THE CASE OF STEVENS & WILKINSON OF SOUTH CAROLINA V. CITY OF COLUMBIA

On August 20, 2014, the South Carolina Supreme Court ruled a city’s Memorandum of Understanding with a development team did not constitute an enforceable  contract,  leaving  the  development  team  without rights to develop the property or recover over $1 million spent on pre-development services. The decision came notwithstanding the negotiation of a detailed Memorandum of Understanding (MOU) that included corresponding obligations, the approval of public financing for the development, the creation of architectural plans for the project and the approval of a guaranteed maximum price (GMP) for construction of the project. The consequence of the decision was that the city was allowed to bring in a new developer under a new deal at a substantial cost savings.

In reaching its decision in Stevens & Wilkinson of South Carolina, Inc. v. City of Columbia, Appellate Case No. 2012- 208490, Opinion No. 27434, (August 20, 2014), the state supreme court overruled a court of appeals decision reversing a trial court’s summary judgment ruling finding that the MOU did not constitute a contract and the city had not been unjustly enriched.

Facts

In 2001, the City of Columbia, South Carolina, issued a Request for Qualifications relating to the development of a hotel property intended to service the city’s neighboring convention center. Proposals were submitted and in December 2002, a development team made up of three developers, a designer, Turner Construction and underwriter Salomon Smith Barney were selected for the project, which was to be publically funded by $60 million in municipal bonds.

In April 2003, the city and development team entered into a detailed MOU that provided that the city would acquire the property and form a not for profit entity to own the hotel and issue bonds to finance the development of the property. In consideration of these obligations, the development team was required to coordinate the design, development, construction and delivery of the hotel. As part of the development team’s pre-development services, the architect would develop preliminary plans for the project to enable the city to determine whether bond financing was feasible.

The MOU provided that if the city determined it was not feasible to finance the project, it could cancel the project and the development team would not be entitled to reimbursement for any of its pre-development services. If the financing was feasible, the MOU provided that the parties would enter into additional agreements, including a development management agreement, to memorialize the specific terms of the deal. It also provided that if the city breached the terms of the development agreement or there was a catastrophic event that prevented the development, the development team would be reimbursed for its pre-development costs.

Over the course of the next year, the architect developed preliminary plans for the project at a cost of $1.2 million, which resulted in the establishment of a city-approved GMP for project construction. In March 2004, the city approved a $71 million financing plan and was scheduled to issue bonds on April 1, 2014. However, before the bonds were issued, a third-party developer approached the city with a plan that would allow for a privately financed hotel project at a fraction of the publicly financed cost. The city elected to abandon its publicly funded project (and the development team) and go forward with the alternative development. Notwithstanding the city’s about face, it never made a finding that the public financing was unfeasible. Apparently, it just liked the privately financed project better.

Summary of Decisions Below

The development team filed suit against the city asserting claims for breach of contract, quantum meruit and unjust enrichment. Pursuant to the city’s motion for summary judgment, the trial court dismissed all of the claims. That decision was reversed in part by the state court of appeals1 which found that, based on the language of the MOU and parol evidence, there was a triable issue of fact as to whether there was a contract and that the lower court erred in finding that there was no material issue of fact on the quantum meruit claim because the court of appeals was not able to determine that the city had not benefited from the architect’s development of project plans.2

The Supreme Court’s Decision

With respect to the breach of contract claim, the state supreme court ruled that plaintiffs could not prevail as a matter of law because the MOU did not constitute an enforceable contract. It noted that the MOU contemplated that a series of agreements between the parties would have to be negotiated in the future, and because the terms of those key agreements were not known, the court was not in a position to enforce contract terms that did not exist.

In reaching this conclusion, it rejected the court of appeals finding that specific “valid consideration” language contained in the MOU3 and the parties’ performance of several of the steps provided for in the MOU constituted evidence of the parties’ mutual intent that the MOU was a binding contract. The supreme court ruled that because the MOU’s language on its face required a finding that the MOU was a nonbinding agreement to agree in the future, parol evidence was not relevant.4 It also cited to authorities, including Corbin on Contracts, that instructed that the parties’ intent is not controlling as to whether a contract exists or not. The court’s ruling that the MOU on its face was not a contract cut off any argument by the plaintiffs that the city owed the plaintiffs a duty of good faith and fair dealing to follow through on the contract.

What was not discussed in the opinion, and perhaps was not argued for strategic reasons by the plaintiffs,5 was that at least one portion of the MOU constituted a severable contract. That is, it appears that an argument could have been made that specific provisions existed in the MOU defining the plaintiffs’ right to be reimbursed for its pre-development services, unless the city determined that the public financing was unfeasible.

To add insult to injury from the development team’s perspective, perhaps more troubling was the supreme court’s finding that there was not sufficient evidence to avoid summary judgment on the quantum meruit claim. The facts showed that the city provided the preliminary design developed by the development team to the subsequent private developer and that the city manager acknowledged that the ultimate hotel development configuration closely resembled the development team’s conceptual design. Notwithstanding that this was a review of a summary judgment ruling, “where all inferences are to be made in favor of the non-moving party,” the court noted that there was no evidence that the new developer actually used this design information and concluded that the “mere scintilla” of evidence offered by the plaintiffs was not enough to defeat summary judgment.

Lessons to Be Learned from Stevens & Wilkinson

The facts presented in the court of appeals and supreme court opinions clearly establish that the parties believed that they had entered into some kind of binding contract. This conclusion is clear based upon both the “valid consideration” provision and the absence of language typically seen in “agreements to agree” providing that “the parties acknowledge and agree that this is not a binding contract.”

Additionally, the parties clearly had taken several steps in conformance with the MOU to achieve the key result–the issuance of the bonds–that would allow the project to go forward. However, the court’s focus on the lack of an agreed upon development agreement was critical to its decision. Development agreements are not boilerplate contracts but rather contracts that are unique in each instance. The court clearly felt hamstrung to make up the terms of that agreement.6

Hindsight is always 20/20, but perhaps the plaintiffs could have fashioned the MOU to divide the scope of work into a series of phases with separate consideration for each phase. That way, if there is a “no-go” decision by the public entity at any point, the developer would at least be in a position to be reimbursed for services provided.

At the end of the day, notwithstanding the contracting parties’ intent, if a contract defers agreement of material terms to the future without providing any kind of definition of those terms, a party stands a good chance of having what it believes to be a binding contract ruled unenforceable.