Supp. To § 1.16 Letters of Intent

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(A) The following cases cite this section:

(1) Burbach Broad. Co. of Del. v. Elkins Radio Corp., 278 F.3d 401 (4th Cir. 2002) . The plaintiff sought specific performance of an alleged agreement for the purchase of radio station assets. The agreement was in the form of a letter of intent. The district court granted summary judgment on the pleadings since the letter of intent was subject to negotiation and execution of a mutually agreeable asset purchase agreement which the parties had not executed. The plaintiff argued that the letter of intent contained all the elements of a complete, binding and enforceable contract and the lack of an asset purchase agreement should not affect the defendant's obligation to sell the assets. The court cited Corbin's discussion of the confusion surrounding letters of intent. It relied upon the analysis of Judge Leval in Teachers Insurance and Annuity Ass'n of America v. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987) , in distinguishing a ''fully binding preliminary agreement'' (Type I) where the parties have reached a complete agreement, including an agreement to be bound, on all issues perceived to require negotiation. Such an agreement is ''preliminary'' only in form in the sense that the parties desire a more elaborate formalization of the agreement which is not necessary but merely desirable. A party may demand performance under such an agreement. A ''binding preliminary commitment'' (Type II), however, does not commit the parties to their ultimate contractual objective. Rather it commits the parties to negotiate the open issues in good faith in an attempt to reach the contractual objective within the agreed framework. The duty to negotiate in good faith bars a party from renouncing the deal, abandoning the negotiations, or insisting on conditions that do not conform to the preliminary agreement. While West Virginia law is silent concerning the recognition of Type II agreements, the court suspected that it would follow the modern trend in recognizing such agreements. While making no determination that the letter of intent did or did not constitute a Type I fully binding preliminary agreement, the court held that the complaint stated a claim on which relief could be granted and remanded the case to the district court, encouraging the district court to ensure that West Virginia recognized Type II agreements. The case also cited § 2.8.

(2) Gordon Constr., Inc. v. Peterbilt of Cincinnati, Inc., 2003 Ohio App. LEXIS 4616 (Ohio Ct. App. Sept. 29, 2003) . The plaintiff asked the defendant to sign a letter of intent to pay for the design of an addition to the defendant's building. The letter of intent stated that the plaintiff would retain firms to assist in the design phase, that any costs associated with such services were to be ''at the expense of'' the defendant ''and paid upon their presentation,'' and that the costs of such design services ''should not exceed $6,000.'' The defendant signed the letter of intent. Subsequently, the defendant's requirements changed, and the defendant agreed to pay the designers for work beyond that called for by the original plans. When the defendant decided not to proceed with the project, the designers sent their bills that exceeded $6000 to the plaintiff, who forwarded them to the defendant. The defendant refused to pay, and the plaintiff initiated this action. The trial court held that the defendant was liable for the costs exceeding $6000. On appeal, the instant court held that the $6000 cost referenced in the letter of intent was a mere estimate, not a binding limitation, and noted that the modifications to the original plans resulting in additional costs had been approved by the defendant. Citing Corbin, the court noted that generally a letter of intent is not in principle a contract, but merely a contract to continue a bargain in good faith, but that circumstances may alter this conclusion since there are times when a letter of intent meets the requirements for an operative contract and is, in fact, a letter of commitment.

(3) Norkunas v. Cochran, 168 Md. App. 192, 895 A. 2d 1101 (2006) . The plaintiffs and the defendant signed a letter of intent for the sale of the defendant's real property indicating that a standard form real estate contract would be delivered to the defendant within 48 hours. The letter set for the price along with statements concerning the payment of a real estate commission and 1/2 ''normal transfer taxes.'' The letter stated that the forthcoming contract would contain a financing requirement for the buyers, but the buyer would not invoke that requirement and the standard home inspection contingency would be deleted. Within 48 hours, the defendant received the pre-printed forms used in Maryland real estate transactions and one form apparently prepared by the buyer's broker. When the defendant decided to withdraw from this transaction, the plaintiffs brought an action for specific performance claiming that the letter of intent she signed evidenced an enforceable contract. Quoting Corbin, the court noted that letters of intent had led to much misunderstanding, litigation and commercial chaos. Courts have traditionally resisted treating letters of intent as binding since they are typically used to set the framework for the later and final negotiation of a contract. Courts have, however, recognized two types of letters of intent that will be binding: (1) agreements that reflect the parties' intention to have entered into a complete and final agreement, and (2) agreements that contain binding commitments to continue negotiations in good faith. The court construed the letter of intent at issue as an agreement that the buyers would submit a more detailed offer. The letter of intent stated that the buyer offered to purchase the defendant's property, but nothing in the signed letter indicates that the defendant had agreed to sell it. The language indicating that an offer will be forthcoming and such offer would include language that will be deleted would have led a reasonable person in the defendant's position to conclude that she had not yet agreed to sell the property but would receive a formal and complete offer to allow her to make that decision. The court held that no contract was formed via the latter of intent. The case is also discussed at 3.13 (B) and 3.24 (A).

(4) Cochran v. Norkunas, 398 Md. 1, 919 A.2d 700 (Md. 2007) . The buyers and seller executed a letter of intent for the purchase of property. in Baltimore. After signing the letter of intent, the seller received a ''Residential Contract of Sale'' and several addenda from the buyers' real estate agent. She then signed the contract and addenda on the majority of the signature lines, but crossed out and did not sign a financing contingency provision. She did not return the documents to the buyers or their agent nor did she otherwise communicate to the buyers or their agent that she had accepted their offer. After a week had passed, she notified the buyers that she was taking the property off the market. The buyers filed suit seeking specific performance of the letter of intent. Citing Corbin, the court explained that a manifestation of mutual assent includes two issues: (1) intent to be bound, and (2) definiteness of terms. Failure of parties to agree on an essential term of contract may indicate that the mutual assent required to make a contract is lacking. Further citing Corbin, the court explained that if the parties do not intend to be bound until a final agreement is executed, there is no contract. Referencing Corbin, the court identified factors that are helpful in determining whether the parties manifested an intention to be bound: (1) whether the agreement had few or many details, (2) whether the amount involved was large or small, and (3) whether it was a common or unusual contract. The court concluded that a reasonable person would have understood the letter of intent in this case to mean that a formal contract to offer was to follow the letter of intent. Three of the paragraphs in the letter of intent made direct reference to the Contract of Sale and the terms that should be included in the contract. The buyers asserted that the letter of intent was enforceable because it was formed by an offer, acceptance, supported by consideration, satisfied the statute of frauds and contained all definite and material terms. The court, citing Corbin, determined that buyers' argument was unpersuasive because there was no binding contract if the parties did not intend to be bound until a formal document was executed. This case is also discussed at §§ 2.9 and 3.21.

(B) The following case is noteworthy:

(1) McBrien v. Master Development, Inc., 840 F. Supp. 362 (E.D. Pa. 1994) . Parties executed a letter of intent for the sale of real property. The letter provided for a $50,000 nonrefundable deposit due upon execution, a 120 day period within which the buyer could, for any reason, notify sellers that it was backing out, a $100,000 nonrefundable deposit due upon expiration of the period, and execution of a contract of sale at some time unspecified in the letter. Buyer notified sellers of its election not to proceed, but only after expiration of the period. Sellers sued for the $100,000 deposit. Despite buyer's lack of timely notice, Judge Pollak concluded that the parties intended that buyer's obligation to pay the deposit would arise only once the parties signed a contract of sale.

Supplement to Notes in Main Volume

2. U.S.- Venture Associates Corp. v. Zenith Data Systems Corp., 987 F.2d 429 (7th Cir. 1993) (letter of intent clearly contemplated that additional steps had to be undertaken before a contract would be formed). This case is also noted in § 2.8 below.

In re Atlantic Computer Systems, Inc., 154 B.R. 166 (S.D.N.Y. 1993) (purchase agreement was only preliminary and not binding where several material contract terms were left open, including identifying the assets to be purchased and the liabilities to be assumed). This case is also noted in §§ 2.8 and 2.9 below.