Friday, January 20, 2017

To Be Enforceable, Or Not To Be Enforceable—That Is The Preliminary Question

Miller v. Flengenheimer, 2016 VT 125

By Thomas M. Kester

Wu-Tang Clan’s “C.R.E.A.M.” (“Cash Rules Everything Around Me”) is a crisp reminder of the everyday drive to “get the money” and exchange “dollar dollar bills” for goods and services (even though “mo money” can mean “mo problems”). We contract for goods and services every day—everything from coffee to expensive houses—sometimes without really thinking about the transaction or how it transpired (hopefully you remember buying a home). Normally, there's a straightforward and delineated “offer” that is followed by (if agreeable) the “acceptance.” But complicated matters can blur the lines of what is an “offer” and what is “acceptance.” Albeit, the complexity of contracting for a cup of joe differs from the complexity of contracting for a home, but that doesn’t mean the tug-and-pull negotiation between the parties can’t be present. I once witnessed someone heatedly negotiate Willy Wonka’s entire warehouse into their coffee with a barista. Because 2% milk was used instead of skim, it was ultimately a contractual and caloric deal breaker.

Putting aside flippant frappuccino fiascos, typical signals of contract formation can be signing on the dotted line, a handshake, or your raised hand triggering an auctioneer’s incoherent babbling. E. Allan Farnsworth (an eminent Columbia Law professor on contracts) described complex modern contracting as “a gradual process in which agreements are reached piecemeal in several ‘rounds’ with a succession of drafts” replacing the simplified scenarios of yesteryear. So at what point does the back-and-forth result in a contract if telltale signs are missing? What things (at a minimum) need to be established so that it can rightfully be said to be “in the bag,” “the deal has been sealed,” or accepted because it is “an offer that you cannot refuse”? This case looks at whether an enforceable contract was created with just such actions.

Buyer and Seller are joint owners of a document shredding company and each owns 50% of the company’s stock. Buyer and Seller don’t get along. The parties attempted (but ultimately failed) to create a “buy-sell” agreement, whereby one party would sell all their shares and the other party would buy them. The “buy-sell” agreement contained a “claw-back provision,” didn’t name a fixed price, or include a non-compete clause.

Two weeks after the tanked “buy-sell” agreement negotiations or December 26th, Seller emails Buyer with an offer to sell the company to Buyer with the claw-back provision and at a price reflecting the average of two appraisals. On December 31st, Buyer responded via email with “‘I will accept’ the offer, acknowledged the claw-back, and that seller should expect ‘definitive documents’ with ‘customary provisions’ within about two weeks.” On January 9th, Buyer sends Seller an email containing a Stock Purchase Agreement and a Non-Compete Agreement (“Agreements”). Two things to note: (1) the Non-Compete Agreement was a condition precedent to the Stock Purchase Agreement and (2) the Agreements reduced the total share price by $50,000. On January 14th, Seller responded by withdrawing his offer to sell after viewing the Agreements and consulting with his attorney.

Buyer files suit against Seller requesting specific performance (basically make a person do something specific). The trial court uses a New York law framework for categorizing preliminary agreements: Type I and Type II. Type I is “‘essentially a done deal that merely needs follow-up documentation’” and Type II is “‘a preliminary agreement that obligates the partners to negotiate further terms in good faith.’” The trial court held that Buyer and Seller entered into a Type II arrangement due to their December emails, that Buyer’s January 9th email was “a proposal of additional terms that did not invalidate the original acceptance of the offer,” and “ordered that the partners were obligated to negotiate the remaining terms of the contract in good faith.”

Seller appeals, arguing the trial court erred in finding an enforceable contract to further negotiate and Buyer cross-appeals arguing that a Type I (not a Type II) arrangement is present.

The SCOV, right off, declines to adopt a Type I-II approach because “agreements to agree” are potential litigious monsters in waiting. There are two things the SCOV looks at when deciding where an agreement falls along the enforceable-preliminary spectrum: “the parties’ intent to be bound and the definiteness of terms in the communications between the parties” (intent + definitive terms = looks more like an enforceable agreement).

The SCOV delves into the first major analysis: the parties’ intent to be bound. The law doesn’t want to bind people to contracts by surprise (“crouching party, hidden offer” style) and, instead, allows them to decide when they want to be bound. So the law <3 intent. The SCOV examines intent using an objective test that “requires that intent to be bound be ‘established by some unequivocal act or acts,’” like words or actions (you may hear the phrases “manifestation of mutual assent” or “meeting of the minds,” the non-Mensa type, used here). The SCOV notes the trial court’s finding that Seller had intent to be bound but declares the trial court erred in its determination.

Four factors are examined to determine whether the parties intended to be bound:
(1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing.
The parties’ correspondence and other relevant documents are examined under Factor #1. An important legal nugget to keep in mind is that “A party’s intent to be bound must be shown by his or her actions at the time of agreement.” Buyer’s December 31st email talks about forthcoming drafts and “a reference to a future writing shows an intent not to be bound.” The SCOV concludes “this factor therefore weighs against enforceability.”

Because there was no partial performance under this alleged agreement, that weighs against enforceability under Factor #2. When there are “several large and material terms were not decided” that won’t bode well for finding enforceability under Factor #3. While not every single term must be precisely hammered down, material terms are kind of important to know. To get over this hurdle, Buyer asserts that Seller can carte blanche insert missing terms into the agreement and “asks us [the SCOV] to imply terms on the issues not discussed in the e-mails to favor seller.” The SCOV politely declines, stating the agreement has to stand on its own and be reasonably interpretable under the circumstances. Because it does not, Factor #3 also weighs against enforceability.

Factor #4 has two subparts: “first, whether the agreement at issue is of a type that is usually committed to writing and, second, whether the agreement is so complex that the parties could not reasonably have expected to be bound without a writing.” SCOV’s answer to the first subpart is a simple “yes.” Buyer argues that the contract doesn’t “need to live up to the standard a bank would use in order to determine financing.” SCOV finds flaws with this argument. As to the second subpart, the SCOV points out the trial court “found that ‘there is no evidence presented that there was anything complicated about this deal,’” even when Seller presented evidence of complicated contractual provisions and told the trial court “‘[n]othing’s simple about a 3.6-million dollar deal.’” There are accounts of Warren Buffett being presented with multi-million oral offers and accepting them within 30 minutes and shaking on the deal. If the objective standard is “What Would Buffett Do?” this matter may have been decided differently. However, the original “buy-sell” agreement was going to be memorialized in writing and, because this present agreement is very similar, that weighs against enforceability.

Next major analysis is the definiteness of terms. First, the SCOV points out the parties’ email communications raise some questions because “‘Share’ and ‘shares’ are distinct terms, and neither of them refers to a non compete or non solicitation agreement,” and it is unclear whether the Non-Compete Agreement was included in the overall agreement. Secondly, the price figure and “claw-back” provisions are not spelled out in the communications. This matters because these provisions differ between Buyer’s proposal and the “buy-sell” agreement.

The SCOV tackles a related issue next: whether the Buyer’s response to Seller’s offer was acceptance (with more terms) or a counter-offer. Counter-offers terminate your ability to accept an offer because acceptance of offers must “be unconditional,” that is to say they “must in every respect meet and correspond with the offer.” SCOV says Buyer’s response was a counteroffer and not an acceptance.

After discussing how they are not going to discuss specific performance, the SCOV moves on to the Buyer’s cross-appeal argument. For a contract or preliminary agreement to be enforceable it must be established by the “preponderance of the evidence” standard and “because the parties have not shown the requisite intent to be bound to meet the standard of a preliminary agreement, they also have not shown the intent to be bound necessary for a contract to be enforceable as written.”

Justice Robinson’s concurrence takes issue with majority’s view that the non-compete agreement (and if it was included in this back-and-forth) “rendered it [the overall agreement] illusory or fatally incomplete.” To Robinson, “a non compete agreement is in no way essential to a coherent agreement that can be understood and enforced by a court” and she sees a potential for abuse.

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