ALP: Are Letters of Intent binding?

May 2006

Usually, Letters of Intent are expected to be non-binding; however, recent judicial decisions in California have found Letters of Intent to be binding obligations. It is important to be careful to assure that you are obtaining an agreement that actually provides the opportunities and protections that are desired, including the opportunity to escape.

Most commonly, the binding portions of a Letter of Intent includes confidentiality, exclusivity or “no shop” clauses, time limits, and clauses on expenses.

The majority of the rest of a Letter of Intent is usually non-binding and subject to further negotiation, including the specific economic terms and points on assets to be acquired and liabilities to be assumed.

The use of terminology within Letters of Intent can help clarify which parts are to be binding and non-binding. The use of tentative language like “preliminary,” “proposed transaction,” and “proposed seller” make the language appear to be not binding.

Whether binding or not, Letters of Intent can create important moral obligations and set the stage for the future relationship between the parties.

Well crafted Letters of Intent are very useful in planning and negotiating business transactions. Drafting language that makes clear which clauses are binding and which are non-binding will help avoid controversy. And when the Letter of Intent has finally been signed, restrain yourself from jumping up, pumping the hands of others in the room, and shouting, “We have a deal!”

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