In IDT Corp. v. Tyco Group, S.A.R.L.,1 language used by the Court of Appeals raises questions concerning the continuing validity of the analysis applied by courts for more than 20 years to determine what effect, if any, a court should give to a preliminary agreement such as a term sheet, memorandum of understanding or commitment letter, when the parties contemplate the later execution of a definitive agreement setting forth the terms of their contemplated transaction.
The ‘Tribune’ Analysis
In determining the effect, if any, to be given a preliminary agreement, courts have followed the analysis first articulated in Teacher’s Ins. & Annuity Ass’n of America v. Tribune Co.2 In Tribune, then Judge Pierre N. Leval noted that preliminary documents can have binding effect and noted two types of binding preliminary agreements. A Type I agreement would bind the parties to the transaction set forth in the preliminary document, while a Type II agreement would bind the parties only to an obligation to negotiate in good faith in an effort to enter into a contract for the transaction set forth in the preliminary agreement.
