Arcadian Phosphates, Inc. v. Arcadian Corp.

• Citation: 884 F.2d 69
• Decision Date: 01 September 1989
• Docket Number: No. 1282,D,1282
• Parties: ARCADIAN PHOSPHATES, INC., Judas Azuelos, and Eli Sivan, Appellants, v. ARCADIAN CORPORATION, Appellee. ocket 89-7277.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 69

884 F.2d 69

ARCADIAN PHOSPHATES, INC., Judas Azuelos, and Eli Sivan, Appellants, v. ARCADIAN CORPORATION, Appellee.

No. 1282, Docket 89-7277.

United States Court of Appeals Second Circuit.

Argued June 16, 1989.

Decided Sept. 1, 1989.

Edwin B. Mishkin, Cleary, Gottlieb, Steen & Hamilton, New York City (Judith A. Ripps, Jessica Sporn Tavakoli, Frances V. Bouchoux, of counsel), for appellants.

Peter J. Gartland, Donovan Leisure Newton & Irvine, New York City (Stephen D. Houck, Cloyd Laporte III, of counsel), for appellee.

Before OAKES, Chief Judge, VAN GRAAFEILAND and PRATT, Circuit Judges.

OAKES, Chief Judge:

This appeal is from a judgment in a diversity suit involving claims for breach of contract and promissory estoppel. The claims are based on a memorandum which described the sale of a fertilizer company's phosphate fertilizer business to a joint venture. The appellants--the potential purchasers, consisting of the joint venture and two individuals involved in its formation--claim that the memorandum was a binding contract. The appellee--the potential seller, the fertilizer company--argues that the memorandum was an unenforceable "argument to agree." The United States District Court for the Southern District of New York, Kevin Thomas Duffy, Judge, granted summary judgment to the fertilizer company. Arcadian Phosphates, Inc. v. Arcadian Corp., No. 87 Civ. 2353 (S.D.N.Y. Feb 27, 1989) (memorandum endorsement). We affirm on appellants' breach of contract claims. Because summary judgment was, however, inappropriate on appellants' promissory estoppel claim, we reverse and remand for further consideration of that claim.

I. FACTS

Appellee Arcadian Corporation ("Arcadian") is a New York corporation that manufactures and sells fertilizer. Appellant Arcadian Phosphates, Inc. ("API") is a Delaware corporation incorporated in 1986 by appellants Judas Azuelos and Eli Sivan as a vehicle for the purchase of Arcadian's phosphate fertilizer business. Azuelos, a citizen and resident of France, represents the Office Togolais Des Phosphates ("OTP"), the governmental entity in Togo that mines, markets, and exports phosphate rock. Sivan, a citizen of Israel and resident of the United Kingdom, was a businessman engaged in buying and selling Togolese phosphate rock on the world market, and is now the president, treasurer, and one of the directors of API.

In 1986, OTP became Arcadian's chief supplier of phosphate. At the same time Arcadian, allegedly motivated by a sharp drop in the price of fertilizer, began negotiating the sale of its phosphate fertilizer facility in Geismar, Louisiana to API. In June 1986, the parties signed a four-page memorandum of understanding outlining areas of agreement concerning the assets to be purchased, the purchase price, and an option for Arcadian to purchase up to 20% of API. The memorandum also set deadlines for further action, all subject to the approval of Arcadian's board and appellants' ability to obtain financing. After such board approval and appellants' successful but unconsummated search and after further negotiations, the parties signed a one-and-a-half page memorandum on November 6, 1986, that incorporated the June memorandum. It is this November 6 memorandum that appellants claim was a binding contract for the sale of Arcadian's phosphate fertilizer business.

The November 6 memorandum, together with the June memorandum that was incorporated by reference, was termed an "agreement" though subject to approval by the boards of both OTP and Arcadian. It specified the purchase price, the timing and amounts of the payments, the fixed assets to be purchased, and a closing date of not later than May 31, 1987. It also outlined a framework of negotiation for the purchase of Arcadian's finished product inventory at closing at a "mutually agreeable market value," with phosphate stores to be purchased at closing at Arcadian's book value. Other provisions were less definite: for example, the memorandum referred to part of the payment as "a note secured to Arcadian's satisfaction" and to additional equity participants in the proposed joint venture as "subject to mutual agreement." The November 6 memorandum provided that if negotiations for the sale failed, Arcadian would repay any capital expenditures agreed to thereafter and made by API, and if the negotiations failed through no fault of API, Arcadian would refund API's deposit. The November 6 memorandum also stated that "the service and supply agreement will be negotiated and agreed to by December 31, 1986" and [a] binding sales agreement will be completed by December 31, 1986." Finally, both parties agreed to the memorandum "to cooperate fully and work judiciously in order to expedite the closing date and consummate the sale of the business."

By November 14, 1986, the Arcadian board unanimously approved what Arcadian's CEO then called the "proposed agreement"--though the CEO now says that the board only approved of his proceeding with negotiations. The November 6 memorandum was also approved by OTP. The parties then confirmed by Telex their respective approvals and took steps to consummate the transaction. According to the appellants, these included establishment of API offices at Arcadian headquarters; Arcadian's obtaining lenders' consents after informing them of the "agreed upon" sale with a "signed agreement"; introduction of Azuelos and Sivan to one supplier as "new owners"; and beginning the negotiation of supply contracts for API.

On November 26, API tendered a cash deposit of $687,500 as required. Arcadian executed an escrow agreement for the deposit, referring to the parties' "agreement" and pursuant to which the deposit was to be non-refundable except "because of force majeure or Sellers' default." The minutes of an Arcadian directors' meeting on December 11, 1986, reflect the deposit payment and say that "[f]inal negotiations are continuing to work out the necessary service and marketing agreements," with a closing date of the "venture" to be "no later than May 31, 1987."

On December 17, 1986, Arcadian agreed in writing that its option for 20% minority participation in API could be reduced by API to as low as 5% to enable API to secure financing. API also incurred, it is alleged, expenses of over $100,000 to install "fenders" at Arcadian docking facilities in Geismar, Louisiana, in order to permit the discharge of Togolese rock. API also obtained a bank commitment for the $7 million required for its cash payment toward the $13.75 million purchase price and allegedly entered into a long-term rock supply contract with OTP. According to appellants, Arcadian did not undertake to enter any 1987 supply contract, but merely extended its existing contract pending the closing. And in January 1987 Arcadian allegedly commissioned a survey which designated which portions of the land and buildings were to go to API and which to remain with Arcadian.

However, as the minutes of the Arcadian board meeting of February 26, 1987, reflect, the market for phosphates changed "dramatically" with market prices of diammonium phosphate, apparently the bellwether of the industry, going up 25% in four to five weeks, production levels increasing, and inventories being depleted. The same board minutes noted:

[API] is pushing for an early closing and therefore is attempting to lock up financing as soon as possible. However, major issues and concerns still exist from Arcadian's point of view and need to be resolved. The major issues to be negotiated involve inventory transfer, charges for SG & A expenses and insurance coverage. The concerns of Arcadian are the need for retention by Arcadian of majority ownership and control of [API] and the long-term affect [sic ] on the nitrogen business. After extended discussion it was the consensus of the Board that Arcadian could not proceed with the joint venture as originally contemplated. In order to proceed with any potential joint venture of the phosphate business, it was the consensus of the Board that Arcadian must have majority ownership and management of the venture and the other open issues must be resolved to Arcadian's satisfaction.

When Arcadian informed API of its change of position--from agreeing to own 5% to 20% of the joint venture (at API's option) to wanting to own 50%-plus and returning the down payment--this suit ensued.

II. DISCUSSION

A. Breach of Contract

As appellants urge, we examine their breach of contract claims ¹ under a framework devised by Judge Leval in Teachers Insurance & Annuity Association v. Tribune Co., 670 F.Supp. 491 (S.D.N.Y.1987). In Tribune, Judge Leval surveyed the doctrine on preliminary agreements, like the one in this case, noting that "[a] primary concern for courts in such disputes is to avoid trapping parties in surprise contractual obligations that they never intended." Id. at 497. Therefore, the judge concluded, "[m]ore is needed than agreement on each detail [to create a binding obligation. There must be] overall agreement ... to enter into the binding contract." Id.; see also Washington Heights-West Harlem-Inwood Mental Health Council, Inc. v. District 1199, Nat'l Union of Hosp. & Health Care Employees, 748 F.2d 105, 107 (2d Cir.1984) (intent determines whether document constituted binding agreement); Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 261 (2d Cir.) (same), cert. denied, 469 U.S. 828, 105 S.Ct. 110, 83 L.Ed.2d 54 (1984); V'Soske v. Barwick, 404 F.2d 495, 499 (2d Cir.1968) (same), cert. denied, 394 U.S. 921, 89 S.Ct. 1197, 22 L.Ed.2d 454 (1969).

In Tribune, Judge Leval identified two types of preliminary agreements. In the first, the parties have reached complete agreement on all of the issues that require negotiation, but they have not yet completely formalized their agreement. In the second, the parties have committed themselves to some major terms, but some terms will remain to be negotiated--as is the case with the memorandum at...