Commercial Division Blog
Term Sheet Not Binding Because it was Contingent on Later, Formal Documentation
On November 12, 2020, the First Department issued a decision in McGowan v. Clarion Partners, LLC, 2020 NY Slip Op. 06456, holding that a term sheet was not a binding agreement because it was contingent on later, formal documentation, explaining:
The court correctly found, as a matter of law, that the term sheet, which said, "Agreed amongst the parties but subject to signed documentations," was a preliminary agreement contingent on and not intended to be binding absent formal documentation. Notably, the term sheet also said that the management team would purchase an economic interest in defendant and that the structure of this economic interest is to be determined. Given the above, the court properly granted defendant's motion for summary judgment dismissing the first cause of action for breach of contract. Stonehill Capital Mgt. LLC v Bank of the W. (28 NY3d 439 ), on which plaintiff relies, is distinguishable, as it involved an auction bid.
To be sure, 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. However, not every good faith negotiation bears fruit. Furthermore, there is a difference between proposing terms inconsistent with the preliminary agreement and insisting upon them. Defendant did propose terms that were inconsistent with the term sheet; however, before things could get to the stage of insisting, one of the three management team members mentioned in the term sheet (who had also signed it) rejected defendant's offer, defendant stopped the lawyers from preparing further documentation, and plaintiff agreed that everyone needed to regroup. Thus, the court properly granted summary judgment dismissing the second cause of action for breach of the covenant of good faith and fair dealing.
(Internal quotations and citations omitted).
In New York, a contract must contain the material terms of the agreement to be binding. As this decision shows, there sometimes are disputes over whether all the material terms of the contract are embodied in the agreement being sued upon. Contact Schlam Stone & Dolan partner John Lundin at firstname.lastname@example.org if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.