Satisfaction Clause Arizona Contract Law
In Horizon Corp. v. Westcor, Inc., 142 Ariz. 129, 133, 688 P.2d 1021, 1025 (App. 1984) the Court addressed whether a "satisfaction clause" rendered a contract void for lack of mutual obligation.
The parties in Horizon entered a real property purchase agreement. Id. at 130, 688 P.2d at 1022.
The contract provided for certain conditions subsequent, among them, that the buyer obtain zoning and site plan approval, that the buyer obtain lease or purchase contracts "with major retail tenants," and that the buyer obtain all of the necessary financing "for the development of the proposed retail shopping center." Id.
If any of the conditions were not fulfilled, the buyer had the option to rescind the contract and withdraw all of its earnest money or waive the condition and proceed with escrow. Id.
The trial court held that the parties' contract was not valid because the buyer's promises were illusory and unsupported by any consideration. Id. at 133, 688 P.2d at 1025.
On appeal, the Court applied California's two-prong analysis for assessing the validity of satisfaction clauses:
First, where commercial value or quality is an issue, an objective standard of reasonableness is applied in determining whether satisfaction is received. Second, if the question of whether satisfaction is received is based upon subjective factors, the party exercising that judgment is required to adhere to an implied duty of good faith. Id. at 134, 688 P.2d at 1026.
In holding that the buyer's promises were not illusory and decreeing that the buyer was entitled to specific performance, we further noted that in the latter circumstance, "the promisor's duty to exercise his judgment in good faith is an adequate consideration to support the contract." Id.
Indeed, "contracts making the duty of performance of one of the parties conditional upon his 'satisfaction' are upheld on the theory that the expression of dissatisfaction must be genuine and not arbitrary and that an objective criterion--good faith--controls the exercise of the right to determine satisfaction." Id.