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New case answers unsettled question in California: can a party sue for breach of a contract to negotiate an agreement or is such a “contract” merely an unenforceable “agreement to agree”?
O.P.M. (Other People’s Mistakes) Alert
Important developments in California business, real estate and litigation from
*New case answers unsettled question in California: can a party sue for breach of a contract to negotiate an agreement or is such a “contract” merely an unenforceable “agreement to agree”?
An important case was just decided that affects potentially every business negotiation. In Copeland v. Baskin Robbins, 02 C.D.O.S. 2533 (March 19, 2002), Baskin Robbins and Copeland entered into negotiations for Baskin Robbins to sell one of its ice cream manufacturing plants to Copeland. The deal was contingent on Baskin Robbins agreeing to buy the ice cream Copeland manufactured there, commonly known as a “co-packing” agreement. In a letter agreement, Baskin Robbins set forth the terms of its sale of the plant and agreed to move forward “subject to a separate co-packing agreement and negotiated pricing”. Copeland signed that letter agreement. Two months later, Baskin Robbins abruptly broke off negotiations of the co-packing agreement due to a change in corporate strategy. Since Copeland maintained this was a “deal breaker” for his purchase of the plant, that contract was terminated as well. Copeland sued Baskin Robbins for breach of its agreement to negotiate the co-packing agreement. Significantly, Copeland sued only for its “expectation damages…in the form of lost profits, lost employment opportunities and injury to his reputation.”
On appeal, the Court acknowledged that “No reported California case has held breach of a contract to negotiate an agreement gives rise to a cause of action for damages. On the other hand numerous California cases have expressed the view the law provides no remedy for breach of an ‘agreement to agree’ in the future. We believe, however, these difficulties could be overcome in an appropriate case.” The Court went on to find that this was such a case. Why?
“A contract to negotiate the terms of an agreement is not, in form or substance, an ‘agreement to agree.’ If, despite their good faith efforts, the parties fail to reach ultimate agreement on the terms in issue the contract to negotiate is deemed performed and the parties are discharged from their obligations. Failure to agree is not, itself, a breach of the contract to negotiate. A party will be liable only if a failure to reach ultimate agreement resulted from a breach of that party’ s obligation to negotiate or to negotiate in good faith.” (emphasis added).
Significantly, even though the Court found in favor of Copeland on liability, it went on to reject Copeland’s expectation damages claim. It said only “reliance” damages are proper (e.g., time spent, expenses incurred, opportunities missed while negotiating with Baskin Robbins). Surprisingly, Copeland’s complaint “disavowed” those damages.
- Mistake by Baskin Robbins:
Not including in every interim negotiating document appropriate language indicating the document was a “non-binding letter of intent” (at least the case makes no mention of such language being present).
Lesson: Include extensive “non-binding” language in all of pre-binding agreement communications.
- Mistake by Baskin Robbins:
Breaking off negotiations abruptly and refusing to entering into any co-packing agreement on any terms.
Lesson: Under the Court’s reasoning, Baskin Robbins could have avoided liability simply by negotiating tough and letting the agreement die a natural death resulting from the parties simply not being able to reach agreement on all terms. In your negotiations, think twice before killing a negotiation to make sure you are not exposing yourself to this new liability.
- Mistake by Copeland:
Not claiming reliance damages.
Lesson: During your negotiations, document time spent, expenses incurred and other opportunities foregone. Then, if you find yourself in the position of asserting this claim, make sure to include these damages in your complaint.