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United States Court of Appeals for the First Circuit - 736 F.3d 609
Tags: Contracts, Letters of intent, Good faith
tl;dr:
An inventor and a company signed a letter of intent (LOI) to negotiate using their best efforts on a purchase agreement. The transaction fell through and the inventor accused the company of making up "specious" reasons to make negotiations fail.Video Summary
Case Summary
In the 2013 case Butler v. Balolia, the First Circuit Court of Appeals overturned a decision in favor of a defendant inventor who had agreed to sell his technology to a plaintiff buyer through a letter of intent but hadn't finalized all the details. This case is significant because it highlights how promissory estoppel, a legal doctrine, can enforce a letter of intent during contract formation.
The court determined that the letter was not a binding contract or an option contract but a promise that led the defendant to make reasonable and harmful decisions based on that promise. The plaintiff was allowed to sue for performance or reliance damages due to evidence of agreement and consideration between both parties. The court also dismissed the plaintiff's accusation that the defendant acted dishonestly when he discovered issues with the technology and tried to cancel the letter of intent.
This case demonstrates that a letter of intent can be enforced even without full agreement on every detail, as it would be unfair for the person making the promise to avoid responsibility. Additionally, the case shows that the court will take into account the parties' expectations and actions when deciding if reliance is present and reasonable.
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The case involves a dispute over the enforceability of a letter of intent containing a choice-of-law provision that directed the application of Washington law. The district court erred in dismissing the case, ruling that the LOI was not an enforceable contract under Washington law. The plaintiff appealed, arguing that the LOI is a binding contract to negotiate that the defendant breached. The appellate court must apply Washington law to determine whether contracts to negotiate are enforceable. The federal court in Boston determined that the Washington Supreme Court would recognize a cause of action for breach of a contract to negotiate and vacated the district court's order of dismissal. The case was remanded for further proceedings. The Washington Supreme Court has not yet ruled on the enforceability of contracts to negotiate, but a recent intermediate appellate court decision enforced such a contract. The trend line seems to be moving in favor of recognizing a cause of action for breach of a contract to negotiate, and there is abundant support for the enforcement of contracts to negotiate in other sources that courts would find persuasive.
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