Letters of Intent: Are They Binding?
| Publication year | 1995 |
| Pages | 2367 |
1995, October, Pg. 2367. Letters of Intent: Are They Binding?
In the typical case, neither party intends to be committed to the transaction or even obligated to enter into a contract until a final agreement has been reached that has been approved by the parties' lawyers and signed by the parties. Nevertheless, there are several ways complications can arise.
To begin with, clients, persuaded by the notion that they are not making a commitment, often sign letters of intent without consulting their lawyers. After all, a primary purpose of the letter of intent is to determine whether the parties are in agreement on the major business points before incurring the expense and delay of having the lawyers negotiate a fullblown contract. Another complication can arise when the parties say too little or too much in the letter of intent, giving rise to a claim by one party that the letter contains all the essential elements and is, in itself, a binding contract. Yet another complication can arise as a result of what the parties do or say outside the letter of intent. At least one other complication lies in the general principle of good faith and fair dealing. A carefully drafted letter of intent will avoid most, but not necessarily all, of these potential complications.
Assuming there has been an offer and the offer has been accepted, omission of details that are not intended to be conditions precedent will not preclude a binding contract if the essential terms have been agreed on and the parties intend to be bound.(fn2)
The general rule is that in order to establish the existence of a contract, it must be shown that the parties reached a complete agreement on all the essential terms and that those terms are definite, certain, complete and unambiguous.(fn3) There is no hard and fast definition in Colorado of the "essential terms" that must be included in an agreement to show that there has been a meeting of the minds.(fn4) What the essential terms are will vary with the transaction and its complexity and, perhaps more importantly, will depend on what the parties believe or intend to be essential terms.(fn5)
Although an agreement on some of the essential terms may be uncertain or incomplete in some respects, it can be specifically enforced if the uncertain or incomplete terms are matters that can be made certain or completed by presumptions, rules or custom and usage. In Shull v. Sexton,(fn6) the court said that time for performance implies a reasonable time, that place of performance can be where the seller lives, that the location of the land need only be described with reasonable certainty and that an agreement to agree on the terms of payment can be made certain by the purchaser agreeing to pay cash at the closing. It also has been held that an agreement to convey, without more, means title in fee free of lien or encumbrance, but does not require a warranty deed.(fn7)
As previously mentioned, the essential terms will vary with the transaction. The Colorado Court of Appeals in Applebaugh v. Hohl(fn10) found the following essential terms missing from the memorandum of the sale: (1) the condition and kind of title to be transferred, (2) the type of deed to be given, (3) the manner in which the purchase price was to be paid and the terms of any deferred payments, and (4) the time and place of performance. The court conceded that most of the missing terms could be supplied by presumption, rule or custom and usage, but concluded
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