As reported by Forbes, a recent decision in New York has addressed the legal implications of an “agreement to agree” (i.e., where parties to a contract agree on major terms but leave other terms subject to further negotiation).
Todd Oldham (“Oldham”) is an artist, designer and television personality. His company, L-7 Designs, Inc. (“L-7”) entered into a contract with Old Navy, LLC (“Old Navy”) for the development and launch of a line of products bearing the “TODD OLDHAM” trademark. The contract stated, in relevant part:
“[L-7] and Old Navy acknowledge and agree that the specific terms and conditions related to this proposed line of products bearing TODD OLDHAM Marks are to be negotiated and agreed upon by the parties in a separate agreement. The parties plan to enter into a separate agreement related to these products by October 1, 2008. The parties agree that this separate agreement will contain at least the following: (1) royalty fees paid to [L-7] of 5% of Old Navy’s retail sales for this particular line only (not all Old Navy products) and (2) agreement and final approval by both Old Navy and [L-7] as to the collections and products to be sold by Old Navy.”
The parties attempted to negotiate the open terms from April 2008 through February 2009, when Old Navy broke off negotiations. L-7 then commenced litigation alleging breach of contract.
The Court held that under New York law, when parties to a contract agree on major terms while leaving other terms subject to further negotiation, “the parties are bound only to make a good faith effort to negotiate and agree upon the open terms and a final agreement; if they fail to reach such a final agreement after making a good faith effort to do so, there is no further obligation.”
Moreover, the Court held that the duty to negotiate in good faith obligates a party only to act honestly and to attempt to reach an agreement. A party will not be found to have acted in bad faith where legitimate business concerns, such as changes in market conditions or financial performance, preclude an agreement.
Accordingly, the Court entered judgment in favor of Old Navy.
The lesson is clear: an “agreement to agree” is little more than an agreement to negotiate in good faith. Contracting parties should not rely upon a contract until all terms are negotiated and the contract is fully executed.
