Is intending to settle a case the same thing as actually settling? As the Court of Special Appeals of Maryland recently confirmed, it can be. In its decision earlier this month in Falls Garden Condo. Ass’n, Inc. v. Falls Homeowners Ass’n, No. 0443, September Term 2012, the Court applied state contract interpretation principles to a “letter of intent” memorializing a settlement agreement, construing the document as a valid “executory accord” that precluded the Appellants’ ability to pursue its claims. The ruling is a reminder that, when a party doesn’t want to be bound by a recording of an agreement, it better make sure the agreement says so.
In Falls Garden Condo. Ass’n, condominium complex Falls Garden used 65 adjacent parking spaces for 23 years before finding out that they actually belonged to a neighboring residential community, The Falls. Falls Garden sought a declaratory judgment that it owned the spaces by adverse possession or, alternatively, by obtaining an easement. As trial neared, the parties negotiated a possible settlement, and eventually executed a letter of intent “meant to memorialize certain aspects of a formal Settlement Agreement and separate Lease to be entered into” between the parties. The letter provided that The Falls would lease the spots to Falls Garden at $20 a month for each spot, provided that The Falls’ homeowners’ association approved. After the association accepted the plan, its attorneys drafted a proposed 99-year lease and submitted it to Falls Garden.
By this point, however, Falls Garden had a change of heart, and hired new counsel that sought to undo the negotiations. Not happy with the reversed course, The Falls took the letter into the circuit court, moving to have it enforced as a settlement agreement. Falls Garden protested that it didn’t intend to be bound by the letter, as evidenced by the fact that it didn’t drop its lawsuit as soon as the letter was executed. The circuit court reviewed the letter, concluding that it revealed an enforceable agreement that had actually been reached. The parties were ordered to execute a settlement agreement and lease, but, before that could happen, Falls Garden went to the appellate court for review.
The Court noted that Maryland law on letters of intent places them into four categories: (1) those that expressly state that the parties aren’t to be bound by it; (2) those that identify specific matters that remain to be negotiated; (3) those that memorialize agreement on all necessary terms and don’t identify any other material matters to be settled; and (4) those that expressly state that the letter is binding. Though the first two categories don’t create an enforceable agreement, the latter two can. In this case, the letter said nothing about whether it was binding or not, so (1) and (4) didn’t apply. Nor did the letter identify any other important issues that were left undecided, taking it out of category (3). Therefore, the Court reasoned, the letter fell into (3) and was enforceable.
As to exactly what kind of enforceable agreement the letter was, the Court identified it as an “executory accord” – an exchange of one party’s performance of some action for a discharge of the other party’s claims. Falls Garden had agreed to drop its lawsuit if The Falls gave it a leasehold interest in the parking spaces; that Falls Garden didn’t end the litigation as soon as the letter was executed simply meant that it was waiting for The Falls to perform its end of the bargain first. Execution of the proposed lease by The Falls prohibited Falls Garden from going forward with its claims. In other words… Falls Garden residents, better get used to a century of shelling out a monthly Jackson for parking.
The take-home point: Executing a letter of intent that’s not meant to be binding should either say so or make clear that there are important issues that still need to be figured out. Need help with making sure your anticipated settlement negotiations don’t have inadvertent consequences? Contact Bill Sinclair, head of STSW’s commercial litigation group, at 410-385-9116 or firstname.lastname@example.org.