Teacher's Insurance and Annuity Association of America v. Tribune Co.

United States District Court for the Southern District of New York · Contracts

Contractspreliminary agreementcommitment letterbinding agreementgood faith negotiationopen termsboard approvalconditions precedent

Facts

Teachers and Tribune exchanged letters concerning a 14-year $76 million loan connected to Tribune's sale of the News Building, and the letters stated that upon acceptance their agreement would become a "binding agreement," while also making the transaction subject to final documentation satisfactory to both sides and approval by Tribune's Board of Directors. The commitment letter and incorporated term sheets covered the important economic terms of the loan and the related mortgage, but left customary secondary terms and documentation to be negotiated. After interest rates declined and Tribune developed concerns about whether the transaction would qualify for off-balance-sheet offset accounting, Tribune refused to continue negotiations unless Teachers agreed to make Tribune's borrowing obligation contingent on satisfactory offset accounting. Teachers was willing to continue negotiating open issues and sued after Tribune ceased pursuing the transaction.

Issue

Whether the parties' commitment letter created an enforceable obligation despite open terms, future documentation, and board approval language. If so, whether Tribune breached that obligation by refusing to continue negotiations unless Teachers accepted a new accounting condition not contained in the agreement.

Rule

A preliminary agreement may be enforceable in two different ways: either as a complete agreement intended to be bound immediately, or as a binding preliminary commitment under which the parties are not yet bound to the ultimate transaction but are bound to negotiate open terms in good faith within the framework of agreed major terms. In deciding whether such a preliminary commitment is binding, the court looks chiefly to the parties' manifested intent, including the language of the agreement, the context of negotiations, the significance of open terms, partial performance, and whether the relevant business community treats such preliminary commitments as capable of binding effect. Open terms, future approvals, and contemplated final documents create a strong presumption against binding obligation, but do not defeat it where the parties expressly manifested an intent to be bound and agreed on the major terms.

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Larkspur Capital, a private lender in Denver, sent Red Mesa Transit, Inc. a signed four-page commitment letter for a warehouse financing in Phoenix. The letter set out principal amount, interest rate, maturity, collateral, draw schedule, and fees, stated that upon countersignature it would become a "binding agreement," and said final loan documents would later include representations, covenants, and defaults "usual and customary" for transactions of that type; Red Mesa signed "accepted and agreed to" and later tried to walk away when market rates dropped.

If Larkspur sues, which is the strongest analysis under the governing doctrine?

Explanation. The majority recognized a second type of enforceable preliminary agreement: a binding preliminary commitment. Explicit language such as "binding agreement" and "accepted and agreed to," together with agreement on major economic terms, strongly supports intent to be bound even though final documents and customary secondary terms remain open. Future documentation creates a presumption against binding effect, but it does not defeat enforceability where the parties manifested a present commitment to negotiate remaining issues in good faith. (Derived from Teacher's Insurance and Annuity Association of America v. Tribune Co. (n.d.).)