Empro Manufacturing Co. v. Ball-Co Manufacturing, Inc.
870 F.2d 423 (1989)
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Rule of Law:
A preliminary agreement or letter of intent that expressly states it is 'subject to' the execution of a definitive contract and includes other conditions precedent does not create a binding contract. The parties' objective intent, as manifested in the language of the document, governs whether a preliminary agreement is legally enforceable.
Facts:
- Ball-Co Manufacturing, Inc. (Ball-Co) offered its assets for sale.
- Empro Manufacturing Co. (Empro) expressed interest and sent Ball-Co a three-page 'letter of intent' to purchase the assets.
- The letter stated that the proposal's general terms and conditions would be 'subject to and incorporated in a formal, definitive Asset Purchase Agreement signed by both parties'.
- The letter also made Empro's purchase 'subject to' the satisfaction of several conditions, including the approval of Empro's shareholders and board of directors.
- Both parties signed the letter of intent in November 1987.
- During subsequent negotiations, the parties could not agree on the terms of a security interest for a promissory note, and the deal collapsed.
- Empro later learned that Ball-Co was negotiating with another potential buyer.
Procedural Posture:
- Empro Manufacturing Co. filed a diversity suit against Ball-Co Manufacturing, Inc. in federal district court.
- Empro sought a temporary restraining order, arguing the letter of intent was a binding contract.
- The district court judge dismissed Empro's complaint for failure to state a claim upon which relief could be granted.
- Empro, as appellant, appealed the dismissal to the U.S. Court of Appeals for the Seventh Circuit.
- Ball-Co was the appellee in the appeal.
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Issue:
Does a letter of intent create a binding contract when it expressly conditions the agreement on the execution of a definitive contract and includes escape clauses allowing one party to unilaterally withdraw from the transaction?
Opinions:
Majority - Easterbrook, Circuit Judge
No, a letter of intent does not create a binding contract under these circumstances. 'Intent' in contract law is objective, determined by the words the parties use, not their subjective thoughts. The letter repeatedly used the phrase 'subject to' a definitive agreement, which manifests an objective intent not to be bound until that later contract is executed. Furthermore, Empro included several conditions precedent, such as the required approval of its board and shareholders, which effectively served as escape hatches allowing it to walk away from the deal. The document was not a one-sided option binding only Ball-Co; it was a non-binding framework for future negotiations, allowing both parties the freedom to disagree on specifics and walk away if a final agreement could not be reached.
Analysis:
This case strongly affirms the principle of objective intent in contract formation, emphasizing that courts will look to the express language of an agreement to determine its binding effect. It provides commercial parties with a clear safe harbor: using phrases like 'subject to a definitive agreement' is an effective way to prevent a preliminary document from being construed as an enforceable contract. The decision protects the common business practice of negotiating in stages, allowing parties to outline general terms in a letter of intent without prematurely losing their 'privilege to disagree on the specifics' before a comprehensive, final agreement is reached.
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