Fischer v. CTMI, LLC
No. 13-0977
Case Summary Written by Zirwa Sheikh, Staff Member
JUSTICE BOYD delivered the opinion of the Court.
In 2007, Ray Fischer, the owner of a tax-consulting business called Corporate Tax Management, Inc. sold his business to CTMI, L.L.C, created by Mark Boozer and Jerrod Raymond by executing a written asset-purchase agreement. A separate written agreement was also executed stipulating that Fischer would remain a CTMI employee until 2010.
The asset-purchase agreement included a list of assets that CTMI would be entitled to. This included accounts receivable on projects that Fischer had not completed by the closing date (2007). For the incomplete projects, Fischer was entitled to a payment that was equal to the percentage by which Fischer had completed the project before closing. In exchange for these assets, CTMI agreed to pay $900,000 in total, but the purchase price would be paid in a series of payments. Fischer was to receive $300,000 in 2007, followed by annual payments for the next four years, and he was to remain a CTMI employee. In addition to his $300,000, Fischer was to receive an “earn-out” payment of $16,215 in 2007. For the years 2008 and 2009, Fischer was to receive annual “earn-out” payments that included a minimum payment of $194,595 plus an adjustment payment that amounted to 30% of that year’s business revenue in excess of $2.5 million.
For the 2010 annual payment, the final year Fischer was to remain an employee at CTMI, the terms of the written asset-purchase agreement provided Fischer a share of the revenue from all projects that CTMI completed prior to Fischer’s last day (December 31, 2010) and a share of the revenue from projects that were pending but not yet completed by the end of 2010. Overall, for 2010, Fischer was entitled to receive a minimum payment of $194,595 and 30% of the business revenue exceeding $2.5 million earned from January 1, 2010 through December 31, 2010. Projects that remained incomplete by December 31, 2010 would be placed on a list by January 31, 2011 with a percentage of completion allotted to each project as of December 31, 2010. Both CTMI and Fischer were responsible to mutually agree and assign the percentage of completion for the incomplete pending-projects. This pending-projects clause requiring both parties future consent regarding the completion percentage assignments to projects at the end of 2010 formed the basis of this dispute.
Problems between CTMI and Fischer arose after the 2007 closing. Once the initial $300,000 payment was made pursuant to the purchase agreement, in addition to the 2007 earn-out payment, CTMI refused further payments. In December 2008 CTMI initiated a suit against Fischer, seeking declaratory judgment that Fischer was not entitled to receive any payment on certain accounts receivable for 2007, and CTMI was under no obligation to make any remaining payments because Fischer was in breach of his employment contract. Fisher counterclaimed alleging that CTMI breached the purchase agreement because of wrongful termination. Later, in 2010, CTMI filed a second amendment to the original petition alleging that portions of the asset-purchase agreement were unenforceable because they were an “agreement to agree.” Additionally CTMI alleged that the 2010 adjustment was also unenforceable because of the “mutually agreed upon” language in the purchase agreement that required both Fischer and CTMI to mutually come to an agreement regarding the incomplete projects completion percentages at the end of 2010. On trial, both parties settled and Fischer received a judgment for $1.7 million, but the settlement excluded CTMI’s allegations regarding the 2010 adjustment. The dispute regarding the 2010 adjustment proceeded to trial. The trial court entered judgment in favor of Fischer, concluding that the 2010 adjustment was not an unenforceable “agreement to agree.” CTMI appealed and the court of appeals reversed. The Supreme Court of Texas granted a petition for review.
Issue for the Texas Supreme Court: Whether the 2010 pending- projects clause created a legally enforceable obligation? In other words, was the “percentage of completion” clause that required mutual agreement by both parties definite as to the essential and material terms?
Justice Boyd began his analysis with a discussion on the standards required for an enforceable contract, acknowledging that an enforceable contract requires definite essential and material terms, one that demonstrates clear intent of the parties desire to be bound, and that allows the court to understand each parties’ obligation, as well as the suitable remedy if applicable. He then articulated how an “agreement to agree” does not meet the enforceability standard because it fails to be definite in regards to all of its essential and material terms, since it leaves the material matters open-ended and to be decided in the future. He also contended that an agreement to enter into a future contract might still be enforceable provided that the agreement lays out all the material terms in the future contract.
In concluding that the pending-projects clause was definite and thus enforceable, the Court utilized several guiding principles: (1) Courts must read the contract as a whole to determine parties’ intent and avoid rewriting contractual language; (2) The law abhors forfeiture and contracts are generally construed by courts to avoid rendering such contracts invalid; (3) reasonable terms will be applied when necessary as to avoid forfeiture; (4) indefinite terms may be defined by trade usage or course of dealings between parties; (5) partial performance and reliance on an agreement demonstrate parties’ intent to be bound and remove any uncertainty.
The Court concluded that the parties had mutual intent to reach a binding contract in which CTMI would pay Fischer a 2010 earn-out payment encompassing an adjustment based on revenue from any pending projects that existed by December 31, 2010. The Court held that this language illustrated CTMI’s immediate intent to be bound. While the parties could not contemplate the specific amount for the 2010 earn-out payments at the time they entered into the agreement, they established the formula for understanding the price making the contract definite enough for the Court to conclude with reasonable certainty what the adequate damages would be. The formula articulated by the Court was the completion percentages of pending- projects at the end of 2010. Since both parties had the intent to be bound, as depicted by the pending-projects clause, the Court held that the law will presume a reasonable price was intended, even if the price is meant to be agreed by parties in the future. Furthermore, the substantial performance by CTMI under the purchase agreement, along with Fischer’s transfer of his business assets to CTMI, indicated that pending-project clause was enforceable.
In response, CTMI argued that the langue of the contract, “will have to be mutually agreed upon by [Fisher] and [CTMI,]” does not allow courts to force the parties to reach a mutual agreement, and it is not under any obligation to make pending-project payments if an agreement isn’t made. Since courts are not allowed to rewrite the language of the contract, CTMI argued that a court cannot impose a price without the negotiation and agreement between both parties. The Court contended that the agreement did not stipulate for additional negotiations over the percentages the 2010 adjustment would be based on. Additionally, the Court held that the pending-project clause also did not stipulate a lack of obligation on the part of CTMI in the event the parties failed to come to an agreement. Essentially, the Court read a “cooperation” provision into the contract, concluding that both parties must take reasonable measures to perform the obligations listed in the purchase agreement, and that CTMI could not avoid its agreement to pay for the 2010 pending projects because it refused to agree on the percentages.
In holding that the pending-projects clause was enforceable, the Supreme Court of Texas reversed the court of appeals’ judgment, and reinstated the trial court’s judgment denying CTMI’s claim for declaratory relief.