International Finance Corporation v. Korat Waste to Energy Co., Ltd.

MOTION to Dismiss the Complaint. Document

S.D.N.Y.August 6, 2007

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK INTERNATIONAL FINANCE CORPORATION, not in its individual capacity, but solely as the Trustee for the IFC-Netherlands Carbon Facility, Plaintiff, v. KORAT WASTE TO ENERGY CO. LTD. (a/k/a Khorat Waste to Energy Co.), Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 07 Civ. 5451 (SHS) KWTE’S MOTION TO DISMISS THE COMPLAINT Defendant Korat Waste to Energy Co. Ltd. (“KWTE”) submits this memorandum in support of its motion pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss plaintiff International Finance Corporation’s (“IFC’s”) Complaint. The claims IFC asserts and the relief it seeks are untenable as a matter of law. The Complaint alleges that KWTE and plaintiff IFC entered into a non-binding Letter of Intent (“LOI”) to negotiate a potential contract for IFC to purchase certified emission reduction credits (“CERs”) from KWTE. The LOI, which IFC did not attach to its Complaint, explicitly provides that KWTE could terminate the LOI at any time and for any reason, and decline to enter into a contract, by fifteen-days notice and by paying a stipulated termination fee. Under the LOI, such termination “shall release [KWTE] and [IFC] from all of their respective obligations under [the LOI], including any liabilities arising therefrom” except for the stipulated termination fee. On March 2, 2007, KWTE exercised its right to terminate the LOI, and offered to make the payment specified by the LOI. IFC has refused to acknowledge that the LOI was terminated under its terms, and instead claims that KWTE had an obligation to continue negotiations with IFC and enter into a final contract. Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 1 of 52 2 None of IFC’s claims are tenable, and all should be dismissed as a matter of law: A. In Count I, IFC asserts that an implied covenant of good faith and fair dealing can overcome the express contractual term in the LOI allowing KWTE to terminate the LOI. Under New York law, no implied covenant can exist that is inconsistent with the written provisions of the contract. New York courts thus hold that an implied covenant of good faith and fair dealing does not apply when a party has the right to terminate the contract. IFC’s proposed implied covenant is directly contradicted by the termination clause of the LOI, and cannot therefore form the basis of a valid claim. B. Also in Count I, IFC seeks contract expectation damages for an alleged breach of an implied covenant to negotiate in good faith. That is contrary to the explicit written terms of the LOI, and unsupported by law or logic. It is axiomatic that a party cannot receive expectation damages for failed negotiations that resulted in no contract, particularly where there was no obligation even to continue negotiations, as that would confer the benefit of a bargain that was not reached. C. In Count II, IFC claims alternatively that the parties in fact entered into a contract in June 2005, and submits or refers to several e-mails from May-June 2005 and a September 2005 “Term Sheet” prepared by IFC, as memorializing a June 2005 contract. In fact, these documents directly contradict IFC’s contract claim. There is no offer and acceptance of common price or quantity terms. Moreover, the September 2005 Term Sheet drafted by IFC – which IFC merely referred to, and, with the LOI, did not attach to its Complaint –states explicitly that nothing in the Term Sheet was binding on either party. Each of these documents is properly before the Court on a motion to dismiss, and the law provides that the Court need not and should not accept conclusory complaint allegations that are contradicted by written materials properly before the court. D. IFC claims in Count III that it is due the termination payment specified in the LOI. That is true, and that fee is all that is due to IFC. To date, IFC has refused KWTE’s Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 2 of 52 3 repeated offers to pay the full termination fee, and in fact has refused to accept that fact that the LOI was terminated. KWTE stands ready at any time to make the required payment to IFC. E. Finally, in Count IV, IFC argues that the LOI’s standard indemnification clause, in which KWTE agreed to indemnify IFC against certain third-party claims, is really a guarantee by KWTE to reimburse IFC for any losses claimed by IFC from KWTE’s termination of the LOI – including, according to IFC, full contract expectation damages to IFC. New York law does not permit a party to use a third-party indemnification provision as a vehicle to bring first-party claims. The grounds for this motion are stated more fully in an accompanying memorandum. A proposed order is also submitted herewith. KWTE respectfully requests oral argument on this motion. Respectfully submitted, /s/ August 6, 2007 Anthony F. King WALLACE KING DOMIKE & REISKIN, PLLC 1050 Thomas Jefferson Street, N.W. Washington, D.C. 20007 Telephone: 202.204.1000 Facsimile: 202.204.1001 Elkan Abramowitz (EA-3987) Thomas M. Keane (TK-6320) MORVILLO, ABRAMOWITZ, GRAND, IASON, ANELLO & BOHRER, P.C 565 Fifth Avenue New York, NY 10017 Telephone: (212) 880-9300 Facsimile: (212) 856-9494 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 3 of 52 TABLE OF CONTENTS TABLE OF AUTHORITIES ............................................................................................. iii INTRODUCTION ...............................................................................................................1 A. Summary Of The Arguments.......................................................................3 B. The Court Should Not Accept Complaint Allegations That Are Contradicted By Materials Attached To The Complaint Or Incorporated By Reference .....................................................................5 STATEMENT OF THE RELEVANT ALLEGATIONS....................................................6 A. Allegations Regarding KWTE’s Right To Terminate The LOI ..................6 1. The LOI Explicitly Allows KWTE To Terminate The LOI At Any Time For Any Reason .................................................7 2. The LOI Explicitly States That All Liabilities By Either Party Under Or Arising From The LOI Are Extinguished If KWTE Terminates The LOI ........................................................7 3. The LOI Provides For A Specific Termination Fee As IFC’s Sole Recovery If KWTE Terminates The LOI......................8 B. Allegations Regarding KWTE’s Termination Of The LOI..............................................................................9 C. Allegations That KWTE And IFC Formed A Contract In June 2005 To Sell And Purchase CERs....................................9 1. No Offer Was Accepted In The May-June 2005 E-mail Exchange Cited by IFC as Forming a Contract .............................10 2. The September 2005 Term Sheet States Explicitly That There Was No Contract Between The Parties As Of September 2005 .............................................................................12 3. IFC Itself Continued To Negotiate And Change The Terms Of Its Offers Long After June 2005.....................................................13 ARGUMENT.....................................................................................................................14 I. PLAINTIFFS’ CLAIM ALLEGING LIABILITY FOR BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING IS INVALID AS A MATTER OF LAW ...................................................................14 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 4 of 52 ii II. IFC’S CLAIM FOR CONTRACT EXPECTATION DAMAGES BASED ON THE ALLEGED BREACH OF AN IMPLIED COVENANT IN A NON-BINDING LETTER OF INTENT SHOULD BE DISMISSED ..................................................................................16 A. Expectation Damages Are Not Available For An Alleged Breach of the Implied Covenant of Good Faith and Fair Dealing.......................................................................................................17 B. IFC Cannot Recover More Than The LOI’s Termination Fee For Any Claim Based On KWTE’s Termination Of The LOI......................................................................................................19 III. PLAINTIFF’S BREACH OF CONTRACT CLAIM IS INVALID AS A MATTER OF LAW.....................................................................................19 IV. PLAINTIFF HAS REFUSED TO ACCEPT THE LOI TERMINATION PAYMENT ...............................................................................21 V. PLAINTIFF’S CLAIM FOR INDEMNIFICATION IS INVALID AS A MATTER OF LAW.....................................................................................21 CONCLUSION..................................................................................................................22 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 5 of 52 iii TABLE OF AUTHORITIES CASES Alusit, Ltd. v. Aluglas of Pa., No. 89 Civ. 3849 (CSH), 1990 U.S. Dist. LEXIS 16755 (S.D.N.Y. Dec. 4, 1990) .........................................5 Arcadian Phosphates v Arcadian Corp., 884 F2d 69 (2d Cir. 1989)......................................................................................17 Barry & Sons, Inc. v. Instinct Prods. LLC, 5 Misc. 3d 172, 783 N.Y.S.2d 225, (2004), affirmed on relevant grounds, 15 A.D.3d 62, 788 N.Y.S.2d 71 (1st Dep’t 2005) .........................................................................22 Burdett Radiology Consultants, P.C. v. Samaritan Hosp., 158 A.D.2d 132; 557 N.Y.S.2d 988 (3d Dep’t 1990)............................................15 Clark Oil Trading Co. v. Amerada Hess Trading Co., 90 Civ. 1856 (PKL), 1993 U.S. Dist. LEXIS 10801 (Aug. 4, 1993).................................................................................20 Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42 (2d Cir. 1991), cert. denied, 503 U.S. 960 (1992) ...................................................6 Cosmas v. Hassett, 886 F.2d 8 (2d Cir. 1989) .....................................................................6 Cyberchron Corp. v. Calldata Sys. Dev., 831 F. Supp. 94 (E.D.N.Y. 1993), vacated in part on other grounds, 47 F.3d 39 (2d Cir. 1995) .............................................20 Goodstein Constr. Corp. v. N. Y., 80 N.Y.2d 366, 590 N.Y.S.2d 425 (1992) .......................................................17, 18 John's Insulation, Inc. v. Siska Constr. Co., 671 F. Supp. 289, 292 (S.D.N.Y. 1987).................................................................20 Kenford Co. v. County of Erie, 67 N.Y.2d 257, 493 N.Y.S.2d 131 (1986).......................................................................................17 Kramer v. Time Warner, Inc., 937 F.2d 767 (2d Cir. 1991) ................................................6 Madonna v. U.S., 878 F.2d 62 (2d Cir. 1989)......................................................................6 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 6 of 52 iv Matterhorn Group, Inc. v. SMH (U.S.) Inc. (In re Matterhorn Group, Inc.), A.P. No. 97-8273 (SMB), 2002 Bankr. LEXIS 1275 (Bankr. S.D.N.Y. 2002) ...............................................18 McKinley Allsopp, Inc. v. Jetborne Int'l, Inc., 1990 U.S. Dist. LEXIS 12405 (S.D.N.Y. 1990)....................................................17 Metro. Life Ins. Co. v. RJR Nabisco, Inc., 716 F. Supp. 1504 (S.D.N.Y. 1989).................................................................14, 15 Murphy v. American Home Prods. Corp., 58 N.Y.2d 293, 461 N.Y.S.2d 232 (1983) .................................................................................15, 16 Paper Corp. of the U.S. v. Schoeller Technical Papers, Inc., 807 F. Supp. 337 (S.D.N.Y. 1992).........................................................................19 Rothman v. Gregor, 220 F.3d 81 (2d Cir. 2000)..................................................................6 Sabetay v. Sterling Drug, Inc., 69 N.Y.2d 329, 514 N.Y.S.2d 209 (1987) ...........................................................................14, 15, 16 Tower Int'l, Inc. v. Caledonian Airways, Ltd., CV-93-1122, 1996 U.S. Dist. LEXIS 20311 (E.D.N.Y. Jan. 25, 1996) ......................................20 Trifiro v. N.Y. Life Ins. Co., 845 F.2d 30 (1st Cir. 1988)...................................................20 RULES Fed R. Civ. P. (12)(b)(6)......................................................................................................1 MISCELLANEOUS 1 FARNSWORTH, CONTRACTS § 3.26a ................................................................................17 5 C. WRIGHT & A. MILLER, FEDERAL PRACTICE AND PROCEDURE (2D ED. 1990), § 1327 ...................................................................5 RESTATEMENT (SECOND) OF CONTRACTS § 39(1)..............................................................20 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 7 of 52 IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK INTERNATIONAL FINANCE CORPORATION, not in its individual capacity, but solely as the Trustee for the IFC-Netherlands Carbon Facility, Plaintiff, v. KORAT WASTE TO ENERGY CO. LTD. (a/k/a Khorat Waste to Energy Co.), Defendant. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) 07 Civ. 5451 (SHS) MEMORANDUM IN SUPPORT OF KWTE’S MOTION TO DISMISS THE COMPLAINT Defendant Korat Waste to Energy Co. Ltd. (“KWTE” or “Korat”) submits this memorandum in support of its motion pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss plaintiff International Finance Corporation’s (“IFC’s”) Complaint. INTRODUCTION KWTE and plaintiff IFC entered into a non-binding Letter of Intent (“LOI”) to negotiate a potential contract for IFC to purchase certified emission reduction credits (“CERs”) from KWTE. The LOI explicitly provides that KWTE could terminate the LOI at any time and for any reason, and decline to enter into a contract. Specifically, the LOI states that KWTE can terminate the LOI “with or without cause” simply by giving fifteen-days notice and by paying a stipulated termination fee. The LOI also provides that KWTE’s termination “shall release [KWTE] and [IFC] from all of their respective obligations under [the LOI], including any liabilities arising therefrom” except for the stipulated termination fee. Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 8 of 52 2 Pointedly, IFC did not provide a copy of the LOI to the Court with its Complaint. It is attached hereto as Exhibit A. On March 2, 2007, KWTE exercised its right to terminate the LOI, and offered to make the payment specified by the LOI. That should have been the end of the matter. IFC instead now seeks through this lawsuit to obtain the contract it could not negotiate. IFC asks the Court to rewrite the LOI to say that KWTE had an obligation to continue negotiations and sign a final contract, and had no right to terminate the LOI, in spite of the clear LOI language giving KWTE the right to terminate. IFC asserts various theories in its Complaint, but all are based on the theory that KWTE was obligated to continue negotiations with IFC and enter into a contract. IFC’s claims are in defiance of the plain terms of the LOI, and are untenable as a matter of law. Although this Court need not resolve any contested factual issues in deciding that IFC has not stated any valid claims, it should be noted that IFC’s description of the dealings between the parties badly mischaracterizes the facts. The true facts demonstrate that IFC, not KWTE, was intransigent and heavy-handed throughout the negotiations. IFC began with an LOI that was one-sided in assessing a termination fee against KWTE for termination, but which allowed IFC to walk away at no cost. KWTE agreed to that provision, and does not complain of it here. But that imbalance was not enough for IFC. As a major market power backed by the government of the Netherlands, IFC apparently assumed that it had the ability to dictate terms to KWTE, a modestly-sized Thai company. Thus, for example, IFC insisted on price terms that did not come close to recognizing the market value of KWTE’s CERs, and refused through the very end to drop its demand that KWTE agree to a commercially irresponsible contract. On numerous other issues, such as penalties to be assessed against KWTE for non-delivery of CERs and KWTE’s right to sell additional CERs to third parties, IFC simply refused to negotiate. Nevertheless, as IFC’s own attached documents demonstrate, KWTE continued to actively negotiate potential terms with IFC throughout the life of the LOI. IFC’s Complaint confirms that, although IFC did not agree with KWTE’s positions (nor KWTE with IFC’s), KWTE itself proposed potential terms, responded to IFC’s proposed terms, reviewed draft Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 9 of 52 3 agreements, provided comments for IFC’s consideration, and engaged in regular e-mail and other communications with IFC to try and negotiate an acceptable deal. (See, e.g., Complaint ¶¶ 18- 29.) IFC’s characterization of this history as a failure to negotiate on KWTE’s part is obviously driven by IFC’s view that KWTE was obligated to accept IFC’s one-sided terms. Happily, because of the termination provision of the LOI, KWTE had no obligation to succumb to IFC’s tactics. Again, the history of the negotiations that were terminated by KWTE (and therefore much of IFC’s Complaint) are not relevant to a resolution of this motion. The claims should be dismissed because they are invalid as a matter of law. A. Summary Of The Arguments First, IFC attempts to use an implied covenant of good faith and fair dealing to circumvent the express language of the LOI that allows KWTE to terminate the LOI at any time for any reason. New York law is clear that an implied covenant must be consistent with the written provisions of the contract, and cannot operate to create new contractual rights. Thus, New York courts hold that an implied covenant of good faith and fair dealing does not apply to a party's express right to terminate a contract. IFC’s proposed implied covenant is directly contradicted by the termination clause of the LOI, and would insert a new term into the LOI requiring KWTE both to continue negotiations against its will and to enter into a sales contract with IFC. Second, IFC seeks contract expectation damages for an alleged breach of an implied covenant to negotiate in good faith. IFC essentially argues that, because KWTE exercised its right under the LOI to end negotiations for reasons IFC does not like, IFC is entitled to the full benefits of a non-existent contract that KWTE had no obligation to negotiate or execute, and to which KWTE never agreed. That is nonsensical, contrary to the explicit written terms of the LOI, and unsupported by basic principles of contract law. It is axiomatic that a party cannot Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 10 of 52 4 receive expectation damages for failed negotiations that resulted in no contract, as that would confer the benefit of a bargain that was not reached. Third, perhaps in recognition of the fundamental weakness of its implied covenant claim, and in its continuing quest to create a claim for full contract damages, IFC claims alternatively that the parties in fact entered into a contract in June 2005. Based on the Complaint allegations as well as the documents submitted by IFC as part of its Complaint, IFC’s claim that the parties entered into a contract is legally unsupportable and should be dismissed now. IFC submits several e-mails from May-June 2005, and refers to a September 2005 “Term Sheet” prepared by IFC, to support its claim that the parties agreed on specific price and quantity terms in June 2005. In fact, these documents demonstrate on their face that no contract was formed as a matter of law. There is no offer and acceptance of common price or quantity terms; to the contrary, according to IFC’s documents, IFC rejected KWTE’s proposal and counter- offered different price and quantity terms. In fact, the parties never reached a final agreement on the terms of a contract, but the salient point here is that the documents offered by IFC as forming a contract fail to do so as a matter of law. Moreover, the September 2005 Term Sheet touted by IFC as setting forth terms agreed to by IFC and KWTE conclusively shows that the parties did not form a contract. As with the LOI, IFC did not attach a copy of the Term Sheet to its Complaint. KWTE does supply the Term Sheet to the Court as Exhibit B hereto. On the first page, at the very top, in bold, capital letters, the Term Sheet states that (1) the Term Sheet did not constitute an offer or commitment by IFC or KWTE; (2) neither party would have any liability under the Term Sheet; (3) the Term Sheet did not purport to set forth final, agreed terms, but rather was “intended to serve only as a basis for discussion of the major terms that would apply” to a completed contract, if any; (4) IFC had no authority to enter into any contract absent approval of its management and the Dutch government; (5) IFC had no authority to enter into any contract until the “the execution of final documentation;” and (6) all “figures, terms and conditions” set forth in the Term Sheet” were “subject to change.” Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 11 of 52 5 IFC thus made clear in its Term Sheet that there was no contract as of September 2005. Obviously, therefore, there could not have been a binding contract between the parties in June 2005. That no contract existed between the parties is further confirmed by IFC’s Complaint allegations that, for over a year after the May-June 2005 e-mail exchange and the September 2005 Term Sheet, IFC itself repeatedly offered different price and quantity terms, and changed other material terms of its proposal. Fourth, IFC correctly claims that it is due the termination payment specified in the LOI. Indeed, that is all that is due to IFC. To date, IFC has refused KWTE’s repeated offers to pay the full termination fee, and in fact has refused to accept that fact that the LOI was terminated. KWTE stands ready at any time to make the required payment to IFC. Fifth, in a final attempt to create a contract where none exists, IFC argues that the LOI’s standard indemnification clause, in which KWTE agreed to indemnify IFC against certain third- party claims, is really a guarantee by KWTE to reimburse IFC for any losses claimed by IFC from KWTE’s termination of the LOI – including, according to IFC, full contract expectation damages to IFC. That is a fundamental mischaracterization of the LOI and of the law of indemnity. B. The Court Should Not Accept Complaint Allegations That Are Contradicted By Materials Attached To The Complaint Or Incorporated By Reference It is important to note at the outset that, although, for purposes of this motion, the Court is generally constrained to accept the allegations of the Complaint, the Court should not accept allegations that are contradicted by written materials properly before the court. Alusit, Ltd. v. Aluglas of Pa., No. 89 Civ. 3849 (CSH), 1990 U.S. Dist. LEXIS 16755, *32 (S.D.N.Y. Dec. 4, 1990), citing 5 C. WRIGHT & A. MILLER, FEDERAL PRACTICE AND PROCEDURE (2D ED. 1990), § 1327 at 766-67 (“The court is not bound to accept the pleader's allegations as to the effect of the exhibit, but can independently examine the document and form its own conclusions as to the proper construction and meaning to be given the material. When a disparity exists between the Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 12 of 52 6 written instruments annexed to the pleadings and the allegations in the pleadings, the written instrument will control”); see also Madonna v. U.S., 878 F.2d 62, 65-66 (2d Cir. 1989). This is an important qualification to the general rule that a court must accept as true all well-pleaded factual allegations in the complaint and draw all reasonable inferences in favor of the non- moving party. Id. at 65. Materials that a court may properly consider on a motion to dismiss include any written instrument attached to the complaint as an exhibit or any statements or documents incorporated in it by reference, and documents that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit. Rothman v. Gregor, 220 F.3d 81, 88-89 (2d Cir. 2000), citing Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989); Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991), Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991), cert. denied, 503 U.S. 960 (1992) . The invalidity of IFC’s claims is demonstrated by reference to the Complaint allegations, the documents attached by IFC to its Complaint, and by documents referred to by IFC in the Complaint. The Complaint allegations and supporting documents demonstrate as a matter of law that IFC has no valid claim against KWTE. IFC’s complaint should be dismissed. STATEMENT OF THE RELEVANT ALLEGATIONS A. Allegations Regarding KWTE’s Right To Terminate The LOI The Complaint alleges that KWTE is engaged in a project located in Thailand that “involves the construction, ownership, operation, and financing of a methane recovery and waste-to-energy project to treat wastewater and capture biogas for ten years, to be delivered as a substitute for consumption of heavy fuel oil, and to be converted into electricity through combustion (thereby displacing grid-supplied electricity).” (Complaint ¶ 13.) The Complaint alleges that IFC, acting as trustee for the IFC-Netherlands Carbon Facility ("INCaF"), held discussions with KWTE “about the possibility of purchasing the CERs expected to be generated” by the KWTE project. (Complaint ¶ 14.) Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 13 of 52 7 IFC alleges that it and KWTE executed an LOI on May 20, 2004. (Complaint ¶ 15.) According to IFC, “the purpose of the LOI was to negotiate the execution of an Emission Reduction Purchase Agreement (“ERPA”) … that “would govern the sale of certified emission reductions (“CERs”), commonly called ‘carbon credits,’ from Korat to the government of the Netherlands….” (Complaint ¶ 2.) 1. The LOI Explicitly Allows KWTE To Terminate The LOI At Any Time For Any Reason As noted, IFC did not attach the LOI to its Complaint. That is a glaring omission. It is attached hereto as Exhibit A. The LOI states explicitly that neither party had any obligation to enter into a sales contract, and that either party could terminate the LOI at will: 7. Termination (a) Methods of Termination This Letter Agreement (i) may be terminated by the Project Company or the Trustee, with or without cause, by giving at least fifteen (15) days' prior written notice to the other party; …. (LOI, Exhibit A at 3.) Under this provision, KWTE thus had the right to terminate at any time and for any reason, or no reason at all, simply by giving fifteen-days notice. 2. The LOI Explicitly States That All Liabilities By Either Party Under Or Arising From The LOI Are Extinguished If KWTE Terminates The LOI Moreover, the LOI states that, once a party terminates the LOI, neither party has any obligation to the other, nor has any liability arising from the LOI, except for a termination fee in the case of KWTE: (b) Consequences of Termination Any such termination shall release [KWTE] and [IFC] from all of their respective obligations under this Letter Agreement, including any liabilities arising therefrom, except as provided in Paragraph 7. (LOI, Exhibit A, at 3.) Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 14 of 52 8 3. The LOI Provides For A Specific Termination Fee As IFC’s Sole Recovery If KWTE Terminates The LOI Paragraphs 7(d) and (g) of the LOI specify the payments to be made if KWTE terminates the LOI: d. Termination by Project Company Subject to the provisions of Paragraphs 7(f) and (g) below, if the Project Company terminates this Letter Agreement or otherwise fails to fulfill its obligations under this Letter Agreement such as to effectively terminate this Letter Agreement prior to concluding an ERPA with the Trustee then the Project Company agrees to reimburse the Trustee: $25,000 if the termination takes place before the due diligence has started; or up to an amount of $100,000 for Appraisal Expenses incurred (whether or not invoiced) in connection with the Services in addition to an amount of $25,000, if the termination takes place after the Project Concept Note (“PCN”) has been approved by VROM as specified in Schedule 1 (b) and after the due diligence by the Trustee has commenced…. g. Sale to Third Party If (i) (a) the Project Company terminates this Letter Agreement or (b) this Letter Agreement automatically terminates pursuant to Paragraph 7(a)(ii)(y) and (ii) within one year of termination or the effective date of such termination of this Letter Agreement, as the case may be, the Project Company enters into an agreement or agreements with another buyer or buyers to sell Emission Reductions generated from or caused directly and/or indirectly by the Project or any configuration or reconfiguration of the Project, then the Project Company agrees to provide INCaF with a certified, true and complete copy of such agreement or agreements with such other buyer or buyers and to reimburse the Trustee the amount specified in Paragraph 7(d) plus $300,000. (LOI, Exhibit A, at 4, 5.) Thus, under 7(d), if KWTE terminates the LOI, it must “reimburse” IFC either $25,000 or $125,000, including $100,000 constituting IFC’s “Appraisal Expenses,” depending on the date of termination in relation to certain events. If KWTE then sells CERs from the project to a third party within one year of terminating the LOI, KWTE must “reimburse” IFC an additional $300,000. These reimbursement amounts are due regardless of IFC’s actual expenses, and even if IFC provides no invoices supporting its expenses. (LOI, Exhibit A, at 4 ¶ 7(d).) Under Paragraph 7(b), KWTE has no liability to IFC beyond these payments. Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 15 of 52 9 B. Allegations Regarding KWTE’s Termination Of The LOI KWTE terminated the LOI by letter dated March 2, 2007. (May 17, 2007 Letter from Danish to DeMarco, attached to IFC’s Complaint as Exhibit A.) The termination letter invoked KWTE’s right to terminate under Paragraph 7(a)(i) of the LOI, and offered to make the required termination payment: Under the terms of the LOI, termination is effective in 15 days. KWTE understands that its termination of the LOI pursuant to paragraph 7(a)(i) triggers a payment obligation under paragraph 7(d). KWTE will await your invoice. KWTE further understands that, pursuant to paragraph 7(d), certain other provisions of the LOI will survive termination and shall remain in full force and effect. (Id.) C. Allegations That KWTE And IFC Formed A Contract In June 2005 To Sell And Purchase CERs The Complaint alleges that an exchange of e-mails in May-June 2005 formed a binding contract between KWTE and IFC in June 2005 to buy and sell CERs, and that the parties agreed upon a “final Term Sheet,” dated September 21, 2005, setting forth terms agreed to in June 2005. (Complaint ¶¶ 18-19.) These allegations are completely contradicted by the documents supplied by IFC, and are entitled to no deference by this Court. IFC alleges that, “[o]n May 26, 2005, Korat proposed certain terms in anticipation of an ERPA, including sale of one and one-half million CERs to IFC for a price of EUR 4.75.” IFC further alleges that, “on June 10, 2005, IFC agreed with Korat on a price/quantity combination of EUR 4.75 for one and three-quarter million CERs….” and accepted Korat's other terms on June 10, 2005.” (Complaint ¶ 18.) IFC attaches e-mails between KWTE and IFC on May 26 and June 10, 2005 as Exhibit D to its Complaint, and alleges that these e-mails “evidence[] … these discussions and the June agreement….” (May 26 and June 10 E-mails, attached to IFC’s Complaint as Exhibit D.) IFC’s characterization of the May-June e-mails is simply wrong. KWTE’s May 26 proposal was to sell up to $1.5 million tons of CERs at a price of 4.75 euros per ton, but IFC Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 16 of 52 10 rejected that proposal. Instead, IFC made a counter-proposal to increase the quantity from 1.5 million to 1.75 million tons, and lower the price from 4.75 to 4.25 euros per ton. KWTE’s e- mail in response did not accept the IFC counter-proposal. It merely stated that the counter- proposal would be referred to KWTE’s Board. IFC’s submissions do not indicate that the parties ever reached a final agreement on the terms of a contract. Similarly, IFC’s allegation that the Term Sheet sets forth terms that were agreed to on June 10, 2005 is contradicted by the Term Sheet itself. The Term Sheet states that it was “intended to serve only as a basis for discussion of the major terms that would apply” to a contract. It explicitly provided that all “figures, terms and conditions” set forth in the Term Sheet” were “subject to change.” Perhaps most notably, the Term Sheet states that it “does not constitute an offer or a commitment by IFC or KWTE, and no party shall have any liability hereunder.” (Term Sheet, Exhibit B, at 1.) 1. No Offer Was Accepted In The May-June 2005 E-mail Exchange Cited by IFC as Forming a Contract Again, the May-June 2005 e-mails that IFC claims reflect an agreement as to price and quantity terms are at IFC’s Exhibit B. They utterly contradict IFC’s allegation that the parties agreed on contract terms on June 10, 2005: a. On May 26, 2005, Korat sent an e-mail to IFC setting forth “general terms” of a KWTE proposal. On the critical terms of price and quantity, Korat proposed to sell up to $1.5 million tons of CERs at a price of 4.75 euros per ton beginning in 2006. (May 26, 2005 E-mail from Locklin to Cook, Complaint Exhibit D at 2.) b. The next e-mail, dated June 10, 2005, memorializes a conversation between IFC and KWTE regarding KWTE’s proposal. IFC did not accept the price or quantity terms of the Korat proposal. Instead, IFC made a counter-proposal to increase the quantity from 1.5 million Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 17 of 52 11 to 1.75 million tons, and lower the price from 4.75 to 4.25 euros per ton. (June 10, 2005 12:24 p.m. E-mail from Locklin to Cook, Complaint Exhibit D at 1.) c. The June 10, 2005 e-mail from KWTE to IFC did not accept IFC’s proposal. To the contrary, the e-mail explicitly states that Locklin will “convey [IFC’s proposal] to the rest of the [KWTE] Board on a call we have already scheduled over the weekend, and hopefully revert with a formal response from our side on Monday.” (Id.) d. The final e-mail, also on June 10, came from IFC to KWTE. IFC alleges that IFC agreed with Korat on June 10 on a price/quantity combination of EUR 4.75 for one and three-quarter million CERs and accepted Korat's other terms. (Complaint ¶ 18.) This e-mail never states that the parties had agreed on anything. It states merely that IFC would agree to a deal based on IFC’s counter-proposal, not on KWTE’s proposal. e. IFC also explicitly acknowledged in its June 10, 2005 e-mail that going forward based on IFC’s terms would be dependent on the approval of the Korat Board. (See June 10, 2005 2:22 p.m. E-Mail from Cook to Locklin, Complaint Exhibit D at 1 (“Provided the Board agrees, I would like to move forward quickly.”)) Plaintiffs’ own complaint and exhibits thus confirm that there was never a meeting of the minds as to any terms of a final agreement, including the threshold issues of price and quantity. More specifically, these submissions cannot support IFC’s conclusory allegation that the parties entered into a contract in June 2005. Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 18 of 52 12 2. The September 2005 Term Sheet States Explicitly That There Was No Contract Between The Parties As Of September 2005 IFC further alleges that the parties agreed upon a “final Term Sheet” dated September 21, 2005: On September 21, 2005, the final Term Sheet, which now reflected the new price and quantity combination for CERs that IFC and Korat had agreed to in June, was agreed upon as well. IFC hence proceeded with drafting the ERPA. The parties envisioned that the ERPA would be completed by the end of the year in accordance with the terms reflected in the Term Sheet. On October 13, 2005, IFC sent a draft ERPA to Korat that reflected the new price and quantity combination, as well as all other terms contained in the final Term Sheet. (Complaint ¶ 19.) This is flatly contradicted by the plain language of the Term Sheet itself. It is curious, at a minimum, that IFC did not attach a copy of the Term Sheet to its Complaint. Had it done so, this Court would have immediately seen that, on the first page, at the very top, in bold, capital letters, the Term Sheet expressly states that there is no contract between the parties: IMPORTANT DISCLAIMER: THIS TERM SHEET IS NOT A COMPLETE DESCRIPTION OF A PROPOSED EMISSION REDUCTION PURCHASE AGREEMENT CURRENTLY BEING DISCUSSED BY INTERNATIONAL FINANCE CORPORATION ("IFC") AND KORAT WASTE-TO-ENERGY COMPANY LIMITED ("KWTE") AND DOES NOT CONSTITUTE AN OFFER OR A COMMITMENT BY IFC OR KWTE, AND NO PARTY SHALL HAVE ANY LIABILITY HEREUNDER. IT IS INTENDED TO SERVE ONLY AS A BASIS FOR DISCUSSION OF THE MAJOR TERMS THAT WOULD APPLY TO THE EMISSION REDUCTION PURCHASE AGREEMENT. IFC'S AUTHORITY TO ENTER INTO THE EMISSION REDUCTION PURCHASE AGREEMENT IS CONTINGENT ON THE APPROVAL OF IFC'S MANAGEMENT, THE APPROVAL OF THE NETHERLANDS, ACTING THROUGH ITS MINISTRY OF HOUSING, SPATIAL PLANNING AND THE ENVIRONMENT, AND THE EXECUTION OF FINAL DOCUMENTATION IN FORM AND SUBSTANCE SATISFACTORY TO IFC. THIS TERM SHEET IS NOT TO BE RELEASED TO ANY PARTY OTHER THAN KWTE WITHOUT THE PRIOR WRITTEN CONSENT OF IFC. ALL FIGURES, TERMS AND CONDITIONS STATED BELOW ARE SUBJECT TO CHANGE. (Sept. 2005 Term Sheet, Exhibit B, at 1.) The Term Sheet thus confirms that: Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 19 of 52 13 • The Term Sheet did not constitute an offer or commitment by IFC or KWTE; • Neither party would have any liability under the Term Sheet; • The Term Sheet did not purport to set forth final, agreed terms, but rather was “intended to serve only as a basis for discussion of the major terms that would apply” to a completed contract, if any; • IFC had no authority to enter into any contract absent approval of its management and the Dutch government; • IFC had no authority to enter into any contract until the “the execution of final documentation;” and. • All “figures, terms and conditions” set forth in the Term Sheet” were “subject to change.” The Term Sheet repeats what was made clear by the LOI: either party could terminate negotiations and walk away. If there was no contract as of September 2005, as the Term Sheet states, there could not have been a contract as of June 2005. IFC’s decision not to attach the Term Sheet with its Complaint cannot change that. 3. IFC Itself Continued To Negotiate And Change The Terms Of Its Offers Long After June 2005 According to the Complaint, the material terms of price and quantity continued to be negotiated for over a year after the May-June 2006 e-Mail Exchange. Specifically, the Complaint alleges that IFC offered different price and quantity terms, and changed other material terms of its May 2005 proposal, in October 2006, or over a year after the parties had supposedly agreed to a contract in June 2005: IFC discussed the following revised terms during a meeting with Korat representatives on October 17, 2006: (a) a higher price for the CERs of EUR 7.25; (b) an advance by IFC of certain of Korat's legal expenses, which it would recoup only if the ERPA was executed; (c) an agreement to purchase an additional 250,000 CERs after 2012 at the same price of EUR 7.25 per CER; (d) assistance in obtaining approval from the Thai government; and (e) assistance with the sale of verified emission reductions if Korat's project was not registered in time to qualify for CERs generated prior to registration. Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 20 of 52 14 (Complaint ¶ 27.) This allegation of a new offer in October 2006 is inconsistent with the notion that a binding agreement was reached in June 10. IFC cannot contradict its own document that conclusively states that no agreement existed. ARGUMENT I. PLAINTIFF’S CLAIM ALLEGING LIABILITY FOR BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING IS INVALID AS A MATTER OF LAW Count I of the Complaint alleges that KWTE breached an implied covenant of good faith and fair dealing in its negotiations with KWTE. (Complaint ¶¶ 38-45.) IFC does not challenge, or even mention, that the LOI states explicitly that KWTE could terminate the LOI at any time, and that KWTE had no obligation whatsoever to enter into a contract with IFC. IFC claims instead that KWTE “failed and refused, without legal cause or justification, to negotiate with IFC in good faith to complete the proposed ERPA” and that KWTE “failed to use its best efforts to achieve the goal of the LOI, which was the execution of an ERPA between Korat and IFC.” (Complaint ¶ 42.) Count I is invalid as a matter of law. Under New York law, an implied term, including an implied covenant of good faith and fair dealing, must be consistent with the written, explicit provisions of the contract. The written termination provision of the LOI gives KWTE the right to end negotiations with IFC and terminate the LOI at any time and for any reason. IFC cannot use an implied covenant to impose a new contractual duty on KWTE to negotiate with IFC. Although New York contracts contain an implied covenant of good faith and fair dealing, “such a covenant is implied only where the implied term ‘is consistent with other mutually agreed upon terms in the contract.’” Metro. Life Ins. Co. v. RJR Nabisco, Inc., 716 F. Supp. 1504, 1519 (S.D.N.Y. 1989), quoting Sabetay v. Sterling Drug, Inc., 69 N.Y.2d 329, 335, 514 N.Y.S.2d 209, 212 (1987). “In other words, the implied covenant will only aid and further the explicit terms of the agreement and will never impose an obligation ‘which would be Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 21 of 52 15 inconsistent with other terms of the contractual relationship.’” Id., quoting Sabetay, 69 N.Y.2d at 335, 514 N.Y.S.2d at 212. Consistent with this rule, New York courts hold that the implied covenant of good faith and fair dealing “does not apply to a party's express right to terminate a contract.” Burdett Radiology Consultants, P.C. v. Samaritan Hosp., 158 A.D.2d 132, 13, 557 N.Y.S.2d 988, 991 (3d Dep’t 1990), citing Sabetay, 69 N.Y.2d at 335-336; see also Murphy v. American Home Prods. Corp., 58 N.Y.2d 293, 304-05, 461 N.Y.S.2d 232, 237-38 (1983). Burdett is instructive. There, plaintiffs entered into a contract with defendants pursuant to which plaintiffs were to provide “all radiological services” for defendant. The contract contained a clause allowing defendants to unilaterally terminate the contract upon 180 days’ written notice. Plaintiffs alleged that defendants acted outside the contract in hiring plaintiffs’ former employee to provide radiological services to defendants. Defendants subsequently exercised their option to terminate. Plaintiffs then sued, alleging inter alia that defendants had breached the covenant of good faith and fair dealing in performing the contract.” Burdett, 158 A.D.2d at 134-35, 557 N.Y.S.2d at 989. The Court rejected this claim, holding that “[s]uch an implied covenant … does not apply to a party's express right to terminate a contract.” 158 A.D.2d at 136, 557 N.Y.S.2d at 991, citing Sabetay, 69 N.Y.2d at 335-336. Other New York courts have applied the principle that no implied covenant of good faith and fair dealing can be implied if the contract can be terminated at will. For example, in Sabetay v. Sterling Drug, Inc., supra, the plaintiff asserted he was wrongfully discharged from at-will employment because he refused to participate in unlawful activities and because he had reported the alleged illegalities to his supervisor. Plaintiff claimed that his discharge breached the implied covenant of good faith and fair dealing. Sabetay, 69 N.Y.2d at 331-33, 514 N.Y.S.2d at 210-11. The Sabetay court held that there was no such covenant because “‘[n]o obligation can be implied … which would be inconsistent with other terms of the contractual relationship … in which the law accords the employer an unfettered right to terminate employment at any time.’” 69 N.Y.2d at 335, 514 N.Y.S.2d at 212, quoting Murphy, 58 N.Y.2d at 304-05. Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 22 of 52 16 Sabetay followed the holding of the New York Court of Appeals in Murphy v. American Home Prods. Corp., supra, where the plaintiff claimed that termination of his at-will employment contract for alleged whistleblower activity breached the implied duty of good faith and fair dealing. 58 N.Y.2d at 304. The Court of Appeals held that the implied covenant of good faith and fair dealing did not apply because it would be inconsistent with the employer’s right to terminate. Absent an express limitation on the right to terminate, no implied covenant could impair that right: Thus, in the case now before us, plaintiff's employment was at will, a relationship in which the law accords the employer an unfettered right to terminate the employment at any time. In the context of such an employment it would be incongruous to say that an inference may be drawn that the employer impliedly agreed to a provision which would be destructive of his right of termination. The parties may by express agreement limit or restrict the employer's right of discharge, but to imply such a limitation from the existence of an unrestricted right would be internally inconsistent. Murphy, 58 N.Y.2d at 304-05; see also Sabetay, 69 N.Y.2d at 336 (“[d]ispositive in Murphy was plaintiff's failure to establish an express limitation on his employer's right of discharge”). The New York rule barring application of an implied covenant of good faith and fair dealing to the termination provision of a contract applies with full force here. Paragraph 7 of the LOI unambiguously allows KWTE to terminate the LOI. KWTE’s right to terminate is unlimited, and is subject only to payment of a termination fee. KWTE’s express right to terminate the KWTE cannot be defeated or impinged by resort to an implied covenant. IFC is clearly dissatisfied with KWTE’s decision to end negotiations. But KWTE had the express contractual right to do so, and IFC cannot sustain a viable claim to the contrary by resort to an implied covenant. Count I should therefore be dismissed. II. IFC’S CLAIM FOR CONTRACT EXPECTATION DAMAGES BASED ON THE ALLEGED BREACH OF AN IMPLIED COVENANT IN A NON-BINDING LETTER OF INTENT SHOULD BE DISMISSED Even if IFC could circumvent New York law and rewrite the LOI to include an implied obligation to continue negotiations with IFC, IFC’s damages claim is nevertheless invalid as a Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 23 of 52 17 matter of law. IFC alleges that, based solely on KWTE’s termination of the LOI and its alleged refusal to further negotiate with IFC, IFC is entitled to “replacement costs for the CERs of not less than $18.3 million.” (Complaint at 16.) IFC’s claim is for full contract expectation damages as if the parties had ultimately agreed to a final contract. New York law does not allow contract expectation damages based on failed negotiations. Instead, such damages are available only if the parties actually enter into a contract and that contract is breached. The only damages even possibly available for failed negotiations are actual, out-of-pocket reliance expenses, but the LOI reduces any such damages to a fixed termination fee and expressly releases all other liability. A. Expectation Damages Are Not Available For An Alleged Breach of the Implied Covenant of Good Faith and Fair Dealing Under New York law, a party can not recover expectation damages if no contract is reached and the parties had no obligation to enter into a contract. Expectation damages are intended to put the party aggrieved by a breach of contract in as good a position as it would have been had the contract been fully performed. E.g., McKinley Allsopp, Inc. v. Jetborne Int'l, Inc., 1990 U.S. Dist. LEXIS 12405, *21-23 (S.D.N.Y. 1990), citing, e.g., Kenford Co. v. County of Erie, 67 N.Y.2d 257, 493 N.Y.S.2d 131, 132 (1986). “[A]n award based on [the expectation interest] would give the injured party the ‘benefit of the bargain’ that was not reached. But if no agreement was reached and … it cannot even be known what agreement would have been reached, there is no way to measure the lost expectation.’” Goodstein Constr. Corp. v. N. Y., 80 N.Y.2d 366, 373-374, 590 N.Y.S.2d 425, 429 (1992), quoting 1 FARNSWORTH, CONTRACTS § 3.26a, at 314. This principle is routinely applied in the very similar contexts of promissory estoppel claims and claims for lost profits. There, a party’s “alleged failure to bargain in good faith is not a but-for cause of [plaintiff's] lost profits, since even with the best faith on both sides the deal might not have been closed [and] attributing [plaintiff's] lost profits to [defendant's] bad faith may be speculative at best.” Arcadian Phosphates v Arcadian Corp., 884 F.2d 69, 74, n. 2 (2d Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 24 of 52 18 Cir. 1989) (promissory estoppel); see also Matterhorn Group, Inc. v. SMH (U.S.) Inc. (In re Matterhorn Group, Inc.), A.P. No. 97-8273 (SMB), 2002 Bankr. LEXIS 1275, *51-52 (Bankr. S.D.N.Y. 2002) (plaintiff cannot recover lost profits for breach of a letter of intent, but only out- of-pocket expenses); Goodstein, 80 N.Y.2d at 373-74, 590 N.Y.S.2d at 429 (lost profits). In Goodstein, the City of New York terminated letter agreements that gave plaintiff the exclusive right to negotiate the terms and conditions of a contemplated contract to develop two sites. The City “retain[ed] the right to terminate negotiations at any time” in which case the City could “negotiate with any other applicant or non-applicant,” just as it could if it “decided not to extend the negotiation period.” 80 N.Y.2d at 368-69, 590 N.Y.S.2d at 426. The City subsequently notified plaintiff that it had been “dedesignated” as exclusive negotiator for the two sites. No development contract was ever concluded. Plaintiffs brought a lawsuit claiming, inter alia, breach of the City’s obligation to act in good faith under the letter agreements, and sought $800 million in damages, all but $1 million of which represented loss of anticipated profits. 80 N.Y.S.2d at 369-70, 590 N.Y.S.2d at 426-27. The Court of Appeals held that plaintiffs could not recover lost profit expectation damages even if the City had breached the covenant of good faith and fair dealing: Contract damages are ordinarily intended to give the injured party the benefit of the bargain by awarding a sum of money that will, to the extent possible, put that party in as good a position as it would have been in had the contract been performed (see, Restatement [Second] of Contracts § 347, comment a; § 344). Here, the City's sole obligation under the letters of January 29, February 1, and June 2, 1982 was to negotiate in good faith. The City was neither bound to agree to an LDA nor to continue the negotiating process. To allow the profits that plaintiff might have made under the prospective LDA as the damages for breach of the exclusive negotiating agreements would be basing damages not on the exclusive negotiating agreements but on the prospective terms of a nonexistent contract which the City was fully at liberty to reject. It would, in effect, be transforming an agreement to negotiate for a contract into the contract itself. 80 N.Y.S.2d at 373, 590 N.Y.S.2d at 429. Here, too, allowing contract expectation damages based on an alleged breach of an implied covenant of good faith and fair dealing would “be transforming an agreement to Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 25 of 52 19 negotiate for a contract into the contract itself.” For the reasons set forth above, the claim for an alleged breach of an implied covenant of good faith and fair dealing should be dismissed in any event. If this claim is allowed to go forward, the claim for expectation damages should be dismissed. B. IFC Cannot Recover More Than The LOI’s Termination Fee For Any Claim Based On KWTE’s Termination Of The LOI Once the claim for expectation damages is stripped away, the only conceivable damages claim is a claim for out-of-pocket reliance damages. Here, however, the computation of IFC’s allowable expenses is expressly set forth in the LOI. As described above, under 7(d), if KWTE terminates the LOI, IFC receives a reimbursement of either $25,000 or $125,000, including $100,000 constituting IFC’s “Appraisal Expenses.” If KWTE then sells CERs from the project to a third party within one year of terminating the LOI, KWTE must pay IFC an additional $300,000. The LOI further provides that these amounts are the sole liability that can be incurred by KWTE for termination: “Any such termination shall release [KWTE] and [IFC] from all of their respective obligations under this Letter Agreement, including any liabilities arising therefrom, except as provided in Paragraph 7.” (LOI, Exhibit A, at 3.) As noted in Section IV below, KWTE has offered to make all payments required by Paragraph 7. IFC has no claim for any additional sum. III. PLAINTIFF’S BREACH OF CONTRACT CLAIM IS INVALID AS A MATTER OF LAW To establish a claim for breach of contract under New York law, a plaintiff must prove: (1) that an agreement existed between it and defendant; (2) what the respective obligations of the parties were; (3) that the plaintiff performed its obligations under the agreement; (4) that the defendant breached the agreement by failing to perform its obligations; and (5) that the plaintiff suffered damages as a result of the breach. E.g., Paper Corp. of the U.S. v. Schoeller Technical Papers, Inc., 807 F. Supp. 337, 341 (S.D.N.Y. 1992). Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 26 of 52 20 “Under New York law, no contract exists, nor may one be implied, where parties do not agree to its material terms.” Tower Int'l, Inc. v. Caledonian Airways, Ltd., CV-93-1122, 1996 U.S. Dist. LEXIS 20311, at *12 (E.D.N.Y. Jan. 25, 1996), citing Cyberchron Corp. v. Calldata Sys. Dev., 831 F. Supp. 94, 108 (E.D.N.Y. 1993), vacated in part on other grounds, 47 F.3d 39 (2d Cir. 1995). Moreover, if one party makes a counteroffer in response to an offer, the initial offer is thereby rejected and no contract is formed. RESTATEMENT (SECOND) OF CONTRACTS § 39(1); Clark Oil Trading Co. v. Amerada Hess Trading Co., 90 Civ. 1856 (PKL), 1993 U.S. Dist. LEXIS 10801, *14-15 (Aug. 4, 1993); Trifiro v. N.Y. Life Ins. Co., 845 F.2d 30, 32 (1st Cir. 1988); John's Insulation, Inc. v. Siska Constr. Co., 671 F. Supp. 289, 292 (S.D.N.Y. 1987). Pursuant to these basic contract principles, the e-mail exchange In May-June 2005 cited by IFC does not indicate in any way that the parties reached final agreement as to the material terms of a contract. To the contrary, if KWTE’s May 26 proposal is construed as an offer, IFC’s June 10 counter-offer terminated KWTE’s offer as a matter of law. Moreover, as discussed above, IFC’s Complaint further confirms the absence of a June 2005 contract by proposing new price and quantity terms long after June 2005, which likewise would have voided any previous offers. Thus, according to IFC’s own submissions, there is no June 2005 contract. If there were any remaining doubt that the Court should disregard IFC’s allegations that the parties entered into a contract on June 10, 2005, that doubt should be fully dispelled by IFC’s September 2005 Term Sheet. That document could not be more clear: There was no agreement as to any terms of a contract as of September 2005. IFC said that three months after the date on which IFC now claims the parties supposedly formed a contract. IFC’s Complaint and exhibits establish that there was no binding contract between the parties, and certainly establish that none existed in June 2005. Plaintiffs’ allegations to the contrary are contradicted by IFC’s own documents, and should be rejected. Count II should be dismissed. Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 27 of 52 21 IV. PLAINTIFF HAS REFUSED TO ACCEPT THE LOI TERMINATION PAYMENT Count III of the Complaint alleges that, having terminated the LOI, KWTE “is obligated to pay IFC the penalties indicated in Paragraphs 7(d) and 7(g) of the LOI.” (Complaint ¶ 55.) As noted, KWTE has acknowledged that it owes IFC a termination fee under the LOI. IFC has refused to invoice or accept KWTE’s payment. IFC’s refusal to accept the termination fee does not state a valid claim against KWTE. KWTE nevertheless makes clear that it stands ready to make the required payment at any time upon receipt of an invoice from IFC. V. PLAINTIFF’S CLAIM FOR INDEMNIFICATION IS INVALID AS A MATTER OF LAW Count IV of the Complaint alleges that the indemnification clause at Paragraph 12 of the LOI – which is clearly a standard indemnity against claims by third parties – somehow requires KWTE to pay IFC its “fees and expenses incurred by IFC in connection with the negotiations under the LOI, as well as fees and expenses incurred in this litigation.” (Complaint ¶ 59.) Remarkably, IFC seeks full contract expectation damages of $18,600,000 under this third-party indemnity clause. (Complaint at 17.) There is no support whatsoever for this claim. IFC uses selective editing to convert this agreement to indemnify IFC against claims by third parties into a guarantee by KWTE to reimburse IFC for any losses incurred in connection with the LOI. IFC alleges in its Complaint: “This indemnification clause requires KWTE to reimburse IFC for any expenses, including legal expenses, incurred in connection with activities contemplated under the [LOI] ‘or with the investigation or defense thereof.” The complete indemnity clause, however, clearly applies to claims against IFC, not claims by IFC against KWTE: 12. Indemnity The Project Company agrees to indemnify and hold IFC, INCaF and the Trustee harmless against any losses, claims, damages or liabilities to which the Trustee, IFC, its governors, directors, employees, agents, consultants or legal Counsel (each, an “Indemnified Party”) may become subject in connection with any Indemnified Party’s activities as contemplated under this Letter Agreement, Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 28 of 52 22 and to reimburse IFC, INCaF and the Trustee for any expenses, including any legal expenses, incurred by IFC, INCaF or the Trustee in connection therewith or with the investigation or defense thereof; provided however that the Project Company shall not be liable in respect of any such loss, claim, damage, or liability to the extent that such loss, cost, damage or liability resulted from such Indemnified Party’s gross negligence or willful misconduct. (LOI, Exhibit A, at 6; emphasis added.) Under New York law, such standard third-party indemnification clauses do not provide a basis to assert a first-party claim against a party to an agreement. Barry & Sons, Inc. v. Instinct Prods. LLC, 5 Misc. 3d 172, 180-83, 783 N.Y.S.2d 225, 232-34 (2004), affirmed on relevant grounds, 15 A.D.3d 62, 788 N.Y.S.2d 71 (1st Dep’t 2005). CONCLUSION For all the foregoing reasons, plaintiff’s Complaint should be dismissed and plaintiff’s demand for damages should be stricken. Respectfully submitted, /s/ August 6, 2007 Anthony F. King WALLACE KING DOMIKE & REISKIN, PLLC 1050 Thomas Jefferson Street, N.W. Washington, D.C. 20007 Telephone: 202.204.1000 Facsimile: 202.204.1001 Elkan Abramowitz (EA-3987) Thomas M. Keane (TK-6320) MORVILLO, ABRAMOWITZ, GRAND, IASON, ANELLO & BOHRER, P.C 565 Fifth Avenue New York, NY 10017 Telephone: (212) 880-9300 Facsimile: (212) 856-9494 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 29 of 52 CERTIFICATE OF SERVICE I HEREBY CERTIFY that, on this 6th day of August 2007, 2001, true and copies of KWTE’s Motion to Dismiss the Complaint, the Memorandum in support thereof, and proposed Order were served via LexisNexis File & Serve on all counsel of record. /s/ Anthony F. King Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 30 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 31 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 32 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 33 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 34 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 35 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 36 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 37 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 38 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 39 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 40 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 41 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 42 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 43 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 44 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 45 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 46 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 47 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 48 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 49 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 50 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 51 of 52 Case 1:07-cv-05451-SHS-THK Document 13 Filed 08/06/2007 Page 52 of 52