lawyers. At the meeting, Criswell
told Hernández that the money from Rodriguez still had not arrived, but
that he hoped to receive it within the next ten days. Hernández
expressed his disappointment. The parties then negotiated over the
terms of a two-week extension of the plaintiffs' option. In lieu of
the missing $100,000 deposit from Rodriguez, Criswell offered the
approximately $1 million fee that his principals would have owed Smith
Barney if they had succeeded in securing financing for the deal.1
The parties' new agreement was set forth in a letter drafted
quickly by Céspedes, one of the plaintiffs’ lawyers, so that Criswell
could catch a flight to Europe. The letter was headed "Re: Deed of
Option to Purchase Mar Chiquita Properties." It said in full:
Dear Mr. Hernández:
In connection with the aforementioned
deed (the "Deed"), we hereby request an
extension of the Initial Option Period, as such
term is defined in Article Third (a) of the
1Criswell said that at the time he made the offer, he thought the
fee was in the range of $600,000. At some point, either during the
meeting or shortly after it ended, Cook called Smith Barney and learned
that the fee, in fact, would have been as much as $1,050,000.
-5-
Deed, through midnight of November 20, 1996. If
you agree with this option period extension,
please signify so by signing in the space
provided below. Your acceptance of this
extension does not modify any future option
periods contemplated in the Deed.
In consideration for the aforesaid
extension, Purchaser shall pay to Sellers by
certified or bank manager's check a sum equal to
the fee that would otherwise have been paid to
Smith Barney for the sale of limited partnership
interests.
Cordially yours,
//s William T. Criswell
After reviewing the letter with Fuentes in private for a few minutes,
Hernández signed it. The meeting quickly adjourned.
Over the next two weeks, the plaintiffs continued to seek
funding from Rodriguez. That money did not materialize. On November
20, Cook sent a letter to Hernández terminating the plaintiffs’ option
to buy because the government bonds had not been approved. The
plaintiffs asked Hernández to direct the escrow agent to return the
$100,000 they had deposited in June for the Initial Option Period. On
December 11, Fuentes replied to Cook in a letter that accused Adria
International and Criswell Associates of acting in "bad faith," thus
"waiv[ing] any possible right under the Deed . . . to request a return
of the initial deposit."
On February 15, 1997, the plaintiffs sued for return of the
$100,000 deposit. The defendants cross-claimed for the $1 million fee.
On July 23, 1998, the plaintiffs moved for summary judgment, arguing
-6-
that the November 6 letter extended the Initial Option Period and was
supported by adequate consideration. The plaintiffs contended that
because the parties agreed in the letter to extend the Initial Option
Period until November 20, that period had not expired before the
plaintiffs terminated their option, entitling them to reclaim their
deposit. On July 24, 1998, the defendants moved for summary judgment
on their counter-claim, making two alternative arguments. First, the
defendants argued that the November 6 agreement to extend the Initial
Option Period was invalid because it was not supported by
consideration. Second, they argued that if the agreement was supported
by consideration, the plaintiffs breached it by refusing to pay the $1
million fee, which was not contingent on completion of the land
purchase, contrary to the plaintiffs’ assertion.
On November 24, 1999, the district court found for the
defendants on the $100,000 claim. The court found that the November
6, 1996 letter was clear on its face, and that the letter demonstrated
the parties' intent to extend the Initial Option Period until November
20, 1996. The court found, however, that this extension was not
supported by consideration, and as a result the November 6 letter was
not a valid contract. Thus the parties had failed to extend the
Initial Option Period, entitling the defendants to retain the $100,000
deposit that the plaintiffs did not reclaim before that period expired.
-7-
The court also granted the plaintiffs' motion for summary
judgment on the defendant's $1 million counter-claim for the fee "that
would otherwise have been paid to Smith Barney." The defendants argued
that payment of the fee was not contingent on completion of the land
transaction. The court found that payment of the fee was contingent.
The defendants did not appeal this ruling.
II.
We review an award of summary judgment de novo. Wightman
v. Springfield Terminal Ry. Co., 100 F.3d 228, 230 (1st Cir. 1996).
Summary judgment is appropriate in the absence of a genuine issue of
material fact, when the moving party is entitled to judgment as a
matter of law. See Fed. R. Civ. P. 56(c). Cross-motions for summary
judgment do not alter the basic Rule 56 standard, but rather simply
require us to determine whether either of the parties deserves judgment
as a matter of law on facts that are not disputed. See Wightman, 100
F.3d at 230.
The parties do not dispute that the Deed of Option to
Purchase was a valid agreement supported by consideration. Their
arguments instead concern the November 6 agreement and its relationship
to the deed. The plaintiffs argue that the November 6 agreement was
supported by consideration because it required them to relinquish
control of the $100,000 deposit for two more weeks, and to pay the $1
million fee described in the agreement if the deal closed. In
-8-
addition, the plaintiffs contend that a duty to act in good faith
tempered their right to terminate the option to buy. The defendants
argue that the letter was not supported by consideration and that the
promises made by the plaintiffs were illusory. The district court
agreed with the defendants.
We begin with some general principles about consideration
drawn from the laws of Puerto Rico. Puerto Rican law provides that "a
bilateral obligation assumed by each one of the parties to the
contract, has, as its consideration, the promise offered in exchange."
United States v. Pérez, 528 F. Supp. 206, 209 (D.P.R. 1981) (citing Del
Toro v. Blasini, 96 P.R.R. 662 (1968)). Both parties must be bound
based on "mutual consideration" that yields either a benefit or a
detriment to each party. Id. In defining legally sufficient
consideration, the Puerto Rican Civil Code states: "In contracts
involving a valuable consideration, the [presentation] or promise of
a thing or services by the other party is understood as a consideration
for each contracting party." P.R. Laws Ann. 31 § 3431. In construing
this provision, the Puerto Rico Supreme court has said:
By consideration is understood, for the purpose
of determining the existence of a contract, the
benefit or benefits which one party receives
from the other, or the latter obligates himself
to confer upon the former, and to which he had
previously no right; or also, the damages which
one party suffers because of the other, and
which he was not obliged to suffer, the
existence of the said benefits or damages being
- 9 -
the reason which caused the other party to
obligate himself.
Guerra v. Treasurer, 8 P.R.R. 280 (1905).
Here, because they did not have in hand the $100,000 deposit
required by the deed to purchase a 90-day Second Option Period, the
plaintiffs made an alternate offer: the possibility of a $1 million
payment in exchange for a two-week extension of their option. The
plaintiffs' promise in the November 6 agreement to pay the $1 million
fee conferred two benefits on the defendants. First, they gained the
possibility of winning a $1 million fee. Second, the defendants gained
an increased likelihood that the land transaction would be completed,
the plaintiffs having informed them that otherwise they would abandon
their efforts to secure financing. These benefits constitute adequate
consideration under Puerto Rican law.
There was also detriment to the plaintiffs in the November
6 agreement. The plaintiffs did not have the use of the $100,000
deposit for the Initial Option Period for two more weeks. More
significantly, they put themselves at risk of paying the $1 million
fee. "Any detriment to the opposite party is a valuable
consideration." In re Las Colinas, Inc., 294 F. Supp. 582, 596 (D.P.R.
1968), vacated and remanded on other grounds, 426 F.2d 1005 (1st Cir.
1970); Bennett v. Boschetti, 31 P.R.R. 809 (1923).
- 10 -
The district court misunderstood the nature of the
consideration that supported the November 6 agreement. The court said
that the plaintiffs’ promise to the defendants was illusory because
payment of the $1 million fee "was conditioned on some future event
which the Plaintiffs controlled," in other words, completion of the
land deal.2 The court continued:
Plaintiffs had the right to cancel at any time
within the IOP [Initial Option Period] if they,
at their sole discretion, considered that they
were unable to obtain the required approval for
the issuance of guaranteed bonds
for the financing of the hotel and golf course.
Plaintiffs’ rights were subjective in nature.
Plaintiffs were not required to give any prior
notice, nor was the termination reliant on an
extrinsic event out of the Plaintiffs’ control.
The court’s reasoning was erroneous,3 even though it is true
that, "when the promised act is conditional on the occurrence of a
future event within the control of the promisor, the promise is
illusory." Crellin Technologies, Inc. v. Equipmentlease Corp., 18 F.3d
1, 8 (1st Cir. 1994) (citing Vickers Antone v. Vickers, 610 A.2d 120,
123 (R.I. 1992)); see also P.R. Laws Ann. 31 § 3043 (1990) (a contract
2 The court also said that "[i]f the consideration was due up-
front, as Defendants assert, it follows that the November 6th Letter is
void for lack of consideration for Plaintiffs never paid the
consideration." This rationale confuses a void contract with a
breached one. A party’s failure to pay agreed-upon consideration
creates a breach of contract, but does not void the underlying
agreement.
3 Indeed, the court's logic would invalidate the original option
agreement, as well as the November 6 agreement to extend.
- 11 -
is void if it includes a conditional obligation that depends on the
"exclusive will" of one party); § 3373 ("The validity and fulfilment
of contracts cannot be left to the will of one of the contracting
parties."). In this case, the future event at issue was not wholly
within the control of the plaintiffs.
In contrast to Crellin, where the parties had not signed a
binding contract, the plaintiffs' obligation to seek financing for the
land deal was subject to the duty of good-faith performance. "Good
faith performance or enforcement of a contract emphasizes faithfulness
to an agreed common purpose and consistency with the justified
expectations of the other party." Restatement (Second) of Contracts
§ 205a (1981). Puerto Rican law imposes the duty of good faith
performance on contracting parties. See An-Port, Inc. v. MBR
Industries, Inc., 772 F. Supp. 1301, 1314 (D.P.R. 1991) ("The
requirement of good faith between the parties in a contract . . . must
guide all contacts between the contracting parties during the existence
of the relationship."); AMECO v. Jaress Corp., 98 P.R.R. 820 (1970)
(contracting parties have obligations by law that extend "to cover not
only what has been expressly stipulated, but also the consequences
which, according to their nature, are in accordance with good faith");
see also P.R. Laws Ann. 31 § 3375 (1990).
To fulfill their duty of good-faith performance, the
plaintiffs had to seek financing for the land deal by negotiating with
- 12 -
third parties. Thus their efforts to perform can be measured against
the objective standard of whether they sought the third-party support
that was central to the transaction. See P.R. Laws Ann. 31 § 3063 ("If
[the obligation] should depend . . . upon the will of a third person,
the obligation shall produce all its effects); Hernández v. Cadilla,
21 P.R.R. 745 (1921) (fulfillment of condition that does not depend
exclusively upon will of obligor, but also upon that of third person
over whom he has no control, is fulfilled and the obligation is
demandable if the obligor does all he was required to do); Resource
Management Co. v. Weston Ranch and Livestock Co., Inc., 706 P.2d 1028,
1038 (Utah 1985) ("[T]he reservation by a promisor of a power to cancel
upon the occurrence of some event not wholly controlled by the promisor
himself does not render this promise illusory or the contract invalid.
'Even if the promisor is himself to be the judge of the cause or
condition, he must use good faith and an honest obligation.'") (quoting
1A Corbin on Contracts § 165 at 86-87 (1963)). The plaintiffs’
negotiations with the Puerto Rican Tourism Department and Chi Chí
Rodriguez reflect the kind of good-faith performance required by the
contract.4 There was nothing illusory about the promise of the
plaintiffs to pay a $1 million fee if the land transaction closed.
4 While the defendants alleged bad faith on the plaintiffs' part
in their pleadings, the district court found that there was no evidence
to support this assertion. We reach the same conclusion based on our
reading of the record.
- 13 -
III.
As an alternative ground for affirming the district court’s
judgment awarding them the $100,000 deposit, the defendants argue that
the November 6 agreement was ambiguous and should be interpreted in
their favor. The defendants note that Puerto Rican law provides that
"[t]he interpretation of obscure stipulations of a contract must not
favor the party occasioning the obscurity," P.R. Laws Ann 31 § 3478,
and that the plaintiffs through their lawyers drafted the agreement.
The plaintiffs, on the other hand, argue that the November 6 letter was
clear on its face in extending the Initial Option Period. The district
court agreed that the contract was clear on its face, but found that
it was not supported by adequate consideration.
We look to Puerto Rican law for the standard for determining
whether a contract is ambiguous. Puerto Rico’s Civil Code provides:
If the terms of a contract are clear and leave
no doubt as to the intentions of the contracting
parties, the literal sense of its stipulations
shall be observed.
If the words should appear contrary to the
evident intention of the contracting parties,
the intention shall prevail.
P.R. Laws Ann. 31 § 3471 (1990). The Puerto Rican courts have
construed this provision to mean the following: "Under Puerto Rican
law, an agreement is 'clear' when it can 'be understood in one sense
alone, without leaving any room for doubt, controversies or difference
of interpretation.'" Borschow Hosp. and Med. Supplies, Inc. v. Cesar
- 14 -
Castillo, Inc., 96 F.3d 10, 15 (1st Cir. 1996), quoting Executive
Leasing Corp. v. Banco Popular de Puerto Rico, 48 F.3d 66, 69 (1st Cir.
1995); see also Heirs of Ramírez v. Superior Court, 81 P.R.R. 347, 351
(1959).
The November 6 letter requests "an extension of the Initial
Option Period as such term is defined in Article Third (a) of the
Deed." However, as the defendants point out, Article Third (a) speaks
only of an "exclusive, irrevocable first option (the "Option"), while
Article Third (b) of the deed defines the "Initial Option Period."5
The plaintiffs say that this discrepancy is a typographical error with
no import. They argue that because "Initial Option Period" was a term
of art used throughout the deed, both parties understood the November
6 letter to refer to the Initial Option Period as defined in Article
Third (b). We agree that the mistaken reference to Article Third (a)
in place of Article Third (b) does not rise to the level of a genuine
dispute of material fact about the meaning of the contract.
However, we find the letter to be ambiguous for another,
more significant reason. The letter fails to address the fate of the
plaintiff’s $100,000 deposit for the Initial Option Period. It does
not explain the relationship between the original consideration
5 Article Third (a) states in relevant part: "For good and
valuable consideration, the receipt of which is hereby acknowledged,
Sellers hereby give Purchasers and their assigns the exclusive,
irrevocable, first option (the "Option") to purchase the Property for
the purchase price described in Paragraph (e) below."
- 15 -
specified in the deed--the $100,000 deposit--and the newly agreed-upon
consideration--the approximately $1 million conditional payment. The
plaintiffs argue that they detrimentally relied on the November 6
agreement by not reclaiming the deposit, thus allowing "those funds to
remain at risk, and outside their absolute control." The defendants
respond that the plaintiffs had no right to recover the deposit after
November 4 because the Initial Option Period had ended. Nothing in the
letter resolves this central disagreement. Such silence can be a
source of ambiguity, and we find that it is so here. See Catullo v.
Metzner, 834 F.2d 1075, 1079-80 (1st Cir. 1987) (where a settlement
agreement was silent on the question of whether one party could operate
a competing business, "[t]his silence creates doubt as to the intention
of the parties").
Given the hurried negotiations that took place before and
during the November 6 meeting, the letter’s lack of clarity is not
surprising. The parties do not even agree on the significance of their
agreement to meet on November 6 rather than on November 4, the day on
which the Initial Option Period expired.6 The plaintiffs say the
6 Nor did the letter explain the status of the fee to which it
refers. The letter does not say whether payment of the $1 million fee
was contingent on completion of the land purchase. It says only that
the plaintiffs "shall pay . . . a sum equal to the fee that would
otherwise have been paid to Smith Barney." As we have noted, the
defendants did not appeal the district court's ruling that the payment
of the $1 million fee was contingent on completion of the land deal.
We cite the issue only to emphasize further the letter's lack of
clarity.
- 16 -
defendants agreed to extend the Initial Option Period until November
6. The defendants say they merely agreed to postpone receipt of the
second $100,000 deposit required to begin the Second Option Period.
The meeting itself took place immediately after the parties
learned that the Rodriguez money had not arrived, throwing the future
of the Mar Chiquita sale into doubt. Moreover, Criswell was in a hurry
to leave for Europe, and Hernández reviewed the letter with his lawyer
for only a few minutes before signing it. Under considerable pressure
and time constraints, the parties improvised in hopes that the deal
could be salvaged. But they failed to draft an agreement that settled
what would happen to the $100,000 deposit. Tellingly, neither side
claims to have mentioned the deposit until the plaintiffs decided to
terminate the option and laid claim to the money nearly two weeks
later.
The defendants argue that if the November 6 letter is
ambiguous, they should prevail because Puerto Rican law provides that
the interpretation of an ambiguous contract must not favor the party
responsible for the ambiguity. See P.R. Laws Ann. 31 § 3478. A court
may state the meaning of a contract on summary judgment if the
agreement is clear on its face. See Torres Vargas v. Santiago
Cummings, 149 F.3d 29, 33 (1st Cir. 1998). If the agreement is
ambiguous, a court may still grant summary judgment "as long as the
extrinsic evidence presented to the court supports only one of the
- 17 -
conflicting interpretations." Id. However, when the extrinsic
evidence relevant to interpreting an ambiguous contract is "contested
or contradictory," summary judgment is inappropriate. Id. The
extrinsic evidence here is contested and contradictory. Thus it is for
a factfinder at trial rather than for the court on summary judgment to
apply Puerto Rico's provision that "[t]he interpretation of obscure
stipulations of a contract must not favor the party occasioning the
obscurity." 31 P.R. Laws Ann. § 3478.
Puerto Rico’s parol evidence rule allows for extrinsic
evidence concerning the terms of an ambiguous agreement. P.R. Laws
Ann. 32 App. IV R. 69 (1983). In determining the intent of the
parties, "attention must principally be paid to [the parties'] acts,
contemporaneous and subsequent to the contract." P.R. Laws Ann. 31 §
3472 (1990). On remand, the jury should consider such evidence to
determine the intent of the parties with respect to disposition of the
$100,000 deposit given by the plaintiffs for the Initial Option Period.
Vacated and remanded for further proceedings consistent with
this opinion.
- 18 -