I am asked, “Are letters of intent binding?” Well, I answer the question, but ask “Are they necessary for your deal?” Here are a few thoughts on the subject…
What is a Letter of Intent?
Ideally, a letter of intent (LOI), a.k.a., a memorandum of understanding or an agreement to agree, is a written description of a proposed transaction which can facilitate the negotiation of a comprehensive written agreement. An LOI may contain both binding and non-binding provisions. However, none of its provisions will be interpreted as being “a little binding.” Although business people experience various degrees of commitment throughout a negotiation process, a written document will either create legally enforceable rights or it won’t. The document won’t create rights which are “a little enforceable.”
Why would anyone want or need to sign a document which is unenforceable?
Non-binding provisions can serve to evidence a party’s good faith and commitment to making a deal; give the negotiations direction and focus; identify “deal breakers” before unnecessary transactional costs are incurred; and provide preliminary information to potential lenders, investors and regulators. At the same time, binding provisions are useful and appropriate to require confidentiality; prohibit the use or disclosure of information shared during the negotiation process; prohibit a party from soliciting, considering or accepting competing proposals so long as the parties are negotiating in good faith; place time limits on due diligence efforts; and require a non-refundable deposit to avoid “fishing expeditions.”
Are LOIs appropriate for every deal?
No. However, if having an LOI is advisable, careful drafting is the key. There are many cases reporting how inaccurate drafting resulted in a party being bound by LOI provisions erroneously believed to be non-binding. In a recent case which resulted in a $15.9 million award, a federal appeals court noted that interim agreements in the midst of protracted negotiations can be enforced; the mere fact that the parties contemplated eventually having a comprehensive written agreement does not relieve the parties from the responsibilities already expressed in writing.
What should I do when I consider using an LOI?
The legal pitfalls of LOIs should not be overlooked when negotiating business transactions, and LOIs should be prepared and evaluated by competent legal counsel.
Would you like more information?
Please contact me if you would like further information.
DISCLAIMER: This BLOG post is provided solely for the general interest of the reader. It is not legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.