Is “fair market value” a sufficiently definite price term?
Wilburn v. Mangano (Va. Dec. 10, 2020)
A mother has three daughters and a son. Her will leaves her home to the daughters. But it also gives the son the option to buy the house from his sisters for “an amount equal to the fair market value at the time of my death.” Is this price term sufficiently certain to be enforceable?
Under Virginia common law, a contract is enforceable if it contains all material terms; it is unenforceable if a material term is missing, uncertain, or indefinite.
Price is a material term. So for the contract to be enforceable, the price “must be either fixed by the agreement itself or the agreement must provide a mode for ascertaining it with certainty.”
But, the Virginia Supreme Court observes, “There is no single, fixed approach to determine fair market value.” Rather, “Virginia courts recognize many valuation approaches, such as the cost approach, income approach, sales approach, development cost analysis, and comparable sales approach.” In short, “fair market value” is insufficiently certain to be enforceable.
Bottom line: If you’re going to have a “fair market value” price term in your contract, make sure you also include a specific means for determining it.
Bonus point: This case was about land, and so was governed by the common law. The result may have been different if it was for the sale of goods. Under the Virginia Uniform Commercial Code, parties who intend to form a contract can “even though the price is not settled.” Va. Code § 8.2-305(1). To learn more, check out Virginia Contract Law.