In re Carter’s Claim

In June 1954, Kardon (buyer) (plaintiff) opened negotiations to purchase the Edwin J. Schoettle Co. and five of its subsidiaries (defendants) (sellers). On September 17, 1954, the parties entered a written agreement providing that the buyer would purchase the sellers for $2,100,000. Of this amount, $187,863.60 would be set aside to be held by an escrow agent to indemnify the buyer against any liabilities of the sellers. The written agreement, which was drafted by counsel, provided “warranties” offered by the sellers to the buyer and “conditions precedent” impacting the buyer’s rights at the time of closing. Section 5(g) of the written agreement, titled “Representations and Warranties,” stated that since June 30, 1954, there had not been “any changes in [sellers’] financial condition, assets, liabilities, or businesses, other than changes in the ordinary course of business, none of which [had] been materially adverse.” Section 9 of the agreement was titled “Conditions Precedent.” Section 9(a) of the agreement, titled “Financial condition at closing,” stated that “as of the time of closing the financial condition of the [sellers] shall be no less favorable than the financial condition shown on the statements of [sellers] dated June 30, 1954.” Section 10 of the agreement provided for indemnification of the buyer by the sellers for “any damage or deficiency resulting from any misrepresentation, breach of warranty, or nonfulfillment of any agreement on the part of [the sellers].” The buyer brought a claim for $69,998.42 from the escrow fund alleging that the financial condition of the sellers on the date of purchase was less favorable than that reflected in the companies’ financial statement of June 30, 1954. The buyer argued that section 9(a) of the agreement operated as a “warranty” against this fact and entitled him to reimbursement from the escrow fund for the sellers' loss in value. The sellers argued that section 9(a) was not a warranty, but rather was a “condition precedent” that functioned to relieve the buyer of his obligation to consummate the sale if the condition was not fulfilled. The sellers argued that when the buyer went through with the sale, he waived the condition in 9(a). The dispute was submitted to arbitration, and the arbitrator awarded $3,182.88 to the buyer. Judgment in this amount was entered for the buyer, and the buyer appealed.