Agree First or it May Cost You Later By Bill Wilson

Business relationships often begin before parties execute a written agreement containing the terms and conditions by which the relationship will be governed. With little more than a Letter of Intent (“LOI”) or Letter of Award (“LOA”) one party is typically pressured to begin investing time and money to start preliminary work on a project. If such LOI or LOA contains nothing more than an agreement to agree later, the performing party should minimize its investment until the later agreement is executed. A recent court decision in New York confirmed the danger to the performing party under “agreement to agree” provisions. 

In Permasteelia North America Corp. v. JDS Const. Group, LLC, 2022 WL 2954131 (N.Y. Sup. CT. 7/22/22), the plaintiff subcontractor allegedly performed $1.9 million worth of preliminary work under nothing more than a LOA with an agreement to agree provision. Issues arose, and the parties never entered any later written agreement. The general contractor refused to pay the plaintiff anything for its preliminary work. In response, the plaintiff filed suit against the general contractor asserting four counts: foreclosure of its lien, breach of contract, unjust enrichment, and account stated. All four counts were based on an alleged oral “handshake deal” for subcontract work for the project. The general contractor’s LOA stated that neither party would be bound “unless and until the parties actually execute a subcontract.” During discovery, the plaintiff admitted that neither party intended to enter into any contract until its potential terms were negotiated, reduced to writing, and signed. Moreover, the plaintiff only offered one set of meeting minutes and a few project agendas to support its alleged “handshake deal.” Once these necessary undisputed facts were confirmed, the defendant moved for summary judgment on all four counts. 

The court readily granted the defendant’s motion on all counts based on clear and well-settled New York law. Where an agreement contains open terms, calls for future approval, and expressly anticipates future preparation and execution of contract documents, there is a strong presumption against finding a binding and enforceable obligation. An agreement to agree, in which material terms are left for future negotiations, is unenforceable unless a methodology for determining the material terms can be found within the four corners of the agreement, or the agreement refers to an objective extrinsic event, condition, or standard by which the material terms may be determined. The defendant’s LOA only called for anticipated future preparation and execution of a subcontract, which is not enforceable. As a result, plaintiff will recover nothing for the work it allegedly performed under the LOA. 

In New York, agreement to agree provisions negate the enforceability of anything other than a subsequent fully executed contract. Under such provisions, one party avoids legal expenses and the risk of an uncertain outcome of a lawsuit based on an oral agreement, and the other party risks nonpayment with no legal recourse to get paid, as happened in the case noted above.

Bill Wilson is a commercial lawyer with more than 20 years of experience representing and counseling municipalities, public and private owners, quasipublic agencies, developers, design professionals, architects and engineers, suppliers, contractors and subcontractors in the areas of construction and commercial law. He is an experienced litigator who also drafts, reviews, and negotiates all types of construction and commercial contracts