Tag Archives: Letter of Intent

Business, Contracts

Is our Letter of Intent Binding?

Buyers and sellers often use a letter of intent (LOI) to memorialize their agreement on the key terms of a transaction. Some of the material terms that are included in the LOI are the price, closing date, due diligence terms and other important deal points. Many parties find a sense of comfort once the LOI has been finalized and executed because it is a strong indication that most of the issues have been hammered out and a deal will occur. In fact, the LOI allows a supplier to start buying material in order to provide its customer with the product on time with the comfort of knowing that they will at least get reimbursed for this expenditure. The LOI serves as the approval to go ahead and spend the money.

Of course, the smaller issues and boilerplate language are not included in the LOI, so negotiations must still occur during the drafting of the contract. Although the LOI is not intended to be binding, certain contractual provisions such as confidentiality clauses and exclusivity terms are binding on the parties. As a result of this mix between binding and non-binding terms, it may leave you wondering when a non-binding LOI is binding?

It is common for the LOI to include a broad disclaimer that the parties are not bound by it unless or until a separate and binding contract has been executed by the parties. Yet, numerous courts have found that the LOI is evidence that the parties had a “meeting of the minds” sufficient to create an enforceable contract that is adequate for awarding damages if a breach occurs. In fact, the court applies an objective test to determine if a binding agreement exists. Thus, whether a party subjectively intended to be bound by the LOI does not matter. Rather, the court examines what a reasonable person in the same position as the parties to the LOI would’ve thought it meant.

Although there are no guarantees on what a court will decide regarding whether a LOI is binding or not, if you want to avoid it being binding on you, there are a few steps you can take, including:

  • Use clear an unequivocal language stating that the LOI is not binding on the parties
  • Include a provision stating that the LOI is an initial statement for consideration only and that additional information will be negotiated as part of a subsequent formal contract
  • Allow each party the right to terminate negotiations at any time and for any purpose
  • Comply with any exclusivity or confidentiality provisions contained within the LOI
  • Exclude the covenant to negotiate in good-faith or consider expressly disclaiming this obligation
  • Never refer to the LOI as a binding or final agreement in any correspondence or other communications with the other party

If you are interested in learning more about a LOI or you need assistance drafting one, contact Leslie S. Marell for an appointment.

Contracts

Drafting Binding and Non-Binding Provisions in Letters of Intent

Understanding binding and non-binding provisions in a Letter of Intent (LOI) is important for anyone who works with business contracts.  Here, we will review some of important information on LOIs and what you should look for when you are negotiating, drafting, and otherwise working with LOIs.

1.  Ensure everyone is on the same page. The first important thing to determine is whether you are working with a binding or non-binding LOI.  The United States, much of the EU, and many other countries around the world only recognize non-binding LOIs where both parties expressly agree to them.  But what does this mean really?  In practical terms, if you are negotiating or discussing a LOI with a potential supplier, distributor, or customer, you should always spell out that you intend the letter to be non-binding, and make sure you put this in writing (e-mail is fine!).  In many cases, you and the other party will want some of the provisions to be binding, while others will be non-binding.  Again, make sure everyone is clear, and put this in writing.  Consider specifically including language that states, “The parties agree that the following provisions shall be binding” and “the parties agree that the following provisions shall be non-binding” directly in the LOI.

2.  Use the mutually understood language. One of the best ways to make sure everyone understands which clauses are binding, and which are not, is to use the right kind of language that is understandable for all parties.  Words like ‘shall’ or ‘require’ conveys a binding requirement, while words like ‘will’ or ‘may’ convey a future intent.  Be cautious, however, that everyone understands this language.

3.  Consider how you frame obligations to negotiate in the LOI. For example, if the LOI ‘requires’ or otherwise obligates the parties to negotiate the proposed terms in good faith, then arguably the entire LOI is binding. Carefully consider the language you use in the LOI with regard to negotiations, and what would happen if the parties fail to reach an agreement on the substance of the bargain.  Could one have a claim against the other for bad faith or even breach of contract?

4.  Consider your leverage when adding binding or non-binding clauses. On many levels, negotiating a contract can be a head game, but many parties to LOIs don’t place the same emphasis on them as they do on “real” contracts.  For this reason, you might consider using binding and non-binding clauses in your LOI to your strategic advantage when you are negotiating the underlying contract itself.  The other party may not review an LOI to the extent that you have, and you may have much better leverage on terms that were listed as binding in the LOI when you are negotiating the deal itself.

5.  Finally: And from the Buyer’s Perspective:  Consider the impact of issuing an LOI on your future leverage. I’ve had seller clients who have told me that once they receive an LOI from their customer, they don’t have the same sense of “urgency” to finalize the contract as they did prior to the LOI. In other words, they know that their customer has “skin in the game” and is unlikely to pull out unless a major problem occurs.  Leverage is an important issue in LOIs!

Leslie S. Marell has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.

Uncategorized

Working with Your In-House Legal Department

As a contract manager, purchaser, sales manager, or department head, have you ever felt like your in-house attorney was ignoring you?  Do other departments seem to get priority treatment from the legal department, while your deals languish at the bottom of the pile waiting for the lawyers to sign off?  Here are a few tips to improve your working relationship with your internal legal department, and move up in the internal legal food chain:

  1. Explain the deal to your attorney. They’re not mind readers. They don’t know if the deal you’ve discussed with your supplier/ customer is actually the deal that is reflected in the written document.  Give them a short, basic outline of what you’ve agreed upon when you give them the contract. Don’t just throw the contract over to your attorney without giving an explanation or context. That’s what everyone else does!
  2. Review your supplier/ customer objections to your contract before sending to your attorney. You’d be surprised how many “contract/ legal” issues lawyers deal with that are actually issues that the business people should have addressed before turning over the document to their legal departments. For example, I am often asking my seller clients if they understand that they are signing up to a 3 year firm price agreement. They’ll tell me that is not the discussion they had with their customer.  However, they haven’t read the contract. So many people are intimidated by the contract that they don’t even read it.
  3. Give your in-house counsel enough time. If you put yourselves in the shoes of the company attorney, you might imagine how many things come across his or her desk with a ‘URGENT’ stamped on them. Think about your own situation: How many of your internal customers tell you their project is “hot”?  Your attorney will be much more responsive to you in the long-term if you always make sure to give them a sufficient amount of time for review—at least a week.  Attorneys much prefer to deal with the ‘reasonable’ departments and personnel, and may give those projects more time and attention.
  4. Consider how you loop your attorney in with information. Find the appropriate balance between carbon-copying your attorney on every email communication and keeping them entirely in the dark until the day before the contract deadline.
  5. Get organized. Your in-house counsel is likely buried under documents.  It will make your attorney’s job much easier if you send a single email with all of the necessary documents attached, or drop by the legal department with a complete file.  Sending documents or email correspondence piecemeal is likely to put you on their black list.  Attorneys particularly like a one-page time line summaries of the deal, summaries of the important points that were negotiated, or summaries of important materials and documents.  Good organization is always appreciated.
  6. Get back to your attorney promptly. If your attorney asks for more information, or calls you with a status update, you should make it a priority to get back to him or her as quickly as possible.  Your attorney is balancing multiple projects simultaneously, and the more quickly you respond, the more likely your deal will be to move to the top of the list.
  7. Lawyers are people too. If you’re a newer employee, or even if you’ve been with the company for years, stop by the legal department to introduce yourself in person.  Getting to know your internal attorneys and staff is one of the best ways to make sure your deals get speedy review.  You know: the more familiar you are with the person who emails you, the more likely you are to respond. Lawyers are also not above being encouraged with free food or other goodies.  You might be surprised at how far you can get with your attorneys through their stomachs! Personally, I love M&Ms!

Leslie S. Marell has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.