The plaintiff and the defendant further agreed in this written document that defendant would acquire the 60 shares of SLE stock owned by his daughter, Deborah Netto (hereinafter "Netto"), and sell them to the plaintiff. The plaintiff alleges that on or about November 25, 1992, Netto initialed the paragraph in the agreement which sets forth the obligation to include her shares in the agreement between the plaintiff and the defendant. Netto was not a signatory to the whole agreement.
Before we delve into the specifics surrounding the alleged agreement of November 25, 1992, some background information should be laid. Plaintiff is a citizen and resident of York, England. He is the owner of Explosives Developments Ltd. and affiliates, which are engaged in the development, manufacture and sale of commercial explosives, primarily to mines and quarries, in the United Kingdom. Explosives Developments Ltd.'s market share for commercial explosives in the U.K. amount to approximately one-third.
Defendant is the controlling shareholder of St. Lawrence Explosives Corp. (hereinafter "SLE"). SLE is a New York corporation with its principal place of business in Adams Center, New York. SLE manufactures low grade explosives, provides drilling and blasting services, and sells and resells explosive products. SLE has 333 shares of outstanding stock and ownership of these stocks are broken down as follows: Defendant, as majority shareholder, owns 242 shares which amounts to 73% of all outstanding shares; defendant's daughter Netto owns 60 shares; defendant's son Erik Dunk (hereinafter "Erik") owns 27 shares; and SLE's President, Julie Pecori (hereinafter "Pecori"), owns 4 shares.
The facts during trial revealed that defendant has, for a long time, been actively attempting to sell SLE. There appear to have been a number of prospective buyers including plaintiff. The most recent offer, excepting the offer made by the plaintiff which is the subject of the present litigation, was an offer made by Boyes, Inc., a Canadian explosives company. Apparently, a lot of work was invested by both parties into the proposed buy-out, but the deal fell through just prior to closing. As for plaintiff and defendant's relationship, they have had a long history of proposed joint ventures which never reached fruition; plaintiff has attempted to purchase SLE on two prior occasions without any success.
In the fall of 1992, Eric contacted plaintiff and his personal solicitor, Reginald Ashworth, to inquire whether plaintiff was still interested in acquiring SLE. At this time, plaintiff, who was disheartened by two prior failures when dealing with defendant, insisted that defendant sign an option contract prior to any further negotiations. Plaintiff did not want to travel to the United States unless plaintiff bound himself to certain terms under the option contract. Proposed option contracts were exchanged by both parties. On or about November 6, 1992, defendant sent a handwritten proposed option contract which was acceptable and signed by both parties.
At this point in time, plaintiff and Ashford made the trans-Atlantic journey to the United States to meet with defendant and to arrange financing for the transaction. They met in Watertown, New York. The terms of the option agreement need not be discussed here because the agreement never materialized due to plaintiff's failure to obtain the required amount of financing for the transaction. The primary factor in the failure to obtain the required financing was plaintiff's insistence that no personal guarantees would be given by him. Soon thereafter plaintiff left Watertown and only Ashford remained.
On or about November 25, 1992, defendant and Ashford met at the Ramada Inn to discuss a new proposal for the sale of SLE. After a breakfast meeting, Ashford retreated to his room to draft an agreement stating the terms discussed by them during their earlier meeting. By early afternoon, Ashford had drawn up a proposed agreement laying out the terms for the sale of SLE (hereinafter "the 11/25 agreement"). Initially, the agreement provides that "Seller agrees to sell and Buyer agrees to buy seller's shareholding comprising 242 shares" of SLE, and moreover, defendant is to "procure" Netto's shares to sell to plaintiff. As for the sale price, plaintiff is to pay defendant a $ 50,000 cash deposit and $ 450,000 upon closing which is to occur no later than January 31, 1993. Netto is to be paid $ 360,000 plus interest for her shares. In addition to the sale price, the agreement goes on to say that defendant is to be paid an amount of $ 2,352,000 plus interest at the rate of 7% over prime in 60 monthly installments commencing one month after closing as compensation for the non-competition and consultation clause. The interest is to have a floor of 10% and a ceiling of 15%. This interest rate is to apply to Netto's purchase price as well. The writing also contemplates the future preparation of a stock purchase agreement.
On or about December 2, 1992, plaintiff wired to defendant's bank account the $ 50,000 deposit as required under the 11/25 agreement. In December of 1992, during correspondence between the attorney's for the parties involved -- William Kissel, Esq. for the defendant and Hartley Chazen, Esq. for the plaintiff -- it was revealed that plaintiff was in the process of forming a corporation to be the record owner of defendant's SLE shares after closing.
From the testimony of the witnesses, it seems clear that defendant was very nervous of the fact that the 11/25 agreement did not call for the personal guarantee of plaintiff. On or about December 22, 1992, defendant held a closed meeting where discussions were had on the issue of whether defendant should continue to pursue negotiations with the plaintiff. The evidence showed that a majority of those attending the meeting expressed concern about the pending deal.
Between December 22 and December 30, 1992, Chazen sent Kissel, or at times Eric, various documents which had either additional or contradictory terms to the 11/25 agreement. Examples of additional terms include, but are not limited to, the terms governing the consultation and non-competition provision of the agreement and terms relating to warranties and covenants. Examples of contradicting terms are the purchase price,
the creation of LeBon, Inc. as the buyer, and the difference in the interest rate charged on the post-closing payments to be made by the plaintiff.
None of these proposed terms were binding on the parties since neither party signed off on the documents in question.
It is here noted that plaintiff did indeed remit the $ 450,000 in a form of a bank check to be deposited at defendant's bank. This check was received by defendant but was never deposited nor cashed, and it was returned to plaintiff after it became apparent that the 11/25 agreement would never be realized.
The plaintiff now brings the suit against the defendant alleging breach of contract.
This is a classic contract dispute case where one side is claiming "contract" and the other is asking "what contract?" Thus, as is the case with all contract disputes, the destiny of the parties lie in the question of whether there is a contract binding the parties to the terms therein. And if not, whether there is, at a minimum, a preliminary agreement giving rise to a duty to negotiate the open terms further in good faith.
The defendant contends that although talks were had by the parties involved and a document was drawn up and signed by both parties, this combination in no way obligates the parties to perform under the tentative 11/25 agreement. It is alleged that there were material terms missing in the said agreement which foreclosed the possibility that the agreement be binding on the parties, irrespective of their intent when signing the document. Moreover, it is argued that even if certain obligations did indeed arise out of the 11/25 agreement, at best, the only such obligation would be an obligation to negotiate further in good faith. And, since the defendant has negotiated in good faith, he contends that the agreement was not breached by him.
The plaintiff, on the other hand, argues that the 11/25 agreement was a binding contract giving rise to certain rights and obligations. He claims that the defendant breached this contract. Alternatively, plaintiff argues that the document represents a preliminary agreement giving rise to an obligation to negotiate further in good faith, an obligation which the defendant has breached by failing to close on the deal as contemplated by the parties.
It is now plain that, under New York's contract law, the parties must not only have the intent to be bound by the terms of an agreement, but the agreement itself must contain all material terms in order to give rise to a binding contract. See Brookhaven Housing Coalition v. Solomon, 583 F.2d 584, 593 (2d Cir. 1978); Rosenthal v. Kingsley, 674 F. Supp. 1113, 1119 (S.D.N.Y. 1987). As the Second Circuit has explained:
to consummate an enforceable agreement, the parties must not only believe that they have made a contract, they must also have expressed their intent in a manner susceptible of judicial interpretation. (citation omitted). If essential terms of an agreement are omitted or are phrased in too indefinite a manner, no legally enforceable contract will result.
Solomon, 583 F.2d at 593. It has been said that the "definiteness as to material matters is of the very essence in contract law," Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 52 N.Y.2d 105, 109, 436 N.Y.S.2d 247, 417 N.E.2d 541 (1981), and hence, without such terms, there would be no binding contract between the parties, irrespective of the parties' intent when forming the agreement. This is because where the parties have not provided all material terms of their contract, there is no standard by which a court can determine what constitutes a breach of that agreement. See Rosenthal, 674 F. Supp. at 1119.
In the instant matter, the agreement at issue is the 11/25 agreement. From the record, there is no dispute that the parties had the requisite intent to be bound to the terms of the agreement when they were signing the agreement. As a matter of fact, the defendant even testified during trial that by signing the agreement, he thought that "they had a deal."
The fact that the intent to form a binding contract was present does not end our inquiry, however. As stated earlier, the Court must now determine whether all of the material terms are present and stated in the agreement with the required amount of specificity. With this in mind, the Court examines the 11/25 agreement.
The agreement, on its face, purports to be a binding contract for the sale of SLE. There are many sub-parts integrated into the agreement. These sub-parts primarily consists of the terms of the stock sale, the consulting and non-compete clause, the benefits defendant is to receive after the sale, and the drawing up of further documents. After a careful review of the agreement, the Court determines that certain material terms have in fact been omitted, and accordingly, this determination forecloses the possibility of finding a binding contract between the parties in question.
There are many instances of such an omission. The first and foremost example is the consulting and non-compete clause. In New York, certain terms are considered to be material and thus are required in employment contracts. More specifically, in order for an employment contract to be effective and binding certain elements must be present. "These elements consist of the identity of the parties, the terms of employment, which include the commencement date, the duration of the contract and the salary." Merschrod v. Cornell University, 139 A.D.2d 802, 805, 527 N.Y.S.2d 109, 111 (3d Dep't 1988). The requirement that certain material terms be present also holds true for non-competition agreements. In such agreements, the required material terms include the duration, the scope and the extent of the non-compete agreement between the parties. See Carvel Corp. v. Eisenberg, 692 F. Supp. 182, 186 (S.D.N.Y. 1988); Reed, Roberts Assocs., Inc. v. Strauman, 40 N.Y.2d 303, 307, 386 N.Y.S.2d 677, 679, 353 N.E.2d 590 (1976). As such, when parties attempt to create binding obligations by entering into a contract for employment and/or non-competition, the parties must include the aforesaid terms in the agreement for the courts to give it any effect.
In the case at bar, paragraph five of the 11/25 agreement states:
5) In addition seller shall be paid as consultant and pursuant to a non-compete agreement the following sums:
a) the sum of 2,352,000 U.S.D.