Schwanbeck v. Federal-Mogul Corp.

CourtAppeals Court of Massachusetts
Citation578 N.E.2d 789,31 Mass.App.Ct. 390
Docket NumberNo. 89-P-1253,FEDERAL-MOGUL,89-P-1253
PartiesJohn R. SCHWANBECK v.CORPORATION et al. 1
Decision Date29 October 1991

Michael P. Angelini (Vincent F. O'Rourke, Jr., & Barry A. Bachrach, Worcester, with him), for Vellumoid Corp.

Samuel Adams (Ralph T. Lepore, III, Boston, with him), for Federal-Mogul Corp.

Donald N. Sweeney (George P. Field & Edgar J. Bellefontaine, Boston, with him), for plaintiff.


KASS, Justice.

Even by the exuberant standards of the 1980's, the final judgment of $32,516,368.60 (entered on July 10, 1989) from which the defendants appeal was sizeable. What spawned the controversy was a failed effort by the plaintiff Schwanbeck to buy the assets of a division of the codefendant Federal-Mogul Corporation (F-M), and the ultimate sale of those assets by F-M to other buyers, who organized a new corporation, Vellumoid, Inc. 2 Disappointed and aggrieved, Schwanbeck brought an action which was tried before a judge of the Superior Court sitting without a jury and obtained a judgment based, against F-M, on theories of breach of contract, misrepresentation, and unfair and deceptive practices (G.L. c. 93A, § 11) and, against Vellumoid, Inc., on theories of wrongful interference with contractual relations, wrongful interference with advantageous business relations, and unfair and deceptive practices.

In 1980 Schwanbeck formed an investment banking and financial counselling firm, Harbor Financial Company. 3 During the twelve years since he had taken a degree from the Harvard Business School, Schwanbeck had acquired experience as a securities analyst, stockbroker, and venture capitalist. Through Harbor Financial Company, Schwanbeck began to scout prospects for acquisition. He became interested in F-M's Vellumoid business, and, after an initial disavowal of inclination to sell by F-M, in the late summer and early autumn of 1980, Schwanbeck and F-M began to talk. Their discussions led to the preparation (by F-M) and signing of a letter of intent dated October 31, 1980, a document peculiarly schizophrenic in expression. 4 Its meaning, purpose, and scope are central to the case, and, as a first order of business, we must focus on that letter.

In its introductory paragraph, the letter of October 31, 1980, which runs fourteen single-spaced typewritten pages, expresses the "interest" of F-M in selling the assets of its Vellumoid division and the "interest" of Schwanbeck in buying them. The same paragraph goes on to state that the letter will express such terms and conditions as have been agreed to concerning the transaction. The very next paragraph is a strongly-worded disclaimer that neither party intends to be legally bound by the letter:

"Of course, this letter is not intended to create, nor do you or we presently have any binding legal obligation whatever in any way relating to such sale and purchase other than (i) with respect to the cost of appraisers and the review of OSHA compliance and repairs to remedy flooding referred to below under the caption 'COSTS AND EXPENSES RELATING TO THE SALE AND PURCHASE' and (ii) those arising from the Confidentiality Agreement referred to in the paragraph following this paragraph. No further obligation will arise until a definitive agreement is reduced to writing and executed by you, the New Corporation and us and then only to the extent provided for and subject to the terms and conditions (e.g., approval of our Board of Directors) which may be set forth therein."

Here is the sort of express limiting provision which we described in Goren v. Royal Investments, Inc., 25 Mass.App.Ct. 137, 142-143, 516 N.E.2d 173 (1987), as affording a safe harbor to parties who do not wish to be bound by a preliminary document. If "[p]arties to what would otherwise be a bargain and a contract ... agree that their legal relations are not to be affected [,] [i]n the absence of any invalidating cause, such a term is respected by the law like any other term...." Restatement (Second) of Contracts § 21 comment b (1979). See also, Bates v. Southgate, 308 Mass. 170, 172, 31 N.E.2d 551 (1941); Salem Laundry Co. v. New England Teamsters & Trucking Indus. Pension Fund, 829 F.2d 278, 281 (1st Cir.1987).

With the very next sentence (which began the third paragraph), the parties manifested uncertainty whether they were merely hugging or engaged to be married. 5 "However," that sentence portentously began:

"it is our intention, and, we understand, your intention immediately to proceed in good faith in the negotiation of such a binding definitive agreement."

To the degree this cordial language smoothed the hard edge of the "this is not yet a binding deal" language that had preceded it, the letter soon (on the second page) reverts to a "keep-your-hands-on-your-wallet" tone:

"It has been agreed that we [F-M] are under no moral or legal obligation to refrain from negotiating the sale of the Vellumoid business with others until the definitive agreement has been executed."

Immediately, there follows a qualification, albeit not an inconsistent one:

"However, should any firm offer to purchase such business be made to us by a third party before December 1, 1980, you will have a right of first refusal to purchase such business on the same terms and conditions contained in such offer. Such right shall be exercisable by you by delivery to us of written notice of such exercise on or before the 15th day following our delivery to you of a writing setting forth such terms and conditions."

Although it covered many business points, the letter of intent by its express terms did not obligate F-M to sell the Vellumoid assets, nor did it obligate Schwanbeck to buy them. If the trial judge, when he made the ultimate finding that, "The LOI [letter of intent] is a contract," thought otherwise, he was in error. Generally, the purpose of a letter of intent is not to bind the parties; rather, it is to establish a framework for negotiating further details. See Mendel Kern, Inc. v. Workshop, Inc., 400 Mass. 277, 279-281, 508 N.E.2d 853 (1987); Tull v. Mister Donut Dev. Corp., 7 Mass.App.Ct. 626, 632, 389 N.E.2d 447 (1979). See also, as a sampling of cases dealing with preliminary documents (with less express limiting language than is contained in the letter of intent in this case) held to be memoranda of imperfect negotiations, Geo. W. Wilcox, Inc. v. Shell E. Petroleum Prod., Inc., 283 Mass. 383, 390, 186 N.E. 562 (1933); Rosenfield v. United States Trust Co., 290 Mass. 210, 216, 195 N.E. 323 (1935); Blair v. Cifrino, 355 Mass. 706, 709, 247 N.E.2d 373 (1969); JRY Corp. v. LeRoux, 18 Mass.App.Ct. 153, 172, 464 N.E.2d 82 (1984); Pappas Indus. Parks, Inc. v. Psarros, 24 Mass.App.Ct. 596, 599, 511 N.E.2d 621 (1987); Gel Sys. v. Hyundai Engr. & Constr. Co., 902 F.2d 1024, 1027-1028 (1st Cir.1990).

Purchase of a substantial business (the Vellumoid division had gross sales in 1979 of $9,328,000) involves questions such as financing, valuation, inventory analysis, allocation of risk for products in the stream of commerce, warranties, pension rights, and labor contracts. Reaching a definitive, binding agreement soaks up time, effort, and intimidating professional fees. When they memorialize key elements of a deal, parties may be in a position to decide that enough is agreed upon to risk the substantial resources which will be consumed in contract formation. The letter of intent focuses attention; it has certain moral force in pressing parties to proceed toward a conclusion of the transaction on the terms outlined; and it assists in obtaining loan financing and capital investment in that the proposed transaction has progressed beyond "just talk." See Feldman v. Allegheny Intl., Inc., 850 F.2d 1217, 1220-1221 (7th Cir.1988); Lake & Draetta, Letters of Intent and Other Precontractual Documents 11-16 (1989).

1. The obligation to negotiate in good faith. Whether the expression of intention "to proceed in good faith in the negotiation of [a] binding definitive agreement" constituted a contractual obligation independent of the sweeping disclaimer is a more subtle question. The disclaimer of binding effect referred to "this letter," i.e., all of it, and excepted from the disclaimer only the obligations concerning procuring appraisals and adhering to the confidentiality agreement. F-M urges that the letter be read literally, especially in light of the specific identification of the two exceptions to the disclaimer. If the disclaimer is expressly limited as to those two exceptions, does it not follow that the disclaimer applies to all else set out in the document? Yet some meaning should be ascribed to the word "however" which introduces the "negotiate in good faith" sentence immediately after the disclaimer paragraph, especially if we take into account the canon of interpretation that ambiguities in documents ought to be resolved against the party which drafted it--in this case that party was F-M. Merrimack Valley Natl. Bank v. Baird, 372 Mass. 721, 724, 363 N.E.2d 688 (1977). We conclude that the intention "to proceed in good faith" provision stands independent of the general disclaimer of binding effect in the letter of intent.

In the absence of an express undertaking to "negotiate in good faith," courts have been reluctant to impose a common law duty so to do. Farnsworth, Contracts § 3.26 (1982). 6 See Channel Home Centers v. Grossman, 795 F.2d 291, 294, 299 (3d Cir.1986), in which the words, "you ... will withdraw the [s]tore from the rental market, and only negotiate the above described leasing transaction to completion," were read as undertaking to negotiate in good faith. See also Itek Corp. v. Chicago Aerial Indus., 248 A.2d 625, 627 (Del.1968).

Even when, from some combination of words in the preliminary agreement, an undertaking to negotiate in...

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