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Copeland v. Baskin Robbins U.S.A.
117
Cal. Rptr. 2d 875 (Cal. Ct. App. 2002)
JOHNSON
We address an unsettled question in California: may a party sue for
breach of a contract to negotiate an agreement or is such a "contract" merely an
unenforceable "agreement to agree?" We hold a contract to negotiate an agreement
is distinguishable from a so-called "agreement to agree" and can be formed and
breached just like any other contract. We further hold, however, even if the plaintiff in
this case could establish the defendant's liability for breach of contract he is limited
to reliance damages--a form of recovery he has disavowed and defendant has shown he cannot
prove. For this reason we affirm the trial court's judgment for defendant.
FACTS AND PROCEEDINGS BELOW
The following facts are undisputed.
Baskin Robbins operated an ice cream manufacturing plant in the city of
Vernon. When the company announced its intention to close the plant, Copeland expressed an
interest in acquiring it. The parties commenced negotiations. Copeland made clear from the
outset his agreement to purchase the plant was contingent on Baskin Robbins agreeing to
purchase the ice cream he manufactured there. Copeland testified at his deposition the ice
cream purchase arrangement, known as "co-packing," was "critical" and
"a key to the deal." Without co-packing, Copeland testified, "this deal
doesn't work." Baskin Robbins does not deny the co-packing arrangement was an
indispensable part of the contract to purchase the plant.
After several months of negotiations an agreement took shape under
which Copeland would purchase the plant's manufacturing assets and sublease the plant
property. Baskin Robbins would purchase seven million gallons of ice cream from Copeland
over a three year period.
In May 1999 Baskin Robbins sent Copeland a letter which stated in
relevant part: "This letter details the terms which our Supply Chain executives have
approved for subletting and sale of our Vernon manufacturing facility/equipment and a
product supply agreement. . . . (1) Baskin Robbins will sell [Copeland] Vernon's ice cream
manufacturing equipment . . . for $ 1,300,000 cash. . . . (2) Baskin Robbins would agree,
subject to a separate co-packing agreement and negotiated pricing, to provide [Copeland] a
three year co-packing agreement for 3,000,000 gallons in year 1, 2,000,000 gallons in year
2 and 2,000,000 in year 3. . . . If the above is acceptable please acknowledge by
returning a copy of this letter with a non-refundable check for three thousand dollars. .
. . We should be able to coordinate a closing [within] thirty days thereafter."
Copeland signed a statement at the bottom of the letter agreeing "the above terms are
acceptable" and returned the letter to Baskin Robbins along with the $ 3000 deposit.
After Copeland accepted the terms in the May 1999 letter the parties
continued negotiating over the terms of the co-packing agreement. Among the issues to be
settled were the price Baskin Robbins would pay for the ice cream, the flavors Copeland
would produce, quality standards and controls, who would bear the loss from spoilage, and
trademark protection. Copeland testified he believed in June 1999 he reached an oral
agreement with Baskin Robbins on a price for the ice cream of his cost plus 85 cents per
tub. He conceded, however, the parties had not agreed on how the cost component was to be
determined and so far as he knew there was no written memorandum of this pricing
agreement. None of the other issues were settled before Baskin Robbins allegedly breached
the contract.
In July 1999, Baskin Robbins wrote to Copeland breaking off
negotiations over the co-packing arrangement and returning his $ 3000 deposit. The letter
explained Baskin Robbins' parent company had "recently . . . made strategic decisions
around the Baskin Robbins business" and "the proposed co-packing arrangement
[is] out of alignment with our strategy." Therefore, Baskin Robbins informed
Copeland, "we will not be engaging in any further negotiations of a co-packing
arrangement[.]" Although Baskin Robbins offered to proceed with the
agreement for the sale and lease of the Vernon plant assets it did not insist on doing so,
apparently accepting Copeland's view the lack of a co-packing agreement was a
"deal-breaker."
In his suit for breach of contract, Copeland alleged he and Baskin
Robbins entered into a contract which provided Baskin Robbins would enter into a
co-packing agreement with Copeland under the terms set out in the May 1999 letter and
additional terms to be negotiated. Baskin-Robbins breached this contract by
"unreasonably and wrongfully refusing to enter into any co-packing agreement with
[Copeland]." As a result of this breach of contract Copeland suffered expectation
damages "in the form of lost profits . . . as well as lost employment opportunities
and injury to his reputation." In response to a discovery request, Copeland stated
his damages consisted of "lost profits from [the] three year co-packing agreement
with defendants" as well as lost profits from other sales he could have made had he
acquired the plant and the profit he could have earned from selling the plant equipment.
Copeland's discovery responses did not provide or allege he could provide evidence of
damages he suffered as a result of his relying on Baskin Robbins' promise to negotiate a
co-packing agreement.
The trial court granted Baskin Robbins' motion for summary judgment
based on the undisputed facts described above. The court concluded the May 1999 letter was
susceptible to several interpretations but no matter how it was interpreted it failed as a
contract because the essential terms of the co-packing deal were never agreed to and there
was no reasonable basis upon which to determine them. Copeland filed a timely appeal from
the subsequent judgment.
For the reasons discussed below we affirm the judgment albeit on a
ground different from those relied upon by the trial court.
DISCUSSION
I. A CAUSE OF ACTION WILL LIE FOR THE BREACH OF A CONTRACT TO NEGOTIATE
AN AGREEMENT.
When Baskin Robbins refused to continue negotiating the terms of the
co-packing agreement Copeland faced a dilemma. "Many millions of dollars" in
anticipated profits had melted away like so much banana ripple ice cream on a hot summer
day. True enough, he could proceed with the contract for the purchase and lease of the
Vernon plant's assets and use those assets to produce ice cream for other retailers. But,
as he explained in his deposition, without the Baskin Robbins co-packing agreement he
could not afford to purchase the assets and pay the on-going costs of operating the plant
while he searched for other business. Alternatively he could attempt to sue Baskin Robbins
for breach of the co-packing agreement on the theory the terms of the agreement set out in
the May 1999 letter plus additional terms supplied by the court constituted an enforceable
contract. Such a suit, however, had a slim prospect of success. While
courts have been increasingly liberal in supplying missing terms in order to find an
enforceable contract they do so only where the "reasonable intentions of the
parties" can be ascertained. 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." Here,
the parties agreed in the May 1999 letter as to the amount of ice cream Baskin Robbins
would purchase over a three year period but, as Copeland candidly admitted, "a
variety of complex terms" remained for agreement before the co-packing contract could
be completed. These included price, the flavors to be manufactured, quality control
standards, and responsibility for waste.
Copeland chose a third course. Rather than insist the parties had
formed a co-packing contract and Baskin Robbins had breached it, he claimed the May 1999
letter constituted a contract to negotiate the remaining terms of the co-packing agreement
and Baskin Robbins breached this contract by refusing without excuse to continue
negotiations or, alternatively, by failing to negotiate in good faith. This path too has
its difficulties. No reported California case has held breach of a contract to negotiate
an agreement gives rise to a cause of action for damages. On the other
hand numerous California cases have expressed the view the law provides no remedy for
breach of an "agreement to agree" in the future. We believe,
however, these difficulties could be overcome in an appropriate case.
Initially, we see no reason why in principle the parties could not
enter into a valid, enforceable contract to negotiate the terms of a co-packing agreement.
A contract, after all, is "an agreement to do or not to do a certain thing."
Persons are free to contract to do just about anything that is not illegal or
immoral. Conducting negotiations to buy and sell ice cream is neither.
Furthermore, as we will demonstrate below, purported contracts which
the courts have dismissed as mere "agreements to agree" are distinguishable from
contracts to negotiate in at least two respects.
A contract to negotiate the terms of an agreement is not, in form or
substance, an "agreement to agree." If, despite their good faith efforts, the
parties fail to reach ultimate agreement on the terms in issue the contract to negotiate
is deemed performed and the parties are discharged from their obligations. Failure to
agree is not, itself, a breach of the contract to negotiate. A party will
be liable only if a failure to reach ultimate agreement resulted from a breach of that
party's obligation to negotiate or to negotiate in good faith. For these
reasons, criticisms of an "agreement to agree" as "absurd" and a
"contradiction in terms" do not apply to a contract to
negotiate an agreement.
In addition, it is important to note courts which have found purported
contracts to be unenforceable "agreements to agree" have focused on the
enforceability of the underlying substantive contract, not on whether the agreement to
negotiate the terms of that contract is enforceable in its own right. In Autry
v. Republic Productions, for example, after stating the law
"provides no remedy for breach of an agreement to agree" the court explained
this was so because "the court may not imply what the parties will agree upon."
Our decision in Beck v. American Health Group illustrates the
distinction between an "agreement to agree" and a contract to negotiate the
terms of an agreement.
In Beck, the plaintiff sued the defendant for breach of
contract. The alleged contract was contained in a letter to plaintiff from defendant's
executive director which began: "'It is a pleasure to draft the outline of our future
agreement . . . .'" After outlining the terms of the agreement, the letter concluded:
"'If this is a general understanding of the agreement, I ask that you sign a copy of
this letter, so that I might forward it to Corporate Counsel for the drafting of a
contract. When we have a draft, we will discuss it and hopefully shall have a completed
contract and operating unit in the very near future.'" Noting that
"'preliminary negotiations or an agreement for future negotiations are not the
functional equivalent of a valid, subsisting agreement'" we concluded the letter
"did not constitute a binding contract, but was merely 'an agreement to agree'
which cannot be made the basis of a cause of action." We based our conclusion on the
words of the letter which "manifest an intention of the parties that no binding
contract would come into being until the terms of the letter were embodied in a formal
contract to be drafted by corporate counsel."
Assume, however, the defendant in Beck did not present
plaintiff with a draft contract and an opportunity to negotiate its terms as promised in
its letter. Instead, defendant presented plaintiff with a final contract on a
take-it-or-leave-it basis, refusing to negotiate any of the contract terms the plaintiff
found unacceptable. Under the law as we see it, plaintiff could have a cause of action for
breach of contract on the theory the letter signed by the parties constituted a contract
to negotiate the terms of an agreement and defendant breached that contract by refusing to
negotiate.
Most jurisdictions which have considered the question have concluded a
cause of action will lie for breach of a contract to negotiate the terms of an agreement.
The Channel Home Centers case is illustrative. There the
parties executed a letter of intent to enter into the lease of a store in a shopping
center. The letter stated, inter alia, Grossman the lessor "will withdraw the store
from the rental market, and only negotiate the above-described leasing transaction to
completion." After Channel Home Centers expended approximately $25,000 in activities
associated with the negotiations, Grossman unilaterally terminated negotiations. The
following day Grossman leased the store to one of Channel Home Centers' competitors, Mr.
Good Buys. Channel Home Centers sued Grossman for breach of contract based on the letter
of intent. After a court trial the court awarded judgment to Grossman. The
Third Circuit Court of Appeals reversed. Distinguishing this case from one alleging merely
the breach of an agreement to agree the court pointed out: "It is Channel's position
that [the letter of intent] is enforceable as a mutually binding obligation to
negotiate in good faith. By unilaterally terminating negotiations with Channel and
precipitously entering into a lease agreement with Mr. Good Buys, Channel argues, Grossman
acted in bad faith and breached his promise to 'withdraw the store from the rental market
and only negotiate the above-described leasing transaction to completion.'" The court
concluded under Pennsylvania law an agreement to negotiate in good faith is an enforceable
contract.
Baskin Robbins maintains there are sound public policy reasons for not
enforcing a contract to negotiate an agreement. In doing so, we would be injecting a
covenant of good faith and fair dealing into the negotiation process whether or not the
parties specifically agreed to such a term. Citing Professor Farnsworth,
Baskin Robbins argues that instead of having a salutary effect on contract
negotiations, imposing a regime of good faith and fair dealing would actually discourage
parties from entering into negotiations, especially where the chances of success were
slight. Alternatively, such an obligation might increase the pressure on the parties to
bring the negotiations to a hasty, even if unsatisfactory conclusion, rather than risk
being charged with the ill-defined wrong of bad faith negotiation. Most parties, Baskin
Robbins suggests, would prefer to risk losing their out-of-pocket costs if the negotiation
fails rather than risk losing perhaps millions of dollars in expectation damages if their
disappointed negotiating partner can prove bad faith. Finally, Baskin Robbins argues, any
precontractual wrong-doing can be adequately remedied by existing causes of action for
unjust enrichment, promissory fraud and promissory estoppel.
We find Baskin Robbins' policy arguments unpersuasive.
Allowing a party to sue for breach of a contract to negotiate an
agreement would not inject a covenant of good faith and fair dealing into the negotiation
process in violation of the parties' intent. When two parties, under no compulsion to do
so, engage in negotiations to form or modify a contract neither party has any obligation
to continue negotiating nor to negotiate in good faith. Only when the
parties are under a contractual compulsion to negotiate does the covenant of good faith
and fair dealing attach, as it does in every contract. In the latter
situation the implied covenant of good faith and fair dealing has the salutary effect of
creating a disincentive for acting in bad faith in contract negotiations.
Professor Farnsworth's criticisms were not directed toward a cause of
action for breach of a contract to negotiate the terms of an agreement. On the contrary,
Farnsworth supports such a cause of action. Rather, his criticisms were
directed at the theory propounded by some European courts and legal scholars that,
even absent a contractual agreement to negotiate, a general obligation of fair dealing
arises out of the negotiations themselves. We rejected this theory of
liability in Los Angeles Equestrian Center, Inc. v. City of Los Angeles as
did the court in Racine & Laramie.
Arguing bad faith is an uncertain concept which could cost the
defendant millions of dollars in expectation damages is also without merit. For the
reasons we explain below, the appropriate remedy for breach of a contract to negotiate is
not damages for the injured party's lost expectations under the prospective contract but
damages caused by the injured party's reliance on the agreement to negotiate. Furthermore,
we disagree with those who say the courts, unlike the National Labor Relations Board or
labor arbitrators, are ill equipped to determine whether people are negotiating with each
other in good faith. While few of us will ever negotiate a multi-million
dollar contract, each of us participates in some form of negotiation nearly every day. In
most cases the question whether the defendant negotiated in good faith will be a question
of fact for the jury. In our view ordinary citizens applying their experience and common
sense are very well equipped to determine whether the parties negotiated with each other
in good faith.
Recovery for unjust enrichment in the context of contract negotiations
is usually based on ideas disclosed or services rendered during the negotiations. Where,
as here, the negotiations are over the sale of goods the subject matter of the contract is
not an idea nor does the potential seller typically confer a precontractual service on the
potential buyer.
A cause of action for promissory fraud is based
on "[a] promise made without any intention of performing it[.]" In
many cases the defendant may have intended to negotiate in good faith when it contracted
to do so but changed its mind later when, for example, a more attractive contracting
partner came along.
Thus, we conclude neither unjust enrichment nor promissory fraud
provide a party an adequate vehicle for relief when its negotiating partner breaks off
negotiations or negotiates in bad faith.
The doctrine of promissory estoppel is generally used to enforce the
defendant's clear and unambiguous promise when the plaintiff has reasonably and
foreseeably relied on it. We agree a cause of action for promissory
estoppel might lie if the defendant made a clear, unambiguous promise to negotiate in good
faith and the plaintiff reasonably and foreseeably relied on that promise in incurring
expenditures connected with the negotiation. We may also assume for the
sake of argument such a cause of action could be based on an implied promise to negotiate
in good faith. If these propositions are correct, then promissory
estoppel is just a different rubric for determining the enforceability of a contract to
negotiate an agreement.
Finally, we believe there are sound public policy reasons for
protecting parties to a business negotiation from bad faith practices by their negotiating
partners. Gone are the days when our ancestors sat around a fire and bargained for the
exchange of stone axes for bear hides. 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. As Professor Farnsworth observes, contracts today are not
formed by discrete offers, counter-offers and acceptances. Instead they result from a
gradual flow of information between the parties followed by a series of compromises and
tentative agreements on major points which are finally refined into contract terms.
These slow contracts are not only time-consuming but costly. For these reasons,
the parties should have some assurance "their investments in time and money and
effort will not be wiped out by the other party's footdragging or change of heart or
taking advantage of a vulnerable position created by the negotiation." This
concept is not new to California law. In Drennan v. Star Paving Co. the court
applied the doctrine of promissory estoppel to hold that where a general contractor used
the bid of a subcontractor in formulating its own successful bid for a job the court would
imply a promise by the subcontractor not to revoke its bid in order "to preclude the
injustice that would result if the offer could be revoked after the offeree had acted in
detrimental reliance thereon."
For obvious reasons, damages for breach of a contract to negotiate an
agreement are measured by the injury the plaintiff suffered in relying on the defendant to
negotiate in good faith. This measure encompasses the plaintiff's out-of-pocket costs in
conducting the negotiations and may or may not include lost opportunity
costs. The plaintiff cannot recover for lost expectations (profits)
because there is no way of knowing what the ultimate terms of the agreement would have
been or even if there would have been an ultimate agreement.
II. BASKIN ROBBINS IS ENTITLED TO SUMMARY JUDGMENT BECAUSE IT HAS SHOWN COPELAND
CANNOT ESTABLISH RELIANCE DAMAGES.
A defendant is entitled to summary judgment if
it "shows that one or more elements of the cause of action . . . cannot be
established" by the plaintiff. The defendant may not make this
showing through argument alone but may do so through the plaintiff's discovery responses
if those responses demonstrate "the plaintiff does not possess, and cannot reasonably
obtain, needed evidence" to establish his cause of action.
As we explained in Part I, reliance damages are the only form of
recovery available in an action on a contract to negotiate an agreement. Baskin Robbins
has shown through Copeland's complaint and discovery responses he cannot establish
reliance damages.
The only damages Copeland seeks in his complaint are derived from what
he would have received if the underlying contract had been consummated, e.g., the profits
he hoped to earn through the co-packing agreement and other ice cream sales. Satisfactory
proof of such damages is impossible because there is no way to know what the eventual
terms of the co-packing agreement would have been, or even if the parties would have
reached an agreement. Copeland's complaint disavowed reliance damages,
e.g., time spent, expenses incurred, opportunities missed while negotiating with Baskin
Robbins.
More importantly, in response to interrogatories from Baskin Robbins,
Copeland stated his damages were his lost profits from the ice cream deals and the profit
he could have made from selling the plant equipment. We conclude the allegations in
Copeland's complaint together with his discovery responses constitute a sufficient
showing Copeland "does not possess, and cannot reasonably obtain, needed
evidence" to establish reliance damages and, therefore, Baskin Robbins was entitled
to summary judgment.
DISPOSITION
The judgment is affirmed.