ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Sunday, July 3, 2011

Preliminary Agreement Enforced in Minnesota: Siemens Wins Again

Wind Turbines Outland Renewable Energy LLC an operator of wind farms brought suit against Siemens Energy Inc. for a breach of duty of good faith.  Siemens claimed that Outland had breached a binding preliminary agreement (a term sheet) that both parties signed in 2007 agreeing to negotiate a sales and maintenance agreement of wind turbine generators.  The term sheet obligated Outland to pay a $15.2 million reservation fee that would automatically convert into a cancellation fee if the parties could not reach a final agreement.  The trial court ruled that the term sheet was enforceable and that there was no breach or violation of the duty of good faith.  Outland appealed to the Minnesota Court of Appeals, which affirmed the trial court’s ruling in Outland Renewable Energy LLC v. Siemens Energy, Inc.

In the term sheet, which was governed by NY law, the parties agreed on the design, supply, transportation, erection, and commissioning of 87 wind turbine generators that Outland was to purchase from Siemens for a total cost of $321.9 million.  Delivery was to begin in the first quarter of 2010.  The parties agreed to negotiate in good faith until they either reached a definitive supply and service maintenance agreement or until October 1, 2008.  The term sheet was not intended to be the final agreement between the parties.  Outland was unable to secure the requisite financing and filed suit, seeking the return of the $15.2 million fee and a declaration that the term sheet was unenforceable.

Although both the trial court and the court of appeals were persuaded that the parties had not concluded a binding agreement for the sale of 87 wind turbines, both found that their preliminary agreement was a separate, enforceable agreement relating to the reservation/cancellation fee.  In consideration of the $15.2 million fee, Siemens reserved capacity and manufacturing space for the project. 

The Court of Appeals treated the $15.2 million reservation fee like the consideration one gives for an option contract. Outland paid for the right to reserve and eventually purchase 87 wind turbine generators from Siemens.  Because the fee was the consideration for the option, the court ruled that it did not constitute liquidated damages. 

[JT & Jared Vasiliauskas]

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