Cincinnati Business Contract Negotiation Lawyer
Can A Letter of Intent Be Binding?
The answer is, sometimes.
When companies are exploring a potential deal – whether it is an investment, a merger, or the sale of real estate or some other asset – they often put together a “letter of intent” prior to finalizing and signing a definitive contract. The purpose of the letter of intent is to outline the key terms of the agreement, and to serve as a basis for negotiating all the details that will go into a definitive agreement.
Sometimes, however, the parties are unable to reach this definitive agreement. Some detail becomes a sticking point, or circumstances change, and one of the parties tries to walk away, thinking that the letter of intent won’t be binding. So what might make the letter of intent binding, and force the parties to conclude a deal?
First, if the letter of intent includes all the material terms in it, a court could decide that there is enough agreement between the parties to find an enforceable contract. This can be the case even if the letter of intent says that it is subject to reaching a comprehensive agreement satisfactory to both parties.
Second, if the letter of intent contains a provision saying the parties will negotiate in good faith, a court might require the parties to continue to do just that. There have been cases where circumstances have changed for one party, so that it wants to walk away, but there was a “good faith” clause that prevented the party from getting out of the deal.
If you want to maintain maximum flexibility, therefore, leave out one or more material terms, deferring agreement on those terms to further negotiation. Also, ensure that there’s no obligation in the letter of intent to continue to negotiate in good faith.
On the flip side, however, companies often expend considerable resources putting deals together, and they want to ensure that a letter of intent will lead to a final deal. For companies in this situation, by all means get those material terms nailed down in the letter of intent, and put in a clause requiring the parties to negotiate in good faith. Another tactic to discourage walkaways is to include a break-up fee clause. That clause provides that if one party walks away from the deal, it will be obligated to pay a break-up fee to the other party, to compensate for the time and other resources invested to date. The problem with this approach, however, is that after making efforts to ensure the letter of intent is binding, you may discover that you no longer want to be bound.
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