Conditional contracts and earnest money

The obligation of a contract may, according to the intention of the parties, depend on whether a certain event has happened or will happen in the future. The contract is then conditional, not absolute. If the event is past or present, but it is not known by the parties whether it has happened or not, the contract at once is valid or not, according as the condition is fulfilled or not, but the parties will not know whether they are bound by the contract until they know whether the condition be fulfilled or not.

When the event is future, and its happening will, according to the intention of the parties, discharge the parties from obligation under the contract, the condition is subsequent. The parties are bound by the contract and will continue to be so bound, unless and until the subsequent condition is verified.

When the parties agree that the contract shall depend upon the happening of a future event, there is a condition precedent. An obligation at once arises from such an agreement of awaiting the event; when it has taken place the contract becomes absolute and begins to bind without any fresh act of the contracting parties; if the event does not take place, the obligation is discharged.

Sometimes on entering into a contract something is given as earnest, which serves as evidence that the contract has been concluded, or as security that it shall be performed. Unless there is a contrary agreement between the parties, the earnest will be treated as part payment or will be returned upon performance; it will be forfeited if the party who gave it fails to perform; it will be returned if the party who received it fails to perform.

If it is agreed that a certain sum is to be paid in the event of breach of contract by the party who was in default, the whole sum will be due if it represents liquidated damages. If, on the contrary, it is a penalty, the injured party, according to English law, cannot recover more than the amount of the loss actually suffered by him.¹

¹ Digest, n. 313.

VIII. Obligations of the buyer. The buyer is bound to pay the just price, and this at the time and in the mode concerning which agreement was made. Besides, compare civil law. But if he himself perhaps received false money from a third party, he cannot for that reason give it to another contracting party as price. If he has given it, even though he acted in good faith, he is bound to restitution; since the fact that he himself suffers damage is not a reason why you can deny to another what is owed (St. Alphonsus, III, 855).

It remains that we say certain things about earnest money. Now then:

I. Earnest money is called a certain thing handed over to the other party on the occasion of a contract.

II. Earnest money is distinguished as twofold, confirmatory and penitential.

Confirmatory earnest money is that which is given by the buyer to the seller as a sign and confirmation of the contract, perfected according to the intention of the contracting parties. From a contract of this kind, since it is perfected and confirmed, one can retreat without mutual consent even less than from another contract. But the earnest money given is judged to be part of the price.

Penitential earnest money is that which is given by one party to the other for this end, that the contract, not yet plainly perfected, may be rendered more certain. In the case each party can withdraw from the contract, yet in such a way that he who gave the earnest money, if he withdraws, loses the earnest money given; but he who received the earnest money, if he withdraws, restores the earnest money received.

In doubt whether the earnest money is confirmatory or penitential, it is presumed to have been given according to the custom of the place (St. Alphonsus, III, 794).

Besides, also as regards earnest money let civil law be consulted.

I. A penalty is added to betrothals if the parties agree that something is to be paid by the one withdrawing. A stipulation of a penalty to be paid by one withdrawing justly is illicit and invalid, as being injurious to the freedom of matrimony. But a penalty established against one withdrawing unjustly is valid and licit (St. Alphonsus VI, 853, q. 1). Appeal can no longer be made to positive law, from which many, while others contradicted, were drawing the contrary, since the Code is silent about it.

II. A mode is a burden added by one party to a perfected betrothal contract and accepted by the other.¹ A mode differs from a suspensive condition. For the latter brings it about that the contract is not perfected before the condition has been fulfilled, while an added mode supposes a perfected contract. Nevertheless the added mode can be intended in such a way that, if the other party does not fulfill it, neither is the prior party bound to sustain the betrothals.

III. Earnest money is a thing given to the other party in pledge of future matrimony. When matrimony follows, the earnest money can be reclaimed, unless the mind of the betrothed was contrary. If matrimony does not follow, it must be restored by the one withdrawing unjustly, but can be kept by the other party. If one withdraws justly from the betrothals, custom has it that each party restore the earnest money received (St. Alphonsus VI, 852).

IV. Iocalia are gifts given to the other party, not as a pledge of future matrimony, but as a sign of love and under the hope of nuptials. When matrimony follows, they can be retained. If matrimony does not follow, they must be restored by the one by whose fault the matrimony is not contracted, except if they are small and are not reclaimed by the other party; but they can be retained by the other party. If through the fault of no one matrimony is omitted, custom has it that each party restore the iocalia received, perhaps excepting smaller ones.

V. An oath added to valid betrothals, or to a valid unilateral promise, adds to the obligation of justice an obligation of religion. When the betrothals fall, the obligation of the oath falls (canon 1318, § 1).

An oath added to invalid betrothals, or to an invalid unilateral promise, for example from defect of legitimate form, is invalid, because the accessory follows the principal (canon 1318, § 1).

¹ "I promise you matrimony; you, however, must do this or that."

When is a contract with a penal clause had? - What is understood by earnest money? R. To the first: A contract with a penal clause is when someone, to firm an obligation, binds himself to something if he does not keep it. C. I. 1209; C. G. 1226; C. H. 1152; Inst. 1. 3. t. 16. § 7. Hence the debtor cannot exempt himself from the obligation by paying the penalty, unless this has been expressly established. C. H. 1153; C. A. 1336. If the principal obligation is invalid, the penalty is invalid, but not conversely. C. I. 1210; C. G. 1227; C. H. 1155. The penalty is owed from the time when he is placed in delay, and indeed from justice if it is sought, for at least culpable non-execution of the principal obligation; but by no means are both the penalty and the principal thing owed at the same time, unless it was established for simple delay. C. I. 1211-1213, 1229, 1230; C. G. 1228-1130; C. H. 1153; C. A. 909-911. Cf. C. B. 339 ff. A conventional penalty is owed before any sentence, since such a penalty involves a pact.

R. To the second: What is given in advance by the contracting parties holds the place of security for compensation of damages, if the agreement is not fulfilled, unless otherwise has been agreed, and is called earnest money, caparra. The party which is not at fault, if it does not wish to urge fulfillment of the agreement, can retain for itself the security accepted from the other; or exact double of that which it gave. C. I. 1217; C. A. 908-910. Cf. C. B. 336 ff.

What force do arrhae add to sale? What force does a promise of sale have? According to Roman Law: If arrhae are added only to a promise of sale, they do not confirm the contract, but each of the contracting parties can withdraw. But in this case, if he who handed over the arrhae to the other withdraws, he simply loses them; if he who received them withdraws, he must restore double, that is, the arrhae received, and in addition a value equal to them. - If they are added to the sale itself, they do not make it conditional, but are an argument of the contracted sale; for they are computed as part of the price, or are given as security of payment; whence neither of the contracting parties, against the will of the other, can withdraw.

In doubt whether they were added to the promise of the contract or to the contract itself, one must stand for the minimum, or they are judged to have been added only to the promise of sale. Inst. 1. 3. t. 24; L. 25 Dig. de Contrahenda emptione; L. Contractus C. de Fide instrumentorum.

According to C. G. 1589, 1590, a promise of selling is equivalent to sale whenever there is reciprocal consent of each party in the thing and the price. But if arrhae are joined to the promise, either contracting party can withdraw from the contract, so that they are lost by him who gave them; but he who received them returns them doubled. Hence it is clear that a promise of sale is not altogether to be confused, even according to C. G., with sale itself; since according to the same Code, by sale ownership of the thing is transferred, but by no means by promise of sale. Wherefore a promise of sale is equivalent to sale, not insofar as it transfers ownership, but insofar as the seller can be compelled, after receiving the price, or conversely the buyer, after receiving the thing, to fulfill it. Gousset 833. According to C. H. 1451, 1454, a promise of sale and purchase gives to the contracting parties the right of claiming fulfillment of the contract. If in the contract of sale and purchase arrhae have been given and accepted, the contract can be rescinded if the buyer is content to lose them, or the seller to restore them doubled. Cf. C. L. 1548. As regards C. I., cf. 993.

Certainly, speaking per se, it is one thing to promise a thing, another to give it. C. B. 336 ff.; Lugo d. 26. n. 10; L. 794.

Is one withdrawing from betrothals bound to restore the earnest money? That betrothals can be contracted with earnest money given, there is no doubt. For earnest money is a pledge given of fulfilling the thing promised. If the thing promised, as here, is licit, a pledge is licitly given for fulfilling it. - One who culpably withdraws from betrothals loses his own earnest money, and is bound to return that of the other party, and to restitution of as much as it was in that party's interest that such a contract be fulfilled. Cf. 926. - L. 852; Sanchez, l. 1, d. 30, 35; Schmalzgrueber, l. 4, t. 1, n. 126 ff.; L. 5, de Sponsal., C.; C. B. 1301.

261. A contract under a condition. A condition added to a contract can be either of the present, or of the past, or of the future. If it is of the past or of the present, then, when the condition is verified, the obligation of the contract begins at once; otherwise, it does not. But a condition of the future is twofold: the one suspensive, when the obligation is suspended until the condition is fulfilled; e.g., I shall give you ten francs if you procure that book for me; the other resolutory, when the obligation of the contract already existing is afterwards revoked upon the fulfillment or non-fulfillment of the condition; e.g., I sell you this book unless it displeases you within a week, or in other words: within a week you can dissolve this contract entered.⁵³

The effects of a suspensive condition are the following: before the event, the obligation of the contract is suspended, but it obliges one to await the event and not impede it; after the event of the condition, the obligation of the contract arises at once without new consent, and the obligation is then ordinarily considered to have existed from the day the contract was entered; but if the condition fails, no obligation arises, nor is it ever considered to have been present.⁵⁴

The effects of a resolutory condition are the following: before the event and if the condition fails, the contract is valid; but when the condition is fulfilled, the contract is immediately dissolved without any sentence of a judge.

If a condition concerning a base thing is added to a contract, i.e., concerning doing something evil or omitting something good, then such a contract, as concerning a morally impossible thing, is null by natural law; nevertheless, in the external forum these conditions are sometimes held as not added, or rather are presumed as modes and not as true conditions. Ecclesiastical law establishes this for the matrimonial contract and for espousals,⁵⁵ and Roman law establishes the same for testaments.⁵⁶ Hence, e.g., when an uncle in a testament bequeaths 1,000 francs to his nephew under the condition that he become a Calvinist, or that he not become a religious notwithstanding a divine vocation, this condition, as being base, is held as not added, and consequently the nephew can retain the 1,000 francs although he does not fulfill the condition. But several modern civil laws do not recognize this statute of Roman law. In practice it is necessary first of all to investigate the true intention of the contracting party or testator. If it is not altogether certain that he primarily intended the base condition, the contract or testament can be ratified even if the base condition will not be verified. For then it is not a contract under a condition, but under a mode, concerning which something will be said immediately.

⁵³ Cf. Noldin, De praeceptis n. 541.

⁵⁴ Cf. Billuart, De contract. diss. 1, a. 7, § 1; German Civil Code § 158ff.; Swiss Code of Obligations, art. 151ff.

⁵⁵ Cf. below, III, n. 664.

⁵⁶ L. 9, D. 28, 7.

473. A conditioned contract in its obligations depends upon the fulfillment of the condition.

A. A contract entered into under a condition concerning the present or concerning the past obliges at once or not, according as the condition exists or does not exist on the part of the thing. And the same holds for a condition concerning a future thing that is certain and already known as such in a necessary cause: such a condition is judged not to have been added.

B. A contract entered into under a condition concerning an uncertain future only obliges or ceases to oblige after fulfillment of the condition. For condition is twofold (a. 1168): one is suspensive (vertragende), which suspends the assent to be furnished so that the existence of the obligation depends upon the fulfilled condition, for example, I buy the house if my absent wife consents; another is resolutory (ontbindende, opschorsende), which dissolves the assent given so that the cessation of the obligation depends upon the fulfillment of the condition, for example, I buy the house unless my wife contradicts; I sell the horse unless within a month I need it. Now:

1. A suspensive condition a) before the event suspends the principal obligation, but induces an obligation of awaiting the event of the thing; whence the debtor preserves dominion of the thing, and the creditor has only a conditioned right (a. 1182). b) Once the condition is fulfilled, the contract without new consent passes into an absolute one; indeed generally the obligation is judged to exist from the day the contract was entered into (a. 1179). c) When the condition is lacking, the contract (unless the debtor impeded the condition, a. 1178) is null; indeed it is judged to have been null from the beginning, and therefore if the thing had already been handed over, it would have to be restored with the fruits received (a. 1181-82).

A contract made under a merely potestative condition, whose fulfillment depends on the will of the debtor alone, is null from the beginning (a. 1174), for example, I will give you the book if I will.

2. A resolutory condition a) before the event does not suspend the obligation, but leaves the contract valid, so that the debtor here and now is held by the same obligations and the creditor has the same rights as if the contract were firm; whence the promised thing is to be handed over to the creditor. b) Once the condition is fulfilled, the contract is dissolved by that very fact without the sentence of a judge, so that the obligation is judged never to have existed; and therefore the thing returns to the prior owner in the same state as if the contract had never existed. c) When the condition is lacking, the contract becomes simply irrevocable, with the same obligations as if no condition had ever been appended (a. 1183).

In synallagmatic contracts a resolutory condition is always understood: unless the other has not stood by the promises; but its fulfillment does not dissolve the contract except by decree of a judge (a. 1184).

X. QUESTION V. How does a contract bound by a condition oblige? ANSWER. A condition added to a contract regards time either past, or present, or future. That which regards the first two times is not properly a condition, since it does not suspend the contract, but makes it absolute. A condition therefore properly taken regards the future. Conditions intrinsically necessary do not suspend a contract. Impossible conditions make the contract null, as do shameful conditions — two contracts being excepted, of matrimony and of last will, in which shameful conditions are held as not added.

NOTANDUM (to be noted), following D. Bonaventure, that a conditional contract requires some condition in order to exist. Now a condition may concern the past, the present, or the future; and again it may be honorable, or dishonorable, or necessary, or contingent.

IF the condition concerns a past event, or the present, it does not suspend consent, because the condition has already been fulfilled or not fulfilled, and it cannot be otherwise; as if you give me an estate, if I was in Rome last year. Or: I take you in marriage, if your Father is dead, or if you are a virgin. So the Holy Doctor, whom very many follow, as Sanchez has it lib. 5. de matrim. disput. 6. Rebell. lib. 2. quaest. 15. Therefore the contract is not suspended by the force of such a condition, as the Holy Doctor explains, and with him Sanchez lib. 8. de matrim. disput. 10. num. 4. et 5. and lib. 4. decal. disp. 23.

IF indeed the conditions are future and contingent, the contract is suspended until the condition is fulfilled, and then the contract brings a absolute obligation, and therefore a new consent of the contracting parties is not required. So it is held with many authorities adduced, as Sanchez disput. 8. de matrim. lib. 5. Azor 3. part. lib. 6. cap. 15. et p. p. lib. 11. cap. 7. quaest. 9. Navar. sum. Lat. cap. 2. numero 63. Innocent. in cap. 1. num. 4. et in cap. super eo, in fine.

IF indeed the conditions are necessary, they are not judged to suspend the contract, because those conditions are necessary, as if you should say: I take you in marriage, if the sun rises tomorrow. So D. Bonaventure, and with him Azor p. p. lib. 11. cap. 15. quaest. 9. Sanchez lib. 5. de matrim. disp. 5. num. 1. and lib. 4. Decal. cap. 23. Suarez Tom. 3. de relig. lib. 6. cap. 12. num. 16. Fagundez lib. 1. de contract. cap. 7. num. 6.

IF indeed the condition be naturally, or morally impossible, the Doctors hold different views.

FOR MANY say that such a condition vitiates the contract by the law itself. So Lessius lib. 2. cap. 18. dub. 15. num. 121. Azor p. p. lib. 11. cap. 15. quaest. 9. Sanchez tract. 1. decal. cap. 23. num. 8. Bonacina de contract. disp. 3. quaest. 1. puncto 4. num. 10. Vasquez de restis. c. 7. disp. 10. speaking of wills, and it is found in Leg. servo manumisso, ff. de condit. instit.

Others say that such a condition is judged as if not appended, and the contract stands. This seems to be the opinion of D. Bonaventure, for even concerning conditions that cannot be morally fulfilled, he says the conditions are to be judged as not added. This is the view of Philiarch. tract. 1. de offic. sacerd. part. 1. lib. 3. cap. 21. and others.

If indeed the condition be contrary to the substance of the contract, it will be null, as D. Bonaventure asserts concerning Matrimony loco cit. patet ex cap. fin. de condit. apposit. et cap. soles 32. quaest. 2. et lib. 5. tit. 4. part. 4. and the reason of D. Bonaventure is, because without its proper substance a thing does not subsist, cap. tua nos de sponsal. cap. detrahe 1. quaest. 1. facit leg. cum hi, §. si Praetor, ff. de transact. So also D. Thom. 3. part. quaest. 47. art. 5. in addit. The same concerning other contracts the Doctors commonly teach, as found in Fagundez lib. 1. cap. 7.

S. Bonaventure then inquires about this wicked condition: I contract with you, if you use poison to procure sterility in our marriage.

The Holy Doctor answers: it invalidates the marriage. So also Paludanus 4. dist. 29. quaest. 2. art. 5. num. 27. Sanchez lib. 5. de matrim. disp. 9. num. 8. Fagundez lib. 1. cap. 7. num. 24. The reason is, because it is just the same as binding oneself to take those poisons, which is against the substance of matrimony, as the Holy Doctor notes.

But if the condition be wicked, yet not against the substance of the contract, as: I take you in marriage, provided you go mad. I say, these conditions are to be judged as if not appended, and the contract is valid; wherefore they are reckoned with morally impossible conditions. For we can do only that which we can do licitly and justly Lege Nepos. Proculo 125. ff. de verb. signific. So D. Bonaventure loco cit. whom follow Ludovicus Lopez 2. part. Instruct. lib. 11. de matrim. cap. 12. Palat. lib. 5. de contract. cap. ult. folio 498. Sotus in 4. dist. 29. quaest. 1. art. 3. Gregorius Lopez lib. 6. verbo si furata res, titulo 4. part. 4.

When indeed the shameful conditions concern the present, or the past, since they already are, or already are not, in act: if they are, the contract is valid; otherwise it is void. So D. Thom. 4. dist. 29. quaest. unic. art. 3. quaest. 3. Paludanus ibi quaest. 2. art. 5. num. 28. Palatius lib. 5. de contract. cap. ult. fol. 498. Henriquez lib. 11. de matrim. cap. 12. num. 7. Alexander de Neuo in cap. de illis, num. 18. Couar. in 4. Decretal. 2. part. cap. 3. §. 2. num. 2. Sylvest. V. matrim. 3. quaesit. 1. Fagundez num. 18.

If the condition concerns the future, depending on the will of a third party, and it is positive, the first act of the third party's will is to be attended to; as: I betroth you to myself, if my father shall wish it. But if it is negative, all the acts are to be attended to; v. g. if my father shall not have objected; then at whatever time he objects, if the matter is still intact, the contract will be void, because it belongs to the nature of negation to destroy all things.

If you promise under this condition: if Peter gives Francis a house, it will suffice if he offers it, even if Francis does not accept, because it did not lie with him Leg. debitor, ff. de usuris. Azor p. p. lib. 11. cap. 15. quaestio 9. and it is deduced ex Leg. si ita, ff. de condit. inst. and ex Lege, statu liber, ff. de statu libero. The same is taught by Sanchez lib. 1. de matrim. disp. 33. num. 19. and lib. 4. Decal. cap. 23. num. 18.

If a condition appended to a contract is impeded by one of the contracting parties, with the other consenting, both already withdraw from the contract; but if with the other unwilling, the one impeding is held to the contract, as if the condition had been fulfilled. So Roderic. a Cunha in decret. in cap. quae ad nos, dist. 47. Molina de primog. lib. 2. cap. 13. num. 15. Sanchez lib. 4. decal. cap. 23. num. 47. Fagundez cap. 7. num. 26. It is proved from the rule: Cum per eum non fiat 66. de regul. iuris in 6. and ex regula in iure civili 122. ff. de regulis iuris, et Leg. in excavatione 85. §. fin. ff. de verb. oblig.

The reason is, because a contract requires good faith in the appended condition, which therefore one ought not to impede, either by oneself, or through another. See Sanchez loco cit. num. 48.

The Holy Doctor adds, that if a condition of marriage is by way of penalty, it has no force, because it ought to be free; whence, even if he does not contract, he is not held to that penalty.