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Brown v. Cara - 420 F.3d 148 (2d Cir. 2005)

Rule:

In some circumstances, under New York law, preliminary agreements can create binding obligations. In general, binding preliminary agreements fall into one of two categories: (1) "Type I" preliminary agreements that are viewed as "complete," reflecting a meeting of the minds on all the issues perceived to require negotiation. Such a preliminary agreement binds both sides to their ultimate contractual objective. (2) "Type II" preliminary agreements that are binding only to a certain degree, reflecting agreement on certain major terms, but leaving other terms open for further negotiation. That type of preliminary 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.

Facts:

The developer and the individual owner signed the memorandum concerning the development of certain vacant property, contingent upon its rezoning. With the knowledge and consent of the owners, the developer expended efforts and funds, and obtained the rezoning. The developer submitted a plenary agreement for the development of the property, but the owners disliked the terms and refused to negotiate further with the developer, who brought suit. The district court found the memorandum to be a nonbinding agreement to agree, and granted judgment for the owners.

Issue:

Did the preliminary agreement bind the parties to negotiate in good faith open terms where the parties intended to be bound to such a good faith requirement, but not their ultimate contract objectives?

Answer:

Yes

Conclusion:

The court of appeals held that the district court erred as a matter of law by dismissing the claims that were based on the developer's assertion that the preliminary agreement created an obligation to negotiate in good faith within the general framework provided by that agreement, and by effecting prematurely a dismissal of claims against corporate owner. While the memorandum did not bind the parties to complete the project, it did bind the parties to negotiate in good faith the terms left open. The parties' Memorandum of Understanding (MOU) was not a binding Type I preliminary agreement. The intention of the parties to create a "Type II" preliminary agreement was patent in the language of the MOU. The essence of a Type II preliminary agreement was that it created an "obligation to negotiate the open issues in good faith in an attempt to reach the [ultimate contractual objective] within the agreed framework." Measuring the MOU by the relevant factors in light of this limited contractual goal it was clear that it was a binding preliminary agreement to work toward the goal of developing the 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 property. While the MOU did not disclose an intention by the parties to be bound to the ultimate goal of the contract, it clearly stated the parties' agreement to "work together to develop, build, market, and manage the property and to "work together in accordance with the terms and conditions outlined [in the MOU]." It was clear evidence of an intention to be bound to the MOU as a general framework in which the parties would proceed in good faith toward the goal of developing the property while preserving for later negotiation the specific details.

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