With intent: defuse the potential landmines in your letter of intent.

• Author: Strassberg, Evan S.
• Position: Legal Brief

A "letter of intent" (LOI) is a unique and useful instrument in conducting business transactions. Used most commonly in proposed acquisitions, LOIs permit the parties to document their understanding of key deal points and express their expectations of what each party will and will not do. But an LOI can also be an inherently contradictory exercise, particularly regarding the all-important question of whether the LOI is a binding legal document. Parties to an LOI can find themselves on the wrong end of a lawsuit arising from a document they thought was unenforceable.

However, the risk of litigation can be significantly reduced through careful drafting. Paying attention to the wording of an LOI is critical both to establish the expectations of the parties and to avoid liability in the event the contemplated transaction is never consummated.

Binding vs. non-binding

The non-binding clauses of an LOI will often include information such as a proposed price for the transaction, the subject of the transaction (e.g. the assets to be acquired or product to be supplied), an approximate timeline and any expectations as to how negotiations may proceed. These sections ensure the parties have analogous impressions about the transaction as dialogue continues and due diligence begins. Generally, these portions of the agreement will be expressly labeled as non-binding to confirm that the parties intend them to establish a framework, not a binding commitment.

An LOI will also generally include binding provisions to protect both parties. To conduct due diligence, a buyer will often need sensitive financial and organizational information. Accordingly, most LOIs will contain a confidentiality provision. The disclosing party would want to ensure these confidentiality obligations are not only binding, but also survive if the negotiations break down. Additionally, LOIs often contain an exclusivity clause that precludes the selling party from soliciting or accepting offers from anyone else during a specified period. Exclusivity provisions should be expressly made binding to ensure the buyer doesn't invest time and money in due diligence only to be ousted from the deal by someone else.

Covenant of good faith

While much litigation can be avoided by clearly documenting which provisions are binding and which are not, a less obvious risk comes from claims arising out of the implied covenant of good faith and fair dealing (the covenant). The covenant includes "an implied...