Situation Management Systems v. Malouf, Inc.

Supreme Judicial Court of Massachusetts · Contracts

Contractsoral contractscontract formationintent to be boundlost profits damagesmeeting of the mindsmaterial termspresent intention to be bound

Facts

SMS developed and sold training materials, and LMA had long operated as an independent agent primarily using SMS materials under a series of substantially similar agency contracts. In 1990, while LMA was considering purchasing another SMS agent, Kasten, Malouf repeatedly told SMS that LMA needed at least a five-year commitment from SMS before it could afford the purchase. At a February 1990 airport meeting, SMS chairman Moore assured Malouf that SMS would change the existing contract to a five-year term, and in June 1990 Rose again assured Malouf of a long-term agreement of at least five years; LMA then proceeded with the Kasten purchase. SMS later sent a proposed written contract containing significant new terms, terminated negotiations in 1991, allowed the existing contract to expire in 1992, and LMA claimed lost profits after its sales sharply declined.

Issue

Was there sufficient evidence for a jury to find that SMS and LMA formed an enforceable oral five-year contract, despite the parties' expectation of a later written agreement and despite some terms remaining to be negotiated? If so, were lost profits an appropriate measure of damages?

Rule

To create an enforceable contract, the parties must agree on the material terms and have a present intention to be bound. Not all terms must be precisely specified, and undefined or unspecified terms do not necessarily preclude formation if the parties have moved beyond imperfect negotiation. Although an intention to execute a final written agreement supports an inference that the parties did not intend to be bound until signing, if all material terms have been agreed upon the later writing may be treated as a mere memorial. In a breach of contract case, damages ordinarily put the injured party in the position it would have occupied had the contract been performed, and expectancy damages may include lost profits.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

For twelve years, Cedar Point Analytics, a consulting firm in Cleveland, and Harbor Lane Learning, a training reseller in Columbus, operated under a series of nearly identical reseller agreements that differed mainly in duration. When Harbor Lane considered buying a smaller Ohio reseller, Cedar Point's president told Harbor Lane's owner, Nora Patel, that Cedar Point would keep Harbor Lane on for five years if Harbor Lane completed the purchase, and Harbor Lane then closed the deal.

If Cedar Point later refuses to continue the relationship beyond the current term and argues there was no contract because some details were never reduced to writing, which is the strongest argument that an enforceable oral contract existed?

Explanation. An enforceable contract may exist even if some terms remain unspecified, so long as the parties agreed on the material terms and had a present intention to be bound. The majority emphasized that a long course of dealing under substantially similar prior contracts can permit a factfinder to infer that a new oral commitment adopted the same or substantially similar terms. A later contemplated writing does not automatically defeat formation if it is merely a memorial. (Derived from Situation Management Systems v. Malouf, Inc. (n.d.).)