Bacou Dalloz USA, Inc. v. Continental Polymers, Inc.
62 Fed. R. Serv. 777, 344 F.3d 22, 2003 U.S. App. LEXIS 18506 (2003)
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Rule of Law:
A preliminary agreement to enter into a future contract is enforceable if its material terms are sufficiently definite to provide a basis for a remedy, such as when terms like price and quality are tied to objective, external benchmarks like prevailing market rates or products available from third parties.
Facts:
- Howard Leight, owner of Howard S. Leight & Associates, Inc. (HLI), engaged in sale negotiations with Bacou, a major customer, but initially rejected Bacou's offer as $10 million too low.
- To bridge the price gap, the parties discussed a proposal where Bacou would purchase its entire requirement of polyurethane prepolymer for five years from Howard Leight Enterprises (now Continental), a new company formed by HLI executives.
- On January 12, 1998, the parties signed a letter confirming Bacou would enter into a supply agreement with Continental.
- The letter specified that the price and quality of the prepolymer must be 'equivalent to that which is then used by HLI and available from third-party suppliers.'
- After the sale of HLI to Bacou was completed, Continental built a manufacturing plant and machinery in Mexico to produce the prepolymer.
- When Continental was ready to begin shipments in 1999, Bacou's existing supplier, Dow, significantly reduced its price for prepolymer to Bacou.
- Subsequent negotiations between Continental and Bacou for a final supply agreement failed due to disagreements over price, quality testing, purchase volume, and confidentiality terms.
- Continental never shipped any prepolymer to Bacou.
Procedural Posture:
- Bacou filed a suit in Rhode Island state court seeking a declaratory judgment that it had no obligations under the January 12th letter.
- Continental removed the case to the U.S. District Court for the District of Rhode Island based on diversity jurisdiction.
- Continental filed counterclaims against Bacou for breach of contract, breach of the duty of good faith and fair dealing, and fraudulent misrepresentation.
- Bacou moved for summary judgment on all of Continental's counterclaims.
- The district court granted summary judgment for Bacou on the breach of contract and good faith and fair dealing claims, ruling the letter was an unenforceable 'agreement to agree'.
- The fraudulent misrepresentation claim proceeded to a bench trial.
- After the trial, the district court entered judgment in favor of Bacou, finding it had negotiated in good faith.
- Continental, as the appellant, appealed the district court's summary judgment ruling and the trial judgment to the U.S. Court of Appeals for the First Circuit.
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Issue:
Is a letter agreement that obligates parties to enter into a future supply contract an unenforceable 'agreement to agree' under Rhode Island law when it conditions the price and quality of goods on terms 'equivalent to that which is then... available from third-party suppliers'?
Opinions:
Majority - Baldock, Senior Circuit Judge
No. A letter agreement that obligates parties to enter into a future supply contract is an enforceable contract when its material terms are sufficiently definite. The district court read precedent too broadly in ruling that all 'agreements to agree' are unenforceable. Unlike cases where a contract is contingent on a party's subjective satisfaction, this letter did not contain such an illusory promise. The terms for price and quality were not too vague because they were tied to objective, external metrics—the price and quality available from third-party suppliers. A term referencing the prevailing market price provides a sufficiently definite basis for a court to determine a breach and grant a remedy. Furthermore, the implied covenant of good faith and fair dealing would prevent Bacou from unilaterally manipulating its quality needs to avoid its obligation. Therefore, the letter constituted a binding agreement to negotiate a final supply contract consistent with its terms.
Analysis:
This decision refines the 'agreement to agree' doctrine under Rhode Island law, clarifying that preliminary agreements can be enforceable contracts. It establishes that when essential terms like price or quality are left open but are tied to objective, ascertainable standards (e.g., market rates, competitor offerings), the contract does not fail for indefiniteness. This ruling provides greater certainty for parties who enter into letters of intent or memoranda of understanding, signaling that courts will enforce these preliminary commitments so long as a framework for determining the core obligations exists. It reinforces the principle that the implied covenant of good faith and fair dealing applies even during the negotiation phase of a final agreement contemplated by an enforceable preliminary contract.
