When One Party's Professional Decides The Sufficiency Of That Party's Performance
Often parties to a contract will agree that a third party will make the final call as to whether an obligation has been performed or an amount to be determined post-closing. In California, it has long been held that the parties may agree that the third party's decision is conclusive and binding in the absence of bad faith, fraud, or gross negligence. Brown v. Aguilar, 202 Cal. 143 (1927). Suppose that the third party is an engineer retained by one of the parties and the engineer is certifying the performance of the party that hired him or her? "Are we really to believe that the parties, who did not trust each other, who spent substantial time coming up with specific repairs that the other were required to perform . . . , could simply do something different and have their own engineer say he believed the new plan was in substantial compliance?" That was the question posed by the other party in Coral Farms, L.P. v. Mahony, 63 Cal. App. 5th 719, 277 Cal. Rptr. 3d 872 (2021).
The Court of Appeal's answer was "Respectfully, if Coral Farms intended a different result, then perhaps it should have negotiated and/or drafted a different contract". The case should reassure those who prize the ability for the parties to contract for final and conclusive decisions by third parties, such as accountants, engineers or architects. It is also a cautionary tale for those who agree to let final and conclusive decisions be made by a professional retained by the other party.