Commercial Division Blog

Posted: June 6, 2014 / Categories Commercial, Contracts, Motion to Dismiss; Motion for Judgment on the Pleadings

Parties Who Agree to Negotiate are not Bound to Negotiate Indefinitely

On June 5, 2014, the Court of Appeals issued a decision in IDT Corp. v. Tyco Group, S.A.R.L., 2014 NY Slip Op. 04044, holding that an agreement to negotiate does not last indefinitely.

In IDT Corp., "the parties . . . alternately negotiated and litigated over the development and use of a telecommunications system" for fifteen years. In 2000, the parties entered into a settlement agreement which required them "to negotiate additional agreements in good faith." The plaintiff subsequently sued the defendant, claiming that it had breached the agreement by proposing terms inconsistent with the agreement in the subsequent negotiations. That dispute reached the Court of Appeals, which held that the defendant "had not breached its obligation merely by proposing (as distinct from insisting upon) terms allegedly inconsistent with the Settlement Agreement."

Five weeks after [that] decision, counsel for [the plaintiff] sent a letter to [the defendant] demanding that [the defendant] "immediately comply with [its]; obligations" under the 2000 Settlement Agreement by providing fiber optic capacity to [the plaintiff]. [The defendant] replied that it had no further obligations under the Settlement Agreement — a position that it reaffirmed several times in the following months — but nevertheless agreed to negotiate. This round of negotiations was no more successful than the previous one, and [the plaintiff] brought the present case in November of 2010, asserting separate causes of action for breach of contract and for breach of [the defendant's] duty to negotiate in good faith.

The trial court granted the defendant's motion to dismiss, "interpreting" the Court of Appeals' "previous decision to mean that" the defendant "has no further obligations under the Settlement Agreement." The First Department reversed, holding that the parties were required to negotiate until they reached agreement or "until either side insisted that the open terms be as set forth in [the defendant's] standard agreements." Moreover, it held that the defendant's statement that it "had no further obligations to negotiate" was an anticipatory breach of the contract.

The Appellate Division granted the defendant leave to appeal, certifying the question of whether its order was properly made. The Court of Appeals again found for the defendant, explaining:

As our 2009 decision makes clear, parties may enter into a binding contract under which the obligations of the parties are conditioned on the negotiation of future agreements. In such a case, the parties are obliged to negotiate in good faith. But that obligation can come to an end without a breach by either party. There is such a thing as a good faith impasse; not every good faith negotiation bears fruit. As then-District Judge Leval explained in Teachers Ins. and Annuity Assoc. v Tribune Co. (670 F Supp 491, 505 [SD NY 1987]):

If, through no fault of either party, no final contract were reached, either because the parties in good faith failed to agree on the open secondary terms, or because, as often happens in business, the parties simply lost interest in the transaction and by mutual tacit consent abandoned it without having reached final contract documents, no enforceable rights would survive based on the preliminary commitment.

[The defendant] says that in this case its obligation to negotiate came to an end in 2004. It relies on our 2009 decision, and the facts underlying it, as establishing that the negotiations reached impasse, or were abandoned by both parties, in 2004, without bad faith on [the defendant's] part at least.

. . .

But even on the assumption that [the defendant's] obligation under the 2000 Settlement Agreement to negotiate additional agreements in good faith still existed in 2009-2010, [the plaintiff's] complaint does not sufficiently allege any breach of the obligation. It is true, as the concurring Justices in the Appellate Division pointed out, that courts normally give a generous reading to pleadings that are attacked as insufficient on their face. But it is not too much to ask that a pleading filed after more than a decade of back and forth between the parties contain some specific facts supporting the claim of bad faith — not just the bald conclusions, contradicted by the only relevant document referred to, that [the defendant] "insisted on terms that conflicted with the Settlement Agreement" and "made a definite and final communication" of its intent to violate its obligations.

While some specific details of the 2009-2010 negotiations are contained in [the plaintiff's] 2010 complaint none of them, in our view, support an inference that [the defendant] failed to negotiate in good faith. [The plaintiff] seems to rely heavily on [the defendant's] repeated insistence, while continuing to negotiate with [the plaintiff], that it was not bound by the 2000 Settlement Agreement to do so. But this mere statement of [the defendant's] legal position — whether or not the position was meritorious — is not in itself a refusal to negotiate.

(Internal quotations and citations omitted) (emphasis added). Judge Pigott dissented (Judge Graffeo concurring), opining that the plaintiff stated a claim for failing to negotiate in good faith by alleging "that [the defendant] insisted that it had no obligation to negotiate and when [it] did entertain negotiations, it did so in bad faith."

One way to view this decision is as seriously compromising the value of any agreement to negotiate in good faith to work out the terms of an ancillary agreement to a settlement agreement or other contract. If one party can simply string out the negotiations, they do not have to ever agree. On the other hand, the decision appears to be at least as much about the plaintiff's inability more fully to allege the defendant's bad faith, something that plaintiffs in the same position as the plaintiff here should do from now on.