Preliminary Agreements and the Duty to Negotiate in Good Faith
Say two businesses agree to do business with each other, but to hold off on the specifics until they get the accountants and lawyers involved to do the dirty work. Later, one business balks on closing the deal. Does the spurned business have a remedy? That depends...
Tennessee contract law has not reached the point of delineating multiple types of preliminary agreements – or agreements to enter a more formal written contract at a later date. New York law, however, recognizes two types. The Eighth Circuit Court of Appeals provides a succinct summary of the two types in Fairbrook Leasing, Inc. v. Mesaba Aviation :
The first, (“Type I”), arises when the parties agree on “all the points that require negotiation” and is preliminary only as to form. The parties have the right to demand performance of the transaction. The second, (“Type II”), establishes a framework for agreement, and binds the parties to negotiate in good faith within that framework. The parties are free to walk away once they have “made a good faith effort to close the deal and have not insisted on conditions that do not conform to the preliminary writing.”
In an unpublished 2002 decision, Kandel v. Center for Urological Treatment and Research P.C., the Tennessee Court of Appeals declined the opportunity to decide whether a cause of action would exist in Tennessee for a breach of a duty to negotiate in good faith, saying that the facts of the case did not qualify as a breach even if the duty existed.
The Eighth Circuit’s opinion also sets out the tests for the existence of a Type I or Type II preliminary agreement under New York law:
To assess whether the parties have demonstrated an intent to be bound by a Type I agreement, a court considers (1) the language of the agreement; (2) the existence of open terms; (3) whether there has been partial performance; and (4) whether the agreement is of the type usually committed to writing. For a Type II agreement, a court considers the same four factors, plus a fifth – the context of the negotiations resulting in the preliminary agreement.
If Tennessee courts adopt a duty to negotiate in good faith when called for by a preliminary agreement, New York jurisprudence may be ripe for persuasive authority.
how about say for example that there is a lease agreement between A & B for 5 years in which both of them agreed that after 5 years they will renegotiate in good faith for the renewal? can anywhere in USA you can said to have created a duty to negotiate in good faith which the law can enforce?