Quake Construction, Inc. v. American Airlines, Inc.
565 N.E.2d 990 (1990)
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Rule of Law:
When a letter of intent contains conflicting language, some indicating an intent to be bound and some indicating that a final executed contract is a condition precedent, the document is ambiguous. In such cases, the parties' intent to be bound is a question of fact that cannot be resolved on a motion to dismiss and requires consideration of parol evidence.
Facts:
- American Airlines, Inc. hired Jones Brothers Construction Corporation to manage an expansion project at O'Hare International Airport.
- In April 1985, after Quake Construction, Inc. submitted a bid, Jones orally informed Quake it had been awarded the contract for a portion of the project.
- To help Quake secure its subcontractors, who required a signed agreement, Jones sent Quake a letter of intent dated April 18, 1985.
- The letter stated Jones had 'elected to award the contract' to Quake, specified the scope of work, set a price of $1,060,568, and mandated a start date for the week of April 22, 1985.
- The letter also contained a clause stating, 'Jones Brothers Construction Corporation reserves the right to cancel this letter of intent if the parties cannot agree on a fully executed subcontract agreement.'
- Following the letter, the parties discussed and made handwritten changes to a form contract, but a formal written contract was never fully executed.
- At a preconstruction meeting on April 25, 1985, Jones identified Quake as the general contractor for the project.
- Immediately after the meeting on April 25, 1985, American Airlines informed Quake that its involvement with the project was terminated.
Procedural Posture:
- Quake Construction, Inc. (plaintiff) sued American Airlines, Inc. and Jones Brothers Construction Corporation (defendants) in the circuit court of Cook County, Illinois (trial court).
- The defendants filed a motion to dismiss the complaint for failure to state a cause of action.
- The circuit court granted the defendants' motion and dismissed the complaint with prejudice.
- Quake Construction, Inc. (appellant) appealed the dismissal to the Appellate Court of Illinois, First District (intermediate appellate court).
- The appellate court, with one justice dissenting, reversed the circuit court's dismissal of the primary counts and remanded the case for further proceedings.
- American Airlines, Inc. and Jones Brothers Construction Corporation (petitioners/appellants) were granted leave to appeal to the Supreme Court of Illinois (highest court).
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Issue:
Does a letter of intent that contains detailed terms, language of award, and a short timeline for performance, but also reserves the right to cancel if a formal subcontract is not executed, create an enforceable contract as a matter of law?
Opinions:
Majority - Justice Calvo
No, a letter of intent with such conflicting provisions is ambiguous as to the parties' intent and its enforceability cannot be determined as a matter of law. The letter contained several provisions suggesting the parties intended to be bound, including the detailed terms, the statement that the contract was awarded, the authorization for work to begin, and the imminent start date. The court found that the cancellation clause itself implied the letter had binding effect, reasoning there would be no need to provide for cancellation of a document that was never binding. However, the letter also contained language pointing to an intent not to be bound, such as its multiple references to a future 'fully executed subcontract agreement' and the cancellation clause, which could be interpreted as a condition precedent. Because these provisions created an ambiguity regarding the parties' intent, the question becomes one of fact for a fact-finder, making dismissal on the pleadings improper and requiring the court to consider parol evidence.
Concurring - Justice Stamos
Yes, I agree that the dismissal was unwarranted because the letter is 'just ambiguous enough' to survive a motion to dismiss, but the majority's analysis gives too much credence to the idea that the letter could constitute a binding construction contract. The cancellation clause powerfully militates against finding an intent to be bound to the underlying project. A more plausible interpretation is that the letter of intent was, at most, a 'contract to negotiate' in good faith, and the cancellation clause gave Jones the right to terminate those negotiations, not to cancel a non-existent construction contract. The misuse of ambiguous letters of intent should be judicially disapproved, and this decision should not encourage courts to find a binding contract where the evidence of intent is so weak.
Analysis:
This case establishes that the enforceability of a letter of intent is determined by the parties' intent, and ambiguity in the document's language will preclude judgment as a matter of law. The court's interpretation of a 'cancellation clause' as potential evidence for a binding contract was significant, as such clauses are typically intended to have the opposite effect. This ruling places a greater burden on businesses to draft letters of intent with unambiguous language clearly stating whether or not the parties intend to be bound prior to the execution of a formal agreement. Failure to do so creates a question of fact, likely leading to costly litigation where parol evidence is admitted to determine the parties' true intentions.
