United States District Court, Southern District of New York
March 31, 2000
HYMAN GORODENSKY, H & H WAREHOUSING CO., AND THE ESTATE OF HAROLD MURAWNIK, PLAINTIFFS,
MITSUBISHI PULP SALES (MC) INC., DEFENDANT.
The opinion of the court was delivered by: Miriam Goldman Cedarbaum, United States District Judge.
This is a breach of contract suit arising out of an alleged
failure to satisfy the obligations of a letter of intent.
Plaintiffs Hyman Gorodensky, H&H Warehousing Co. ("H&H"), and the
estate of Harold Murawnik attempted, unsuccessfully, to establish
a venture to build a manufacturing plant, operate the plant, and
sell its output. Plaintiffs claim that defendant Mitsubishi Pulp
Sales (MC) Inc. ("MPS") entered into a binding contract with them
by signing a letter of intent to purchase all of the output of
the proposed plant. The complaint alleges that MPS breached this
contract by repudiation shortly after it was signed, and that the
breach caused the venture to fail. Plaintiffs seek putative lost
profits and other consequential damages, as well as damages for
wasted time and effort invested in the project.
MPS moves for summary judgment on three grounds: first, that
the letter of intent was not a binding contract; second, that
even if a contract existed, it does not provide for lost profits
as a remedy; and third, that even if MPS breached a binding
contract, the breach did not cause plaintiffs' injuries.
Plaintiffs also move for summary judgment on three grounds:
first, that the letter of intent was a binding contract; second,
that MPS breached the contract; and third, that there is no
dispute as to the extent of plaintiffs' damages. At oral
argument of these motions, I denied plaintiffs' motion as to the
issues of breach and damages. I reserved decision on the issue
of the existence of a contract and as to the entirety of MPS'
motion. Because I find that there was no binding agreement
between plaintiffs and MPS, MPS' motion is granted and the
balance of plaintiffs' motion is denied.*fn1
THE UNDISPUTED FACTS
Hyman Gorodensky is a citizen and resident of Montreal, Canada.
Prior to the transactions at issue in this case, Gorodensky's
business consisted mainly of the purchase and sale of recycled
materials, primarily textiles. Gorodensky was a partner, along
with Harold Murawnik, of H&H, a family partnership. MPS is a New
York corporation that is currently based in Chicago, Illinois.
MPS sells pulp manufactured by others to paper mills.
Two types of pulp manufactured and sold in the paper industry
are relevant to this case. Virgin pulp is pulp manufactured from
wood. Deinked pulp is one
form of pulp that is manufactured from recycled materials. As
of 1993, MPS had extensive experience in the sale of virgin pulp
in the United States and overseas but had never sold pulp made
from recycled materials, including deinked pulp. Plaintiffs had
no prior experience in manufacturing either virgin pulp or pulp
made from recycled materials.
In early 1992, plaintiffs began to investigate the technical
and environmental feasibility of setting up a venture to
manufacture and sell deinked pulp. Plaintiffs owned two
commercial rental buildings in an industrial section of Montreal,
Canada. They proposed to convert these buildings into a facility
to manufacture deinked pulp. This interest stemmed from the fact
that, in 1991 and 1992, demand for pulp made from recycled
materials was growing because regulations in the United States
and Canada were increasingly requiring the use of recycled
materials in the manufacture of paper.
After making a preliminary determination that the project was
feasible, plaintiffs began to decline to renew tenants' leases in
the two Montreal buildings, or to renew leases only for limited
time periods. They also did not seek new tenants for those
buildings. Their purpose was to make the buildings available for
conversion to a pulp mill in the near future. In mid-1992,
plaintiffs retained Dick Engineering to prepare a feasibility
study of the proposed mill. The study, completed by September
1992, contains preliminary engineering design specifications,
proposed technology to be used, specifications of the pulp to be
produced, and estimated costs of the proposed facility.
After completion of the feasibility study, plaintiffs started
to contact potential sources of raw materials and various Quebec
governmental agencies. In March and April 1993, they obtained
written expressions of interest in supplying waste paper from
Perry S. Koplik & Sons, Inc. and D. Benedetto, Inc. Although
plaintiffs' business plan described these letters as "letters of
intent," Gorodensky testified that this was an error and that he
never considered these letters as binding. Plaintiffs never
entered into a contract with a supplier of waste paper.
Plaintiffs also received a letter in March 1993 from the
Societe de Development Industriel Du Quebec ("SDI"), the economic
development agency of the government of Quebec. The letter
suggested that SDI might guarantee 50% of the possible loss a
lender could incur in the project, dependent upon further review
of plaintiffs' business plan and discussions with other
government officials. Plaintiffs never forwarded a copy of their
business plan to SDI or formally applied for a loan guarantee.
After completion of the feasibility study, plaintiffs met with
Ted Homa, a marketing manager of Mitsubishi Canada Ltd. ("MCL")
to discuss whether MCL would be interested in participating in
the deinked pulp mill project. By March 15, 1993, MCL informed
plaintiffs that it was interested in being a "turnkey contractor"
for the project, meaning that it would build the pulp mill to
agreed-upon specifications for a fixed price. However, MCL stated
that it was not interested in operating or otherwise having a
continuing investment or involvement in the pulp mill project.
MCL's interest in the project was contingent on the securing of
suitable financing by plaintiffs. In response to a request by
plaintiffs, MCL provided a letter in July 1993 stating that MCL
was interested in being the turnkey contractor for the project if
plaintiff were able to secure term or project financing.
In early 1993, MCL contacted MPS to determine whether MPS would
be interested in selling the output of the proposed pulp plant.
MPS was enthusiastic about the project because MPS did not handle
deinked pulp and wished to add a recycled product to its product
To assist in obtaining financing for the plant project,
plaintiffs requested a letter of intent from MPS to purchase the
output of the proposed facility. Negotiations began
in April 1993 between plaintiffs and MPS. MPS signed the first
version of the letter that month. A number of drafts were
subsequently exchanged in which MPS incorporated plaintiffs'
suggested revisions. One revision adjusted the language, upon
plaintiffs' request, to state that MPS intended to purchase the
output of the plant, rather than simply receive an option to
purchase the output. Plaintiffs and MPS agreed to the final
letter of intent, just over one page long, dated May 25, 1993
(the "Letter of Intent"). This letter is the subject of the
The Letter of Intent states that MPS "inten[ds] to enter into a
contract" for the "exclusive right and obligation" to purchase
and sell the entire output of plaintiffs' plant for five years,
"conditional on the output of the facility" meeting certain
specifications outlined in the letter. The letter states that
pulp would be "competitively priced, on a calendar monthly and
quarterly basis, at levels mutually agreed upon." The letter
does not state whether MPS would receive a commission for its
sales or how the price paid by MPS for the plant's pulp would be
determined. The letter concludes by stating that MPS is "looking
forward to entering into detailed commercial discussions" with
plaintiffs. It is signed by Stephen Rieu, MPS' Executive Vice-President,
on behalf of MPS. It is not signed by any of the
During the months following the date of the Letter of Intent,
plaintiffs and MPS continued to correspond, though the nature of
the correspondence is hotly disputed. In a June 22, 1993 letter,
MPS notified plaintiffs that MPS was in the process of
determining what kind of contract would be appropriate for their
transaction. Plaintiffs claim that in a July 21, 1993 meeting,
MPS breached the letter of intent by informing plaintiffs that
MPS would not agree to any obligation to purchase the entirety of
the mill's output. MPS claims that the July 21 meeting was part
of a series of negotiations over the final structure of the
agreement between MPS and plaintiffs.
In August 1993, MPS sent a six-page draft of a proposed
contract to plaintiffs. This draft proposed an agency
relationship between plaintiffs and MPS and suggested a 5%
commission. Plaintiffs rejected the draft proposal. Plaintiffs
never prepared a revised draft agreement for MPS to review or
sign. However, in late September or October of 1993, plaintiffs
proposed what the parties characterize as a "floor/ceiling"
pricing arrangement which would set minimum and maximum pulp
prices regardless of prevailing market prices for the purchase
and sale of pulp. Plaintiff also offered MPS an equity stake in
the proposed mill. MPS rejected these suggestions. MPS had
never accepted such conditions in prior contracts.
The parties continued to negotiate through November 1993. For
example, in letters dated October 18 and November 11, 1993, MPS
stated that it still wished to form an agreement with plaintiffs
but noted that there were numerous outstanding issues remaining
to be addressed. In an October 25, 1993 letter, plaintiffs,
through Gorodensky, responded that "[w]hile I do not agree with
your characterization of a letter of intent, I do not think we
need to quibble about it. We both want our deal to go forward in
a mutually satisfying fashion." (Def. Ex. 15.) However, MPS and
plaintiffs never resolved their differences.
From February 1993 through the end of the year, plaintiffs were
also attempting to obtain financing for their project. The
project's total cost was estimated at approximately $50
million. Plaintiffs planned to contribute approximately $10
million worth of property and funding. They thus needed to raise
approximately $40 million from outside sources to finance the
project. Plaintiffs contacted a number of potential lenders and
investors regarding financing the pulp mill project, including
Canadian Imperial Bank of Commerce, Newcourt Capital, Inc.,
Republic Financial Corporation, the Bank of Montreal, Bank of
America, and Toronto Dominion Bank.
In late 1993, plaintiffs were unable to make their mortgage
payments for the properties on which the plant was to be built.
Plaintiffs lost these properties to foreclosure, and went into
bankruptcy shortly thereafter. Plaintiffs never obtained any
financing for their project. The pulp plant was never built.
Summary judgment must be granted "if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law." Fed.R.Civ.P.
56(c). In determining whether the moving party has met this
burden, the Court must resolve all ambiguities in favor of the
party opposing the motion. Summary judgment is appropriate
"against a party who fails to make a showing sufficient to
establish the existence of an element essential to that party's
case, and on which that party will bear the burden of proof at
trial." Celotex Corp., v. Catrett, 477 U.S. 317, 322, 106 S.Ct.
2548, 2552, 91 L.Ed.2d 265 (1986). Put differently, summary
judgment should be granted where the "record as a whole could not
lead a rational trier of fact to find for the non-moving party."
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986); see also 3 Com
Corp. v. Banco do Brasil, 171 F.3d 739, 743 (2d Cir. 1999).
The question of whether a binding contract exists is one of law
that is appropriately decided on a motion for summary judgment.
Shann v. Dunk, 84 F.3d 73, 77 (2d Cir. 1996); Mallad Construction
Corp. v. County Federal Savings and Loan Association, 32 N.Y.2d 285,
291, 298 N.E.2d 96, 100, 344 N.Y.S.2d 925, 930 (1973). It
is undisputed that New York law governs this action. Plaintiffs
argue that the Letter of Intent was intended to constitute a
binding contract between plaintiffs and MPS. MPS argues that the
Letter of Intent was only a preliminary understanding that
contemplated further negotiations.
"Ordinarily, preliminary manifestations of assent that require
further negotiation and further contracts do not create binding
obligations." Shann, 84 F.2d at 77. "[I]n some rare instances,
if a preliminary agreement clearly manifests such intention, it
can create binding obligations." Id. However, "[a] primary
concern for courts . . . is to avoid trapping parties in surprise
contractual obligations that they never intended." Teachers Ins.
& Annuity Ass'n v. Tribune Co., 670 F. Supp. 491, 497 (S.D.N Y
The Second Circuit analyzes the enforceability of preliminary
agreements under New York law using the framework devised by
Judge Leval in Tribune. See Arcadian Phosphates, Inc. v.
Arcadian Corp., 884 F.2d 69, 71-72 (2d Cir. 1989). Under this
framework, there are two types of binding preliminary agreements.
The first type is a fully binding preliminary agreement, which is
created "when the parties agree on all the points that require
negotiation (including whether to be bound) but agree to
memorialize their agreement in a more formal document."
Adjustrite Sys., Inc. v. GAB Business Servs., Inc., 145 F.3d 543,
548 (2d Cir. 1998). Such an agreement is binding just as if it
were a formalized agreement, since it contemplates the signing of
a more elaborate contract only as a mere formality. Tribune, 670
F. Supp. at 498. The second type is a "binding preliminary
commitment," which is created "when the parties agree on certain
major terms, but leave other terms open for further negotiation."
Adjustrite, 145 F.3d at 548. Parties to this type of agreement
"accept a mutual commitment to negotiate together in good faith
in an effort to reach final agreement." Tribune, 670 F. Supp. at
498. A party to such an agreement "has no right to demand
performance of the transaction." Adjustrite, 145 F.3d at 548.
The parties' intention to be bound by a preliminary agreement
of the first type is determined by examining (1) the language of
the agreement; (2) the existence of open terms; (3) whether there
has been partial performance; and (4) the necessity of putting
the agreement in final form, as indicated by the customary form
of such transactions. Id. at 549. Determining the parties'
intention to be bound by a preliminary agreement of the second
type requires consideration of these same four factors, along
with one additional factor, the context of the negotiations
resulting in the preliminary agreement. Id. at 549 n. 6.
Plaintiffs contend that the Letter of Intent was an agreement
of the first type, arguing that "[t]he letter had to be and was
intended to be a binding and firm commitment to purchase all of
the [plaintiff's] conforming pulp."*fn2 (Pl. Reply Mem. at 2.)
However, the Letter of Intent does not bear the indicia of a
binding preliminary agreement.
The first factor, the language of the agreement, is "the most
important." Arcadian, 884 F.2d at 72. The language of the
Letter of Intent shows that MPS did not intend the letter to be a
binding agreement. The subject of the letter is "Letter of
Intent to Purchase De-Inked Pulp." The letter states that MPS
"is prepared to enter into a commercial agreement" to purchase
plaintiffs' pulp and that "it is our intent to enter into a
contract." The letter goes on to state that "[o]ur intent is
conditional upon" the facility's output meeting a number of
technical requirements and assumes that "all quality and
logistical questions can be satisfactorily addressed."
Importantly, the letter concludes "[w]e are looking forward to
entering detailed commercial discussions as soon as practicable."
All of these statements show that MPS intended the letter to be
exactly what it was titled, a letter of intent, and not a binding
commitment. See Adjustrite, 145 F.3d at 548-50.
Furthermore, there is nothing in the Letter of Intent to
suggest that plaintiffs intended to be bound by it. In Tribune,
Judge Leval noted that "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.'" 670 F. Supp. at 499. The
corollary to this statement is that a party that does wish to be
bound can protect itself by insisting on such language. See,
e.g., id. at 494, 499 (holding that preliminary writing was
binding where it provided that "[u]pon receipt . . . of an
accepted counterpart of this letter, our agreement to purchase
from you and your agreement to issue, sell and deliver to
us . . . the captioned securities, shall become a binding
agreement between us"); Keis Distribs., Inc. v. Northern Distrib.
Co., 226 A.D.2d 967, 968-69, 641 N.Y.S.2d 417, 419-20 (App. Div. 3
d Dep't 1996) (holding preliminary writing binding where it
directed plaintiff "to accept this offer by signing below" and
suggested retaining counsel to work out the "wording of the final
Here, plaintiffs suggested, and obtained, various revisions to
the letter, but did not negotiate for language stating a clear
commitment by either themselves or MPS. Plaintiffs were not
obligated to build the pulp plant. Nor were they obligated to
provide MPS with the exclusive right to the plant's output.
Accordingly, the language of the Letter of Intent does not
evidence an intent by either side to be bound by its terms. See
Arcadian, 884 F.2d at 72.
The second factor, the existence of open terms, also shows that
the letter was not a binding agreement. There were a number of
open terms remaining to be negotiated. The letter noted that
MPS' intent to enter into a contract with plaintiffs was based on
the condition "that all quality and logistical questions can be
satisfactorily addressed." More importantly, the price term
remained to be negotiated. The only reference to the price MPS
would pay for the plant's output was a statement that the
pulp "will be competitively priced, on a calendar monthly and
quarterly basis, at levels mutually agreed upon."
Plaintiffs argue that this was a sufficiently specific price
term, as market price in the pulp industry can be easily
determined. However, the letter did not specify what discount or
commission MPS would receive for its pulp purchases. This was a
necessary term because MPS was not an ultimate buyer of the pulp
but rather only a "pulp agent" which was to resell the pulp to
buyers, in place of plaintiffs' developing a marketing and sales
infrastructure of its own.
Furthermore, plaintiffs themselves demonstrated that the price
term was not sufficiently definite when they continued to
negotiate the price through September, 1993. Their suggestion of
a pricing system involving floor and ceiling prices, and its
rejection by MPS, is an indication that the vague sentence on
price in the Letter of Intent did not reflect an agreement on
that term. "Changes requiring revision of the agreement
typically result in a finding that there was no complete
contract. . . . Once the price bec[omes] uncertain, the contract
bec[omes] devoid of a critical term." Cleveland Wrecking Co. v.
Hercules Constr. Corp., 23 F. Supp.2d 287, 297 (E.D.N.Y. 1998);
see also Winston v. Mediafare Entertainment Corp., 777 F.2d 78,
82-83 (2d Cir. 1986); Tribune, 670 F. Supp. at 499 ("There is a
strong presumption against finding binding obligation in
agreements which include open terms, call for future approvals
and expressly anticipate future preparation and execution of
contract documents."). Accordingly, the second factor also
weighs against finding a binding agreement.
The third factor, partial performance, is not helpful because
the Letter of Intent envisioned future performance. Defendants
could not purchase pulp, and plaintiffs could not deliver it,
until the plant was built, so neither party could perform its
alleged duties during the time period in question. "Partial
performance requires some actual performance of the contract."
P.A. Bergner & Co. v. Martinez, 823 F. Supp. 151, 157 (S.D.N Y
1993). Furthermore, "partial performance of the contract must
secure a benefit to the other party to be enforceable." Id.
Nothing plaintiffs did after receiving the Letter of Intent, even
if it could be characterized as performance under an alleged
agreement, benefitted MPS. Thus, this factor does not favor
The remaining factors — the context of the negotiations
and the necessity of a formal agreement — weigh in favor of
MPS. This transaction was to be a five-year commitment for the
purchase of a pulp plant's total output which was to be worth
millions of dollars. However, the Letter of Intent is slightly
over a page long, and signed only by MPS. "In view of the size
of the transaction, the nature of the [transaction], and the
length of the contemplated . . . contract, the Agreement
clearly was of the type that ordinarily would be committed not
only to a writing but to a formal contract complete with
representations and warranties and the other standard provisions
usually found in sophisticated, formal contracts." Adjustrite,
145 F.3d at 551. Nothing about the context of the negotiations
suggests that the parties intended to memorialize their agreement
in so brief and incomplete a form.
No reasonable finder of fact could conclude, based on the above
factors, that plaintiffs and MPS intended to be bound by the
Letter of Intent. The first factor alone supports this
conclusion as a matter of law. Accordingly, the Letter of Intent
is not an enforceable contract.
For the foregoing reasons, MPS' motion for summary judgment is
granted. Plaintiffs' motion for summary judgment is denied.
New York, New York, March, 2000.