Butler v. Balolia

United States Court of Appeals for the First Circuit · Contracts

Contractspreliminary agreementscontract to negotiateRule 12(b)(6)letter of intentLOIcontract to negotiateagreement to agree

Facts

David Butler developed cutting-tool safety technology called Whirlwind, and Shiraz Balolia sought to buy it. In April 2012, the parties signed a letter of intent stating that they intended to negotiate and enter into a separate purchase agreement by June 20, 2012, setting a purchase price payable upon closing, requiring both sides to use their best efforts to negotiate and attempt to agree on terms, and requiring Butler not to negotiate with other prospective buyers during the exclusivity period. No final purchase agreement was executed. Butler alleged that Balolia falsely claimed deficiencies in the technology as a pretext to renegotiate price and failed to negotiate during critical periods.

Issue

Whether, under Washington law, a letter of intent can constitute an enforceable contract to negotiate even though it is not a final contract of sale. If so, the further question is whether Butler's complaint plausibly alleged the formation and breach of such a contract sufficient to survive a Rule 12(b)(6) motion.

Rule

When state law is unsettled, a federal court sitting in diversity must predict how the state's highest court would rule by consulting analogous state decisions, lower state court decisions, trends in other jurisdictions, treatises, and policy considerations. Applying Washington's contract principles, an enforceable contract to negotiate may exist where freely contracting parties objectively manifest mutual assent, supported by consideration, to be bound to a specific course of conduct during negotiations, and the obligations are sufficiently definite to permit liability to be fixed; a complaint survives dismissal if it plausibly alleges both the existence of such a contract and conduct inconsistent with the promised best efforts or good-faith negotiation.

🔒

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.

In federal court in Portland, Maine, Nina Ortiz sues Caleb Mercer over a failed software-licensing deal. The agreement selects Oregon law, and the Oregon Supreme Court has not squarely decided whether a preliminary writing requiring the parties to use best efforts to negotiate a final agreement is enforceable, though lower Oregon courts, treatises, and a majority of other jurisdictions favor recognition.

On Caleb's Rule 12(b)(6) motion, what is the federal court's proper approach to the unsettled state-law question?

Explanation. A federal court sitting in diversity does not stop merely because the state's highest court has not yet spoken directly. The court must make an informed prediction using the kinds of sources the state high court would likely consult, including analogous precedent, lower state decisions, other jurisdictions, treatises, and public policy. The majority rejected the view that the absence of controlling state supreme court authority alone defeats the claim.