Agreement in Principle: Meaning, Enforceability, and Bar Exa...

Introduction

An agreement in principle (AIP) captures the main terms of a deal before a full contract is signed. In the United States, you’ll also see it called a letter of intent (LOI), term sheet, or memorandum of understanding (MOU). Even when all details aren’t worked out, parties often set out the key deal points—like a royalty schedule, price range, or project milestones—so they can move forward with drafting.

For bar exam prep and real-world practice, the big questions are whether an AIP is binding, what it needs to say, how the Statute of Frauds applies, and what happens if one party starts performing before the final agreement is executed.

What You’ll Learn

• What an agreement in principle is and how it relates to LOIs, MOUs, and term sheets
• When an AIP is binding (Type I) or creates only a duty to negotiate (Type II)
• Essential terms, intent to be bound, and the Statute of Frauds (common law and UCC)
• Common disputes, including partial performance and reliance
• How courts use AIPs as evidence of intent when conflicts arise
• Practical drafting tips to make intent unmistakable and reduce risk
• Bar exam angles: definiteness, writings, good faith negotiation, and remedies

Core Concepts

Definition and Purpose

An agreement in principle records the main terms the parties agree on while signaling that a more detailed contract will follow. It helps:

• Align expectations on key business terms (e.g., scope, price, royalties, timelines)
• Keep the deal moving while counsel drafts the definitive agreement
• Establish a framework for due diligence, approvals, and next steps

AIPs can be binding or nonbinding depending on language, context, and conduct. They may also contain a mix of both—where certain provisions (like confidentiality or exclusivity) are binding, while the rest is nonbinding until the final contract is signed.

Binding vs. Nonbinding Preliminary Agreements

Courts, especially in New York and federal cases applying New York law, often sort preliminary agreements into two categories:

• Type I (fully binding): The parties have agreed on all essential terms and intend to be bound, even though they plan to memorialize the deal in a longer document. A breach can lead to standard contract damages.
• Type II (agreement to negotiate in good faith): The parties commit to keep negotiating open issues in good faith. There’s no promise that a final contract will be reached, but a party can be liable for failing to negotiate honestly.

Key signals that a preliminary document is nonbinding:

• Clear disclaimers: “This letter is nonbinding” or “No obligation until a definitive agreement is signed”
• “Subject to” language: “Subject to board approval,” “Subject to execution of a definitive agreement”
• Open material terms: Price, quantity, scope, or royalty details still unsettled
• Custom and practice: In the industry, deals of this type typically aren’t final until the long-form agreement is signed

Key signals a court may find it binding (Type I):

• Explicit language of commitment without a nonbinding disclaimer
• Agreement on all material terms (including price, scope, and timing)
• Partial performance, deposits, or other conduct consistent with a final deal
• A context where the final writing is a formality, not a condition to contract formation

Essential Terms and the Statute of Frauds

For a contract to be enforceable, material terms must be reasonably certain. Courts look for clarity on the who, what, when, and how much.

• Common law (services, real estate, IP licenses): Indefinite material terms can defeat contract formation. Restatement (Second) of Contracts §33 addresses certainty.
• UCC Article 2 (sale of goods): The UCC can fill gaps for some terms, but a writing signed by the party to be charged is required for contracts for goods priced at $500 or more (UCC §2-201), and the quantity term generally must appear in the writing.
• Statute of Frauds: Certain agreements must be in writing and signed, including contracts that cannot be performed within one year, transfers of interests in real property, and suretyship agreements. An AIP can satisfy the writing requirement if it includes the necessary terms and signatures, but many AIPs purposely avoid being binding.

Tip: If you intend a nonbinding AIP, make that explicit in the document and avoid language that reads like a final commitment.

Acting Before the Final Contract

Parties often start performing under an AIP—sharing data, beginning work, or making initial payments. That can trigger several doctrines:

• Promissory estoppel: If a party reasonably relies on a promise and suffers a loss, a court may award reliance damages even if no contract is formed.
• Restitution/unjust enrichment: A party who conferred a benefit may recover the value of that benefit if the deal falls apart.
• Partial performance: In real estate and other contexts, partial performance can allow enforcement despite the Statute of Frauds, depending on the jurisdiction and facts.
• Good faith negotiation (Type II): If the AIP obligates good faith negotiation, walking away without honest effort can lead to liability for negotiation costs or reliance losses.

Key Examples or Case Studies

• Real-life scenario: Two companies, Alpha Corp. and Beta Inc., agree on division of responsibilities, profit sharing, and a project timeline for a new product. They memorialize those points in a short document while their lawyers draft the full contract. That short document is an agreement in principle. It gives both sides a shared roadmap but may or may not be binding depending on its wording.

• Smith v. Global Enterprises (illustrative): Smith negotiates a patent license with Global Enterprises. They agree in principle on the license fee and royalty rates, but later clash over the final language. When Smith sues on the AIP, the court treats it as a preliminary step. Because the AIP signaled no binding commitment until a final contract and left important details open, the court declines to enforce it as a full contract.

• Johnson v. Tech Innovators (illustrative): Johnson and Tech Innovators settle on a joint venture’s objectives, initial investments, and management structure in an AIP. They begin working together before signing the long-form agreement. Disputes follow. The court looks to the AIP as evidence of intent and uses it to guide resolution of issues the parties had already aligned on. If the AIP included a duty to negotiate in good faith, a breach of that duty can lead to reliance-type remedies.

What these examples show:

• Clear nonbinding language and open terms point away from enforceability as a contract.
• Starting performance can create reliance exposure and support recovery under estoppel or restitution, even if no final contract exists.
• Courts often use the AIP to interpret the parties’ intent and manage interim disputes.

Practical Applications

Drafting moves that reduce risk:

• Say whether it binds: Include a bold, plain statement that the AIP is nonbinding, except for specific sections (confidentiality, exclusivity, no-shop, governing law, dispute resolution, and costs).
• Use “subject to” phrasing: Condition the deal on execution of a definitive agreement and any required approvals.
• Identify material terms: Price or pricing formula, quantity/royalties, scope, deliverables, deadlines, IP ownership, termination triggers. Note any open issues.
• Define the negotiation window: Set a timeline, outline milestones for diligence and approvals, and add an expiration date for the AIP.
• Limit reliance: Add a “no reliance” clause and restrict pre-contract performance unless authorized in writing.
• Keep track: Keep emails and drafts organized. Mixed signals about intent are a common litigation problem.
• Isolate binding provisions: If you need confidentiality or exclusivity to be binding, label those sections as binding and separate them from the nonbinding deal points.

Analysis steps for bar exam questions:

1. Identify the governing law (common law vs. UCC Article 2).
2. Ask whether the AIP contains definite material terms and whether the parties intended to be bound now or only after a final contract.
3. Check Statute of Frauds: Is a signed writing required, and does the AIP satisfy it?
4. Look for disclaimers and “subject to” language, partial performance, and conduct suggesting commitment.
5. Consider alternate theories: promissory estoppel, restitution, good faith negotiation (Type II).
6. Remedies: expectation damages for Type I; reliance for Type II breach or estoppel; restitution for unjust enrichment.

Common issues and disputes to watch for:

• Did the parties intend to be bound by the AIP itself?
• Can an AIP be enforced if the final contract was never signed?
• What happens to terms not spelled out in the AIP?
• What are the legal consequences of acting on an AIP before the final agreement?

Summary Checklist

• State whether the AIP is binding, nonbinding, or mixed (some clauses binding).
• Use clear “subject to definitive agreement” and approval conditions.
• Include or flag all material terms; avoid ambiguity on price, scope, and timing.
• Address Statute of Frauds requirements; ensure the right kind of writing where needed.
• Separate and label any binding provisions (confidentiality, exclusivity).
• Limit reliance and pre-contract performance unless approved in writing.
• Preserve emails and drafts; conduct must align with the stated intent.
• For disputes, evaluate intent, definiteness, Statute of Frauds, reliance, and restitution.
• For exams, apply Type I/Type II logic, Restatement §33, UCC §2-201, and estoppel principles.

Quick Reference

Related terms to review:

• Lessor and Lessee
• Material Term
• Benefit of the Bargain Damages
• Severable Contract
• Acquiescence