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University of South Dakota School of Law

Thursday, November 4, 2004

Cases—Precontractual Liability—No lost profits on prospective venture

A supermarket developer who wasted time negotiating with "sellers" over a piece of property that was not, in fact, for sale, could not recover lost profits on the transaction, according to the Third Circuit. The developer negotiated with two members of a family about a piece of family-owned property. Discussions went on for three months before the developer learned that the family did not intend to sell the property and the two members had no authority to negotiate. The developer sued for breach of duty to negotiate in good faith, promissory estoppel, and fraud, and sought lost profits on the deal.

The court held that there was nothing to show that even had the parties negotiated in good faith, a final agreement necessarily would have been reached, and no guarantee that necessary zoning permits could be obtained. Lost profits were thus too speculative. Lost profits were not available on the fraud claim, either, because the measure of damages for fraud is actual loss, not the value of the lost bargain.

B&P Holdings I, LLC v. Grand Sasso Inc., 2004 U.S. App. LEXIS 20559 (Ct. App. 3d Cir. Sept. 30, 2004) (unpublished)

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The opinion in this case, and the comment on it, seem to assume that there exists a duty to negotiate in good faith, but the materials I'm teaching from, at least, indicate that there's no such duty in the absence of an agreement to do so (explicit or implied from the acts and expressions of the parties). The opinion at one point refers to the claim as one for breach of "an agreement to negotiate in good faith"; in another place, it refers to "a cause of action for breach of the implied duty to negotiate in good faith." If the implied duty arises from the acts and words of the parties, then the two references mean the same thing. But does the court actually mean there is an implied-in-law duty to negotiate in good faith, in the absence of agreement of the parties? Are there cases finding a duty to negotiate in good faith in cases where there is no agreement to do so? Is it actionable simply to offer to sell something without ever intending to sell it (which is what happened in this case)? Just trying to check whether my understanding of the case law (which I taught to my students) is accurate.

Posted by: Carol Chomsky | Nov 4, 2004 1:04:19 PM

I think that's what the court is saying, and I think that this isn't in accord with the normal American rule. If the court is adopting a general duty to bargain in good faith, I think the case is important. It bugs me that an opinion on something like this can be "unpublished."

Posted by: Frank Snyder | Nov 4, 2004 1:18:03 PM

I'm not sure the court was actually adopting a general duty to bargain in good faith, especially since it's a federal circuit court applying Pennsylvania law. In a quick search of Pennsylvania decisions, I found references only to statutorily imposed duties to bargain in good faith (for public entities and employers and unions operating under labor law). If there was no factual basis for finding an agreement to negotiate in good faith (impossible to tell from the opinion, and no district court opinion to look at), I think the court slid into suggesting there was some kind of duty because it was so focused on the damages issue (and having found no right to lost profits, it didn't really have to justify its pro forma conclusion that there might have been some duty, since it wasn't compensable anyway). They couldn't adopt a new rule for Pennsylvania without some kind of discussion, and there was none. Being able to choose to make the opinion "unpublished" may invite that looseness, but it's probably just as well that this case isn't really available to cite as indicating a break with the normal American rule.

Posted by: Carol Chomsky | Nov 4, 2004 2:12:58 PM

Some have read Hoffman v. Red Owl Stores as imposing a duty to bargain in good faith. There was certainly no assurance in Hoffman that a bargain would ultimately be reached by the parties. The "promises" that were made by the defendant were too indefinite to be enforceable, and had the parties continued to bargain for a franchise in good faith and not reached agreement, it is almost certain that the court would have found no liability, even liability for reliance damages, on the part of the defendant despite his assurances that a bargain would eventually be reached. Hoffman, of couse, involved such assurances by the defendant from which this duty to continue to bargain in good faith may have arisen, while there do not appear to be any such assurances in the Pennsylvania case.

Posted by: Greg Travalio | Nov 5, 2004 5:45:00 AM

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