Agreements to Agree Obligate Parties to Negotiate in Good Faith

On March 4, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in GE Oil & Gas, Inc. v. Turbine Generation Services, L.L.C., 2016 NY Slip Op. 30376(U), holding that where parties enter into an agreement to agree, they are obligated to negotiate in good faith.

In GE Oil & Gas, the parties executed several documents, including a term sheet that stated:

This summary of principal terms does not constitute a contractual commitment of any party but merely represents the proposed terms of a transaction. Any commitments will be subject to, among other things, completion of due diligence, acceptable definitive documentation, with among other things, acceptable representations, warranties, covenants and events of default, and requisite General Electric Company ("GE") internal approvals.

The parties engaged in litigation in both Louisiana and New York regarding the alleged breach of those agreements. Ultimately, the matter was resolved by the Commercial Division. The court held that the defendants had breached two agreements the parties had entered into. As to the term sheet, which the defendants argued, the plaintiff had breached, the court held:

[T]he Term Sheet[] clearly is not a definitive, binding agreement obligating [the plaintiff] to provide further financing to [defendant] TGS. The Term Sheet makes this perfectly clear. Rather, the Term Sheet leaves myriad terms open for future negotiations and is a classic agreement to agree.

Agreements to agree obligate the parties to negotiate in good faith. However, the obligation to negotiate in good faith can come to an end without a breach by either party because not every good faith negotiation bears fruit. A party that fails to negotiate in good faith may be liable to the non-breaching party, but the only damages recoverable are the party's out-of-pocket expenses.

(Internal quotations and citations omitted) (emphasis added).