Although often styled as non-binding, certain terms contained in a letter of intent (LOI) are intended to be legally binding.
Problems can arise if the parties do not give proper focus to the interplay among those terms, particularly with respect to termination and survival clauses.
Often an LOI is signed with a limited exclusivity period and is structured to terminate upon its expiration. Although this may be prudent given the circumstances, what happens if the parties continue to negotiate after the LOI terminates? The answer can be murky, but a properly drafted LOI can eliminate the uncertainty.
In some cases, juries have found a binding oral agreement to exist when, following the termination of an LOI, the parties continued to negotiate, but never signed, a definitive purchase agreement. It is important to pay careful attention to the binding and non-binding provisions of an LOI and to be mindful of the effect a termination of the LOI may have on the parties in the future.
This post was written by Timothy Kravetz.
