When two parties enter a contract, they may unknowingly disagree over what certain terms mean. Indeed, the first party may understand a contract’s language to mean something entirely different than how the second party understands the exact same language.
For example, if A and B enter into a contract stating “A will pay $1,000 to B, after B paints A’s home” several misunderstandings could arise. Suppose A understands the contract language to mean that B must paint the outside and inside of A’s home in order to collect the $1,000, and while B understands the language to require him to paint only the outside of A’s home. In this situation, whose understanding prevails? If B painted the outside of A’s home, and sued A for payment, would the court require A to pay B the $1,000?
Questions like the one above require courts in Utah to develop methods of interpreting contract language when the parties cannot agree. The case of Mind & Motion Utah Investments, LLC v. Celtic Bank Corp., 2016 UT 6, is an example of the Utah Supreme Court analyzing a real estate contract using Utah’s contractual interpretation methods.
In that case, Mind & Motion entered a real estate purchase contract (“REPC”) with Celtic Bank to buy a large piece of property. The REPC required Celtic Bank to record certain documentation by a predetermined date, but gave Mind & Motion sole discretion to extend that deadline. After extending the deadline once, Mind & Motion declined to extend it a second time and sued Celtic Bank for breach of contract. Celtic Bank argued that its ability to meet the recording deadline depended on when county officials decided to approve its application, so it should not be liable for breach of contract.
The Utah Supreme Court first distinguished between covenants and conditions in a contract. It explained that a covenant is a promise between the parties about their mutual obligations. Because covenants are almost always in the control of one or both of the parties, they create specific legal duties that give rise to a breach of contract claim if not fulfilled. In contrast, a condition is an event, not certain to occur, which must occur before performance under a contract becomes due. Conditions typically fall outside the control of the parties, such as “weather permitting” or “upon the lender's approval.” Because a condition is usually a matter of fate or of a third party’s decision, they do not create legal duties that give rise to a breach of contract claim if not fulfilled.
With those definitions in mind, the court turned to its longstanding contractual interpretation principles. The first step is to ascertain the parties' intent, the best indication of which is the ordinary meaning of the contract's language and terms. Thus, if a contract’s plain language is unambiguous, a court may unilaterally determine its meaning and application. However, a court may not do this if the contract is ambiguous, meaning one or more if its terms are capable of multiple reasonable interpretations. Upon a finding of ambiguity, the court must consider evidence beyond the contract’s plain language to determine the intentions of the parties.
Upon application of these principles, the court found that Celtic Bank's recording obligation outlined in the REPC was unambiguously a covenant, not a condition. Despite the fact that Celtic Bank could not ultimately control when the county issued its approval, the contract’s plain language placed the burden on Celtic Bank. Celtic Bank accepted this obligation and could have insisted on conditional language, as was used elsewhere in the agreement. Thus, the court held Celtic Bank breached the contract by failing to timely record.