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ALLEN & CO. v. OCCIDENTAL PETROLEUM CORP.

August 30, 1974

ALLEN & COMPANY, Plaintiff,
v.
OCCIDENTAL PETROLEUM CORPORATION, Defendant


Edward Weinfeld, District Judge.


The opinion of the court was delivered by: WEINFELD

EDWARD WEINFELD, District Judge.

Plaintiff is a limited partnership which is and has been engaged in the business of investment banking; its managing partners are Charles Allen, Jr. and Herbert Allen, Sr., brothers. The defendant is a corporation engaged in promoting various projects including the acquisition and exploitation of oil concessions; its principal executive officer is Dr. Armand Hammer.

 Plaintiff seeks to recover in excess of one hundred million dollars upon a claim of breach of a joint venture with defendant to acquire and exploit oil concessions in the Kingdom of Libya, or for an accounting of profits. The defendant denies the existence of a valid and enforceable agreement, contending that the arrangement of the parties was an agreement to agree in the future which never ripened into a binding arrangement and that if an agreement was in effect, a material term was not performed; in addition, it sets up various defenses, including termination of the alleged agreement by consent and acquiescence, laches, and estoppel.

 The litigation has been somewhat protracted from its start. The pretrial proceedings, including the oral depositions of the parties and witnesses, interrogatories and answers thereto, documents produced under discovery, requests for admissions and other pretrial activities produced in advance of trial a record of thousands of pages. The trial itself took twenty-one trial days, with a transcript of testimony totaling over 3,000 pages *fn1" and with several hundred exhibits in evidence. Since the trial was to the court, some testimony and a number of exhibits, which upon their face include hearsay matter and self-serving declarations, were received with the observation that the court's determination of the issues would be uninfluenced thereby and that only proper evidence would be considered. *fn2"

 Despite the very voluminous record, the issues to be decided are comparatively simple -- at least so they appear to this court -- although the parties relentlessly pursued many matters which are of minimal consequence to what the court finds are the three basic issues: *fn3" (1) was there a valid and enforceable contract of joint venture between the parties; (2) if so, did Ferdinand Galic, *fn4" as the amended complaint alleges, "turn up" the concessions granted by the Libyan government to the defendant, which are the subject of plaintiff's claim; and (3) assuming a valid agreement, was it terminated with plaintiff's consent and acquiescence. As to the first two, the plaintiff has the burden of proof; *fn5" as to the third, the burden of persuasion is upon the defendant. Thus, even if plaintiff establishes the existence of an agreement as alleged, in the event it was terminated with plaintiff's acquiescence there would be no basis for recovery. So, too, if the defendant sustains its defense of estoppel or laches plaintiff would be barred from a recovery.

 THE ALLEGED AGREEMENT OF JOINT VENTURE

 Early in 1964, in Paris, France, a "General" deRovin advised one Ferdinand Galic that he had powerful contacts in Libya to obtain oil concessions there. Galic, a long-time friend of the Allens, conveyed this information to them and portrayed deRovin as a man of great influence in Libya. Herbert Allen in turn communicated with Dr. Armand Hammer, advising they had a friend, Galic, who, with associates, could deliver oil concessions in Libya where Occidental was interested in acquiring concessions, having previously submitted proposals therefor. Thereafter, in September 1964, at London, England, Herbert Allen, Sr., Armand Hammer, "General" deRovin, Ferdinand Galic and one Taher Ogbi, a Libyan who also was represented to be influential in Libyan affairs, met at different meetings over a 2-day period. The result was twofold: (1) the defendant confirmed in writing on September 18, 1964 separate arrangements it had made with Galic, "General" deRovin and Ogbi to render services relating to Occidental obtaining oil concessions in Libya; (2) Herbert Allen, Sr. and Hammer had discussions upon which plaintiff bases its claim that an agreement was reached to form a joint venture to acquire and exploit oil concessions in the Kingdom of Libya. No writing was then signed; plaintiff alleges the agreement was sealed by a handshake between Allen and Hammer; that its terms provided, as the amended complaint alleges, the parties would share all concessions "turned up" by Galic on the basis of a 25% interest to plaintiff and 75% interest to defendant with profits and costs to be shared in the same proportion. The defendant denies that such an agreement was reached. The complaint further alleges that on December 17, 1964 a memorandum was signed in relation to their agreement. This refers to a letter bearing that date sent by Hammer to Herbert Allen which states in part:

 
"Confirming our recent conversation regarding possible concessions in Libya, we agree to the same arrangements with you on the possible second concessions as on the first concessions, namely, Occidental will share on the basis of 75% for us and 25% for you on anything Ferdinand Gallic turns up. This includes sharing costs and profits."

 Herbert Allen, after consultation with an attorney for plaintiff, made a handwritten change in the above letter by the insertion of the phrase "to be mutually agreed upon" following the words "costs." Allen then initialed and returned it to Hammer with a letter dated December 24, 1964, wherein he stated:

 
"I am returning herewith your letter of December 17th in duplicate with just one major change and that is, that the cost should be 'to be mutually agreed upon', and I have initialed same.
 
* * *"

 The change made by Herbert Allen was accepted, and initialed by Hammer who returned the letter to plaintiff on December 28, 1964.

 The foregoing recital of facts is not in dispute; also, it is not disputed that the "first concessions" referred to in the letter of December 17 are the two concessions bid for and eventually granted to defendant that are the subject of this lawsuit. Plaintiff contends that the December 17 letter with its handwritten insertion of the words "to be mutually agreed upon" merely memorialized certain provisions of the September 16, 1964 agreement concluded at London, England. In summary, it is contended that Herbert Allen for plaintiff and Armand Hammer for defendant then and there orally entered into an agreement for the acquisition and development of oil concessions in Libya, the specific terms of which were: (1) the plaintiff and defendant were co-venturers with respect to areas numbered 32 and 59, *fn6" on the basis of a 25% interest to plaintiff and a 75% interest to defendant; (2) plaintiff would contribute, upon being billed by defendant, 25% of the costs thereof and defendant would contribute 75% of such costs; (3) profits and losses would be shared 25% by plaintiff and 75% by defendant; (4) defendant would manage the venture and handle all necessary details and would bill plaintiff for its share of the costs; and (5) that either in September 1964 or sometime afterwards but prior to December 17, 1964 the foregoing agreement was amended so as to provide that the costs should be mutually authorized. *fn7"

 Defendant, on the other hand, denies that a joint venture agreement was reached in London or thereafter or that the parties even discussed at London that defendant would be managing partner of such a venture. Hammer's version is that Allen stated that Allen & Company wanted to participate to the extent of 25%, which was acceptable to him provided the concessions were obtained by Galic; further, that Allen & Company would make an investment proportionate to its percentage, but Allen said his firm was not ready to make a heavy risk investment unless the amount was mutually agreed upon in advance; that Allen "wanted freedom of action of deciding if they wanted to put up their money or if they didn't want to put up their money at any stage," *fn8" which also was agreeable to Hammer. The defendant further contends, and in support of his position points to Charles Allen's testimony at the trial, *fn9" that the December 17 letter contains their total arrangements regarding the Libyan oil concessions. The defendant's further position is that even accepting plaintiff's contention that an agreement was reached in September, later memorialized in December 1964, that it simply reflected an agreement to agree in the future since the costs of the project, a vital term, remained subject to mutual agreement.

 It may readily be acknowledged that New York law *fn10" on the issue is not sharply defined so that there may be certitude of judgment. It is clear, however, that the court's inquiry does not "come[s] to a full stop as soon as the phrase '[to be] mutually agreed upon' is encountered." *fn11" This court is of the view that the New York courts would find the answers to two questions decisive as to whether the parties here entered into an enforceable contract: (1) Did the parties intend to enter into a binding contractual relationship, even though a material term was "to be mutually agreed upon" in the future, or did the parties intend the "contract" to be binding only if they did thereafter in fact arrive at a mutually satisfactory agreement as to the term? *fn12" If the answer to the first part of the question is no and the second part yes, the agreement is incomplete and unenforceable; if the answers are the reverse, there may be an enforceable contract depending on the answer to the second or following question. (2) Assuming the parties intended to enter into a binding contractual relationship, are there sufficiently objective criteria whereby a court can determine -- in effect, fill in -- the blank or open terms? *fn13" Here, the questions are close and the cases cited by the respective parties offer no solution; the instant case must be decided upon its own facts.

 Turning to the first question, it is apparent, if the parties reached an understanding, whether in September or December 1964, that an item of importance was left open and subject to future mutual agreement -- the costs to be incurred in pursuit of the venture. These could include the preliminary expenses for the acquisition of the concessions, and once acquired, the additional expenses of their exploitation. Passing for the moment the cost of the acquisition, the expense of exploitation could run into the many millions of dollars and end up as a "dry hole" -- a complete loss of capital, one of substance and consequence, even to those of great wealth. In fact, as the parties knew, two leading American oil companies each had expended fifty million dollars exploring concessions in Libya without getting a single barrel of oil; a French oil company had a similar experience to the extent of twenty-five million dollars. The Allens acknowledged they were aware that hundreds of millions could be sunk into the ground in a vain search for oil. Thus, substance is given to Hammer's testimony that Herbert Allen, both in his discussion at the London meeting in September 1964 and again in December 1964 by his handwritten insertion of the phrase "to be mutually agreed upon," described by Allen himself as a "major change," was the cautious financial investor who sought to protect plaintiff against the risk of extremely heavy commitments with respect to the Libyan oil concessions without its prior approval and consent. I accept Hammer's testimony that at the London meeting, the discussions relative to a 25% participation by Allen & Company reflected plaintiff's purpose to have "the freedom of action of deciding if they wanted to put up their money or didn't want to put up their money at any stage" *fn14" -- that plaintiff sought and obtained such "freedom of action," thereby leaving open for future agreement an essential term of the proposed relationship.

 With "costs to be mutually agreed upon," was the defendant free to make vast expenditures of risk capital and was plaintiff to pay 25% upon being billed, or were the expenditures subject to plaintiff's prior agreement or veto? Whether conceived by Herbert Allen alone or with the advice of his counsel, the court is convinced that, upon the facts of this case, the phrase "to be mutually agreed upon" was intended by plaintiff as an escape clause whereby it would not be bound to the proposed venture unless and until it approved any costs incurred. The evidence supports a finding that the parties did not intend to enter into a binding contractual relationship absent mutual agreement upon the costs for the acquisition and exploitation of the project.

 Second, even assuming that the parties intended to be bound by their arrangement, costs, an essential term thereof, upon which the parties never reached an agreement, is so indefinite that the contract is unenforceable. If the parties failed to "mutually agree" on costs to be charged against the venture, upon what basis could a court fill in that essential term?

 What is the standard of reasonable costs or investment for the project which plaintiff claims was the subject of the joint venture agreement? Plaintiff argues that it "could no more have abandoned defendant, without paying its 25% share of the costs which were reasonably appropriate to the exploitation of the venture, than defendant could have exclude[d] plaintiff from the venture. . . ." *fn15" This rhetorical position must yield to the realities of the situation as the parties created them. Assume defendant had expended twenty million dollars for exploitation and billed plaintiff for its 25% share, but plaintiff refused to pay because the funds had been expended without its approval. Who decides, and upon what criteria, whether twenty million dollars was, to use plaintiff's language, "reasonably appropriate to the exploitation of the venture"? And if after the expenditure of that substantial sum oil was nowhere in sight, was defendant thereafter free to probe further in the hope of striking oil and to incur additional substantial expenses with plaintiff committed to pay its 25%? This is not a situation where prior demonstrated experience in an industry can be drawn upon in deciding what costs are reasonable and may be reasonably incurred, despite initial failure in carrying out or exploiting the purpose of a joint venture, as was the case in Lord v. Pathe News, Inc., *fn16" so heavily relied upon by plaintiff.

 The exploitation of concessions involves astronomical costs which vary from project to project; unusual risk capital is required. Indeed, plaintiff's lawyer, who counseled it on the inserted clause, referred to the concessions as "at most a hunting license, maybe only just a lottery ticket." *fn17" It has not been suggested, and certainly no proof has been offered, that such amounts can be determined by industry practice, custom or usage of the trade.

 Moreover, standards for determining what costs would be proper and reasonable in "turning up" the concessions are even less tangible. If the Galic group submitted a one million dollar expense bill for "turning up" concessions and one party refused to pay the agreed upon percentage of the sum, on what basis would a court determine what items on the bill were properly chargeable against the joint venture? What exactly does "turning up" an oil concession entail? Does it include hotel bills, entertainment expenses or gifts? Plaintiff has offered no evidence that would begin to answer these questions.

 The indefiniteness of the agreement is further emphasized by the testimony of plaintiff's counsel, who, upon consultation by Herbert Allen, either authorized or approved the phrase "to be mutually agreed upon." He testified that he understood the phrase to apply differently to the two phases of the proposed joint venture *fn18" -- as to the acquisition of the concessions, consent of the plaintiff to costs was required; however, once acquired, the defendant had absolute discretion to expend whatever sums it deemed necessary in exploiting the concessions. *fn19" This testimony serves to underscore that the agreement alleged by plaintiff, the enforceability of which plaintiff has the burden of proving, is indefinite, incomplete and abounds in too many uncertainties as to what the parties agreed upon. The court finds that the parties did not enter into or reach a binding agreement; further that they left open vital matters as to costs for future agreement, as to which there are lacking definite objective criteria.

 TERMINATION OF THE AGREEMENT

 Assuming, contrary to the foregoing conclusion, that there was a valid joint venture agreement, as plaintiff contends, there remain the issues of whether the concessions were in fact "turned up" by Galic, and whether the agreement was terminated with plaintiff's consent or acquiescence. Since plaintiff, somewhat contrary to its pretrial and trial position, *fn20" now contends that its claimed agreement with defendant was effective immediately when, in the summer of 1964, Galic brought to the parties' attention the opportunity to obtain oil concessions, and it was not ...


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