The Military Tribunal and the End of Political Harmony
Buy Sell Agreements
Made in USA?
Law Update Turns 7
When A Tree Falls...
What is the Work-At-Home Scam?
Collection -- Get Your Money's Worth (Anatomy of Successful Collection)
Nursing Home Care
The Queen's English -- 'Bout Done with Apostrophes
Recent Changes for IRAs and Retirement Plans
Copyright - Work Made for Hire
Slip and Fall Injuries
Foundations Made Easy
The Letter of Intent -- The Letter of Intent
Funding a College Education
Restrictive Covenants: Can You Compete?
The Queen's English -- A Detour
Mandatory Arbitration Agreements When Hiring New Employees
Co-Ownership of Property
Tax Relief Act of 2001
Disability Related Inquiries and Medical Examinations Under the Americans with Disabilities
A Parting. A Thank You!
Latin Lovers 2001
Overview of Agency Adoption
Real Estate Closings
Marty Eckard Retires
Other Changes . . .
Security Interests Revisited
No Time Like the Present
Employment Discrimination: Employee/Employer Perspectives
Easements and Licenses
Your Deposition -- Be Prepared
The Shock and Somber Wake
Subdivision of Land
There Ought to be a Law...
Federal Estate Tax Exemption Increases
What Happens if I Die Without a Will?
Queen’s English - The Most Common (and Vexing) Greeting
At various stages of a business
negotiation it seems inevitable that someone involved in the
transaction will suggest a letter of intent ("LOI") to be signed by
both parties to encapsule the terms of the transaction in an
abbreviated manner. It is an effort to "freeze" preliminarily the key
terms of a deal before formal agreements can be prepared and executed.
The first, obvious question: is the LOI to be legally binding? In the
vast majority of cases the response is "no, it is only intended as a
non-binding expression"; however, sometimes the parties do
want the LOI to be legally binding where there is concern that one of
the parties is skittish and may change his or her mind before the
lawyers (ever the villains, naturally) can put together a final draft
of a formal agreement (after a dozen revisions, etc.). The obvious
problem with a legally binding LOI is the abbreviation; if it is not a
full-blown agreement, what is left out? That "the devil is in the
details" is never more manifest than in a complex commercial
transaction; and it can be an invitation to litigation to encompass the
major terms in an LOI (e.g., the price, the assets being purchased, and
the time for closing the transaction) and ignore the less apparent but
ultimately critical considerations which are integral to a satisfactory
Incidentally, once a legally-binding LOI has been
signed by both parties, negotiating the details that have been
purposely omitted in order to expedite the "freezing of the deal" can
be well-nigh impossible. A party who has the security and leverage of a
binding LOI can be expected to be more intransigent in negotiating any
details which might diminish his or her position. As to the non-binding
LOI the first question that might occur is: why bother? If it is not to
have any legal effect, what is its purpose? The answer seems to lie in
effect of a document which contains the principal terms and is signed
by both parties but specifically provides that it is not legally
binding. Somehow, the reasoning is, if the LOI is in writing and
signed, albeit non-binding, the parties are more likely to hang in
until a formal agreement is signed. This may be in spite of the fact
that the LOI may state that each party is free to continue negotiations
with other parties!
Another question you might ask is: okay, it
may not serve any great purpose, but what harm can there be in a
non-binding LOI? After all if the letter specifically states it is not
legally binding (as it always should, if that is the intention), that
should be the end of it. Maybe.
In a recent case decided by the Pennsylvania Superior Court (GMH Associates, Inc. v. Prudential, et al., 752 A.2d 889)
the parties had signed a "non-binding" LOI which outlined the terms of
a deal until a formal agreement of sale of certain commercial real
estate could be agreed upon. The seller took a further step by assuring
the buyer orally that the properties were "off the market"
even though the LOI provided specifically that the seller was free to
negotiate with other parties. The buyer, in reliance upon the seller's
promise to take the real estate off the market and with the seller's
knowledge, made exhaustive efforts and spent substantial amounts to
locate tenants as though it had a binding agreement.
In the end
the Superior Court held that the words in the LOI meant what they said,
and the seller prevailed. Obvious result? Not really. The case was
appealed from a lower court which had found in favor of the buyer on
the equitable principle that the buyer had substantially altered its
position based on the seller's oral representations; that coupled with
the terms of the LOI which set the principal terms of the "deal" was
enough in the eyes of the lower court to negate the "non-binding"
provision of the LOI. It should be noted also that the three-judge
Superior Court panel split two-to-one in its verdict. So, on a
different day with different judges, who knows?
All of this serves to illustrate the obvious: extraordinary caution
must be exercised in preparing an LOI, legally binding or not; and we
would argue that in most cases it would be far preferable to direct the
same energy into the preparation of a formal, complete agreement. There
may be situations where an LOI can be the "glue" which serves the
purpose of keeping the parties together to a final agreement. We
suggest that in most cases a term-sheet, containing all the vital
provisions but not signed by anyone, in lieu of an LOI, would be a less
volatile document and could accomplish the same purpose.
Oh yes, if you should decide to use a term-sheet, as a precaution it too
should contain a statement that it is not intended as a formal offer
and no one would be bound to anything until a formal agreement is fully
executed. One more reason to love lawyers!
-- Ken Butera