How to avoid Benefit of the Bargain Damages With 2 Simple Ways

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Parties frequently memorialize crucial deal points in preparatory agreements before joining into a final contract. The Benefit of the Bargain Damages: Letters of intent, letters of interest, term sheets, expressions of interest, and memoranda of understanding are all names for these preliminary agreements.

Preliminary agreements frequently include both nonbinding and binding requirements, including an exclusivity clause or a consensus to negotiate a deal. When a party violates a binding provision in the otherwise explicitly non-binding company can make, the question of damages inevitably arises.

The “Rule” of the Venture – Benefit of the Bargain Damages

The "Rule" of the Venture - Benefit of the Bargain Damages
The “Rule” of the Venture – Benefit of the Bargain Damages

A close examination of the facts in Venture is informative. Venture Associates Corporation proposed the acquisition of certain assets from Zenith Data Systems Corporation. Venture, the buyer, proposed terms for the acquisition in a letter to Zenith, the seller.

The Benefit of the Bargain Damages The letter stated that this was not a binding responsibility on either party, but rather “simply a letter of intent” subject to the execution of a conclusive sales contract, except for a section in the letter stating that the members agree to enter negotiations to enter into a definitive purchase contract and that the seller would not start negotiating with other businesses pending the implementation of a conclusive purchase agreement.

When the deal outlined in the purchaser’s letter fell through, the disappointed buyer sued, alleging that the seller breached the contract to negotiate a deal toward a definitive purchase agreement as well as seeking expectation damages for the breach.

In recognizing the proper measure of Benefit of the Bargain Damages, Judge Posner wrote the following passage, which parties will undoubtedly see if they ever find themselves embroiled in court action over the appropriate way of measuring damages for the breach of a binding providing in a formally non-binding preliminary agreement.

“The difficulty, which may well be insurmountable,” Judge Posner said, “is that since by theory the parties had not agreed to any of the provisions of the contract, it may be impossible to ascertain what those terms would have been and thus what profit the complainant of bad faith would have had.” However, this difficulty “relates to the practicality of the cure, not the principle of it,” according to Judge Posner.

Judge Posner’s decision in Venture, perhaps unwittingly, creates a convenient means for plaintiffs to survive default judgment in civil suits trying to seek expectation damages based on the breach of a conditional provision of an otherwise formally non-binding preliminary agreement.

If a non-breaching party can persuade a court that a binding requirement “found” in an otherwise non-binding company can make carries with it a responsibility to negotiate a deal toward a final deal, the non-breaching party can make the argument under Venture that it is obligated to expectation damages because a final deal would have been reached “but for” the breaching party’s bad faith.

The Venture “Rule” has a Limited Scope – Benefit of the Bargain Damages

While the Venture case creates uncertainty, violating parties can rely on a body of case law that claims that “benefit of the bargain” as well as expectation damages are viewable for the breach of binding provisions of formally non-binding preliminary agreements.

First, the Hadley v. Baxendale rule requires that contract damages be a “normal and inevitable consequence” of the breach and might have been in the parties’ minds when the contract was made. When parties expressly disavow any intention to be bound by the substantive terms underlined in a preliminary agreement, it contradicts Hadley and defies logic to recommend that such non-breaching party’s “benefit of the bargain” damages are within parties’ contemplation at the time the agreement was made, because those are the same damages available for a breach of the completed contract.

In effect, the parties’ intent to never be bound by the preliminary agreement’s terms should shield them from liability for a breach of the final deal.

In a similar case, the New York Court of Appeals aptly described the difficulty of granting expectation damages based on a breach of a conditional provision found in an already non-binding letter of intent. The court reasoned in Goodstein Construction Corp. v. City of New York, 604 N.E.2d 1356 (N.Y. 1992), that “profit loss based on the fulfillment of the terms of the contract being tried to negotiate could not have been fairly contemplated as damages for a breach of the agreement to start negotiating those very contractual terms.”

Steps to Avoid Using the Venture “Rule” – Benefit of the Bargain Damages

Steps to Avoid Using the Venture "Rule" - Benefit of the Bargain Damages
Steps to Avoid Using the Venture “Rule” – Benefit of the Bargain Damages

The Benefit of the Bargain Damages: Of course, as with most things, prevention is better than cure: parties can take proactive steps to avoid ending up in court action over the proper measure of damages reclaimable for breach of a binding stipulation of an explicitly non-binding preliminary agreement.

To avoid an argument there is a binding responsibility to negotiate a deal, bringing the provision under the scope of Venture, sides should specify that there is no such obligation. Furthermore, care should be taken to avoid using “contract-like” language in letters of intent. Words are important.

Non-binding provisions, for example, should relate to the “plans regarding” or “possible deal,” or another contract that “would” be relevant. It is important to avoid using words like “shall,” “will,” or “must” in any non-binding provision.

In contrast, any regulations intended by the parties to be binding, if included, should use these kinds of words to indicate contracting formality. Choosing a precise language to be included in a letter of intent adds an extra layer of safeguard from a court seeking to impose a duty to come to the negotiating table.

The net result of such precision is a provisional agreement that explicitly states it is not an agreement to negotiate a deal and does not encompass any language capable of being interpreted as constructing a binding obligation to negotiate in good faith, deeming the Venture rationale inapplicable.

Parties should include language that formally limits recovery for breach of the binding stipulation to reliance damages for the non-breaching party, or provide for a particular break-up fee. Given such a limitation, it would be difficult for a plaintiff to argue that a prize of expectation damages was in the parties’ minds at the time the letter of intent was signed.

Such language must be included in combination with a provision explicitly noting that no liability will connect for the breach of any expressly non-binding provisions of a letter of intent.

Conclusion

The Benefit of the Bargain Damages: Before executing a final contract in the increasingly challenging business world, negotiating parties regularly enter into provisional agreements, which often contain binding as well as non-binding provisions. When entering into such prelim agreements, sides should be wary of the Venture “rule,” which allows for expectation damages to be awarded for breach of a non-binding company can make.

 

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