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NYLJ “No Breach of Settlement Agreement Where Text of Unsigned Draft Agreement Indicated Execution Was Required”

By Thomas E.L. Dewey

When the parties to a dispute negotiate a settlement agreement, they generally memorialize their agreement in a written document and sign it. But what happens when the parties negotiate a draft settlement agreement, one party makes changes to the draft, the other party accepts those changes and requests a signature, but the party who had proposed the changes does not sign the document?

In Centrans Truck Lines v. Orient Express Container Co., U.S. District Judge Mary Kay Vyskocil of the Southern District of New York examined this question. Specifically, the court analyzed whether a motor carrier had plausibly alleged a claim for breach of a settlement agreement against a common carrier concerning a dispute over unpaid invoices. The motor carrier had sent the common carrier a draft settlement agreement, the common carrier revised the draft in redline, the motor carrier accepted the changes and requested that the common carrier sign the document, but the common carrier did not do so.

After noting the general rule that parties who express an intent not to be bound until their contract negotiations result in an executed contract will not be bound until they do so, the court analyzed the sufficiency of the motor carrier’s complaint based on a four-factor test outlined by the U.S. Court of Appeals for the Second Circuit. In its decision, the court explained that those factors include whether there has been an express reservation of the right not to be bound absent execution, which the court called the “most important” factor.

After examining the motor carrier’s complaint, the court held that it did not plausibly state a claim for breach of the settlement agreement because the draft agreement contained numerous textual indications that the parties believed execution was required for it to become effective.

This decision is significant because it makes clear that, even when parties negotiate the substantive terms of a settlement agreement and accept redlined changes in a draft of the agreement, if the text of their draft expresses their intent to be bound only if the document is signed, an unsigned draft will not bind them.

This article first appeared in the New York Law Journal on October, 13 2023. Thomas E.L. Dewey is a partner at Dewey Pegno & Kramarsky. Christopher P. DeNicola assisted in the preparation of the article.

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