Sometimes the best way to kick-start a complex deal is by keeping things simple—get agreement on the material terms and aim to negotiate the ancillary terms later. These preliminary agreements can take various names and forms: term sheets, letters of intent, memoranda of understanding, or heads of terms. But while an agreement on the key terms can be useful in a negotiation, parties can leave the table with different understandings of what that preliminary agreement actually means and, importantly, whether and to what extent that agreement is binding. This can be particularly true where one party begins to act in reliance on a deal that is still inchoate. When deals do come to fruition with some sort of definitive documentation, these differences of opinion moot themselves and rarely ever matter. But when one party walks away and leaves the other holding the bag, it often falls upon courts to determine whether a term sheet amounted to an enforceable contract. Where a term sheet is not a contract, but merely an “agreement to agree,” New York law imposes an obligation to continue negotiations in good faith. See IDT v. Tyco Group, S.A.R.L., 13 N.Y.3d 209 (2009); IDT v. Tyco Group, S.A.R.L, 23 N.Y.3d 497 (2014).
A recent case in the Supreme Court for New York County, Commercial Division, demonstrates how this precise situation can play out. In GE Oil & Gas v. Turbine Generation Services, the court was faced with breach of contract and fraud allegations from Turbine Generation Services after its would-be partner, General Electric, walked away from a deal to form a new business venture. Index No. 652296/2015, New York County (Feb. 10, 2017). The proposed business venture—which TGS alleged was a “joint venture”—was envisioned to engage in oil drilling and fracking. To that end, GE loaned TGS $25 million, which TGS claimed was needed to start purchasing equipment. In a separate term sheet signed on the same day as the note, GE further “committed” to contributing a total of $100 million of equity at later points in time. But GE never put that equity capital into the alleged joint venture. Instead, TGS got stuck with a $25 million note to GE that it couldn’t repay (TGS already bought the equipment) and an underfunded business venture.
