When is a Deal a Deal?

Posted by William J. Piercy on

Goobich v. Waters, 283 Ga. App. 53 (2006).  The Waters entered into negotiations to sell their nursery business to Goobich.  After protracted negotiations, the parties both signed a Letter of Intent (LOI) under which Goobich was to buy the business for $1,950,000 in cash at closing, a five-year contract for consulting by the Waterses in exchange for $225,000, a six-year earn-out of $600,000 to the Waterses, and an incentive bonus of $150,000.  However, the LOI further provided that:

It shall not create any legally binding rights or obligations … except as provided in Paragraphs 6, 7, 8, [and] 10 below.  Instead, Buyer and Seller … have merely expressed their intention of negotiating one or more agreements … containing principal terms, as may be mutually agreed therein.  Upon your execution of this letter, each of the undersigned will use their mutual reasonable efforts to negotiate a binding Purchase Agreement …

Paragraph 6 of the LOI conditioned closing the transaction on, among other things, execution of a definitive Agreement of Sale by all the parties.  In other words, there was no deal until the parties signed a formal contract.  Paragraph 11 of the LOI reiterated that it “[did] not constitute an agreement to consummate the transactions described herein,” and that “any legal obligations between the parties hereto shall be only as set forth in a duly negotiated and executed formal written definitive Agreements of Sale if the parties are successful in negotiating same.”

Approximately a month later, the parties executed an addendum identified as “ an integral part” of the LOI.  In addition to removing various contingencies not at issue here, the addendum specified that the previously non-binding LOI was to be binding on the parties, subject only to the precondition that they sign a “definitive Agreement of Sale” and some additional conditions.  Per the addendum, the parties also agreed to deposit $1,000 with a broker to be used to pay a transactional attorney to draft the “definitive Agreement of Sale.”  The Waterses then paid the $1,000 to the broker.

The property was appraised pursuant to Goobich’s efforts to finance the transaction.  The appraisals indicated a property value that was much higher than the Waterses had anticipated.  Perhaps believing that Goobich was getting the better end of the deal, the Waterses, therefore, asked Goobich to personally guarantee the earn-out payments.  When Goobich declined, the Waterses refused to sign any Agreement of Sale or to otherwise consummate the transaction.

Goobich subsequently brought suit for breach of contract and for specific performance.  In so doing, Goobich took the position that the LOI, as amended by the addendum, constituted a binding contract.  However, the trial court disagreed and found that no enforceable agreement existed.

The Court of Appeals reversed the trial court, holding that the addendum here can be read in only one reasonable way:  that the parties intended to bind themselves to the terms laid out in the LOI, subject to the contingency that the parties prepare and execute closing documents.  Shortly after the signing of the addendum, the Waterses paid for their portion of the closing attorney fees and assured Goobich that his providing them with the appraisals would not scuttle the deal.  The existence of this future obligation to execute closing documents, identified by the LOI one of “the customary conditions to closing,” does not mean that the parties did not intend to be bound by the essential terms already agreed to.  The execution of the closing documents was, in short, “a condition precedent to the duty of both parties to render their promised performances[,] and not a condition precedent to the existence of a valid contract.”  The Court went on to note that the plain language of the addendum shows that the parties had reached a binding agreement on all material terms concerning the purchase and sale of the nursery business.