Pre-Closing Liability

Abstract

Two years after Penzoil v. Texaco threatened to burst the seam of contract formation and find binding commitments before negotiations ended, Judge Easterbrook stitched the rupture. His landmark decision in Empro v. Ball Co. held that a letter-of-intent, which is subject to the preparation of a more comprehensive formal document, is not binding. Each party can freely walk away from it prior to the closing, without incurring any liability and without the court scrutinizing the reasons for the negotiations breakdown. Many courts have since cited and followed Judge Easterbrook’s approach. In this commentary, I argue that that this freedom to walk away from negotiations is too broad and in conflict with the ex ante interests of the parties. Intermediate liability at the pre-closing stage would induce more efficient levels of precontractual reliance, benefiting both parties. I develop one possible foundation for an intermediate liability regime and demonstrate how it would apply in the case.