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Butler v. Balolia - 736 F.3d 609

Rule:

Under Washington state law, agreements entered into by willing parties, which do not offend public policy, are generally enforceable. Washington follows the objective manifestation test for contracts, under which parties form a contract by manifesting their mutual assent to be bound. The obligations of the parties must be sufficiently definite to allow courts to fix liability, and the exchange of promises must be supported by consideration. 

Facts:

David Butler is an inventor who has spent years researching and developing safety technology for cutting tools. Among the fruits of his labors is the so-called "Whirlwind" technology, which relies on both existing and pending patents. Defendant-appellee Shiraz Balolia is the president of Grizzly Industrial, Inc. He sought to purchase the Whirlwind technology from the plaintiff and, after some initial haggling, the two men signed a letter of intent (LOI). The LOI is not quite three pages in length; it memorializes the parties' mutual intention "to negotiate and enter into a separate Purchase Agreement;" and it describes the technology to be purchased in some detail, specifying a purchase price "payable upon closing." The LOI also stipulates that the parties "will use their best efforts to negotiate and attempt to agree to terms for the Purchase Agreement" and that the plaintiff will refrain from negotiating with any other prospective purchasers before the signing deadline. Last — but far from least — the LOI contains a choice-of-law provision that directs the application of Washington law.

For reasons that are hotly disputed, the transaction fell through and no purchase agreement was ever signed. Plaintiff blames the defendant, alleging that defendant professed to have discovered deficiencies in the Whirlwind technology and used these "specious" deficiency claims as a basis for attempting to renegotiate the arrangement.

After the deal imploded but before the end of the exclusivity period, plaintiff sued the defendant in a Massachusetts state court. The plaintiff sought, among other things, a declaration that the LOI was an enforceable contract, pecuniary damages for breach of contract and breach of an implied covenant of good faith and fair dealing, and damages for violation of the Massachusetts Consumer Protection Act. After the case was transferred to the federal court on the basis of the parties' diversity of citizenship, Balolia filed a motion to dismiss, which the district court granted, reasoning that the LOI was not an enforceable contract of any kind under Washington law and, therefore, all of the plaintiff's claims failed. Plaintiff sought further review.

Issue:

Did the LOI to negotiate and enter into a separate purchase agreement support a cause of action by the seller for breach of a contract to negotiate under the Washington law?

Answer:

No.

Conclusion:

On appeal, the United States Court of Appeals for the First Circuit reviewed the state law and noted that the Washington Supreme Court has never recognized the enforceability of contracts to negotiate. By the same token, however, that court has not repudiated such a cause of action. There, the Washington Supreme Court declared that it was "unnecessary to decide whether Washington will ever enforce a contract to negotiate. agreements entered into by willing parties, which do not offend public policy, are generally enforceable. Moreover, "Washington follows the objective manifestation test for contracts," under which parties form a contract by manifesting their mutual assent to be bound. The obligations of the parties "must be sufficiently definite" to allow courts to fix liability, and the exchange of promises "must be supported by consideration." Even though the Washington Supreme Court has not spoken definitively to the issue, the state's intermediate appellate court had recently enforced a contract to negotiate. But the strength of this precedent is suspect because the appellant there apparently did not dispute the enforceability of such contracts but, instead, merely appealed the damages award. Consequently, the federal appellate court gave this precedent little weight.

The Court clarified that it did not hold either that the LOI is an enforceable contract to negotiate or that, if it is, the defendant breached it. Those matters remained subject to proof. It did hold, however, that as a matter of pleading, the complaint plausibly alleged that such a contract was formed and that the defendant breached it.

The Court vacated the judgment below in its entirety and remanded for further proceedings.

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