Miller v. Flegenheimer - 2016 VT 125, 203 Vt. 620, 161 A.3d 524

Rule:

The question of whether an agreement is an enforceable contract or merely an agreement to agree involves two interrelated areas: intent to be bound and definiteness of terms. There is a paramount right of each party to determine the exact moment at which it becomes bound to an agreement. The freedom to determine the exact moment in which an agreement becomes binding encourages parties to negotiate as candidly as possible, secure in the knowledge that they will not be bound until execution of what both parties consider to be a final, binding agreement. This consideration is born out of the primary concern for courts in such disputes to avoid trapping parties in surprise contractual obligations that they never intended.

Facts:

Miller and Flegenheimer are joint owners and two of three cofounders of a document shredding company (the company). Each partner currently owns half of the stock in the company. The company has been successful, but ny 2010, it had become apparent to the partners that they were not working well together, so they hired an outside CEO and put in place a three-person advisory board to resolve their disputes independently. They also considered selling the company to an interested outside purchaser but could not agree on the price. The following year, the outside CEO left and seller became CEO. Miller withdrew from day-to-day operations for both business and personal reasons. The partners then conducted months of negotiations in an attempt to include a buy-sell agreement in their shareholders' agreement. The buy-sell agreement would create a process for one partner to buy out the other. The partners engaged counsel and exchanged numerous drafts of the proposed agreement. They spent over $30,000 of company money on the effort. In the end, Miler refused to sign the final draft of the agreement, and negotiations fell apart on December 9, 2013. The buy-sell agreement drafts had several features that mirrored seller's eventual offer to buyer. These included a “claw-back provision,” which provided that if one partner bought out the other and then sold the company for a higher price within two years, the partner who was bought out would receive half of the difference between the value at which he sold the company and the value his partner received when he resold it. The buy-sell agreement drafts did not name a fixed price for the company, and they did not include a non compete agreement or a non solicitation agreement. On December 26, fifteen days after negotiations had broken down over the buy-sell agreement, Flegenheimer sent Miller an e-mail offering terms of sale for his stock in the company. In the e-mail, Flegenheimer offered to sell the company to buyer at a price reflecting the average of two appraisals they had previously commissioned and also with the claw-back provision in place. Five days later, on December 31, Miller replied by e-mail that “I will accept” the offer, acknowledged the claw-back, and that Flegenheimer should expect “definitive documents” with “customary provisions” within about two weeks. On January 9, 2014, Miller sent a short e-mail to seller and attached a twelve-page Stock Purchase Agreement and a six-page Confidentiality, Non-Competition, and Non-Solicitation Agreement (Non-Compete Agreement). In the Non-Compete Agreement, Flegenheimer would agree not to compete with the company or solicit employees or customers of the company for three years. The Non-Compete Agreement referred to itself as “a condition precedent” of the Stock Purchase Agreement. The agreements also lowered the price buyer offered seller for his shares by $50,000, assigning that consideration to the Non-Compete Agreement. Five days later, on January 14, Flegenheimer responded that he had reviewed the Stock Purchase Agreement and Non-Compete Agreement and would be withdrawing his offer to sell his shares. Miller brought suit against Flegenheimer, requesting specific performance of the contract. Flegenheimer moved for summary judgment. The lower court found that Miller’s January 9 e-mail and draft documents constituted a proposal of additional terms that did not invalidate the original acceptance of the offer. 

Issue:

Is there an enforceable contract between the parties to sell Flegenheimer’s interest in their jointly owned business to Miller?

Answer:

No.

Conclusion:

Re: intent to be bound — following the test in Catamount Slate Products, Inc. v. Sheldon, the Court found that the parties did not intend to be bound. As to the first factor, in his December 31 e-mail, Miller made reference to forthcoming “drafts of the definitive documents.” The Second Circuit, from which the Court has adopted the four-factor Catamount Slate test, has found that a reference to a future writing shows an intent not to be bound. As to the second factor, there was no partial performance of the purported contract. As to the third factor, not all the terms were agreed on and several large and material terms were not decided. As to the fourth factor, the contract involved herein was usually reduced to a formal writing of the type that it must be reduced to in order to be enforceable. The court likewise found that this is the type of contract that is usually reduced to a writing, and we agree. The court found that “[t]he parties agree they intended a written document to follow their emails.” Further, the potential contract was so complex that the partners could not reasonably have expected to be bound without a writing. Flegenheimer was able to presente evidence that this contract contained numerous complicated provisions, including the claw-back and the Non-Compete Agreement. Added to the fact that the partners were considering a very similar agreement — the buy-sell agreement — to which they both agreed they were not bound without a signed writing also demonstrated that this potential contract was so complex that the partners could not reasonably have expected to be bound without a writing. This factor therefore weighed against enforceability.

Re: definiteness of terms — Here, framed only by the two e-mails, the terms of the agreement were unclear. First, the very nature of what seller was selling was unclear. In his December 26 e-mail, Flegenheimer referred both to “my share of [the company]” and “the entire company.” Miller, in his reply on December 31, referred to “your shares of [the company]”. “Share” and “shares” were distinct terms, and neither of them referred to a non compete or non solicitation agreement. Miller replied by sending the Non-Compete Agreement on January 9 — and referring to it as a “condition precedent” of the Stock Purchase Agreement — revealing that he assumed that the terms “share” and “shares” must include such an agreement. In other words, Miller assumed that the Non-Compete Agreement was part of the contract as agreed to in the e-mails. If he had not made such an assumption, Miller could have sent a cover letter explaining that he was proposing additional terms, which the court acknowledges “certainly would have been simpler,” but he did not. Second, the price seemed unclear. While both partners refer to the same price for seller's “shares,” Miller lowered that price by $50,000 in his draft contract, calling the difference in consideration the price of the Non-Compete Agreement. Finally, the e-mails laid out none of the particulars regarding the claw-back provision. These particulars were important because in Miller’s version of the claw-back provision, he could sell up to 75% of the company within two years without having to pay Flegenheimer, whereas the proposed buy-sell agreement's claw-back provision triggered the claw-back at 50%.