Assignment 21 Precontractual Liability
Read: C 233‐244; Note 1 on 243‐244 + notes 2&3 on p. 238 & 239
S 226 § 90
- Hoffman v. Red Owl Stores
- Cyberchron Corp. v. Calldata Sys. Dev., Inc.
Liability When Negotiations Fail
Most major contractual commitments are the product of lengthy negotiations during which no offer is made (see p. 130). If the negotiations succeed, a K will result. But what happens if the negotiations fail? Is it possible for one party to recover for expenses they undertook during the negotiations process?
- Maybe. If one party, during negotiations, has conferred a benefit on the other party, the recipient of the benefit may be required to make restitution.
Ex. A buyer of land who puts a down payment on the parcel but no K ever results can probably get the down payment returned.
However, claims seeking restitution for services performed during negotiations have a much harder time recovering, including ideas and suggestions made by one party to another.
Reasons that FAIL for claims for restitution damages:
-If activities are regularly exchanged b/n parties endeavoring to reach a mutual accomodation (Songbird Jet)
-The services were rendered voluntarily
-If the services were designed to and had the effect of protecting the providing party
BUT: If the services were designed to benefit the receiving party, recovery might be attainable
Grounds that may allow one negotiating party to recovery reliance damages:
-Misrepresentation. If one party misrepresents its intention to come to terms, they are breaking the rules. (These cases are rare. One example is when a commercial landlord let its tenant believe that it would renew its lease for three years and then ended up selling the property & demanded the tenant vacate. The Supreme Ct of Washington concluded that the landlord had fraudulently promised to renew the lease & negotiate that amount of rentals in good faith. .. It upheld an award in an amount based on the lessee's reliance losses, including not only the extra expense incurred as a result of the move to another warehouse but also profits lost when the lessee's principal customers left b/c no preparations had been made for that move.
No estoppel under written agreement. If there's a cancellation at will agreement b/n the parties, promissory estoppel is inapplicable b/c there's a valid K… (See Legalines p. 51)
- Promissory estoppel is applied on in situations where it is really needed to prevent injustice. It was developed to do "rough justice" when a party lacking contractual protection relied on another's promise to its detriment.
*Really strange decision on p. 235 re: hockey team. It looks like the team provided the services (promotion/advertising) sans K (deliberately. The company did not renew)… Yet were allowed to recover damages. WTF?
When are promises NOT reasonable as a basis for reliance?
- Promises that are subject to numerous conditions under the control of 3rd parties
When are promises OK?
-employment Ks-- when a P relocates for a new job… (Grouse v. Group health Plan, Inc. 1981) Here, P lost current job as well as other future job. (reliance damages for time that we was unemployed AB's suggestion… Closed-ended, looks like what he had…)
-When used to further certain public policies-- like awarding damages to a contractor when the public entity failed to abide by a statute (Kajima)
-P entered the lowest bid on a major job
-D instead accepted a bid $1M more expensive (against the law, D was obligated to accept the lowest bid by law)
-To give him expectation damages would be a punishment to taxpayers for the mistakes made by low level bureaucrats… It's important to compensate, but not so much as expectation...
-Can only get costs incurred in preparing & submitting the bid were rewarded as reliance damages
-Lost profits are not within pervue of what justice requires.
Hoffman v. Red Owl Stores
Supreme Court of Wisconsin, 1965
Parties:
P is Hoffman, baker
D is Red Owl Stores Inc., super market chain
Background:
- P & wife owned and operated a bakery in Wautoma, WI.
- Nov. 1959 P contacted D seeking to obtain a franchise for one of D's stores in Wautoma
- He mentioned that he only had $18,000 to invest.
- He was assured that the amount would be sufficient.
- He was assured that the amount would be sufficient.
- In Feb. 1961, on the advice of D's representaive, Lukowitz, he bought his own grocery store (small) for the purpose of gaining experience in the industry.
- After 3 months, the store was making a profit & Lukowitz then advised P to sell it, assuring him that D would find him a larger store elsewhere.
- P complied w/ the advice & sold the store in June 1961 (at the loss of the summer tourist business)
- In Sept., on Lukowitz's advice, P put down $1K on a lot in Chilton selected by D.
- Later in Sept, after meeting w/ D to prepare a financial statement, Lukowitz told P: "Everything's ready to go. Get your $$ together & we are set." Lukowitz then told P to sell his bakery, which P did in november for $10K at a loss of $2K.
- He also spent $125 on a month's rent for a house in Chilton & $140 in moving his family to Neenah, on D's suggestion that he move there to spent one month getting experience in one of D's stores.
- That job did not materialize, so P went to work on the night shift at an Appleton bakery.
- So far, P had raised $24,100. D then told P that an add'l $2000 was required.
- P secured the $$ through a family loan from his father in law.
- D then required that loan from the father in law be changed to a gift b/c D did not want another party to join in.
- Early in Feb. 1962, the negotiations collapsed when P refused to accede to a financial arrangement that required P's complete financial contribution of $34,00 (incl. the $13K from father in law) as an outright gift to D.
PH:
-P brought suit against D for reliance damages (sale of the grocery store, sale of the bakery, the costs of taking up the option on the Chilton lot, moving & relocation expenses) & D's nonperformance.
Jury gave a special verdict for P for all damages
Trial court confirmed jury's verdict except sale of grocery store, which it ordered a new trial to decide damages
D appeals
Issue on appeal:
In order for a promise to sustain a COA for promissory estoppel, must it embrace all essential details of a proposed transaction b/n promisor & promisee-- (so it's really the equivalent of an offer that would usually result in a K b/n the parties if the promisee were to accept the same)??
D's arg on appeal:
-Can not be held liable under promiss estoppel b/c all the essential factors were omitted from negotiations (these factors were specifics, like size of store)
Rule:
R2C sect 90: promissory estoppel
Analysis:
Can P recover reliance damages under Doctrine of Promissory Estoppel?
The doctrine, as it is under Sect. 90 of R2C, is not as strict as to the definiteness requirement b/c this is an ALTERNATIVE method of recovery… Cn't really hold it to the same requirements that we would hold a K-- this is different than a BOC action.
The cool part about promissory estoppel is its fluidity in application. Instead, the promise just has to meet the 4 elements of promissory estoppel:
- There's a promise
- The promisor reasonably expects to induce action or forbearance by promissee in response to the promise
- If promisee actually does that action or forbearance
- Is enforaceable if injustice can be avoided only by enforcement of the promise
Court chooses to use level of discretion b/c of the four elements of promiss estoppel, a-c are questions of fact and 4 is a question of policy which necessarily allows for a level of discretion to be exercised by the courts.
Damages: Ct was OK w/ most of the damages that were awarded w/ the exception of the sale of P's small grocery store. ...
What damages can P get for the sale of the grocery store?
The recovery should be limited to the difference b/n the sales price rec'd and the fair market value of the assts sold, giving consideration to any goodwill attaching thereto by reason of the transfer of an already good business.
("What did you lose in reliance on the promise?")
Profits earned by new owners are not relevant here in equating what P can recover under reliance theory.
- There's a promise
Rule: | When damages are awarded under Promiss Estoppel, they should only be given as necessary in the opinion of the court to prevent injustice. Mechanical or "rule of thumb" approaches should be avoided. |
Lost profits are generally expectation damages-- they are what is expected from looking forward.
- The reason why P bought the store was for his own benefit-- to gain experience in the industry… It was "a temporary experiment" from the outset.
- Therefore, he is entitled to only the actual loss he sustained measured by the difference b/n the sales price & the fair market value
- Therefore, he is entitled to only the actual loss he sustained measured by the difference b/n the sales price & the fair market value
Conclusion:
-The trial court was correct in reordering a new trial on this issue. Order affirmed.
Important points in Hoffman:
- Extends the doctrine of promiss estop since it does not rationalise it in terms of reliance as a substitute for consideration (SOP, generally)
- Here, there is not even an offer. There is simply negotiation
Implication
of this court's finding= Parties must bargain in good faith… if they do not, in cases where one party relies on the other to its detriment, promissory estoppel will apply & damages will be awarded to prevent injustice from the detrimental reliance.
Cyberchron Corp. v. Calldata Systems Development Inc.
U.S. Ct of App, 2nd Cir 1995
Parties:
P is Cyberchron, is in the business of providing computer hardware to military & civilian use
D is Calldata subsidiary of Grumman Data Systems Corp., who is under K to do work for USMC
Background:
D negotiated w/ P to purchase certain equipment (rugged computer work stations) that was to be used for a military K.
The parties never agreed to the weight of the equipment or to the penalities P would incur for exceeding the weight. (Main problem)
D gave P a PO specifying a max. weight of 145 lbs. P never agreed to the terms, but commenced production despite the lack of an agreement.
In July, D directed P to proceed w/ production as if there had been an agreement on the weight issue, on the understanding that they would resolve the PO terms in the future. Sent a follow-up letter in July insisting P continue with its contractual duties under the PO...
P submitted a progress payment request for $495,000 which represented 80% of its incurred cots.
D didn't pay the progress payment due to separate litigation.
Instead, in Sept. D directed P to show cause as to why the PO should not be terminated.
P hurriedly responded as directed. D rejected & terminated the PO & contracted w/ another supplier for inferior equipment that weighed more than P's.
-Although produced (some of it), the equipment was never shipped or paid for.
-Agreement b/n the parties was never achieved.
PH:
Both parties appeal from a J on a claim of promissory estoppel awarding P damages for labor & material costs incrred in reliance upon statements and conduct of D.
P's recovery on BOC & unjust enrichment was denied by district judge
Analysis of district court:
-There was no enforceable agreement b/n the parties b/c there was never agreement on two of the most "essential, material and substantial terms of the proposed K" -- the weight of the equirment and the penalties of not meeting the specified weight requirements.
As a result:
-P's BOC claim & D's counterclaim were dismissed.
-P's claim of quantum meruit was also dismissed b/c 1) the D did not receive any benefit, 2) the failure by P to fully perform and 3) the absence of any unjust enrichment by the D.
Neither party appeals any of those dismissals.
-P is entitled to reliance damages b/c of the representations & promises made by D in mid July 1990 to P. J in the amount of $162,824.10 for out-of-pocket labor and materials costs incurred after july 15, 1990 and before the termination of negotional on Sept. 25 '90. (Used theory of promiss estoppel)
-Court DENIED any recovery for lost profits, administrative or general overhead on the bases that:
- These expenses were not proved to have been specifically incurred for the transaction w/ D
- P offered proof of overhead expenses for the 6 months ended June 30, 1990 rather than the period July 15-Sept. 25 1990
- The overhead expenses were not proper "reliance damages" but rather were speculative & conjectural.
-Court did allow prejudgment interest from December 18, 1990, the date of the commencement of this lititgation.
(Court did not address the issue of "shutdown expenses" incurred after Sept. 25 1990)
Issue on appeal:
Where the parties never agreed to a material term of a K, but the buyer induces the seller to incur development costs in the hope that an agreement would be reached, is the seller entitled to damages under promissory estoppel? (Despite knowing that a enforceable K is absent)...
If so, to what extend (general overhead costs too)?
Rule:
Slightly modified version of sect. 90: | In NY, promiss estoppel has three elements… "clear & unambiguous promise"; reasonable & foreseeable reliance by the party to whom the promise is made; and an injury sustianed by the party asserting the estoppel by reason of the reliance" |
Application:
-Sometimes an "unconscionable" injury is required in order to meet the third element. See p. 242 for individual element breakdown.
-We'll allow it here based on D's actions toward P. All elements are met.
-We reject P's argument that promissory estoppel should be extended to the periods prior to mid-July 1990 b.c. the commitments made b/f that point were not suficient to "undegird" Cyberchron's reliance claim… (Ct did not find a promise that would have justified P's performance until mid-July)--
-We are unprepared to conclude that agreements made at that juncture should be interpreted to validate recovery of the expenses incurred by P prior to any promise sufficient to undergird P's claim of promissory estoppel.
-Letter on June 26: We have a K & you better perform. But b/c PO was not signed, ct might have disregarded… Maybe.
Damages: Reliance damages OK after mid-July but what about overhead & admin costs?
Issue: | P argues that it should get overhead & shutdown expenses (was denied these in lower ct) |
Rule: | No controlling authority on this point for either party |
Analysis: | Court holds that it likes the "workable rule" that would allow recovery for reasonable overhead costs when it is shown that there is a demonstrable past history of ongoing business operations, w/o requiring proof that a specific alternative project would have absorbed the overhead costs at issue. |
Conclusion: | Shutdown costs are recoverable even if they incurred outside of the negotiation timeframe as long as these damages incurred ONLY b/c of P's reliance on D. (P must provide evidence to this effect) |
Conclusion:
J of district ct is affirmed for P's recovery under promiss estoppel
J is vacated & remanded for determination of damages
Precontractual Liability
Pp. 223-233
- Drennan v. Star Paving Co.
- Holman Erection Co. v. Orville E. Madsen & Sons, Inc.
Sunday, October 19, 2008
6:58 PM
R2c sect. 87(2) OptionK:
Reliance on an unaccepted offer… fxs just like a "promise" would in terms of resolving/recovering for detrimental reliance under sect. 90 & opens up possibility for offeree to recover.
R2C sect. 45: "Option K created by part performance or tender":
Unilateral K
- When an offeror invites an acceptance by performance only (does not invite promissory acceptance), an option K is created when the offeree tenders or begins to tender performance
- The offeror's duty of performance under an option K so created is conditional on completion or tender of the invited performance in accordance w/ terms of the offer
Rationale | This rule is designed to protect the offeree in justifiable reliance on the offeror's promise |
How to overcome: Offeror | Must show that the offeree's reliance was unjustified. No promise + no offer = offeror retains power to revoke |
Offeree | What is begun or tendered must be part of actual performance-- and sometimes, preparations for the actual performance (see sect. 87: Option k). This hinges on the extent to which the offeree's conduct is clearly referable to the offer. |
R2C sect. 90: Promise Reasonably Inducing Action or Forebearance (promissory estoppel)
Elements:
- There's a promise
- The promisor reasonably expects to induce action or forbearance by promissee in response to the promise
- If promisee actually does that action or forbearance
- Is enforaceable if injustice can be avoided only by enforcement of the promise
1-3 are questions of fact
4 is a question of policy
R2C section 50(2): Acceptance by performance requires at that least part of what the offer requests be performed or tendered. It includes acceptance by performance which operates as a return promise.
- Exceptions to the general doctrine of "no party is bound (& it's unsafe for one party to rely) until an offer is accepted & a K has formed"
- -Unjust enrichment is one (one party is unjustly enriched after another has conferred a benefit upon it)-- restitution may be awarded
- In some circumstances, a party who relies on an offer but does not confer a benefit on the other party may still have a claim for promissory estoppel.
Promissory estoppel: | Within limits, the detrimental action or forbearance by the promissee in reliance on a promise, is sufficient consideration to enforce the promise…. While it's not a true "substitute" for consideration, it is enough to estop the promisor from asserting lack of consideration by the promisee. Typically, it is applied so as to create an option & prevent the offeror from revoking the offer for at least a reasonable time. |
The Ragosta case is distinguishable from these types of cases b/c the performance wasn't actually started, instead, the Ragostas merely started to prepare for their performance.
Drennan v. Star Paving Co.
Supreme Ct. of California, 1958
Parties:
P is Drennan, a general contractor
D is Star Paving Co., a sub-contractor
PH:
P brought suit against D for damages b/c of D's refusal to perform paving according to D's submitted bid to P
Trial court held for P b/c it found that D had made a definite offer & that P had relied on that offer for his own. P granted J amt of $3,817.00
D appeals.
Facts:
- July 28, 1955 P is preparing a bid for a school job. Deadline was 8 p.m. that evening. Calls were coming in from subkrs throughout the day. High volume of calls; hectic environment. Each sub-bid was recorded & posted on a master cost sheet
- P asserts this was industry custom
- P asserts this was industry custom
- P had money on the line to guarantee his entrance of the K if his bid won
- That afternoon, P's secretary talks to Hoon, an estimator for D, who provided his name & number and entered a bid for D in the amount of $7131.60. Hoon repeated the bid.
- P listened in on this bid & posted it on the master sheet
- D's bid was lowest
- D's bid was lowest
- P finished the sheet & entered P's own bid accordingly. He then submitted his bid & was awarded the K
- The next day, P stops in at D's office. Is told that D will not complete job at that amount (would NOT do it for <$15,000) -- Claims the bid entered was in error.
- P demands performance
- D refuses
- P demands performance
- P tried for months to find paver to do job at similar figure. Fails. Settles with other company at $10,948.60.
Issue on appeal:
Did P's reliance make D's offer irrevocable? (Was it too late for D to revoke on the day P showed up the day after the bid was awarded?)
D's argument on appeal:
- There was no enforceable K b/n the parties b/c D made a revocable offer & revoked it b/f P communicated his acceptance to D. ("We revoked in time")
- The bid was a mistake & he is entitled to rescind
Says also: P failed to state a COA b/c P's failed to allege that P tried to mitigate damages or that they could not have been mitigated
P's argument on appeal:
- P says he relied on D's offer (we are now bid to the other guy--the school district-- and now you're bound to us) to his detriment- and that D must therefore answer in damages for its refusal to perform. (Promissory estoppel)
Rule:
Sect. 90 of R2C applies in this state-- a promise which the promisor should reasonably expect to induce action or forbearance of a definite & substantial character on the part of the promisee and which does induce such action… is binding if injustice can be avoided only by its enforcement…"
R2c sect. 87(2):
Reliance on an offer b/f acceptnace and fxs just like a "promise" would in terms of resolving/recovering for detrimental reliance\
Analysis:
D's offer did not expressly reserve the right to revoke at any time before acceptance.
Q: Is the right of revocation b/f acceptancce absolute or are there some legal limitations on that right?
There are some legal limitations sometimes. (Limits in unilateral Ks when other party starts to perform; some limits in bilateral Ks when there's a subsidiary promise (in the form of a partial performance that fxs as a consideration) but there's enough consideration legally for the offeree to estop the offeror from revoking that acceptance. (R2C sect. 45)
There is no evidence that D offered to make its bid irrevocable (option K)
Nor is there evidence that would warrant P's use of D's bid as the acceptance of D's offer which in turn would bind P to use D if P's bid were accepted.
There was neither a option K or a bilateral K binding both parties.
However, D had reason to believe that if his bid was the lowest among the pavers, it would be accepted and if P's bid were awarded the K, that P would rely on D's performance.
If D had expressly stated or clearly implied that his bid was revocable at any time before P's acceptance, we would treat it accordingly. But, D's bid was silent on revocation and we must determine whether there are conditions to the right of revocation imposed by law or reasonably inferred by fact.
Court relies on analogy: In an offer for a unilateral K, the offer is not fully revocable until the performance is complete. …If part of the consideration or performance is given by offeree (of the same type as was requested), the offeror will not revoke his offer, and if full tender is made, it will be accepted. Part performance may furnish consideration for the subsidiary promise.
More on "subsidiary promise": a reasonable reliance resulting in a foreseeable prejudicial change in position affords a compelling basis for a "subsidiary promise" not to revoke an offer for a bilateral K. (Just like we have here.)
Lack of consideration is not fatal to the enforcement of such a promise…. The fact that P did not provide consideration is not a deal-breaker… The whole point of sect. 90 is to allow for enforcement of promises that lack consideration.
Instead, reasonable reliance steps in to act as consideration.
When the P used the D's figures in computing his own bid, he bound himself to perform in accordance w/ D's terms.
Though D did not bargain for this use of his terms, he did not make it idly. He knew there was a chance that this could happen.
D not only reasonably expected P could rely on these terms, but he wanted him to.
General Kr's can't delay acceptance after he has been awarded a K in the hope of getting a better price.
Nor can they reopen bargaining w/ the sub while claiming a right to accept the original offer.
D's argument #2: The cases (Kemper) D relies on the bidder's mistake was known or should have been known to the offeree and the offeree could be placed in the status quo.
Here, of course, if P had reason to believe that D's bid was in error he could not justifiably rely on it and section 90 would afford no basis for enforcing it. But in this case P had no reason to know D's bid was a mistake under these circumstances (everything was pretty normal in terms of percentages & usual course of how these bidding things go).
D's argument #3: P spent several months trying to get bids from other subs & he took the lowest bid. He did infact try to mitigate damages.
-Further, there's a procedural error: D faild to raise special demurrer
Conclusion:
J is affirmed. B/n a subKr who made the bid and the general kr who reasonably relied on it, the loss resulting on the mistake should fall on the party who caused it.
This is a risk allocation decision (very normal in K disputes).
Comments:
Would it have made the decision simpler if P had said "I accept" b/f introducing himself?
Yes.
Holman Erection Co. v. Orville E. Madsen & Sons, Inc.
Minnesota, 1983
P=Holman
D=Madsen
Background:
P entered bids w/ 7 general Krs who were bidding on a wastewater treatment project for the City of Moorhead, MN. One of them, D, used P's sub-bid and listed him on the bid. D won. When D was awarded the K, it made subKs w/ other subKrs, but not P b/c D is required to use a minority subKr in order to win the K. P sued D alleging that D had accepted P's subbid.
PH:
Trial court held for D b/c it found that no K was formed b/n the parties. (Summ J for D)
P appealed.
P's argument on appeal:
Listing P as a subKr = acceptance b/c:
- There is no other reasonable explanation for the act
- It is unfair to bind P to its bid w/o binding D to use it (What's good for the goose is good for the gander)
- D knew the general bid was public record pursuant to the statutes
- B/c D knew that P could find out that it listed P in its general bid, the inference could be drawn that D intended to accept P's offer & communicated the assent by listing P in its general bid.
Analysis:
Precedent says no K was formed by the listing of a subK in the general contractor's bid.
Underlying P's notion lies a superficial equity notion.
In this state the subKr may be obligated to perform under promissory estoppel, but the general is free to negotiate w/ other subKrs.
Why: The nature of the bidding process compels this to maintain the flexibility in executing subKs & selecting the subKrs it will hire for a project. The process is hectic and crazy-- details are left to be dealt w/ in the future.
The way it's designed (which is designed to actually benefit and protect the sub from bid shopping by the general), the general K must choose one subkr and then rely on that subKr to perform. The inverse is NOT true-- the subKr is able to put out many bids.'
If the law is going to intervene, it has to intervene at the point where there is the most pressure.
The subKr does not rely on the general and suffer s no detriment. A subKr submits bids to all or most of the general contractors. Who a subKr bids to is random and sometimes uninvited. The time & expense of entering these bids is not segmented to any bid in general, instead, it's just the cost of doing business. The same expense is assumed whether or not these Ks are won by either the general or the sub Kr.
Conclusion:
Affirmed for D. Rule: there is no bind for general K to sub; but there is a bind the other way around.
Questions:
When did acceptance actually occur?
- There is no other reasonable explanation for the act
Was this an offer for a unilateral K that would fall under section 45?
Not really. It was more like, you submit a bid and I'll let you know later if I accepted your bid. The offer here instead invites a return promise… I promise to pay you the amount you bid when you do the work.
P never actually got to make his return promise b/f Start withdrew the bid.
Now, run promissory estoppel test:
- Was there a promise here?
Yes. D promised to do the work for the bid price.
- Did Star reasonably expect to induce action on the promise?
Yes. Star not only expected but wanted Drennan to include its bed in the overall bid for the job.
- Did P act?
Yes. P included D's bid in the overall bid
- Would it be unjust not to enforce the promise?
Yes. We would put P on the hook for the difference b/n the costs of the pavers… It's only fair that P should hav at least an opportunity to accept D's bd after the gneral K had been awarded to him. He's not in a position after the K has been awarded to re-open negotiations w/ subKrs.
Contingent acceptance by general K that hinges on whether general bid is awarded. Tehre's a period in between where general K is vulnerable & can't accept right away. But, once general K is awarded, the general K is obligated to perform at specific price.
Legally, it's reasonable for general Ks to rely on the bids entered by subKs. Otherwise, general Krs are obligated but w/o means to perform or will be forced to perform at his extreme detriment.
"If the law is going to intervene, it has to intervene at the point where there is the most pressure."
- The act by the general in this case is distinguishable from bid shopping b/c it's simply the general just wants to comply w/ federal regulation instead of usual (bad-faith) motives of bid shopping.
- A general MAY NOT change subs after K is awarded for $$$ motives… Apparently, compliance w/ federal regulation is OK reason.
- Sometimes, generals are allowed to sub the subKrs in and out but there's a "market constraint" against doing this… AB says the market won't allow this to happen very often (bad faith is not allowable by generals)
- Sometimes, generals are allowed to sub the subKrs in and out but there's a "market constraint" against doing this… AB says the market won't allow this to happen very often (bad faith is not allowable by generals)
The sub is not reciprocally justified in relying on general bid as the general would be in his reliance on the sub's bid after the K is awarded.
The sub, but NOT the general, is on the hook when the general includes the sub's bid in an overall project bid.
Promissory Estoppel "Test"
Tuesday, October 21, 2008
2:07 PM
Obligation to negotiate in good faith
- Channel Home Centers, Division of Grace Retail Group v. Grossman
Thursday, October 23, 2008
5:48 PM
Channel Home Centers, Division of Grace Retail Group v. Grossman
U.S. Ct of Apps, 3rd Cir, 1986
Parties:
P is Channel Home Centers, a retail home improvement store throughout the NE U.S.
D is Grossman, a real estate broker & developer who was in the process of buying Cedarbrook Mall
Facts:
D approached P w/ the possibility of P leasing space in D's new mall -- Nov. 21ish, 1984
P's real estate director expressed interest & he discussed terms (not too specific) w/ D
In a memo dated Dec. 7, 1984 real estate director wrote to Tabak, P's senior VP outlining salient lease terms as per his conversation in Nov. w/ D
Tabak & president of P visited the site w/ D & indicated that they wanted to lease the site
D then requested that P execute a letter of intent that could be shown "to other people, banks, or whatever" (Tabak later testified that D intended to use the letter to help secure financing)
D wanted the site b/c it would help secure 4 anchor stores (according to P)
Dec. 11, 1984 P sent letter of intent setting forth a bunch of terms. The letter expressly said P requires D to withdraw the store from the rental market and only negotiate w/ them. It required D's acceptance of the terms (express) and $10 consideration to be returned w/n 10 days.
- Approval by P's parent company, Grace, of the essential business terms of the lease
- Approval by P of the status of title for the site (???)
- P's obtaining w/ D's cooperation all necessary permits and zoning variances for the erection of Ps ID signs
D promptly signed the letter of intent & sent it back to P.
D contends that he & Tabak orally agreed that P would draft up a lease to be submitted w/n 30 days.
P denies this
Both parties then began procedures directed towards satisfaction of lease contingencies.
Dec. 14, 1984 P directed Grace legal dept. to draft lease
Dec. 20 P's real estate committee approved the lease site
Dec. 21 P's agents visited the site to get measurements for architectural alterations, renovations & related construction
Detailed mktg plans were also created & equipment + materials were purchased for the new store
D applied to the township for bldg & zoning permits for P's signs as well as for the other tenants in the mall
Jan. 11, 1985 P's lawyer sent D 2 copies of 41 p. draft lease & a request for some documents to be worked into the lease
D responds w/ a letter & all requested documents. Asks that lease get moving
D sent add'l letter asking for lease to get going quickly to Perkowski
Jan. 23: D called P to discuss the lease. Anything D could recall discussing was re: "use" of the site in terms of whether or no P could use the site for warehouse facilities at some future point.
D related other areas of concern & P's lawyer suggested the issues be discussed via phone conference in the future.
Call never came through from D & P did nothing to initiate a call.
D terminated negotiations w/ P. Given reason = P's failure to submit a signed & mutually acceptable lease for the mall site w/n 30 days of the 12/11 letter of intent. (This was the 1st & only written evidence of the purported 30 day time limit. The letter of intent did not contain such a term.) --Feb. 6
D later leases space to Mr. Good Buys who was going to pay him more (Feb. 7)
Feb. 13-- Grace approved the terms of P's proposed lease
PH:
Trial ct went for D. B/c no enforceable agreement w/ P at the time new lease was executed w/ Good Buys
P appeals
Issue on Appeal:
Whether an agreement (the letter in intent) to negotiate in good faith may meet the conditions of enforceability (was the letter sufficient to bind the parties?)
P's argument on appeal:
The agreement to negotiate in good faith was binding.
-P does NOT contend that the letter of intent is binding as a lease or an agreement to enter into a lease.
Instead, P believes this document is enforceable as a mutually binding obligation to negotiate in good faith.
-When D unilaterally terminated the negotiations w/ P & entered in a K w/ Mr. Good Buys, d acted in bad faith & breached his promise to withdraw the Store from the rental market…and other terms of the letter of intent.
D's argument on appeal:
- A promise to negotiate in good faith, or to use best efforts to reduce to formal writing, an agreement b/n the parties is enforceable only if the parties have in fact reached agreement on the underlying transaction.
- Even if the agreement were an otherwise enforceable K, the letter of intent and any promises contained therein are unenforceable by virtue of P's lack of consideration.
Rule:
PA law applies in this case.
No binding caselaw.
In other jxs, it has been held that such an agreement, if otherwise meeting the requisites of a K, is an enforceable K.
-Instant court is satifisfied that PA would follow this rule
-Applies "PA law" and finds that a promise to negotiate in good faith can be the basis for an enforceable K
***Good faith in bargaining (negotiations) is different than good faith in performing (R2C sect. 205)
Analysis:
Three questions the court asks itself in this case:- Whether both parties manifested an intention to be bound by the agreement
- Whether the terms of the agreement are sufficiently definite to be enforced
- Whether there was consideration
The approach:
- Examine the entire document
- Relevant circumstances surrounds its adoption
The findings:
- The agreement did contain an "unequivocal promise" by D to w/draw the store from the rental mkt. & to negotiate the proposed leasing transaction w/ P to completion.
- The evidence does show that both parties intended to be bound. (Objective manifestation of intent by both parties-- Lucy v. Zehmer)
- Both parties took actions directed towards satisfying the lease contingencies:
- Both parties took actions directed towards satisfying the lease contingencies:
- Whether both parties manifested an intention to be bound by the agreement
D | P |
Met w/ city for zoning permits for P's sign | Directed Grace to prepare draft lease 41pgs |
| Planning reps visited site |
| Developed extensive mktg campaing |
| Set delivery schedules; bought stuff |
| Drafted a lease |
- The language of the letter was sufficiently definite: d's promise to w/draw from rental mkt was expressed upon his signing of the terms as long as P provided legal consideration in return.
- The tender of the letter by P was of substantial value to D.
- This point was made clear by D's statements. P then sought to solidify its bargaining position by requesting d sign the letter of intent and promse to its terms (w/draw from the rental market)
- This is evidence that value passed from one party to another.
P's consideration: | Execution & tender of the letter of intent conferred a bargained-for benefit on D |
D's consideration: | His return promise to negotiate in good faith |
What we have now:
- Evidence supports parties intended to enter into a binding agreement to negotiate in good faith
- Agreement had sufficient specificity to make it an enforceable K if the parties so intended and that consideration passed b/n the parties
Conclusion:
Remanded for 2 main issues:
- Did the parties intend to be bound by the letter of intent?
- Was there a time limit on the negotiations that was not specified in the letter of intent?
- D's think P orally agreed to forward a draft lease w/n 30 days on which the letter of intent was executed…. If this is true, P's failure to do this would terminate the agreement.
- P think the parties did NOT fix a definite time for the duration of negotiations, therefore a reasonable amount of time would be applicable.
- The court must then determine what would be a reasonable amt of time.
- The court must then determine what would be a reasonable amt of time.
- D's think P orally agreed to forward a draft lease w/n 30 days on which the letter of intent was executed…. If this is true, P's failure to do this would terminate the agreement.
Notes 1, 2 & 3:
There are two types of binding preliminary agreements: Tribune 1 and Tribune 2
Tribune 1: | A fully binding prelim agreement whichi s created when the parties agree on all the points that require negotiation (including whether to be bound) but agree to memorialize their agreement in a more formal document. |
| Agreement is fully binding |
| "Preliminary" only in form -- only in the sense that the parties desire a more elaborate formalization of the agreement |
| It binds both sides to a K despite gaps in between-- it's recognized that a K is the goal, so it leaps ahead of the formalities |
Tribune 2: | Binding prelim commitment |
| Created when parties agree on certain major terms but leave out other terms for further negotiation |
| Parties accept a mutual commitment to negotiate together in good faith in an effort to meet final agreement |
| Does not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith in an attempt to reach the objective w/n the agreed framework… |
| If a final K is not agreed upon, the parties may abandon the transaction as long as they have made a good faith effort to close the deal and have not insisted on conditions that do not conform to the prelim writing |
What's bad faith?
Trickery & other forms of obduracy
What's remedies like in this situation?
If P can prove his loss caused by D's bad faith (negotiations crumble b/c D's a weenie), P then is considered to have lost the benefit of the K--> expectation damages.
The problem is proving it. It's hard to prove b/c by hypothesis (??) the parties had not agreed on any of the terms in the K…. So it may be impossible to prove what would have been…. Like, the profit P might have had.
"But this goes to the practicality of the remedy, not the principle of it." J. Posner.
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