The writing that is alleged to embody the settlement accord in
question — a letter written to Horphag by an executive of Cognis
— recites agreements reached between the parties, "[s]ubject to
the signing of a full and definitive settlement agreement (the
`Agreement')." (Hoevelmann Decl. Exh. A) The principal basis for
the nascent settlement was Horphag's agreement to buy Cognis's
inventory of Pycnogenol, and to pay for it in installments, the
last of which would have been due September 30, 2000. (Id.)
Apparently in aid of permitting Horphag to arrange to have funds
available for the purchase, the letter required Henkel/Cognis to
project its closing inventory of the product within five days of
the letter, but the letter itself estimated the value of that
inventory at "$15 to $16 million." (Id.)
Other agreements set forth in the letter include Cognis's
undertaking to stop distribution of Pycnogenol as of July 1,
2000. (Id.) The letter solicited the written approval of
Horphag, upon receipt of which "we will instruct our people in
the U.S. to work out a definitive agreement." (Id.) That
letter stated as well that the parties "will refrain from any
communication to the market on the subject matter till the date
of signing of the Agreement."
Henkel/Cognis cites also the covering letter from Horphag
memorializing the return of a signed copy of the above-cited
letter, in which Horphag's principal, Charles Haimoff, accepted
"your outline of the agreement between Cognis and Horphag
Research," and wrote that Horphag "will do its utmost to comply
with our agreement in the short time available." (Id. Exh. B)
Henkel/Cognis argues that, in reliance on the existence of a
binding agreement, Cognis disclosed its inventory of Pycnogenol,
and ceased distributing the product from approximately June 11
or 12, until the settlement fell apart on or about June 30,
2000, when Horphag notified Henkel/Cognis that it had been
unable to secure financing to support the settlement. (Id. ¶
The record includes also correspondence from counsel for
Henkel/Cognis to the AAA, notifying that forum on June 22 that
"[t]he parties . . . are currently circulating a proposed
settlement agreement," and stating that this court had "extended
its time to issue a decision [on the parties' motions for
preliminary relief] to July 12 in order to allow the parties to
complete a settlement." (Tabio Decl. Exh. A)
On July 17, counsel for Henkel/Cognis notified the AAA that it
was then "necessary to reactivate the arbitration proceedings"
and that the court had "denied the parties' cross motions for
preliminary injunctions." (Id. Exh. B) Counsel followed up
that letter with one on July 20 to press urgency of the case, as
follows: "Now that the District Court has denied the cross
motions for preliminary injunctions, a prompt hearing is of
utmost importance." (Id. Exh. C) Neither letter mentioned that
a settlement had been reached.
It bears mention as well that the parties appeared in court on
July 13, 2000, at which time I read into the record an opinion
denying both sides' applications for preliminary injunctive
relief. Neither party advised the court at that time, or at any
time prior thereto, that a settlement had been concluded. It was
not until a conference on August 3 that Henkel/Cognis disclosed
to the court its assertion that Horphag had reneged on a
The standard for determining whether a settlement has been
reached may be derived from cases dealing generally with the
issue of when parties in negotiation have reached a binding
agreement. "In any given case it is the intent of the parties
that will determine the time of contract formation." Winston v.
Mediafare Entertainment Corp., 777 F.2d 78, 80 (2d Cir. 1985).
In Winston, a case in which parties to litigation exchanged
drafts of settlement agreements but never signed the same
document, the court listed the
following factors for a court to consider in determining whether
the parties intended to be bound:
(1) whether there has been an express reservation of
the right not to be bound in the absence of a
writing; (2) whether there has been partial
performance of the contract; (3) whether all of the
terms of alleged contract have been agreed upon; and
(4) whether the agreement at issue is the type of
contract that is usually committed to writing.
A refinement of that standard may be found in Arcadian
Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 72 (2d Cir.
1989), where the Court applied a framework devised by Judge
Leval in Teachers Ins. & Annuity Ass'n. v. Tribune Co.,
670 F. Supp. 491, 498-99 (S.D.N.Y. 1987). Judge Leval identified two
kinds of preliminary agreements to which courts could find that
parties intended to be bound. The first was one in which the
parties had reached complete agreement on all issues that
required negotiation, but had not yet formalized their
agreement. The second was one in which they had reached
agreement on major terms, but still had to negotiate others. In
the latter case, the agreement on major terms could be found
binding, with a binding obligation as well to negotiate the
remaining terms in good faith. See Arcadian Phosphates, 884
F.2d at 72.
In addition to the standards and elements described above, it
bears mention that when the parties are not only in negotiation
but also in litigation, the litigation itself may present facts
that should be considered in order to determine the parties'
Henkel/Cognis contends that we are dealing in this case with
the first kind of binding preliminary agreement — one covering
all issues that required negotiation. Henkel/Cognis stresses
also that it is the first factor listed in Winston whether
there is an express reservation of the right not to be bound
absent a final writing — that is the most important in
determining whether parties intended to be bound to a
preliminary agreement. See Krauth v. Executive Telecard, Ltd.,
890 F. Supp. 269, 293 (S.D.N.Y. 1995) (citing R.G. Group, Inc.
v. Horn & Hardart Co., 751 F.2d 69, 75 (2d Cir. 1984)).
Here, there is no such express reservation. However, the
letter on which Henkel/Cognis relies, which its own principals
drafted, is notable for its omission of any language that
suggests finality or a current willingness to be bound, and for
its specific placement of the moment of contracting in the
future. The letter sets forth agreements "[s]ubject to the
signing of a full and definitive settlement agreement," and
seeks the signature of Horphag's representative so that people
in the United States could be instructed to "work out a
definitive agreement." Moreover, one of the points agreed to, as
described in the letter, was that the parties "will refrain from
any communication to the market on the subject matter till the
date of signing of the Agreement." (Hoevelmann Decl. Exh. A)
Thus, by Henkel/Cognis's own description, the terms set forth
in its letter were neither "full" nor "definitive." Moreover,
the parties' decision to withhold public announcement of an
agreement until a final document had been signed bespeaks
awareness and acknowledgment that it was still possible that a
"full" and "definitive" agreement might not be reached.
The covering letter from Horphag's representative returning a
signed copy of Henkel/Cognis's letter is not to the contrary.
That letter refers to the signed enclosure simply as an
"outline." Although it states Horphag's intent to "do its utmost
to comply with our agreement in the short time available," that
statement can be read simply as a commitment to seek financing
to help put the agreement into effect, an effort no one denies
that Horphag made.
Henkel/Cognis argues that it partially performed the agreement
by disclosing its inventory to Horphag — presumably in an
inventory projection called for in the letter, and by refraining
from sales beginning on or about June 11 and continuing until on
or about June 30. Henkel/Cognis suggests that its inventory
projection was somehow to Horphag's benefit, and disclosed a
trade secret. However, the letter itself belies that position.
The only reason for the inventory projection was to permit
Horphag to arrange to have funds available to purchase
Henkel/Cognis's inventory. Even before Henkel/Cognis was aware
that Horphag would sign and return the letter, it disclosed that
its inventory was worth between $15 and $16 million. Any more
precise disclosure, which in any event was only a projection,
could not have advantaged Horphag in any perceptible way.
Although Henkel/Cognis did cease sales of Pycnogenol for a brief
time in June, such cessation could not have been part
performance of the alleged agreement because, according to the
letter, Henkel/Cognis was not called upon to cease distributing
Pycnogenol until July 1. If Henkel/Cognis stopped distributing
Pycnogenol before that, it did so either as a gesture of good
will, or, considering that its entire inventory was to be
purchased by Horphag, in furtherance of its own interest.
As to the third element, it appears from both the signed
letter and the covering letter returned by Horphag that the
signed letter did not contain all of the terms to be included in
a settlement agreement.
Finally, although the disputed letter is a writing, the
agreement in question, involving the settlement of a litigation,
is usually in a form more precise and inclusive than the
proffered letter, which does not even provide explicitly for
termination of the litigation.
Again, examining the various factors listed above is intended
to disclose the status of negotiations and when the parties
intended to be bound. These parties were engaged in litigation,
and events in that litigation also should be examined insofar as
they may reflect that intent. The status of the negotiations as
of the time Horphag signed the letter from Henkel/Cognis, and
the parties' intent, may be discerned in the June 22 letter of
Henkel/Cognis's attorney to the AAA. He wrote that the parties
"are currently circulating a proposed settlement agreement," not
that an agreement had been reached. (Tabio Decl. Exh. A)
Moreover, as noted, Henkel/Cognis's counsel did not disclose to
the court on July 13 that a settlement had been agreed upon and
breached, and wrote again to the AAA on July 17 and July 20
without making that disclosure.
At most, it would appear that the parties had an agreement of
the second type enumerated by Judge Leval — an agreement on
major terms with others to be negotiated, and an obligation
imposed on both parties to negotiate in good faith. It appears
further that what brought these negotiations to grief was
Horphag's inability to obtain financing. There is no claim that
that barrier resulted from Horphag's bad faith, or that Horphag
did not try to overcome it. It appears that Horphag did not
complete the settlement because it became impossible to do so.
For the above reasons, Henkel/cognis's motion for specific
enforcement of a settlement herein is denied.
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