Chapter 6 - US Law

Summary

Introduction

The period of contractual negotiations is the time of alea – hazard, venture, and risk, with little or no role for contract law. This view is rooted in the English law and is fundamental to the US legal system. The so-called ‘all or nothing’ approach underpinned by this view completely dominated US contract law until the last decades of the twentieth century. Either all the elements of the formed contract were found, or nothing was binding on the parties. As a result, precontractual documents could be regarded as a fully formed contract, with the risk of trapping ‘parties in surprise contractual obligations that they never intended’. Alternatively, any attempts by the parties to frame their negotiations with preliminary documents were held to be unenforceable. The main reason for this unenforceability was the failure of these documents to fulfil all the conditions of enforceability for a fully formed contract.

While the aleatory view of negotiations is still fundamental, the ‘all or nothing’ approach has been progressively nuanced since the 1970s. The US courts have ‘relaxed the knife-edge character of the common law by which parties are either fully bound or not bound at all’. This new trend has admitted that at the stage of negotiations, parties may not yet have the intent to form the final contract, but have an intent to make some of their preliminary commitments binding for different reasons. In a ‘major shiftin doctrine,’ the ‘core theory of a cause of action for breach of contract to negotiate has been more and more readily accepted by courts’. In particular the courts have begun to distinguish between the final negotiated contract and the preliminary agreements preparing it. Scholarship has distinguished ‘agreements with open terms’ and ‘agreements to negotiate’.

These regimes are intermediary between the non-binding negotiations and the final contract. Courts in some states have held that a preliminary regime entails an enforceable contractual obligation to negotiate the final contract in good faith. They have started to develop the content of bona fides in negotiations. This is not to say that the US law imposes a duty of good faith in negotiations. The very possibility of the existence of bona fides at the precontractual stage is debated. Its eventual content is also the subject of discussions.