Saying You Have a Deal Before the Contract Has Been Finalized

Eric Goldman—he of the Technology & Marketing Law Blog and Goldman’s Observations Blog—recently told me about an interesting case, EEOC v. Regal-Beloit Corporation, 2007 U.S. Dist. LEXIS 31818 (W.D. Wis. May 1, 2007). (Click here for a copy.) It relates to what can happen when you say to the other side in a transaction that you have a deal, subject to some trivial fixes.

The Case

On March 15, 2007, the EEOC and Regal-Beloit (RB) held discussions regarding settlement of an action that the EEOC had brought against RB. On March 19, the EEOC told RB in a letter that it accepted RB’s settlement offer of $50,000 and a draft consent decree that the parties had discussed. The letter further stated that “As we agreed last Thursday, additional editing of the language may be necessary.”

Later that day RB’s counsel e-mailed to the EEOC proposed changes to the consent decree. On March 20, the EEOC sent RB a letter with a revised draft of the consent decree. Later that day RB informed the EEOC that the proposed draft of the consent decree looked fine “subject to the following nits and nats.”

On March 21, 2007 at 5:24 p.m. the EEOC informed RB that the EEOC had signed the decree. Later that day, RB’s counsel informed the EEOC that he had signed the consent decree on behalf of RB.

But before 4:30 p.m. on March 21, 2007, the court entered judgment granting RB’s motion for summary judgment. Neither party was aware of that when they signed the consent decree. The parties received the court’s decision in the mail on March 22, 2007.

The EEOC then moved to have the court reconsider its judgment and instead enforce the settlement. In response, RB argued that the consent decree was void for mutual mistake, in that when the parties signed the consent decree on March 21, 2007, they didn’t know that the court had granted RB’s motion for summary judgment.

The court noted that the EEOC had accepted RB’s offer of $50,000 and the consent decree, and that only minor editing of the consent decree remained to be completed. This prompted the court to hold that “Although it is not clear whether the consent decree was fully executed prior to this Court’s order of dismissal, there is no doubt that a contract of settlement existed prior to dismissal.” The court vacated its judgment against the EEOC and granted the EEOC’s motion to enforce the settlement agreement and enter the consent decree.

Some Thoughts

This would seem to have been an easy enough decision for the court to reach. For one thing, RB itself indicated that the revisions it wanted were trivial. Furthermore, the court was in a position to make sure that that was in fact the case, given that the parties ultimately signed the consent decree.

So whereas this case is of interest, it’s not so much because of the particular facts of this case. Instead it’s because, as Eric suggested to me, “we have a deal subject to some wordsmithing” is something that one hears all too often. (“Wordsmithing” again!)

This sort of gun-jumping can cause problems. For one thing, as in this case, it can cause a court to conclude, to the detriment of one of the parties, that the parties had reached agreement earlier than the date the contract had been signed.

One can imagine an even more awkward situation, in which one of the parties claims that a deal is all but done, but then has a change of heart and abandons the deal, and maybe even signs a deal with someone else. It’s not difficult to imagine a court willing to build on the logic of the Regal-Beloit court in holding that the parties had reached an agreement even in the absence of signed contracts.

Often enough, when one party observes that all that stands in the way of a deal is some trivial matters, that may well be the case. But what can make such assertions particularly awkward is that often they are fueled by optimism, or desperation. It’s to be expected that in their zeal to get a deal done, or to give the impression that it’s almost done, lawyers and their clients will sometimes minimize the obstacles that remain. It would be unfortunate to have a court take any such cheerleading at face value.

So here’s what I suggest: whenever you’re inclined to tell someone that a deal is close to being done, add something to the effect that of course the deal won’t in fact be final until the parties have signed the contract. I can’t swear that a court would pay attention to such a disclaimer, but it’s surely better than saying nothing.

Note that I haven’t looked into any other case law on this issue. If you have any observations, I’d be pleased to hear them.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.