Continental Laboratories, Inc. v. Scott Paper Co.
759 F. Supp. 538 (1990)
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Rule of Law:
If a party's objective words and actions demonstrate an intent not to be bound by an agreement until a written document is fully executed, no binding oral contract is formed, even if the other party subjectively believes a final agreement was reached.
Facts:
- In early 1987, Continental Laboratories, Inc. (Continental) and Scott Paper Company (Scott) began negotiating a potential supply and distribution agreement for hotel amenity products.
- From May to August 1987, Scott representatives prepared and submitted at least five drafts of a written agreement to Continental, with each draft incorporating changes from ongoing negotiations.
- On July 19, 1987, a Scott representative internally announced that the companies had reached a supply and distribution agreement 'in principle'.
- During a telephone conference on August 25 or 26, 1987, Continental representatives believed a binding oral contract was formed.
- On September 2, 1987, Scott sent Continental a copy of the agreement stamped 'DRAFT,' which was signed by a Scott vice-president but was never signed by any officer of Continental and had a blank 'Commencement Date'.
- After the alleged oral agreement, the parties continued to meet and on September 14, a Scott representative presented another revised draft of the agreement to Continental.
- On September 16, 1987, a Scott representative informed Continental that Scott was no longer interested in the venture and terminated all discussions.
Procedural Posture:
- Continental Laboratories, Inc. filed suit against Scott Paper Company in the Iowa District Court for Boone County, alleging breach of an oral contract.
- Scott removed the action to the United States District Court for the Southern District of Iowa on the basis of diversity of citizenship.
- Scott filed a motion for summary judgment, arguing that no binding contract existed.
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Issue:
Does a binding oral contract exist when parties engage in extensive negotiations and exchange multiple written drafts, but one party's objective actions indicate an intent to be bound only by a fully executed written document?
Opinions:
Majority - Vietor, Chief Judge
No. A binding oral contract does not exist because the parties' intent, determined objectively from their words and actions, shows that Scott did not intend to be bound in the absence of a fully executed written document. The court applied a multi-factor test to ascertain the parties' intent, and nearly all factors indicated that a signed writing was a condition precedent to contract formation. The transaction was a large, complex commercial undertaking of a type usually put in writing, it involved many details, a large sum of money, and was unusual for Scott as it represented entry into a new market. Furthermore, the continuous exchange of drafts, unresolved details even after the alleged oral agreement, and the inclusion of clauses requiring any modifications to be in writing all objectively communicated Scott's intent to be bound only by a formal, signed contract.
Analysis:
This decision exemplifies the objective theory of contract formation, highlighting that a party's subjective belief that a contract was formed is irrelevant if their counterparty's objective actions indicate otherwise. The court's application of the multi-factor test from 'Emmons' provides a clear analytical framework for distinguishing preliminary negotiations from a binding oral agreement in complex commercial contexts. This case serves as a precedent and a practical warning that in substantial business deals where written documents are contemplated, courts are unlikely to find a binding oral contract unless there is clear objective evidence that both parties intended to be bound before signing.
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