A DIRTer whose firm won this case recently mentioned it briefly in a post, but I thought it an interesting enough topic to write it up. Ed.

Daily Development for Friday, October 29, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

VENDOR/PURCHASER; LETTERS OF INTENT; DUTY OF GOOD FAITH: Written response to offer that “we are prepared to negotiate a Purchaser and Sale Agreement with you subject to two modifications to your proposal,” does not create and duty of good faith to bargain or to bargain exclusively even when recipient of such response agrees to accept the stated modifications.

Keystone Land & Dev. Co. v. Xerox, 94 P.3d 945 (Wash. 2004)

The case apparently involved a proposal to sell and leaseback a Xerox facility. Xerox was represented by a broker, which apparently was talking to several parties, including the local city government. Xerox’s broker wrote to Keystone and the City and invited these two, out of all those who had sent in initial bids, to send in their “final, best offer.” Keystone did so, indicating that its offer would expire if not accepted prior to April 16. On April 13, Xerox’s broker sent back a letter containing the language stated in the caption above, that Xerox was “prepared to negotiate . . . [a contract] subject to two modifications.” On April 13, Keystone formally agreed to the modifications and expected a final executable contract, containing final details of closing, to follow. (In fact, Xerox had indicated that its’ “offer” would expire on April 12, and Keystone’s president unilaterally changed this on the letter itself, but these facts do not appear to have had any influen!
ce on
the court’s outcome here.)

But Xerox was conducting parallel negotiations with both bidders, and ultimately selected the city.

Keystone sued in federal court, and the federal court certified to the Washington court the question of whether Washington courts would recognize a duty to negotiate in good faith on the basis of the exchange described above.

The Washington Supreme Court refused to hold that there was no possibility of parties have a duty to bargain in good faith following the exchange of letters of intent. And it acknowledged that there is an implied covenant of good faith and fair dealing in every Washington contract. But the court stressed that before the duty arises there must first be a contract. It concluded that in this case the facts did not give rise to the inference that any contract of any kind was created. Thus, there could be no duty of good faith.

The court outlined three distinct types of agreements that occur under circumstances such as these. The first, which it characterized as an “agreement to agree,” is an understanding that the parties have agreed to do something which requires a further meeting of the minds of the parties . . . without which [the agreement] would not be complete.” The court stated that such “agreements” are not enforceable in Washington. (It was careful, thankfully, to distinguish cases in which the parties to an existing lease had stipulated to an agreement to renegotiate extension rents.)

The second type of agreement in this line is one “with open terms.” Here the parties intend to be bound by key points with other terms supplied by a court or another authoritative source, such as the UCC. The court here held that the federal court had already decided that the Keystone contract was not such a contract, and that this issue was not before it. Apparently this precluded any argument by Keystone that the remaining terms of the agreement were to be filled in by local custom and practice.

The third type of agreement, then, was the only type that Keystone could rely upon for its case. This is a “contract to negotiate.” This is where “parties exchange promises to conform to a specific course of conduct during negotiations, such as negotiating in good faith, exclusively with each other, or for a specific period of time.” Xerox acknowledged that such contracts might be enforceable in Washington, but argued that they cannot be found to arise when the parties have stated that they intend to “defer legal obligations until a writing is made,” no agreement can be found. The Washington court agreed.

Thus, the emphasis in the analysis was upon the use of the phrase “prepared to negotiate.” Keystone argued that this language manifested an agreement to establish an exclusive bargaining relationship, but Xerox responded, and the court agreed, that it was not an express agreement of any sort, merely a statement of willingness to bargain toward an express agreement.

Similarly, the statement that Xerox would “proceed immediately to draft the Purchase and Sale Agreement for review and execution” contained within itself the evidence that there was no express present agreement, since the new language of the new agreement needed to be “reviewed” before execution.

The Washington court did not conclude expressly that it would enforce an “agreement to negotiate,” but elected to defer that question to another day. Here it simply concluded that no such agreement existed.

Comment: A few years ago the editor addressed the issue of “agreements to agree,” in the context of a shattering trial court decision in Pennsylvania in which $20 million in actual damages and $10 million in punitive damages were awarded against lawyers, brokers and potential buyers (who could afford to pay it). GMH Associates v. Prudential Realty Group, CD Commercial Real Estate Group and Douglas Joseph, 38 D&C 4th 225 (C.P.Del. 1998), the DIRT DD for 11/4/99).

The reversal by the court of appeals in GMH,, as critical of the trial court as the trial court was critical of the defendants, is reported at 200 Pa. Super. 59 (March 1, 2000) (the DIRT DD for 3/3/01).

The editor discussed the case with a group of business lawyers (not real estate specialists) and they weren’t too surprised by the ruling, as they indicated that letters of intent in the securities and finance industry frequently are construed to be “agreements to negotiate” that state exclusive dealing obligations. In fact, they stated that this is so often the case that they would expect that any letter of intent should expressly negate that kind of expectation if it were not intended.

All of this was news to your humble dirt lawyer editor, but he took it all in. And, despite the fact that

Comment 2: Also see: Officemax, Inc., v. Sapp, 132 F.Supp.2d 1079 (M.D. Ga. 2001) (the DIRT DD for 11/1/01), which involved a letter of intent to make lease that in fact involved a specific “non shop” clause. The tenant shopped anyway, and the court held, pretty much, that an agreement to negotiate for a lease must pretty much contain all of the provisions planned for the lease itself. Agreement not upheld. But compare Channel Home Centers, Div. of Grace Retail Corp. v. Grossman, 795 F.2d 291 (3d Cir.1986) (reversing lower court ruling and finding that a letter of intent that to complete a deal on a lease that had a “non shop clause” and said that the and stated that the landlord “would only negotiate with the above described leasing transaction” did establish a binding duty to bargain in good faith with that tenant.

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