Mind & Motion Utah Investments, LLC v. Celtic Bank Corp.

AMENDED OPINION*
This opinion is subject to revision before final
publication in the Pacific Reporter
2016 UT 6
IN THE
SUPREME COURT OF THE STATE OF UTAH
MIND & MOTION UTAH INVESTMENTS, LLC,
Appellee,
v.
CELTIC BANK CORPORATION,
Appellant.
No. 20131168
Filed January 27, 2016
Third District, Salt Lake
The Honorable Todd M. Shaughnessy
No. 110915222
Attorneys:
Steven W. Dougherty, Troy L. Booher, Leslie Kay Rinaldi,
Beth E. Kennedy, Salt Lake City, for appellant
Marcy G. Glenn, Denver, Nathan R Runyan,
Salt Lake City, for appellee
CHIEF JUSTICE DURRANT authored the opinion of the Court, in which
ASSOCIATE CHIEF JUSTICE LEE, JUSTICE DURHAM,
and JUDGE PEARCE joined.
Having recused himself, JUSTICE HIMONAS does not participate
herein; COURT OF APPEALS JUDGE JOHN A. PEARCE sat.
JUSTICE PARRISH sat for oral argument. Due to her resignation from
this court, she did not participate herein.
* The court has rewritten paragraph 45.
MIND & MOTION v. CELTIC BANK
Opinion of the Court
CHIEF JUSTICE DURRANT, opinion of the Court:
Introduction
¶1 Utah law recognizes two different kinds of promises parties
make in a contract, covenants and conditions. Covenants are mutual
obligations the parties bargain for in their agreement, and the failure
to perform them generally gives rise to remedies for breach of
contract. Conditions, on the other hand, are events not certain to
occur, but which must occur before either party has a duty to
perform under the contract. In contrast to covenants, the failure of a
condition relieves the parties of any performance obligations, and
neither may seek remedies for breach.
¶2 In this case, Mind & Motion entered into a real estate
purchase contract (REPC) with Celtic Bank to buy a large piece of
property the bank had acquired from a developer through
foreclosure. Although the county had approved plans to construct
condominiums on the land, the developer had not recorded the plats
for the first phase of development. Accordingly, the REPC required
Celtic Bank to record the plats by a certain date, and it allowed Mind
& Motion sole discretion to extend the recording deadline as
necessary to allow Celtic Bank enough time to record. It further
provided that any extension of the recording deadline automatically
extended the deadline to complete the transaction.
¶3 After extending the recording deadline once, Mind &
Motion declined to extend it a second time and sued Celtic Bank for
breach of contract. The district court granted summary judgment in
Mind & Motion‘s favor, concluding that the recording provision was
unambiguously a covenant, not a condition. It then awarded Mind &
Motion $100,000 in liquidated damages and more than $200,000 in
attorney fees, as well as the return of Mind & Motion‘s $100,000
earnest money deposit. On appeal, Celtic Bank argues that summary
judgment was improper because the recording provision is
unambiguously a condition. And in the alternative, it maintains that
the agreement contains facial and latent ambiguities.
¶4 We agree with the district court that the language of the
contract lends itself to just one plausible reading—that the recording
provision is a covenant, not a condition. Under our caselaw,
although it is true that the fulfillment of a condition often hinges on
the action of a third party, conditions are also typically phrased
using explicitly conditional terms. Here, Celtic Bank is correct that its
ability to meet the recording deadline depended on when county
officials decided to approve its application. But the parties employed
explicitly mandatory language to characterize the recording
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Opinion of the Court
provision, while using explicitly conditional language elsewhere in
the agreement. Based on these features of the REPC, we conclude
that there is no plausible way to read the recording provision as
anything other than a covenant.
¶5 We also conclude that there is no latent ambiguity in the
REPC. Latent ambiguities arise only where unambiguous language
mislabels a person or thing due to a collateral matter. And parties
cannot make such a showing by merely submitting affidavits that set
forth their own subjective understanding of particular terms. Here,
Celtic Bank has not argued that any terms in the agreement fail to
reflect the parties‘ intent due to some collateral matter. And even if it
had, the only extrinsic evidence Celtic Bank submits are affidavits
from bank officers describing their own subjective understanding of
the recording provision. We therefore reject Celtic Bank‘s latent
ambiguity argument and affirm the district court‘s summary
judgment ruling.
Background
¶6 On appeal from a motion for summary judgment, we view
the facts and all reasonable inferences from them in the light most
favorable to the nonmoving party, Celtic Bank.1 The following
recitation of the facts is consistent with that standard.
¶7 Celtic Bank acquired fourteen acres of real estate in
Huntsville, Utah, through a foreclosure sale. The prior owner had
partially completed four condominium units and received approval
to construct more than 160 additional units. But the prior owner had
not recorded the plat for the next phase of development, and neither
had Celtic Bank after assuming ownership of the property.
¶8 Mind & Motion agreed to purchase the property from Celtic
Bank in a real estate purchase contract executed May 25, 2010. The
REPC described the property as including ―[a]pproximately 14 acres
with recorded PRUD for 168 units‖ and stated that Celtic bank was
selling the property ―AS RECORDED.‖ The agreement required
Mind & Motion to deposit $100,000 in earnest money with an escrow
agent, which was fully refundable if the property did not pass a
buyer‘s inspection. Mind & Motion could complete its inspections
anytime within fifteen days after receiving notice that the property
was substantially complete and that Celtic Bank had recorded the
plat.
1 See Anderson Dev. Co. v. Tobias, 2005 UT 36, ¶ 31, 116 P.3d 323.
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¶9 The REPC also provided that Celtic Bank ―shall record
Phase 1‖ and ―agrees to complete recording of Phase 1‖ of the
development by June 15, 2010. It further provided that Celtic Bank
―will accomplish any necessary construction or repairs required to
complete recording of Phase 1.‖ But it granted Mind & Motion ―the
sole discretion‖ to extend the deadline ―as necessary to allow‖ Celtic
Bank to record. If Mind & Motion extended the deadline, ―the
Evaluations and Inspection Deadline and the Settlement deadline‖
would be ―automatically extended by the same amount of time.‖
¶10 The recording process requires an applicant to obtain
approval from a number of different entities. First, the Weber
County Planning Commission requires ―an applicant to complete a
required landscaping or infrastructure improvement prior to any
plat recordation or development activity.‖2 After the planning
commission approves a final plat, the commission submits it to the
county surveyor, county health department, and county engineer for
signatures.3 After the county engineer approves the plat, the
engineer submits it to the county attorney and the board of county
commissioners for their approval.4 An applicant who jumps through
each hoop is entitled to record—county officials do not have
discretion to decline an application that complies with the applicable
zoning ordinances.5
¶11 The REPC also contained a ―time is of the essence clause,‖
which provided that ―[u]nless otherwise explicitly stated in this
Contract,‖ performance must be completed ―by 5:00 PM Mountain
Time‖ on the applicable deadline. The clause also stated that
―[p]erformance dates and times referenced herein shall not be
binding upon title companies, lenders, appraisers, and others not
parties to this Contract, except as otherwise agreed to in writing by
such non-party.‖
¶12 In the event Mind & Motion defaulted, the REPC allowed
Celtic Bank to keep the earnest money as liquidated damages. If
Celtic Bank defaulted, Mind & Motion would receive back its earnest
money and could either sue to specifically enforce the contract or
obtain $100,000 in liquidated damages.
2 See UTAH CODE §§ 17-27a-604(1)(b)(i), -604.5(2)(a).
3 WEBER COUNTY, UTAH, ORDINANCES § 106-1-8(d)(1).
4 Id.
5See Springville Citizens for a Better Cmty. v. City of Springville, 1999
UT 25, ¶ 30, 979 P.2d 332.
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Opinion of the Court
¶13 The day the parties signed the REPC, the planning
commission recommended final approval of recording the phase 1
plat. But several entities still needed to approve various aspects of
Celtic Bank‘s application. None of them approved the plat by the
June 15 recording deadline, and Mind & Motion accordingly
extended it to July 26.
¶14 That date came and went, however, without the application
being approved, and rather than extend the deadline a second time,
Mind & Motion claimed Celtic Bank had breached the contract and
demanded the return of its earnest money as well as the payment of
liquidated damages. Celtic Bank refused to pay, so Mind & Motion
filed a breach of contract action. The district court granted Mind &
Motion partial summary judgment on its breach of contract claim,
concluding that the recording provision was unambiguously a
covenant, not a condition. It reasoned that because the REPC
phrased Celtic Bank‘s recording obligation in mandatory terms—the
bank ―shall record Phase 1‖—there was no plausible way to read the
provision as anything other than a covenant. Celtic Bank appeals.
We have jurisdiction under Utah Code section 78A-3-102(3)(j).
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Opinion of the Court
Standard of Review
¶15 Celtic Bank argues that the REPC‘s recording provision is
unambiguously a condition, not a covenant, and that the district
court therefore erred in granting summary judgment in Mind &
Motion‘s favor. In the alternative, the bank argues that the provision
is at least reasonably susceptible to either reading and is therefore
facially ambiguous. Additionally, Celtic Bank has urged us to
consider affidavits from two of its officers that it argues show a
latent ambiguity in the contract. We review a district court‘s decision
granting summary judgment for correctness, viewing ―the facts and
all reasonable inferences drawn therefrom in the light most favorable
to the nonmoving party.‖6 Summary judgment is appropriate when
―there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.‖7 The interpretation of a
contract is legal question, which we also review for correctness.8
Analysis
¶16 We conclude that the district court correctly granted
summary judgment in Mind & Motion‘s favor. Although Celtic
Bank‘s ability to meet the recording deadline hinged in large part on
the approval of county officials, the parties couched the recording
obligation in mandatory language while employing explicitly
conditional language elsewhere in the REPC to describe other
performance obligations. This shows that Celtic Bank and Mind &
Motion, both sophisticated parties, knew how to draft a condition
when they so desired. Accordingly, it is not plausible to read Celtic
Bank‘s duty to record the phase 1 plat as anything other than a
covenant, and the REPC is therefore not facially ambiguous.
¶17 We also conclude that Celtic Bank has failed to establish a
latent ambiguity in the contract. Latent ambiguities arise only when
a collateral matter—such as trade usage, course of dealing, or
linguistic context—shows that a contract‘s terms mislabel a person or
thing or otherwise fail to reflect the parties‘ intentions. And extrinsic
evidence is only relevant to such a determination if it is objective.
Here, because Celtic Bank has submitted affidavits from its officers
setting forth their own subjective understanding of the agreement, it
Orvis v. Johnson, 2008 UT 2, ¶ 6, 177 P.3d 600 (internal quotation
6
marks omitted).
7 UTAH R. CIV. P. 56(a); see also Orvis, 2008 UT 2, ¶ 13.
8Encon Utah, LLC v. Fluor Ames Kraemer, LLC, 2009 UT 7, ¶ 11, 210
P.3d 263.
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Opinion of the Court
has failed to submit any credible evidence relevant to establishing a
latent ambiguity. For these reasons, we affirm the district court‘s
decision.
I. The REPC Is Unambiguous as to the Nature of Celtic Bank‘s
Recording Obligation
¶18 Because resolving the parties‘ dispute hinges on whether the
recording obligation is a covenant or a condition, we first discuss the
key differences between these types of obligations. We then analyze
the relevant provisions of the REPC and conclude that the only
plausible way to read Celtic Bank‘s recording obligation is as a
covenant. As we explain in more detail below, this is primarily
because the obligation is phrased in explicitly mandatory terms
despite the parties‘ use of conditional language to characterize other
performance obligations. For that reason, even though Celtic Bank
could not control the precise timing of recordation, the language the
parties‘ employed cannot plausibly be read as creating a conditional
obligation. Rather, the plain language of the agreement shows that
Celtic Bank agreed to shoulder the same type of regulatory risk
businesses routinely assume in such contracts.
A. Covenants and Conditions
¶19 The distinction between covenants and conditions is an
important one because each imposes qualitatively different kinds of
obligations. A covenant is a ―promise[] between the parties to the
contract about their mutual obligations.‖9 In essence, covenants are
the core bargained-for exchange of an agreement. They create
specific legal duties, the violation of which gives rise to remedies for
breach of contract.10
¶20 Conditions are different. ―A condition is ‗an event, not
certain to occur, which must occur . . . before performance under a
contract becomes due.‘‖11 We have noted three principal differences
between conditions and covenants. First, the parties to the contract
have no duty to perform until the condition is fulfilled, so the failure
9McArthur v. State Farm Mut. Auto. Ins. Co., 2012 UT 22, ¶ 28, 274
P.3d 981 (alteration in original) (quoting HOWARD O. HUNTER,
MODERN LAW OF CONTRACTS § 10:1 (2012)).
10 Id.
11 Id. ¶ 29 (alteration in original) (quoting RESTATEMENT (SECOND)
OF CONTRACTS § 224 (AM. LAW INST. 1981)).
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Opinion of the Court
of a condition relieves the parties of all of their contractual duties.12
Second, the parties have no remedy for breach of contract if a
condition is not fulfilled, because at that point there is simply no
contract to breach.13
¶21 Third, conditions ―typically fall outside the control of the
parties to the contract, often requiring some environmental trigger
(such as ‗weather permitting‘) or action by a third party (such as
‗upon the lender‘s approval‘) for the contract to begin.‖14 Stated
differently, even if one of the parties has some influence over the
fulfillment of a condition, ―its incidence usually is a matter of fate or
of the decision of one or more third parties.‖15 Covenants, by
contrast, ―are almost always within the control of the contracting
parties.‖16
¶22 To determine whether a contractual obligation is a covenant
or a condition, we examine the language of the provision in question
and the nature of the agreement itself.17 In McArthur v. State Farm
Mutual Automobile Insurance Co., for example, we held that an
exhaustion clause in an insurance policy was a condition, not a
covenant, for two reasons: (1) its fulfillment was outside the control
of the contracting parties, and (2) the parties employed conditional
language to characterize the exhaustion requirement in the
agreement.18 The clause provided in part that the insured would
have ―NO COVERAGE UNTIL‖ coverage limits on a separate bodily
injury insurance policy had been ―USED UP.‖19 We noted that the
―word ‗until‘ exemplifies a word[] of condition‖20 and that satisfying
the exhaustion condition was ―dependent on the actions of a non-
12 Id.
13 Id. ¶ 30.
14 Id. ¶ 31 (citing HUNTER, supra note 9, § 10:1).
15 Id. (quoting HUNTER, supra note 9, § 10:1).
16 Id. (quoting HUNTER, supra note 9, § 10:1).
17 See RESTATEMENT (SECOND) OF CONTRACTS § 226 cmt. a (AM.
LAW INST. 1981) (―An intention to make a duty conditional may be
manifested by the general nature of the agreement, as well as by
specific language.‖).
18 McArthur, 2012 UT 22, ¶¶ 33–34.
19 Id. ¶ 33.
20 Id. (alteration in original) (internal quotation marks omitted).
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contracting third party—the liability insurer.‖21 Accordingly, we
concluded that exhaustion of the other policy‘s limits was ―the very
event, not certain to occur, which must occur . . . before performance
under a contract becomes due.‖22
¶23 Our analysis in McArthur indicates that express terms like
―unless,‖ ―on condition that,‖ ―provided that,‖ and ―if,‖ often create
conditions.23 This implies that more mandatory terms, such as
―shall,‖ ―must,‖ or ―agree,‖ will often create covenants. That is not to
say that such terms are talismans—regardless of the precise terms
used in the contract, the parties‘ degree of control over the
fulfillment of an obligation remains ―a significant indication‖ of
whether the parties intended a performance obligation to be a
condition or a covenant.24 But when parties employ mandatory
terms to characterize an obligation whose fulfillment hinges on the
action of a third party, this may indicate an express assumption by
one party of the risk that the condition will remain unfulfilled.25
B. The Recording Obligation Is Unambiguously a Covenant
¶24 Having set forth the key distinctions between covenants and
conditions, we now discuss whether the district court correctly
interpreted the REPC‘s recording provision as a covenant. When
interpreting a contract, our task is to ascertain the parties‘ intent.26
And the best indication of the parties‘ intent is the ordinary meaning
of the contract‘s terms.27 Accordingly, ―[i]f the language within the
four corners of the contract is unambiguous, the parties‘ intentions
21 Id.
22 Id. (alteration in original) (internal quotation marks omitted).
23 Id. ¶ 32; see also RESTATEMENT (SECOND) OF CONTRACTS § 226
cmt. a (1981).
24See McArthur, 2012 UT 22, ¶ 37; see also RESTATEMENT (SECOND)
OF CONTRACTS § 226 cmt. a (1981).
25 See RESTATEMENT (SECOND) OF CONTRACTS § 227 cmt. b (AM.
LAW INST. 1981) (noting that ―even without clear language‖
indicating whether an obligation outside of the parties‘ control is a
covenant or a condition, ―circumstances may show that [one party]
assumed the risk of its non-occurrence‖).
26 See Strohm v. ClearOne Commc’ns, Inc., 2013 UT 21, ¶ 34, 308
P.3d 424.
27 See Glenn v. Reese, 2009 UT 80, ¶ 10, 225 P.3d 185.
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Opinion of the Court
are determined from the plain meaning of the contractual language,
and the contract may be interpreted as a matter of law.‖28 A contract
is facially ambiguous if its terms are ―capable of more than one
reasonable interpretation because of uncertain meanings of terms,
missing terms, or other facial deficiencies.‖29 But terms are not
ambiguous ―simply because one party seeks to endow them with a
different interpretation according to his or her own interests.‖30
Rather, the proffered alternative interpretations ―must be plausible
and reasonable in light of the language used.‖31 If the parties‘
intentions cannot be determined from the face of the contract,
―extrinsic evidence must be looked to in order to determine the
intentions of the parties.‖32
¶25 Applying these principles, we conclude that the REPC is
facially unambiguous. While Mind & Motion‘s preferred reading of
the agreement is strongly supported by the REPC‘s plain terms,
Celtic Bank‘s interpretation finds no such support in the language of
the contract. Below, we examine each party‘s proffered
interpretation of the REPC in turn.
1. Mind & Motion‘s Reading of the REPC Is Strongly Supported
by the Language of the Agreement
¶26 Mind & Motion urges us to affirm the district court‘s
conclusion that the recording provision is unambiguously a
covenant, citing the mandatory language in the agreement. For
several reasons, we agree that this reading of the REPC receives
strong support from the language of the contract.
¶27 First, the recording provision states that Celtic Bank ―shall
record [the] Phase 1‖ plat ―no later than 90 calendar days from
accepted offer.‖ The next paragraph also states that Celtic Bank
―agrees to record‖ the plat. As we have discussed, when interpreting
a contract, we generally give each term its plain and ordinary
28WebBank v. Am. Gen. Annuity Serv. Corp., 2002 UT 88, ¶ 19, 54
P.3d 1139 (internal quotation marks omitted).
29 Id. ¶ 20 (internal quotation marks omitted).
30 Saleh v. Farmers Ins. Exch., 2006 UT 20, ¶ 17, 133 P.3d 428.
31First Am. Title Ins. Co. v. J.B. Ranch, Inc., 966 P.2d 834, 837 (Utah
1998).
32 WebBank, 2002 UT 88, ¶ 19 (internal quotation marks omitted).
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meaning.33 And here, Black‘s Law Dictionary defines ―shall‖ as ―a
duty to,‖ ―is required to,‖ or ―mandatory.‖34 We have also held that
the legislature‘s use of the word ―shall‖ in statutes creates
mandatory obligations.35 And while it is true, as Celtic Bank argues,
that ―shall‖ can be directory or express a future expectation, it is ―the
mandatory sense that drafters typically intend and that courts
typically uphold.‖36 The word ―agree‖ similarly means to ―exchange
promises‖ or ―to unite in an engagement to do or not do
something.‖37 Our court of appeals has also interpreted the word
―agree‖ to create a covenant rather than a condition.38
¶28 These mandatory terms contrast sharply with the explicitly
conditional language in McArthur that we held created a condition.39
There, as we have discussed, the contract provided that no insurance
coverage would be provided ―until‖ other coverage had been
exhausted. And we noted that the ―word ‗until‘ exemplifies a word[]
of condition.‖40 The recording provision, of course, contains no such
language.
¶29 Second, not only is the recording obligation phrased in
mandatory terms, but the parties used explicitly conditional
language in other provisions of the REPC. For instance, paragraph
eight provides, ―Buyer‘s obligation to purchase under this Contract
is conditioned upon Buyer‘s approval of the content of each of the
33 Glenn, 2009 UT 80, ¶ 10 (―[T]he parties‘ intentions are
determined from the plain meaning of the contractual
language . . . .‖ (internal quotation marks omitted)).
34 Shall, BLACK‘S LAW DICTIONARY (9th ed. 2009).
35 See Ramsay v. Kane Cty. Human Res. Special Serv. Dist., 2014 UT
5, ¶ 10, 322 P.3d 1163.
36 Shall, BLACK‘S LAW DICTIONARY (9th ed. 2009).
37 Agree, BLACK‘S LAW DICTIONARY (9th ed. 2009).
38 See, e.g., Baxter v. Saunders Outdoor Advert., Inc., 2007 UT App
340, ¶¶ 11–12, 171 P.3d 469 (interpreting an obligation as a covenant
in a contract that stated, ―It is agreed that the terms of this lease shall
commence upon completion of the installation of the structure which
is the subject matter of this lease agreement‖ (emphasis added)).
39 2012 UT 22, ¶ 32, 274 P.3d 981.
40 Id. ¶ 34 (alteration in original) (internal quotation marks
omitted).
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Seller Disclosures referenced in Section 7 [and] is conditioned upon
Buyer‘s approval of the following tests and evaluations.‖ (Emphasis
added). This shows that Mind & Motion and Celtic Bank, both
sophisticated parties, understood how to consciously identify a
condition precedent when they so desired.41
¶30 Finally, the recording provision also must be satisfied by a
specific date. The REPC contains a ―time is of the essence clause,‖
stating that ―performance under each Section of this Contract which
references a date shall absolutely be required by 5:00 PM Mountain
Time on the stated date.‖ While it is true that deadlines can be
coupled with conditions,42 the REPC explicitly makes all deadlines
―absolute . . . require[ments].‖
¶31 Standing alone, language of this kind could conceivably be
found to be a conditional obligation, depending on a particular
contract‘s operation and surrounding terms. But together, these
features of the REPC—mandatory language, a hard deadline for
performance, and other provisions that employ conditional
language—strongly suggest that the parties intended the recording
provision to operate as covenant, not a condition.
¶32 We therefore conclude that Mind & Motion‘s reading of the
contract is strongly supported by the language of the agreement.
Consequently, in order for the contract to be facially ambiguous,
Celtic Bank‘s alternative reading must also be reasonably supported
by the language of the agreement. For a variety of reasons, however,
we conclude that it is not.
2. Celtic Bank‘s Reading of the REPC Receives No Support from the
Agreement‘s Plain Terms
¶33 In arguing that the recording provision is a condition, Celtic
Bank relies heavily on the fact that the county ultimately controlled
the timing of recordation. It argues that ―parties may manifest their
intent to create a condition ‗by clear implication‘‖ and cites McArthur
for the proposition that conditions generally fall outside the control
41 See Bakowski v. Mountain States Steel, Inc., 2002 UT 62, ¶ 19, 52
P.3d 1179 (―We will not make a better contract for the parties than
they have made for themselves. Nor will we avoid the contract‘s
plain language to achieve an ‗equitable‘ result.‖ (citation omitted)).
42 See RESTATEMENT (SECOND) OF CONTRACTS § 225 cmt. a (1981)
(―The time within which the condition can occur in order for the
performance of the duty to become due may be fixed by a term of
the agreement . . . .‖).
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of the contracting parties, ―often requiring some environmental
trigger . . . or action by a third party . . . for the contract to begin.‖43
And here, Celtic Bank maintains, there is no dispute that it needed
approval from the planning commission, engineers, and other
county officials before the phase 1 plat could be recorded.44 So even
though Celtic Bank ―controlled whether it completed the
various . . . lists of tasks that were prerequisite to the county‘s
approval and recordation process,‖ no ordinance required the
county to ―approve the Phase 1 plat‖ by the recording deadline. As a
result, Celtic Bank argues, ―whether the county approved the Phase
1 plat before the deadline was beyond [its] control.‖ Celtic Bank also
argues that none of Mind & Motion‘s performance obligations
became due until the phase 1 plat was recorded, which is consistent
with one of the touchstones of conditions precedent we outlined in
McArthur.45
¶34 We have no quarrel with Celtic Bank‘s description of the
recording process. It seems clear that even if Celtic Bank complied
with the county‘s every demand, the county officials ultimately
controlled the timing of the recordation—not Celtic Bank. Celtic Bank
is also correct that the deadline for performing many of its
obligations under the REPC was automatically extended whenever
Mind & Motion extended the recording deadline. But we do not
agree that these aspects of the agreement are sufficient to override
the explicit mandatory language in the REPC.
¶35 It is a basic principle of contract law that parties are
generally ―free to contract according to their desires in whatever
terms they can agree upon.‖46 This includes assuming risks that third
parties or external environmental circumstances will fail to conform
to the parties‘ expectations.47 And absent language in the contract to
43McArthur, 2012 UT 22, ¶ 31; accord Cheever v. Schramm, 577 P.2d
951, 953 (Utah 1978) (―The intention to create a condition in a
contract must appear expressly or by clear implication.‖).
44 See supra ¶ 10.
45 McArthur, 2012 UT 22, ¶ 29.
46 Russell v. Park City Utah Corp., 548 P.2d 889, 891 (Utah 1976).
47 See Bitzes v. Sunset Oaks, Inc., 649 P.2d 66, 69–70 (Utah 1982)
(enforcing the unambiguous language of a real estate purchase
contract even though ―delays in final approval of Plat ‗B‘ caused by
neighborhood opposition and governmental review‖ rendered
―performance of the agreement . . . a substantially less profitable
(Continued)
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the contrary, ―[a] party who contracts knowing that governmental
permission or license will be required ordinarily assumes the
obligation of assuring that permission will be granted.‖48
¶36 For example, in Central Utah Water Conservancy District v.
Upper East Union Irrigation Co., a water district entered into a contract
with several irrigation companies to make specific improvements to
its irrigation systems in exchange for rights to the increased water
flow.49 The water district failed to complete the promised
improvements to its irrigation systems, however, citing
―environment[al] and permitting concerns.‖50 The irrigation
companies sued for breach of contract, and the district court
eventually granted summary judgment in their favor.51 On appeal,
the water district argued that it was impossible to secure state and
federal permits because ―[t]he contemplated design‖ of the irrigation
improvements ―was inconsistent‖ with federal and state
regulations.52 We affirmed the district court, holding that the water
district ―explicitly undertook the obligation of obtaining the
necessary permits,‖ so ―its performance under the Agreement was
not contingent on its ability to do so.‖53 In so holding, we noted that
by signing a contract providing that the water district ―shall obtain all
construction permits required by‖ state and federal law, the water
district ―assumed the risk that such permits may be difficult, or even
impossible, to obtain.‖54
¶37 Like the water district in Central Utah Water, Celtic Bank
signed an agreement that phrased its recording obligation in
mandatory terms even though fulfilling that obligation required
third-party approval. And as even Celtic Bank concedes, so long as
its application complied with the applicable zoning ordinances, ―the
transaction than originally anticipated,‖ and noting that these events
were ―contingencies the respondent, as an experienced real estate
developer, could have foreseen and covered in the contract‖).
48 14 JAMES P. NEHF, CORBIN ON CONTRACTS § 76.5 (2001).
49 2013 UT 67, ¶ 1, 321 P.3d 1113.
50 Id. ¶ 7 (alteration in original).
51 Id. ¶¶ 8–12.
52 Id. ¶ 29 (alteration in original).
53 Id. ¶ 32.
54 Id.
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county‘s eventual approval was nearly guaranteed.‖ So this is not a
case where government permits are ―difficult, or even impossible, to
obtain,‖ and even if it were, the language of the agreement strongly
indicates that Celtic Bank ―assumed the risk‖ that its application
would not be approved before the recording deadline.55 We
therefore conclude that it is simply not plausible to read the
recording provision as a condition, and therefore the REPC is not
facially ambiguous.
II. There Is No Latent Ambiguity in the REPC
¶38 Having concluded that the REPC is not facially ambiguous,
we now turn to Celtic Bank‘s argument that there is a latent
ambiguity in the REPC. Celtic Bank relies on language from Ward v.
Intermountain Farmers Ass’n for the proposition that ―any relevant
evidence must be considered‖ when ―determining whether a contract
is ambiguous.‖56 Accordingly, it urges us to consider affidavits
submitted by its chief lending officer and chief executive officer
stating that they understood the recording provision as a conditional
obligation when they negotiated and signed the REPC.
¶39 We decline to consider the affidavits and conclude that there
is no latent ambiguity in the REPC. Latent ambiguities arise only
where a collateral matter arising after the contract is executed
renders otherwise clear terms ambiguous. And affidavits setting
forth the parties‘ subjective understanding of contractual terms are
insufficient to make this showing. Here, Celtic Bank does not argue
that a collateral matter rendered the REPC‘s terms ambiguous, nor
does it offer the type of extrinsic evidence relevant to such a
determination. We therefore reject its argument that the REPC
contains a latent ambiguity.
¶40 Before addressing Celtic Bank‘s latent ambiguity argument,
we first take the opportunity to clarify the conditions under which
latent ambiguities arise and the evidence relevant to establishing
them. Unlike facial ambiguities, a ―latent ambiguity ‗arises from a
collateral matter when the document‘s terms are applied or
55 Id.
56 907 P.2d 264, 268 (Utah 1995) (emphasis added); accord Watkins
v. Ford, 2013 UT 31, ¶ 26, 304 P.3d 841 (―‗When determining whether
a contract is ambiguous, any relevant evidence must be considered‘
and ‗the better-reasoned approach is to consider the writing in light
of the surrounding circumstances.‘‖ (quoting Ward, 907 P.2d at 268)).
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MIND & MOTION v. CELTIC BANK
Opinion of the Court
executed,‘‖ not from any facial deficiency in the contract‘s terms.57
So, ―[b]y its very nature, a latent ambiguity is one that cannot be
found within the four corners of the document but is only
discoverable through the introduction of extrinsic evidence.‖58 But
we have also recognized that instances where extrinsic evidence is
allowed to ―uncover‖ a latent ambiguity ―will prove to be the
exception and not the rule.‖59 Parties may not simply proffer
subjective affidavits setting forth their favored interpretation of
otherwise clear terms to create an ambiguity. Rather, the extrinsic
evidence must show that due to some collateral matter—trade usage,
course of dealing, or some other linguistic particularity that arises in
the context of extrinsic collateral matters—the contract‘s terms
mislabel a person or thing, or otherwise fail to reflect the parties‘
intentions.60
¶41 For example, in Watkins v. Ford, a buyer contracted with a
car dealership to preorder a Ford concept car, the ―GT40.‖61 Before
Ford made the cars available for sale, however, it shortened the
name to ―GT.‖62 When the dealership refused to sell the buyer a GT
at the price mentioned in their agreement, the buyer filed suit for
breach of contract.63 The district court granted summary judgment in
the dealership‘s favor, holding that the contract unambiguously
required the dealership to sell ―GT40s to [the buyer], not the GTs.‖64
57Watkins, 2013 UT 31, ¶ 28 (quoting Ambiguity, BLACK‘S LAW
DICTIONARY (9th ed. 2009)).
58 Id.
59 Daines v. Vincent, 2008 UT 51, ¶ 30 n.5, 190 P.3d 1269.
60See id.; see also Watkins, 2013 UT 31, ¶ 30; Barraford v. T & N Ltd.,
778 F.3d 258, 266 (1st. Cir. 2015) (noting that the latent ambiguity
rule ―typically applies only in a narrow set of circumstances in
which ‗a word, thought to have only a single meaning, actually has
two or more meanings,‘ RICHARD A. LORD 11 WILLISTON ON
CONTRACTS § 33:43 (4th ed.), such as when a word ‗denotes more
than one actual thing‘ or ‗designates something particular within the
industry‘s jargon.‘ Coffin v. Bowater Inc., 501 F.3d 80, 97 (1st Cir.
2007).‖).
61 Watkins, 2013 UT 31, ¶¶ 7, 30.
62 Id. ¶ 11.
63 Id. ¶ 13.
64 Id. ¶ 14 (internal quotation marks omitted).
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Opinion of the Court
We reversed, holding that there was a latent ambiguity in the
contract.65 We so held because undisputed extrinsic evidence
showed ―that when the [contract was] executed, both parties were in
agreement regarding the particular car for which they were
contracting—the production version (eventually designated the Ford
‗GT‘) of Ford‘s concept car, the ‗GT40.‘‖66 So there was ―no dispute
as to the identity of the vehicles for which the parties contracted,‖
even though the terms of the agreement failed to correctly reflect
their intentions.67
¶42 As illustrated by Watkins, latent ambiguities do not arise
unless matters collateral to the contract cast doubt on the
interpretation of terms that otherwise appear clear and
unambiguous. Such matters may include trade usage, the
mislabeling of a person or thing, or linguistic context.68 Parties
cannot create a latent ambiguity by simply ―seek[ing] to endow‖
clear terms ―with a different interpretation according to his or her
own interests.‖69 That is, latent ambiguities are objectively verifiable
and ordinarily cannot be proven based on the parties‘ subjective
understanding of contractual terms.70 Therefore, affidavits and other
evidence that fails to identify a collateral matter are not ―relevant‖ to
showing a latent ambiguity. As the Seventh Circuit observed in an
opinion authored by Judge Posner, when considering extrinsic
evidence of a latent ambiguity,
65 Id. ¶¶ 28–30.
66 Id. ¶ 30.
67 Id.
68See AM Int’l, Inc. v. Graphic Mgmt. Assocs., Inc., 44 F.3d 572, 575
(7th Cir. 1995) (―Suppose the parties to [a] contract . . . had been
members of a trade in which the term ‗cotton‘ was used to refer to
guncotton rather than to the cotton used in textiles. The ordinary
reader of English would not know about this special trade usage,
and so would suppose the contract unambiguous. Again, the [latent]
ambiguity is in the reference, that is, the connection between the
word and the object that it denotes.‖).
69 See Saleh v. Farmers Ins. Exch., 2006 UT 20, ¶ 17, 133 P.3d 428.
70 Of course, where parties stipulate that a term in their
agreement adopted ―an idiosyncratic meaning, the court will honor
their agreement.‖ See AM Int’l, 44 F.3d at 576.
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MIND & MOTION v. CELTIC BANK
Opinion of the Court
the key is the distinction between what might be called
―objective‖ and ―subjective‖ evidence of ambiguity. . . .
By ―objective‖ evidence we mean evidence of
ambiguity that can be supplied by disinterested third
parties: evidence that there was more than one ship
called Peerless, or that a particular trade uses ―cotton‖
in a nonstandard sense. The ability of one of the
contracting parties to ―fake‖ such evidence, and fool a
judge or jury, is limited. By ―subjective‖ evidence we
mean the testimony of the parties themselves as to
what they believe the contract means. Such testimony
is invariably self-serving, being made by a party to the
lawsuit, and is inherently difficult to verify.
―Objective‖ evidence is admissible to demonstrate that
apparently clear contract language means something
different from what it seems to mean; ―subjective‖
evidence is inadmissible for this purpose.71
¶43 Here, Celtic Bank has not identified any particular term in
the REPC as latently ambiguous, nor has it offered any objective
evidence that a collateral matter rendered a term in the recording
provision ambiguous. Instead, the bank offers sworn testimony from
its chief lending officer asserting generally that he ―understood that
Mind & Motion had a right . . . to terminate the transaction if the
Phase 1 plat were not recorded by the deadline,‖ and that ―[i]t was
never Celtic Bank‘s intention to, in effect, gamble that it could record
a plat on the Property.‖ Celtic Bank‘s chief executive officer also
makes general assertions in an affidavit that he believed if the plat
were not recorded by the deadline, the parties simply ―would no
longer have a viable transaction to proceed with.‖
¶44 Celtic Bank argues that we can consider these affidavits
because ―this litigation is [a] ‗collateral matter‘ that shed[s] light on
the latent ambiguity.‖ But accepting this assertion would broaden
the latent ambiguity rule beyond all recognition. If litigation
qualified as a collateral matter, any party to a contract dispute could
create an ambiguity by going to court and submitting affidavits
setting forth their subjective understanding of otherwise
unambiguous terms. Contrary to our precedent, this would allow
71 Id. at 575; see also Coffin v. Bowater Inc., 501 F.3d 80, 98–99 (1st
Cir. 2007) (adopting standard in AM Int’l); Evergreen Invs., LLC v.
FCL Graphics, Inc., 334 F.3d 750, 757 (8th Cir. 2003) (same); Kerin v.
U.S. Postal Serv., 116 F.3d 988, 992 n.2 (2d Cir. 1997) (same).
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Opinion of the Court
parties ―to create ambiguity out of whole cloth,‖72 swallowing the
general rule prohibiting consideration of extrinsic evidence absent a
facial ambiguity. We therefore reject it and decline to consider the
affidavits Celtic Bank has submitted. For all these reasons, we
conclude that there is no latent ambiguity in the REPC.
Conclusion
¶45 We conclude that Celtic Bank‘s recording obligation
outlined in the REPC is unambiguously a covenant. Even though
Celtic Bank could not ultimately control when the county issued its
final approval to record the phase 1 development, the recording
obligation is framed in mandatory language, and the REPC employs
explicitly conditional language elsewhere in the agreement. We also
conclude that Celtic Bank has failed to establish a latent ambiguity in
the contract. Affidavits that seek to endow otherwise clear language
with an alternative meaning are insufficient. We therefore affirm the
district court‘s ruling in its entirety. As a final matter, Mind &
Motion has requested it be awarded attorney fees and costs incurred
on appeal, and the parties have stipulated to such an award. We
accordingly remand for the calculation of reasonable fees and costs.
72 Watkins, 2013 UT 31, ¶ 28 n.2.
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