Brief Fact Summary.
Plaintiffs sued Defendant, alleging that Defendant breached a commitment letter for a loan.
Synopsis of Rule of Law.
A preliminary agreement is enforceable if the parties intended to be bound to it or to negotiate in good faith to reach an agreement on disputed terms.
Teachers Insurance and Annuity Association of America (Plaintiffs) sued Tribune Co. (Defendant), arguing that Defendant breached a commitment letter whereby it agreed to take a loan from Plaintiffs, subject to execution of final documents and approval by Defendant’s board of directors. To make a more attractive public stock offering, Defendant wished to employ offset accounting, whereby it could withhold disclosure of certain assets on its balance sheets. When Defendant learned that offset accounting would likely be unacceptable to the Securities and Exchange Commission, it broke off negotiations, arguing that its obligation to borrow was contingent on its ability to use offset accounting to report the loan on its balance sheets, though no mention of offset accounting was made in the commitment letter.
Whether a preliminary agreement is binding on the parties.
Yes. Judgment is granted to Plaintiffs. A preliminary agreement is enforceable if the parties intended to be bound to it or to negotiate in good faith to reach an agreement on disputed terms.
The primary concern for courts in disputes over preliminary agreements is to avoid trapping parties in surprise contractual obligations that they never intended. That the parties contemplate concluding a final agreement does not prevent that preliminary agreement from taking effect before the final agreement is reached. Moreover, parties can bind themselves to negotiate together in good faith in an effort to reach final agreement within a scope laid out in the preliminary agreement. There is a strong presumption against finding binding obligation in agreements which include open terms, call for future approvals, and expressly anticipate future preparation and execution of contract documents. but courts are willing to uphold a preliminary agreement if it is clear that the parties intended to be bound to it. Here, the language of the letter expressly stated that the parties were executing a binding agreement. Furthermore, Defendant specifically sought a firm commitment from Plaintiffs so it could be sure to obtain the financing by the year’s end. The open terms indicated that the parties intended to negotiate in good faith to resolve the disputes over those terms. Finally, commitment letters are customarily used in the market, and Defendant’s board approved the loan. Finding that the parties intended to be bound to the commitment letters, the agreement was enforceable.