Contracts: Preliminary Agreements

Definition of Preliminary Agreement

“A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.” - Rest. 2d, section 26

Considerations for Preliminary Agreements

 

A proposal is not an offer if there is reason to know some further manifestation of assent is intended through…

·      Words or conduct of the parties.

·      Circumstances

Previous communications

Usages of community or line of business

Statute Application of Preliminary Agreements

“Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented from so operating by the fact that the parties also manifest an intention to prepare and adopt a written memorial thereof; but the circumstances may show that the agreements are preliminary negotiations.” - Rest. 2d (27)

3 Types of Preliminary Agreements

1. Entirely Preliminary

2. Regardless of its label as preliminary, it’s complete and binds both parties to the ultimate contractual objective. 

   1. Binding, but not the ultimate contractual objective - only to continue to negotiate within an “agreed framework” toward that objective in good faith. 

Brown v. Cara

Preliminary agreement to continue to negotiate in good faith.

Factors to be considered to determine whether a preliminary agreement manifests mutual assent to contract, negotiate in good faith or a nonbinding desire to contract.

1. An expressed reservation of the right not to be bound in the absence of a writing.

2. Whether there has been partial performance.

3. Whether all of the important/necessary terms of the alleged contract have been agreed upon (how many terms are “open”).

4. Whether the agreement at issue is the type of contract that is usually committed to a formal writing.

What is the Common Law approach to vague/indefinite contracts? 

If the agreement is not reasonably certain as to its material terms, there is fatal indefiniteness and the agreement is unenforceable. 

1. Indefiniteness is evidence of lack of intent to contract. The greater the lack of specificity in an agreement, the more likely the parties do not actually agree.

2. If the parties have intended to contract, if the terms are too uncertain, no contract is formed because the court can’t determine if either party has breached or what the remedy should be.

Baer v. Chase

If a court can’t determine a remedy, the contract is unenforceable.

UCC Approach to Vague/Indefiniteness: UCC 2-204(3)

“Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.”

UCC Approach to Vague/Indefiniteness: UCC 2-305

“The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if (a) nothing is said as to price, or (b) the price is left to be agreed by the parties and they fail to agree; or (c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.”