ProfessorMelissa A. Hale
CaseCast™ – "What you need to know"
Brief Fact Summary. Company 1 sought to initiate a takeover of company 2. The two companies entered into a tentative written agreement, specifying certain terms of the takeover. After all relevant parties signed the tentative written agreement, company 3 sought to takeover company 2.
Synopsis of Rule of Law. Courts examine four factors to determine whether parties intended to be bound by only a formal, signed writing: "(1) whether a party expressly reserved the right to be bound only when a written agreement is signed; (2) whether there was any partial performance by one party that the party disclaiming the contract accepted; (3) whether all essential terms of the alleged contract had been agreed upon; and (4) whether the complexity or magnitude of the transaction was such that a formal, executed writing would normally be expected."
Issue. Was the Memorandum involved in this matter specific enough to constitute a binding obligation?
Held. Yes. The court first observed that pursuant to "New York law, if parties do not intend to be bound to an agreement until it is reduced to writing and signed by both parties, then there is no contract until that event occurs." On the other hand, "[i]f there is no understanding that a signed writing is necessary before the parties will be bound, and the parties have agreed upon all substantial terms, then an informal agreement can be binding, even though the parties contemplate evidencing their agreement in a formal document later." Further, "[i]f the parties do intend to contract orally, the mere intention to commit the agreement to writing does not prevent contract formation before execution of that writing, and even a failure to reduce their promises to writing is immaterial to whether they are bound." Still further, "if either party communicates the intent not to be bound before a final formal document is executed, then no oral expression of agreement to specific terms will constitute a binding contract." Consequently, New York law allows parties to obligate themselves either informally or if they so choose, only by a formal written document. What governs whether a contract is formed is the parties' intent. Intent is determined by the objective signs of intent, either spoken words or the deeds of the parties. Subjective, or internal intent is immaterial. The court then examines four factors which courts have used to determine whether parties intend to be bound by only a formal, signed writing: "(1) whether a party expressly reserved the right to be bound only when a written agreement is signed; (2) whether there was any partial performance by one party that the party disclaiming the contract accepted; (3) whether all essential terms of the alleged contract had been agreed upon; and (4) whether the complexity or magnitude of the transaction was such that a formal, executed writing would normally be expected."
• The court then applies the four factors. As to the first, the court concentrates on Getty's and the Plaintiff's January 4, 1984 press releases, and observes "[a]ny intent of the parties not to be bound before signing a formal document is not so clearly expressed in the press release to establish, as a matter of law, that there was no contract at that time." The court recognizes the use of the phrases "agreement in principle", "subject to", "after the execution and delivery of this agreement", but finds that the use of the word "will" throughout, better expresses the parties' intention to be bound.
• As to the second factor, the court observes "[o]ther than the preliminary financial arrangements made by Pennzoil, we find little relevant partial performance in this case that might show that the parties believed that they were bound by a contract." Nonetheless, the court finds "the absence of relevant part performance in this short period of time [only a few days] does not compel the conclusion that no contract existed."
• As to the third factor, whether the parties agreed to all material terms, the court observed "[t]here was sufficient evidence for the jury to conclude that the parties had reached agreement on all essential terms of the transaction with only the mechanics and details left to be supplied by the parties' attorneys."
• The court agreed with Texaco about the fourth factor, because the size of the transaction at issue would generally only be consummated by a signed agreement. However, the court refused to find as a matter of law that this factor by itself is determinative of the question of the parties' intent. Further, the court observed "[a]lthough the magnitude of the transaction here was such that normally a signed writing would be expected, there was sufficient evidence to support an inference by the jury that that expectation was satisfied here initially by the Memorandum of Agreement, signed by a majority of shareholders of Getty Oil and approved by the board with a higher price, and by the transaction agreement in progress that had been intended to memorialize the agreement previously reached."
• After addressing the four factors, the court rejects another of the Defendant's contentions, which was "the terms that they intended to include in their agreement were too vague and incomplete to be enforceable as a matter of law." The court observes that a court will enforce a contract when the terms of the agreements are "ascertainable to a reasonable degree of certainty." This determination can only be made on a case-by-case basis. "The agreement need not be so definite that all the possibilities that might occur to a party in bad faith are explicitly provided for, but it must be sufficiently complete so that parties in good faith can find in the agreement words that will fairly define their respective duties and liabilities." The court concludes, "[t]he terms of the agreement found by the jury are supported by the evidence, and the promises of the parties are clear enough for a court to recognize a breach and to determine the damages resulting from that breach."
Discussion. This case demonstrates how agreements can be consummated in a variety of ways – oral, written, partially oral and partially written – and that a case-by-case analysis is the only way to determine whether an agreement was made.