Newharbor Partners, Inc. v. F.D. Rich Co.
961 F.2d 294, 1992 WL 69994 (1992)
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Rule of Law:
A letter of intent containing an unequivocal and specific clause stating that it creates no legally binding obligations will not give rise to an enforceable duty to negotiate in good faith, even if the letter also contains general language about the parties proceeding in good faith.
Facts:
- Newharbor Partners, Inc. (Newharbor) was pursuing a real estate development and held an option to purchase a key 82-acre tract from David Friedman, which was set to expire on September 27, 1988.
- Newharbor needed an equity partner to help finance the purchase and was negotiating with both F.D. Rich Co. (Rich) and another company, Forest City Development.
- On September 23, 1988, while Newharbor was meeting with Forest City, Rich sent Newharbor a unilaterally signed letter of intent along with a copy of a $100,000 check.
- Based on Rich's favorable terms, Newharbor terminated its negotiations with Forest City.
- During revisions, Newharbor’s own counsel requested the insertion of a clause stating the letter created no legally binding obligations, except for a provision governing the disposition of the $100,000 deposit.
- The final letter of intent, executed on October 10, 1988, contained both the non-binding clause and a sentence stating its purpose was for the parties to 'proceed in good faith' toward a definitive agreement.
- On November 9, 1988, the evening before the parties were to finalize their agreement, Rich demanded a new financing condition that required the seller, Friedman, to finance Rich's capital contribution, a term Friedman immediately rejected.
- On November 16, 1988, Rich's attorney terminated all further discussions, causing the collapse of the proposed joint venture.
Procedural Posture:
- Newharbor Partners, Inc. filed a diversity suit in federal district court against F.D. Rich Co. and Rich-Boston (the Riches).
- Newharbor alleged the Riches breached an express and implied duty of good faith and fair dealing contained in the letter of intent.
- The Riches filed a counterclaim seeking the return of their $100,000 deposit.
- The case was tried before a jury, which returned a verdict in favor of Newharbor on the good faith claim.
- Following the jury's verdict, the trial court judge granted the Riches' motion for a directed verdict (technically a judgment notwithstanding the verdict), setting aside the jury's finding.
- The trial court, which heard the counterclaim without a jury, entered judgment for Newharbor, allowing it to keep the deposit.
- Newharbor, as appellant, appealed the court's grant of the directed verdict to the U.S. Court of Appeals for the First Circuit.
- The Riches, as appellees, cross-appealed the judgment against them on their counterclaim.
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Issue:
Does a letter of intent that explicitly states it creates no legally binding obligations, except for a specific provision regarding a deposit, nevertheless create a binding duty to negotiate in good faith if it also contains language stating its purpose is to set forth the basis on which the parties shall proceed in good faith?
Opinions:
Majority - John R. Brown, Senior Circuit Judge
No, a letter of intent with an unequivocal non-binding clause does not create a duty to negotiate in good faith, even if it contains aspirational language about proceeding in good faith. The court reasoned that the enforceability of such a document depends on the clarity with which the parties express their intent. Here, the clause stating that 'nothing herein... will be deemed to create any legally binding obligations' was unequivocal. In contrast, the sentence stating the letter's purpose was to 'set forth the basis on which the parties shall proceed in good faith' was ambiguous and could be interpreted as a non-binding goal. Applying the principle of contract construction that a specific, clear term controls over a general, ambiguous one, the non-binding clause prevails. The court noted that the parties explicitly created an exception to the non-binding clause for the deposit provision but failed to do so for the good faith language, indicating they did not intend for the good faith reference to be a legally enforceable obligation.
Analysis:
This decision reinforces the principle of freedom of contract, allowing parties to negotiate without fear of being prematurely bound. It serves as a critical lesson in contract drafting, emphasizing that courts will enforce clear and unambiguous 'non-binding' clauses as written. For parties who wish to create a binding duty to negotiate in good faith within an otherwise preliminary agreement, this case demonstrates the necessity of using explicit language to carve out that duty as a specific, binding exception. The ruling solidifies the role of letters of intent as negotiating tools rather than enforceable contracts, unless specific obligations are clearly and expressly made binding.
