You’ve been negotiating with the other side and have finally nailed down most of the terms. You want to memorialize those terms in a preliminary agreement or memorandum of understanding, but make everything subject to a final written formal document in case you still can’t agree on the final terms. Is an express reservation that the agreement is not final until formalized and executed sufficient to protect you and your company? The answer may depend upon the jurisdiction whose law applies. At the very least, you may have an obligation to continue to attempt to finalize the agreement in good faith. Therefore, it is important to check applicable law before memorializing a preliminary agreement to avoid unintended obligations.
For illustration, we will use New York case law, as applied by the federal courts, as an example. (Notably, there are distinctions between how New York state courts and federal courts address this issue.) In the 2nd Circuit, there are two types of preliminary agreements under New York law: Type I and Type II. Type I agreements are relatively straightforward because they are “complete, reflecting a meeting of the minds on all the issues” and enforceable “even if a more formal agreement never materializes.” In assessing whether parties have entered into a Type I agreement, courts applying New York law will consider four factors: