What’s the point of a letter of intent if it doesn’t serve as the final binding agreement? Isn’t it just extra work and more legal fees that could have been avoided by just getting to work on the agreement itself? As it turns out, letters of intent serve a valuable purpose and can actually save on legal fees. That is, drafting a letter of intent allows the parties to outline the major deal points and address any areas of particular concern held by one or more parties sooner rather than later. To that end, the contracting parties are able discern whether they can agree on the fundamentals and arrive at a meeting of the minds on those fundamentals before spending significant time and money on due diligence and/or drafting a final agreement. Said differently, a letter of intent affords the parties the opportunity to first focus on and agree upon the big picture items before moving forward.
There are generally two types of letters of intent. The first is the letter of intent in which substantially all of the material terms have been agreed upon. The second is the letter of intent in which the parties state in broader terms their goals and intentions followed by an agreement to cooperate in good faith to reach a final agreement. The former is typically more detailed and substantive than the latter. Nevertheless, regardless of document titles and the amount of detail contained in the document, the relevant inquiry in determining whether any letter of intent is binding is the intent of the parties. If the parties did not intend to be bound, then they are not bound. Indications that a letter of intent is non-binding are: a) the use of language clearly indicating that the parties do not intend for it to be binding; b) the complexity of the deal relative to the amount of detail in the letter of intent; c) the importance of the missing terms; and d) references to the need or intent to further negotiate.
The bottom line is that the parties should be clear by expressly stating whether they intend to be bound by a letter of intent or not. Further, if they do intend to be bound, it should be very clear as to precisely what terms are binding or what each party is bound to do going forward. This can vary widely. Some letters of intent make binding the purchase price, collateral, payment terms and assets to be sold, while other agreements leave nearly everything to be determined through future negotiations.
Patrick J. Van Zanen
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.