Commercial Division Blog
Countersigned Letter is an Enforceable Contract Even Though Parties Contemplated Later Execution of a Formal Agreement
On January 16, 2014, Justice Bransten of the New York County Commercial Division issued a decision in Noryb Ventures v. Mankovsky, 2014 NY Slip Op. 30087(U), finding a countersigned letter to be an enforceable contract notwithstanding that it explicitly envisioned a later, more formal, agreement.
In Noryb Ventures, the court denied the defendants' motion for summary judgment on the plaintiff's breach of contract claim, holding that a letter sent by the plaintiff and countersigned by the individual defendant was an enforceable agreement, notwithstanding that it expressly referenced the parties' intention to enter into a formal Stock Purchase Agreement (which was never executed). The court explained:
a mere agreement to agree, in which a material term is left for future negotiations [would be] unenforceable. . . . [However], a purported contract that leaves items to be agreed in the future may still be given effect . . . where the parties have completed negotiations on sufficient essential elements of [the] contract.
The letter expressly stated that it was "binding" but the court found this fact alone not dispositive, since notwithstanding the parties' "intention to be bound," "a contract is nonetheless incomplete and unenforceable when, as to some essential term, there has been no agreement but only an agreement to agree in the future." There were "no essential or significant elements missing" from the letter: it provided for "a price, a quantify of shares, a schedule for the timing of the transactions, conditions for the use of funds, and other obligations of the signatories."
Whether a term sheet or other preliminary document in a negotiated transaction is an enforceable contract or merely an "agreement to agree" is a recurring issue in commercial litigation. Noryb Ventures serves as a reminder that the analysis is not driven by the formality of the writing but by whether all essential terms of the parties' agreement are set forth.