Letters of intent: Binding or non-binding
In light of the current economic climate brought on by the nation’s response to the COVID-19 outbreak, many parties may have found their potential transactions stalled or outright canceled. This situation has likely left many wondering whether or not their executed letter of intent (or “LOI”) can provide them with any protection, recourse or relief.
Generally, letters of intent are drafted such that they are not intended to bind the parties but rather are intended to act as a harbinger to a definitive agreement. However, the exact terms and language in the LOI are critical in determining whether or not the LOI, in whole or in part, is binding on the parties.
Terms of the LOI
Simply labeling a document a “letter of intent” does not make it non-binding on the parties. A properly drafted LOI provides that none of its provisions are legally binding other than certain provisions such as confidentiality and exclusivity. If the LOI is properly drafted and specifies the binding and/or non-binding nature of the provisions, then this is a rather short analysis. However, if the LOI is silent as to the binding and/or non-binding nature of the provisions, then the analysis takes longer and is a bit more nuanced.
When analyzing party’s intentions, courts will generally look more closely to the language and terms of the document at issue. If the LOI contemplates an additional, definitive agreement between the parties, then (absent direct language to the contrary) it is unlikely that the terms of the LOI will be binding on the parties. Absent any reference to a definitive agreement or direct language to the contrary, a letter of intent could be interpreted as a binding agreement if the parties set forth the material terms to the transaction in the LOI. However, if any of the terms are left open for future negotiation, the letter of intent would likely not form the basis of a binding contract.
Binding Provisions in the LOI
As mentioned, when drafted properly, LOIs will specifically state that certain provisions in the document are binging between the parties. One such provision is exclusivity. Among sophisticated parties, it is quite common that a prospective buyer will contractually restrict a prospective seller from discussing, negotiating, or shopping a potential sale with other parties who are not the prospective buyer. These exclusivity provisions are typically tied to a certain period of time beyond the effective date of the LOI (30 days, 60 days, 90 days, etc.).
Prospective sellers should carefully review and consider exclusivity provisions and understand that although negotiations on a deal may have “died” or gone cold, they could very well still be restricted from shopping the deal elsewhere. Additionally, prospective buyers should keep in mind that the economic climate may improve before the end of the exclusivity period; keeping the available only to the prospective buyer until they are able to enter into a definitive agreement.
When determining whether an LOI has any binding provisions, parties must look to the exact language drafted in the document. In general, LOIs are specifically drafted as being non-binding (with few specifically excepted terms). However, if the LOI does not contemplate a subsequent, definitive agreement and contains all of the material terms of the transaction, the LOI may be interpreted as binding between the parties.