A party that has signed a letter of intent may be legally bound to it depending on how the letter is drafted. In a business-to-business transaction, a letter of intent normally contains a provision stating the letter is non-binding. Even if such language is not included, it is possible a court would rule the letter is only an expression of intent. On the other hand, the parties to a letter of intent should not rely on assumptions — strong non-binding language is recommended.
How Courts Interpret Letters of Intent
A court relies on two factors when determining if a letter of intent is binding: written expressions of intent present in the letter and demonstrative actions taken by both parties after the letter of intent is signed. If it is treated like a contract, it could be ruled binding.
It is also important to understand the relationship between the two parties. If two parties draft and sign an ambiguous letter of intent but have a history of non-binding agreements together, it is likely the court will rule the most recent letter as also being non-binding.
Business etiquette and protocol can be a determining factor.
For example, most mergers and acquisitions begin in earnest with a term sheet, which functions like a letter of intent. The term sheet states the intentions, purchase price and payment terms. However, term sheets are almost always non-binding. Courts will likely take this precedent into consideration.
When a Letter of Intent Is Non-Binding
Suppose a letter of intent is non-binding, but one company incurs costs or devotes resources only to eventually have the deal fall through. In many cases, there is no recourse for losses incurred. However, it is possible the breaching party could be found to have failed to negotiate in good faith.
These laws are ambiguous and likely depend on jurisdiction and the type of letter of intent.
For example, in 2012, the Delaware Supreme Court approved recovery of “benefit of the bargain” damages between two companies in a mergers and acquisitions deal in the case of SIGA Technologies, Inc v. PharmAthene, Inc.