Greer Properties, Inc. v. LaSalle National Bank

United States Court of Appeals for the Seventh Circuit · 1989 · Contracts

Contractsgood faith and fair dealingcontractual discretiontermination clausessummary judgmentbest business judgmenteconomic impracticabilitycommercial impracticability

Facts

Old Orchard and LaSalle agreed to sell commercial real estate to Greer for $1,250,000, and the contract required the sellers to remediate environmental contamination unless, in the sellers' "best business judgment," the cleanup cost would be "economically impracticable," in which case they could terminate. After obtaining consultant estimates ranging from roughly $100,000 to $240,000, the sellers pursued renewed negotiations with Searle, another interested buyer, and received a proposed higher purchase price of $1,455,000. The sellers then sent Greer written notice terminating the contract and later indicated Greer could still buy if it increased its offer by $250,000. Greer claimed the sellers invoked the termination clause in bad faith to obtain a better deal.

Issue

Did the contract's termination clause give the sellers broad discretion to decide whether cleanup costs were economically impracticable under their best business judgment, and if so, was summary judgment still improper because there was a genuine issue of material fact as to whether the sellers exercised that discretion in bad faith?

Rule

Under Illinois law, every contract includes an implied duty of good faith and fair dealing. A party vested with contractual discretion may have broad authority under the contract's express language, but must exercise that discretion reasonably and not arbitrarily, capriciously, or in bad faith. Where a contract expressly addresses a foreseeable contingency, the doctrine of commercial impracticability does not govern the interpretation of that contractual termination provision.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Pine Harbor Development agreed to sell a warehouse site in Cleveland, Ohio to Nora Velasquez for $2 million. The contract required Pine Harbor to complete asbestos abatement unless, in Pine Harbor's "best business judgment," the abatement cost would be "economically impracticable," in which case Pine Harbor could terminate. When the abatement estimate came in at $180,000, Nora sued after Pine Harbor canceled, arguing the seller had to prove performance was nearly impossible under the doctrine of commercial impracticability.

Which argument most strongly supports Pine Harbor's right to rely on the clause as written?

Explanation. The majority held that where the parties expressly addressed a foreseeable contingency and negotiated a termination option keyed to the seller's "best business judgment," the court should interpret that contractual language rather than equate "economic impracticability" with the separate doctrine of commercial impracticability. Broad discretion exists under the clause, though it remains limited by good faith.