First Department Holds that Term Sheet is Not a Binding Contract
Print Article- Posted on: Jun 16 2023
Generally speaking, “term sheets” outline the basic terms of a transaction being negotiated by the parties thereto. This Blog has previously addressed the enforceability of “term sheets.” See, e.g., [here], [here], [here], [here], [here] and [here].
On June 15, 2023, the Appellate Division, First Department, decided Parkmerced Investors, LLC v. WeWork Companies LLC, in which the enforceability of a term sheet was decided by the Court. [Eds. Note: many of the facts recited herein were obtained from the underlying court file available on the court’s NYSCEF system, in particular, the underlying supreme court decision which quoted extensively from the complaint.] The plaintiff in Parkmerced was redeveloping a neighborhood in San Francisco. The president of WeWork contacted an individual involved with the plaintiff’s redevelopment efforts and “urged for WeWork to participate in the redevelopment project.” After numerous meetings during which the details of WeWork’s potential investment were discussed, “plaintiff and WeWork allegedly entered into an agreement that contained all the material terms for WeWork’s investment.” However, the “term sheet” was a “‘non-binding indication of terms for a preferred equity investment … of $450 million.’” The “‘non-binding’” “term sheet” contained a few provisions that were expressly intended to be binding. One such provision of the “term sheet” required plaintiff to negotiate exclusively with We Work for the right to participate in the redevelopment, a provision for which WeWork paid a “$20 million nonrefundable exclusivity fee.” Accordingly, plaintiff terminated its discussions with other potential investors. Ultimately, WeWork “repudiated the agreement.”
Plaintiff commenced an action against WeWork, alleging breach of contract, breach of the covenant of good faith and fair dealing and promissory estoppel. As to the breach of contract cause of action, plaintiff alleged that the “term sheet” was a binding agreement that WeWork breached by failing to perform. Relying on documentary evidence (i.e., the term sheet) WeWork moved to dismiss all three causes of action pursuant to CPLR 3211(a)(1).
Among other things, as recognized in supreme court’s underlying decision and order, WeWork argued that: the term sheet “explicitly states that it was generally not binding”; “while the exclusivity fee section was binding, it specifically states that WeWork may decline to pursue the transaction”; and, “the $20 million exclusivity fee was to serve as liquidated damages.” Supreme court generally discussed the law regarding breach of contract and stated:
The elements of a breach of contract claim are: (1) existence of a contract, (2) plaintiff’s performance pursuant to the contract, (3) defendant’s breach of contractual obligations, and (4) resulting damages. The court will enforce a clear and complete written agreement according to the plain meaning of its terms, and not look to extrinsic evidence to create ambiguities within the four corners of the contract. A written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. Moreover, the court considers the context of the clauses when reading the contract as a whole. [Citations, internal quotation marks and brackets omitted.]
Supreme court, citing Keitel v. E*Trade Fin. Corp., 153 A.D.3d 1181, 1181 (1st Dep’t 2017), lv. Denied, 31 N.Y.3d 903 (2018), then noted that “[a] term sheet is non-binding when it sets forth the general intent for the parties to engage in good faith discussions and only be bound by a future written agreement.” Supreme court found that the term sheet “clearly provides that [it] is non-binding, which is emphasized at the beginning and the end of the Term Sheet.” Supreme court also found that the “exclusivity fee” was a liquidated damages provision covering the “very breach for which plaintiff seeks recovery in this action: failure to ‘proceed’ or ‘consummate’ in the Term Sheet compared to failure to negotiate or close in the complaint.” Based on these and other issues, supreme court dismissed the breach of contract cause of action.
On plaintiff’s appeal, the First Department unanimously affirmed. As to the contract cause of action, the Court stated:
A term sheet that sets forth the general intent of the parties to discuss in good faith the terms and conditions of a deal and states that neither party shall be bound until the parties execute a more formal written agreement, does not constitute an enforceable contract. Here, the inception sentence of the term sheet stated that what followed was a “non-binding indication of terms for a preferred equity investment” in plaintiff by WeWork …. The final provision, titled “non-binding,” reiterated that the parties understood and agreed that the term sheet was provided “solely for discussion purposes and is not a commitment or agreement of any kind on the part of WeWork . . . .” In addition, since the exclusivity fee, or liquidated damages provision, pertained to the very breach for which plaintiff seeks recovery, i.e., the failure to proceed or consummate the proposed transaction, actual damages are unavailable. The exclusivity fee, however, did not pertain to attorneys’ fees, which were allowed if any party commenced any action against another in connection with the term sheet and prevailed. [Citations and internal quotation marks omitted.]
As to the remaining two causes of action, the Court stated:
The cause of action based upon breach of the covenant of good faith and fair dealing cannot be sustained absent a contractual obligation between the parties. Nor can the claim be used as a substitute for the nonviable breach of contract claim. Furthermore, plaintiff’s vague assertions that WeWork refused to negotiate in good faith were conclusory.
The promissory estoppel claim was correctly dismissed as duplicative of the breach of contract claim. Moreover, the claim was undercut by the absence of a sufficiently clear and unambiguous promise. [Citations and internal quotation marks omitted.]
Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.
This article is for informational purposes and is not intended to be and should not be taken as legal advice.
