Intent and Principles of Contract Construction Weigh in Favor of Closing Agent
 
September 17, 2002
 

The intent of the parties and basic principles of contract construction set right a sale gone wrong. The Appellate Court of Illinois, Second District, recently handed down a decision that serves as a reminder to consider carefully the intent of the parties to a contract when crafting its language.  In Premier Title Company v. Duane Donahue, No. 2-00-1076 (Ill. App. Ct. March 1, 2002), http://www.state.il.us/court/Opinions/AppellateCourt/2002/2ndDistrict/March/Html/2001076.htm, the Court considered a situation in which two parties to a contract each reasonably relied upon a different portion of that contract to support their positions.  The task before the Court was to decide which provision would give effect to the intent of the parties.

Defendant was the seller in a real estate transaction for which the plaintiff was the closing agent.  The transaction closed on August 8, 1997, at which time the 1995 real estate taxes on the subject property remained unpaid, as well as the first tax installment of 1996.  Because the buyer would not accept these exceptions to title, the closing agent and the seller entered into an indemnity agreement under which the seller was required to place $3,500 in escrow with the closing agent, which sum the closing agent would use to pay the overdue taxes.  According to the agreement, the closing agent was required to remove the exceptions by August 21, 1997, and upon their removal was to disburse the remaining funds to the seller.

The closing agent redeemed the 1995 taxes, reimbursed itself from escrow, and then returned the balance of the escrow funds to the seller.  The closing agent then paid the outstanding 1996 tax payment, and requested reimbursement from the seller.  The seller, however, refused to pay.

The closing agent filed a small claims action, both parties moved for summary judgment, and the seller made an additional motion for sanctions.  The closing agent’s motion was granted while the seller’s motions were denied.  The seller appealed.

Each party relied on a different clause in the indemnity agreement to support its position.  The seller pointed to a provision that stated that if the agreement was not terminated within 30 days of a particular date, the closing agent would charge an annual service fee to be paid out of the deposit.  According to the seller, this provision proved that the primary intent of the parties was to create a relationship that would terminate within 30 days, and that the disbursal of the deposited funds terminated the agreement.  The closing agent, however, identified a portion of the agreement that stated that the seller would forever hold the closing agent harmless from any loss, costs, damages, etc., which arose on account of the exceptions.

In order to resolve the apparent conflict between these two provisions, the Court viewed the agreement as a whole in order to determine the true intent of the parties.  The Court concluded that the parties intended for the seller to be held liable for the expenses the closing agent incurred in removing the exceptions from the contract.  In reaching this conclusion, the Court explained that the seller’s interpretation violated three well-established principles of contract construction, while the closing agent’s interpretation did not.

The Court first addressed the proposition that when two portions of a contract conflict, it must be determined which portion most clearly expresses the main purpose of the contract.  In this case it was clear that the main purpose of the agreement was to hold the seller responsible for the unpaid real estate taxes.  The section upon which the closing agent relied gives effect to this purpose by requiring the seller to indemnify the closing agent from all expenses incurred on account of the unpaid taxes, and thus relates to the main purpose of the agreement.  The section to which the seller referred, which relates to fees that may be imposed should the agreement last longer than 30 days, concerns only a collateral matter.

Next, the Court noted that the clause that the seller cited, if given effect over the one upon which the closing agent relied, would render meaningless the term “forever” in the latter clause.  If the Court were to do so, it would violate another principle of contract construction that requires a contract be construed such that none of its terms are regarded as mere surplusage.  However, this principle of contract construction is not violated if the word “forever” is given its plain meaning and the clause upon which the seller relied is found only to mean that fees may be imposed in certain situations.  This reasoning struck another blow against the seller’s interpretation of the contract.

Finally, the Court recited the principle that specific provisions in a contract are given more weight than general provisions in the event of a conflict.  The section upon which the closing agent relied was more specific as it directly addressed the seller’s indemnity obligation, while the section to which the seller pointed was unrelated to this obligation, and only peripherally addressed termination of the agreement.  Thus, the section upon which the closing agent relied was given more credence.

The seller argued that the agreement merged into the real estate deed at closing.  In response, the Court noted that two exceptions to the merger doctrine applied in this case.  First, agreements for the execution of obligations outside the conveyance itself do not merge with a deed at closing.  In this case, the seller’s obligation to indemnify the closing agent was distinct from the obligation to convey the real property to the buyer.  In addition, duties that are not required to be performed until after the deed is delivered do not merge.  The indemnity agreement required that the exceptions be removed no later than August 21, 1997, two weeks after closing.  Hence, the agreement did not merge.

For more information, contact Amy McShane, toll free at 888-688-8500, or via e-mail at amcshane@hklaw.com