670 F. Supp. 491
The United States District Court for the Southern District of New York made findings of fact and conclusions of law in an action brought by plaintiff lender against defendant borrower in which the lender alleged that the parties had made a binding agreement to borrow and to lend on the agreed terms and that the borrower breached that agreement.
-The borrower sought a loan under terms which it believed would permit it to employ offset accounting, by which certain assets and liabilities would not appear directly on its balance sheets.
-An anticipated stock offering would thus appear more attractive.
-The lender sent a letter which set forth the basic economic terms of the proposed loan but which made no reference to offset accounting. It invited the borrower to send a counterpart of the letter, upon which time the agreement would become binding upon the parties.
-When advisers to the borrower expressed doubt that the Securities and Exchange Commission would accept the offset accounting, the borrower refused to conclude the loan. In response to the lender’s complaint, the borrower argued that the lender had understood the loan to be contingent upon the borrower’s ability to employ offset accounting.
The court held that the agreement became binding when the borrower responded to the lender’s letter with an acceptance letter that made no mention of offset accounting. While there were still open terms, they were not basic terms of prime importance and were subject only to good-faith negotiation.
a binding preliminary commitment obligates both sides to negotiate in good faith towards the conclusion of a final judgment.
- Preliminary agreements cover a broad scope ranging from letters of intent which presuppose that no binding obligations will be placed upon any party until final contract documents have been signed, to firm binding commitments which, notwithstanding a need for a more detailed documentation of agreement, can bind the parties to adhere in good faith to the deal that has been agreed. Prime significance attaches to the intentions of the parties and to their manifestations of intent. Labels such as “letter of intent” or “commitment letter” are not necessarily controlling although they may be helpful indicators of the parties’ intentions. Notwithstanding the intention of the parties at the time, if the agreement is too fragmentary, in that it leaves open terms of too fundamental importance, it may be incapable of sustaining binding legal obligation. The conclusion that a preliminary agreement created binding obligations may leave open the further question of the nature, scope and extent of the binding obligations.
- Notwithstanding the importance of protecting negotiating parties from involuntary judicially imposed contract, it is equally important that courts enforce and preserve agreements that were intended as binding, despite a need for further documentation or further negotiation. It is the aim of contract law to gratify, not to defeat, expectations that arise out of intended contractual agreement, despite informality or the need for further proceedings between the parties.
- A preliminary contract with binding force occurs when the parties have reached complete agreement, including the agreement to be bound, on all the issues perceived to require negotiation. Such an agreement is preliminary only in form — only in the sense that the parties desire a more elaborate formalization of the agreement. The second stage is not necessary; it is merely considered desirable. The mere fact that the parties contemplate memorializing their agreement in a formal document does not prevent their informal agreement from taking effect prior to that event.
- One kind of preliminary binding agreement is a statement that expresses mutual commitment to a contract on agreed major terms, while recognizing the existence of open terms that remain to be negotiated. Although the existence of open terms generally suggests that binding agreement has not been reached, that is not necessarily so. The parties can bind themselves to a incomplete agreement in the sense that they accept a mutual commitment to negotiate together in good faith in an effort to reach final agreement within the scope that has been settled in the preliminary agreement.
- Contracts of preliminary commitment characteristically contain language reserving rights of approval and establishing conditions such as the preparation and execution of documents satisfactory to the contracting party. Although such reservations, considered alone, tend to indicate an intention not to be finally bound, they do not necessarily require that conclusion. Such terms are not to be considered in isolation, but in the context of the overall agreement. Such terms are compatible with intention to be bound. Since the parties recognize that their deal will involve further documentation and further negotiation of open terms, such reservations make clear the right of a party, or of its board, to insist on appropriate documentation and to negotiate for or demand protections which are customary for such transactions.
- Although the existence of open terms may always be a factor that suggests intention not to be bound, it is not conclusive. Where the parties have manifested intention to make a binding agreement, the mere fact of open terms will not permit them to disavow it.
- A factor in determining whether the parties considered a preliminary commitment to be binding is whether the agreement at issue is the type of contract that is usually committed to writing.
The court held that a binding agreement existed between the borrower and the lender.
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