To most businesses that engage in the negotiation and performance of contracts, life should be simple. When parties engage in preliminary negotiations, they are not bound by formal obligations until a final agreement is signed, but after a final contract is signed, all parties are bound by the agreements’ terms going forward.
But life is not always so cut-and-dried. Often, after negotiations break down, one party will claim enforceable obligations arose from negotiations; just as often, after a contract is signed, one party will attempt to “get out from under” contractual provisions, or change the obligations in the contract to those more favorable.
For example, because generally all that is required for contract formation is a “meeting of the minds,” negotiating parties sometimes argue that enforceable obligations arose from mere negotiations, because they agreed on relevant provisions despite the lack of a signed contract. Other times, a negotiating party will allege that because it relied upon, and took action based upon, representations or a course of performance, an enforceable “quasi-contractual” obligation arose despite the lack of a formal contract. Further, even if negotiations have concluded, one party may still allege that the other has a “good faith” duty to continue negotiations to consummate an agreement.
After a contract is executed, parties sometimes assert contractual provisions were changed or modified to their benefit. For example, one party may contend that the failure of the other to enforce certain provisions gives rise to a waiver, preventing later enforcement of those provisions. Likewise, one can assert that a course of performance is conclusive evidence of the understanding of the parties, even if the signed agreement contains contrary language. In addition, under a theory of fraud in the inducement or justifiable reliance, a party may argue that pre-contractual representations and promises are enforceable, even though they were not contained in the final agreement.
So can a business take steps to prevent it from being bound to pre-contractual discussions, and ensure that the obligations in an agreement will not be subject to change after it is signed? The answer is that a business should always take care to define and limit the scope of pre-contractual negotiations, and have specific provisions in business agreements precluding post-contractual attempts to deviate from contractual terms.
As to pre-contractual negotiations, Pennsylvania courts enforce pre-contractual provisions that no contract will exist unless there is an offer and acceptance in a specific “mode and manner,” and that no contract can arise until one or both parties have made a “further manifestation of assent.” Practically speaking, this permits parties to execute a term sheet or pre-contractual description of deal points, while preventing the formation of a valid and enforceable agreement until some specified future event (such as the execution by a specific person of a definitive written agreement) occurs. For example, in GMH Associates, Inc. v. Prudential Realty Group, 752 A.2d 889, 901 (Pa.Super. 2000), the court found that no enforceable obligation, including a duty to negotiate in good faith, could arise where a term sheet between negotiating parties contained the following provisions:
NOTWITHSTANDING THAT EITHER OR BOTH PARTIES MAY EXPEND SUBSTANTIAL EFFORTS AND SUMS IN ANTICIPATION OF ENTERING A CONTRACT, THE PARTIES ACKNOWLEDGE THAT IN NO EVENT WILL THIS LETTER BE CONSTRUED AS AN ENFORCEABLE CONTRACT … AND EACH PARTY ACCEPTS THE RISK THAT NO SUCH CONTRACT WILL BE EXECUTED.
Any Contract which may be negotiated shall not be binding … until it has been approved by the senior corporate officers and the Law Department of Seller … Such approvals are conditions precedent to the Seller’s obligation to perform … and may be withheld for any reason or for no reason.
To provide even greater protection, other “belt and suspenders” disclaimers can be used, such as a provision that no duty or obligation to negotiate in good faith or to continue negotiations can arise, and “no reliance” and “no course of dealing” provisions, which are discussed below.
Once a written agreement is signed, Pennsylvania courts enforce various contractual provisions precluding the parties from contending after a contract is signed that it is not enforceable as written. For example, Pennsylvania courts generally enforce “anti-waiver” provisions to prevent the parties from later asserting that contractual provisions have been waived. Generally, an “anti-waiver” provision will state:
Failure of [the parties] to demand strict compliance with any of the terms, covenants or conditions of this Agreement shall not be deemed a waiver … nor shall any waiver or relinquishment by the [parties] of any right or power hereunder at any one time or more times be deemed a waiver or relinquishment of such right or power at any other time.
Similarly, to preclude a later argument that the parties agreed to an “oral modification” of a contract, Pennsylvania courts generally enforce “no oral modification” provisions, which state generally “this Agreement may only be amended by written agreement signed by both parties hereto or by their duly authorized representative,” or “no agent, representative, employee or officer of [the company] has or had authority to make or has made any statement, agreement or representation, either oral or written, modifying adding or changing the terms and conditions herein set forth.” To protect against an argument that the parties’ course of performance created a change to a contract, the following provision can be utilized: “No present or past dealings or custom between the parties shall be permitted to contradict or modify the terms hereof.”
To protect against an argument that pre-contractual representations not included in the final contract induced one party to sign the agreement, Pennsylvania courts generally enforce “integration” clauses, such as “this agreement constitutes the entire agreement between the parties and supersedes and extinguishes all previous drafts, agreements, arrangements and understandings between them, whether written or oral, relating to this subject matter.” Under most circumstances, such clauses will prevent parties from claiming fraudulent inducement to contract based on statements not included in a signed agreement. Additionally, Pennsylvania courts will generally enforce “no reliance” provisions to preclude fraud and quasi-contract claims arising from the negotiations and performance of a contract. This is a sample “no-reliance clause:
[Company A] acknowledges and agrees that [Company B] has not made any representations or warranties to [Company A] except as expressly set forth in the [Written Agreement] and, in making its decision to enter into the [contract], [Company A] is not relying on any representation, warranty, covenant or promise of [Company B] other than as set forth in the [Written Agreement]. Neither party shall rely upon or be bound by any statements (written or oral) different from those in this [Written Agreement] that may appear subsequently in communications between the parties.
Use of these provisions during business negotiations and performance of business agreements can ensure certainty as to contractual obligations, and prevent unexpected contractual liability.
Andrew J. DeFalco is a trial and appellate lawyer and a Member of Spector Gadon Rosen Vinci, P.C. He represents and advises companies and individuals in complex business disputes. His e-mail is email@example.com, and you can connect with and follow him on LinkedIn at www.linkedin.com/in/andrew-defalco-6b63275/.