## Facts

- David Butler developed “Whirlwind” safety technology for cutting tools and sought to sell it.
- Shiraz Balolia, president of Grizzly Industrial, Inc., pursued a potential purchase of the technology.
- In April 2012, the parties executed a letter of intent (LOI) stating their mutual intention to negotiate and enter a separate purchase agreement by a specified date.
- The LOI described the technology, specified a purchase price payable at closing, and included a Washington choice-of-law clause.
- The LOI required both parties to use their “best efforts to negotiate and attempt to agree” to terms for the contemplated purchase agreement.
- The LOI included an exclusivity restriction barring Butler, for a period, from negotiating with other prospective purchasers.
- Butler alleged he complied with exclusivity by declining other inquiries.
- Butler alleged Balolia later asserted purported deficiencies in the technology and attempted to rescind or radically renegotiate rather than negotiate toward the contemplated agreement.

## Issues

1. Under Washington law, can an LOI that expressly requires “best efforts to negotiate and attempt to agree” create an enforceable contract to negotiate in good faith?
2. If so, did Butler’s complaint plausibly allege breach of that obligation sufficient to survive a Rule 12(b)(6) motion to dismiss?

## Decision

- The First Circuit vacated the district court’s dismissal of the complaint and remanded for further proceedings.
- The court predicted that the Washington Supreme Court would likely recognize the enforceability of an express contract to negotiate in good faith.
- The court held the LOI plausibly alleged a binding obligation to negotiate, not a completed purchase agreement.
- Accepting the pleaded facts as true, the court concluded Butler plausibly alleged Balolia breached the LOI’s contractual duty to use best efforts to negotiate.

## Legal Principles

- In a diversity case, a federal court applies the chosen state’s substantive law and, where unsettled, predicts how the state’s highest court would rule.
- A preliminary agreement may be unenforceable as an “agreement to agree” on essential terms, yet still be enforceable as an express agreement to negotiate in good faith toward a final contract.
- “Best efforts” language can constitute a binding contractual commitment when supported by bargained-for terms and objective indicia of intent, including exclusivity and defined commercial parameters (e.g., identified subject matter and price).
- At the pleading stage, a plaintiff states a claim by plausibly alleging the existence of an enforceable duty to negotiate and conduct inconsistent with good-faith negotiation under the agreed framework.

## Conclusion

The First Circuit, applying Washington law, held that an LOI containing an express “best efforts” negotiation clause and exclusivity can form an enforceable contract to negotiate in good faith, and it allowed Butler’s claim to proceed by vacating the Rule 12(b)(6) dismissal and remanding.


Butler v. Balolia, 736 F.3d 609 (1st Cir. 2013)