Agreement to Agree is Not Enforceable in NY

Is this the end of agreement to agree in New York?

A recent New York court decision highlights that letters of intent can often lead to messy breach of contract lawsuits – especially when it comes to the concept of agreement to agree.

As the appeals court highlighted in New York Military Academy v. NewOpen Group, businesses can’t enforce the terms of a letter of intent unless both parties intended it to be a binding contract.

The Letter of Intent

The New York Military Academy and NewOpen Group executed a letter of intent regarding a potential joint venture and loan. The letter of intent provided that parties “shall negotiate to arrive at mutually acceptable Definitive Agreements” regarding the potential joint venture and loan. The letter of intent further provided that the parties “each reserve the right to withdraw from further negotiations at any time if, in the sole judgment of either or both, it is in either Party’s best interest to do so, without further liability or obligation to the other.”

…it is essential that that the letter of intent is precisely written to reflect the true intent of the parties…

After negotiations broke down, the New York Military Academy filed suit, asserting causes of action alleging breach of contract, breach of the covenant of good faith and fair dealing, promissory estoppel, and fraud. The defendants moved to dismiss the complaint. After the New York Supreme Court denied the motion, NewOpen Group appealed.

The Court’s Decision

The New York appeals court reversed the lower court’s decision and dismissed the New York breach of contract litigation. “The Supreme Court should have granted the defendants’ motion pursuant to CPLR 3211(a) to dismiss the complaint, as documentary evidence, in the form of the letter of intent, utterly refuted the plaintiff’s factual allegations, thereby conclusively establishing a defense as a matter of law,” the court held.

In support of its decision, the court cited prior precedent holding that it is well-settled under New York common law of contracts that a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable. “Here, the letter of intent demonstrated that the plaintiff’s allegations of breach of contract related to a mere agreement to agree,” the appeals court explained.

The Bottom Line for New York Businesses

To avoid a costly legal dispute, New York businesses should ensure that all letters of intent are properly drafted to expressly indicate if certain provisions are enforceable agreements in and of themselves (such as confidentiality provisions), even if a final transaction is still under negotiation. Since it is essential that that the letter of intent is precisely written to reflect the true intent of the parties, the assistance of an experienced business lawyer is often advisable.

Otherwise, if you’re a business owner unsure of how to properly put together a letter of intent or would like to discuss the matter further, please contact me, Dan Brecher.