Commercial Division Blog

Posted: February 18, 2017 / Categories Commercial, Contracts

Court Rejects Claim Based on Term Sheet for Later-Memorialized Agremeent

On February 6, 2017, Justice Singh of the New York County Commercial Division issued a decision in Pate v. BNY Mellon-Alcentra Mezzanine III, L.P., 2017 NY Slip Op. 30256(U), rejecting a breach of contract claim based on the terms sheet for a later-memorialized agreement, explaining:

The amended complaint alleges that: 1) the Term Sheet is a written agreement, and the participation provision is included in the Term Sheet; 2) plaintiff paid millions of dollars to DRC and transferred his holdings interest to Alcentra and United; 3) plaintiff performed all of his other obligations under both the Term Sheet and the release agreement, but defendants did not cause Holdings to provide him with a 10% economic interest in that partnership, as required by the Term Sheet; and 4) defendants' failure to transfer that interest to him constitutes a material breach of the participation provision in the Term Sheet.

Defendants contend that plaintiff's breach of contract claim is expressly barred by the merger clause in the release agreement. In opposition, plaintiff maintains that the parol evidence rule does not bar him from introducing or relying on the Term Sheet. Arguing that the parol evidence rule applies only where a party is seeking to challenge the terms of an agreement based on a prior inconsistent agreement or representation, plaintiff contends that he is not using the Term Sheet to challenge the terms of the subsequent release agreement; rather, he is seeking to enforce the Term Sheet itself, and specifically a provision of the Term Sheet that is not referable to the subject matter of the release agreement and, therefore, cannot be inconsistent with it.

Plaintiff maintains that the parties entered into two separate, enforceable, written contracts. Acknowledging that the subject matter of the two contracts overlapped in parts, plaintiff asserts that the second agreement (the release agreement) was - by design - narrower in scope than the first (the Term Sheet). To prove his point, plaintiff relies upon the statement made by Echausse during the telephone call on November 1, 2013, when Echausse said:

Any document I send to you is going to be a very simple 5-page document. It says you get a full release, we indemnify you for the bonds, you put 2 1/2 in, we pay X for the 90% of your LLP interest, and then over the next 30 days we will negotiate a 10% participating interest in DRC going forward.

Accordingly, plaintiff asserts that the participation provision is not "inconsistent" with any provision in the release agreement.

The Court finds that the Term Sheet is unenforceable for several reasons. First, the merger clause states expressly and unambiguously that the release agreement supercedes any prior term sheet. If the Court were to find that the provisions in the Term Sheet were enforceable notwithstanding such language, the Court would render the clause meaningless. An interpretation of a contract that would leave one of its clauses without meaning or effect should be avoided. It is well settled that where the parties have clearly expressed or manifested their intention that a subsequent agreement supercede or substitute for an old agreement, the subsequent agreement extinguishes the old one and the remedy for any breach is to sue on the superseding agreement. It is equally well settled that the construction of a plain and unambiguous contract is a matter for the court to pass upon without recourse to circumstances extrinsic to the agreement.

Second, the Term Sheet was not intended to be the final agreement; rather, it is an agreement to agree. The Term Sheet states plainly, The parties hereby agree to enter into a forbearance agreement (the "Definitive Agreement") A term sheet that constitutes nothing more than an agreement to agree is not an enforceable agreement between the parties.

Third, plaintiff cannot rely on any telephone conversations or e-mails with the defendants, for the merger clause states unambiguously that the release agreement set forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements (written or oral). The Court of Appeals summarized the purpose of merger clauses in contracts in Matter of Primax Int. Corp. v. Wal-Mart Stores. The Court wrote:

Courts and commentators addressing the substantive and procedural aspects of New York commercial litigation agree that the purpose of a general merger provision, typically containing the language found in the clause of the parties' agreement that it represents the entire understanding between the parties, is to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing. The merger clause accomplishes the objective by establishing the parties' intent that the agreement is to be considered a completely integrated writing. A completely integrated contract precludes extrinsic proof to add to or vary its terms.

When parties set down their agreement in a clear complete document, their writing should be enforced according to its terms and evidence outside the four comers of the document as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing. Likewise, evidence of what may have been orally agreed by the parties prior to the execution of an integrated written document cannot be used to vary the temis of the writing.

Where there is a conflict between an express provision in a written contract and an alleged oral agreement, the oral agreement is unenforceable. Similarly, where an
agreement contains a merger clause that evinces the parties' intent that the agreement is to be considered a completely integrated writing, extrinsic evidence that adds to or varies the agreement's terms should be precluded.

(Internal quotations and citations omitted).