Daily Development for Friday, March 3, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

GOOD FAITH AND FAIR DEALING; LETTERS OF INTENT: Thirty million dollar verdict in Prudential v. GMH dies with a whimper. No factual predicate for trial court's findings.

GMH Assoc. v. Prudential Realty Group, 200 Pa. Super. 59 (Pa. Super. 3/1/2000)

The specter of a duty of good faith and fair dealing in contract negotiations, backed by a substantial possibility of a punitive damages award, has kept transactions lawyers awake nights ever since the trial court decision in this case, reported as the DIRT Daily Development for November 4, 1999 (on the DIRT website: GOTOBUTTON BM_1_ http://www.umkc.edu/dirt/)

Now these lawyers can all roll over and snooze. A Pennsylvania appeals court (albeit by a 2-1 vote), has completely dismantled most of the legal conclusions of the trial court and has granted a judgment notwithstanding the verdict.

In the original case, seller executed a letter of intent with buyer for the sale of a $100 million mixed use commercial building. The letter provided that the deal would close within 90 days and also stated that any agreement actually reached was subject to approval by a committee of senior officers of seller. Further, the agreement provided that either side could withdraw from the letter of intent at any time.

The letter of intent did not state that the deal was "off the table" and that the seller could not negotiate with others, but the trial court found (and the appeals court accepts) that agents or employees of the seller made such statements to the buyer a number of times during the course of subsequent negotiations. Later, after the ninety days had run, the parties continued negotiations, but Seller showed the property to another prospective buyer (and allegedly lied about this), then later disclosed the presence of this potential buyer and challenged the plaintiff Buyer to put its best bid on the table. Then, having received that bid, awarded the sale at a higher price to the competing buyer.

The trial court had found that these statements that the property was off the market constituted modifications of the original agreement, made enforceable by estoppel. The appeals court reversed this finding because it found, as a matter of law, there was no reliance on these statements and that they were not material misrepresentations in any event. The sellers had negotiated for 90 days with the prospective buyers. The court said that, at best, this was all the Buyer was entitled to, since Buyer attempted to alter substantially the deal originally identified in the letter of intent and were not ready to close after 90 days.

The court doesn't dwell on the fact that one of the representations that the deal was "off the table" appears to have been made after the running of the 90 days and when all of Buyer's positions were well known to Seller. But the court's further analysis renders this point moot, since it holds that Buyer could not show that it relied to its detriment upon this representation. Before the seller sold to others, it told plaintiff buyer that there was a competing party and that buyer had to produce its "best bid." In any event, the "best bid" produced by plaintiff Buyer was still below the price contemplated in the original letter of intent.

The trial court had also found a breach of the implied covenant of good faith and fair dealing. The appeals court notes that the Third Circuit has posited that such a duty exists in Pennsylvania in contract negotiations, but that no stat court has so found. In any event, the court assumes that the duty exists, but concludes that there was no support for a finding that such a duty was breached here. It says that the duty must be grounded in the letter of intent, and the letter of intent neither contained any representation of an exclusive dealing right nor committed Seller to do anything but look at Buyer's offer, which it did. Any implied or verbal statements concerning exclusive dealing rights necessarily were limited to the ninety day period originally contemplated by the parties.

Comment 1: Of course, that's a big "whew" for Prudential and other land sellers. But note that this case was decided 2-1, and with a verdict this size, there will surely be an appeal. Maybe the negotiations for settlement, however, will be more serious. Note that the appeals court accepted the findings of fact completely, including all those dealing with misrepresentation by Seller and its agents.

Comment 2: The case is "no big deal" from a legal theory standpoint. The most important aspect, probably, is the narrowing of the argued for duty of good faith and fair dealing in negotiations to situations in which a letter of intent exists that sets for the agreed upon basic terms of a deal. Often a letter of intent will set forth all the principle economic terms, and the parties agree not to deal with anyone else while they work out minor details. Where there is such a letter, the court, although it denies it is making any holding, assumes that a duty of good faith and fair dealing could exist. But this is a far cry from a general duty of good faith and fair dealing in all negotiation situations.

Comment 3: As to the argument that the deal could not be amended by subsequent estoppel, the editor finds this discussion a bit puzzling. The trial court had dealt with an argument that the original letter, by its terms states that it cannot be amended except by a writing. The appeals court doesn't mention this provision at all. Instead, it holds that the lack of a showing of reliance bars any finding of a valid amendment. The problem with this analysis is that in most jurisdictions no consideration is required to support a modification of a contract. The original contract consideration suffices. Why would estoppel be needed either, in that event? Perhaps to escape the Statute of Frauds, but if this is the case, it would have been nice for the court to say so.

Comment 4: The answer to any concerns about the estoppel argument is the court's conclusion that the deal was clear enough to make out a claim of an implied duty of good faith and fair dealing in any event. This perhaps is the most important legal conclusion. The court suggests the existence of a "trigger standard," - a degree of certainty giving rise to an implied duty to stand by that proposed deal even though admittedly it is not a "done deal." Despite its admonition for clarity, it gives us very little clarity as to what kind of certainty really meets the "trigger standard."

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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