Goodstein Construction Corp. v. City of New York, 80 N.Y.2d 366 (1992)
A party cannot recover lost profits for breach of an agreement to negotiate a contract when the final contract was contingent on discretionary approvals and the agreement to negotiate was terminable.
Summary
Goodstein Construction Corp. sued the City of New York for breach of contract and tortious interference, seeking damages including lost profits, after the City terminated Goodstein’s exclusive right to negotiate a land disposition agreement (LDA). The court held that Goodstein could not recover lost profits because the City’s obligation was only to negotiate in good faith, not to finalize an LDA, and any LDA required discretionary approval by the Board of Estimate. Awarding lost profits would transform an agreement to negotiate into a binding contract and would be speculative.
Facts
Goodstein and the City entered into letter agreements granting Goodstein the exclusive right to negotiate an LDA for two development sites. The agreements required Goodstein to incur costs for designs and financial projections. The City retained the right to terminate negotiations. Any LDA was contingent on approval by the Community Board, City Planning Commission, and the Board of Estimate. The City terminated Goodstein’s exclusive negotiator status, stating it was in the City’s best interest to reserve the sites for commercial development.
Procedural History
Goodstein sued, seeking damages including lost profits. The City’s motion to dismiss for facial insufficiency was initially denied, a decision affirmed by the Appellate Division and the Court of Appeals. The City then moved for summary judgment, which was granted in part by the IAS Court, dismissing the claims for lost profits. The Appellate Division reversed, allowing the lost profits claim. The Court of Appeals granted leave to appeal.
Issue(s)
Whether a party can recover lost profits for breach of an agreement to negotiate a land disposition agreement, when the final agreement required discretionary governmental approvals and the agreement to negotiate was terminable.
Holding
No, because the City’s sole obligation was to negotiate in good faith, not to guarantee the completion of an LDA, which was contingent on discretionary political approvals. Allowing lost profits would transform the agreement to negotiate into a binding contract, and such damages were not within the contemplation of the parties.
Court’s Reasoning
The court emphasized that the City’s obligation arose from the agreement to negotiate, not a finalized LDA. The Board of Estimate’s approval was a discretionary, political act, not a mere formality. Contract damages aim to put the injured party in as good a position as if the contract had been performed, but here, the City was only obligated to negotiate in good faith. Awarding lost profits would base damages on a nonexistent contract the City could reject. Quoting Goodstein Constr. Corp. v City of New York, 145 Misc 2d 870, 876, the court noted that “a party’s ‘alleged failure to bargain in good faith is not a but-for cause of [plaintiff’s] lost profits, since even with the best faith on both sides the deal might not have been closed [and] attributing [plaintiff’s] lost profits to [defendant’s] bad faith may be speculative at best’.” Furthermore, under Hadley v Baxendale, the damages must be within the contemplation of the parties when the contract was made. It was not reasonably contemplated that the City would guarantee profits from a project that required multiple approvals and that Goodstein never had to build. Citing Kenford Co. v County of Erie, 73 NY2d 312, the court found that awarding lost profits would be “irrational” where the claims were founded only on an agreement to negotiate.