Whether the parties had agreed on the material terms necessary to create a binding contract was the issue resolved by the Business Court in two opinions issued simultaneously on Friday, March 13th. The claims in one case survived a motion to dismiss, the claims in the other were cut down on summary judgment.
In the first case, JDH Capital, LLC v. Flowers, 2009 NCBC 4 (N.C. Super. Ct. Feb. 13, 2009), the Court ruled that a Letter of Intent executed by the parties was a "non-binding agreement to agree," and dismissed the case. In the second case, Crockett Capital Corp. v. Inland American Winston Hotels, Inc., 2009 NCBC 5 (N.C. Super. Ct. Feb. 13, 2009), the Court ruled that the plaintiff could proceed in its case even though the Master Agreement at issue contemplated the need to negotiate the terms of future agreements.
These cases are must reads if you are litigating a contract formation issue in the Business Court. They are equally important to look at if you are drafting Letters of Intent or other agreements involving commercial real estate ventures, which were the business deals involved in both Flowers and Crockett. (There are reportedly non-litigation lawyers who read this blog precisely to see how their deal documents might play out in Court).
The Flowers Case: Letter Of Intent Unenforceable
In Flowers, the parties had entered into a Letter of Intent contemplating that JDH would develop a commercial shopping center on land to be contributed to the venture by Flowers. JDH, an expert in the field of commercial development, had drafted the LOI and included the following provision:
Both parties agree to work diligently toward the full execution of limited liability company documents reflecting the terms and conditions agreed upon herein within 30 days of the date of this agreement. This Letter of Intent does not create any binding, contractual rights between Flowers and JDH and shall serve only as an expression of intent between the parties.
The parties never agreed on the form of LLC documents. In fact, JDH didn’t circulate a draft document until well after the thirty day deadline referenced in the LOI. JDH sued to enforce Flowers’ alleged obligation to contribute the property, and to recover for its work on the development of the property.
Judge Tennille granted summary judgment, finding that (1) the document itself supported the finding that it was a non-binding agreement, (2) there were many significant terms left unaddressed in the LOI, (3) complicated real estate development projects "generally require the execution of lengthy, sophisticated, and detailed documents to govern the relationships between the parties," (4) courts should decline to fill in material gaps left open by contracting parties, (5) the LOI failed to provide any remedy in the event the LLC was never formed, and (6) JDH, as the drafter of the LOI, should have any ambiguity resolved against it.
The Court also rejected the argument that the subsequent oral agreements of the parties, and their partial performance, made the LOI enforceable; and also the argument that the Plaintiff was in the alternative entitled to a recovery in quantum meruit.
The Crockett Case: Motion To Dismiss Denied Notwithstanding Open Contractual Terms
In the Crockett case, the Court denied a Motion to Dismiss. The parties there had executed a Master Agreement which contemplated the future development of hotel properties. The Master Agreement called for Plaintiff to present preliminary development packages for identified "Pipeline Properties."
If Defendants were interested in a development of a Pipeline Property, Plaintiff was to present more detailed development packages. If Defendants decided to proceed after reviewing those packages, the parties were to form an LLC to operate the property and to execute a series of agreements regarding the operation of the property. These included a hotel management agreement, a construction management agreement, and a development agreement. The parties furthermore had to agree on their respective capital contributions and ownership percentages in the project. Forms of all of the contemplated agreements were attached to the Master Agreement.
The Agreement in Crockett included what Judge Tennille referred to as "impasse provisions." These required Defendants to convey all of their right in a Pipeline Property to the Plaintiff if they rejected a proposal, but also required Crockett to resubmit a proposal if it presented that same proposal to a third party with a defined "material change."
The case arose when the Defendants refused to convey their rights in Pipeline Properties which they had rejected, and refused to finalize the documentation on two properties which they had elected to develop. Defendants argued that the Master Agreement was unenforceable because the Court would need to "supply key material terms in order to enforce the agreement," Op. ¶ 31, and pointed in particular to the lack of an agreement on capital contributions.
Judge Tennille described the Agreement and its attachments as "a very sophisticated business transaction among parties of equal knowledge negotiating at arms length," and said that "the extensive nature of the documentation left very few terms to be negotiated for each side." Op. ¶ 19. He denied the Motion to Dismiss, holding:
The impasse provisions in . . . the Master Agreement do not require the Court to supply any material terms. . . . Unlike the JDH case, in which the Court is asked to supply terms missing from a written letter of intent, this case involves the enforcement of specific remedies provided for in the agreement itself.
Op. ¶¶ 33-34.
Flowers And Crockett Further Distinguished
Turning back to Flowers, Judge Tennille in that opinion distinguished Crockett as follows:
the Letter of Intent differs significantly from the agreement at issue in Crockett. In Crockett, the Court was not required to supply any material terms in order to enforce the agreement. The agreement was complete in the sense that it provided a contractual remedy in the event there was no agreement reached in connection with a proposed joint venture. Here, the Court would have to speculate as to the final design of the development, the projected budget, and the success of the development in order to determine damages from an unexecuted agreement.
Flowers at ¶ 38.
Judge Tennille further observed that JDH, a "sophisticated developer," could have provided for a remedy in the LOI but that it had not done so. He held "[t]he absence of any remedy is the best indication that this was simply a non-binding agreement by which the parties explored the possibility of a joint venture without any obligation to go forward and without any penalty for failing to complete a final agreement." Op. ¶ 37.
Business Court Trivia
If you care about Business Court trivia, the decisions of March 13th are only the second time in thirteen years that the Court has issued two opinions on the same day referencing one another on similar issues. The other instance was on November 1, 2006, when Judge Tennille entered simultaneous Orders in Analog Devices, Inc. v. Michalski, 2006 NCBC 14 (N.C. Super. Ct. Nov. 1, 2006) and Bank of America Corporation v. SR International Business Insurance Company, Ltd., 2006 NCBC 15 (N.C. Super. Ct. Nov. 1, 2006). Those cases involved the allocation of the cost of the production of electronically stored information.