A contract that conditions one party’s performance upon his or her satisfaction is enforceable and not illusory or lacking in mutuality of obligation if the determination of such satisfaction is either (i) made according to a judicially discerned, objective standard of a reasonable person, or (ii) controlled by good faith, regardless of reasonableness. (Mattei v. Hopper (1958) 51 Cal.2d 119.)
ELEMENT 1: Presence of a Satisfaction Clause in Contract
A satisfaction clause is a provision in a contract that makes one party’s performance conditional on his or her satisfaction as to the other party’s performance or as to the status of something involved in the contract. (Pmc, Inc. v. Porthole Yachts (1998) 65 Cal.App.4th 882.)
Choice of Test
If a contract provision makes one party’s performance conditional on his or her satisfaction as to the other party’s performance or as to the status of something involved in the contract, the court will apply either an objective test or a subjective test to determine the appropriateness of this “satisfaction clause.” (Kadner v. Shields (1971) 20 Cal.App.3d 251.)
Which test is to be used in a given transaction is a matter of actual or constructive (legally presumed) intent of the parties. The distinction between the two tests is not meant to create a hard and fast line; the difference is one of degree. The choice can be settled by explicit language in the instrument. However, in the absence of a specific expression or a clear indication from the nature of the subject matter, the law prefers the less arbitrary standard of the reasonable man. (Id.)
If a contract is capable of two constructions, the court must choose the interpretation that will make the contract legally binding if such interpretation does not violate the intent of the parties. (People v. Morgan (2010) Cal.App.Unpub. LEXIS 464 citing (Bleecher v. Conte (1981) 173 Cal. Rptr. 278).)
Validity of Contract – Good Faith & Fair Dealing
When a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing. The lack of an express requirement of reasonableness or good faith does not mean the contract lacks sufficient legal consideration and mutuality of obligation. (Bevis v. Terrace View Partners, LP (2019) 33 Cal.App.5th 230.)
Satisfaction Clause Limited by Implied Duty to Use Good Faith
A satisfaction clause which required the buyers’ approval of termite and roof inspection reports was limited by the implied duty to use good faith and diligence and did not render the contract void for lack of mutuality. (Converse v. Fong (1984) 159 Cal.App.3d 86.)
Contract Permits One Party to Set or Change the Price
A contract provision that leaves the price to be paid, or other performance to be rendered, to the will and discretion of one of the parties is generally not enforceable. However, a contract that permits one party to set or change the price charged for goods or services is not illusory, because that party has a duty of good faith and fair dealing. (Perdue v. Crocker Nat’l Bank (1985) 38 Cal.3d 913.)
A contract provision that a football player would be paid even if his performance was unsatisfactory (and even if he did not play at all) was valid. (National Football League Players’ Ass’n v. National Football League Management Council (1986) 188 Cal.App.3d.)
ELEMENT 2: Good Faith Dissatisfaction with Performance
The plaintiff’s determination must be in good faith and he must be genuinely dissatisfied with the other party’s performance of the contract or with the item that is subject to his approval, and not merely with the contract itself. (PMC, Inc. v. Porthole Yachts, Ltd. (1998) 65 Cal.App.4th 882.)
Objective Test/Reasonable Person Standard
The court uses the “reasonable person” standard to determine whether satisfaction has been received when a contract calls for satisfaction as to commercial value or quality, operative fitness, or mechanical utility; in such cases, dissatisfaction cannot be claimed arbitrarily, unreasonably, or capriciously. (Kadner v. Shields (1971) 20 Cal.App.3d 251.)
Example: A building contract providing for installation of a plumbing, heating, and ventilation plant to the owner’s satisfaction involved a question of operative fitness or mechanical utility and had to be performed in a manner that would be satisfactory to a reasonable person. (Thomas Haverty Co. v. Jones (1921) 185 Cal. 285.)
Under the “reasonable person” standard, a party’s determination of dissatisfaction may be unreasonable even if made in personal good faith. (Kadner v. Shields (1971) 20 Cal.App.3d 251.) (satisfaction clause in land sale contract allowing buyer to approve encumbrance on property was a condition precedent to buyer’s obligation to purchase the property, not a condition to existence of contract).
Mental Condition as to Satisfaction is Immaterial
Where a contract provides for performance in accordance with plans and specifications fixed by the contract, to the satisfaction of the owner or architect, and the contract is performed as required by the plans, the person whose judgment is invoked must accept the performance, and his mental condition as to satisfaction is immaterial. (Pmc, Inc. v. Porthole Yachts (1998) 65 Cal.App.4th 882.)
Satisfaction Clause in Purchase Agreement Subject to Reasonable Standard
A satisfaction clause in a land sale contract giving the purchasers the right to have a well-tested to determine the amount of water available was a contract condition subject to the reasonable person standard. (Lyon v. Giannoni (1959) 168 Cal.App.2d 336.) (buyers’ right to terminate contract if test results were not satisfactory did not merely create an option to purchase).
A condition in a land sale contract for buyer’s approval of a soil compaction report and certain maps for the subject property was not illusory because the buyer’s approval of such items was to be based on reasonable standards for the commercial purpose of subdivision. (Collins v. Vickter Manor, Inc., (1957) 47 Cal. 2d 875.)
Performance Bond in Construction Contract Subject to Reasonable Standard
The sufficiency of a performance bond under a satisfaction clause in a construction contract was to be determined by the objective reasonableness test. (Weisz Trucking Co. v. Emil R. Wohl Construction (1970) 13 Cal. App. 3d 256.)
A provision in a land sale contract that the buyer’s approval of reports and studies could be given or withheld in its “sole judgment and discretion” was valid, as the buyer had a duty to exercise its judgment in good faith. (Larwin-Southern Cal., Inc. v. JGB Inv. Co. (1979) 101 Cal.App.3d 626.)
Bona Fide Dissatisfaction is a Question for the Jury
What constitutes bona fide dissatisfaction under a satisfaction contract is a question for the jury, and the jury’s role is limited to that; there can be no inquiry into whether the dissatisfaction was reasonable or whether there was “good cause” for the termination. (Pugh v. See’s Candies, Inc. (1988) 203 Cal. App. 3d 743.)
The allegation and subsequent proof of reasons, other than dissatisfaction, that the contract was terminated can raise a triable issue of fact as to the existence of “bona fide” dissatisfaction. (Locke v. Warner Bros., Inc. (1997) 57 Cal.App.4th 354.) (summary judgment was improper where evidence raised triable fact question whether defendant merely “went through the motions” of purporting to consider plaintiff’s film projects before rejecting them as unsatisfactory).
When a party to a contract agrees to perform to the satisfaction of the other, he renders the other party the sole judge of his satisfaction without regard to the justice or reasonableness of his decision, and a court or jury cannot say that such party should have been satisfied where he asserts that he is not, subject only to the limitation that he is acting in good faith. (Leboire v. Royce (1960) 53 Cal.2d 659.)
Example: A contract requiring performance to the “satisfaction” of the employer was breached when the employer was dissatisfied in good faith, regardless of whether a reasonable man would or would not have been dissatisfied. The employer’s good faith determination of dissatisfaction was conclusive on the employee. (Crillo v. Curtola (1949) 91 Cal.App.2d.)
Approval of Third Person
Where work is to be done to the satisfaction of a third person, evidenced by a certificate to that effect, the production of such a certificate is a condition precedent to a right of action upon the contract. (Patrick J. Ruane, Inc. v. Parker (1960) 185 Cal.App.2d 488.)
However, where a contract required an architect to certify his satisfaction with the work, and the architect unreasonably refused to issue the certificate, the plaintiff was not required to produce the certificate as a condition to a breach of contract action. (Id.)
Performance to the satisfaction of the architect was not required when the named architect was discharged, another architect was employed, but the parties made no agreement for his substitution. (Id.)
Plaintiff allowed to amend complaint to add prayer for damages in addition to equitable relief of specific performance, thus permitting a less exacting scrutiny of the contract’s terms than that required for equitable relief. (Larwin-Southern Cal., Inc. v. JGB Inv. Co. (1979) 101 Cal.App.3d 626.)
Purchaser was allowed to rescind land sale contract and recover his deposit based on his dissatisfaction with subdivision map. (Rodriguez v. Barnett (1959) 52 Cal.2d 154.)
STATUTE OF LIMITATIONS
Statute of Limitations for Written Contracts
The statute of limitations is four years if the contract is written. Civ. Proc. Code § 337(1).
Statute of Limitations for Oral Contracts
For oral contracts, the limitations period is two years. Civ. Proc. Code § 339(1).
Bad Faith; Fraud; Failure of Consideration; Lack of Mutuality of Obligation
(Converse v. Fong, 159 Cal. App. 3d 86, 90, 205 Cal. Rptr. 242, 245 (1984)).
Rejection of the work as unsatisfactory is premature if the work is not sufficiently completed for a reasonable determination whether it is or will be satisfactory.