United States Court of Appeals
For the First Circuit
No. 02-1625
YSIEM CORPORATION,
Plaintiff, Appellant,
v.
COMMERCIAL NET LEASE REALTY, INC.,
Defendant, Appellee.
__________
OFFICEMAX, INC.,
Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jay A. García-Gregory, U.S. District Judge]
Before
Boudin, Chief Judge,
Selya and Lipez, Circuit Judges.
Eugenio C. Romero with whom Eugenio C. Romero Law Offices was
on brief for appellant.
Verónica Ferraiuoli-Hornedo with whom Néstor Durán and
McConnell Valdés were on brief for appellee.
May 1, 2003
BOUDIN, Chief Judge. Ysiem Corporation ("Ysiem") is a
Puerto Rico corporation that owns a parcel of land in Rio Piedras,
Puerto Rico. In late 1997, Ysiem inquired through a broker whether
the office supply chain OfficeMax would be interested in building
a store on a portion of the site. OfficeMax replied that it does
not acquire or develop property itself; it will only lease (or
sublease) sites that are fully developed. The broker put Ysiem in
contact with Commercial Net Lease Realty, Inc. ("Commercial Net"),
a company that develops commercial properties that are then leased
to major retail businesses under long-term leases. Commercial Net
had developed sites for OfficeMax in the past.
Commercial Net and Ysiem began to negotiate a ground
lease agreement in February 1998. During these negotiations,
Commercial Net had no assurance from OfficeMax that the latter
would be interested in subleasing the site from Commercial Net:
OfficeMax usually does not negotiate with the developer at all
until it has received a pro forma budget, for the developer will
ordinarily first need at least a tentative agreement with the
landowner as to the ground rent.
Representatives from Ysiem and Commercial Net met in
March 1998. Ysiem understood that Commercial Net hoped to lease
the land from Ysiem and build a retail store to OfficeMax
specifications that OfficeMax would then sublease from Commercial
Net. On March 26, 1998, Commercial Net and Ysiem signed a letter
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of intent specifying the lease term, annual ground rent, and other
contemplated provisions including a statement that the effective
date of the ground lease would be the date that OfficeMax opened
its doors or six months after the start of construction, whichever
came later. The letter also stated: "The parties shall enter into
negotiations for the completion of documentation incorporating the
above. This transaction shall not be binding until final execution
and delivery of such mutually agreeable documentation."
After signing the letter of intent, Commercial Net and
Ysiem began to negotiate the ground lease agreement and, in May
1998, the parties settled upon final language incorporating many of
the terms laid out in the letter of intent. But unlike the
deferred effective date for the lease contemplated in the letter of
intent, the ground lease stated (conventionally) that the lease was
"made, entered into and effective as of" a specific date--which was
left blank in the draft. Section 7.6 of the ground lease gave
Commercial Net the right to terminate the agreement if it was not
able to enter into a sublease agreement with OfficeMax within 60
days:
Within sixty (60) days of the Effective Date,
Tenant shall have obtained a sublease with
OfficeMax, Inc., an Ohio corporation
("OfficeMax"), in a form satisfactory to
Tenant in its sole and absolute discretion. If
Tenant does not obtain the sublease within
such 60-day period, Tenant, at Tenant's
option, by written notice to Landlord within
five (5) days after the expiration of such 60-
day period, may terminate this Lease. If
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Tenant does not give the aforesaid notice to
Landlord prior to the expiration of the
applicable 5-day period, Tenant shall be
deemed to have waived this condition. If
Tenant terminates this Lease under this
Section 7.6, this Lease shall become null and
void, and neither party shall have any further
obligations hereunder.
On May 6, 1998, Commercial Net sent Ysiem four copies of
the ground lease agreement for execution. The accompanying letter
instructed Ysiem's representative to execute the four copies and
return them to Commercial Net for Commercial Net's execution.
Ysiem signed the copies, leaving the execution date blank, and
returned them to Commercial Net on May 12. In early June,
Commercial Net asked Ysiem for a resolution from Ysiem's board of
directors stating that the Ysiem employee who had signed the ground
lease had authority to do so; Commercial Net said this was
necessary for the ground lease "to be effective and binding against
the landlord and in order to record the Lease." Ysiem's board
quickly passed this resolution.
Commercial Net did not execute the lease after it
received notice of this resolution; instead it began negotiating
the sublease agreement with OfficeMax. At the end of June,
Commercial Net submitted to OfficeMax a pro forma budget stating
that OfficeMax's rent would be $23.09 per square foot. OfficeMax
said this figure was too high, so Commercial Net asked Ysiem for a
reduction in the rent, explaining OfficeMax's position. Ysiem
refused. Commercial Net attempted to salvage the deal by lowering
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its own return rate and reducing the annual rent increases, thereby
reducing OfficeMax's annual rent to $22.42 per square foot.
OfficeMax still found the rent too high.
Ysiem's own broker then sent a letter to an OfficeMax
representative justifying the ground lease rent as comparable to
other rents in the area. Mentioning various possible tenants, the
letter also said that Ysiem had instructed the broker for the
property to find an alternate lessee but to hold off doing so until
Ysiem reached a final resolution with Commercial Net and OfficeMax.
In late July 1998, Commercial Net made one last effort to make a
deal with OfficeMax, which the latter rejected because it still
found the rent too high.
At the end of August, Ysiem requested from Commercial Net
an executed copy of the ground lease. Ysiem's letter, plainly a
predicate to litigation, stated that "[a]lthough such formal
requirement is not strictly necessary under Puerto Rico contract
law, it would seem compelling to have an original copy of the
Agreement available in our files." The letter ended by noting,
"[i]n view of the foregoing, we hereby reiterate YSIEM's emphatic
position that the Ground Lease Agreement is a valid, effective, and
enforceable contract with [Commercial Net]." Commercial Net
responded that there was no contract because Commercial Net had
never executed the ground lease agreement. It also returned the
original four copies without its own signature.
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Ysiem filed this diversity action against Commercial Net
and OfficeMax in federal district court in Puerto Rico in December
1998, seeking specific performance or damages. Ysiem alleged that
the defendants had breached the ground lease agreement and that
their actions had been wrongful. After discovery, Ysiem
voluntarily dismissed the claims against OfficeMax. The remaining
parties then cross-moved for summary judgment. After receiving a
recommendation from the magistrate judge, the district court
dismissed the remaining claims, and Ysiem has appealed. We review
a grant of summary judgment de novo, construing the record in the
light most favorable to the non-moving party. Motorsport Eng'g,
Inc. v. Maserati S.p.A., 316 F.3d 26, 28 (1st Cir. 2002).
The district court gave two bases for rejecting Ysiem's
contract claim that the ground lease between it and Commercial Net
is binding. Its first reason was that the ground lease agreement
was not binding because Commercial Net never signed a sublease
agreement with OfficeMax. The court stated that OfficeMax was "the
linchpin of the proposed transaction" and "without OfficeMax's
execution and sub-lease documentation, the proposed transaction was
not binding." This effectively reads the final version as if it
retained the effective date language proposed in the letter of
intent.
Under this line of reasoning, the ground lease agreement
would not be an enforceable contract at the outset even if both
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parties had signed and dated the final copies unless and until
OfficeMax executed a sublease. Yet this would be contrary to the
explicit effective date language in the final version of the ground
lease agreement, and it would make redundant the 60-day back-out
clause quoted above. To us, the change from the letter of intent
language to the final ground lease language was self-evidently
meant to give Ysiem a measure of limited protection once the ground
lease agreement was executed by both sides.
The district court's second reason was that the ground
lease agreement never became an enforceable contract because it was
never executed by Commercial Net. Ysiem answers that under Puerto
Rico law an agreement can be binding without executed documentation
if, inter alia, the parties have a "meeting of the minds expressed
through the offer and the acceptance."1 There is nothing wrong
with this abstract proposition; and (statute of frauds or like
requirements aside) the proposition might apply if the parties had
merely agreed to a set of final terms without any understanding
that executed documentation was essential to the formation of the
ground lease agreement. See Consarc Corp., 996 F.2d at 570.
However, in the present case, the framework for the
negotiations was created by the letter of intent which specified
1
Producciones Tommy Muniz, Inc. v. Comite Organizador de los
VIII Juegos Panamericanos, 13 P.R. Offic. Trans. 666, 670 (1982);
see also Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568,
570 (2d Cir. 1993).
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that the negotiations were to be conducted for "the completion of
documentation" and said that the transaction was not "binding"--
that is, did not create an effective contract--"until final
execution and delivery of such mutually agreeable documentation."
Although the parties were still free to alter the final terms and
omit this requirement, the ground lease agreement itself explicitly
provided that it would be effective only when executed, and, in
context, this obviously means by both sides.
Ysiem has an alternative claim for relief that does not
depend on the existence of a binding ground lease agreement. This
argument rests on the civil law doctrine of culpa in contrahendo,
which requires parties to negotiate in good faith. Kessler & Fine,
Culpa in Contrahendo, Bargaining in Good Faith, and Freedom of
Contract: A Comparative Study, 77 Harv. L. Rev. 401 (1964) The
argument was not well-developed in the district court, but after
reviewing the complaint and motion papers, we think the argument
was just barely presented and preserved for this appeal, where
somewhat more emphasis is placed upon it.
At common law, liability for bad faith bargaining, in the
absence of a final contract, is fairly limited although claims
based on fraud or estoppel are possible; and depending upon
language and inclination, courts sometimes construe letters of
intent as themselves creating a contractual or quasi-contractual
obligation to negotiate in good faith toward a final contract.
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See, e.g., Venture Assocs. Corp. v. Zenith Data Sys. Corp., 96 F.3d
275, 277-78 (7th Cir. 1996); Farnsworth, Contracts § 3.26 (2d ed.
2001). But the governing law in this case is that of Puerto Rico
where the somewhat broader doctrine of culpa in contrahendo
governs.2
Under this doctrine, negotiations toward an agreement
can--even without a letter of intent--readily give rise to mutual
expectations that the parties will bargain in good faith and
refrain from misconduct. The doctrine looks to common law eyes
closer to a tort than a contract claim and is designed primarily to
protect reliance rather than expectation interests. Satellite
Broad., 807 F. Supp. at 219-22. The culpa in contrahendo test is
not very precise and the courts appear reasonably cautious in
applying a doctrine that could, if applied too freely, chill
negotiations rather than facilitate them. Satellite Broad., 807 F.
Supp. at 222; Farnsworth, supra, § 3.26.
The leading case in Puerto Rico is the Tommy Muniz
decision already cited. There, the plaintiff was the highest
bidder to broadcast the Pan American games in Puerto Rico, and the
committee awarding the contract told the plaintiff that its bid had
2
See generally Tommy Muniz, 13 P.R. Offic. Trans. at 676;
Torres v. Gracia, 19 P.R. Offic. Trans 742, 746-49 & n.2 (1987);
Velazquez Casillas v. Forest Labs., Inc., 90 F. Supp. 2d 161, 166-
70 (D.P.R. 2000); Prime Retail, L.P. v. Caribbean Airport
Facilities, Inc., 975 F. Supp. 148, 151-53 (D.P.R. 1997); Satellite
Broad. Cable, Inc. v. Telefonica de Espana, S.A., 807 F. Supp. 218
(D.P.R. 1992).
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been accepted subject to negotiation of the detailed contract.
Tommy Muniz, 13 P.R. Offic. Trans. at 666-67. In the midst of
negotiations, the committee decided to broadcast the games over
government stations and ended its negotiations with the plaintiff.
Id. at 668-69. Holding that the committee had violated its duty of
good faith, the court adopted a rather general test dependent upon
the circumstances, including conduct, reasonable expectations and
virtually any other relevant circumstance. Id. at 680.
It is possible to criticize Commercial Net's action in
sitting on the ground lease agreement signed by Ysiem instead of
executing and returning the lease promptly or, in the alternative,
saying forthrightly that it was not prepared to sign until its own
negotiations with OfficeMax began to bear fruit. On this record we
cannot know whether this was a deliberate effort to mislead, or an
oversight, or neither: obviously Ysiem knew that it had not
received in return a signed copy of the lease. How much scienter
matters to culpa in contrahendo doctrine under Puerto Rico law is
also unclear.
By contrast to the Tommy Muniz case, Commercial Net's
delay in signing the ground lease was part of an effort to achieve
a sublease with OfficeMax in the interest of both Commercial Net
and Ysiem. The negotiations with OfficeMax were protracted because
of disagreement as to rent; Ysiem was aware of the problem and the
delay: it itself urged OfficeMax to reconsider. Accordingly, even
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if Commercial Net were treated as modestly blameworthy, the fault
was a limited one and occurred in the course of an effort to save
the project as a whole.
In all events, Ysiem would not have been any better off
if the ground lease agreement had been signed by Commercial Net and
returned to Ysiem in early June. Had this occurred, Commercial
Net--as the end of the 60-day period approached without a sublease
from OfficeMax--would surely have exercised the option clause to
terminate the agreement unless Ysiem extended the 60-day period.
Ysiem, in failing to press for return of a signed copy more
quickly, may well have understood the situation.
Affirmed.
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