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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: December 31, 2018

Memorandum of Understanding Found to be Unenforceable Agreement to Agree in the Future on Terms Rather Than Binding Contract

On December 20, 2018, the Third Department issued a decision in Doller v. Prescott, 2018 NY Slip Op. 08733, holding that a memorandum of understanding was an unenforceable agreement to agree in the future on terms rather than a binding contract, explaining:

Plaintiff’s first, second, fifth and seventh causes of action for breach of contract, fraud, unjust enrichment and breach of the duty of good faith and fair dealing, respectively, as well as the sixth cause of action for a declaratory judgment, all stem from the MOU and plaintiff’s attempt to purchase the Ryan Trust Shares. The MOU defines the Ryan Trust Shares as those that were in the control of a trust that was a party to litigation involving both Prescott and Integra pending at the time the MOU was executed. In relevant part, the MOU included an “[o]ffer of [e]quity,” specifically, that plaintiff was to “be given a right of first refusal for [e]quity.” The MOU defined equity as “ownership or the rights of ownership in Integra.” The “[o]ffer of [e]quity” provided that plaintiff’s first refusal right “shall include, but not be limited to, the right of first refusal to acquire the Ryan Trust Shares should they become available and/or equity grants or an equity earn in. However, the precise manner in which this [e]quity is offered shall be determined subsequent to the [e]nd of [l]itigation or circumstances deemed mutually sufficient by both Prescott and [plaintiff].” Further, the MOU confirmed the parties’ understanding that “the offer of [e]quity [was] a material inducement to [plaintiff] entering into [the] [a]greement.” Plaintiff alleged that Prescott misrepresented his intention to allow plaintiff to purchase the Ryan Trust Shares, made similar offers of equity to other Integra employees and intentionally refused to issue the Ryan Trust Shares to plaintiff.

We agree with Supreme Court’s determination that the MOU was unenforceable. A contract must be definite in its material terms to be enforceable, and the terms must manifest mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms. This requirement of definiteness assures that courts will not impose contractual obligations when the parties did not intend to conclude a binding agreement. An agreement to agree, in which a material term is left for future negotiations, is unenforceable.

In the MOU — which is documentary evidence that may be considered in the context of a motion pursuant to CPLR 3211(a)(1) — plaintiff and Prescott expressly confirmed that both would proceed diligently and in good faith to satisfy the conditions required in order to enter into definitive agreements to close the offer of equity. Similarly, the parties confirmed that, during the pendency of the trust litigation, the offer of equity was to be held in abeyance, and that once the litigation ended, the two would proceed diligently with a view toward completing, among other transactions, the offer of equity. In our view, the qualifying language in the MOU expressly belies plaintiff’s allegations that he was contractually entitled to purchase the Ryan Trust Shares. To the contrary, the parties left open for future negotiation both the type of equity and the precise manner in which that equity would be offered. In effect, the MOU was an unenforceable agreement to agree in the future on terms of a definitive agreement regarding the offer of equity, and Supreme Court therefore properly granted defendant’s motion to dismiss the first (breach of contract) and sixth (declaratory judgment) causes of action.

(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 jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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