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general / Contracts

Drafting contracts that sufficiently define material terms

One of the most important but frequently misunderstood issues in contract drafting is whether the material terms are sufficiently set forth so that a court can enforce the contract. Business-minded individuals often wrongly believe that leaving terms open ended or ambiguous is a good business strategy; they think it will give them leverage in the future to "re-negotiate" the deal. But it also leaves open the possibility that a court will declare the contract unenforceable, because there was no "meeting of the minds" between the parties.

The problem with an uncertain contractual provision is that the uncertain term "provides no rational method for determining breach or computing damages." Ladas v. Cal. State Auto. Ass'n, 19 Cal. App. 4th 761, 771 (1993). This article will address what is necessary to make sure that all the terms of the contract are sufficiently set forth during drafting stage so that a court does not later declare the contract unenforceable.

California Law

Under California law, there is no enforceable contract until there has been a complete "meeting of the minds" on all material points. Krasley v. Superior Court, 101 Cal. App. 3d 425, 431-32 (1980). Even one missing or inadequately defined material term can render a contract unenforceable. Weddington Productions, Inc. v. Flick, 60 Cal. App. 4th 793, 815-16 (1998). The determination of whether the essential terms of a contract are "sufficiently definite" presents a question of law for the court. Ladas, 19 Cal. App. 4th at 770. Legally, a contract that "leaves an essential element for future agreement of the parties" is unenforceable. Okun v. Morton, 203 Cal. App. 3d 805, 817 (1988); see also Los Angeles v. Superior Court, 51 Cal. 2d 423, 433 (1959) ("The general rule is that if an 'essential element' of a promise is reserved for the future agreement of both parties, the promise gives rise to no legal obligation until such future agreement is made," quoting Ablett v. Clauson, 43 Cal. 2d 280, 284 (1954)).

In sum, a contract "is unenforceable if the parties fail to agree on a material term or if a material term is not reasonably certain." Lindsay v. Lewandowski, 139 Cal. App. 4th 1618, 1623 (2006); Cal. Civ. Code Section 1580 ("[c]onsent is not mutual, unless the parties all agree upon the same thing in the same sense"); Cal. Civ. Code Section 3390(e) (contract not specifically enforceable where terms are "not sufficiently certain" to make act to be done "clearly ascertainable").

Below is a collection of cases demonstrating how contracts should and should not be drafted; it contains employment contracts, contract terms related to payment, financing agreements, settlement agreements, and motion picture production contracts.

Employment Contracts

Ladas is an example of how not to draft an employment contract. There, the unenforceable promise in the contract was "[a]n amorphous promise to 'consider' what employees at other companies [were] earning" when setting commission rates. Id. at 771. In finding the promise unenforceable, the Ladas court noted the numerous uncertainties that would defeat enforcement of the promise. The court asked, "[b]y what standard would a court or a jury determine that the company failed to meet its obligation to 'consider' commissions earned by competitors?" and concluding that "[t]he nature of the obligation asserted provides no rational method for determining breach or computing damages." Id.

Time, Place and Manner for Payment

Likewise, the lack of a time, place and manner for the payment can make a contract insufficiently definite to be enforceable. See e.g., Roberts v. Adams, 164 Cal. App. 2d 312, 315 (1958) ("[i]t is firmly established as the law of California that failure to specify or furnish a standard for determination of terms of payment ... is fatal to [the contract's] enforceability notwithstanding any desire of the courts to be liberal and helpful.") In Roberts, the court held that an option to purchase the leased property for $85,000 payable "as mutually agreed by both parties" was unenforceable, even though it was part of a five-year lease of the property, the parties executed the lease (indicating that the parties intended to conclude an agreement), and that there were other promises and consideration (a lease for five years, on specified terms).

Financing Agreements

With regard to how to draft a financing agreement, Peterson Development Co. v. Torrey Pines Bank, 233 Cal. App. 3d 103 (1991), is a good example of how not to draft a contract. There, a builder sued a lender claiming breach of a contract to provide take-out financing. The builder relied on a "letter of commitment," but the "letter of commitment" did not specify identity of the borrower (whether the builder or his homebuyers), loan amount, percentage of purchase price, interest rates or repayment terms.

The court preliminarily noted that: "A loan commitment is not binding on the lender unless it contains all of the material terms of the loan, and either the lender's obligation is unconditional or the stated conditions have been satisfied. When the commitment does not contain all of the essential terms ... the prospective borrower cannot rely reasonably on the commitment, and the lender is not liable for either a breach of the contract or promissory estoppel." (9 Miller & Starr, [Cal. Real Estate (2d ed. 1989)] [813] § 28.4, at p. 8, fn. omitted.) The material terms of a loan include the identity of the lender and borrower, the amount of the loan, and the terms for repayment." Torrey Pines Bank, 233 Cal. App. 3d at 115.

The court then found the material terms not stated with sufficient certainty to create a contract, stating: "These material contractual terms of the letter of commitment are so broadly defined that they do not appear to be capable of being made certain; on this record, no binding agreement could have been reached to supply permanent financing on mutually agreed-upon terms. ... No enforceable contract to provide permanent financing is created by this document." Torrey Pines Bank, 233 Cal. App. 3d at 115.

Settlement Agreements

Notably, even attorneys -- in the middle of litigation -- make mistakes. Weddington is illustrative as to how not to draft a settlement agreement. There, a motion picture sound effects company sued a former principal for misappropriating its library of sound effects. Id. at 798. The parties participated in voluntary mediation, at the conclusion of which they executed a one-page memorandum stating that "[a]ll parties agree to settle and dismiss on the following terms: ..." Id. at 799. One of the terms provided that "[t]he parties will formalize a Licensing Agreement." Id. at 799. The memorandum did not define "Licensing Agreement." Id. Subsequent to execution of the memorandum, the parties were unable to agree on the terms of the licensing agreement. Id. at 801-02. When the parties were unable to reach agreement, the mediator created a licensing agreement based on the mediator's perception of what licensing terms were "consistent" and "inconsistent" with the memorandum. Id. at 802-07. The plaintiff sound effects company thereafter moved to enforce the memorandum, and the trial court granted the motion and entered judgment. Id. at 809.

On appeal, the Weddington court reversed. The Weddington court reasoned the parties' settlement agreement too uncertain to enforce, id at 815, stating that the record "graphically show[ed] that there was never any meeting of the minds, either subjectively or objectively," regarding what the parties meant by the term "Licensing Agreement." Id. at 808 ("While both Weddington and the Flick Parties clearly agreed to the words 'Licensing Agreement' and 'fully paid up license' in the Deal Point Memorandum, the record summarized and highlighted above graphically shows that there was never any meeting of the minds, either subjectively or objectively, as to exactly what these words meant.").

Inamed Corp. v. Kuzmak, 275 F. Supp. 2d 1100 (C.D. Cal. 2002), demonstrates the importance of having a release in a settlement agreement. There, the plaintiffs filed a complaint against defendant, seeking a declaration that certain patents held by defendant were invalid and unenforceable and that plaintiffs had not infringed the patents. Id. at 1104. The parties engaged in settlement negotiations that culminated in a letter agreement. Id. A dispute arose regarding the enforceability of the letter agreement, however, and claims based on breach of contract related to the letter agreement were added to plaintiffs' complaint. Id. The letter agreement, however, lacked a clearly defined release provision. Id. at 1128. As such, the court held that the letter agreement was unenforceable, reasoning "[t]here is no doubt that release provisions are generally thought to be material terms of any settlement agreement." Id. at 1125. Moreover, the court noted that the letter agreement "contains no language regarding dismissal of the pending lawsuits," id. at 1126, and the court further noted, while it may be true that it is "implied," "an important and material detail is missing -- whether the dismissal was to be with prejudice or without," id. (emphasis in original).

Accordingly, the court held the letter agreement was unenforceable, because "[a]n agreement must be sufficiently definite that a court can determine the parties' respective duties and whether they have been breached. Here, while the license agreement portion of the parties' contract is sufficiently definite, in the court's view, to permit enforcement, the substance of their agreement regarding pending litigation and releases is not. Were the court to attempt to enforce the agreement at this point, it would not know which claims to dismiss with prejudice -- such that they could not be brought again in the future -- and which to dismiss without prejudice. It would not know whether to imply a broad release running in [plaintiffs'] favor, a narrow one, or none at all. It would similarly not know whether any release of [defendant] should be limited to the temporal and substantive parameters." Id., at 1127-28.

Ryles v. Palace Hotel, 2006 U.S. Dist. LEXIS 82229, 9-10 (N.D. Cal. Oct. 27, 2006), is also instructive on settlement agreements. There, the parties reached an agreement as to the amount of the settlement in the mediation session. Id. at 9. However, not all material terms of the settlement were agreed upon: the parties continued to engage in discussions regarding various terms, and defendant rejected the version of the settlement first signed by plaintiff, which contained strike-outs. Id. at 9-10. Among the items lined-out by plaintiff were factual matters agreed to regarding the case and an attorney fees provision. Id. at 10. The court found the agreement unenforceable, stating "[t]hese are important terms of the agreement; the amount of money exchanged is not the only material term." Id.

Motion Picture Production Contracts

On how to properly draft a motion picture production contracts, Roth v. Garcia-Marquez, 942 F.2d 617 (9th Cir. 1991), is instructive. There, a movie producer and an author entered into negotiations regarding the film rights to the author's work. Id. at 619. The producer's representative faxed a letter to the author's agent. Id. The letter had a detailed breakdown of the terms of the purchase and option rights. Id. The author's agent signed the fax letter and returned it with a cover letter, stating: "Thank you for today's fax and I am happy that this deal is finally concluded. I had no time to tell [the author] about this conclusion. In any case, I am returning your letter duly signed. I shall await the formal agreement at your earliest convenience." Id.

The producer's representative transmitted the 25-page formal agreement to the author's agent. Id. at 620. The author's agent objected to a number of points. Id. Weeks of renewed negotiations failed to produce an agreement. Id. The author never signed the formal agreement. Id. The producer filed a complaint in district court seeking declaratory relief to determine the status of his rights to produce the film. Id. The district court dismissed the complaint for failure to state a cause of action. Id. at 625.

The 9th U.S. Circuit Court of Appeals affirmed the dismissal, focusing on the fact that the faxed letter was too uncertain and did not contain all the essential terms: "The terms [the fax letter] set out are the following: 1) price for option rights; 2) price for extension of rights; 3) price for exercising option; 4) further payment on release of video; 5) further payment on television release; and 6) percentage of net profits. All of these terms, at bottom, concern price. Yet the other two critical terms -- where the film would be shot and who would direct it -- were not in this agreement. In fact, they were absent from the long-form agreement as well, which seems to be a major reason why it was never signed." Id. at 627.

Applying California law, the Roth court held that the failure to include all the essential terms and the failure to agree upon the essential terms was fatal. Id. ("if an essential element of a promise is reserved for future agreement by both parties there is no legal obligation until such future agreement is made."). The Roth court also rejected the producer's argument that "[t]he long-form agreement ... was merely boilerplate required by the studios," reasoning "there is no such thing as a standard form of motion picture production contract. ... [T]he terms of such contracts can and do vary." Id. (quoting Carter v. Milestone, 170 Cal. App. 2d 189 (1959)).

Carter is also instructive on motion picture production contracts. There, the court held that a motion picture agreement detailing seven different terms -- including setting up of the company, price to be paid, and option length -- was unenforceable. Id. at 192 n.1, 195-96. The writing stated: "The signatures of the parties below will indicate that this is the general understanding under which formal contracts will be prepared." Id. at 192 n.1. The writing also stated that "[t]he parties agree that the form of formal contract to be entered into will be the standard form of motion picture production contract and shall contain all of the rights usually contained therein." Id. In finding the agreement unenforceable, the court reasoned "there is no such thing as a standard form of motion picture production contract. ... [T]he terms of such contracts can and do vary." Id. at 195.

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Ben Armistead


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