Agreement to Agree/ Letters of Intent, 0315 SCBJ, S.C. Lawyer, March 2015, #30

• Author: J. Kirkland Grant, J.

Agreement to Agree/ Letters of Intent

Vol. 26 Issue 5 Pg. 30

South Carolina BAR Journal

March, 2015

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0An Enforceable Contract in South Carolina?

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0 J. Kirkland Grant, J.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Parties in a negotiation will often execute a written “letter of intent, ” “preliminary agreement, ” “commitment letter, ” “agreement in principle, ” “memorandum of understanding” or “agreement to agree” indicating their agreement on some terms. Typically, additional terms to those expressed in the letter or memorandum are contemplated, and often the parties state that the terms agreed to in principle are subject to a more formalized agreement.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0In a recent case, the City of Columbia was sued for $4 million in damages over an aborted hotel project.^[1] The issue was a “memorandum of understanding” (MOU) entered into by the City and the developers for a hotel at the Columbia Metropolitan Convention Center, which was to be built with $60 million in tax-exempt municipal bonds. The City backed out. Another developer built a privately-financed Hilton hotel on the same site. The City prevailed in the Supreme Court, with an opinion by Justice Hearn holding material terms cannot be left for future agreement. The MOU was an agreement to agree in the future, in effect an outline of the framework under which the parties would continue to negotiate a final development agreement. The MOU was not a “contract” under long-established South Carolina law because there was never any agreement on the material business terms and conditions. The holding that the MOU was unenforceable as a matter of law is because the Court found there was “no meeting of the minds on numerous material terms …”

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0So in South Carolina how do parties make a binding commitment in advance of a formal contract?

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The law generally

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The law wants to encourage parties to negotiate freely without risk of precontract liability. In reality, parties agree to general expressions of willingness to enter into a bargain on certain terms, while at the same time not including or offering additional terms that will lead to a commitment. It is clear that preliminary negotiations without agreement as to the essential terms do not create a contract. Several drafts of a negotiated deal are not unusual, each representing the parties’ agreement as to some terms at least. However, until there is nothing left to future negotiations, there is no binding contract.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0In the classic article The Basis of Contract, Professor Cohen articulated this concept of negotiation, stating:

[Some] transactions … are more complicated and would become too risky if we were bound by every chance promise that escapes us. Negotiations would [then] be checked by such fear. In such cases men do not want to be bound until the final stage, when some formality like the signing of papers gives one the feeling of security, o f having taken proper precautions. The issue obviously depends upon such factors as the relative simplicity of a given transaction, the speed with which it must be concluded, and the availability of necessary information …^[2]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Judge and former Chicago Law Professor Frank Esterbrook stated:

1. [The law] allows parties to approach agreement in stages, without fear that by reaching a preliminary understanding they have bargained away their privilege to disagree on the specifics. Approaching agreement by stages is a valuable method of doing business…

2. The shoals that wrecked this deal are common hazards in business negotiations. Letters of intent and agreements in principle often . . . do no more than set the stage for negotiations on details. Sometimes the details can be ironed out; sometimes they can’t.^[3]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Williston states that the cases of this type are legion, but share two primary characteristics: first, in virtually all of the cases there is the absence of a promissory undertaking. Second, in all of the cases a reasonable person receiving the communication has reason to know from the circumstances that no contract exists. An agreement to make a contract in the future is not binding. To be binding, nothing can be left to future negotiations.^[4] There must be enough to find the essential elements, either in writing or in conduct, which evidence a mutual intent to be bound, to have an enforceable contract.^[5]

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Even if negotiations evidence complete willingness to agree in the future upon such issues as might subsequently arise, it must still follow that a valid and binding contract is not made on the earlier date; agreement to reach agreement is a contradiction in terms and imposes no obligation on the parties.^[6]

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