An Agreement to Agree is not a Binding Contract in Virginia

A “letter of intent” which recites the terms of a transaction contemplated in the future, or which sets forth terms to be embodied in a more formal agreement to be executed at a later time, is presumed to be a non-binding “agreement to agree” rather than an enforceable contract. In Virginia, unlike some other jurisdictions, a letter of intent, reflecting each party’s commitment to negotiate open issues in good faith to reach a contractual objective within an agreed framework, will not be construed as a binding contract absent circumstances suggesting the parties intended to bind themselves. The Eastern District of Virginia recently dealt with this issue in Virginia Power Energy Marketing, Inc. v. EQT Energy, LLC.

EQT contracted with a pipeline to buy natural gas once the pipeline completed its expansion. The purchase was subject to the pipeline’s FERC (Federal Energy Regulatory Commission) gas tariff and applicable laws, orders, rules and regulations. EQT then sought to sell some of the excess capacity to VPEM, a distributer, in a non-biddable release. By regulation, a non-biddable release must use the maximum applicable rate. The parties signed a letter of intent (LOI) for 30,000 dekatherms per day with the rate to be paid as the lesser of $0.84 per dekatherm or the rate applicable to EQT under the NLRA (the negotiated rate letter agreement between the pipeline and EQT). Subsequently, the applicable rate was set at $0.88 so either the LOI rate had to be revised or EQT was free to release the capacity to the highest bidder.

The letter of intent stated EQT “propose[d] to release a portion of (the pipeline’s capacity) to VPEM.” Before the pipeline completed its expansion, however, gas prices rose and the value of EQT’s capacity increased. EQT received bids that exceeded VPEM’s and asked VPEM to pay an additional $12 million for the capacity. VPEM refused and EQT abandoned the transaction. VPEM then sued EQT in the Eastern District of Virginia for breach of contract.

napkin.jpgIn Virginia, to form a contract, the parties must have ‘mutuality of contract,’ i.e. they must exchange promises binding each to act or refrain from acting and must agree to terms that are reasonably certain under the circumstances. A contract dependent on something else happening (a condition precedent) does not become operative until that event or performance occurs. If that condition is not satisfied or performed, a defendant will not be liable for not performing under the contract.

In this case, the parties expressly stated that the LOI embodied their entire understanding and any future agreement had to be in writing. The Court nevertheless found the LOI to be a mere “agreement to agree” and not a binding contract. There was no meeting of the minds or mutuality of contract and the condition precedent was never fulfilled.

The Court cited a number of clauses in the LOI that showed the parties realized the future transaction might not occur. For example, the LOI stated the parties intended to enter into a future transaction but certain “express provisions” in the LOI would excuse them from having to execute the deal and “regardless of whether the Transaction is implemented,” each party would bear its own costs.

The LOI required the parties to negotiate in good faith to draft all contracts and documents necessary to implement the transaction and diligently seek “approval for this Transaction from their respective senior management and/or board of directors as quickly as possible.” Moreover, EQT had sent a letter to VPEM stating EQT management had not yet approved the LOI and the negotiations had, in fact, broken down. At that point, the Court held, any exclusive dealing obligations in the LOI terminated and EQT was free to negotiate with others.

The parties expressly designed the LOI to terminate and cease to have effect upon the execution of the transaction. VPEM argued the LOI had a contract’s specificity including length of time, quantity of capacity release, delivery location, and demand, commodity and fuel rates. But the Court found numerous provisions were subject to change. By regulation, VPEM would either have to pay the maximum rate for the release to be non-biddable or it could reject it when that rate was finally set, requiring another agreement to be executed to seal the transaction. VPEM argued EQT could have converted it to a biddable release. But then the parties would have had to renegotiate price, proving the absence of a final agreement.

The LOI also recited no remedy in the event of a breach which is evidence the parties did not intend to be bound. It actually precluded damages, stating that, whether the transaction was implemented or not, neither party would be liable for consequential, incidental, indirect or exemplary damages or loss of prospective profits.

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