The Second Department recently held in New York Military Academy v. NewOpen Group, 142 A.D.3d 489, 36 N.Y.S.3d 199 (2d Dep’t 2016), that a letter of intent (“LOI”) is unenforceable if it merely constitutes an agreement to agree. There is nothing especially new about that, but this decision serves as a reminder that parties must clearly and explicitly indicate the enforceability of a LOI within the instrument, if parties, in fact, intend it to be binding.
In Military Academy, the plaintiff brought an action to recover damages for breach of contract based on an LOI. The LOI in question provided that parties “shall negotiate to arrive at mutually acceptable Definitive Agreements” regarding a potential joint venture and loan, and further allowed for either party to withdraw from the negotiations at any time. Defendants moved to dismiss and the Supreme Court, Orange County denied that motion, presumably finding that there was at least a question of fact as to the LOI’s enforceability. Defendants appealed.
The Appellate Division, considering the language of the LOI, and omission of any terms specifying that any certain provisions were enforceable, reversed the lower court’s decision. The Appellate Division cited to well-settled New York precedent to reiterate that an agreement to agree, including a material term which allows for future negotiations, is unenforceable. In this case, the court explained that “in light of the language of the letter of intent, any reliance on the defendants’ alleged promises and representations would, as a matter of law, have been unreasonable.”
This case demonstrates that parties cannot enforce the terms of an LOI unless both parties clearly intend the LOI to be a binding agreement. If the parties expect an LOI to be enforceable, it is imperative that the document expressly designate such intentions.