In P.E. Systems, LLC v. CI Corp. (pdf) the Washington Supreme Court clarified two important points about the Washington Civil Rules and the common law of contracts.  First, the Court squarely held that Washington trial courts may consider a contract attached to a pleading in deciding a motion to dismiss under CR 12(b)(6) without converting the motion to dismiss into a motion for summary judgment.  This is an important procedural issue.  While federal courts have clearly addressed the issue in dozens of published opinions, this opinion eliminates any uncertainty under Washington law and aligns our courts with federal courts.  Second, the Court concluded that a contract that incorporated by reference an incomplete addendum was an “agreement with open terms,” which is binding on parties, rather than an “agreement to agree,” which is unenforceable under Washington law.

BACKGROUND

P.E. Systems (“PES”) is a company that seeks to reduce the credit card processing costs that companies incur.  Under PES’s standard contract, if a client decides to implement the program it must pay PES one half of any savings realized.  To determine the amount of those savings, PES’s contract requires a baseline from which to make the comparison.  That baseline is the client’s “Historic Cost,” which according to the body of the contract is to be mutually agreed upon by the parties and set forth “in Addendum A.”  Here, PES allegedly entered into such a contract with CPI Corporation, but the parties left the Historic Cost calculation blank.

When a dispute arose, PES sued CPI.  CPI filed an answer and attached a copy of the contract to that pleading.  CPI also filed a motion to dismiss, arguing that the contract was an unenforceable agreement to agree.  PES responded to the motion and attached to its response a copy of the same contract as well as a PowerPoint presentation it had given to CPI.  The trial court concluded that the contract was an unenforceable agreement to agree and dismissed PES’s claims.  The court of appeals reversed and directed the trial court to enter judgment in favor of PES on its breach of contract claim.

The Washington Supreme Court affirmed in part and reversed in part.

ANALSYIS

  • “The contract from which a dispute arises, and the authenticity of which is not contested, may be attached to a pleading and may be considered in a CR 12(b) or CR 12(c) motion.”
  • “Conversion from a CR 12(b) or (c) motion to a motion for summary judgment is unnecessary if the sole reason for conversion is attachment of a contract or similar instrument to a pleading.”
  • In contrast to the contract, PES’s PowerPoint presentation (attached to its response to CPI’s motion to dismiss) was extrinsic evidence offered to clarify the terms of the contract.  Once such evidence is considered, a motion on the pleadings should be converted to a motion for summary judgment.
  • The Washington Supreme Court has identified three types of contracts regarding which disputes may arise:  an agreement to agree, an agreement with open terms, and a contract to negotiate.
  • An agreement to agree is an agreement that requires a further meeting of the minds.  Such agreements are not enforceable under Washington law.
  • Under an agreement with open terms, the parties intend to be bound by the agreement on the key points that are agreed upon with the remaining terms supplied by a court or another authoritative source (such as the Uniform Commercial Code).
  • In a contract to negotiate, the parties exchange promises to conform to a specific course of conduct during negotiations.  No Washington Court has directly addressed whether a contract to negotiate is independently enforceable.
  • Here, the parties agreed to all material terms, including the formula for calculating CPI’s Historic Cost.  Because that number can be determined by a specific mathematical formula, any dispute regarding that calculation can be resolved by a trial court.  As such, the contract is an agreement with open terms.
  • Because the resulting contract is an enforceable agreement with open terms, the Court of Appeals properly reversed the trial court’s dismissal order.  But it erred by directing judgment in favor of PES.  The trial court should consider all remaining defenses on remand.