Schultz Letter, Interview With KJR, “Imposes a Very High Burden on Bennett,” Legal Prof Says

Back when we originally considered whether Howard Schultz could sue Clay Bennett, the legal expert I spoke to, Professor Joel Ngugi, said this was the main unknown: “There will be a real question here whether the side agreement became part of the sale agreement.”

Now, Mitch Levy of KJR played an interview with Schultz from the day of the sale, in which Schultz plainly states that the side agreement was indeed a very important part of the sale agreement.

So this morning I went back to Professor Ngugi–does this shed any light on whether the agreement will be enforceable?

“Yes it does,” he told me, “in three ways.”

“Firstly, the fact that Howard made this statement on the day of the deal could be accepted in evidence to demonstrate the “true” meaning of the obligations Bennett & Co. had assumed. Howard’s statement, thus, could be useful as extrinsic evidence to establish what ‘good faith’ meant to the parties at the time they signed their contract.”

“Secondly, it seems important that Howard used very specific legal language namely ‘best efforts.’ If this language was actually included in the contract, it imposes a very high burden on Bennett & Co. It not only obligates them to act diligently and cooperatively to accomplish the purpose of the contract, but an express ‘best efforts’ clause would impose a higher burden that rises to near fiduciary level of obligation. This would make it easier to prove a breach of ‘good faith’ efforts clause.


“Thirdly, and perhaps most importantly, that Howard made this statement might be used to demonstrate that the ‘good faith’ obligation assumed by Bennett & Co. was a ‘material’ part of the deal. This is important because if a court finds that it was ‘material,’ then a breach entitles Howard & Co. not just to damages but to rescission (i.e. cancellation or ‘unwinding’) of the contract.”

So if the breach of the contract is so bad that it’s considered a “material” breach, Ngugi wrote, the contract can be unwound.

But what constitutes a material breach?

“Some of the factors considered in determining whether a breach is material or not include the extent to which the non-breaching party will be deprived of the benefit she reasonably expected from the deal; the extent to which she can adequately be compensated with money; and, the extent to which the breaching party acted in ‘bad faith.’

“It is by no means clear that a court would necessarily hold the ‘good faith clause’ in the Sonics contract to be a ‘material’ term to entitle Howard & Co. to rescind the contract if they are so inclined–but the fact that Howard thought it important enough to make this statement on the day the deal was made would be evidence that this part was the deal was considered ‘material’ by the parties.”

If this crazy maneuver should work, put KJR on your thank-you-note list.