KF&C California Law Blog

December 20, 2023 | Business Litigation

When a Contract Doesn’t State the Price: It May Still Be Enforceable if it Provides a Practical Method for Determining the Price

An allegedly indefinite contract may not be enforceable for two reasons: First, the contract may be too indefinite for the court to administer—no remedy can be properly framed. Second, the indefiniteness of the contract may show a lack of contractual intent. Nevertheless, a contract need not specify price if price can be objectively determined. The absence of a price provision does not render an otherwise valid contract void.

Under California law, courts construe instruments to render them effective rather than void. Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 954. The law leans against destroying contracts because of uncertainty. If feasible, courts construe agreements to carry out the reasonable intention of the parties. Patel v. Liebermensch (2008) 45 Cal.4th 344, 349.

In a recent opinion by the California Court of Appeal, Second District, the Court re-examined the issue of enforceability of an alleged contract with indefinite terms. Tiffany Builders, LLC v. Delrahim (Cal. Ct. App., Nov. 28, 2023, No. B314861) 2023 WL 8229908. In Delrahim, Tiffany Builders signed an agreement with non-party Mekhail to purchase 13 gas stations for $12.4 million. The deal was then delayed. A few months later, Defendant Delrahim expressed interest in this deal to Tiffany Builder’s owner, Rostamian. After discussions via email and text, the two met in a coffee shop. During the meeting, they composed and signed a two-page handwritten document on a piece of notebook paper to reflect their agreement (the “Writing”). Id. at *1. As Rostamian’s declaration later explained, Delrahim agreed to pay Rostamian $500,000 for Rostamian to withdraw from the escrow in the agreement with Mekhail so that Delrahim could complete the deal with Mekhail at a price to be determined by further negotiation with Mekhail. Delrahim would then own nine out of the 13 stations, and Rostamian would own the other four dealer sites that would be operated by Delrahim. Rostamian would pay Delrahim $4,000 a month for operating the four dealer sites. Id. at *2.

None of what was listed in the Writing occurred; Delrahim dealt directly with Mekhail and bought the 13 stations for approximately $11 million, and Tiffany Builders and Rostamian were cut out of the deal.

Tiffany Builders then sued Delrahim for breach of contract, specific performance, intentional and negligent interference with prospective economic advantage, and unfair business practices. Delrahim moved for summary judgment, which the trial court granted. The court reasoned the Writing was too indefinite to be a contract. The court considered the parol evidence from Rostamian’s declaration but concluded this evidence failed to clarify the terms to a legally acceptable degree. Delrahim also argued that Rostamian’s declaration was a sham. Id. at *2-3.

The Appellate Court first examined the issue of parol evidence. As the Court noted, the “test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible.” Pacific Gas & Electric Co. v. G. W. Thomas Drayage & Rigging Co. (1968) 69 Cal.2d 33, 37. The Court found that Rostamian’s declaration satisfied this test, because it was relevant to prove a meaning to which the Writing was reasonably susceptible. Id. at *3.

The Court then examined the enforceability of the parties’ Writing, and stated: “[t]here are two reasons not to enforce an indefinite agreement. First, the agreement may be too indefinite for the court to administer—no remedy can be properly framed. Second, the indefiniteness of the agreement may show a lack of contractual intent.” Id. at *4

“The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy.” Rest. 2d of Contracts § 33 (2). “When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.” Id. § 204.

The Court found that Rostamian’s explanation of the Writing made it definite enough for judicial enforcement. As explained, first, “[Rostamian] would withdraw from the escrow to give Delrahim pride of place, allowing Delrahim to profit from Rostamian’s effort in finding and trying to exploit this business opportunity. Second, Rostamian would cooperate with Delrahim’s effort to negotiate from Mekhail a price lower than $12.4 million. Third, Rostamian would pay Delrahim $4,000 a month to operate the four gas stations referred to as dealer sites. In return, Delrahim made three clear promises of his own: to pay Rostamian $500,000; to grant Rostamian ownership of, and profits from, the four dealer sites; and to operate the four dealer sites for Rostamian.” Delrahim, 2023 WL 8229908, at *4. Such an exchange of promises was an enforceable contract. Id.

The Court further determined that even though a price-related term was still to be determined at the time of signing the Writing, that did not destroy the contract. “A contract need not specify price if price can be objectively determined. The absence of a price provision does not render an otherwise valid contract void.” Id. at *5 (citing Cal. Lettuce Growers v. Union Sugar Co. (1955) 45 Cal.2d 474, 481–82). The Court reasoned that “[i]n the process of negotiating an agreement, price is a term frequently left indefinite and to be settled by future agreement. If the parties provide a practical method for determining this price, there is no indefiniteness that prevents the agreement from being an enforceable contract.” Id.

It is well-settled under California law that “although the necessity for definiteness may compel the court to find that the language used is too uncertain to be given any reasonable effect, when the parties’ language and conduct evidences an intent to contract, and there is some reasonable means for giving an appropriate remedy, the court will strain to implement their intent.” Id.

Finally, the Appellate Court found that the trial court misapplied the doctrine against sham declarations. In the trial court’s statement of decision concerning contract uncertainty, the court disregarded part of Rostamian’s declaration. That declaration, however, was consistent with the relevant portion of Rostamian’s deposition. Therefore, on this issue, Rostamian’s declaration was not a sham. Id.

Practice Tips

In a situation where a contract contains a price provision that is not certain, this uncertain price provision may not be a barrier to contract enforcement if the parties have provided a practical and objective method at the time of contracting for determining the price. Use of a price “placeholder” may be considered acceptably certain under Delrahim. As such, when a contract is without a definite price, one of the key factors for the contract’s enforceability will be whether the contract provides a formula for ascertaining the presently unknown price, where the exact number can be determined by future events.

For further questions or comments on the content of this post, please email Matt Cave at [email protected] or Sara Borjigin at [email protected].

 

John
Matthew J. Cave

Founding Partner

(310) 409-0475

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sara
Shiqi (Sara) Borjigin

Associate

(310) 409-4678

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