Portions of this posting have been excerpted from AIPLA Newsstand (Powered by Lexology), 9/11/13 (http://www.lexology.com/library/detail.aspx?g=d95553a2-fb28-4d46-9a22-4533682627e2&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+Federal+section&utm_campaign=AIPLA+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2013-09-16&utm_term=).
A letter of intent (an “LOI”) sets out the key terms of a transaction agreed on in principle by the parties. It is usually entered into at the beginning of a transaction, once preliminary terms are agreed to but before the start of detailed due diligence and drafting of the definitive transaction documents. An LOI evidences the serious intent of the parties and may have moral force, but usually does not require parties to conclude a proposed deal on the terms set out in the letter. Therefore, although an LOI resembles a written contract, most of the terms in an LOI are not binding on the parties. Indeed, the document is typically marked “non-binding” even though some terms relating to non-disclosure obligations, covenants to negotiate in good faith, and “no-shop” provisions are binding. Many clients (and lawyers) assume that there is no liability if the definitive agreement differs from the LOI or if no definitive document is drafted based on the LOI. However, depending on the governing law for the LOI, “binding” and expressly “non-binding” provisions may be enforceable as a binding contract if a judge were to decide what the parties would have agreed to had they negotiated in good faith.
In an article from AIPLA Newsstand titled “When is a Non-Binding Term Sheet or Letter of Intent Enforced as a Binding Contract?” the authors discuss a lawsuit in which the Delaware Supreme Court upheld a lower court finding that a party breached a duty to negotiate in good faith by proposing terms that were not “substantially similar” to the economic terms of the LOI. Notably, the LOI was not signed and expressly stated on each page that it was “non-binding.” The Delaware Supreme Court also held that the aggrieved party could recover “benefit of bargain” damages (that is, the value of the agreement that would have been entered into but for the bad faith) for breach of a duty to negotiate based on an LOI expressly identified “non-binding.” Based on the Delaware Supreme Court decision, the authors suggest the inclusion of the following provisions in LOIs: (1) choice of law other than Delaware to govern the LOI, (2) expressly state that the LOI is non-binding, disclaim any party to be bound by a particular term or to be required to reach any agreement, and disclaim any duty to negotiate in good faith, and (3) limit the remedies to preclude lost profits and limit recovery of costs for anything other than a breach of any binding terms that are specifically described.
IP & Business Law Counseling, LLC can help your company draft or review LOIs to ensure the full and proper intent of the parties and, thereby, limit your company’s exposure to liability.