Opinion ID: 791573
Heading Depth: 3
Heading Rank: 2

Heading: The MOU is a binding Type II preliminary agreement.

Text: 34 We agree with the lower courts that the MOU is not a binding Type I preliminary agreement. We hold, however, that the intention of the parties to create a Type II preliminary agreement is patent in the language of the MOU, presenting us with a pure issue of law. See Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 73 (2d Cir.1989). We reverse the judgment of the District Court to the extent that it finds to the contrary. 2 35 In Tribune, Judge Leval identified two core, but often competing, policy concerns relevant to preliminary agreements. The first is to avoid trapping parties in surprise contractual obligations that they never intended. 670 F.Supp. at 497; Adjustrite, 145 F.3d at 548. The second is the enforce[ment] and perserv[ation of] agreements that were intended as binding, despite a need for further documentation or further negotiation. 670 F.Supp. at 498; Adjustrite, 145 F.3d at 548. The path between this Scylla and Charybdis is, of course, to enforce a preliminary agreement only to the extent that the parties intend it to be binding. In this regard, giving legal recognition to [Type II agreements] serves a valuable function in the marketplace. . . permit[ting parties] to make plans in reliance upon their preliminary agreements and present market conditions . . . [without] expend[ing] enormous sums negotiating every detail of final contract documentation before knowing whether they have an agreement, and if so, on what terms. Tribune, 670 F.Supp. at 499. In our view, this is exactly what these parties did when they signed the MOU. 36 This flexibility comes with limitations, of course. While a Type I preliminary agreement is fully binding as to the final contractual goal, a Type II agreement does not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith in an attempt to reach the . . . objective within the agreed framework. Adjustrite, 145 F.3d at 548 (internal quotation marks omitted). This obligation does not guarantee that the final contract will be concluded if both parties comport with their obligation, as good faith differences in the negotiation of the open issues may prevent a reaching of final contract. Tribune, 670 F.Supp. at 498. Whether the differences that have terminated the parties' working relationship in this case reflect good faith is a question for the District Court on remand. 37 The considerations relevant to whether a preliminary agreement is a binding Type II agreement are: 38 (1) whether the intent to be bound is revealed by the language of the agreement; 39 (2) the context of the negotiations; 40 (3) the existence of open terms; 41 (4) partial performance; and 42 (5) the necessity of putting the agreement in final form, as indicated by the customary form of such transactions. 43 See Arcadian, 884 F.2d at 72; WILLISTON ON CONTRACTS, § 4:8. 44 While some of these factors are the same as those applied to determine whether a document is a Type I preliminary agreement, they have a somewhat different significance where . . . the nature of the contract alleged is that it commits the parties in good faith to negotiate the open terms. Tribune, 670 F.Supp. at 499. More to the point, if the question posed is whether the parties have agreed to proceed within an open framework toward a contractual goal, leaving necessary terms for later negotiation, rather than whether the parties have agreed to achieve the ultimate contractual goal, then the language of the agreement, its contents and omissions, and the context in which it was negotiated and signed, may lead to different conclusions. 45 The essence of a Type II preliminary agreement is that it creates an obligation to negotiate the open issues in good faith in an attempt to reach the [ultimate contractual objective] within the agreed framework. Tribune, 670 F.Supp. at 498; see also Adjustrite, 145 F.3d at 548. Measuring the MOU by the relevant factors in light of this limited contractual goal it is clear that it is a binding preliminary agreement to work toward the goal of developing the Jay Street Property within a defined framework, preserving for later negotiation in good faith business, design, financing, construction, and management terms necessary to achieve the ultimate goal of developing and exploiting the Jay Street Property. 46 As to the first factor, while the MOU does not disclose an intention by the parties to be bound to the ultimate goal of the contract, it clearly states the parties' agreement to work together to develop, build, market, and manage [the Jay Street Property] and to work together in accordance with the terms and conditions outlined [in the MOU]. We cannot imagine more clear evidence of an intention to be bound to the MOU as a general framework in which the parties will proceed in good faith toward the goal of developing the Property while preserving for later negotiation the specific details of necessary business, design, construction, financing, and management terms. 47 The second factor also supports a finding that the MOU is a binding Type II agreement. As the parties agree, at the time the MOU was signed, the Jay Street Project was subject to numerous contingencies that had the potential to dramatically affect planning, execution, and management. It was in this context that the parties elected to negotiate a general framework within which they could proceed while preserving flexibility in the face of future uncertainty. While it was possible in the abstract to negotiate a more definitive contract, using determinative methodologies to be applied to open issues, the context of the negotiations did not require derivation of such algorithms if the parties opted instead for a more open arrangement. The MOU is evidence of such an arrangement, and, as a Type II agreement, is consistent with the context of the negotiations. 48 Turning to the third factor, where the existence of open terms creates a presumption against finding a binding contract as to the ultimate goal, see Adjustrite, 145 F.3d at 548, these same omissions may actually support finding a binding Type II agreement, see Tribune, 670 F.Supp. at 499. The MOU leaves open terms-critical to every aspect of the Jay Street Project, from design, to business structure, to ownership and management. However, these omissions do not warrant against finding the MOU enforceable as a Type II agreement. In view of indeterminate regulatory and market conditions, JMB and Cara simply elected to pursue rezoning first, leaving finalization of project design and execution for later negotiation within the framework described in the MOU. 49 Consistent with views expressed in our discussion of the MOU as a Type I agreement, we find that the fourth prong, partial performance, cuts strongly in favor of finding the MOU to be a Type II agreement. JMB provided extensive and valuable performance within the framework described by the MOU. Plaintiffs are entitled to demand defendants' good faith in negotiating remaining open terms. 50 Finally, while the requirement for a more formal future contract may be terminal to a Type I claim, Type II agreements, by definition, comprehend the necessity of future negotiations and contracts. Here, there can be little debate that creation of the holding corporation, construction, financing, and management of the Property, all required more formal and extensive contracts, both practically and as matters of customary form. The MOU clearly contemplated these future agreements, and, after rezoning, the parties expended considerable effort to negotiate some of these agreements. 51 Defendants' contention that enforcement of the MOU as a Type II preliminary agreement is barred by the New York Statute of Frauds, N.Y.G.O.L. § 5-703, is without merit. 3 N.Y.G.O.L. § 5-703(1) provides that: 52 An estate or interest in real property . . . or any trust or power, over or concerning real property, or in any manner relating thereto, cannot be created, granted, assigned, surrendered or declared, unless by act or operation of law, or by a deed or conveyance in writing, subscribed by the person creating, granting, assigning, surrendering or declaring the same, or by his lawful agent, thereunto authorized by writing . . . N.Y.G.O.L. § 5-703(3) provides that: 53 A contract to devise real property or establish a trust of real property, or any interest therein or right with reference thereto, is void unless the contract or some note or memorandum thereof is in writing and subscribed by the party to be charged therewith, or by his lawfully authorized agent. 54 The requirement for a signed writing does not prohibit enforcement of the MOU as a Type II preliminary agreement. First, read as a Type II agreement, the MOU does not purport to create, convey, transfer, or assign an interest in real property. N.Y.G.O.L. § 5-703(1) and (3). While conveyance of the Jay Street Property to a hypothesized corporate entity is contemplated as part of the broader framework described, the nature of the corporation, its ownership, and the terms of the transfer remain as open terms that must be negotiated in the future. The MOU creates only an obligation for defendants to negotiate in good faith these and other terms within the broader framework. The MOU does not, by itself, give rise to any enforceable rights or duties that alter defendants' interests in the Property. Second, assuming, arguendo, that the obligation to negotiate in good faith does somehow implicate an interest in property sufficient to bring the MOU under N.Y.G.O.L. § 5-703, it is a writing. Of course, enforcement of that writing as to Tracto will turn on facts presently subject to genuine dispute, including whether Tracto or its lawful agent signed the writing, N.Y.G.O.L. § 5-703(1) and (3), or whether there was partial performance, N.Y.G.O.L. § 5-703(4). See Section III, infra. 55 For these reasons we reverse the judgment of the District Court to the extent that it dismissed causes of action based on plaintiffs' claim that the MOU is a Type II preliminary agreement. We hold that the MOU is a Type II preliminary agreement binding the parties to negotiate in good faith terms necessary to pursue joint development of the Jay Street Property. We remand for further proceedings consistent with this holding. 56