Schwanbeck v. Federal-Mogul Corp.

• Decision Date: 27 May 1992
• Docket Number: FEDERAL-MOGUL
• Citation: 412 Mass. 703,592 N.E.2d 1289
• Parties: John R. SCHWANBECK v.CORPORATION, et al. 1
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1289

592 N.E.2d 1289

412 Mass. 703

John R. SCHWANBECK v. FEDERAL-MOGUL CORPORATION, et al. ¹

Supreme Judicial Court of Massachusetts Suffolk.

Argued Feb. 3, 1992.

Decided May 27, 1992.

John M. Harrington, Jr., Boston, John C. Bartenstein with him, for plaintiff.

Michael P. Angelini, Worcester, Vincent F. O'Rourke, Jr., and Barry A. Bachrach with him, for Vellumoid, Inc.

Samuel Adams, Boston, Ralph T. Lepore, III, with him, for Federal-Mogul Corp.

Before NOLAN, LYNCH, O'CONNOR and GREANEY, JJ.

NOLAN, Justice.

This action arises out of failed negotiations between the plaintiff and the defendant, Federal-Mogul Corp., for the purchase and sale of Federal-Mogul's Vellumoid Division (division), which Federal-Mogul eventually sold to another party (buyer), who organized a new corporation, the defendant Vellumoid, Inc. The plaintiff alleged in his complaint that Federal-Mogul breached an agreement to negotiate in good faith with the plaintiff and to honor the plaintiff's right of first refusal; defrauded the plaintiff; and violated G.L. c. 93A, § 11 (1990 ed.). The plaintiff alleged that the buyer tortiously interfered with the plaintiff's contractual and advantageous business relationship with Federal- Mogul, and also violated G.L. c. 93A, § 11 (1990 ed.).

Following a jury-waived trial, bifurcated as to liability and damages, the trial judge issued extensive findings and rulings in the plaintiff's favor. The judge awarded the plaintiff approximately $10,200,000 in damages for his "lost opportunity" to own the division; double damages under G.L. c. 93A; interest in the amount of approximately $9,600,000; and attorney's fees of approximately $2,500,000. The total damages amounted to over $32,500,000.

Both defendants appealed, and the plaintiff cross appealed from "all rulings, orders and decisions adverse to his interests." The Appeals Court reversed the judgment and remanded the action to the Superior Court. Schwanbeck v. Federal-Mogul Corp., 31 Mass.App.Ct. 390, 417, 578 N.E.2d 789 (1991). The Appeals Court held that: (1) an obligation to negotiate in good faith means that neither party may enter into the preliminary agreement for some ulterior purpose, and that Federal-Mogul satisfied this obligation, id. at 396-405, 578 N.E.2d 789; (2) a draft agreement entered into between Federal-Mogul and the buyer did not constitute an enforceable offer which triggered the plaintiff's right of first refusal, id. at 406, 578 N.E.2d 789; (3) certain misrepresentations made by Federal-Mogul to the plaintiff were not actionable because the plaintiff did not rely on them to his detriment, id. at 410-412, 578 N.E.2d 789; (4) two other misrepresentations by Federal-Mogul to the plaintiff were actionable under both common law fraud and G.L. c. 93A, id. at 411-412, 415-416, 578 N.E.2d 789; (5) the facts found by the judge did not warrant the conclusion that the buyer had tortiously interfered with the plaintiff's relationship with Federal-Mogul, id. at 412-413, 578 N.E.2d 789; and (6) with the exception of the two misrepresentations by Federal-Mogul, neither Federal-Mogul nor the buyer engaged in unfair or deceptive acts in violation of G.L. c. 93A, § 11, id. at 413-416, 578 N.E.2d 789. The Appeals Court, in reversing the judgment, remanded the case for consideration of damages and attorney's fees allocable to Federal-Mogul's two misrepresentations and the damages which flowed therefrom. Id. at 417, 578 N.E.2d 789.

This court granted the plaintiff's application for further appellate review. After a careful review of the record and arguments of counsel, we conclude that, while we agree with the Appeals Court's result, we do have some significant differences with that court's reasoning. We remand this case for consideration of damages and attorney's fees in accordance with the Appeals Court's decision. We also respond briefly to those areas of the Appeals Court's opinion with which we disagree without repeating the facts which are generously set forth in that opinion.

1. The obligation to negotiate in good faith. Both the trial judge and the Appeals Court concluded that the stated intention of the plaintiff and Federal-Mogul "to proceed in good faith in the negotiation of ... a binding definitive agreement" constituted a contractual obligation in spite of the parties' preceding disclaimer. ² 31 Mass.App.Ct. at 396, 578 N.E.2d 789. The courts differed, however, on whether Federal-Mogul violated this alleged duty to negotiate in good faith. We believe, however, that it is not necessary to determine what constitutes an obligation to negotiate in good faith or whether Federal-Mogul breached any such obligation, because we conclude that the parties did not bind themselves contractually to any such obligation.

It is a settled principle of contract law that "[a] promise made with an understood intention that it is not to be legally binding, but only expressive of a present intention, is not a contract." Kuzmeskus v. Pickup Motor Co., 330 Mass. 490, 493, 115 N.E.2d 461 (1953). Phoenix Spring Beverage Co. v. Harvard Brewing Co., 312 Mass. 501, 506, 45 N.E.2d 473 (1942). Wellington v. Apthorp, 145 Mass. 69, 74, 13 N.E. 10 (1887). It is also elementary that an unambiguous agreement must be enforced according to its terms. Freelander v. G. & K. Realty Corp., 357 Mass. 512, 516, 258 N.E.2d 786 (1970). There is no ambiguity in the letter of intent between the plaintiff and Federal-Mogul. The parties clearly stated certain contractual commitments to which they were binding themselves and, just as clearly, they followed those commitments with an expression of their intention to proceed to negotiate in good faith. That this expression of intent follows the parties' disclaimer of binding effect and begins with the word "however" does not elevate its status from a mere expression of intent into a binding obligation. ³

2. The right of first refusal. Both the trial judge and the Appeals Court also concluded that Federal-Mogul was contractually bound to recognize that the plaintiff had a right of first refusal. 31 Mass.App.Ct. at 406, 578 N.E.2d 789. In contrast to the parties' written statement concerning good faith negotiations, Federal-Mogul's promise concerning the plaintiff's right of first refusal was far more than a mere expression of intention, see note 2, supra, and therefore we agree with the conclusion of the lower courts. The trial judge found that Federal-Mogul violated that duty, by failing to give the plaintiff an opportunity to purchase the division on the same terms as were set out in a January 8, 1981, draft memorandum initialled by Federal-Mogul and the buyer, because, concluded the trial judge, that memorandum constituted a firm offer. ⁴

The Appeals Court, reversing the judge, concluded that the memorandum did not constitute a firm offer "because it contained a major hole pertaining to how the buyer would pay the purchase price, and the amount of that price, itself, was unresolved." Schwanbeck v. Federal-Mogul Corp., 31 Mass.App.Ct. at 406, 578 N.E.2d 789. The Appeals Court reasoned that the memorandum was deficient with regard to the price because: 1) the memorandum did not specify which of Federal-Mogul's liabilities would be assumed by the buyer or the value of whatever liabilities the buyer would assume; (2) various economic terms within the memorandum varied from the terms of the agreement that Federal-Mogul and the buyer executed on February 2, 1981; and (3) neither the value nor the attributes of the preferred stock, which was contemplated as part of the purchase price, were addressed by the memorandum. Schwanbeck v. Federal-Mogul Corp., 31 Mass.App.Ct. at 407-409, 578 N.E.2d 789. Once again, we agree with the Appeals Court's result although we disagree with that court's reasoning.

The first two reasons offered by the Appeals Court do not support a conclusion that the buyer did not make a firm offer to Federal-Mogul on January 8, 1981. Under the terms of the memorandum, whatever liabilities the plaintiff would have assumed from Federal-Mogul were to be deducted from the purchase price. The liabilities, therefore, would have had no net economic effect on the purchase price and their indefinite value did not affect the memorandum's status as a firm offer. Similarly, because the parties were free to modify the terms of the memorandum, that they did so does not mean that the initial memorandum was not a firm offer. See Beach & Clarridge Co. v. American Steam Gauge & Valve Mfg. Co., 202 Mass. 177, 182, 88 N.E. 924 (1909).

The memorandum's provision that the price was to include an undisclosed amount of stock at an undetermined value with unspecified attributes, however, standing alone, would have made the memorandum too indefinite to constitute a firm offer. ⁵ See Simons v. American Dry Ginger Ale Co., 335 Mass. 521, 523, 140 N.E.2d 649 (1957). The judge found and the plaintiff contends, however, that any deficiencies in the memorandum were corrected by extrinsic evidence, specifically the parties' notes and oral testimony, which established that the parties had arrived at a price of $300,000 for the preferred stock and that the basic features of the stock had been worked out. The Appeals Court, however, without explanation, did not consider the extrinsic evidence and concluded that whether the memorandum was enforceable was a question of law rather than fact. Schwanbeck v. Federal-Mogul Corp., 31 Mass.App.Ct. at 406, 578 N.E.2d 789. The plaintiff asserts, in response to the Appeals Court's position, that, when evidence is of a mixed character, testimonial and documentary as was the situation in the present case, the fact finder's determination is subject to the more deferential, "clearly erroneous" standard of review. See Bresky v. Rosenberg, 256 Mass. 66, 75, 152 N.E. 347 (1926) (if evidence of contract consists of more than writings, question is for jury); Gel Sys. Inc. v. Hyundai Eng'g & Constr....