Arnold Palmer Golf Co. v. Fuqua Industries, Inc.

United States Court of Appeals for the Sixth Circuit · Contracts

ContractsPreliminary agreementsIntent to be boundSummary judgmentmemorandum of intentletter of intentintent to be boundpreliminary negotiation

Facts

Palmer, a golf-products company that relied on outside manufacturers, sought to acquire manufacturing facilities and negotiated with Fuqua about a business combination involving Fuqua's subsidiary Fernquest and Johnson. After months of discussions and drafts, the parties signed a six-page Memorandum of Intent stating that it confirmed the general understanding reached regarding Fuqua's acquisition of 25% of Palmer stock in exchange for all outstanding stock of Fernquest and Johnson, $700,000, and management services. The memorandum set out detailed terms on the form of the combination, conduct of business, license rights, employment contracts, loans, financial statements, and preparation of a definitive agreement, while also listing conditions including preparation of a definitive agreement satisfactory to both parties and approval by Fuqua's board. Before any definitive agreement was executed, Fuqua's chairman decided he did not want to go through with the deal, and Fuqua informed Palmer the transaction was terminated.

Issue

Did the district court err in granting summary judgment by deciding, as a matter of law, that the signed Memorandum of Intent created no contractual obligation because the parties did not intend to be bound until a definitive agreement was prepared and approved? More specifically, was the parties' intent to be bound by the memorandum, or at least to proceed to a definitive agreement consistent with it, a factual question for trial?

Rule

An enforceable contract requires both a clear understanding of the terms and an intention to be bound. When parties sign a preliminary writing such as a memorandum of intent, the existence of contractual intent must be determined from the entire document and the surrounding circumstances, including extrinsic evidence; and, except in the clearest cases, that issue is a question of fact for the trier of fact rather than one to be resolved on summary judgment.

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In Cleveland, Orion Trail Bikes, Inc. and Lakeview Components, LLC signed a five-page "memorandum of understanding" for Orion to acquire Lakeview's wheel division in exchange for stock, cash, and management support. The document stated that Lakeview "will transfer" the division, Orion "shall retain" certain employees, and counsel "will prepare" a definitive agreement acceptable to both sides; two weeks later, Lakeview walked away before any final agreement was signed.

If Orion sues for breach and Lakeview moves for summary judgment arguing the memorandum was only preliminary because it contemplated a later definitive agreement, how should the court most likely rule?

Explanation. The majority held that a signed preliminary writing may be binding if the parties clearly understood the terms and intended to be bound, and that intent is determined from the entire document and surrounding circumstances. Where a writing contains detailed terms in unqualified language but also contemplates a later definitive agreement, reasonable inferences may point both ways. In that situation, intent is ordinarily a factual question for the trier of fact, so summary judgment is improper. (Derived from Arnold Palmer Golf Co. v. Fuqua Industries, Inc. (n.d.).)