In a lawsuit based on breach of an agreement to negotiate the sale of real estate, the Ninth Circuit Court of Appeals held that damages based on lost profits were too speculative to allow the buyer to continue his lawsuit. [Vestar Development II v. General Dynamics Corp., 249 F.3d 958 (9th Cir. 2001).]
General Dynamics (Seller) and Vestar Development (Buyer) entered into an agreement, a Letter of Understanding, to negotiate the sale and purchase of part of a tract of land owned by Seller. The Letter of Understanding required Seller to negotiate exclusively with Buyer. Before the end of the term of the agreement, however, Seller advised Buyer that it would be selling the entire tract of land to a third party.
Buyer sued Seller for breaching the agreement to negotiate; Buyer only sought damages for lost profits, arguing that it had lost $48,000,000 because it had not been able to purchase the property and build a shopping center on it. The district court dismissed Buyer’s lawsuit, because the damages for lost profits were too speculative and could not be proved with “reasonable certainty.” Buyer appealed to the Ninth Circuit Court of Appeals.
The Court’s Decision
The Ninth Circuit Court of Appeals agreed with the district court, relying on California Civil Code § 3301, which states, “No damages can be recovered for a breach of contract which are not clearly ascertainable in both their nature and origin.” In other words, Buyer was required to establish with reasonable certainty and probability the profits that it allegedly lost as a result of Seller’s failure to negotiate.
According to the Court, the damages for lost profits in this case were not reasonably certain because there was no way to evaluate, other than through speculation, the profits that Buyer might have made if it had been able to build its shopping center. The Court further noted that there was no way to know if the parties would have even reached an agreement or what the terms of that agreement would have been. The Court indicated that Buyer’s action would probably not have been dismissed if Buyer had sought reliance damages which are not as speculative, such as damages for time spent, expenses incurred, opportunities foregone, or damaged reputation.
Questions Left Open
It should be noted that the Court of Appeals left a couple of important questions unanswered. Seller argued on appeal that agreements to negotiate are unenforceable under California law. Noting the unsettled nature of California law on this issue, the Court of Appeals declined to address the issue because it could resolve the dispute on other grounds. The parties also addressed the issue of whether lost profits for breach of an agreement to negotiate should ever be allowed. Again, the court declined to address the issue because it could resolve the dispute on other grounds.
Other Recent Relevant Cases
For a discussion of a recent decision where the Ninth Circuit Court of Appeals found that damages were proved with reasonable certainty and probability, see the legal alert on Silver Sage Partners, Ltd. v. City of Desert Hot Springs, 2001 WL 585539 (9th Cir. 2001).