Adria International Group, Inc. v. Ferré Development, Inc.

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

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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

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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.

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 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.

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 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

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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.

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 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

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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

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 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).

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 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.

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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

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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.

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 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

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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."

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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.

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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

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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.

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