Preliminary Negotiations or Binding Obligations? A Framework for Determining the Intent of the Parties

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It is a fundamental tenet of contract law that mere participation in negotiations does not result in a binding obligation.   Rather, to form a contract, all parties to the agreement must manifest an intent to be bound.   Sometimes, however, the intent of the parties is not clear, and disputes between the parties arise.

For instance, think about the following scenario.  Two parties enter into negotiations for a potential transaction.  Somewhere in the negotiation process, the parties execute a preliminary written agreement, with the intention of ultimately replacing it with a more formal, comprehensive, and binding written agreement in the future.  In other words, the intent of the parties at the time they executed the preliminary written agreement was that it be non-binding.  However, two months later, prior to the execution of the formal written agreement, negotiations break down.  The disappointed party makes a claim for breach of contract, asserting that the terms of the preliminary agreement were in fact binding on the parties.  If the language of the preliminary agreement is ambiguous as to the parties’ intent —or if subsequent words, deeds, or writings of the parties seem to suggest a change in the parties’ intent from the time the preliminary agreement was executed— a judge or jury will be called upon to determine whether the parties are bound by the terms of the preliminary agreement.

Even in the absence of a signed preliminary agreement, disputes between parties can arise over the intent to be bound.  If two or more parties are negotiating an agreement —either orally or through the exchange of written (yet unsigned) draft agreements,— but a written agreement is never executed, when one party pulls out of the discussions, the disappointed party might assert a claim for breach of oral contract.  A court will again be in the difficult position of having to determine the intent of the parties after the fact.

Courts analyzing the intent of the parties to be bound by informal agreements —in the absence of a signed definitive written agreement —must balance competing interests.  On the one hand, courts seek to avoid trapping parties in surprise contractual obligations they never intended.   On the other hand, courts must enforce agreements that the parties intended to be binding— even if one party has subsequently had a change of heart or if the parties intended to create more comprehensive documentation in the future.   Ultimately, the aim of contract law is to “gratify, not defeat, expectations.”


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