United States Court of Appeals for the Seventh Circuit - 7th Cir. 1989, 870 F.2d 423
In the 1989 case Empro Manufacturing Co. v. Ball-Co Manufacturing, Inc., the Seventh Circuit Court of Appeals supported the ruling in favor of the defendant, a seller of specialized valve parts. The plaintiff, a potential buyer, had sent a letter of intent to buy the defendant's assets, but they hadn't agreed on all the necessary terms yet. This case clarifies the difference between a letter of intent and a legally binding contract in the process of contract formation.
The court decided that the letter of intent was not a binding contract or option contract, but rather an unenforceable "agreement to agree". This was because one key term (the security for the plaintiff's note) was still up for negotiation. As a result, the plaintiff could not sue for performance or reliance damages since there was no mutual assent or consideration between them.
Additionally, the court dismissed the plaintiff's claim that the defendant acted in bad faith by talking to other potential buyers. This case demonstrates that a letter of intent doesn't automatically become an offer that can be accepted just by using or relying on it. Instead, further communication or negotiation may be required to create a contract. It also highlights that courts won't enforce agreements missing crucial elements like mutual assent or consideration.
The case involves a dispute between Ball-Co Manufacturing and Empro Manufacturing over the purchase of Ball-Co's assets. Empro sent a "letter of intent" proposing to purchase the assets for $2.4 million, subject to certain conditions. The deal fell apart over the issue of security for a 10-year promissory note. Empro argued that the letter of intent obligated Ball-Co to sell only to Empro and requested a temporary restraining order. However, the district judge dismissed the complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim on which relief may be granted. Empro argues that the binding effect of a document depends on the parties' objective intent, which must be determined solely from the language used when no ambiguity in its terms exists. The use of "subject to" does not automatically render a letter unenforceable, and letters of intent may not always be dispositive. The objective manifestations of intent, such as the text and structure of the letter, must be considered.
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