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Letters of Intent and the Duty to Negotiate in Good Faith

The Pennsylvania Superior Court affirmed a trial court order granting summary judgment to the defendant in a matter which raised issues concerning the enforceability of a letter of intent. The decision in Brasler Realty & Financial Services, Inc. and Leebob Associates, LLC v. TruServ Corporation, No. 2209 EDA 2000 (filed April 6, 2001) followed the decision of the Superior Court only a year earlier in GMH Associates, Inc. v. The Prudential Realty Group, et al., 752 A.2d 889 (Pa. Super. 2000), leave to appeal denied, 2000 Pa. LEXIS 2714 (Nov. 1, 2000).

Competing Interests in Letters of Intent

The TruServ case presented a typical situation illustrating the competing interests of the parties to a letter of intent. TruServ was anxious to sell the industrial property which had served as its local distribution center. Brasler, a developer, was obviously interested in tying up the property while it did due diligence, sought financing, and hopefully identified tenants. By its terms the letter of intent described itself as an offer subject to a due diligence period, and gave the buyer a forty-five day period in its sole discretion to determine whether or not to proceed. The concluding paragraph of the letter stated:

The price had been agreed upon. After several months, when no definitive agreement of sale had been negotiated, TruServ sold the property to another interested party. Brasler contended that TruServ breached the letter of intent by not negotiating in good faith.

The Chester County Common Pleas Court granted summary judgment for TruServ following the Superior Court decision in GMH noting again that Pennsylvania has not recognized a cause of action for breach of a duty to negotiate in good faith. Further, even if such a duty were recognized, the Court said the letter of intent in TruServ did not give rise to such a duty since it was plaintiffs intention at all times to leave itself free to walk away from the transaction for any reason or for no reason at all in its sole discretion.

Despite the opportunity to address the issue of whether a letter of intent imposes a common law duty to negotiate in good faith, the Supreme Court refused to hear an appeal for the GMH case. Brasler petitioned the Pennsylvania Supreme Court to hear the TruServ case, but on August 27,2001, the Court denied the appeal, leaving the Superior Court's decision intact. See WP 851 ASSOCIATES, LP v. Wachovia Bank, NA, Dist. Court, ED Pennsylvania 2009

Fifteen years ago, in the case of Channel Home Centers, et al. v. Frank Grossman, et al., 795 F.2d 291 (3d Cir. 1986), the United States Court of Appeals for the Third Circuit predicted that the Supreme Court of Pennsylvania would recognize a duty to negotiate in good faith. The Third Circuit emphasized the fact that the parties in Channel Home had included in their letter of intent a provision that the parties "negotiate the above-described leasing transaction to completion."

No Duty to Negotiate in Good Faith

While the Supreme Court of Pennsylvania has not recognized a common law duty to negotiate in good faith as inherent in a letter of intent, the Superior Court has recognized that the parties by the terms of the letter of intent can create such an obligation. In Jenkins v. County of Schuylkill, 441 Pa. Super. 642, 658 A.2d 380, 385 (1995) the Court said:

  • The full extent of a party's duty to negotiate in good faith can only be determined, however, from the terms of the letter of intent itself.
  • The clear implication, therefore, is that parties can, by their letter of intent language, create a duty to negotiate in good faith.

Irrespective of whether the Pennsylvania Supreme Court recognizes a cause of action for breach of a duty to negotiate in good faith, the outcome of any particular letter of intent dispute will be fact driven. The Superior Court noted in the TruServ case:

Based on the facts of this case, we decline to create a cause of action for failure to negotiate in good faith. We conclude that if the Supreme Court were to recognize the existence of such a cause of action, based on the letter of intent, the duty to negotiate in good faith was not breached in this case.

In TruServ, prior to the end of the letter of intent's specified forty-five day period, the buyer did not give notice that it would or would not proceed with completion of the purchase. The draft agreements which the buyer submitted after the forty-five day period recited specifically that neither party was obligated to accept or execute the draft agreement, and the agreement would be binding upon purchaser and seller if and only if each executed and delivered a copy of the agreement to the other party. Had those facts been different, a question might well have existed as to the parties' intent to negotiate the agreement to a conclusion. If the Court had found an undertaking to negotiate to a conclusion, that obligation would imply that the negotiations be "in good faith." Without a good faith requirement a duty to negotiate to a conclusion would be meaningless.

Example Languge for Letter of Intent

If, on the one hand, a party intends to assume no obligation by a letter of intent, that can be made clear in language such as the following:

It is understood that this letter of intent constitutes a statement of our current mutual intentions with respect to the proposed transactions and does not contain all matters upon which agreement must be reached in order for the transactions to be completed. Except as set forth in paragraphs ___, and ___, (customarily, paragraphs dealing with exclusive dealings, with expenses, and with confidentiality, are to be binding) which shall be binding on the parties hereto in accordance with their respective terms, this letter of intent does not constitute the binding commitment of the parties with respect to the transactions contemplated hereby, and no legally binding agreements or obligations of any party are created by this letter of intent.

A binding commitment with respect to the transactions will result only from the execution and delivery of the definitive Purchase Agreement, and the agreements contemplated therein expressed therein. The provisions of this letter of intent (other than with respect to the parties' obligations under paragraph ___ (expenses) and ___ (confidentiality), which shall survive the expiration of this letter of intent) shall be of no force and effect upon the earlier to occur of (i) ___(date) , and (ii) the execution of a definitive Purchase Agreement.

If, on the other hand, a party intends the letter of intent to have the force and effect of a contract, even though all of the details and boiler plate of a more formal agreement have not been resolved, the parties can surely evidence that intent by obligating themselves to negotiate the less essential terms in good faith to a conclusion. If an alternative phrasing is used somewhere along the continuum, the meaning of the letter of intent may ultimately be resolved by a court or jury with all the cost and uncertainty of any trial.

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