Business deals and commercial transactions often involve term sheets. Sometimes multiple versions and exchanges of draft term sheets are used as the starting point for negotiations of the basic deal elements that culminate in a final writing for the closing of the transaction. We urge our clients to exercise care in the writing and exchanges of term sheets and deal terms, even when the parties declare that the term sheet or letter of intent is not binding until the final contract is prepared and executed by the parties. Sometimes, the parties don’t get to a final contract, and the negotiations end when one of the parties walks away.
Ordinarily, walking away concludes the discussions. But a recent North Carolina Business Court decision, following a trend in other jurisdictions, set forth a new rule in North Carolina: the party walking away may be liable for breach of a duty to negotiate, or to continue negotiating, in good faith.
The Business Court noted that North Carolina law already implies in every contract a duty of good faith and fair dealing. Under the right circumstances, the Business Court ruled that a jury or a court could conclude that, even though the parties failed to reach a final agreement on all of the material terms of the transaction, “their words and conduct established an agreement to continue negotiating in [an] attempt to finalize the terms of the agreement and close” on the transaction. And, while the “agreement to negotiate” might not bind either party to the final terms, “such an agreement would carry with it an implied obligation that the parties . . . conduct any further negotiations in good faith.” North Carolina law also recognizes that oral agreements may constitute enforceable contracts.
The lesson here may be that careful drafting of your deal terms includes carefully wording your term sheet, to make clear that you have no duty to continue negotiating and that the deal discussions may be called off at any time without liability.
Ellinger Carr is a business law and commercial real estate law firm based in Raleigh, North Carolina. Ellinger Carr lawyers are experienced and knowledgeable counselors, transaction leaders and business problem solvers, admitted to practice in North Carolina, South Carolina, Florida, Louisiana and New York. For assistance in commercial real estate and corporate and business development matters, call 919-785-9998 or email Susan Ellinger at sellinger@ellingercarr.com, Steven Carr at scarr@ellingercarr.com, Heather McDowell at hmcdowell@ellingercarr.com, and Sarah Goodin at sgoodin@ellingercarr.com.
