Opinion ID: 1196085
Heading Depth: 2
Heading Rank: 2

Heading: The April 9 Agreement

Text: By its plain terms, the April 9 agreement contemplates the preparation and execution of additional documentation, namely, a stock purchase agreement and a technology transfer agreement. The April 9 agreement therefore belongs to a class of agreements known as preliminary agreements, which ... provide for the execution of more formal agreements. Adjustrite Sys., Inc. v. GAB Bus. Servs., Inc., 145 F.3d 543, 547 (2d Cir.1998). Under New York law, [o]rdinarily, where the parties contemplate further negotiations and the execution of a formal instrument, a preliminary agreement does not create a binding contract. Id. at 548; see also Shann, 84 F.3d at 77 (Ordinarily, preliminary manifestations of assent that require further negotiation and further contracts do not create binding obligations.). In some circumstances, however, preliminary agreements can create binding obligations. Adjustrite, 145 F.3d at 548; see also Shann, 84 F.3d at 77 ([I]f a preliminary agreement clearly manifests such intention, it can create binding obligations.). The questions for us, then, are: (1) whether the April 9 agreement created binding obligations; and (2) if so, whether those obligations included a commitment to buy and sell the AVT stock, thereby terminating CCC's disclose-or-abstain duty on April 9. We conclude, for the reasons set forth below, that the answer to both questions is yes.
[B]inding preliminary agreements fall into one of two categories. Adjustrite, 145 F.3d at 548. Agreements within the first category are type I preliminary agreementsfully binding preliminary agreement[s], which [are] created when the parties agree on all the points that require negotiation (including whether to be bound) but agree to memorialize their agreement in a more formal document. Id.; see also Shann, 84 F.3d at 77 (Type I is where all essential terms have been agreed upon in the preliminary contract, no disputed issues are perceived to remain, and a further contract is envisioned primarily to satisfy formalities.). Agreements of this type render the parties fully bound to carry out the terms of the agreement even if the formal instrument is never executed. Adjustrite, 145 F.3d at 548. Agreements within the second category are type II preliminary agreements `binding preliminary commitment[s]' that are binding only to a certain degree because the parties agree on certain major terms, but leave other terms open for further negotiation. Id.; see also Shann, 84 F.3d at 77 (Type II is where the parties recognize the existence of open terms, even major ones, but, having agreed on certain important terms, agree to bind themselves to negotiate in good faith to work out the terms remaining open.). These agreements do[] not commit the parties to their ultimate contractual objective. Adjustrite, 145 F.3d at 548 (quoting Teachers Ins. & Annuity Ass'n of Am. v. Tribune Co., 670 F.Supp. 491, 498 (S.D.N.Y.1987) (Leval, J.)) (internal quotation mark omitted). Rather, they bind the parties to the obligation to negotiate the open issues in good faith in an attempt to reach the ... objective within the agreed framework. Id. (quoting Tribune, 670 F.Supp. at 498) (internal quotation mark omitted). If the parties fail to reach such a final agreement after making a good faith effort to do so, there is no further obligation. Id. The April 9 agreement bound the parties to purchase and sell the AVT stock, thus obviating any duty of disclosure on the part of CCC after April 9, if it constituted a type I agreement, but not if it constituted a type II arrangement or was, in the alternative, not binding in any respect. We have identified four factors to analyze when considering whether an agreement is a type I preliminary agreement, and five factors to analyze when considering whether an agreement is a type II preliminary agreement. [2] Some of the factors from the two sets are neither relevant nor helpful in the present context. For example, one factor common to both setswhether the parties have partially performed the agreement, evidencing after the fact their intention to be bound at the time of the alleged agreementneeds no extended discussion here because the record clearly shows that both parties fully executed their obligations under the April 9 agreement. Similarly, whether the agreement is of the type usually reduced to writing, another factor common to both sets, does not aid our analysis because we cannot discern what is usual in this context. Although a million-dollar acquisition involving the purchase of business assets ordinarily would be committed ... to a formal contract complete with representations and warranties and the other standard provisions usually found in sophisticated, formal contracts, Adjustrite, 145 F.3d at 551, this case does not involve the ordinary situation in which an outside investor acquires stock in, or acquires the business of, another entity. Rather, the Ceramis, who were already insiders and affiliates of AVT, acquired the stock of AVT that they did not already own from Immunotherapy, another affiliate, which retained no continuing ownership interest. In this context, and based on the record before us, this factor is of little help. As for the other factors, some duplicate or overlap with each other, and we therefore address both type I and type II agreements in the same discussion. In doing so, we remain mindful that these factors help us identify categories of facts that are often useful in resolving disputes of this sort, but they do not provide us with a talismanic scorecard. The ultimate issue, as always, is the intent of the parties: whether the parties intended to be bound, and if so, to what extent. Id. at 548-49.
We begin, as we usually do, with the language of the agreement. In particular, we ask whether the agreement expressly states that the parties will not be bound in the absence of a further, definitive written instrument. See Brown v. Cara, 420 F.3d 148, 154 (2d Cir.2005); Adjustrite, 145 F.3d at 549. We find no such reservation here. The April 9 agreement is six pages long and titled a letter agreement. It is not a proposal, a draft, an expression of desires, or a memorandum of understanding. Cf. Brown, 420 F.3d at 154 (two-page memorandum of understanding held not to be a type I preliminary agreement); Adjustrite, 145 F.3d at 549 (two-page proposal that stated desires held nonbinding); Winston v. Mediafare Entm't Corp., 777 F.2d 78, 81 (2d Cir.1985) (proposed agreement held nonbinding). Neither did the April 9 agreement speak in decidedly non-committal language suggesting, at most, a promise to `work together.' Brown, 420 F.3d at 154. Rather, it specified, in considerable detail, the performance that it required of each party. Just as importantly, it specified in equal detail what would become of the virtual lymph node technology if CCC were unable to obtain financing by May 1, and thus unable to purchase Immunotherapy's stock on June 1. Immunotherapy asks us to place great weight on the fact that the agreement reads, [s]ubject to the terms and conditions hereof, it is presently contemplated that [CCC] would purchase the 50,000 shares ... for an aggregate purchase price of $1,000,000, rather than, for example, it is agreed that CCC would do so, subject to financing. In Immunotherapy's view, the words presently contemplated clearly manifest the parties' intent not to be bound. We disagree. To be sure, a manifestation of intention that a promise shall not affect legal relations may prevent the formation of a contract. Restatement (Second) of Contracts § 21 (1981). The phrase presently contemplate, however, is not such a manifestation. Cf. id. § 21 cmt. b, illus. 3-4 (statements that an instrument `constitutes no contract,' `confers no legal right,' or is not to be a legal agreement or subject to legal jurisdiction in the law courts negate binding obligations). Every contract that calls for future performance contemplates that performance, and every such contract speaks of the parties' present intentions at the time they enter into it. In this context, it is clear that contemplate means anticipate doing or performing, plan on, and intendnot view mentally with continued thoughtfulness or muse or ponder about. Webster's Third New International Dictionary 491 (2002). Even a brief survey of publicly available transaction agreements confirms the ubiquitous use of phrases such as transaction contemplated by this Agreement in written instruments of sale and acquisition. See, e.g., Millennium Pharms., Inc., Current Report (Form 8-K) ex. 2.1 (Apr. 10, 2008), available at http://www.sec.gov/ Archives/edgar/data/1002637/XXXXXXXXXXXX 004416/a2184684zex-2_1.htm (transactions contemplated by this Agreement, transactions contemplated hereby, and similar phrases used twenty-two times in Takeda Pharmaceutical's agreement to acquire Millennium Pharmaceuticals); Bear Stearns Cos., Current Report (Form 8-K) ex. 2.1 (Mar. 20, 2008), available at http:// www.sec.gov/Archives/edgar/data/19617/ XXXXXXXXXXXXXXXXXX/mergeragreement2. htm (sixty times in JPMorgan Chase's agreement to acquire Bear Stearns); Int'l Paper Co., Current Report (Form 8-K) ex. 10.1 (Mar. 24, 2008), available at http:// www.sec.gov/Archives/edgar/data/51434/ XXXXXXXXXXXXXXXXXX/dex101.htm (thirty-one times in International Paper's agreement to purchase several businesses from Weyerhaeuser Co.); ChoicePoint Inc., Current Report (Form 8-K) ex. 2.1 (Feb. 22, 2008), available at http://www.sec.gov/ Archives/edgar/data/1040596/XXXXXXXXX XXXXXXXXX/dex21.htm (sixty-three times in Reed Elsevier Group PLC's agreement to acquire ChoicePoint); Countrywide Fin. Corp., Current Report (Form 8-K) ex. 2.1 (Jan. 17, 2008), available at http://www.sec. gov/Archives/edgar/data/25191/XXXXXXXXXX 08000107/exhibit21.htm (sixty-eight times in Bank of America's agreement to acquire Countrywide). We have no reason to think here that the parties intended to deviate from this established usage. We note, in addition, that courts also have had occasion to use the term contemplate to describe the future performance called for under a binding contract. For example, the doctrine of anticipatory breach allows a contracting party to sue before performance is due if the other party repudiates its contractual duties. N.Y. U.C.C. § 2-610; Norcon Power Partners, L.P. v. Niagara Mohawk Power Corp., 92 N.Y.2d 458, 462-63, 705 N.E.2d 656, 659, 682 N.Y.S.2d 664, 667 (1998). New York courts have described this doctrine as applicable to bilateral contracts which contemplate some future performance. Am. List Corp. v. U.S. News & World Report, Inc., 75 N.Y.2d 38, 44, 549 N.E.2d 1161, 1164, 550 N.Y.S.2d 590, 593 (1989) (emphasis added); accord Gardiner Int'l, Inc. v. J.W. Townsend & Assocs., Inc., 13 A.D.3d 246, 247, 788 N.Y.S.2d 312, 314 (2004) (emphasis added). If contemplate were a magic word that signaled the lack of a binding obligation, then a party could not invoke the doctrine of anticipatory breach on the basis of contemplated performance. One cannot sue based on a repudiation of performance that is not, in fact, required. Our conclusion draws considerable support from the April 9 agreement's drafting history, which we are both permitted and required to consider. See Winston, 777 F.2d at 80-81 (in determin[ing] whether the parties intended to be bound, we consider `correspondence [and] other preliminary or partially complete writings' (quoting Restatement (Second) of Contracts § 27 cmt. c)); Brown Bros. Elec. Contractors, Inc. v. Beam Constr. Corp., 41 N.Y.2d 397, 399-400, 361 N.E.2d 999, 1001, 393 N.Y.S.2d 350, 351-52 (1977); Morgan Servs., Inc. v. Abrams, 21 A.D.3d 1284, 1285, 801 N.Y.S.2d 457, 457-58 (2005). The April 9 agreement was styled a letter agreement, whereas all five previous drafts were styled a summary of discussions or the like. The April 9 agreement was signed by Immunotherapy's chairman, whereas all five previous drafts were not. The April 9 agreement was not followed by any further back-and-forth, whereas all five previous drafts were soon followed by further negotiations. Moreover, the early drafts expressly and conspicuously stated that they were not intended to be binding, but this language is absent from the April 9 agreement. Immunotherapy asks us to consider the presently contemplated language in a vacuum, but this is not how we are to view it. Rather, we look at this language and the April 9 agreement as a whole, in light of the totality of the circumstances, which includes the five prior drafts. See Brown Bros., 41 N.Y.2d at 399-400, 361 N.E.2d at 1001, 393 N.Y.S.2d at 352 (In determining whether the parties entered into a contractual agreement ... disproportionate emphasis is not to be put on any single act, phrase or other expression, but, instead, on the totality of all of these, given the attendant circumstances....). Considering all this, we find it inescapable that the parties meant for the April 9 agreement to be not a summary of discussions, but a binding expression of their intent with regard to the transfer of Immunotherapy's AVT stock.
The second factor here, the context of the negotiations, is helpful in distinguishing type II agreements from the fully binding commitments that constitute type I arrangements. An agreement is likely to be a type II preliminary agreement, and not a fully binding type I preliminary agreement, when it is subject to numerous contingencies that ha[ve] the potential to dramatically affect planning, execution, and management of the ultimate contractual objective. Brown, 420 F.3d at 158; see also Tribune, 670 F.Supp. at 500-01. Parties enter into type II agreements committing themselves to good-faith efforts to reach agreement on the remaining terms, but not to the ultimate objective when they seek to preserv[e] flexibility in the face of future uncertainty rather than establish determinative methodologies that will apply to future contingencies. Brown, 420 F.3d at 158. Here, this factor favors the conclusion that the April 9 agreement was of the type I varietya definite agreement to buy and sell the AVT stock, subject to CCC's ability to secure financing. The parties fore-saw that their transaction had the potential to be affected by a future contingency, namely, CCC's failure to obtain the needed financing. They chose to establish a determinate framework, rather than a flexible one, to address that contingency. The April 9 agreement thus expressly provided that Immunotherapy and CCC would divide the market for the virtual lymph node technology if CCC was unable to purchase Immunotherapy's AVT stock. Immunotherapy, moreover, was the party that strongly desired that the provisions related to the division of the technology be binding as to [CCC's] making efforts to finance, and as to ... the plan [for dividing the technology] if [CCC] fails to purchase [the] AVT interests. Indeed, the parties' correspondence indicates that Immunotherapy, anxious to wind up its affairs, adamantly insisted that the technology-splitting arrangement have legal force upon expiration of CCC's deadline for obtaining financing, and before the June 1 closing date. The context of the negotiations thus strongly suggests that the parties sought determinateness and certainty in the April 9 agreement, not flexibility and optionality subject to the parties' good-faith efforts to reach agreement as to open issues.
The existence of open terms is always a factor tending against the conclusion that the parties have reached a binding agreement, Tribune, 670 F.Supp. at 499, and indeed, there is a `strong presumption against finding binding obligation[s]' in an agreement that `include[s] open terms... and expressly anticipate[s] future preparation and execution of contract documents,' Arcadian, 884 F.2d at 73 (quoting Tribune, 670 F.Supp. at 499). At the same time, the parties' intent is ultimately controlling: if the parties intended to be bound despite the presence of open terms, courts should not frustrate their achieving that objective or disappoint legitimately bargained contract expectations, Tribune, 670 F.Supp. at 499, provided that the agreement is not so fragmentary as to be incapable of sustaining binding legal obligation, id. at 497. If a preliminary agreement contains no issues outstanding that were perceived by the parties as requiring negotiation, their agreement should be seen as a[] Type I binding obligation, Shann, 84 F.3d at 82, notwithstanding that the parties may intend to memorialize their understanding in more formal documents, Adjustrite, 145 F.3d at 548. But if, in contrast, the parties enter into a preliminary agreement perceiving that open issues remain to be worked out and intending simply to bind themselves to good-faith efforts at further negotiation, then the preliminary agreement, if an agreement at all, is a type II obligation. Id. Here, nothing in the record reveals that the parties left anything for further negotiation, nor does the record show that the parties in fact negotiated anything between April 9 and June 1. In its Local Civil Rule 56.1 statement of disputed facts opposing the Ceramis' motion for summary judgment, Immunotherapy pointed to paragraphs 4 and 5 of the April 9 agreement in contending that it contained full paragraphs setting forth open terms that had to be negotiated to both parties' satisfaction, including no fewer than twelve contractual elements to be negotiated. The record, however, belies the assertion that anything had to be negotiated regarding these elements. To the contrary, the April 9 agreement referred to the undrafted stock purchase agreement, as well as the representations and warranties to be contained therein, as standard. And paragraph 5 of the April 9 agreement specifically set forth the substance of the provisions to be included in the technology transfer document to be executed at closing. The April 9 agreement itself thus strongly suggests that [a]lthough the parties recognized that the final contract would include additional `boilerplate,' they foresaw no disputes relating to the boilerplate. Shann, 84 F.3d at 77. In such a circumstance, the task of formalizing contract documentation does not negate the finding of a type I agreement, so long as the parties viewed their contract as ... a binding Type I agreement ... in which everything had been agreed and all that remained was the need for lawyers' embellishments. Id. at 77-78. We see nothing in the record to undercut the conclusion that CCC and Immunotherapy so viewed the April 9 agreement. Although the record is replete with drafts, markups, and comments to the document that eventually became the April 9 agreement, it is wholly silent regarding the parties' interactions after April 9. Immunotherapy has failed to point to evidence that, for example, the parties had ongoing negotiations after April 9 and hence more remained to be done besides adding lawyers' embellishments. We therefore see no evidence from which we could conclude that the parties left material terms of their agreement open to further negotiation. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (when the burden of proof falls on the nonmoving party, summary judgment is appropriate if there is insufficient evidence to support an element of the claim).