The language of a preliminary
agreement calling for the parties to negotiate in good faith with a view to
signing a "Definitive Agreement" was sufficient to allow for the
remedy of specific performance of the preliminary agreement. Dr. John E.
Murray, Jr. analyzes Stanford Hotels Corp.
v. Potomac Creek Associates, L. P., 18 A.3d 725 (D.C. Ct. App. 2011) [an enhanced version of this opinion is available to lexis.com
subscribers / unenhanced version available from lexisONE Free Case Law].
Negotiations concerning a major
sale of a business or commercial property will typically require considerable
time and expense. To assure efficiency and good faith in negotiations, the
parties often enter into a preliminary agreement that earlier courts often
refused to enforce on the footing that they were mere "agreements to
agree." Even if a court concluded that there was a breach of an implied
covenant of good faith, it would often find an insuperable difficulty in providing
an effective remedy. Other courts found good faith to be an unreliable guide in
the negotiation phase of a transaction where both parties in a business
transaction were seeking the better side of the deal. See Corbin on
Contracts § 2.8(b).
Modern Courts Will Enforce Preliminary Agreements
Modern courts, however, are willing to consider the enforcement of such
preliminary agreements. While the remedy for breach would often be relegated to
the protection of the aggrieved party's reliance interest, courts have
announced their willingness to allow the recovery of expectation damages if
they can be proved with reasonable certainty. See, e.g., Venture Associates
Corp. v. Zenith Data Systems Corp., 96 F. 3d 275 (7th Cir. 1996) [enhanced version only]. The remedy of specific performance
of such a preliminary agreement, however, may appear inapplicable since a
preliminary agreement is not a final agreement to sell property or a business.
In a recent case, a trial judge so held, but the court of appeals found the
language of the preliminary agreement sufficient to remand the case to allow
for the specific performance of the preliminary agreement. Stanford Hotels,
Corp v. Potomac Creek Associates, L. P., 18 A.3d 725 (D.C. Ct. App. 2011) [enhanced version / unenhanced (free) version].
In October 1997, Stanford Hotels made the highest bid of $48.75 million to buy
the 370 room L'enfant Plaza Hotel from Potomac Creek. Shortly thereafter, the
parties signed a preliminary agreement that contained the following clause:
Definitive Agreement. Buyer and Seller shall negotiate in good faith with a
view to signing a Definitive Agreement within ten (10) days after execution of
this letter, which agreement shall, inter alia, include the terms and conditions
set forth in this offer.
Because the parties had underestimated the complexities involved in the
transaction, the negotiations proceeded for several months rather than a mere
ten days. Potomac created a definitive agreement which it sent to Stanford to
sign. Notwithstanding some discomfort with the agreement, the president of
Stanford signed it on June 2, 1998 and returned it with a cover letter from
Stanford's counsel stating that, regardless of its discomfort, Stanford was
willing to move forward with the agreement as set forth. Potomac, however,
refused to sign the agreement though it had pressed Stanford to sign it.
Stanford resorted to seeking specific performance of the preliminary agreement
that both parties had signed.
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Dr. Murray, So, in the case of Stanford Hotels, Corp v. Potomac Creek Associates, has it been decided that specific preformance was actually decided to be the remedy (meaning Potomac Creek would have to go forward with the sale)? Thank you,