A question of ethics
John Schwanbeck entered into negotiations with Federal-Mogul Corp to purchase Federal-Mogul's Vellumoid Division. The two parties drew up a letter of intent stating that "
A QUESTION OF ETHICS
1. The court held that the letter of intent did not contractually bind the parties when it specifically stated that it was not intended to create any binding legal obligation. The court pointed out that "[a] promise made with an understood intention that it is not to be legally binding, but only expressive of a present intention, is not a contract."
2. Under the common law of contracts (which applied in this case), as well as under UCC 1-203, the obligation of good faith applies to the performance of contracts. The court held that the provision in the letter of intent—in which Federal-Mogul and Schwanbeck stated their intention "immediately to proceed in good faith in the negotiation of [a] binding definitive agreement"—did not contractually bind the parties to negotiate in good faith, when the letter of intent also specifically stated that it "is not intended to create * * * any binding legal obligation whatever." In other words, the court held that the parties had no contract to negotiate. For this reason, the court did not determine what constitutes an obligation to negotiate in good faith or whether Federal-Mogul breached any such obligation. Even if there were such an obligation, however, there would have been nothing to prevent Federal-Mogul from breaking off negotiations in good faith and selling Vellumoid to another party.
3. As the court noted, the letter of intent stated that "[i]t has been agreed that we are under no moral or legal obligation to refrain from negotiating the sale of [Vellumoid] with others until [a] definitive agreement has been executed" (emphasis added). The same argument might be made against the existence of an ethical duty as can be made against the existence of a legal duty. It could be argued that there is no reason to determine whether there was an ethical duty to negotiate a contract or whether Federal-Mogul breached any such duty, because the parties included a term in their agreement expressly negating any such obligation. And even if there were such an obligation, there would have been no ethical duty to prevent Federal-Mogul from breaking off negotiations and selling Vellumoid to another party.
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