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July 24, 2014

It Ain't Over 'Till the Fat Lady Sings - Party's Contractual Obligations Continue In Agreement To Negotiate

In IDT Corp. v Tyco Group, S.A.R.L., 2012 NY Slip Op 09190 (1st Dept. Dec. 27, 2012) the Appellate Division held that if you sign a binding agreement that includes an obligation to negotiate, the obligation to negotiate is not extinguished even if the parties sue for other breaches of that agreement.

In 2000, the parties entered into a settlement agreement under which plaintiffs would have the right to use an undersea fiber optic telecommunications networks owned by defendants. However under the settlement agreement, the plaintiff’s so-called “indefeasible right to use” (“IRU”) the network, as well as network operations, administration and management (“OAM”), were not fully explicated. The IRU and OAM issues would be further documented in “definitive agreements to be mutually agreed upon,” that would contain terms and conditions “consistent with those described” in the settlement agreement.

By 2004, there were still no “definitive agreements” in place, and plaintiffs sued, claiming that the defendants had breached the settlement agreement by failing to provide the IRU and OAM The trial court found for the plaintiffs and granted summary judgment. The Appellate Division reversed and the Court of Appeals affirmed the First Department’s reversal, finding that, although the settlement agreement was a valid contract, the defendants’ “obligation to furnish capacity never became enforceable because agreed-upon conditions were not met.” IDT Corp. v. Tyco Group, S.A.R.L., 13 NY3d 209, 214 (2009). Further, the Court of Appeals found that defendants had not breached the settlement agreement “by merely proposing an IRU which allegedly contained terms inconsistent with settlement,” since the settlement agreement required negotiation and did not specify the terms that would be included in the further “definitive agreements.”

Following the 2004 case, the parties resumed negotiations but soon found themselves again at an impasse. In 2010, plaintiffs commenced the instant action in the Supreme Court Commercial Division, alleging that the defendants had breached the settlement agreement and their duty to negotiate in good faith. The defendants moved to dismiss the complaint, arguing that their obligations under the settlement agreement were extinguished by the Court of Appeals decision.

The trial court (Schweitzer, J.) granted the defendants’ motion based on the Court of Appeals’ decision that the defendants’ obligations “never became enforceable because agreed-upon conditions were not met.” The First Department reversed, finding that the motion court misinterpreted this language. Specifically, the Court of Appeals dismissed plaintiffs’ 2004 complaint not because defendants’ obligations under the settlement agreement had been extinguished, but because “the allegations specified in the plaintiffs’ first complaint did not articulate a breach at the time the action was commenced given the non-occurrence of a condition precedent: namely, the parties had not yet entered into final agreements, and the defendants had not otherwise breached their duty to negotiate.” Further, there was no res judicata or collateral estoppel bar because the “plaintiffs’ current claims arise from the alleged actions and omissions of the defendants after the Court of Appeals decision.”

The Appellate Division reiterated that the parties’ obligation to negotiate survived “until either side insisted that the open terms be as set forth in the defendants’ standard agreements. Since there was no evidence that either party insisted on this provision, the parties remained obligated to continue negotiations subsequent to the Court of Appeals decision.” Thus, defendants’ statements that they had no further obligations to negotiate, if proven, would constitute an anticipatory breach of the settlement agreement. The Appellate Division rejected the Defendants’ argument that its contractual obligations had expired “through the mere passage of time.”

Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.

About the Author

Associate

Sarah Aberg is an associate in the Business Trials Practice Group in the firm's New York office.

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