United States: Delaware Supreme Court Addresses Preliminary Agreements That Contemplate Second-Stage Contracts

Wilmington, Del. (March 9, 2022) - The Delaware Supreme Court recently issued a decision in which it reviewed Delaware contract law as it relates to preliminary or transitional agreements that contemplate a more comprehensive second-stage agreement.

In Cox Communications, Inc. v. T-Mobile, Inc., Del. Supr., No. 340, 2021 (March 3, 2022), a majority of the Delaware Supreme Court ruled that a settlement agreement contained an enforceable obligation to negotiate in good faith with the goal of reaching a separate definitive contract within the parameters outlined in the settlement agreement. The court recognized, however, that such a contractual obligation did not assume that a definitive agreement would necessarily be reached.

Background Facts

In the Cox matter, Cox and Sprint signed a settlement agreement that resolved litigation between the parties. T-Mobile later purchased Sprint. Section 9(e) of that settlement agreement contained a sentence that was the crux of the dispute over contract interpretation that the Delaware Supreme Court decided. The disputed provision provided that:

T-Mobile, as the successor to Sprint's rights in the settlement agreement, argued that the above language required Cox to enter into an agreement with it for a term of 36 months before it could provide wireless services with any other carrier. Cox, however, read the above provision to merely require it to negotiate in good faith to “try” to reach an agreement. The Delaware Court of Chancery agreed with T-Mobile's view of the provision, while the Delaware Supreme Court did not.

Delaware Supreme Court's Analysis

In adjudicating the Cox matter, the Delaware Supreme Court reviewed important principles and nuances of Delaware contract law, including that Delaware recognizes two types of enforceable preliminary agreements: Type I and Type II. Type I agreements, which are fully binding, reflect a “consensus on all the points that require negotiation,” but indicate the mutual desire to memorialize the pact in a more formal document. In contrast, Type II agreements exist when the parties “agree on certain major terms, but leave other terms open for future negotiation.” Type II agreements “do not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith.” Moreover, Type II agreements do not guarantee the parties will reach agreement on a final contract because “good faith differences in the negotiation of the open issues may preclude final agreement.”

The Delaware Supreme Court read Section 9(e) of the agreement at issue to leave open a number of essential terms, such as price, which barred it from being categorized as a Type I agreement. That is, the provision specifically contemplated a future “definitive” agreement and provided that open terms would be “mutually agreed upon between the parties." Thus, the provision at issue in this case did not include a promise to do anything other than negotiate in good faith.

Applicability of Ruling

The Cox decision will be relevant and important in contexts such as where a lawsuit is settled after a long day of mediation. Basic terms of an agreement are signed while all parties are present; however, a more complete and formal agreement is contemplated. Cox illustrates the importance of ensuring that the abbreviated memorialization of essential terms is expressly stated to be enforceable in the event that a more formal, comprehensive agreement is never finalized. This lesson also applies beyond settlement agreements, such as in the context of any deal where essential terms are agreed upon before a more comprehensive, formal agreement is completed (assuming, of course, that the parties want to enforce those essential terms).

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