Empro Mfg. Co. v. Ball-Co Mfg., Inc. – Case Brief
Empro Manufacturing Co., Inc. v. Ball-Co Manufacturing, Inc., 870 F.2d 423 (7th Cir. 1989).
Facts: Ball-Co Manufacturing (D) made specialty valve components and sought a buyer for its assets. Empro Manufacturing Co. (P) expressed interest and after preliminary negotiations submitted a three page letter of intent to purchase Ball-Co for $2.4 million. The letter conditioned the purchase upon certain conditions precedent including the approval of Empro’s board of directors.
Negotiations broke down when Empro refused Ball-Co’s request for a security interest in the land upon which the plant was situated. Empro later learned that Ball-Co was negotiating to sell the assets to another party and Empro brought an action in diversity, asserting that the letter of intent was a binding agreement. Empro sought a temporary restraining order and the trial court dismissed the complaint for failure to state a claim upon which relief may be granted. Empro appealed.
Issue: What is the test for establishing intent to be bound in contract formation?
Holding and Rule: An objective test is used to determine intent in the context of contract formation.
Intent in contract law is evaluated under an objective rather than a subjective standard. A party who makes a deal subject to a later definitive agreement has manifested an objective intent not to be bound. Under the parol evidence rule this becomes the definitive intent even if one party later claims that its true subjective intent at the time was different.
Empro’s letter states twice that it was subject to a later definitive agreement. It also states twice that it contains general terms and conditions but that each side retains the right to make additional demands. Empro insulated itself further from the transaction by making the deal subject to board approval.
The letter was not a one sided commitment to buy Ball-Co because from the beginning Ball-Co assumed it could negotiate terms different from those contained in the letter. While approaching agreement in stages is a valuable method of doing business, in this case there was no binding agreement.
Disposition: Affirmed.