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Andrew Hutcheon and Mark LeeAndrew Hutcheon and Mark Lee ()

When parties are negotiating an agreement or exchanging term sheets that will form the basis for a more formalized agreement, there is no shortage of business and economic issues to consider, especially when the proposed transaction involves parties across the Atlantic. The parties, however, should be aware that there are subtle differences between the approaches of New York and English law as to whether the courts will step in to “complete” preliminary or incomplete agreements where material terms are left to be agreed. One such difference is whether a preliminary agreement creates a duty to negotiate any remaining open terms in good faith.

Under both New York and English law, where parties contemplate further negotiations of open terms and/or the execution of a formal written agreement, a preliminary agreement ordinarily does not create binding obligations.See Gas Natural v. Iberdrola, S.A., 33 F. Supp. 3d 373, 378 (S.D.N.Y. 2014); Barbudev v. Eurocom Cable Management Bulgaria Eood [2012] EWCA Civ. 548. In certain circumstances, however, both New York and English courts may enforce these agreements where doing so would be consistent with the parties’ intent.

When deciding whether a preliminary agreement is enforceable, both English and New York courts first ask the same basic question, which is whether the words used, and the background circumstances show, there is an intention to create binding legal relations. If so, courts will “strive” to give effect to that intention.See Point Developers v. F.D.I.C., 921 F. Supp. 1014, 1022 (E.D.N.Y. 1996); Interoil LNG Holdings v. Merrill Lynch PNG LNG, 60 A.D.3d 403, 404 (1st Dep’t 2009); Chadwick LJJ. in BJ Aviation v. Pool Aviation [2002] EWCA Civ. 163, paragraphs 20 and 23; Eder J. in MRI Trading AG v. Erdenet Mining Corporation [2012] EWHC 1988 (Comm), paragraph 27; Mamidoil-Jetoil Greek Petroleum Company SA v. Okta Crude Oil Refinery Ad [2001] EWCA Civ. 406, paragraph 69.

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