Type 1 Preliminary Agreement

A pre-agreement is a succinct agreement reached by the parties, but may not have all the terms of the contract or has been formally written or executed. For example, interim agreements are agreements, declarations of intent and declarations of intent. It is important that a “contract-compliant” agreement does not always place them in this third non-binding category of interim agreements. Therefore, a Type II agreement does not bind the parties to their contractual commitments. It obliges the parties to negotiate open terms in good faith and to refrain from any act contrary to the negotiations, for example by insisting on the conditions that conflict with the original agreement. If the parties fail to reach a final agreement after infidelity, there will be no other obligation. In a recent case, which also involved allegations that a contract to sell a loan was entered into when there had been a language in accepting an offer that said it was “mutual enforcement of an acceptable agreement,” the New York Court of Appeals said in Stonehill Capital Management, LLC v. Bank of the West , 2016 NY Slip Op 08481 (December 20, 2016), reached the opposite conclusion obtained by the Court of Appeal of England. Admittedly, the facts were much more favourable for the party insisting on the existence of a binding contract, despite the apparently related status of the contract established by the offer to accept the correspondence.

However, while the New York Court of Appeals recognized that “if a party openly and reasonably signals that it should be bound only by a written agreement, the courts should not thwart this intention,” the Court of Appeal said: a Type II agreement must make it clear that the parties have agreed to the most important terms and will negotiate still-open terms. If the parties merely express a general willingness to negotiate, to leave open terms of too fundamental importance, or to commit to negotiation, a court will consider that parties wishing to negotiate are not in a position to meet binding obligations. When will an “agreement” apply and when can you ask another party to negotiate with you? Federal courts in New York provide a legal framework that answers both questions. There are three generally accepted categories of preliminary contracts, although a fourth has recently been subject to further judicial review. Federal courts that apply the application of New York law1 classify mandatory pre-contracts in two types: a Type I preliminary decision is a writing that contemplates negotiating a final agreement, but nevertheless sets out all the essential conditions of an agreement and proves that they receive all the essential conditions of an agreement, even if other conditions may remain open. A type I agreement is fully binding, regardless of the expectation that another final agreement will be reached and that the final agreement envisaged will actually be concluded (unless this provisional agreement makes it clear that the final agreement envisaged is implemented as a precondition for the formation of the contract). A Type II precontract is a letter that similarly envisages the negotiation of a final agreement, but defines only some of the essential conditions of the agreement, while others are open to essential conditions for the negotiation of the final agreement envisaged. Notwithstanding the fact that a Type II pre-agreement would generally not meet the test of an agreement at all, the New York courts will apply a tacit undertaking to negotiate in good faith the terms of the proposed final agreement, which is consistent with the “general framework” established in this interim agreement.