Be Careful with Letters of Intent
Originally published: 07.01.06 by Mike Coyne
If you becomeinvolved in buying or selling a business, or if you are negotiatingparticipation in a large project, you might be presented with, or may want toprepare, a letter of intent. Simply put, a "letter of intent" is a documentthat describes business terms that parties intend to include in a formalwritten agreement.
In an articlepublished several years ago, an attorney described the letter of intent as agentleman's agreement. In warning of the dangers of such agreements, he quoteda British Justice who wrote, "A gentleman's agreement is an agreement which isnot an agreement, made between two persons neither of whom is a gentleman,whereby each expects the other to be strictly bound without himself being boundat all."
Letters ofintent are serious matters, and in some circumstances, a party may be bound bysuch a nonbinding agreement.
WhyLetters of Intent May Be Binding
Many lettersof intent are similar to a preliminary agreement. They describe the generalterms which parties have agreed to, and frequently describe those issues whichremain open. Quite frequently, letters of intent will state bluntly that theletter of intent is nonbinding. You might think that use of the term"nonbinding" would be the end of the story.
, judges willrule that the word "nonbinding" means just what it says--the parties merelyentered into an unenforceable agreement to agree. In one case, a judge ruledthat a letter of intent was unenforceable because the letter referred to thepossibility that negotiations might fail, and that the parties hoped to sign afuture binding agreement. However, there are ways that you can get stuck by anonbinding letter of intent.
First, if yousign a letter of intent, you have an obligation to bargain in good faith. Thismeans that you may not be able to walk away from the deal, abandonnegotiations, or insist on conditions that do not conform to the letter ofintent.
Courts havealso bound parties to a nonbinding letter of intent under the doctrine ofpromissory estoppel. Under the doctrine of promissory estoppel, a party can beheld liable for damages if the letter of intent causes the other party to loseout on other opportunities. Under this theory, some parties have recoveredvarious costs incurred in reliance of the letter of intent, such as the cost ofarchitectural drawings, preliminary construction costs, and the like.
Given thelegal risks associated with letters of intent, our first advice is always toapproach such a letter as if it may become a binding agreement. If you do notintend to be bound, say so – say that the agreement is "nonbinding." If youknow there are things which might cause negotiations to fail, talk about themin the letter. If you don't want the party to rely on the letter, say so. Or,if you only intend the letter to be binding in a limited way, describe how itis to be binding. List in the letter all of the things that you still have toagree upon. Require that the letter be confidential so that third partiescannnot rely on it. Reserve the right to discontinue negotiations for whateverreason, so that you won't be required to negotiate in good faith. However, ifyou do break off negotiations, attempt to document that you did so in goodfaith.
In summary,treat the nonbinding letter of intent as a serious matter. Give it as muchattention and care as you would a binding agreement.
MichaelP. Coyne is a founding partner of the law firm, Waldheger Coyne, located inCleveland, Ohio.Mike's practice focuses on business and tax planning for closely-heldbusinesses and professional practices, as well providing legal counsel onqualified retirement planning, mergers and restructuring. For more informationon the firm, visit www.healthlaw.com,or call 440-835-0600.
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