• Copeland v. Baskin Robbins: When Negotiation of a Contract Becomes a Contract to Negotiate
  • July 15, 2003 | Author: Karina B. Sterman
  • Law Firm: Ervin Cohen & Jessup LLP - Beverly Hills Office
  • Today's business transactions can begin with a formal, detailed term sheet or letter of intent, or informal e-mail exchange or telephone conference. These items are typically considered simply part of the negotiation process, and their value derives from the possibility of a transaction without a binding commitment. This may no longer be acceptable. A California Court of Appeal recently ruled that, while an "agreement to agree" is absurd and unenforceable, an agreement to try to agree is enforceable. Copeland v. Baskin Robbins U.S.A., et al. (2002).

    In early 1999, Baskin Robbins announced its intention to sell off its ice cream packing plant in Vermont. Kevin Copeland offered to purchase it on the condition that any purchase agreement would include a co-packing arrangement standard in the industry guaranteeing that Baskin Robbins would purchase a minimum amount of ice cream manufactured at the plant. The parties signed a letter agreement including these and other essential terms of the purchase. Several months later, however, Baskin Robbins wrote Copeland that it was breaking off negotiations over the copacking element of the deal in light of its parent company's change in business strategy. Rather than go through with the remaining portion of the deal, Copeland sued Baskin Robbins -- not for breach of the purchase and co-packing agreements, but for breach of the contract to negotiate these agreements.

    At the trial court level, Copeland's case was dismissed on summary judgment on the ground that no valid contract existed between the parties. The trial court found the letter agreement to be no more than an unenforceable "agreement to agree."

    The appellate court disagreed. Although it ultimately held against Copeland (because he failed to prove his damages), the Court of Appeal stated that an agreement to negotiate could be an enforceable contract, with an implied covenant of good faith and fair dealing, because "parties should have some assurance their investments of time and money and effort will not be wiped out by the other party's foot-dragging or change of heart or taking advantage of a vulnerable position created by the negotiation."

    The Court of Appeal noted that the important distinction between an unenforceable agreement to agree and an enforceable agreement to negotiate remains. "If, despite their good faith efforts, the parties fail to reach ultimate agreement on the terms in issue," the court reasoned, "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." The court was quick to point out, however, that a covenant of good faith and fair dealing will be implied only when parties are under a contractual compulsion to negotiate, not when they are merely engaging in voluntary negotiations to form or modify a contract. In the latter case, the parties continue to be free to break off negotiations or, apparently, to negotiate in bad faith.

    Life After Copeland V. Baskin Robbins

    While the appellate court was under the impression that it was breaking new legal ground, this is not entirely accurate. Prior to the holding in Copeland, California litigants could bring a cause of action for unjust enrichment (typically when proprietary information was disclosed or services rendered during the negotiations); for promissory fraud (when promises were made without any intention of performing them); and for promissory estoppel (when a party reasonably and foreseeably relied, to his detriment, on another party's clear and unambiguous promise). In fact, the damages available under the "new" cause of action of breach of a contract to negotiate are, as with promissory estoppel, limited to the injury the plaintiff suffered in relying on the defendant's promise to negotiate. This includes outof- pocket costs in conducting the negotiations, such as legal fees, travel expenses, or services rendered fees, and may include lost opportunity costs. The plaintiff cannot, however, recover for lost expectations, such as future profits, because these would be too speculative.

    Even when plaintiffs face a small recovery in damages, the settlement value of this type of case may be great. The Court of Appeal in Copeland stated that the issue of whether a party negotiated in good faith or broke off negotiations without excuse is a question of fact (i.e., cannot be ruled on by a judge in a summary judgment motion and must be litigated at trial). This means that defendants may face substantial legal expenses even if they ultimately prevail or are found to be liable for only nominal reliance damages. This also means that parties may wish to be less cavalier in breaking off negotiations without explanation.

    Suggestions In Light Of Copeland

    The Copeland decision serves as a cautionary reminder that negotiating parties must now decide whether they want to be bound by a duty to continue to negotiate and/or negotiate in good faith, and then ensure that all pre-contractual discussions, whether oral or written, are carefully worded to reflect this decision. For example, parties may want to include explicit disclaimers in any letter of intent, memo of understanding, or other writing containing contractual words (e.g., "we agree" or "we accept") limiting their obligations to continue to negotiate. They may want to provide an express statement of what constitutes a "good faith" negotiation by each side. Parties may also want to curtail telephonic or in-person negotiations if they suspect that the other party may self-servingly misinterpret the intent of these informal negotiations. Finally, regardless of the complexity and value of a deal, it is always advisable to have experienced legal counsel prepare or review documents, as well as what seems like mere correspondence, to avoid the costly mistake of creating an unintentional obligation to negotiate.