Court Opinion

ID: 4757865
Source: CourtListenerOpinion
Date Created: 2021-08-12 17:52:15.639139+00
Date Added: 2024-06-11T08:08:55.424808
License: Public Domain

¶58 (dissenting) — The courts of this state have not yet determined when parties can enter into an agreement that contemplates an additional future agreement, let alone the proper standard for awarding damages for breach of such agreements. Like the majority, I conclude that contracts that imply future negotiation will take place are valid. However, I would hold that only reliance damages are recoverable in cases of breach of those contracts. Expectation damages are too speculative to be awarded in this case and are inconsistent with Washington’s “new business rule.”
Korsmo, A.C. J.

Contracts Requiring Future Agreement

¶59 Courts across the country, and commentators as well, are split on the enforceability of agreements that contemplate future agreements. See generally Alan Schwartz & Robert E. Scott, Precontractual Liability and Preliminary Agreements, 120 Harv. L. Rev. 661 (2007); E. Allan Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Colum. L. Rev. 217 (1987).
*92¶60 Washington initially rejected the idea5 but subsequently put its toe in the water in Badgett v. Security State Bank, 116 Wn.2d 563, 807 P.2d 356 (1991). There the court rejected a claim that a bank had an obligation to continue negotiating modification of an existing loan agreement in the absence of a contractual position requiring it to do so. The court also stated that the contractual obligation to act in good faith relates only to existing contract terms and was not an obligation to negotiate further. Id. at 569-572.
¶61 The issue was squarely presented by Keystone Land & Development Co. v. Xerox Corp., 152 Wn.2d 171, 94 P.3d 945 (2004). There the court addressed certified questions from a federal court concerning whether Washington would recognize an agreement to negotiate a future contract under the circumstances presented by the case and, if so, what the measure of damages would be. Id. at 173-174. The court decided that there was no contract under the facts of the case and, thus, it did not need to answer the question of damages. Id. at 179-180. In the course of its discussion, the court determined that it would not recognize agreements that merely called for the parties to agree in the future. Id. at 175-176. The court also noted, but did not analyze, “agreement[s] with open terms.” Id. at 176. These agreements show the parties have agreed to be bound to key terms that will be supplied by courts or other authorities. Id.
¶62 Finally, the court discussed contracts to negotiate. These involve promises to behave in a particular manner while attempting to negotiate an ultimate agreement. Id. Typical promises include agreements to negotiate in good faith, or exclusively with each, or for a specific period of time. Id. The Keystone court found that Badgett supported a conclusion that “a specific course of conduct agreed upon for future negotiations is enforceable when it is contained in an *93existing substantive contract.”Id at 177. The court declined to decide if it would ever enforce a contract to negotiate because the parties had not created such a contract. Id. at 179. There was no objective manifestation of mutual assent. Id.
¶63 The development option agreement (DOA) signed here does not expressly require the parties to negotiate further, but it leaves so many issues open that further negotiations were implicitly required. The agreement granted Columbia Park Golf Course Inc. “an exclusive option for the development of a recreation vehicle park, shoreline improvements and potential boat moorage being located with Columbia Park.” DOA at 1 (Ex. 1-AA). It was noted that Columbia desired to have an exclusive option to prepare a plan subject to city of Kennewick (City) approval. Id. The DOA required the developer to provide a development plan, pursue all necessary permits, and construct the development upon final site plan approval. Id. at 1-2. The City agreed to refrain from requesting or entertaining other development proposals dealing with recreational vehicle parks, shoreline improvements, or boat moorage within Columbia Park. It also was required to timely process all applications and permit requests. Id. at 2. The agreement would expire February 16, 2006, but was subject to three mutually agreeable six-month extensions of time. Id.
¶64 Noticeably missing from this barely three-page document, which was drafted by Columbia’s counsel, is any express indication that the parties would be negotiating further, other than the fact that the parties explicitly were required to agree on a site plan. However, it is implicit that they had to negotiate further. The DOA did not include any terms for leasing the land for the new projects. Would the City share in profits, or would it simply charge a ground lease as it was doing for the golf course?6 What obligation *94for maintenance and liability would the parties have? What about the federal government that actually owned the land? There also was an existing sublease between the City and Columbia that required it to maintain a driving range that would have to be moved or eliminated to make the new project work. The conclusion to be drawn is that while there was a project in the works, the terms of any future development still needed to be decided upon. The timing clause makes clear that neither party was bound to the project. Columbia was free not to go forward if the project failed to pencil out, and the City was free to let the option expire if it could not agree on the site location or other terms.
¶65 In this circumstance, the reasonable interpretation is that the parties had a contractual obligation to negotiate further over the terms of the proposed development. I agree with the majority that this was a contract to negotiate further.7

Available Damages

¶66 The jury found that the City had breached its duty to exclusively deal with Columbia and its duty to act in good faith. The evidence amply supports those determinations. The question is what was the appropriate measure of damages?
¶67 If the law concerning contracts that require further agreement is unsettled, the issue of damages for breach of the agreement is even less certain. Among the states that permit contracts to negotiate, the majority appear to allow only reliance damages in cases of breach. See Brady v. State, 965 P.2d 1, 11 (Alaska 1998) (collecting cases), cert. denied, 526 U.S. 1026 (1999). Expectation or consequential damages are permitted primarily in the Seventh Circuit, where that court has applied its ruling in Venture Associates v. Zenith Data Systems Corp., 96 F.3d 275 (7th Cir.1996), *95as the presumptive state law in other states in that circuit.8
¶68 The argument for reliance damages is that they make the nonbreaching party whole and avoid speculative claims for damages. Copeland v. Baskin Robbins U.S.A., 96 Cal. App. 4th 1251, 1262-1263, 117 Cal. Rptr. 2d 875 (2002). It is often an open question whether the parties would have entered into a subsequent agreement, let alone what the contents of that agreement would have been. Venture Assocs., 96 F.3d at 281 (Cudahy, J., concurring).
¶69 The primary argument for expectation damages appears to be that they are necessary to prevent bad faith. Id. at 278-280. “Bad faith is deliberate misconduct.” Id. at 279. Permitting expectation damages is seen as an effective tool to prevent one party from trying to ruin another or extorting additional concessions from the other party. Id. at 278. Other judges have focused on the fact that consequential damages normally would flow from breach of a completed contract, so they ought to apply in this arena as well. Logan v. D.W. Sivers Co., 343 Or. 339, 169 P.3d 1255, 1266-1267 (2007) (Kistler, J., concurring in part and dissenting in part).
¶70 It is unclear why reliance damages are necessarily insufficient to make a party whole when there has been a breach of a contract to further negotiate.9 There also are other reasons why this is an inappropriate policy for this state. Washington law already prohibits speculative damages for breach of contract. Larsen v. Walton Plywood Co., 65 Wn.2d 1, 16, 390 P.2d 677 (1964). Contracts to further negotiate that are as nebulous as this one require significant speculation about what terms would have been agreed *96upon and provide little basis beyond speculation for assessing damages for breach.10
¶71 An additional concern applicable to this case is Washington’s new business rule. That doctrine, with some exceptions, generally prohibits claims for lost profits for most start up businesses. Id., Layman v. Swanson, 3 Wn.2d 370, 379, 101 P.2d 304 (1940). It is a specific application of Washington’s general rule that lost profits are recoverable only if there is a clear track record of profit for a specific business or industry. Larsen, 65 Wn.2d at 16-17. While Columbia eschewed a claim of “lost profits,” a topic briefly discussed infra, our state policy against such speculative claims is informative in this context. For all of these reasons, awarding expectation damages for breach of an agreement to negotiate is not a good fit with existing Washington law.
|72 There is still another policy reason to counsel against allowing expectation damages in this type of case. Agreements to negotiate are an important tool in dealing with complex transactions such as purchasing existing businesses or developing large parcels of land. Modern practices often require these transactions to be accomplished in stages while the parties learn more about each other and the nature of the transaction. Changes in market demand and financing requirements may require adjustments in negotiating stances. Numerous dynamic factors may come into play during the process. Copeland, 96 Cal. App. 4th at 1262; Farnsworth, supra, at 219-220. Because of developing information, it is easy to see that a party may want to change its position or even decline to continue negotiating.
f 73 In this circumstance, allowing expectation damages might well undercut usage of agreements to negotiate because a party that is not required to come to an agree*97ment still can be faulted for not doing so. This disincentive is nicely stated by Judge Cudahy’s concurring opinion in Venture Associates:
By adopting this principle, the majority certainly does create a disincentive for acting in bad faith in contract negotiations; but the adoption of the principle has another effect which is not so salutary. For we cannot lose sight of the fact that a contract is a deliberate agreement of the parties, frequently marked by certain formalities, establishing their own framework of rules to govern their relations. It seems to create a different paradox to foist the peculiar and special consequences of an agreement on parties who have not in fact agreed. In principle, it cannot be reasonably foreseeable that the parties will ever reach agreement — let alone what the terms of an agreement will be. Good faith is a necessary but not a sufficient condition of agreement. There are many perfectly legitimate reasons for negotiations to fail, even if good faith prevails.
As a matter of policy I think it is undesirable to force agreement on parties under threat of a bad faith finding and subsequent imposition of consequential damages, the same sanction as would issue from actual agreement. Freedom not to contract should be protected as stringently as freedom to contract. The present case is an excellent example of how preliminary negotiations may be pyramided into a demand indistinguishable from a claim for breach of contract.
Reliance damages should be an adequate sanction for breach of an agreement to negotiate in good faith. Presumably, punitive damages could be assessed in egregious cases. With those sanctions, a good faith obligation is more likely to be enforced than if the matter could be escalated into what appears to be a breach of contract suit.
96 F.3d at 281.
¶74 Given existing Washington law and the mixed incentives created by the expectation damages, I would hold that breach of a contract to negotiate involving a new business venture should result only in reliance damages. In this case, I would remand for a trial solely on damages.
¶75 The same result should occur here even if this state adopts the Venture Associates test. There, the Seventh *98Circuit indicated that expectation damages would be available in cases of bad faith, which it defined as “deliberate misconduct.” Id. at 278-279. The Seventh Circuit appears to equate the failure to bargain in good faith as the equivalent of acting in bad faith, stating, “for it is only through bad faith that an agreement to negotiate in good faith can be violated.” Id. at 280.
|76 Washington’s case law is less clear. The concept of bad faith has been raised in many different contexts. A dictionary definition has been applied in cases defining “bad faith” for the purpose of awarding attorney fees: “ ‘actual or constructive fraud’ ” or a “ ‘neglect or refusal to fulfill some duty ... not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive.’ ” State v. Sizemore, 48 Wn. App. 835, 837, 741 P.2d 572 (alteration in original) (quoting Black’s Law Dictionary 127 (5th ed. 1979)), review denied, 109 Wn.2d 1013 (1987).
¶77 The jury in this case was not instructed on the concept of “bad faith.” Rather, it was directed to consider whether the City had fulfilled its obligation to act in “good faith.” The trial court, following well-settled law, defined the duty to act in good faith for the jury in the following terms: “This duty requires the parties to cooperate with each other so that each may obtain the full benefit of performance.” Clerk’s Papers at 5175 (Instruction 15).11 Nothing in this definition required the jury to consider the City’s motives or reasons for not living up to its obligations.
¶78 On this record, it is not clear that the jury determined that the City acted in bad faith when it failed to live up to its duty of acting in good faith. While actual bad faith will constitute a breach of the duty to act in good faith, the *99converse is not necessarily true. The concept of good faith appears broader than the negative concept of bad faith, and a party can fail to act in good faith without necessarily acting for bad or sinister reasons.
¶79 Thus, even if Venture Associates states Washington law in this context, it is not clear that Columbia established an entitlement to expectation damages. For this reason, also, the jury award should be reversed.

Measure of Damages

¶80 While I conclude that expectation damages are not appropriate, a brief comment on the factual basis for the damages awarded in this case is still in order. Columbia calculated the value of its development interest by reducing the expected “revenue stream” to a present value figure.
¶81 Methinks the Bard correctly identified the problem at issue here: ‘What’s in a name? That which we call a rose by any other word would smell as sweet.” William Shakespeare, Romeo and Juliet act 2, sc. 2. Capitalizing projected profits and recasting them as the market value of the development opportunity is simply calling lost profits by another name.
f 82 If a claim of lost profits for a new business venture is too speculative to permit a jury to consider the issue, the same rule should apply to a business owner speculating that someone would buy his speculative profits. That should particularly be the case where the profits are based on an agreement of unknown terms. If there was a market for this DOA, potential investors could have been called to testify to that fact and its value to them. The evidence presented here was just Columbia claiming lost profits under another guise.

Conclusion

¶83 At its core, a contract to negotiate further is not necessarily a contract binding the parties to agree. The parties here were free to walk away from this venture. *100Under those circumstances, it is not proper to hold the breaching party to the terms of some agreement it never made. There was a duty to negotiate, not a duty to agree.
¶84 The proper measure of damages was Columbia’s reliance costs, not expectation of profits from an expected agreement that was never made. I respectfully dissent.
Reconsideration denied April 11, 2011.

 See Hedges v. Hurd, 47 Wn.2d 683, 689-694, 289 P.2d 706 (1955) (Donworth, J., dissenting); Sandeman v. Sayres, 50 Wn.2d 539, 541-542, 314 P.2d 428 (1957) (“[A]n agreement to do something which requires a further meeting of the minds of the parties and without which it would not be complete is unenforceable.”); Pac. Cascade Corp. v. Nimmer, 25 Wn. App. 552, 556, 608 P.2d 266, review denied, 93 Wn.2d 1030 (1980).

 The existing lease spelled out the annual ground rent through January 1, 2050.

 If this is not an agreement to further negotiate, the DOA would not itself provide any basis for awarding expectation damages.

 Even at the time Venture Associates was written, the court recognized that there was very little state law on the topic and that it was the federal courts that were making state law on the topic. 96 F.3d at 277-278.

 Parties also are free to negotiate liquidated or other damages as part of the contract process.

 Some agreements requiring future negotiation may be certain in enough specific terms that the remaining terms can be easily calculated and damages determined. Contracts that leave open only the price are among that category. See, e.g., Farnsworth, supra, at 253-255.

 “Good faith” also has other definitions. In the instance of insurance contracts, where statutes and case law impose a duty of good faith dealing, the Washington Supreme Court once noted: “This fiduciary duty to act in good faith is fairly broad and may be breached by conduct short of intentional bad faith or fraud.” Indus. Indem. Co. of the Nw., Inc. v. Kallevig, 114 Wn.2d 907, 916-917, 792 P.2d 520 (1990); accord Rizzuti v. Basin Travel Serv. of Othello, Inc., 125 Wn. App. 602, 105 P.3d 1012 (2005); Anderson v. State Farm Mut. Ins. Co., 101 Wn. App. 323, 329, 2 P.3d 1029 (2000), review denied, 142 Wn.2d 1017 (2001).