More on Type II Contracts--the duty to negotiate in good faith
The federal Second Circuit Court of Appeals recognized preliminary agreements to enter into construction contracts create an enforceable duty to negotiate in good faith last month in Brown v. Cara.
A contractor and a land owner entered into a Memorandum of Understanding (MOU) contemplating the construction of a commercial and residential development if a zoning change could be secured. After the zoning change occurred, the parties negotiations broke down and the contractor sued alleging the MOU was an enforceable contract or, alternatively, that the MOU created an agreement to negotiate in good faith. The second circuit affirmed summary judgment on the first claim but reversed on the second.
The Court discussed the distinction between Type I contracts, which contain all essential terms and are intended to bind the parties to the ultimate contractual objective , and Type II contracts, which contain terms agreed upon but are not intended to bind the parties to the ultimate contractual objective until they are negotiated.
The court observed that "the essence of a Type II preliminary agreement is that it creates an 'obligation to negotiate the open issues in good faith in an attempt to reach the [ultimate contractual objective] within the agreed framework.' For more information and links read my earlier post on Type I and Type II contracts. Owners and Builders Law Blog, Type I and II Contracts Defined.