Situation Management Systems, Inc. v. Malouf, Inc.
Facts: Π and Δ had longstanding business agreements for Δ to purchase services from Π. Π’s business became less profitable and Π agreed with Δ that Δ should purchase a Π’s competitor for sale. In order for Δ to make the purchase, they requested a longer term for the renewal on Π and Δ’s longstanding contract. Π assured Δ of the commitment and Δ bought the competitor. Π then added terms to the renewal contract that had not been present in previous dealings. When Δ did not abide by the new terms, Π sued for breach.
Rule: (Prof. points this out): While it is true that the parties’ intention to execute a final written agreement “justifies a strong inference that the parties do not intend to be bound” until the agreement is executed, it is also true that if “all the material terms…have been agreed upon, it may be inferred that the writing to be drafted and delivered is a mere memorial of the contract.”
2nd Rst, Sec. 27: “Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations.”
How do you know whether the parties intend to be bound by the writing, or prior to the writing?
Comment c to Section 27 may be particularly helpful
Held: Δ and Π’s minds had met because of the longstanding contract. The contract was enforceable when Π offered assurances (without the new terms).
Arnold Palmer Golf Co. v. Fuqua Industries, Inc.
Facts: Π solicited Δ to merge. Π and Δ negotiated and drafted a memorandum to be distributed by the press stating in part that counsel for Π and Δ will proceed to make a definitive agreement containing details, and conditions obligation on completing such a definitive agreement. Δ then declined to go forward with the deal. Π complains of breach of contract.
Issue: Is it a breach when there is simply an “agreement to agree?”
Analysis: Courts agree that “the parties can contract as they please, binding themselves orally or by informal letters or telegrams; or, they can maintain immunity from all obligation…The question is one of expressed intention.”
The decision on whether the parties intended to enter a contract must be based upon an evaluation of the circumstances surrounding the parties’ discussions at the time; circumstantial evidence is OK to prove a crime, it’s OK to prove a contract!
Sec. 26, Rst.: “Mutual manifestations of assent that are in themselves sufficient to make a contract will not be prevented from so operating just because the parties also manifest an intention to prepare and adopt a written memorial thereof.”
Comment to Sec. 26: “Parties…often, before the final writing is made, agree upon all the terms. It is possible to make a contract to execute subsequently a final writing which shall contain certain provisions. If parties have definitely agreed that they will do so, and that the final writing shall contain these provisions and no others, they have fulfilled all the requisites for the formation of a contract.
In the instant case, a reading of paragraph 11 in the Memo of Intent might lead one to believe the parties did not intend to be bound by the Memo; or, a trier of fact might believe the parties did intend to be so bound because there’s also language in the Memo that a “general understanding had been reached”
Result: The agreement to agree is upheld, obligating the two parties to make the detailed agreement. (The issue of whether the parties intended to be bound is a factual issue to be determined by the jury.)
Empro Manufacturing Co., Inc. v. Ball-Co Manufacturing, Inc.
Facts: Ball-Co offered a sale of its assets on the open market; Empro expressed interest and sent a “letter of intent” to Ball-Co with a shitload of “subject to” clauses; Empro filed diversity suit when it learned Ball-Co was negotiating with someone else–argued that the letter of intent obliges Ball-Co to sell to Empro only; court affirmed trial court’s dismissal of Empro’s claim, said letter of intent had no definitive force.
Analysis: “Intent” in contract law is objective rather than subjective; contract law gives effect to the parties’ wishes, but they must express these openly.
As a matter of law, parties who make their pact “subject to” a later definitive agreement have manifested an (objective) intent not to be bound, which under the parol evidence rule becomes the definitive intent even if one party later says that the true intent was different.
However, realizing that intermediary letters are not written with the kind of care reserved for a definitive agreement, the court must also consider whether such terms as “subject to” were inserted without care; and, if the full agreement showed that the formal contract was to be nothing but a memorial of an agreement already reached, the letter of intent would be enforceable.
In the instant case, though, the letter of intent did NOT reach that standard.
City of Kenai v. Ferguson
Facts: Δ leased a plot of land from the city, Π for a term of 55 years where the rent was set by an escalation clause. The clause allowed for renegotiation every 5 years. For 10 years, the rent remained constant, and then the city demanded a 500+% increase (the highest use value) without negotiation. When Δ didn’t pay, Π sued for breach.
Rule: “Intent is to be determined from a view of the instrument as a whole, and a consideration of all of the facts in the case. If the agreement to renew was the essence of the contract, and the terms of the lease or rental to be paid thereunder were to be fixed by agreement at the time of the extension of the lease, the failure of the parties to so agree does not avoid the lease. In such a case the courts will declare the terms upon which the parties fail to agree.”
“Courts are no longer reluctant to supply lease terms when parties who, at the time of contracting agreed to set or renegotiate particular terms in the future, are unable to reach agreement;” especially true when the amount of rental is the term left to future agreement.
UCC on “open terms”: (Prof. notes this section) Sec. 2-204(3): “Even though one or more terms are left open a contract for sale [of goods] does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.”
Sec. 2-305: “A contract can be valid even though the price term is left open, or is subject to determination by one party or by a third party;” HOWEVER, where the parties do NOT intend to be bound unless the price is fixed or agreed and it is NOT fixed or agreed, there is NO contract.
Held: Good faith is implied in every contract with open terms, and Π did not act in good faith. Π had the duty to negotiate, and the highest use value was inappropriate.
Notes:
Even if the term in the lease is valid, it doesn’t give the city the right to unilaterally set the price of rent.
The court is filling in the rental term b/c it’s pretty easy to fill in a lease term when there are so many default terms out there. Court says City is not entitled to highest and best use, but actual use.
Example: Say you own a brownstone in Richmond in the Fan District (gentrifying). Currently renting it as a single family home for 2000/month. Fixes rent for 3 years allows for renegotiation.
Highest and best use
Let’s you take advantage of gentrification
Let’s you charge the amount it would be for the how much you could get for the best use for it
Actual use
Tenant would argue that you’re actually using for residential lease, not commercial.
Things change over time; it’s important to think about what might happen to an asset over time when getting into a long-term lease (such as this 55-year one).
