Litigation: Preliminary agreements may not be as “preliminary” as you expect

In-house counsel should pay due care to the law affecting such agreements because it can vary by jurisdiction

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:

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Vincent Syracuse

Vincent J. Syracuse is Chair of Tannenbaum Helpern Syracuse & Hirschtritt LLP’s Litigation & Dispute Resolution Practice. He represents a variety of clients in commercial...

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Paul Sarkozi

Paul D. Sarkozi is partner in Tannenbaum Helpern Syracuse & Hirschtritt LLP’s Litigation & Dispute Resolution Practice. Recently, Paul was named as one of the...

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George du Pont

George F. du Pont (Geordie) is a partner in Tannenbaum Helpern Syracuse & Hirschtritt’s Litigation & Dispute Resolution Practice, which focuses primarily on complex commercial...

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Richard Trotter

Richard W. Trotter is an associate in Tannenbaum Helpern Syracuse & Hirschtritt LLP’s Creditors’ Rights & Business Reorganizations Practice. He focuses on complex bankruptcy and...

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