Delaware Supreme Court Dealing With Preliminary Agreements Considering Second Stage Contracts – Corporate Law/Commercial Law

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United States: Delaware Supreme Court deals with preliminary agreements that contemplate second-stage contracts

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Wilmington, Delaware (March 9, 2022) – The Delaware Supreme Court recently released a decision in which it considered 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., Of the. Supr., No. 340, 2021 (March 3, 2022), a majority of the Delaware Supreme Court ruled that a settlement agreement contained an enforceable duty to negotiate in good faith for the purpose of reaching a separate definitive contract at the within the parameters defined in the settlement agreement. The court, however, acknowledged that such a contractual obligation did not imply that a definitive agreement would necessarily be reached.

Background Facts

In the coxswain issue, Cox and Sprint signed a settlement agreement that resolved the dispute between the parties. T-Mobile then bought Sprint. Section 9(e) of that settlement agreement contained a phrase that was at the heart of the contract interpretation dispute that the Delaware Supreme Court decided. The impugned provision provided that:

Before Cox or any of its Affiliates (the “Cox Wireless Affiliate”) begins providing the Mobile Wireless Service (as defined below), the Cox Wireless Affiliate will enter into a definitive MVNO Agreement with an Affiliate Sprint (the “MVNO Sprint Affiliate”). identifying Sprint Affiliate MVNO as the “preferred provider” of mobile wireless service for Cox Wireless Affiliate, on terms to be mutually agreed between the parties for an initial term of 36 months (the “Initial Term”).

T-Mobile, as 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 operator. Cox, however, interpreted the above provision as simply obliging him 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 Analysis

By judging the coxswain In this regard, the Delaware Supreme Court reviewed important principles and nuances of Delaware contract law, including the fact that Delaware recognizes two types of enforceable preliminary agreements: Type I and Type II. Type I agreements, which are fully binding, reflect “consensus on all points requiring negotiation”, but indicate the mutual willingness to record 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 purpose but rather to an obligation to negotiate outstanding issues in good faith”. Additionally, Type II agreements do not guarantee that the parties will reach agreement on a final contract because “good faith differences in the negotiation of outstanding issues may prevent a final agreement”.

The Delaware Supreme Court read section 9(e) of the agreement at issue to leave open a number of key terms, such as price, that prevented it from being categorized as a type of agreement. I. In other words, the provision specifically contemplated a “final” future agreement and provided that the terms open would be “by mutual agreement of 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 the decision

the coxswain decision will be relevant and important in contexts such as where a case is settled after a long day of mediation. The basic terms of an agreement are signed while all parties are present; however, a more comprehensive and formal agreement is being considered. coxswain illustrates the importance of ensuring that the abbreviated memorization of essential terms is expressly declared enforceable in the event that a more formal and comprehensive agreement is never finalized. This lesson also applies beyond settlement agreements, such as in the context of any agreement where essential terms are agreed upon before a more comprehensive formal agreement is reached (assuming, of course, that the parties wish to apply these essential conditions).

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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