Sunday, May 22, 2011

Caution -- what you say in a proposal may make it binding.


Two sides seeking to negotiate a lease option contract sign a document explicitly entitled “Final Proposal” which states clearly that its terms “are hereby accepted by the parties subject only to approval of the terms and conditions of a formal agreement.”   Where a formal agreement is never approved by the parties, can this be a binding contract?

Yes.  In First National Mortgage Company, v.  Federal Realty Investment Trust, 631 F.3d 1058, 1065 (9th Cir. 2011) the Ninth Circuit applying California law affirmed a $15 million breach of lease jury verdict finding the existence of a binding contract in precisely the above situation.  The Court distinguished another case holding no binding contract where the document was entitled “letter of intent” and specifically provided that “this letter of intent is of no binding effect.”

The lesson is that it is not enough to state that a contract is conditioned upon the approval of the terms and conditions by way of a formal agreement.  An informal agreement, but an agreement nonetheless, may be found to exist.  If a party wishes to make plain that contractual language is not meant to be binding, the party should state that plainly in the document. 

The Court observed “calling something a ‘proposal,’ instead of a ‘contract’ or a ‘lease,’ does not necessarily mean it was not meant to be binding, especially where the circumstances suggest otherwise.”   In other words, the language of an ambiguous document together with the circumstances surrounding its creation may allow the finder of fact to determine a contract has been formed.