If intent were wholly subjective there would be no parol evidence rule, no contract case could be decided without a jury trial, and no one could know the effect of a commercial transaction until years after the documents were inked. That would be a devastating blow to business. Contract law gives effect to the parties' wishes, but they must express these openly. Put differently, "intent" in contract law is objective rather than subjective. As a matter of law parties who make their pact "subject to" a later definitive agreement manifest an objective intent not to be bound, which under the parol evidence rule becomes the definitive intent even if one party later says that the true intent was different. Intent must be determined solely from the language used when no ambiguity in its terms exists. Parties may decide for themselves whether the results of preliminary negotiations bind them, but they do this through their words.
Plaintiff buyer sued defendant seller claiming that a letter of intent to purchase defendant's assets signed by the parties obliged defendant to sell only to plaintiff. Plaintiff sought a temporary restraining order. The district judge dismissed the complaint for failure to state a claim on which relief may be granted. The district court concluded that the statement, appearing twice in the letter, that the agreement was "subject to" the execution of a definitive contract meant that the letter had no independent force.
Is a letter of intent binding if it conditions the execution of a formal agreement?
The court noted that plaintiff insulated itself from binding effect by listing, among the conditions to which the deal was "subject," the approval of plaintiff's shareholders and board of directors. Plaintiff even took care to require the return of its earnest money without set off, in the event the transaction was not closed, although the seller usually got to keep the earnest money if the buyer changed its mind. Neither the text nor the structure of the letter suggested that it was to be a one-sided commitment, an option in plaintiff's favor binding only defendant.