or "letter of intent", memorializing these terms but anticipating further negotiations and decisions--an appraisal of the assets, the clearing of title, the list is endless. One of these terms proves divisive, and the deal collapses. The party that perceives itself the loser then claims that the preliminary document has legal force independent of the definitive contract.
The present case is analogous to the dispute described in Empro. The question raised in ZDS's motion to dismiss is whether the documents exchanged by the parties, starting with the Letter of Intent dated May 31, 1991 and ending with the September 13, 1991 draft agreement as edited by Venture, form a legally binding contract.
We think not.
As discussed above, the proposed purchase of ZDS's Health Business began with a "Letter of Intent" drafted by Venture and accepted in principle by ZDS. This preliminary agreement led to the exchange of various draft purchase agreements in the effort to solidify a definitive agreement. The initial draft agreement was drafted by Venture, representing an offer. ZDS responded on September 11, 1991, by sending a revised draft purchase agreement--i.e., a counteroffer. Such counteroffer is a rejection of the original offer, which expires and may not be accepted later. Lee v. Voyles, 898 F.2d 76, 78 (7th Cir. 1990) (citing Ebert v. Dr. Scholl's Foot Comfort Shops, Inc., 137 Ill. App. 3d 550, 558-59, 484 N.E.2d 1178, 1185, 92 Ill. Dec. 323 (1st Dist. 1985)). Rather than accept ZDS's counteroffer, Venture "returned the agreement on September 13, 1991, with proposed minor, nonsubstantive changes on it in writing . . . ." Complaint P 9, at 3. Venture's characterization of its modification as minor and nonsubstantive does not alter the legal conclusion to be drawn from its action. Illinois law is clear that an "acceptance must comply strictly with the terms of the offer. . . . An acceptance requiring any modification or change of terms constitutes a rejection of the original offer and becomes a counteroffer that must be accepted by the original offeror before a valid contract is formed." Ebert, 137 Ill. App. 3d at 558-59, 484 N.E.2d at 1185 (emphasis added); see also Dresser Indus. v. Pyrrhus AG, 936 F.2d 921, 927 (7th Cir. 1991) (interpreting Illinois law). Accordingly, Venture's proposed modification created yet another counteroffer, and not an acceptance of the initial ZDS counteroffer. As conceded by Venture, ZDS did not act upon this second counteroffer, see Complaint P 10, at 3, and no contract could have been formed as a result of this string of correspondence and negotiation. Therefore, to the extent that any contractual obligation arose out of the parties' dealings, such obligation must stem from the preliminary agreement in principle--i.e., the Letter of Intent.
Under Illinois law, whether a writing setting forth all the essential terms of a contract, but contemplating a later execution of a formal agreement, is itself a contract as opposed to mere negotiation depends on the intent of the parties. See Inland Real Estate Corp. v. Christoph, 107 Ill. App. 3d 183, 185, 437 N.E.2d 658, 660, 63 Ill. Dec. 9 (1st Dist. 1981); Interway Inc. v. Alagna, 85 Ill. App. 3d 1094, 1098, 407 N.E.2d 615, 618, 41 Ill. Dec. 117 (1st Dist. 1980). Generally, when no ambiguity exists in the terms of the document, the construction of the writing is a question of law, and the intention of the parties must be determined exclusively from the language used. Chicago Inv. Corp. v. Dolins, 93 Ill. App. 3d 971, 974, 418 N.E.2d 59, 62, 49 Ill. Dec. 415 (1st Dist. 1981); Interway, 85 Ill. App. 3d at 1098, 407 N.E.2d at 618. As recently noted by the Seventh Circuit: "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 . . . ." Empro, 870 F.2d at 425 (interpreting Illinois law).
Upon careful review of the unambiguous text and structure of the Letter of Intent, there can be no doubt that the parties intended that the execution of a formal agreement be a condition precedent to a contractual obligation. Paragraph six of the Letter begins: "This proposal, of course, is subject to the preparation and execution of a mutually satisfactory Purchase Agreement (containing customary representations and warranties)." Similar language is contained in paragraph eight: "It is understood that this is merely a letter of intent subject to the execution by Seller and Buyer of a definitive Purchase Agreement . . . [and] does not constitute a binding obligation on either of us. Moreover, the Letter of Intent provides that "upon acceptance by Seller of this letter, we shall commence the drafting of a definitive Purchase Agreement for submission to Seller and Seller's counsel for review. Finally, paragraph eight explicitly deals with the possibility that no binding obligation may result from future negotiations, providing: "If the acquisition contemplated hereby shall not become effective for any reason, each of the parties hereto shall pay its own expenses."
Letters of intent and agreements in principle often . . . do no more than set the stage for negotiations on details. Sometimes the details can be ironed out; sometimes they can t. Illinois, as Chicago Investment, Interway, and Feldman [v. Allegheny Int'l, Inc., 850 F.2d 1217 (7th Cir. 1987) (interpreting Illinois law)] show, allows the parties to approach agreement in stages, without fear that by reaching a preliminary understanding they have bargained away their privilege to disagree on the specific. Approaching agreement by stages is a valuable method of doing business. So long as Illinois preserves the availability of this device, a federal court in a diversity case must send a the disappointed party home empty-handed.
Empro, 870 F.2d at 426. In the absence of an enforceable contractual obligation, we are obligated to send Venture--surely disappointed by the evaporation of its prospect to acquire the Health Business at a price substantially below market value--"home empty-handed."
In a final attempt to salvage its complaint, Venture argues that the decision in Quake Const. v. American Airlines, Inc., 181 Ill. App. 3d 908, 537 N.E.2d 863, 130 Ill. Dec. 534 (1st Dist. 1989), aff'd, 141 Ill. 2d 281, 565 N.E.2d 990, 152 Ill. Dec. 308 (1990), has changed the face of Illinois law regarding letters of intent and preliminary agreements. We disagree. Indeed, the court in Quake affirmed the standards under which to evaluate such preliminary understandings, stating that "if the parties intended that the execution of a formal agreement be a condition precedent, then no contract arises unless and until a formal agreement is executed." Id. at 913, 537 N.E.2d at 866 (citations omitted). The court in Quake continued by analyzing the document in question to determine if the language of the writing is ambiguous or not. Concluding that the letter of intent (advising plaintiff that it had been awarded a contract for the construction project in question) was in fact ambiguous, the court held that the construction of the writing is an issue of fact, and parol evidence is admissible to explain and ascertain what the parties intended. Id. at 913-14, 537 N.E.2d at 537-38. This holding is entirely consistent with the holdings of Chicago Investment, Interway, Feldman and Empro. That the court in Quake could not determine as a matter of law that a contract either did or did not exist represents nothing more than a factual discrepancy between that case and the present case. Accordingly, ZDS's motion to dismiss is granted.
For the reasons set forth above, we deny Venture's motion to exclude documents, and grant ZDS's motion to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6). It is so ordered.
MARVIN E. ASPEN, United States District Judge