Empro Manufacturing Co., Inc. v. Ball-Co Manufacturing, Inc.

United States Court of Appeals for the Seventh Circuit · Contracts

ContractsLetters of intentPreliminary agreementsletter of intentsubject to definitive agreementobjective intentpreliminary negotiationsconditions precedent

Facts

Ball-Co put its assets up for sale, and Empro sent a three-page letter of intent proposing to buy Ball-Co's assets and related landholding interests for $2.4 million. The letter twice stated that the proposal was subject to and to be incorporated in a formal definitive asset purchase agreement, and it made Empro's purchase subject to several conditions precedent, including approval by Empro's shareholders and board. The parties negotiated for several months, but disagreed over security for Empro's promissory note, with Ball-Co seeking a security interest in the land and Empro refusing. When Empro learned that Ball-Co was negotiating with someone else, it sued, arguing that the letter bound Ball-Co to sell only to Empro.

Issue

Did the signed letter of intent create a binding obligation requiring Ball-Co to sell only to Empro, despite language making the transaction subject to a definitive agreement and other conditions precedent? More broadly, when does a letter of intent have independent contractual force under Illinois law?

Rule

Under Illinois law, intent to be bound is determined objectively from the language and structure of the writing, not from a party's later assertion of subjective intent. A letter of intent that states the transaction is subject to a later definitive agreement ordinarily manifests an intent not to be bound, unless the document as a whole shows that the later formal contract was intended only as a memorial of an agreement already reached.

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

In Chicago, Nora Vale of Lakefront Tooling and Devin Cross of Prairie Forge signed a two-page letter stating the proposed asset sale was "subject to the execution of a mutually acceptable definitive purchase agreement." The letter also said it set out only the "general terms and conditions" of the proposed deal, and after signing, Prairie Forge accepted a higher offer from another buyer.

If Nora sues claiming both parties actually intended the letter to be immediately binding, which is the best answer?

Explanation. Under the majority opinion, intent to be bound is determined objectively from the writing, not from later testimony about subjective intent. Language making the deal "subject to" a later definitive agreement and describing the writing as containing only general terms and conditions ordinarily shows that the parties did not intend the preliminary writing to have independent contractual force.