Most complex commercial transactions, such as merger and acquisition agreements and joint venture arrangements, are reduced to writing and memorialized in a formal written contract. Negotiating these complicated transactions and arrangements, however, can be time consuming and require parties to devote significant amounts of resources before a formal agreement can be finalized. Additionally, other opportunities may be lost by one or both parties while they complete the negotiation process and draft the final contract. It is understandable, then, that parties entering into such transactions or arrangements might want something in writing indicating that the other party is serious about reaching a final agreement. A letter of intent, or LOI, provides such reassurance.
A letter of intent typically contains an outline of an agreement between two or more parties that will be memorialized in a more detailed, formal written contract at a later date. A typical letter of intent is relatively short and written either in an outline or abbreviated format because the details of the agreement have yet to be negotiated and/or agreed upon by the parties. Think of it as an agreement to reach a final agreement. It serves as a roadmap for future negotiations between the parties and as a guide for all subsequent negotiations while the final agreement is being hammered out. The thought being that a letter of intent tends to facilitate an agreement on the remaining terms and provides a certain level of significance to the parties’ negotiations. With an executed letter of intent, the parties are signaling to one another that they are serious about making the transaction happen.
Are Letters of Intent Binding?
Letters of intent can be binding, non-binding or partially binding, depending upon the intent of the parties and the express language in the letter of intent. For the most part, the terms and provisions in a letter of intent are not binding on the parties because they are nothing more than an agreement to agree, which in Florida is not enforceable. See Midtown Realty, Inc. v. Hussain, 712 So.2d 1249 (Fla. 3d DCA 1998) (A realtor and a buyer sought to enforce a letter of intent to buy a gas station. The letter of intent contemplated a later formal purchase agreement, but when such an agreement was prepared and presented to the parties, they did not agree on its terms. The court determined a final agreement was never reached and the letter of intent was not binding.); de Vaux v. Westwood Baptist Church, 953 So.2d 677 (Fla. 1st DCA 2007) (A buyer sought to enforce an agreement to buy a vacant lot from a church. No formal sale agreement was ever signed by the parties and the buyer tried to rely upon a letter of intent. The court found the letter of intent was not binding because it lacked essential terms and was clear that other issues remained open for negotiation before a more definitive agreement would be signed.); Spanish Broadcasting System of Florida v. Alfonso, 689 So.2d1092 (Fla. 3dDCA 1997). To avoid any confusion, many letters of intent expressly state that the parties are not contractually bound unless they sign a subsequent formal contract. Language to this effect is desirable because it precludes litigation over a transaction in which the parties have yet to agree on all terms.
If a letter of intent, as a whole, is not binding, certain individual provisions in a letter of intent can be binding even if a final agreement is not consummated by the parties. Specifically, provisions that govern the non-disclosure of information exchanged during the negotiation process, governing law over any dispute related to the transaction, exclusivity and covenants to negotiate in good faith are all provisions that may be legally binding when contained in a letter of intent. It is recommended that if the parties want any provision in a letter of intent to be binding regardless of their ability to finalize a formal contract, specific language should be included in the letter of intent clearly recognizing the binding effect of the selected provisions.
Finally, letters of intent, in their entirety, can be binding on the parties if two conditions are satisfied – (1) if it is the intent of the parties for the letter of intent to be binding; and (2) the essential elements of the deal are fixed and adequately set forth in the letter of intent. Florida law is clear that when the parties express their intention to be bound and they specify the basic terms of the transaction, courts will enforce contracts to avoid frustrating the parties’ original intent. See White Construction Company, Inc. v. Martin Marietta Materials, Inc., 633 F. Supp.2d 1302 (M.D. Fla. 2009). Letters of intent will be enforced if these two conditions are satisfied even if parties intend to prepare and execute a subsequent agreement. Plumbing Service Company v. Progressive Plumbing, Inc., 952 So.2d 1211 (Fla. 5th DCA 2007); W.R. Townsend Contracting, Inc. v. Jensen Civil Construction, Inc., 728 So.2d 297 (Fla. 1st DCA 1999).
Other Examples of Letters of Intent
Letters of Intent are not only used as a prelude to complex commercial transactions. In fact, they are routinely used outside of the business world. Letters of intent are commonly used by universities when they offer a student-athlete a scholarship or when parents want to provide guidance when appointing a guardian for their children. Finally, a letter of intent is often required when applying for a government grant so that the agency or organization has a better idea of where the money will go and how it will be spent.
While letters of intent are designed to assist parties while they are negotiating a complex transaction, many times they become the focus of litigation when the negotiations break down. Even though letters of intent are, by nature, less formal, it is important that the parties’ true intent be accurately and sufficiently memorialized in a letter of intent. Given the high costs associated with litigating the legal effect of a letter of intent, an experienced attorney should help draft, negotiate and interpret any letter of intent.
LegalStandard.com’s experienced attorneys can draft a letter of intent for $695.00. LegalStandard.comsm can also review an existing letter of intent and explain the parties’ legal rights, obligations and risks associated with the agreement. LegalStandard.com’s review services start at $295.00 for a letter of intent.