In commercial litigation, it is not at all unusual for courts to be called upon to determine whether an unsigned agreement is binding. The federal courts have a long line of cases dealing with this very issue, and perhaps the seminal one in this area is the Second Circuit’s decision in Winston v Mediafare Enter. Corp., a case considering whether an unsigned settlement agreement was enforceable. The court there identified several factors to be considered in determining whether an agreement — in that case, a settlement — is binding: “(1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to writing.”
New York courts take a similar approach. They have long recognized that a binding agreement may be found, even though a contract was not signed, so long as it is not proscribed by New York’s statute of frauds, NY Gen. Obligs. L. 5-701. In Brown Bros. Elec. Contrs. v Beam Constr. Corp., for example, the Court of Appeals held that “[i]n determining whether the parties entered into a contractual agreement and what were its terms, it is necessary to look . . . to the objective manifestations of the intent of the parties as gathered by their expressed words and deeds.” See also Flores v. The Lower East Side Service Center, Inc. Not exactly a recipe suitable for summary judgment.
Recently, in 223 Sam, LLC v. 223 15th Street, LLC, the Appellate Division, Second Department affirmed the trial court’s order denying defendants’ motion for summary judgment seeking to dismiss breach of contract claim. The case arose out of plaintiff’s claim for breach of contract based upon an unexecuted amendment to an operating agreement. The amendment added plaintiff as a 50% member of defendants, and also acknowledged plaintiff as a co-manager. The damages sought reflect the management fees allegedly earned.
Defendants argument, made in the context of a motion for summary judgment was simple: the amendment was never executed by the parties, and therefore is not binding.
In rejecting defendants’ argument, the court first noted that New York has long recognized the rule that parties will not be bound if they state their intent not to be bound unless and until the agreement is signed by all. However, if the parties reach agreement on “all the substantial terms” and nothing material is left for the future, then even if the parties intended to reduce the agreement but did not, this may nevertheless create a binding agreement between them. Express reservation is the key. The ultimate question of whether the parties intended to be bound is a question of fact.
In denying defendants’ motion, the court referred to emails exchanged between the parties which simply “failed to eliminate triable issues of fact as to whether the parties had agreed upon the major terms of the agreement and whether the parties began to perform . . . .”
The hard lesson: be careful in exchanging drafts, revisions and amendments (1) without expressly reserving the right not to be bound unless and until signed by all, and (2) partially performing before the agreement is signed. Otherwise, once all material terms are agreed upon, you may indeed have a binding agreement.