The Lawletter Vol 40 No 11
Paul Ferrer—Senior Attorney, National Legal Research Group
Courts often give voice to the black-letter principle that a so-called "agreement to agree, where [material] terms are left to future negotiations, is unenforceable." In re Estate of Wyman, 8 N.Y.S.3d 493, 494 (App. Div. 2015). Some courts have concluded that an agreement to negotiate at a later date is an unenforceable agreement to agree. See, e.g., 77 Constr. Co. v. UXB Int'l, Inc., No. 7:13-CV-340, 2015 WL 926036, at *4 (W.D. Va. Mar. 4, 2015). But other courts have distinguished unenforceable agreements to agree from valid agreements to negotiate in good faith. See, e.g., Copeland v. Baskin Robbins, U.S.A., 117 Cal. Rptr. 2d 875 (Ct. App. 2002).
In that case, Copeland negotiated with Baskin Robbins to buy an ice cream manufacturing plant. The purchase transaction was contingent on Baskin Robbins's agreeing to a "copacking" arrangement, by which Baskin Robbins would agree to buy the ice cream that Copeland manufactured at the plant. After several months of negotiations, Baskin Robbins sent Copeland a letter indicating that it would (1) sell Copeland the plant for $1.3 million, and (2) buy the ice cream manufactured at the plant for three years, "subject to a separate co-packing agreement and negotiated pricing." Id. at 878. Copeland indicated his agreement, after which the parties continued negotiating over the terms of the copacking agreement. Two months later, Baskin Robbins broke off the negotiations because due to recent business decisions, the copacking arrangement was no longer in alignment with its strategy. Copeland sued for breach of contract, but the trial court granted summary judgment in favor of Baskin Robbins because the essential terms of the copacking deal were never agreed to.
The court of appeal disagreed with that aspect of the trial court's decision. In particular, the court concluded that a cause of action will lie for the breach of a contract to negotiate an agreement. See id. at 880 ("Initially, we see no reason why in principle the parties could not enter into a valid, enforceable contract to negotiate the terms of a co-packing agreement."). The court distinguished a valid agreement to negotiate from an unenforceable agreement to agree:
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.
Id. at 880-81 (footnotes omitted). The court emphasized that the covenant to negotiate in good faith arises "[o]nly when the parties are under a contractual compulsion to negotiate." Id. at 883.
Unfortunately for Copeland, the court of appeal still affirmed the judgment in favor of Baskin Robbins on the basis that Copeland could not recover the only damages that he was seeking for the breach, which consisted of what he would have received had the copacking agreement actually been consummated, including the profits he hoped to earn through the copacking agreement and other ice cream sales. Id. at 886. But the damages recoverable for the breach of an agreement to negotiate are instead measured by the injury, if any, the plaintiff suffered in relying on the defendant's promise to negotiate in good faith, such as his out-of-pocket costs in conducting the negotiations and, possibly, the cost of opportunities missed while negotiating with the defendant. See id. at 885-86. Because Copeland's complaint expressly disavowed such reliance damages, his claim for breach of the agreement to negotiate necessarily failed.
Copeland shows that a potential plaintiff should not be so quick to dismiss the possibility of a breach-of-contract action where the material terms of the parties' agreement were not carved in stone, if there may have been an enforceable promise to negotiate the terms of the deal. But it will have to be the right type of case, as the plaintiff will have to have suffered damages in reliance on the broken promise to negotiate, rather than the expectation damages usually recovered in a contract action for the breach of the underlying promise.