Opinion ID: 1194140
Heading Depth: 1
Heading Rank: 3

Heading: The New York Law of Preliminary Agreements.

Text: In general, New York courts will not enforce a mere agreement to agree, in which a material term is left for future negotiations. Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 52 N.Y.2d 105, 436 N.Y.S.2d 247, 417 N.E.2d 541, 543 (1981). But the intent of the parties is controlling. Therefore, a contract is enforceable even though it leaves some elements for future negotiation and agreement if some objective method of determin[ing the open terms] is available, independent of either party's mere wish or desire. Metro-Goldwyn-Mayer, Inc. v. Scheider, 40 N.Y.2d 1069, 392 N.Y.S.2d 252, 360 N.E.2d 930, 931 (N.Y.1976). The absence of a contemplated formal agreement is also not dispositive. If the parties do not intend to be bound until a formal agreement is signed, there is no contract until that event occurs. On the other hand . . . where all the substantial terms of a contract have been agreed on, and there is nothing left for future settlement, then an informal agreement can be binding even though the parties contemplate memorializing their contract in a formal document. R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 74 (2d Cir.1984) (quotation omitted). In addition, even if the parties have not agreed on all the essential terms of a final agreement, a New York court may conclude that they entered into an enforceable good-faith contractual obligation to cooperate in the negotiation of a final agreement. Goodstein Constr. Corp. v. City of New York, 67 N.Y.2d 990, 502 N.Y.S.2d 994, 494 N.E.2d 99, 100 (N.Y.1986). A federal court in New York attempted to synthesize these diverse principles in Teachers Insurance & Annuity Association of America v. Tribune Co., 670 F.Supp. 491, 498-99 (S.D.N.Y.1987) ( Tribune ). Recognizing a strong presumption against finding binding obligations in preliminary understandings that include open terms and call for future approvals and the execution of contract documents, the court nonetheless identified two types of preliminary agreements that are given binding force. One occurs when the parties have reached complete agreement . . . on all the issues perceived to require negotiation. Such an agreement is preliminary only in form. . . . The second . . . expresses mutual commitment to a contract on agreed major terms, while recognizing the existence of open terms that remain to be negotiated. In this second type, the parties bind themselves to a concededly incomplete agreement in the sense that they negotiate together in good faith . . . to reach final agreement within the scope that has been settled in the preliminary agreement. In Tribune, the court enforced a preliminary commitment for a long-term loan that recited it was a binding agreement after the borrower used the commitment to its advantage before refusing to close on the final agreement because interest rates had declined. Two years later, in Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 72 (2d Cir.1989), the Second Circuit observed that, in determining whether a preliminary manifestation of assent was a binding preliminary agreement of the second type, the court in Tribune used a modified version of a test that this court devised for preliminary agreements that more closely resemble the first type. Looking no further than the first factor of that test, the court in Arcadian held that the preliminary agreement at issue was not binding because references that negotiations might fail and that a binding agreement would be completed in the future demonstrated the parties did not intend to be bound. Tribune and Arcadian were concerned with identifying when an agreement of the second type is an enforceable agreement to negotiate a contemplated final agreement. In some later cases, however, the federal courts in New York have declared there are two types of binding preliminary agreements, Type I and Type II, distinguished only by a fifth, highly subjective factor, the context of the negotiations. See Adjustrite Sys., Inc. v. GAB Bus. Servs., Inc., 145 F.3d 543, 548-51 (2d Cir. 1998); Shann v. Dunk, 84 F.3d 73, 77 (2d Cir.1996); Krauth v. Executive Telecard, Ltd., 890 F.Supp. 269, 293 (S.D.N.Y.1995). In contrast, New York's intermediate appellate courts have held, consistent with Goodstein, that parties can enter into binding preliminary agreements to negotiate a final contract in good faith, but we have found no New York appellate decision enforcing a Type I agreement, or even recognizing the Type I-Type II dichotomy applied by the federal courts. See 180 Water St. Assocs., L.P. v. Lehman Bros. Holdings, Inc., 7 A.D.3d 316, 776 N.Y.S.2d 278, 279 (N.Y.App.Div.2004); SNC, Ltd. v. Kamine Eng'g & Mech. Contracting Co., 238 A.D.2d 146, 655 N.Y.S.2d 47, 48 (N.Y.App.Div.1997). After reviewing this array of decisions, we have serious doubt whether the so-called Type I binding preliminary agreement occupies a legitimate place in New York contract law. Much of our doubt is based on experience. When negotiating and drafting countless contracts in our prior legal careers, we rarely if ever encountered a memorandum of understanding or a preliminary agreement that required nothing more than the wordsmithing of a true scrivener to become a final contract. When such a document is encountered  and the expressly binding commitment letters in Tribune and contemporaneous cases [5] may be examples, even though the federal courts described them as Type II preliminary agreements  it should be enforced as a final, not as a preliminary, agreement. Any document less final, if binding under New York law, should be enforced as a preliminary agreement to negotiate in good faith in accordance with the two opinions of the New York Court of Appeals in Goodstein, [6] unless, consistent with Scheider, there is some objective method of determining its open terms independent of either party's mere wish or desire, 392 N.Y.S.2d 252, 360 N.E.2d at 931. This case well illustrates our reluctance to acknowledge the Type I category of binding preliminary agreements. After the Term Sheet was signed, any lawyer worth her salt would not have signed off on a final contract committing client Mesaba to sublease twenty expensive airplanes for eight years, and granting the sublessor options for four more years, without seeking to negotiate whether there might be unforeseen circumstances (in addition to an act of God) that should relieve Mesaba of its longterm commitment. A premature decision by Saab to stop supporting the 340 series of aircraft is an example of a circumstance that might warrant bargaining.