We Scribbled Our Deal On A Napkin!
Is It Binding?

      So you cut a deal to buy a coin laundry at the neighborhood
coffee shop and the closest piece of paper was a napkin!  Is  the
deal binding?  You wouldn't be the first person in California  to
ask  the  question.   Some people expect to  bind  themselves  by
signing a napkin or other piece of paper, and others don't.   The
issue is frequently litigated in California.

     In Rennick v. O.P.T.I.O.N. Care, Inc., 77 F.3d 309 (9th Cir.
1996),  a physician and an attorney sought to become the Canadian
franchisee  of a franchisor that provided home medical  services.
A  meeting  was held to discuss the acquisition of the franchise.
The   proposed  franchisee  circulated  a  written  agenda   that
indicated  one  of the purposes of the meeting was "to  formulate
terms  of a proposed initial agreement" establishing the business
relationship   and  also  provided  that  the  proposed   initial
agreement  would  be subject to Board approval of  all  parties."
The meeting was held without lawyers.

      Everyone came to an "agreement" on the basic terms  of  the
deal  and  at  the  conclusion  of  the  meeting,  the  physician
suggested  that the persons present "formalize" the  relationship
by shaking hands.  Everyone obliged and shook hands.

      One of the negotiators on behalf of the proposed franchisee
testified in deposition that:

     "At  the end of the meeting I volunteered that the  way
     we  had formalized relationships before getting lawyers
     involved was to sort of do it on a handshake basis, and
     that  we wanted to feel that the people we were dealing
     with  were  as  good  as their word.   And  we  usually
     formalized  that  by a handshake on  the  deal.   So  I
     proposed  that, having spent these previous months  and
     these  three or four hours bringing into the best  form
     we could our understandings, that we formalize the deal
     by  a  handshake.   And my recollection  is  that  [the
     franchisor representative] enthusiastically  agreed  to
     that   and  all  the  principal  parties  got  up   and
     circulated  around the room and shook hands  with  each
     other on having made the deal."  (Emphasis added.)

      The  physician's attorney prepared a letter of intent  that
included an agreement that the parties would "continue good faith
discussions  directed  toward  the  creation  of  formal  written
contracts."   The  franchisor  signed  the  letter,  but   added,
however,  that "this letter of intent is of no binding effect  on
any  party  hereto."   The franchisor later denied  that  it  was
required to comply with the agreement.

      The  proposed  franchisees asserted  that  either  an  oral
agreement reached at the meeting, confirmed by the handshake,  or
the letter of intent, created a binding agreement.  The Court  of
Appeal   affirmed  the  trial  court's  decision  rejecting   the
agreement on the ground that no contract was made.

      The  court noted that the parties' understanding that  they
would later enter into more formal agreements did not prevent  an
oral agreement from acting as a binding contract, if that is what
everyone  intended.  The court also noted that  a  handshake  can
constitute  sufficient  evidence for a jury  to  infer  that  the
parties intended to be bound at the time.

      The  court also noted, however, that the handshake must  be
interpreted in light of the agenda and the letter of intent.  The
letter  of intent indicated that it did not bind the parties  and
that there would be no contract until the boards of directors  of
the parties approved the written contract.

      A  letter  of  intent that refers to the preparation  of  a
subsequent   definitive  agreement  can  constitute   a   binding
agreement.  In such circumstances, the letter of intent creates a
binding  obligation for the parties to act in good faith  in  the
preparation   of   definitive  documents.   In  this   particular
situation, however, the letter included express language that  it
did not bind the parties.  It said, "this letter of intent is  of
no binding effect on any party hereto."  The court thus concluded
that  "[I]f  `there  is  a  manifest intention  that  the  formal
agreement is not to be complete until reduced to a formal writing
to  be  executed,  there  is no binding contract  until  this  is
done.'"

      In  another case of Jacobs v. Freeman, 104 Cal. App.3d  177
(1980),  however,  subsequent  board  of  director  approval  was
determined to not necessarily mean that the parties do not intend
to be bound.

     In Jacobs v. Freeman, the parties had entered into an escrow
for  the sale of property.  The escrow instructions providing for
the  sale  obligated  the seller to convey the  land  upon  board
approval.   The  court  noted  that  the  "seller's  agents  were
required to act in good faith by seeking board approval  for  the
transaction, and the board was required to consider the  proposal
honestly."   The  court  in Jacobs v. Freeman  focused  on  three
fundamental principles of contract interpretation:

     "First,  a contract must receive such an interpretation
     as   will   make  it  lawful,  operative,   definitive,
     reasonable,  and capable of being carried into  effect,
     if this can be done without violating the intent of the
     parties. . . .

     "The  second  principle is that  `[i]n  every  contract
     there  is  an implied covenant of good faith  and  fair
     dealing  that  neither  party will  do  anything  which
     injures  the right of the other to receive the benefits
     of  the agreement. . . .'  The implied covenant imposes
     upon  the  parties  an  obligation  that  the  contract
     presupposes they will do to accomplish its purpose.

     "Third, in the case of an uncertainty as to the meaning
     of  the  contract, when the uncertainty is not remedied
     by  other rules of interpretation, the language  should
     be construed most strongly against the party who caused
     the  uncertainty  to exist. . . .  Since  the  seller's
     agents   prepared   the   escrow   instructions,    any
     uncertainty not remedied by other rules of construction
     must be construed against the seller."

      It is thus clear that individuals entering into a letter of
intent  should state expressly whether they intend to  be  bound.
Any evidence of an intention to be bound could raise a good faith
duty  to  continue  discussions  and  negotiations  to  reach   a
definitive agreement.

     The moral to the story?   Get the lawyers involved!

[This column is intended to provide general information only  and
is  not intended to provide specific legal advice; if you have  a
specific  question  regarding the  law,  you  should  contact  an
attorney  of your choice.  Suggestions for topics to be discussed
in this column are welcome.]


Reprinted from New Era Magazine
Myles M. Mattenson © 1996-2002