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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: June 18, 2020

Plaintiff States Claim for Breach of Obligation to Negotiate in Good Faith

On April 21, 2020, Justice Cohen of the New York County Commercial Division issued a decision in Sonenshine Partners LLC v. Duravant LLC, 2020 NY Slip Op. 31574(U), holding that a plaintiff had stated a claim for breach of an obligation to negotiate in good faith, explaining:

To state a viable claim for breach of contract, a plaintiff must allege facts establishing the existence of a contract, the plaintiffs performance thereunder, the defendant’s breach thereof, and resulting damages. A valid, enforceable contract must contain “a manifestation of mutual assent to essential terms of the agreement.

Here, there is no dispute that the parties had an agreement relating to SP’s employment as a financial advisor. The NDA required Duravant to use commercially reasonable best efforts to ensure that SP is offered the opportunity to be engaged as Duravant’ s financial advisor on customary and market terms and conditions to be negotiated at the appropriate time. SP argues this constitutes a binding agreement that it must be retained as a financial advisor for the proposed transaction. In response, Duravant argues that it is, at most, an unenforceable agreement to agree. The Court finds that the answer lies between these two poles.

The NDA is not, on its face, a retention agreement. As Duravant correctly points out, the conditional language in the NDA cannot reasonably be read to impose an unconditional obligation upon Duravant to retain SP. If the parties intended that Duravant was required to retain SP, they easily could have done so. They did not. The Court will not accept SP’s invitation to rewrite the contract to include such an unconditional retention provision. That said, the NDA imposed an obligation upon Duravant to do something in exchange for SP’ s services. The issue is whether Duravant’s promise to use commercially reasonable best efforts can, in these circumstances, be construed as something more than an unenforceable agreement to agree. The Court finds that it can.

While a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable, an agreement will not necessarily fail for indefiniteness where a methodology for determining the cost was to be found within the four comers of the contract or where it invites recourse to an objective extrinsic event, condition or standard on which the amount was made to depend. The Court of Appeals has cautioned that the doctrine of indefiniteness, if applied with a heavy hand, may defeat the reasonable expectations of the parties in entering into the contract. Indeed, it is to be sparingly used, as a last resort and only when an agreement cannot be rendered reasonably certain by reference to an extrinsic standard that makes its meaning clear.

Affording the Complaint its most liberal construction, SP states a viable claim that Duravant failed to use commercially reasonable efforts to ensure that it would give SP an opportunity be engaged as its financial adviser on customary market terms and conditions. Although Duravant argues that it seriously considered retaining SP as its financial advisor, that assertion is based on pre-answer, disputed factual assertions that cannot be considered in resolving a motion to dismiss. Moreover, the fact that the NDA references customary market terms and conditions, rather than specific monetary terms, does not render the agreement unacceptably indefinite.

Given that Duravant had control over whether SP would be retained; that it allegedly accepted SP’s introduction to the target and encouraged its follow-on work; that it allegedly proceeded with the transaction without ensuring SP the opportunity to be retained; and that the NDA described the terms of the proposed retention of SP with reference to identified commercial practice and/or trade usage, the Court finds that SP has adequately pleaded its contract claim to avoid a summary disposition via a motion to dismiss.

(Internal quotations and citations omitted) (emphasis added).

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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Posted in Commercial, Contracts
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