Caseflicks

Court of Appeals for the Ninth Circuit • 2001

Vestar Development Ii, Llc, an Arizona Limited Liability v. General Dynamics Corporation, a Corporation

249 F.3d 958 | 2001 Daily Journal DAR 4601 | 2001 Cal. Daily Op. Serv. 3732 | 2001 U.S. App. LEXIS 8722

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Takeaway

In short, this case shows that even if a promise to negotiate may be enforceable, lost profits from a never-finalized transaction cannot be recovered when the deal's essential terms and even its ultimate formation remain unknown.

Background

General Dynamics owned a 240-acre tract in San Diego. Vestar Development II sought to purchase and develop a 50-acre portion as a shopping center. In July 1997, the parties signed a Letter of Understanding stating proposed business terms as a basis for a later purchase-and-sale agreement. General Dynamics agreed to negotiate exclusively with Vestar for 90 days, and the parties later extended that period by 60 days. The letter also made clear that neither party would remain obligated if they did not reach a final purchase-and-sale agreement.

General Dynamics later told Vestar it would sell the entire tract to a third party. Vestar sued for breach of the agreement to negotiate, seeking more than $48 million in anticipated profits from developing and leasing the proposed shopping center. It expressly did not seek reliance damages, such as negotiation expenses or lost opportunities.

After removal to federal court on diversity grounds, the district court initially dismissed for lack of consideration. Vestar amended to allege consideration, and the district court concluded that those allegations were sufficient to state a claim for breach of an agreement to negotiate. But it dismissed again because Vestar's claimed lost profits were too speculative. Vestar requested dismissal of the entire complaint if reconsideration was denied, and the district court entered final judgment. The Ninth Circuit affirmed.

Issues

Issue #1

Whether California law makes an agreement to negotiate unenforceable as a matter of law.

Holding

The court did not decide the issue because California law was unsettled and Vestar's claim failed independently for lack of provable damages.

Reasoning

General Dynamics argued that the Letter of Understanding could not be enforced because it was merely an agreement to negotiate rather than a final contract. California decisions had often refused to enforce preliminary writings as the substantive contracts contemplated by the parties, but those cases did not directly resolve whether a separately supported promise to negotiate could itself be enforceable.

The court also identified California authority suggesting that parties can, through a letter of intent or similar agreement, assume a duty to bargain in good faith. Because no California court had definitively recognized or rejected enforcement of such an agreement for reliance damages, the Ninth Circuit declined to predict a categorical rule where the case could be resolved on the damages issue.

Issue #2

Whether Vestar could recover $48 million in expected shopping-center profits for an alleged breach of the agreement to negotiate.

Holding

No. The requested lost profits were impermissibly speculative and could not be proved with the reasonable certainty California law requires.

Reasoning

California Civil Code section 3300 permits recovery for detriment proximately caused by a contractual breach, but section 3301 separately requires that damages be clearly ascertainable in their nature and origin. California law therefore requires a plaintiff seeking future damages to establish them with reasonable certainty and probability rather than conjecture.

The alleged breach was a failure to continue negotiating, not a breach of a completed sale contract. The Letter of Understanding supplied only a starting point for negotiations and expressly contemplated that the parties might fail to reach a final agreement without further obligations to each other. It did not establish the ultimate sale terms necessary to calculate development profits.

A damages award would require speculation about whether the parties would have reached a deal through good-faith negotiations and, if so, what price, conditions, contingencies, and other terms the final agreement would have contained. Without those terms, no reliable basis existed for calculating the profits Vestar might have earned from the planned shopping center.

The court did not adopt a per se rule barring expectation damages for every breach of a preliminary agreement. On these facts, however, only reliance-type damages—such as negotiation costs, foregone opportunities, or reputational harm—could potentially be established with adequate certainty. Because Vestar expressly sought only lost profits, dismissal was proper.