Upholding a Letter of Intent

The Oregon court of appeals ruled that provisions in a letter of intent were enforceable, requiring the seller to pay damages for breach of the letter (Logan v. D.W. Sivers Co., 141 P.3d 589). The case involved the enforceability of a “nonshop” provision contained in a letter of intent to enter into the final purchase and sale agreement for real property. In the nonshop provision, D.W. Sivers Co. promised Lillian Logan not to solicit other orders or contract to sell the property to a third party for a period of sixty days. The property at issue was a shopping center the plaintiff intended to buy as part of a Section 1031 exchange to avoid tax liability from her sale of a different property. However, 21 days after the letter of intent was executed, Sivers entered into a sale agreement with a third party. Logan began this action for breach of contract, and a jury awarded her the consequential tax losses she suffered but not the expectation damages she anticipated. The trial court entered judgment notwithstanding the verdict (JNOV) on the grounds the letter of intent was not an enforceable agreement and that even if it were, the claimed damages were unavailable as a matter of law. The appellate court reversed.

Whether a contract exists is a question of law. Sivers argued there was no enforceable agreement because the parties expressly stated they did not intend to be bound by a purchase and sale agreement. Logan countered by saying the parties did express their intent to be bound by the nonshop provision and provisions to supply and review due diligence documents. This constituted an enforceable agreement to negotiate on those terms and it is that agreement to negotiate that Logan is seeking to enforce. The court said that courts have identified four main types of preliminary agreements.

The first type is one in which the parties have reached complete agreement on all issues but also contemplate they will set out their agreement in a formal writing. The second type is called “an agreement with open terms.” Here the parties agree to be bound by some terms, but leave others open for the court to fill in. The third type is an agreement to negotiate, which imposes a duty to negotiate on certain terms specified by the parties, but if negotiation fails, no final contract will result. The fourth type is the proverbial “agreement to agree” in which the parties do no more than express a desire to complete negotiations.

Here the agreement is of the third type, purporting to bind the parties to certain terms, specifically the “nonshop” provision and the requirement that Sivers deliver and plaintiff review the due diligence materials. In short it is an “agreement to negotiate.” The traditional view is that parties to such an agreement do no more than express a desire to complete the negotiations and thus such agreements are merely agreements to agree and are not enforceable. There are two primary arguments as to why agreements to negotiate are too indefinite to be enforced. The first is that it is too difficult to determine what the obligation to negotiate consists of--in other words, too difficult to determine what would constitute a breach. The second argument is that it is too difficult to calculate the damages caused by a breach.

With respect to the first argument--that it is too difficult to determine what would constitute a breach--this may be true in some cases. But it should not be a blanket rule barring enforcement of all agreements to negotiate. A better approach is to consider such agreements on a case-by-case basis to determine whether the agreement manifests an intent by the parties to be bound by the agreement and whether the terms are sufficiently definite to provide a basis for determining whether a breach has occurred.

In this case, the parties expressly manifested their intent to be bound by certain terms governing the negotiation. The key provision provides that “seller agrees to be bound to provide the required due diligence documents within the time required to comply with the non-solicitation provision.” Thus the parties manifested an intent to be bound by certain terms that would govern their negotiations. Said the court, “We see no reason to disregard that expressed intent. Thus the agreement to negotiate is enforceable if its terms are sufficiently definite.” Thus the court concluded that the terms were sufficiently definite.

With respect to the argument that calculating damages is too difficult, courts following the modern trend do not see this as justifying a complete bar to enforcement of agreements to negotiate. If the plaintiff can prove that, but for the defendant’s breach, the parties would have entered into a final contract, then loss of the benefit of the contract is a consequence of the defendant’s bad faith and provided that it is a foreseeable consequence, the defendant is liable for that loss.