quit his employment with Saks), Martinez met in New York with the management team of Bergner and reviewed Bergner's business and strategic plans. On July 13, 1992, the Board of Directors of Bergner appointed Martinez to serve as CEO and approved the Employment Agreement; this was subject, of course, to the Bankruptcy Court's approval. Finally, in mid-July 1992, Martinez and his counsel reviewed and approved a joint press release for use if the parties' intentions became public, announcing Martinez's appoint as CEO of Bergner and stating that Martinez was "enthusiastic about the opportunity to join the P.A. Bergner organization." During this time, however, Martinez responded to a request for comment about rumors of his departure from his current position by a leading trade newspaper for the apparel industry by stating that, "I don't plan to leave" on July 9, 1992.
Between July 20 and July 24, Bergner and the two creditors' committees set up in Bergner's bankruptcy case, the Bank Creditors' Committee and the Trade Creditors' Committee, met in order to secure the committees' support for Martinez's appointment as Bergner's CEO. On July 27, the Bank Creditors' Committee announced its approval of the appointment of Martinez as CEO. When counsel for Bergner tried to reach Martinez with this news on July 28, however, they were informed that Martinez was negotiating about becoming CEO with Sears. Maus called Martinez about this on July 29, and Martinez assured him that the call from Sears was unsolicited, that he was committed to Bergner, and that he would break off all talks with Sears immediately. (Pl. Compl. at P 38).
On August 5, 1992, counsel for Bergner filed a motion with the United States Bankruptcy Court for the Eastern District of Wisconsin, requesting approval for the appointment of Martinez as CEO of Bergner. Hearing on the motion was scheduled for August 11, 1992, and arrangements were made for Martinez to be in Wisconsin on Monday, August 10, to prepare for the hearing.
On August 10, 1992, counsel for Martinez called Bergner's attorneys and informed that Martinez had already accepted and signed an employment agreement with Sears. This lawsuit followed.
Bergner alleges seven causes of action altogether, four against Martinez (misrepresentation and fraud, detrimental reliance, breach of the indemnification agreement, and breach of the oral agreement to enter into an employment agreement) and three against Sears (tortious interference with contractual relation for each of two contracts and another for prospective business advantage). All parties agree that all claims are governed by New York law and that Bergner, as the intended third-party beneficiary of the Indemnification Agreement between Maus and Martinez, has standing to sue on the Indemnification Agreement.
Claims Against Martinez
Bergner alleges that Martinez breached two contracts with Bergner, and did so through misrepresentation and fraud. Martinez asserts that neither set of circumstances alleged by Bergner constitutes a contract between the parties, denies the allegations of fraud, and asserts that the incidental business expenses to which Bergner was put cannot justify Bergner's claim for detrimental reliance.
Breach of the Preliminary Contract to Negotiate and Enter Into An Employment Agreement in Good Faith
There are at least two distinct types of preliminary contracts with binding force. Teachers Ins. & Annuity Ass'n v. Tribune Co., 670 F. Supp. 491, 498 (S.D.N.Y. 1987). The first type occurs when the parties have reached complete agreement on all the issues which require negotiation. "Such an agreement is preliminary only in form -- only in the sense that the parties desire a more elaborate formalization of the agreement. The second stage is not necessary; it is merely considered desirable." Id. Such an unwritten agreement may take effect before the formal writing is drawn up and signed, since the parties have intended the informal agreement itself to be the contract and the writing is a mere memorialization of it. Id.; see also V'Soske v. Barwick 404 F.2d 495, 499 (2d Cir. 1968), cert. denied, 394 U.S. 921, 22 L. Ed. 2d 454, 89 S. Ct. 1197 (1969), quoting Restatement (Second) of Contracts § 26 (then Tent. Draft No. 1, 1964), 1 Corbin on Contracts § 30 (1950), 1 Williston on Contracts § 28 (2d ed. 1957).
Bergner alleges that the existence of the Draft Employment Agreement and the necessity for gaining the approval of the Bankruptcy Court show that the preliminary oral agreement between Bergner and Martinez here is an example of the second type, one that expresses mutual commitment to a contract on agreed major terms. Teachers Ins., 670 F. Supp. at 498.
The parties may execute such an agreement in order to demonstrate their commitment to each other during ongoing negotiations, since typically "enforceable legal rights do not arise from contract negotiations until both parties consent to be bound or, in any event, manifest that consent to each other," Chrysler Capital Corp. v. Southeast Hotel Properties Ltd. Partnership, 697 F. Supp. 794, 799 (S.D.N.Y. 1988), aff'd, 888 F.2d 1376 (2d Cir. 1989). Under these circumstances, the parties may make an oral, binding "agreement to agree," i.e., an agreement expressing an intent to be bound in a formal, written agreement. Even if open terms remain to be negotiated, "the parties can bind themselves to a concededly incomplete agreement in the sense that they accept a mutual commitment to negotiate together in good faith in an effort to reach final agreement within the scope that has been settled in the preliminary agreement." Teachers Ins., 670 F. Supp. at 498. See also Channel Home Centers, Div. of Grace Retail Corp. v. Grossman, 795 F.2d 291 (3rd Cir. 1986); Teachers Ins. & Ann. Ass'n. v. Butler, 626 F. Supp. 1229 (S.D.N.Y. 1986). Both parties can fulfill their obligations under this second type of binding preliminary agreement, and yet not agree on the ultimate written contract, provided good faith differences in the negotiation of the open issues prevent the parties from reaching a final contract. Such an "agreement to agree," however, does prevent one party from arbitrarily abandoning the transaction or insisting on conditions that to do not conform to what was spelled out in the preliminary agreement. Teachers Ins., 670 F. Supp. at 498. In effect, an agreement to agree buys a party an assurance that the transaction will falter only over a genuine disagreement, thus allowing a party strapped to time or money to go ahead with arrangements with a sufficient degree of confidence in the outcome:
Giving legal recognition to preliminary binding commitments serves a valuable function in the marketplace . . . . without such legal recognition, parties would be obliged to expend enormous sums negotiating every detail of final contract documentation before knowing whether they have an agreement, and if so, on what terms. At the same time, a party that does not wish to be bound at the time of the preliminary exchange of letters can very easily protect itself by not accepting language that indicates a 'firm commitment' or 'binding agreement.'