Family members often transfer family-business ownership interests or other assets between each other. Their discussions sometimes progress from informal negotiations to a written term sheet to a final written agreement.  However, a term sheet itself can be found to be a binding agreement if the terms are sufficiently definite for a court to determine each party’s obligations and if the parties’ conduct evidences their agreement to perform according to those terms.

In Kunz v. Kunz, a Court of Appeals in Iowa recently ruled upon a claim by one family member against another to enforce a “Settlement Memorandum” which provided for the purchase and sale of stock in the family business, even though the Memorandum contemplated the drafting of later documents to finalize the transaction.  In 1973, brothers Richard and Robert Kunz formed Happy Homes, Inc., a company that sold factory-built homes.  Richard died in 2007 and his 50% interest in the company was transferred to his wife, Connie.  Connie and Robert then began discussing the sale of Richard’s interests and later participated in mediation to aid in these discussions.

Following their mediation, in April 2010, Connie and Robert signed the Settlement Memorandum. Among other things, the Memorandum provided that “Robert will purchase Connie’s shares of stock in Happy Homes, Inc. for the sum of $250,000 . . . .  This agreement is subject to Robert Kunz being able to arrange financing for this purchase.”  The Memorandum also provided that the parties’ lawyers would “prepare all detailed agreements necessary for the purchase of the corporate stock.”  By June 2010, however, Robert’s lawyer notified Connie that Robert would not proceed with the stock purchase because he had not been able to secure financing for the purchase.

Connie testified that… she considered the Settlement Memorandum to be a contract.

Connie later sued Robert for breach of contract, seeking payment for the stock purchase. At trial, Connie testified that Robert agreed at the mediation to purchase her stock in the company and that she considered the Settlement Memorandum to be a contract.  For his part, Robert also testified that he signed the Memorandum and agreed to purchase Connie’s shares.  However, Robert maintained that he was excused from further performance because he was unable to arrange financing for the purchase.  The jury found that there was a contract between the parties, that Robert had breached the contract, and that Connie was entitled to an award of approximately $80,000, after crediting certain payments that Connie had received upon the company’s liquidation of its business assets.

On appeal, Robert argued that “the Settlement Memorandum was not a binding contract — only an agreement to agree.” He pointed to the language in the Memorandum requiring additional papers to finalize the sale.  The Court of Appeals disagreed, noting that the Memorandum repeatedly provided that the parties had reached an “agreement.” The Court also noted that Robert testified that the parties had reached an agreement, that Robert had attempted to obtain financing, and that the parties’ lawyers had begun drafting the transfer documents. The Court concluded: “[W]here parties have agreed upon all essential facts there is a binding contract, notwithstanding the fact that a more formal contract is to be prepared and signed later.”  The Court thus upheld the jury’s finding of a binding contract.

The Court did, however, reverse the judgment in Connie’s favor and remand the matter for a new trial based on Robert’s separate argument on appeal that the trial court improperly refused to instruct the jury on the issue of whether Robert had satisfied the financing condition precedent to his obligation to purchase the stock. The Court indicated that, on remand, whether Robert made sufficient efforts to obtain financing should be decided by the jury.  Only by first determining if Robert satisfied the condition to his performance under the parties’ agreement could the jury then decide if he had breached any further duty to perform.

The Kunz decision serves as a reminder that parties can be bound by term sheets or similar documents, such as the Settlement Memorandum in this case, even when such documents expressly contemplate the preparation of further documents to finalize the transaction.  As the Court cautioned, “In deciding whether there is an enforceable contract, we consider not only the language used but also the surrounding circumstances and the conduct of the parties.” Parties to negotiations involving the sale of family-owned business stock or assets should therefore be cautious in their drafting and conduct in order to ensure that it is clear to all parties what documents are – and are not – intended to create enforceable rights and obligations.  By doing so, the parties can minimize the potential for misunderstanding during their negotiations and can minimize the risk that a court may enforce a term sheet against a party who otherwise may not intend or expect to be bound.