Court Holds that a Letter of Intent is a Binding Contract When It Contains All the Material Terms of An Agreement

• Posted on: Feb 8 2019

Parties to commercial/business transactions are no doubt familiar with “term sheets”, “letters of intent”, “memoranda of understanding” and “agreements in principle”. As the parties to these documents know, they outline the fundamental terms of the transaction being negotiated.

Not surprisingly, disputes arise over the enforceability of these documents. In A.J. Richard & Sons, Inc. v. Forest City Ratner Cos., LLC, 2019 N.Y. Slip Op. 30215(U) (Sup. Ct. Kings County Jan. 28, 2019) (here), Justice Sylvia G. Ash considered this question in connection with Forest City’s plan to develop the Atlantic Yards (now Pacific Park), located adjacent to the Barclay’s Center and the Atlantic Terminal. As discussed below, the Court held that the letter of intent at issue (“LOI”) was a binding and enforceable agreement, finding that the document “set forth all of the material terms of the agreed-upon transaction” between the parties.

When is a Letter of Intent Binding?

In determining the rights and obligations of parties to a written instrument, courts will enforce the agreement according to its terms when the agreement “is complete, clear and unambiguous on its face.” Greenfield v. Philles Records, 98 N.Y.2d 562, 569 (2002); RIS Assoc. v. N.Y. Job Dev. Auth., 98 N.Y.2d 29, 32 (2002). The aim of the court when interpreting a written instrument is to arrive at a construction that gives fair meaning to all of its terms and provisions, and to reach a “practical interpretation of the expressions of the parties so that their reasonable expectations will be realized.” Pellot v. Pellot, 305 A.D.2d 478 (2d Dept. 2003). Courts do so by employing “an objective test,” which “means that the manifestation of a party’s intention rather than the actual or real intention is ordinarily controlling.” Four Seasons Hotels v. Vinnik, 127 A.D.2d 310, 317 (1st Dept. 1987); see also Conopco, Inc. v. Wathne Ltd., 190 A.D.2d 587, 588 (1st Dept. 1993). In determining the party’s intentions, the courts look to the language and terms of the instrument at issue. Conopco, 190 A.D.2d at 588; Lake Constr. & Dev. Corp. v. City of New York, 211 A.D.2d 514, 515 (1st Dept. 1995).

“If the language of the agreement is free from ambiguity, its meaning may be determined as a matter of law on the basis of the writing alone without resort to extrinsic evidence.” Salerno v. Odoardi, 41 A.D.3d 574, 575 (2d Dept. 2007). As it is a question of law whether or not a contract is ambiguous (W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157 (1990)), a court must first determine whether the agreement at issue on its face is reasonably susceptible to more than one interpretation (see Chimart Assoc. v. Paul, 66 N.Y.2d 570 (1986)). When a contract term or clause is ambiguous, and the determination of the parties’ intent depends on the credibility of extrinsic evidence or a choice among inferences to be drawn from extrinsic evidence, then the interpretation of such language presents a question of fact and the determination is a matter for trial. Amusement Bus. Underwriters v. American Intl. Group, 66 N.Y.2d 878,880 (1985). Any ambiguity in a contract is to be construed against the party who drafted the contract. See Guardian Life Ins. Co. of Am. v. Schaefer, 70 N.Y.2d 888 (1987).

When the writing is a letter of intent or a memorandum of understanding the foregoing rules apply. And, where the letter of intent or memorandum of understanding contain all of the essential terms of the contract, “the fact that the parties intended to negotiate a ‘fuller agreement’ does not negate its legal effect.” Conopco, 190 A.D.2d at 588. Thus, a letter of intent or a memorandum of understanding is not rendered ineffective simply because certain non-material terms are left for future negotiation or because the agreement states that the parties will execute a formal agreement in the future. RES Exhibit Servs., LLC v. Genesis Vision, Inc., 155 A.D.3d 1515, 1518 (4th Dept. 2017); Sustainable PTELtd. V. Peak Venture Partners LLC, 150 A.D.3d 554, 555 (1st Dept. 2017). The writing must expressly reserve the right not to be bound until a more formal agreement is signed. Bed Bath & Beyond Inc. v. IBEX Constr., LLC, 52 A.D.3d 413, 414 (1st Dept. 2008); Emigrant Bank v. UBS Real Estate Sec., Inc., 49 A.D.3d 382, 383-384 (1st Dept. 2008). In fact, the lack of an expressed reservation of the right not to be bound by the letter of intent or memorandum of understanding in the absence of further agreements strongly favors a finding of a binding agreement. Netherlands Ins. Co. v. Endurance Am. Specialty Ins. Co., 157 A.D.3d 468, 469 (1st Dept. 2018).

[Ed. Note: This Blog has written on the issue here, here and here.]

A.J. Richard & Sons, Inc. v. Forest City Ratner Cos., LLC

Background

In early 2005, the City of New York entered into a Memorandum of Understanding (“MOU”) with Forest City, authorizing the company to develop the Atlantic Yards Project. The MOU contemplated that the Empire State Development Corp. (“ESDC”) would seek approval for the acquisition by eminent domain of the ownership interests of the tenants occupying space on the site (“Site 5”).

In early 2006, when the Atlantic Yards Project was in its early stages, Forest City made a proposal to A.J. Richard, whereby it would purchase the property from A.J. Richard in exchange for a replacement property in the same location after the redevelopment of Site 5 was complete (“Replacement Property”). At the time, Forest City was planning to redevelop the property as a mixed-use building and convert the building to a condominium form of ownership with retail and/or commercial spaces on the ground floor and a residential or office tower.

Discussions over the proposal ensued. Between September and December 2006, the parties negotiated the terms of the LOI, and exchanged multiple drafts of the LOI with each other. On December 2, 2006, the parties executed the LOI.

The LOI set forth the proposed terms of the transaction between A.J. Richard and Forest City with respect to the proposed redevelopment of the property. In that regard, the LOI contained a number of provisions relevant to the action: a) an exclusivity provision, in which Forest City agreed to be A.J. Richard’s exclusive purchaser of the property and exclusive developer for the Replacement Property and the proposed redevelopment; b) an agreement to negotiate a purchase and sale agreement related to the property on Site 5 in which certain terms and condition of sale were agreed upon and required to be included in the final agreement; c) a “Proposed Redevelopment” section, which described in detail the proposed redevelopment of a mixed use building at Site 5, and which required A.J. Richard to cease operations at the property and vacate the property on 90 days’ notice from Forest City; d) a “Development Agreement” in which Forest City agreed to, among other things, develop the Replacement Property in accordance with the terms of the development agreement to be entered into by the parties, and substantially complete the Replacement Property within 18 months of the “Go Dark Period”; e) provisions governing the duties of each of the parties; f) a section governing the payments that Forest City would make to A.J. Richard annually ($3,800,000 per year each year) during the Go Dark Period, representing A.J. Richard’s “lost profits during such Go Dark Period”; g) sections governing the purchase price for the Replacement Property, required approvals and inducements from relevant governmental entities to enable the Proposed Redevelopment; h) a confidentiality agreement; i) amendment and assignment sections; j) a compliance with laws section; and k) an agreement section that required the parties to negotiate and finalize the Purchase and Sale Agreement and Development Agreement “within a commercially reasonable period of time.”

Thereafter, A.J. Richard and Forest City drafted detailed purchase and sale agreements and development agreements (the “Implementing Documents”), as provided by the LOI, in order to implement the transaction that had been agreed upon in the LOI. From February 2007 to January 2008, A.J. Richard and Forest City exchanged various drafts of the Implementing Documents and their comments concerning them.

By letter dated April 11, 2008, A.J. Richard advised Forest City that it had learned of Forest City’s intention to exclude A.J. Richard as an occupant with ownership of the store at the proposed site, as contemplated in the LOI. The letter sought an assurance from Forest City that it intended to perform all of its obligations pursuant to the LOI, noting that A.J. Richard considered the LOI to be a binding contract, notwithstanding the absence of a more formal contract. The letter further stated that if A.J. Richard did not receive the requested assurance by April 18, 2008, A.J. Richard would consider the agreement set forth in the LOI to have been anticipatorily breached by Forest City and would seek appropriate remedies.

By letter dated April 17, 2008, Forest City expressed disagreement with A.J. Richard’s assertion that the LOI was a binding contract. Notwithstanding, however, Forest City subsequently reached out to A.J. Richard to resume work on the Implementing Documents. By letter dated April 22, 2008, A.J. Richard advised Forest City that it disagreed with the latter’s legal characterization and effect of the LOI and reserved all rights with respect to the issue. A.J. Richard noted, however, that further debate on that issue would serve no purpose since the parties were proceeding towards finalizing the Implementing Documents. The parties exchanged additional drafts of the Implementing Documents in June 2008 and January 2009. By mid-2009, the Implementing Documents were almost finalized.

By October 2009, however, Forest City informed A.J. Richard that due to economic uncertainty caused by the recession and financial crisis, it was delaying the proposed development of Site 5 and that there was a good chance Forest City would never develop the site. Forest City advised that because of the uncertainty surrounding the future of Site 5 and the Atlantic Yards Project as a whole, Forest City wanted to suspend discussions regarding the Implementing Documents and avoid expending further resources on the Implementing Documents at that time.

In response, A.J. Richard advised Forest City that it viewed the LOI as a binding contract and asked whether Forest City intended to consummate the transaction. In mid-November 2015, Forest City advised A.J. Richard that it did not consider the LOI to be a binding agreement for the purchase and sale of the property. Forest City further informed A.J. Richard that it intended to proceed with the development of Site 5 without delivering the Replacement Property to A.J. Richard in exchange for A.J. Richard’s existing property at Site 5, and that A.J. Richard would no longer be permitted to operate at the property site. Forest City stated that the ESDC would imminently bring an action to take title to the property by eminent domain.

The Lawsuit

On December 4, 2015, A.J. Richard filed the action. A.J. Richard asserted four causes of action.

The first cause of action sought a declaratory judgment that (a) the LOI was a valid and binding contract, (b) it performed under the LOI, (c) Forest City breached the LOI, (d) it would be irreparably harmed if Forest City or those working in concert with Forest City were to obtain the property other than pursuant to the terms of the LOI, and (e) it had no adequate remedy at law.

The second cause of action alleged that Forest City breached its obligations under the LOI by directing the ESDC to initiate proceedings to take title to the property without Forest City purchasing the property and without conveying to it the Replacement Property, and by explicitly repudiating its obligations under the LOI.

The third cause of action alleged that Forest City breached its contractual obligations under the LOI by failing to negotiate in good faith, including by, in September 2015, directing the ESDC to seize title to the property by eminent domain, and, in November 2015, explicitly repudiating its obligations under the LOI and declaring that it would not honor the LOI.

In its second and third causes of action, A.J. Richard sought specific performance, and an award of incidental damages resulting from Forest City’s alleged breaches of the LOI.

The fourth cause of action alleged, in the alternative, that A.J. Richard was entitled to specific performance because Forest City should be estopped from acquiring the property by a method other than that prescribed in the LOI or upon terms other than those set forth in the LOI. A.J. Richard contended that it reasonably and foreseeably relied upon Forest City’s promises in the LOI to its detriment, and that it would suffer irreparable harm if Forest City was not ordered to specifically perform its obligations under the LOI.

On February 18, 2016, the Court granted a motion by A.J. Richard for a preliminary injunction restraining Forest City and all those acting in concert with it from developing the project as it pertained to A.J. Richard.  Forest City appealed the February 18, 2016 order, and later withdrew its appeal. By order dated October 13, 2016, the Court directed A.J. Richard to provide an undertaking in the amount of $500,000.

Forest City moved for an order: (1) granting it partial summary judgment dismissing plaintiff’s first, second, and fourth causes of action against it; and (2) vacating the preliminary injunction issued on February 16, 2016. A.J. Richard cross-moved for an order: (1) granting it summary judgment on all causes of action set forth in its complaint; (2) declaring that: (a) the LOI was a valid and binding contract; (b) it had performed under the LOI; (c) Forest City was in breach of the LOI; (d) it would be irreparably harmed if Forest City or those working in concert with Forest City obtained its property, other than pursuant to the terms of the LOI; and (e) it had no adequate remedy at law; (3) enjoining Forest City and those working in concert with Forest City from breaching the LOI; (4) compelling Forest City to specifically perform its obligations pursuant to the LOI; and (5) setting the matter down for a hearing to award it incidental damages resulting from Forest City’s prior breaches of the LOI.

The Court’s Decision

The Court held that the LOI constituted a valid and binding agreement between the parties. The Court found that the “LOI set forth all of the material terms of the agreed-upon transaction, including the parties, purchase price, location, and size of the Replacement Property; mortgage arrangements; Go Dark Payments; assumption of costs; and terms of delivery.” Slip Op. at *14. In addition, the Court found that the LOI “included detailed specifications with respect to the Replacement Property, including parking spaces, loading dock requirements, and a preliminary floor plan …” and a delivery requirement in which Forest City agreed to “deliver the Replacement Property to [A.J.] Richard substantially complete in ‘vanilla box’ condition,” which the LOI defined to mean “specified electrical system capacity,” “air conditioning system requirements, accessibility requirements, and requirements for plumbing, sprinklers, and modes of ingress and egress.” Id. at **14-15.

The Court rejected Forest City’s argument that because the LOI required the parties to negotiate the specific terms and conditions of the sale of the property in a purchase and sale agreement and a development agreement, the LOI was “a non-binding agreement to agree and unenforceable as a contract.” Id. at *15. The Court noted that the agreement was “not rendered ineffective simply because certain non-material terms [were] left for future negotiation or because the agreement state[d] that the parties [would] execute” a more formal agreement. Id. at *16 (citation and internal quotation marks omitted). The Court concluded that the “matters to be negotiated [were] non-essential terms that ‘concern[ed] fine details,’ which ‘may still be decided by the parties without effecting the viability of the contract.’” Id. (quoting Tetz v. Schlaier, 164 A.D.2d 884, 885 (2d Dept. 1990)). The Court found it dispositive that the LOI did not “contain an express reservation by either party of the right not to be bound until a more formal agreement [was] signed. Id. See also id. at *18 (“The lack of an expressed reservation of the right not to be bound by the LOI in the absence of further agreements strongly favors a finding of a binding agreement”) (citations omitted).  As a result, the Court rejected Forest City’s assertion that the LOI was non-binding because it “did not state that the parties intended to be legally bound”: “there is no requirement in a contract that it state that the parties are bound by it. Rather, it is the fact that the language of the agreement evinces a binding contract which determines that the parties are bound.” Id. at *17 (citations omitted).

The Court summarized its findings as follows:

The plain language used in the LOI manifests the intention of the parties to be bound by it. The LOI contained extensive language that makes sense only in the context of a binding contractual commitment. The LOI used mandatory terms with respect to the parties’ obligations, such as “shall” and “will” throughout its provisions, indicating its binding nature. There is no explanation as to why the parties would use such mandatory language to refer to commitments if they were merely optional or precatory. Furthermore, the LOI stated that by signing, the parties “indicate[d] … agreement with the terms of this [LOI].” This is indicative of a binding agreement.… Forest City does not explain why a document that created no binding rights would provide for the termination of “rights hereunder,” or why a document that created no binding obligations would nonetheless provide for their “automatic[] release[].”

… Forest City offers no explanation as to why the parties would provide for amendment procedures and governing law, or a liquidated damages provision for a document that it believed was of no legal effect. Thus, the LOI was replete with the terminology of a binding contract, evincing the parties’ intention to create mutually binding contractual obligations, which is incompatible with Forest City’s contention that it was free to walk away from the deal upon deciding that its interests were no longer served by it.

Slip Op. at *18-19 (citations omitted).

Accordingly, the Court denied Forest City’s motion, except as to the promissory estoppel claim and granted A.J. Richard’s cross-motion, to wit: (1) granting a declaratory judgment, finding that (a) the LOI was a valid and binding contract, (b) Forest City breached the LOI, (c) A.J. Richard performed under the LOI; (d) A.J. Richard would be irreparably harmed if Forest City or those working in concert with Forest City obtained the property, other than pursuant to the terms of the LOI; and (e) A.J. Richard had no adequate remedy at law; (2) granting summary judgment in favor of A.J. Richard on its second and third causes of action for breach of contract; (3) Forest City was directed to specifically perform its contractual obligations under the LOI, and, pursuant to the terms of the LOI, Forest City was directed to negotiate and finalize the Implementing Documents in good faith in order to complete the transaction; and (4) Forest City and those working in concert with Forest City were enjoined from breaching the LOI, as previously provided in the preliminary injunction, pending the completion of the transaction.

Takeaway

Courts have repeatedly held that agreements in principle, letters of intent and memoranda of understanding, as well as other less formal written documents, such as terms sheets and emails, can serve as an enforceable agreement. Documents containing words that evince an agreement, along with language demonstrating contract formation, will suffice to create an enforceable agreement.  A.J. Richard illustrates these points.

A.J. Richard also shows that whether a less-than-formal agreement is binding is often a hotly contested issue. It is not surprising, therefore, that Forest City has already filed a notice of appeal. This Blog will continue to follow the case as it winds its way through the appellate system.

Tagged with: Agreement in Principle, Agreement-to-Agree, Breach of Contract, Business Litigation, Commercial Litigation, Contract, Letter of Intent, Memorandum of Understanding