July 17, 2012

No Leisure For Some Letters of Intent

Recently, Keith Bishop of Allen Matkins blogged this item:

In the distant past, agreements were reached and performed contemporaneously. Our ancestors would meet, negotiate an exchange of meat for hides, and be on their way. Without writing, most deal making was necessarily consigned to exist only in the eternal present. Of course, it was possible to make oral promises, but these created significant problems of proof. Did the other party make a promise? If so, what exactly did she promise? Writing allowed for agreements to be memorialized and thus to have future effect. While the law continued to recognize oral agreements, statutes of fraud typically allowed for the enforcement of only inconsequential agreements. Sir William Blackstone in his Commentaries on the Laws of England distinguished between covenants and promises: “A promise is in the nature of a verbal covenant, and wants nothing but the solemnity of writing and sealing to make it absolutely the same.” (Book III, ch. 9).

Times have changed. As the California Court of Appeal has observed:

Today the stakes are much higher and negotiations are much more complex. Deals are rarely made in a single negotiating session. Rather, they are the product of a gradual process in which agreements are reached piecemeal on a variety of issues in a series of face-to-face meetings, telephone calls, e-mails and letters involving corporate officers, lawyers, bankers, accountants, architects, engineers and others.

Copeland v. Baskin Robbins U.S.A., 96 Cal. App. 4th 1251, 1262 (2002). As deal making has become more complex, parties often create term sheets and letters of intent as both a memorial and guide. As a memorial, a letter of intent evidences the terms on which the parties have agreed so far. As a guide, it identifies lacunae that must be filled by future agreement. Because parties can expend considerable resources in a negotiation, the enforceability of letters of intent has become a subject of litigation.

In some situations, a party may sue for breach of contract. However, the incomplete nature of letters of intent is likely to lead to grief because it is “still the general rule that where any of the essential elements of a promise are reserved for the future agreement of both parties, no legal obligation arises ‘until such future agreement is made.'” Copeland at 1256 (quoting City of Los Angeles v. Superior Court, 51 Cal.2d 423, 433 (1959). A party may also try to sue on the basis that the letter of intent constitutes an “agreement to agree”. These attempts are likely to be unavailing because numerous California courts have held that there is no remedy for breach of an agreement to agree. Copeland at 1256.

In Copeland, the Court of Appeal identified a third way by holding that parties could enter into an enforceable agreement to negotiate a contract. In doing so, the court distinguished agreements to agree by explaining that a contract to negotiate is performed even though the parties do not ultimately reach an agreement. A party doesn’t breach a contract to negotiate by failing to agree but by failing to negotiate or to negotiate in good faith.