Quake Construction and American Airlines reached an agreement regarding a construction project, formalized by a letter of intent which referenced a further written form contract. The letter of intent clearly awarded the contract but reserved a right of cancellation. Before the written form contract was completed, American Airlines attempted to terminate the relationship. Quake sued for damages on breach. The lower court dismissed, stating that there was no contract, and Quake appealed. The appellate court found the letter of intent ambiguous and remanded, and American Airlines appealed to the Supreme Court of IL.
Rules of law
Letters of intent may be enforceable, but only if the parties intend them to be contractually binding.
If the terms of an alleged contract are ambiguous or unclear, parol evidence is admissible to determine intent.
Determining whether two parties intend to reduce their agreement to writing, i.e., be contractually bound, depends on whether the written agreement has few or many details, whether it involves small or large amounts of money, and other factors.
Quake argued that the letter of intent clearly stated that American Airlines had chosen to award the contract to them and constituted an acceptance of the offer which arose from their prior negotiations. It argued that ambiguities in the letter were mere formalities, that no material elements of the contract remained to be negotiated, and that the reservation of cancellation right was ineffectual.
American Airlines argued that the reservation of cancellation right was binding and rendered the letter of intent non-contractual. It also argued that there was no intent to be bound because of the references to a further contract.
The supreme court affirmed the appellate decision, finding that the combination of clear intent to be bound with apparent reservations of cancellation right rendered the language ambiguous. Thus, it was necessary to introduce parol evidence to resolve the ambiguity as to the parties’ intent, and so the original dismissal was improper.