## Facts

- Robert B. Prochazka and Donna M. Prochazka (the sellers) entered a written contract to sell a commercial lot to Bee-Three Development, LLC (the buyer).
- The buyer intended to develop the lot and lease it to a commercial tenant.
- Article 4 of the contract, titled “Inspection of Property,” set an “Inspection Period” during which the buyer could investigate the property and related development feasibility.
- Article 4.1 listed examples of investigations the buyer could conduct, including soil, engineering, environmental and geotechnical tests; inquiries into permits and governmental requirements; confirming utilities and access; and determining the “desirability and utility” of the property for the buyer’s planned use. It also stated that after the Inspection Period expired, the earnest money would become nonrefundable and “at-risk,” except in certain circumstances such as seller default.
- Article 4.3 provided that during the Inspection Period the buyer could terminate the contract if, “in [the buyer’s] sole and absolute discretion,” the property was unsuitable for the buyer’s intended use; if the buyer timely terminated, it was entitled to a full refund of the earnest money.
- The buyer paid $7,000 in earnest money.
- During the Inspection Period, the buyer terminated the contract after the tenant it had planned to lease to backed out, and the buyer demanded return of the earnest money.
- The sellers refused to return the earnest money, contending the buyer’s termination right was limited to problems discovered through the types of suitability investigations described in Article 4.1, and asserting the buyer breached the contract.
- The buyer sued for return of the earnest money in Pope County Circuit Court, and the sellers counterclaimed for breach of contract and sought to retain the earnest money as liquidated damages.
- The circuit court granted the buyer summary judgment, concluding the contract unambiguously gave the buyer an “absolute” right to terminate within the Inspection Period. The sellers appealed.

## Issues

1. Whether Article 4’s inspection-period termination language was ambiguous when Article 4.3 was read together with Article 4.1 and the contract as a whole.
2. If the termination language was ambiguous, whether summary judgment awarding the buyer the earnest money and disposing of the sellers’ counterclaim was improper.

## Decision

- The Arkansas Court of Appeals reversed the summary judgment for the buyer.
- The court held the termination clause was ambiguous when the entire contract was considered, because the agreement supported more than one reasonable interpretation of when and why the buyer could terminate during the Inspection Period.
- The court reinstated the sellers’ counterclaim and remanded for further proceedings.

## Legal Principles

- Whether a contract is ambiguous is a question of law; ambiguity exists when a provision is reasonably susceptible to more than one meaning.
- Contract terms must be construed together and in context; a court should read related provisions as parts of a single agreement rather than isolating one sentence or phrase.
- When a contract is ambiguous, the parties’ intent becomes a question of fact, making summary judgment generally improper where the competing interpretations are both reasonable.
- Summary judgment is appropriate only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law; ambiguity that affects a party’s right to terminate and recover earnest money can create a material fact dispute.

## Conclusion

Because Article 4.3’s “sole and absolute discretion” termination wording could reasonably be read either as an open-ended right to terminate for any reason during the Inspection Period or as a right tied to the suitability investigations described in Article 4.1, the Court of Appeals found the contract ambiguous, reversed summary judgment awarding the buyer the earnest money, reinstated the sellers’ breach-of-contract counterclaim, and remanded for fact-finding on the parties’ intent and resulting rights to the earnest money.


Prochazka v. Bee-Three Development, LLC, 2015 Ark. App. 384, 466 S.W.3d 448 (2015)