Entering into letters of intent or heads of terms will often give comfort at the outset of negotiations. It is important, however, to ensure that something that is agreed at an early stage on the basis that it is non-binding doesn’t come back to haunt when negotiations break down. Some key considerations are:
- Say that it is non-binding – a letter of intent (LOI) should contain a clear, unambiguous statement that it is not intended by either party to be binding. Any provisions which are intended to be binding (often confidentiality or exclusivity provisions) should contain similarly clear and unambiguous statements that those provisions will be binding on both parties.
- Acts and intentions – the parties’ intention that the LOI is non-binding should be clear not only from the wording of the LOI, but also the course of conduct during and after negotiation of the LOI. Key factors could be the amount of time spent negotiating the LOI, the extent and nature of drafting changes, and whether the parties go on to perform obligations contemplated in the LOI prior to entering into a definitive contract.
- Certainty versus flexibility – while both parties have an interest in agreeing key terms up front, a LOI which includes definitive agreement on all details may be interpreted as a binding contract. If in doubt, leaving minor issues open will add weight to an argument that the parties did not intend the LOI itself to be binding.
- Legalese and boilerplate – the use of legalistic terms such as ‘undertakes’, ‘agrees’ or ‘agreement’ could show an intention to bind. The inclusion of a governing law clause and other boilerplate provisions in a LOI might also suggest an intention to bind, unless those apply only to any provisions of the letter intended by both parties to be binding.
- Jurisdictional specifics – check any local requirements with legal counsel where time and costs allow. For example, in certain jurisdictions (including Belgium, France, Germany, Italy, the Netherlands, Poland, Portugal and Spain) parties are subject to a duty to negotiate in good faith, which can give rise to liability if one party unreasonably withdraws from negotiations or purports to renege on previously agreed terms. The existence of a signed LOI (whether expressed to be binding or not) may add fuel to a claimant’s assertion that the other party withdrew from advanced negotiations or is refusing to accommodate a previously agreed term.