Time was it was easy to tell what was and was not a contract and for a party to define and enforce its terms with very little room for anyone to maneuver or renege. To start with, there was usually a formal writing, ritualistically sworn to and/or sealed, which set out plainly words that were intended to mean exactly what they said. The agreement also carried with it the moral force of the community, which took all such commitments seriously and tended to punish any second thoughts or equivocations, at times to an extent far beyond the contract’s actual economic value. Not for nothing were the first binding elements of society labeled by some great thinkers a “social contract.” In a similar vein, Shakespeare himself played on both of these elements in The Merchant of Venice. There, Shylock first exults in and then is brought to grief by the precise words of his “bond,” while the city of Venice looks on, steadfastly unwilling to suspend or deem unenforceable any part of the parties’ contract, even in the face of potentially catastrophic consequences for its most prominent citizen.
By the mid-19th century, neither element retained the force it once had. Having lost the formal trappings of oaths or sealing wax, contracts were deemed to exist without the formality, or the precise character for that matter, of their predecessors. And they were much less viewed as solemn or permanent commitments enjoying the moral support of society. To see the waning of the latter, one need go no further than John Marshall’s lone dissent while chief justice in the puzzling case of Ogden v. Saunders. His uncharacteristic disagreement with his colleagues seems to have been fueled in part by the old way of thinking about the sanctity of contracts, while the majority was already up on emerging trends toward a new, more flexible approach.
Contracts were becoming a free choice between performance and damages, based on mere economic factors, with no moral element anywhere in sight. At the same time, and partly for the same reason, some looser, oral contracts began to gain greater force. In all these respects, what came to qualify as a contract better served America’s fast-moving, efficient marketplace, which had no patience for the rituals and social rigidities of ancient scruples.
Traps for the Unwary
If the result has proved a boon to business, it has also given rise to uncertainty, not always serving to free up contracting parties but instead becoming traps for the unwary. Nowhere is this more apparent than in the rise of “the agreement to agree.” The idea seems to be that before the parties ever finalize a contract, they might commit themselves in binding form to do so later on. On the one hand, this kind of agreement seems nothing special. Parties can make binding agreements to certain things, like confidentiality and exclusivity in their negotiations, before agreeing to the complete deal. But sometimes something more is meant, viz, that one has committed oneself to later agree to everything, even before knowing exactly what everything is.
In what sense would this even be a contract? If a contract is a final binding commitment, how could it be said that the parties had really intended to have entered into a contract if they were merely agreeing to later agree? Could such a thing ever be binding, especially in a way that reliance became reasonable? And what would be the consequences of a failure to perform? Imposition of the ultimate contract? Some reliance damages? Attorney fees?
The problem shows up most acutely in the context of the so-called “letter of intent” or “term sheet.” What are these documents and why are they being entered into? Are they merely “signposts” on the road of negotiation, as some courts have termed them, providing nothing that a party could rely on and no obligation that would be enforceable? Or, at the other extreme, are they an actual contract, which a party could attempt to enforce in court, though to what end might still be unclear? Or something in between? Businesspeople tended to describe these phrases as “terms of art,” though strikingly not without sometimes very different views of what the terms might artfully mean. As a result, these instruments, and agreements to agree generally, more and more have become fertile sources of litigation, leaving to the courts to determine what really was intended, as one party or the other thought better of any prospective deal.
How was one to know what was intended? Certainly not from the title of the document itself, particularly once parties (or their lawyers) began injecting new ideas into its meaning. The answer, as always, lay in their “objective” intent, what reasonably would be understood by the use of the phrase “letter of intent” or “term sheet,” and their surrounding circumstances. But notice how what might be reasonable was destined to evolve. The more letters of intent became accepted as possible agreements to agree, the more “reasonable” it might be to view them that way. Was there any bare minimum that was necessary or might suffice?
The difficulty could be avoided, perhaps, by requiring parties to put in the letter of intent language that stated what the document was and whether or not it was binding. But what if part of it were binding and the rest not, as in the case of the aforementioned confidentiality provision or agreement for exclusivity? Even with the best of care, a general “nonbinding” recital, subject then to binding language for specific provisions, could sometimes result in a party being bound beyond those subsidiary terms. In such a case, and even as a general matter, the results might surprise one party or another, and the entire process could result in the very interference with free negotiation that the loosening of contract requirements was designed to prevent. Not for the first time, or the last, have the wiles of clever lawyers expanded rules beyond their initial scope and frustrated the more limited intention of an evolving common law.
Muddled Thinking by the Courts
Muddled thinking by the courts has not helped, as the Seventh Circuit’s decision in KAP Holdings, LLC v. Mar-Cone Appliance Parts Co., No. 1:21-cv-05648 (7th Cir. Dec. 12, 2022), shows. In that case, the plaintiff, also known as PartScription, sued Mar-Cone Appliance (called “Marcone” in the decision), contending that Marcone had agreed, but reneged, on a contract to form a partnership under which Marcone would sell its replacement appliance components through PartScription’s e-commerce platform. The alleged contract was first negotiated orally, and the top executives at both companies shook hands on a 50-50 partnership. A term sheet followed, stating that the companies “have agreed to form a partnership/joint venture to serve the independent hardware industry.” As the court notes (without setting out the term sheet in full), “[o]ther terms address[ed] market strategy, profit sharing, and the like.”
Negotiations continued and, in the words of the court of appeals, eventually “coalesced” around the term sheet, whatever that meant. PartScription’s complaint and the emails cited in it were quoted by the court to the effect that both parties “approved” the terms in that written agreement to set up the partnership. A slide presentation PartScription later made available to Marcone detailed certain technical aspects of platform integration.
Thereafter, Marcone, without obvious explanation, went dark. Eventually, PartScription filed suit in Illinois state court, a complaint that was removed to the Northern District of Illinois, which dismissed the claim. PartScription appealed, and the Seventh Circuit upheld the dismissal. The court summarized PartScription’s case as one in which Marcone reneged on a promise to form a partnership. Didn’t it? Certainly the law supported the notion. The court acknowledged that in Illinois, under an 1848 case, “parties can enter a binding agreement to form a partnership separate and apart from the partnership itself.” Such an “agreement to agree” remained “executory,” needing further action actually to agree to and implement the underlying partnership agreement, but it could nevertheless be binding. Although acknowledging that this is what the term sheet purported to be—indeed, the term sheet stated explicitly that this is what it was—the court nevertheless concluded there was no binding agreement in the case.
Why not? The character of the eventual partnership, while not articulated in all its details, was rather comprehensively set out. And all signs pointed to the parties’ agreement to later enter into the deal. There was a term sheet, a handshake, later reaffirmation, work toward the eventual deal, and more. The court still demurred. The law, it said, required more clarity on what was agreed to. As the court put it, “PartScription’s contract theory could be cognizable under state law, but only if the parties orally agreed to sufficiently definite terms.”
But which terms? Those of the partnership or those of the agreement to agree? It seems it should be the latter, but the circuit court focused on the former. The court said the term sheet was deficient for a partnership. It quoted PartScription as arguing at oral argument that “[t]he term sheet confirms that the parties agreed to form a partnership. It sets forth the terms of how to form the partnership.” And the court found that the contract showed only that the parties “planned” to do business together, in a partnership, but a partnership whose exact structure was not yet determined.
Did it need to be? Why, then, even have an agreement to agree rather than just enter into the partnership itself? The court’s further comments turned this even curiouser. It noted that many sections of the term sheet used “aspirational words that neither resemble contract language nor identify clear, binding obligations.” Thus, “[s]everal sentences” begin with “would” or “will” language, including that the partnership “would serve all current and future hardware store Affiliates,” that Marcone “would provide all Marketing, Product Strategy, Field Sales & Support,” and that the partnership “would jointly set strategy, operational standards and planning for all activities,” the emphasis always in the opinion itself. “Such language,” the court said, “does not evidence the parties’ intent to be bound.” Also, there was no timeline for an agreement, the court noted, and while the term sheet set out the need for a nondisclosure agreement, the specific terms of that nondisclosure agreement were not provided. In the end, the court opined, “[a] party can agree to a plan. But it is something else for a party to promise performance and intentionally bind itself in a legally enforceable manner. The plain language of the term sheet shows no intent to do the latter.”
But isn’t the court confused? Certainly, PartScription and Marcone had not entered into a binding partnership agreement. But, again, hadn’t the parties entered into a binding agreement to enter into a binding partnership agreement, an agreement to agree? All of the evidence the court cited bore on the terms of the partnership agreement itself, not the supposed agreement to agree, which the court went out of its way to emphasize was (under Illinois law) both possible and executory. What more could the parties have done to specify their intention to agree to a later partnership agreement than to say what the partnership agreement would cover and how responsibilities would be allocated, all of which they had apparently done? Unless it was to finish the partnership agreement itself, making the agreement to agree unnecessary.
What’s happening here? The most likely explanation has to be that something in the record left the court uncomfortable enough about the parties’ process that it viewed the matter as not having tipped over the point from mere negotiations to an actual agreement. It styled its conclusion in terms of the need for precision, often losing track of whether that precision was wanting in the “agreement to agree” or the ultimate partnership. It is right to be more skeptical about the former than maybe the latter. Since there is a high risk of parties being stuck with something unfairly while still negotiating and before there is a genuine intent to be bound, it pays to be a bit more demanding in the former context than in the latter. One wishes, however, that the court might keep clearer in its own mind, not to mention in its decision, which agreement—the agreement to agree or the eventual partnership—it was talking about and not anomalously using evidence bearing on one context in the other.
There may be a larger sense to the court’s conclusion. This is that if you are going to have an agreement to agree, the later agreement must be more detailed than just an idea or plan. It doesn’t have to be finished, but it has to have progressed beyond something merely identified in its form and characteristics. This would shift the focus from whether the parties really agreed to later agree to whether they knew, when agreeing now to agree later, what they would be agreeing to. This would make sense as a check on trapping parties still in the negotiation process into something binding before they know what their ultimate contract would be. But it would have helped if the court had actually said that. After all, if there is to be a rule of what’s “objectively reasonable” governing contracts, including an agreement to agree, it would help to know what it is.