Last month, the Supreme Court of Iowa issued a strongly worded and unanimous opinion (with two justices abstaining) that reversed an intermediate appellate court’s decision to reinstate a $10 million judgment in favor if a company that manages casinos, against a developer that owns them. The court’s opinion offers insights for attorneys who negotiate asset management agreements and other contracts. Chief among these is that an “agreement to agree” in anticipation of a later contract can be more binding than a negotiating party may expect. The opinion also highlights the potential perils of oral agreements, which also can make more binding commitments than parties may expect.
The case, Pavone v. Kirke, ___ Iowa ___, Case No. 08-0180 (July 1, 2011), involved a management company, Signature Management Group, LLC (“Manager”) and a developer, Wild Rose Entertainment, LLC (“Developer”). At one point, these parties anticipated that the Developer would obtain gaming licenses from the Iowa Racing and Gaming Commission to open casinos, which the Manager would manage. The parties first considered opening a casino in Ottumwa, Iowa. After prolonged negotiations, the parties entered into a contract that, on one level, was an agreement to make another agreement in the future. However, beyond a mere “agreement to agree,” this contract identified specific terms that the future agreement would include. The contract provided that if the Developer were awarded a license for a casino in Ottumwa, then it would enter into a management agreement with the Manager under which the Manager would receive an annual fee equal to four percent of this casino’s “Adjusted Gross Revenue.” The contract also provided that if the Developer had an opportunity to develop any other casino in Iowa, the Developer would “use good faith best efforts to involve [the Manager] when the opportunity is first known, and to negotiate in good faith a Management Agreement . . .” I will refer to the contract the parties executed as the “Tentative Agreement”).
The Developer included a copy of the Tentative Agreement as part of its application to the Iowa Racing and Gaming Commission for a gaming license for a casino in Ottumwa, to demonstrate the availability of a Manager should a license be granted. Meanwhile, the Developer began pursuing a license for a second casino, in Emmetsburg, Iowa. The Developer orally told the Manager that the terms of the Tentative Agreement applicable to the Ottumwa development would also apply to any casino in Emmetsburg. The Developer also included a copy the Tentative Contract as part of its application to the Racing and Gaming Commission for a gaming license for a casino in Emmetsburg.
The parties engaged in prolonged negotiations toward management agreements for the two casinos, but never completed these negotiations. Instead, the Developer arranged to hire a third party to manage either or both casinos if licenses were granted.
The Iowa Racing and Gaming Commission awarded the Developer a license for a casino in Emmetsburg, but denied a license for any casino in Ottumwa. The Developer subsequently notified the Manager that it was terminating the Tentative Agreement and any future relationship between these parties. The Emmetsburg casino opened some time afterward, managed by a third party.
The Manager filed an action against the Developer for having breached the Tentative Agreement with respect to the Emmetsburg casino. In 2007, a jury found that the Developer had breached the Tentative Agreement, and awarded the Manager $10 million in damages. The jury reached this figure from projected earnings of the Emmetsburg casino over an initial 10-year term of the management agreement that was contemplated in the Tentative Agreement. The trial court entered a judgment in this amount, denying the Developer’s motions for judgment notwithstanding the verdict and a new trial. The Iowa Court of Appeals reversed this judgment. However, on further appeal, the Supreme Court of Iowa reversed the Court of Appeals and reinstated the judgment.
The Iowa Supreme Court held that there was sufficient evidence for a jury to conclude that the Tentative Agreement was more than a mere “agreement to agree,” and was in fact “a binding management agreement between the parties.” The court held that the oral promise to extend the Tentative Agreement to the Emmetsburg casino was admissible under exceptions to Iowa’s Statute of Frauds. It also held that the damages awarded by the jury were not overly speculative, noting that “recovery may be had if there is proof of a reasonable basis from which the amount can be inferred or approximated.”
The following are highlights from the Iowa Supreme Court’s opinion:
On our review of the record, we find . . . substantial evidence . . . to support the jury’s findings that the [Tentative Agreement] is a binding management agreement between the parties. A jury could find that the agreement contains all of the material terms and that the parties intended to be bound by those terms. The agreement identified the parties . . . . The purpose of the agreement was for [the Manager] to provide management services to [the Developer] for the Emmetsburg casino. The agreement specified that the [Developer] would own the casino. The duration of the agreement . . . was for an initial term of ten years . . . . The agreement specified the duties of the casino manager would be governed by industry standards known to the parties. The agreement set forth the compensation of the manager would be four percent of adjusted gross revenue . . . . Finally, the agreement contained a clause allowing termination for cause. . . .
It is true that [the Developer] presented evidence that this agreement was only an agreement to agree. . . . We must consider the record as a whole in the light most favorable to the nonmoving party and take into consideration all reasonable inferences that could be fairly made by the jury when determining if substantial evidence supports a verdict. [citation omitted] We agree with the district court, when it overruled [Developer’s] posttrial motion . . .
. . . [T]he jury could have decided from this record that the parties had a binding contract . . . [and] that [the Developer] reneged on its contractual obligations and sought to renegotiate the deal . . .
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The jury could have found the negotiations for the Emmetsburg management agreement wore on for months and every time [the Manager] believed that [it was] close to an agreement, [the Developer] would raise new objections or demand more concessions. The jury could also conclude from the evidence that [the Developer was] stalling the negotiations while attempting to negotiate a more beneficial management agreement with [the third party management company]. . . .
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Finally, the jury could have inferred a lack of good faith on [the Developer’s] part due to [the Developer’s] termination of their relationship with [the Manager] shortly after they received a gaming license. This fact could have supported a finding that [the Developer] never intended to enter into a formal management agreement with [the Manager] and [was] simply using [the Manager] to procure a gaming license for the Emmetsburg casino.
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There is reasonable basis in the record from which the amount of damages awarded by the jury can be inferred or approximated. At trial, there was testimony that, for the first five years of the Emmetsburg casino management agreement between the parties, it was conservatively projected [the Manager] would earn $6,597,029 in management fees. . . . Assuming the casino’s revenue remained flat for the next three years, the projected management fees for eight years . . . would total $10,889,108, which is $889,108 more than what the jury awarded [the Manager].
In addition to the important point that parties should deal with one another in good faith, Pavone v. Kirke offers a few reminders to attorneys who negotiate asset management agreements and other contracts:
- An “agreement to agree” can bind parties both to negotiate in good faith toward the anticipated agreement and to any specific terms that the earlier agreement requires the anticipated agreement to include.
- Oral agreements are risky, and are a recipe for dispute. They convey to some people an impression that they are not binding while, in fact, they often are. Their terms are easy for one or both parties to forget. They enable misunderstandings even as of the time they are executed, and certainly later after memories have faded.
- Even if a party to a contract dispute has a strong legal argument, if the equities of the case favor the other party, there is always a substantial possibility that the other party will win, especially if that party also has a colorable legal argument.