Agreements to agree

Suffolk County, New York, nineteen seventy three. A landlord leases a retail store to a delicatessen for five years, at a rent that climbs from five hundred dollars a month in the first year to six hundred and fifty in the fifth. The lease gives the tenant one more thing. The Tenant may renew this lease for an additional period of five years at annual rentals to be agreed upon.
Five years later the tenant gives notice that it wants to renew. The landlord says he will renew, at nine hundred dollars a month. The tenant hires an appraiser, who says the fair market rent is five hundred and forty five dollars and forty one cents. The tenant sues to compel the landlord to renew at the appraiser's figure, or at whatever the court finds reasonable. The landlord sues to evict.
So here is the question. The tenant has a renewal clause, and has used it on time. Everything about the renewal is fixed except the rent, and the rent is to be agreed upon. The parties cannot agree. May a court set the rent for them? Think about it before I go on, and notice how close this is to last lecture. The difference is that the clause names no standard at all.
And now the question I keep asking. What exactly did these people promise each other? The landlord promised a renewal. The tenant promised to give notice. And on the one term that matters, both promised only to agree later. A promise to agree is a promise about a future state of mind. If the state of mind never arrives, what has been broken?
Here is the first line for the board. A mere agreement to agree, in which a material term is left for future negotiations, is unenforceable. That is the common law, and it is not a technicality. If the parties did not fix the term, or a way to fix it, a court that supplies it is writing their contract for them.
Second line. The concern is with substance, not form. It is enough if a method for finding the term is inside the agreement, or if the agreement points to an objective outside event, condition or standard. What can be made certain is certain. That is the maxim, and it is the whole of last lecture in six words.
Third line, the exception. Where the parties clearly meant to be bound, and their own mechanism for setting a price breaks down, some courts will set a reasonable price and hold the parties to the deal, especially in a long relationship where letting the contract fail would be the greater injustice. Article Two says this for goods in section two three oh five. A few courts have said it for other contracts. Most have not.
Now the case. Joseph Martin Junior Delicatessen against Schumacher, New York Court of Appeals, nineteen eighty one. The trial court had thrown the tenant out, holding that a bald agreement to agree on a future rental was unenforceable for uncertainty as a matter of law.
The Appellate Division reversed, overruling a line of its own cases, and said a court could set a reasonable rent if the parties had not meant the lease to end on a failure to agree. The Court of Appeals reversed the Appellate Division.
Judge Fuchsberg began with first principles. A contract is a private ordering. This liberty is no right at all if it is not accompanied by freedom not to contract. And then, before the power of law can be invoked to enforce a promise, it must be sufficiently certain and specific so that what was promised can be ascertained. Otherwise, a court, in intervening, would be imposing its own conception of what the parties should or might have undertaken.
Thus, definiteness as to material matters is of the very essence in contract law. Impenetrable vagueness and uncertainty will not do. And the rule. It is rightfully well settled in the common law of contracts in this State that a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable. This is especially true of the amount to be paid for the sale or lease of real property.
Then the court told the tenant what would have worked. It certainly would have sufficed, for instance, if a methodology for determining the rent was to be found within the four corners of the lease, for a rent so arrived at would have been the end product of agreement between the parties themselves. Nor would the agreement have failed for indefiniteness because it invited recourse to an objective extrinsic event, condition or standard on which the amount was made to depend.
But the renewal clause here in fact contains no such ingredients. Its unrevealing, unamplified language speaks to no more than annual rentals to be agreed upon. Its simple words leave no room for legal construction or resolution of ambiguity. Neither tenant nor landlord is bound to any formula. There is not so much as a hint at a commitment to be bound by the fair market rental value. The tenant lost the store.
Two judges wrote separately, and the split is worth thirty seconds. Judge Meyer concurred but refused to say that no course of dealing could ever make such a clause enforceable. Judge Jasen dissented in part. The better rule, he wrote, would let a court fix a reasonable rent to avoid a forfeiture where the tenant was otherwise entitled to renew. He lost, but his view is the law in several states, and the majority listed them.
Now the exception, and a very different pair of parties. Oglebay Norton was a Great Lakes shipping company. Armco was a steel maker. In nineteen fifty seven they signed a contract under which Oglebay would carry Armco's iron ore down the lakes, and the contract ran, by its later amendments, to the year twenty ten.
It had two ways of setting the price. First, the published rate for a leading shipper in a trade paper called Skillings Mining Review. Second, if that failed, the rates charged by leading independent vessel operators.
After nineteen eighty five both mechanisms failed. The trade paper stopped publishing the rate, and the independents' rates were no longer public. Armco said that meant the contract was dead. It became impossible to price, so there was nothing to enforce. Oglebay said the parties had meant to be bound for fifty years and asked the court to set the rate.
The Supreme Court of Ohio, in Oglebay Norton against Armco, nineteen ninety, asked three questions and answered yes to all three. Did the parties intend to be bound despite the failure of both pricing mechanisms? The trial court had evidence.
The long-standing and close business relationship of the parties, including joint ventures, interlocking directorates and Armco's ownership of Oglebay stock, and a contract that let Armco require Oglebay to carry up to seven point one million gross tons a year. Whether the parties intended to be bound was a question of fact, and the trial court had answered it.
Second, could the court set a rate? Yes. It set six dollars and twenty five cents a gross ton for the nineteen eighty six season, between the extremes proved at trial, and the supreme court affirmed, citing the Restatement and section two three oh five by analogy.
Then the sentence that separates this case from the delicatessen. If it is found that the parties intended to be bound, the court should not frustrate this intention, if it is reasonably possible to fill in some gaps that the parties have left, and reach a fair and just result.
Third, could the court order the parties to negotiate each season, and to mediate if they failed? Yes, because damages over a contract running to twenty ten were too speculative to calculate, and specific performance was the only remedy that fit. So Armco, which had wanted out, was ordered to keep shipping with Oglebay for another quarter century, at rates the parties would negotiate under the court's eye.
Put the two beside each other and the line is visible. In the delicatessen the clause pointed nowhere, the relationship was five years old, and the court would not write a rent.
On the lakes the contract pointed to two standards that later vanished, the relationship was thirty years old and woven through both companies, and the court would not let the contract die. Intent to be bound decided both. In one it was absent from the words. In the other it was proved from a lifetime of dealing.
For goods, the statute settles it. Section two three oh five. The parties if they so intend can conclude a contract for sale even though the price is not settled. The price is a reasonable price at the time for delivery if the price is left to be agreed by the parties and they fail to agree, or if it is to be fixed by an agreed market or other standard and it is not so set or recorded.
That is Oglebay's problem, solved by the legislature for sales. And subsection four preserves the parties' freedom. Where they intend not to be bound unless the price be fixed or agreed, and it is not, there is no contract.
Now let's change one fact. The delicatessen's renewal clause reads, at the fair market rental value as fixed by an appraiser chosen jointly by landlord and tenant. The landlord refuses to name an appraiser. Choose an answer before I go on.
Most people say the tenant wins now, and they are right, and the Court of Appeals told you so in its own opinion. A methodology within the four corners of the lease, an objective standard, an appraiser. What can be made certain is certain. The landlord cannot defeat the clause by refusing to cooperate with the mechanism he agreed to. A court will appoint the appraiser or take the evidence itself.
Change one fact again. The Oglebay contract had been signed two years before the pricing mechanisms failed, not thirty, and the companies had no other ties. Choose.
This one is argued, and the argument is the point. The words of the contract are the same, so the mechanism and its failure are the same. What is missing is the evidence that made the Ohio court confident the parties meant to be bound whatever happened to the price.
Thirty years, joint ventures, shared directors, shared stock. Take those away and a court has to decide intent from the paper alone, and the paper says the price will come from a publication that no longer exists. Many courts would let that contract go. Oglebay is the exception, and the facts made it.
Change one fact a third time. The delicatessen lease were instead a contract to buy the store's meat from a supplier for five years, with the price to be agreed each year. Choose.
Goods, so section two three oh five. If the parties intended a contract, and a five year supply deal says they did, the price left to be agreed and not agreed becomes a reasonable price at the time for delivery. The supplier cannot walk away by refusing to agree, and neither can the store. Unless, subsection four, the contract itself made agreement on price a condition of being bound. Read for that clause before you answer.
Here is what people get wrong here, and why it is tempting. The first mistake is assuming that courts fill every gap. At common law they fill gaps the parties left a way to fill. To be agreed leaves none. The second mistake is reading Oglebay as the rule. It is the exception, earned by extraordinary evidence of intent, and the Ohio court said so by making intent the first of its three questions.
The third mistake is forgetting subsection four. Article Two supplies a reasonable price only for parties who meant to be bound without one. Parties who say they will not be bound until the price is agreed get exactly what they asked for. No price, no contract, goods to be returned.
Here is the rule, in one breath.
A term left to be agreed is no term, and at common law an agreement to agree on a material term is unenforceable unless the agreement supplies a method or points to an outside standard, but where the parties clearly meant to be bound and their mechanism fails, a court may set a reasonable term and hold them to the deal, which Article Two does as a matter of course for goods unless the parties made agreement on price a condition. Now, five questions.