A recent ruling by the United States District Court for the District of Massachusetts should cause all entities entering into engagement letters or other similar letters, including banks and other lenders, to carefully consider the language used in their standard form letters.

While the case, Janet Baker, et al. v. Goldman Sachs & Co, et al.1, arises out of an engagement letter entered into in connection with a merger transaction, the issues raised may apply to all engagement letters and other similar letters. In Baker, the plaintiffs were majority owners of a private company (the Company) that entered into an engagement letter with Goldman Sachs & Co. (Goldman), whereby Goldman agreed to act as a financial advisor in connection with a potential sale of the Company. The Company was subsequently merged into another entity, and the plaintiffs received stock in the surviving entity. When the surviving entity filed for bankruptcy and the plaintiffs’ stock became worthless, the plaintiffs sued the defendants for, among other things, breach of contract, breach of contract under a third party beneficiary theory, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty.

Goldman and certain of its affiliates, as defendants, filed a motion to dismiss all of the claims. The court refused in part to grant the defendants’ motion to dismiss after considering the terms of the engagement letter. The engagement letter was signed on behalf of the Company by its Chief Financial Officer and was addressed to three individuals: the Chief Financial Officer of the Company, Janet Baker (one of the directors of the Company and a plaintiff in the case) and Donald Waite (an individual who was an officer of a minority shareholder of the Company). Baker and Waite each signed the engagement letter with a signature block that provided that they were signing as stockholders agreeing only to one particular sentence that provided for a limitation on Goldman’s liability.

After considering the terms of the engagement letter, the court, applying both New York and Massachusetts law, determined that the engagement letter was a contract between the Company and Goldman only (and not the individuals who were addressees and signatories) and the court dismissed the breach of contract claim. With regard to the plaintiffs’ breach of contract claim as third party beneficiaries, however, the court refused to grant the motion to dismiss Janet Baker’s claims in part because of certain language in the engagement letter. Specifically, while noting that under New York law a person who is not a party to a contract must be an intended beneficiary of the contract (and not just an incidental beneficiary) in order to successfully bring such a third party claim, the court found that the language in the engagement letter that stated “any written or oral advice provided by Goldman Sachs in connection with our engagement is exclusively for the information of the Board of Directors and senior management of the Company” showed “an express intent on Goldman’s part to benefit members of [the Company’s] Board of Directors.” In addition, the court found that a provision in the engagement letter that stated “we will provide you with financial advice…” (emphasis added), rather than stating “we will provide the Company with financial advice…” was a reflection of Goldman’s understanding that others, not just the Company, would benefit from its advice. The court specifically determined that the use of the term “you” rather than “the Company” was “not a mere semantic quibble,” but rather an express reflection of Goldman’s intent. Therefore, at least in part because of such provisions, the court determined that Janet Baker had sufficiently alleged that she was a third party beneficiary of the engagement letter and could bring suit against Goldman.

Because it found that Janet Baker had sufficiently alleged such third party beneficiary status, the court also refused to dismiss her claim based on a breach of the implied covenant of good faith and fair dealing. It should be noted that while the court did refuse to dismiss such claims of Janet Baker, it did dismiss such claims of James Baker, finding that he was not a third party beneficiary of the engagement letter and noting that he was neither an addressee of the letter nor on the Board of Directors of the Company.

Janet Baker and James Baker each also claimed a breach of fiduciary duty. In its analysis of the defendants’ motion to dismiss such claims, the court distinguished precedent that was favorable to the defendants on the basis that the engagement letter did not explicitly state that Goldman was working only for the Company. The court observed that, to the contrary, as discussed above, there was language in the engagement letter stating that Goldman specifically undertook to provide advice to the Company’s senior management and Board of Directors. Such provision, and the lack of an explicit statement to the contrary, helped establish that there was a sufficient relationship between the plaintiffs and Goldman to give rise to a fiduciary duty. The court also specifically noted that the engagement letter did not contain an explicit waiver of any extra-contractual fiduciary duty. As a result, the court allowed such claims to continue and refused to grant the defendants’ motion to dismiss.

In conclusion, the ruling by the Baker court demonstrates that often overlooked language in engagement letters and other similar letters, including the seemingly inconsequential use of pronouns (such as “you”) that are otherwise undefined, as well as the way such letters are addressed and executed, may provide the potential for unintended liability to third parties. Therefore, in order to avoid such potential liability, all entities, including banks and other lenders, should review their form letters to ensure that the language used therein does not provide support for such lawsuits and, in addition, that such letters expressly disclaim any such liability.



1. Janet Baker, et al. v. Goldman Sachs & Co., et al., No. 09-10053-PBS (D. Mass Sept 15, 2009).