Johnson v. Maki and Associates, Inc.: Release Contained in Cancellation Agreement is Invalid

A 1997 Appellate Court of Illinois decision held that a release contained in a Cancellation Agreement for Contract to Purchase Real Estate was unenforceable due to lack of consideration. Johnson v. Maki and Associates, Inc. In this case, Jeanne Johnson listed a house for sale with Maki & Associates, Inc. Johnson entered into a real estate contract (the "Contract") with a couple (the "Buyers") to sell the house, and Maki placed the Buyers’ $2,000 earnest money deposit in an escrow account. When Johnson and the Buyers could not reach agreement on repairs to be made to the property, the Buyers decided they did not want to go through with the transaction and wanted their earnest money back. According to the Contract, the earnest money was to be returned upon written demand to Maki by Johnson and the Buyers.

Johnson sent a letter to Maki directing that the earnest money be returned to the Buyers. However, before it would return the funds, Maki required Johnson to sign a document entitled "Cancellation Agreement for Contract to Purchase Real Estate," which contained the following release provision: "The Buyer and Seller shall indemnify, save and hold harmless Broker and Broker’s agents from all claims, litigation, judgments, and costs arising from the cancellation of the Contract." Johnson signed the agreement, and Maki released the money to the Buyers.

Subsequently Johnson filed a lawsuit against Maki, claiming among other things, that it had breached its fiduciary duty to her "(1) by making false representations regarding the Buyers’ ability to obtain financing, and (2) by misrepresenting the operation and effect of the home inspection contingency." Maki filed a motion to dismiss, claiming that Johnson’s lawsuit was barred by the release contained in the cancellation agreement. The trial court agreed with the brokerage, granted its motion and dismissed the case.

On appeal, Johnson argued that for the release to be enforceable, like any other contract, it required consideration, and that since she did not receive any consideration from Maki in exchange for her promise not to sue, the release was not enforceable. The Illinois Appellate Court agreed that in order for the release to be valid, it required consideration. It explained this principal by quoting from an Illinois Supreme Court decision: "A valid release must be based upon a consideration before it can be efficacious in a court of law. Where the promisor receives no benefit and the promisee suffers no detriment the whole transaction is in its nature a nudum pactum." In Maki, not only did the release protect the broker from liability in connection with releasing the earnest money, it also protected Maki from any liability arising from the cancellation of the Contract. As the court stated, "the right to sue is significant and cannot be released absent valuable consideration given in return."

Johnson argued that since Maki was acting as an escrowee, Maki had a preexisting legal duty to return the earnest money upon the parties’ direction. The court explained that according to the preexisting duty rule, when a party does what it already legally is obligated to do, there is no consideration because there has been no corresponding detriment. Since Maki was an escrowee for the parties, the brokerage had the fiduciary duty to act pursuant to the escrow instructions. According to the Contract, to get Maki to release the earnest money deposit, all the parties needed to do to was give Maki written direction to do so. Since Maki already had a preexisting duty under the Contract to release the funds when so directed, the court held that releasing the funds did not constitute consideration for the release. The appellate court ruled that the lower court had erred by dismissing Johnson’s action and it remanded the case for further proceedings.

Johnson v. Maki & Assoc. , 289 Ill. App. 3d 1023, 682 N.E.2d 1196 (Ill. Ct. App. 1997).