Brief Fact Summary.
Plaintiff and Defendant began negotiations to purchase a division of Defendant’s company. The parties came to an agreement on the terms of the sale after the specified period of the letter of intent. Nonetheless, Defendant brought the agreement to its parent company’s president. The parent company’s president rejected the sale. Thereafter, Defendant’s Board of Director’s rejected the sale. Plaintiff brought suit.
Synopsis of Rule of Law.
When a contract is created during negotiations or through some type of formalization of a contract, the contract becomes binding if the parties intended it to become enforceable.
Plainitff, A/S Apothekernes Laboratorium For SpecialPreaeparate, began negotiations with, Defendant, I.M.C. Chemical Group, Inc., through Plaintiff’s president and Defendant’s president and CEO to buy a Lab of Biochemical division of IMC. Both parties signed a letter of intent that contained the terms for negotiations in the future. The letter also contained a clause that stated the final agreement of the sale was conditioned on the both, Plaintiff and Defendant’s, Board of Directors approval. While approval was pending, Defendant was not to engage in negotiations with any other party for the sale of its assets. Likewise, the letter stated that the sale must be made within sixty days from December 9, 1977. On February 24, 1978, the parties reached an agreement to the terms of the deal. This date was past the sixty-day deadline. At this time, neither party formed a formal agreement of the sale. Before the parties brought the agreement to the Board of Director’s for approval, Defendant’s president took the agreement to the president of Defendant’s parent company, Lenon. Lenon rejected the sale. Lenon’s decision was binding on Defendant’s Board of Directors, causing Defendant to reject the sale as well. Plaintiff brought suit claiming breach of contract and a violation of good faith. The trial court ruled in favor of Defendant. Plaintiff appealed.
Whether the intent of the parties to a contract indicates if the contract created through negotiations or through a formalization of an agreement becomes binding and enforceable against both parties.
Yes, the intent of the parties to a contract indicates if the contract created through negotiations or through a formalization of an agreement becomes binding and enforceable against both parties.
In this case, the parties did not have a binding agreement. When a contract is created during negotiations or through some type of formalization of a contract, the contract becomes binding if the parties intended it to become enforceable. The preliminary letter of intent is not a letter that is created to bind the parties, but a letter to negotiate in good faith. Further, the terms of this letter of intent does not indicate sufficiently an intent by the parties to be bound by its terms. The parties were still required to seek approval by their Board of Directors. When Defendant’s president sought Lenon and his Board of Directors, Defendant’s president did not violate the duty of good faith in the letter of intent because the letter expressly required the Board’s approval. The Board’s disapproval was proper, and it indicates that the parties did not intent to be bound by the initial letter of intent. Thus, there is not a binding agreement between Plaintiff and Defendant, and the trial court’s decision is affirmed.