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Bustany v. Draper

A-6561-96T5 (N.J. Super. App. Div. 1998) (Unpublished)

CONTRACTS; LETTERS OF INTENT; ARBITRATION—The terms of a preliminary, informal agreement contemplated a “formal” agreement, and also contained other sufficiently definite provisions. The court enforced the informal agreement’s arbitration provision because it inferred that the parties intended to provide for arbitration in their formal agreement.

An employee/owner who also had management duties was negotiating with his company about the terms on which he would relinquish his right to participate in management in exchange for increased ownership in the company. The parties signed a preliminary settlement agreement which included language that its terms would be set forth, “in a formal settlement agreement…containing the above provisions and such other terms…including an agreement to arbitrate disputes.” When negotiation over the formal agreement broke down, the manager filed for arbitration. The company filed an action seeking to enjoin arbitration. The lower court determined that the preliminary settlement agreement was binding and included a valid agreement to arbitrate disputes arising thereunder. The company appealed, arguing that the agreement was not an enforceable contract and that the arbitration clause only applied to future disputes that might arise under the formal settlement agreement, if and when executed.

The Appellate Division cited case law for the proposition that as long as there are sufficiently definite provisions, parties may bind themselves by an informal memorandum even though they contemplate execution of a later, formal document. Although the company argued that a formal settlement agreement was a condition precedent to any duty to arbitrate, courts in New Jersey liberally construe arbitration agreements and usually resolve such issues in favor of arbitration. Accordingly, the Appellate Division found the arbitration provision to be enforceable and not dependent on the existence of a formal agreement. The Court thought it reasonable to infer that since the parties intended to provide for arbitration of disputes under the formal agreement, there was no harm or injustice in permitting arbitration for the period of time between execution of the informal and formal agreements.


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