Oral Agreement Not Binding

October 27, 2000


Michael I. Rudell

Court Holds Preliminary Oral Agreement Not Binding

(Originally published in the Entertainment Law column in the New York Law Journal, October 27, 2000.)

In a decision rich with references to the television industry a federal district court has granted defendants’ motion to dismiss claims against them for breach of contract, fraud and violation of section 51 of the New York Civil Rights Law.1 The dominant portion of the decision discusses the nature and enforceability of an oral preliminary agreement.

For the past eight years, Jill Rappaport has worked as the entertainment reporter for NBC’s “Today” show. In February of 1998, Ed Mansfield, a television producer, commenced a series of conversations with Rappaport involving his interest in hiring her as the host of a proposed television series which he and Amy Buske had developed entitled “Fabulously Fit & Famous.” The series was similar to “Lifestyles of the Rich & Famous,” but focused on fitness.

In his conversations with Rappaport, Mansfield emphasized that the host of the proposed series would be required to travel and interview celebrities and that there would be merchandise tie-ins. Rappaport purportedly expressed concerns regarding the travel and wanted assurances that the series would not interfere with her commitments to NBC. She also proposed that the title of the series be changed to “Fabulously Fit & Famous With Jill Rappaport.”

In the spring of 1998 Rappaport, Mansfield and Buske held their first face-to-face meeting (the “Spring Meeting”). According to Rappaport, at this meeting the parties “reached a firm oral understanding pursuant to which to Ms. Rappaport would be hired as host of the thirteen program series, at a per program salary of $10,000 … subject to plaintiff’s commitments to NBC.”

On May 14, 1998, Manfield sent Babette Perry, Rappaport’s agent, a letter of intent which stated in relevant part, “as per your request, here is our letter of intent to retain Jill Rappaport as the host of the thirteen-week television series, ‘The Fit & Famous.’ As we discussed, Jill will be paid $10,000/episode for a total of $130,000. The official contracts are being drawn up at this time and when they are ready, we will send them to you for your approval and signature.”

By letter dated May 18, 1998, Perry responded stating “This letter is to confirm that Jill Rappaport will be the host of the thirteen-week television series, ‘The Fit & Famous.’ The other terms and conditions will be negotiated in good faith.”

At Rappaport’s instructions, defendants sent a draft of a written employment agreement to Perry on June 4, 1998. The contract specified Rappaport’s commitment to act as the host of the series for thirteen episodes, subject to her professional commitments at NBC, and her base salary. It also covered the timing of how that salary would be paid, payment of her travel and hotel expenses and a per diem, her percentage of net profits from the series and net merchandising revenue, her obligation to make personal appearances related to the advertising of the series and its merchandising products and the assignment of all right, title and interest in and to her services to the production company.

At her deposition, Rappaport testified that there were several items in the agreement to which she objected because the terms differed from her understanding of the alleged oral agreement. These included 1) the omission from the contract that the series was to be based in New York, 2) the draft being in the name of defendants’ newly-formed corporation, 3) the provision for profit-sharing which in her view she could not accept because she was a newsperson, 4) the requirement that she make personal appearances in connection with the series and products which, again, she felt she could not do because of her position as a journalist and 5) the description of her duties, not just as host of the series, but also as interviewer which she considered to be an additional job that merited a higher salary.

Based on these objections, Rappaport telephone Buske in late June or early July and told her that the employment agreement was unacceptable. Thereafter, defendants withdrew the offer and placed an ad in a trade publication for a new host. In July of 1998, plaintiff filed an action for breach of contract, fraud and violation of the New York Civil Rights Act. Believing that the series had become irreparably tainted because of the lawsuit, defendants abandoned all production and development of the series in August of 1998.

In its discussion, the Court addresses plaintiff’s contention that the parties reached a final oral agreement. Plaintiff argues that as of the Spring Meeting there was such an agreement as “to all the material terms of the contract, with nothing left for negotiation.” However, the Court indicates that, taking all inferences in plaintiff’s favor, the letter from her agent leaves no room for doubt that this is not a case about a final oral contract, but, rather, one about a preliminary agreement.

Parties to proposed commercial transactions often enter into preliminary agreements that may provide for the execution of more formal agreements. Ordinarily, when the parties contemplate such further negotiations and execution of a formal instrument, a preliminary agreement will not create a binding contract. In some circumstances, however, courts have recognized that preliminary agreements can create binding obligations.

Binding preliminary agreements fall into one of two categories. The first is created when the parties agree on all of the points that require negotiation (including whether to be bound), but agree to memorialize their agreement in a more formal document. Such an agreement is preliminary only in form and is fully binding. Despite anticipation of further formalities, a party to this type of preliminary agreement may demand performance of the transaction even though the parties fail to produce the more elaborate formalization of the agreement.

The second is created when the parties agree on certain major terms but leave other terms open for further negotiation. Such a preliminary agreement does not commit the parties to their ultimate contractual objective, but rather, to the obligation to negotiate the open issues in good faith in an attempt to reach the objective within the agreed framework. If the final contract is not agreed upon, the parties may abandon the arrangement as long as they have made a good faith effort to close the transaction and have not insisted on conditions that do not conform to the preliminary agreement.

In determining whether a preliminary agreement is binding, the court must balance the concern of trapping parties in surprise contractual obligations they never intended to undertake with enforcing and preserving agreements that were intended to be binding despite a need for further documentation and negotiation. It is the aim of contract law to gratify, not defeat, expectations. The key is whether the parties intended to be bound and, if so, to what extent. To discern that intent, a court must look to the words and deeds of the parties which constitute objective signs in a given set of circumstances.

Here, plaintiff contends that the agreement was the first type of preliminary agreement. She alleges that all of the material terms of the transaction were negotiated during the Spring Meeting and there was nothing left for negotiation. The issue thus presented is whether when the parties reached the alleged oral agreement in the Spring Meeting they had negotiated all the terms of the employment contract and intended to be bound even if a written contract were never executed.

The Second Circuit has identified four factors to be considered in determining whether the parties to a preliminary agreement that called for execution of a formal instrument intended to be bound in the absence of such an executed final instrument: 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 the alleged contract have been agreed upon and 4) whether the agreement at issue is the type of contract that is usually committed to writing.

In analyzing the first factor, the Court considers the admissions of the plaintiff and the conduct of the parties. In reviewing the testimony of the plaintiff at her deposition and her conduct after the Spring Meeting, the Court concludes that the plaintiff expressly reserved the right not to be bound. In particular, plaintiff’s insistence that the defendants send a written contract to her agent constituted an express reservation not to be bound absent a writing. The agent’s May 18, 1998, letter supports that conclusion.

Regarding partial performance, the decision notes that plaintiff must have conferred something of value on the defendants which they accepted. Neither putting in for vacation time from NBC to shoot the series nor introducing the defendants to plaintiff’s industry contacts satisfied, even partially, obligations imposed on plaintiff by the alleged employment agreement. These acts are not evidence of partial performance.

Clearly, the third factor, existence of open terms, weighs strongly in favor of the defendants; for there remained numerous open items as demonstrated by the May 18th letter from plaintiff’s agent. Further, well after that date, both sides were negotiating terms that were crucial to the agreement.

In its argument concerning the fourth factor, plaintiff asserts that in circumstances such as these, the custom in the entertainment industry is to conclude deals orally, not in writing. Even if the Court were to accept this testimony, there can be no doubt that in this instance the parties intended for their agreement to be reduced to writing and testimony about custom becomes irrelevant. Plaintiff’s own conduct in this transaction conclusively establishes that this agreement was to be reduced to writing. She insisted that the defendants send a written contract to her agent who never advised the defendants that “official contracts” were unnecessary under the circumstances.

An analysis of the four factors referred to above shows beyond dispute that the parties did not intend a contractual obligation to exist before a writing was executed. Even taking all inferences in favor of the plaintiff, the Court finds that the alleged oral agreement was one that falls in the second category. No reasonable finder of fact could conclude, based on the record, that the parties agreed on all material elements of the transaction, intended to be fully bound when they concluded their Spring Meeting and considered the formal, written contract that plaintiff herself demanded to be an unnecessary formality.

In regard to plaintiff’s cause of action for fraud, the Court holds that she did not suffer injury. New York follows the “out-of-pocket” rule of damages for fraud. The true measure of damage is the actual pecuniary loss sustained as a direct result of the wrong. Under this rule, damages are to be calculated to compensate plaintiff for money she actually lost because of the fraud, not for what she might have gained.

Plaintiff alleges damages for fraud in the amount of $130,000. However this amount does not reflect any out-of-pocket loss, but rather the amount that plaintiff stood to gain if the parties had gone forward with the series. There was no pecuniary loss to the plaintiff.

Lastly, plaintiff alleges that defendants violated section 51 of the New York Civil Rights Law by using her name with potential advertisers and sponsors to solicit interest in the series. Plaintiff’s claim turns on whether defendants violated section 51 by using her name within New York for purposes of trade.

Taking all inferences in favor of plaintiff, defendant Mansfield “used” plaintiff’s name with Castle Hill Productions when he responded to its question as to who would be the host of the series. He told them that discussions were under way with plaintiff, which prompted a positive response from Castle Hill. The Court notes that it has not been able to uncover a single case in which an analogous isolated use of a complainant’s name has been found to be sufficient to state a claim under section 51. The decision also notes that section 51 is to be narrowly construed.

Even assuming that Mansfield’s single use of Rappaport’s name as aforesaid constituted a “use” under section 51, this would not satisfy the “for the purposes of trade” element. The case law reveals that the term “purposes of trade” is not susceptible to ready definition. The fact that the use of the name or picture is spurred by a profit motive or included to encourage sales may be a necessary, but hardly a sufficient, ingredient in determining the existence of a trade purpose. Here Mansfield used plaintiff’s name for the limited purpose of obtaining a preliminary response from Castle Hill to the series and its prospects for syndication. Notwithstanding defendants’ ultimate profit motive, the plaintiff in the instant action cannot allege that the defendants generated any revenue through the one-time use of plaintiff’s name to Castle Hill.

Accordingly, the Court granted defendants’ motion for summary judgment and dismissed the complaint in its entirety.


1 Rappaport v. Buske et al., U. S. District Court, Southern District of New York, 98 Civ. 5255 (August 24, 2000).