THE LETTER OF INTENT
IVAN HOFFMAN, B.A., J.D.
In order to be a valid and enforceable agreement, a document must contain certain essential legal provisions and must not leave either undecided or to be determined at some time in the future any aspect of such essential legal provisions. If these essential elements are not present, then the document is not a binding one and is often referred to by courts as an “agreement to agree” or a letter of intent, both of which are not enforceable as contracts.
Parties to a transaction sometimes intentionally create a letter of intent as an expression of what they intend to agree upon should certain circumstances arise. The document may even be made expressly non-binding until such other circumstances do in fact arise but even if there is no express statement to that non-binding effect, the document will not be binding and thus not enforceable until those circumstances arise. Thus, the letter of intent is essentially a legally worthless document. It is not clear to me the reason any party would ever bother to create such a document and yet I have seen it used on many occasions. If parties to a transaction intend to bind each other, then they should create a binding contract, not a letter of intent. If the parties to a transaction do not intend to bind each other, then why bother creating a document that is not binding?
However, sometimes one of the parties prepares a document believing it to be a valid and enforceable agreement only to find, after expensive litigation, that it was not a binding agreement at all but merely a non-binding, non-enforceable agreement to agree, letter of intent.
A recent case points out the issues related to this latter type situation. In Richie Co. LLP vs. Lyndon Insurance Group, Inc., a federal case out of the Eighth Circuit interpreting Minnesota law, the Court was called upon to decide if a document was a binding obligation or merely an unbinding letter of intent, agreement to agree. Although the case dealt with an interpretation of Minnesota law, the same general principles of contract law are applicable in most states, although you should consult with an attorney in your state.
The summary of the facts in that case is as follows: the plaintiff, Richie, had a previously existing contractual relationship with another entity, Mechanical Breakdown Protection, Inc. (“MBPI”) and proposed, on April 16, 1999, in a writing called “letter of agreement,” which writing was signed by all parties, an agreement with the defendant Lyndon, that the defendant would pay Richie on terms that were “substantially identical” to the terms in the MBPI agreement. The April 16, 1999 writing set forth certain terms regarding payment to Richie, which terms were to be included in a “subsequently-drafted ‘Service Contract Agreement.’” This “Service Contract Agreement” was to be entered into within 180 days after the defendant acquired a specific company, called FPC. That event took place on March 6, 2000. However, the Service Contract Agreement was never entered into.
The plaintiff sued, claiming that the defendant breached the April 16, 1999 “agreement” [my quotes] by failing to enter into that said Service Contract Agreement. The defense was, in part, that the said April 16, 1999 “agreement” was not in fact an agreement at all but a non-binding agreement to agree in the future. The defense also stated that the plaintiff never presented any such Service Contract Agreement to the defendant nor did the parties ever act on the terms of any such Service Contract Agreement.
The Court held that the April 16, 1999 “agreement” was not an agreement at all but a non-binding letter of intent and agreement to agree. The Court stated:
The Court also stated:A letter creating an agreement to negotiate in good faith in the future is not enforceable where the parties have contemplated that the agreement is not the complete and final agreement governing the transaction at issue.
The Court stated further:Furthermore, where the parties have agreed that an “agreement to negotiate” or letter of intent, in its entirety, is not a binding legal agreement, Minnesota courts have refused to enforce an individual provision of the letter as a freestanding “contract” promise.
The Court discussed a similar case in which certain terms, terms that might otherwise be essential to contract formation, were in fact set forth but the “agreement” also stated that “the parties shall enter into a definite purchase agreement which shall be drafted by the buyers within 30 days.” That court held and this Court agreed that such “agreement” was not a binding agreement but merely an agreement to agree and that the setting forth of such definitive terms was merely a “summary of negotiations.”However, the parties need not agree on every point, but only that the parties’ intent as to fundamental terms be reasonably certain [citing a case]. But where substantial and necessary terms are left open for future negotiation, the purported contract is void. [citing a case].
In the instance of this case, the Court said that the April 16, 1999 document was not a binding obligation but merely a non-binding letter of intent and agreement to agree. The Court pointed to the language of the document itself which stated that the defendant “will enter” into the above-mentioned service agreement. Thus “will enter” was the same as “shall enter” in the above-discussed case.
The Court stated further:
Such language clearly manifests an intention to do something essential at a later date…thus the document is not a binding contract but merely an unenforceable agreement to agree and a non-binding letter of intent.That language [in the cited case], like the language in the April 16, 1999 letter, spoke of future actions and agreements contemplated but not yet completed by the parties, and showed that the letter “was not the complete and final agreement the parties contemplated would govern” but “merely created an agreement to negotiate in good faith.”
Note: while there may be other legal causes of action a plaintiff might legally pursue in this situation, such other legal causes of action were not discussed in this case and thus are not addressed in this article.
Result: plaintiff loses, defendant wins. In truth, both sides lost since the cost and time consumption involved in pursuing both the trial and appeal must have been enormous. I have been at both the negotiation table and the litigation table and the former is significantly less expensive than the latter.
In general terms and not in reference to the above specific case, if you intend to have your project be a success, then plan for success. (Most people say that this is what they want but in fact seem to operate contrary to those statements). Otherwise, all you are doing is putting yourself in a lose-lose situation. If the project is a failure, you lose. If the project is a success and your legal foundation is not proper, you may find that the other party, not you, ends up making all the money or you may open yourself up for more claims and expenses than you can even imagine and in which event, you lose because you pay all your profits to lawyers and/or damages to the offended parties.
What kind of a way is that to run a business? Remember, “help me is almost always cheaper than fix me.”
Contract Language,” “The Do It Yourself Publishing
Lawyer,” “What Business Are You In?”, “Set
To Fail” and “The Need for Vision.”
© 2003 Ivan Hoffman. All Rights Reserved.