Wait, I changed my mind! Here’s your Earnest Money Back.

You are the Buyer in an Earnest Money Agreement to purchase land. For reasons that seem fanciful or illogical to you, the Seller terminates the agreement and offers to return your Earnest Money. Do you have any remedies? To compound the matter, let’s say that you’ve invested substantial time and money selecting the site and working to obtain permits so you may use it as intended.

The case of Grant County Port District No. 9, Port of Ephrata, v. Washington Tire Corporation, is such a case.

The facts Grant County Port District No. 9 are interesting, but beyond the scope of this article. To summarize, a Chinese citizen, formed a corporation, Washington Tire, to manufacture giant off-the-road tires primarily used in mining equipment. The corporation entered into an Earnest Money Agreement with the Port to acquire land for its manufacturing site, and made a $40,000 Earnest Money payment.

Nearly a year and a half later, after paying for multiple studies, flying local and state officials to China, and flying investors to Washington, the Port learned that the Buyer’s president, a Chinese national, used an Americanized name when working with people in the West, and importantly, when he signed documents, including the Earnest Money Agreement. A practice the Court of Appeals found to be a commonly practiced by Chinese business people.

Seizing on Buyer’s president using an Americanized name, the Port demanded assurances that Buyer would perform, including a demand that Buyer provide “certification from a Washington attorney known to [the Port’s attorney] who deals extensively in commercial transactions which established the legitimate incorporation of [Buyer] and the legal authority of [its president] to bind [Buyer].” Buyer submitted numerous assurances, but submitted no certification from a Washington attorney known to the Port’s attorney.

Shortly thereafter, the Port terminated the agreement and offered to refund the Earnest Money as Buyer’s sole remedy.

The Port made two arguments to support its position. First, it argued that Buyer repudiated the agreement by failing to provide adequate assurances it would perform and the Port was therefore justified in repudiating the agreement. The court made quick work of this argument noting that Buyer paid the Earnest Money, invested substantial time and money performing numerous studies needed to operate its plant on the site, and fully performed all of its obligations under the Earnest Money Agreement.

Next, the Port asserted that under the agreement, if it failed to perform, Buyer’s sole remedy was to seek rescission of the agreement and refund of the Earnest Money. The operative clause reads

ENFORCEMENT: If title is insurable and all other terms of the Agreement are satisfied, and Purchaser refuses to complete purchase, then the earnest money shall be forfeited to Seller as liquidated damages. If Seller refuses to complete the sale then Purchaser shall be entitled to rescission of this Agreement and return of its earnest money.

On first blush, the Port’s second argument seems good. The agreement calls for rescission and refund if the Port refuses to complete the sale. The key point, and the take away from this case is to never accept your opponent’s argument, or stop your analysis after the first read.

In rejecting the Port’s second argument, the Court of Appeals noted that nowhere in the Enforcement clause did it say that rescission and refund were Buyer’s sole or exclusive remedy. Rather, the clause states that “Purchaser shall be entitled to rescission” meaning it was an option, but not the sole option available to Buyer.

The Court further noted that if rescission and refund were Buyer’s sole remedy, then the agreement would allow the Port to breach the agreement without consequence, an absurd result.

 

This blog post is offered for general information and educational purposes only. It is not offered as legal advice and does not constitute legal advice or opinion. Although I intend to keep this information current, I do not promise or guarantee that the information is correct, complete, or up-to date. You should not act or reply upon the information in this post without seeking the advice of an attorney.

Leave a Reply