CASE FACTS
Allwaste considered acquiring Geotrack. The In Tan, the court analyzed the letter
parties entered into a letter of intent containing
a purchase price for the sale of Geotrack, owned
by the plaintiffs. The purchase of the company,
however, was contingent on the buyer's
"satisfactory review" of the business' financial
statements. The letter of intent provided that
"the closing of the purchase was contingent on a
'satisfactory review' of Geotrack's financial
Tan v. Allwaste, statements and its operational practices.' When
Inc.1 Allwaste learned that Geotrack had not paid
payroll and withholding taxes for some time,
Allwaste decided not to proceed with the
acquisition. Allwaste withdrew from further
negotiations and was unwilling to buy Geotrack
even after Geotrack's shareholders of- fered to
lower the price. The plaintiffs claimed that
Allwaste made no demands at all but simply
backed out of the deal.
The Swatch wanted to expand its franchise
operations to sell watches in the United States.
Matterhorn and Swatch signed a letter of intent
In re: Matterhorn granting Matterhorn the exclusive franchise for
Group, Inc.2 a list of possible locations. The agreement called
for Matterhorn to invest in finding appropriate
locations for retailing Swatch watches from
among thirty possible sites. As Matterhorn filed
applications for franchises at potentially
1
Schwartz, Alan and Scott, Robert E., "Precontractual Liability and Preliminary Agreements" (2007), citing Tan v.
Allwaste, Inc., No. 96 C 3558, 1997 WL 337207, at *4 (N.D. Ill. June 11, 1997). Faculty Scholarship Series. Paper
301.http://digitalcommons.law.yale.edu/fss_papers/301
2
In re Matterhorn Group, Inc., No. 97-8273 (SMB), 2002 WL 31528396 (Bankr.S.D.N.Y.Nov.I5, 2002)
HELD
of intent not as a fully binding
contract for Allwaste to acquire
Geotrack, but as a preliminary
agreement obligating Allwaste to
negotiate further in good faith.
The U.S. District Court for the
Northern District of Illinois held that
the plaintiff submitted enough
evidence to proceed to the jury:
[A] party's self-interested behavior
is not considered bad faith.... Rather,
plaintiffs must show Allwaste
insisted unreasonably on terms not
contained in the letter of intent or
that Allwaste attempted to alter
terms already agreed upon.... While
Allwaste is entitled to pursue its
self-interest in the course of
negotiations, it cannot simply
refuse to negotiate in the face of an
agreement to negotiate in good
faith. Since a reasonable jury could
find that Allwaste ended
negotiations for reasons unrelated to
any demand, misrepresentation,
omission, or information from
Geotrack, a jury could also conclude
that Allwaste acted in bad faith.
The court found Swatch to be in
breach of a preliminary agreement
to bargain in good faith and
awarded Matterhorn reliance
damages based on the out-of-
pocket costs of investigating the
locations in question. The court,
however, denied Matterhorn's
claim for expectation damages
 profitable locations, Swatch agreed to process
the applications diligently and to seek financing
and approval from its parent firm. Here again,
the parties agreed to make a simultaneous
investment in a complex project: Swatch was to
invest in opportunity costs by granting
exclusive rights to Matterhorn and in the
human capital needed to process applications
and to become familiar with the American
business climate; Matterhorn was to make
human capital investments in search and
information costs. The project establishing retail
sites for selling Swatch watches in shopping
malls could have taken many possible forms,
and precisely what form would be profitable
could not be specified ex ante. Investment and
the passage of time would have revealed which
sites, if any, would prove profitable. In this case,
however, Swatch engaged in the strategic
behavior that our model predicts: it delayed
processing several applications and failed to
secure the necessary approvals.
Hoffman and Red Owl engaged in extensive
negotiations and preparations aimed at
Hoffman's opening a Red Owl franchise. In the
course of these negotiations, Red Owl officials
recommended that Hoffman take numerous
financial and nonfinancial actions. He followed
these recommendations because the officials
also assured him that $18,ooo would be a
sufficient capital investment. Thereafter, Red
Hoffman v. Red Owl developed several financing proposals, last
Owl Stores, Inc.3
of which required Hoffman to contribute
3 Hoffman v. Red Owl Stores, Inc., 133 N.W.2d 267 (1965)
based on lost profits, holding that
"there is no guarantee that it would
have opened a store in [that
location]."
Accordingly, Swatch breached the
Letter of Intent by rejecting the Vail
application for improper reasons.
Matterhorn is entitled to recover its out
of pocket costs incurred after the
execution of the Letter of Intent in
investigating Vail. Matterhorn is not,
however, entitled to recover lost profits.
Because of its financial problems, and as
discussed in more detail below,
Matterhorn declined to open stores at
several other sites that Swatch had
approved, and there is no guarantee that
it would have opened a store in Vail.
Goodstein Constr. Corp. v. City of
New York, 604 N.E.2d 1356, 1360-62
(N.Y. 1992) (plaintiff cannot recover
lost profits based on the
defendant's failure to negotiate in
good faith the prospective terms of
a nonexistent contract; there is no
certainty that the parties would
have ever entered into that contract,
there was no evidence that the
parties contemplated liability for
lost profits in that situation, and an
award would be too uncertain,
speculative and conjectural); see
Schonfeld v. Hilliard, 218 F.3d 164,
172 (2d Cir. 2000); Kenford Co. v.
County of Erie, 493 N.E.2d 234, 236
(N.Y. 1986)
The court held as a matter of law
that the parties never reached
agreement on essential factors
necessary to establish a contract. For
instance, they had not agreed on any
of the details concerning Red Owl's
investment, such as the size, cost,
design, and layout of the store, nor
had the parties agreed on the terms
of the lease, including rent,
maintenance, renewal, and
 $34,000 and equity. In response, Hoffman broke
off negotiations and sued Red Owl to recover
his sunk costs.
VENTURE Venture Associates Corporation sent a letter of
franchisee purchase options. Indeed,
the parties never agreed on just
what was meant by the statement
that $18,ooo of capital would be a
sufficient investment to sustain a
franchise.
Thus, the court held, there could be
no basis-of-the-bargain liability.
Nevertheless, the court permitted
Hoffman to recover sunk costs
based on the doctrine of
promissory estoppel. The court held
that under this doctrine, a promise -
Red Owl's assurances that $18,ooo
was a sufficient investment need
not be as definite in its terms as a
promise that is the basis of a
traditional bargain contract.
We determine that there was ample
evidence to sustain the answers of the
jury to the questions of the verdict with
respect to the promissory
representations made by Red Owl,
Hoffmans reliance thereon in the
exercise of ordinary care, and his
fulfillment of the conditions required of
him by the terms of the negotiations had
with Red Owl.
There remains for consideration the
question of law raised by defendants
that agreement was never reached on
essential factors necessary to establish a
contract between Hoffman and Red
Owl. Among these were the size, cost,
design, and layout of the store building;
and the terms of the lease with respect to
rent, maintenance, renewal, and
purchase options. This poses the
question of whether the promise
necessary to sustain a cause of action for
promissory estoppel must embrace all
essential details of a proposed
transaction between promisor and
promisee so as to be the equivalent of an
offer that would result in a binding
contract between the parties if the
promisee were to accept the same.
The court held that Zenith did not
ASSOCIATES intent to Zenith Data Systems Corporation
CORPORATION, (defendant), proposing to acquire Zeniths
a Tennessee subsidiary, Heath Company (Heath) for $11
Corporation, million. The letter stated that the only binding
Plaintiff- obligation in it was the obligation of Venture
Appellant, and Zenith to negotiate in good faith toward a
v. purchase agreement for Heath. Zenith sent
ZENITH DATA Venture a letter agreeing to Ventures letter in
SYSTEMS principle. Venture and Zenith negotiated for six
CORPORATION, months, after which Zenith ended negotiations
a Delaware because Venture refused to provide a third-
Corporation, party guaranty of its financial obligations or
Defendant- agree to allow the purchase price to be adjusted
Appellee.4
after closing. Venture sued Zenith. The district
court dismissed the action, and Venture
appealed, arguing that a binding contract was
formed through the parties exchange of non-
identical contract drafts. The court of appeals
found that no contract was formed by the non-
identical drafts, but that the letters between
Venture and Zenith created a binding contract
to negotiate in good faith toward the
formation of a final contract. On remand, the
district court found that Zenith had not acted in
bad faith and was not liable for any damages.
Venture appealed.
4 Venture Associates v Zenith Systems Corp, 96 F3d 275, 280 (7th Cir1996).
breach its preliminary agreement to
negotiate in good faith by breaking
off contract negotiations after six
months of bargaining. The plaintiff
had failed to furnish third-party
guarantees (after the plaintiff did
not produce financial information)
and failed to agree to post-closing
adjustments. The court rejected the
plaintiff's argument that Zenith had
no right to demand these additional
conditions:
This argument overlooks the
difference between an agreement to
negotiate a contract and the contract
to be thrashed out in those
negotiations. The agreement to
negotiate does not contain the terms
of the final agreement. Otherwise it
would be the final agreement. A
preliminary agreement might
contain closed terms (terms as to
which a final agreement had been
reached) as well as open terms, and
be preliminary solely by virtue of
having some open terms. The
parties would be bound by the
closed terms. There were no such
terms here. [FN78]
The court also noted that where a
breach of the duty to negotiate in
good faith exists, "[d]amages for
breach of an agreement to negotiate may
be, although they are unlikely to be, the
same as the damages for breach of the
final contract that the parties would
have signed had it not been for the
defendant's bad faith." But, the court
recognized that the nonbreaching party
is entitled to reliance damages--i.e., "the
expenses he incurred in being misled."
The Seventh Circuit Court of
Appeals in Venture also recognized
that a duty to negotiate in good faith
is a viable claim, but it cautioned
 against enlarging such a duty:

*1197: The process of negotiating

multimillion dollar transactions, like
the performance of a complex
commercial contract, often is costly
and time-consuming. The parties
may want assurance that their
investment in time and money and
effort will not be wiped out by the
other party's foot dragging or
change of heart or taking advantage
of a vulnerable position created by
the negotiation.... [T]he notion of a
legally enforceable duty to negotiate
in good faith toward the formation
of a contract rests on somewhat
shaky foundations.

2. LOSS OF BUSINESS OPORTUNITY

*see in Re: Matterhorn