Urging the Maine Supreme Judicial Court to Adopt Reliance Damages As the Proper Measure of Compensation for Breach of An Agreement to Negotiate in Good Faith
This case raises an issue of first impression in Maine, namely what should be the proper measure of damages where a court has determined that there has been a violation of a duty to negotiate in good faith. Here, the jury, after finding that the duty had been breached and over the defendants’ objection, was permitted by the trial judge to award “lost profits” to the plaintiff. The appellant, Eastern Maine Electric Corporate, Inc., while not conceding that the jury finding that it had violated its duty was legally correct, also disputes that “lost profits” are a proper measure of damages.
While there is a split in the decisions on this issue throughout the country, NELF has filed an amicus brief urging the Maine Supreme Judicial Court to adopt a general rule that where, as here, a deal has never been finalized, the appropriate measure of compensation for the violation of a duty to negotiate in good faith, should strictly be reliance damages, and not lost profits. NELF relies on the reasoning of the New York court in Goodstein Constr. Corp. v. City of New York, which focused its legal analysis on the precise nature of the sole obligation that was breached, which was not a breach of a contract, but a breach of the duty of negotiate in good faith a contract not yet in existence. Since the contract was never executed, NELF argued that it would be anomalous to award expectancy damages for the breach of an agreement that was never finalized.
In addition, NELF pointed out several policy and logical reasons that dictate that reliance damages are the most appropriate form of compensation when there has been a failure to negotiate in good faith. Among these, NELF noted that holding “lost profits” to be the measure of compensation could have a deleterious effect on the use of term sheets and other interim agreements that are routinely used as the parties work through their negotiations; such a ruling would create an in terrorem regime in which such interim documents could be potential bases for “lost profits” damages, which are typically much larger than the actual costs that the parties have sunk into their contract negotiations. (In this case, the lost profits damage award was $13.6 million, which is exponentially larger than the costs actually incurred by the plaintiff in the negotiations, which were estimated to be not more than $350,000.)
This case raises an issue of first impression in Maine, namely what should be the proper measure of damages where a court has determined that there has been a violation of a duty to negotiate in good faith. Here, the jury, after finding that the duty had been breached and over the defendants’ objection, was permitted by the trial judge to award “lost profits” to the plaintiff. The appellant, Eastern Maine Electric Corporate, Inc., while not conceding that the jury finding that it had violated its duty was legally correct, also disputes that “lost profits” are a proper measure of damages.
While there is a split in the decisions on this issue throughout the country, NELF has filed an amicus brief urging the Maine Supreme Judicial Court to adopt a general rule that where, as here, a deal has never been finalized, the appropriate measure of compensation for the violation of a duty to negotiate in good faith, should strictly be reliance damages, and not lost profits. NELF relies on the reasoning of the New York court in Goodstein Constr. Corp. v. City of New York, which focused its legal analysis on the precise nature of the sole obligation that was breached, which was not a breach of a contract, but a breach of the duty of negotiate in good faith a contract not yet in existence. Since the contract was never executed, NELF argued that it would be anomalous to award expectancy damages for the breach of an agreement that was never finalized.
In addition, NELF pointed out several policy and logical reasons that dictate that reliance damages are the most appropriate form of compensation when there has been a failure to negotiate in good faith. Among these, NELF noted that holding “lost profits” to be the measure of compensation could have a deleterious effect on the use of term sheets and other interim agreements that are routinely used as the parties work through their negotiations; such a ruling would create an in terrorem regime in which such interim documents could be potential bases for “lost profits” damages, which are typically much larger than the actual costs that the parties have sunk into their contract negotiations. (In this case, the lost profits damage award was $13.6 million, which is exponentially larger than the costs actually incurred by the plaintiff in the negotiations, which were estimated to be not more than $350,000.)
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