PURPOSE:
The primary purpose of a Letter of Intent or ‘LOI’
[sometimes they are also referred to as a "Letter of Understanding"
or "Memorandum of Understand"] is to facilitate the start of a specific
business deal or project between 2 or more entities,
or for the prospective purchase of a company and/or their assets.
By identifying the key business and contractual understandings which will
form the basis of the final contract, LOI’s can provide the vital bridge
between mere oral discussions/ understandings and a future binding written agreement.
However, if the LOI is not properly drafted, it could result in huge damage awards,
so one needs to be careful in order to avoid the legal pitfalls inherent in this
commonly used business tool.
KEY DRAFTING ISSUES:
Binding vs. Non-binding:
LOI’s are either "binding" or "non-binding".
If the LOI is to be non-binding it must clearly express this intent.
If the LOI is silent in this regard, then it is presumed to be binding and
enforceable in the courts. If the LOI is non-binding, but confidential information
must be exchanged during the initial discussion stage, a separate non-disclosure
agreement [NDA] should be used which clearly states that the provisions of the
NDA are binding and survives the LOI. In that case, the LOI should be
qualified to reflect this understanding.
Brevity:
It is very easy to say too much in an LOI.
Depending on who initiates the LOI and the complexity of the deal,
brevity is recommended. Setting forth the salient business
points of the deal generally should suffice. For example, statements
in a non-binding LOI such as "agree to bargain",
"make every reasonable effort to agree upon and have prepared
as quickly as possible a contract providing for-----", and
"negotiate in good faith" could make and have been held to make
an otherwise non-binding LOI binding. One Massachusetts case on point is
Schwanbeck v. Federal Mogul Corp.; 412 Mass 703 (1992).
In this case, the LOI clearly stated the following: "
This LOI is not intended to create, nor do you or we presently have any
binding legal obligation whatever....."
But, in the very next paragraph the following statement was made:
" --- however, it is our intention, and we understand, your
intention immediately to proceed in good faith in the negotiation of such
binding definitive agreement---".
The court held that the word "however"
coupled with the intention language to "proceed in good faith’
constituted a contractual obligation independent of the prior sweeping
disclaimer that the LOI was non-binding.
When drafting an international LOI, however, it is important to also
include such terms as: what law will govern, and where,
i.e the jurisdiction/venue; what currency payment will be made in;
the language of the documents; and a right of cancellation.
A FINAL WORD:
The message in preparing LOI’s is caution and brevity;
careful drafting is critical in order to avoid/minimize
financial and legal exposure.
KEY LOI CASES [FOR REFERENCE ONLY]
Schwanbeck v. Federal-Mogul Corp., 412 Mass. 703 (1992).
Rand-Whitney Packaging Corp. v. Robertson Group, Inc. 651 F. Supp. 520.
Texaco, Inc. v. Pennzoil Co.; 729 S.W. 2nd 769.
Channel Home Centers, Inc. v. Grossman, 795 F2nd 291 (3rd Cir., 1986).
Itek Corp. v. Chicago Aerial Industries, Inc.; 248A. 2nd 624 (Del. 1967).