DRAFTING LETTERS OF INTENT
HAROLD S. SMALL, J.D., CPA, and AEP
Last month I discussed the recent decision of the California Court of Appeal (Second District) in Copeland v. Baskin Robbins (2002) 96 CA 2nd 1252, and circumstances relating to when a letter of intent may be binding, even though the parties did not intend to enter into a binding letter of intent. This month’s column continues the discussion, but focuses on issues relating to drafting of letter of intent, and indicating whether it is to be binding or non-binding.
Parties entering into a letter of intent usually are trying to reach agreement and desire to summarize the material agreements reached, in anticipation of moving forward with reaching agreement on other issues, fully documenting their agreements, and pursuing due diligence relating to the prospective relationship/agreement. However, as stated by the Court in the Copeland case,
Gone are the days when our ancestors sat around a fire and bargained for the exchange of stone axes for bear hides. Today the stakes are much higher and negotiations are much more complex. Deals are rarely made in a single negotiating session. Rather, they are the product of a gradual process in which agreements are reached piecemeal on a variety of issues in a series of face-to-face meetings, telephone calls, e-mails and letters involving corporate officers, lawyers, bankers, accountants, architects, engineers and others. ... [C]ontracts today are not formed by discrete offers, counter-offers and acceptances. Instead they result from a gradual flow of information between the parties followed by a series of compromises and tentative agreements on major points which are finally refined into contract terms. These slow contracts are not only time-consuming but costly. For these reasons, the parties should have some assurance “their investments in time and money and effort will not be wiped out by the other party’ footdragging [sic] or change of heart or taking advantage of a vulnerable position created by the negotiation.”
It was because of this thinking that the Court indicated the right to recover damages when a party does not act in good faith.
Some of the issues that are important to consider before entering into a letter of intent include the following:
1. Should the time and energy be used to negotiate the agreement rather than a letter of intent?
2. Are all of the essential “deal points” agreed upon and can they be documented in a letter of intent?
3. What confidential or proprietary information may be exposed in the negotiations?
4. How can confidential and proprietary information be protected? Should there be a confidentiality agreement, or similar terms contained in a letter of intent?
5. Are there other parties that can provide the desired benefits/contract rights, or must the contracting party be the party to a letter of intent?
6. What costs or damages are to be incurred or suffered by going forward with a letter of intent or failing to do so?
7. What time period is important to completing negotiations and documenting the agreement reached?
8. What other terms need to be negotiated and incorporated into other documents to evidence the agreements reached?
9. What language can be included to indicate the intention that the letter of intent is “binding” or “non-binding?”
This list is not exhaustive, but is intended to highlight the more important issues.
An example of language for consideration in connection with a non-binding letter of intent is as follows:
This letter shall not constitute a formal and binding agreement. This letter summarizes our present understanding of our discussions regarding the terms and conditions of the proposed transaction and we anticipate that any agreement that is negotiated between us with respect to this transaction will be generally consistent with the foregoing. Neither of us intend to enter, nor have we entered into any agreement to negotiate a definitive agreement. Either party may, at any time prior to execution of a definitive agreement, propose different terms from those set forth above, or unilaterally terminate negotiations without any liability to the other party.
Each of us shall be solely responsible for our own respective fees and costs incurred relating to this letter and negotiating an agreement. Neither of us shall be responsible for the fees and costs of the other party if we are unable to reach agreement.
Language should be contained in the letter of intent indicating the manner in which negotiations may be terminated, any time period important to the parties, and language indicating what provisions, if any, of the letter of intent survive its termination. For example, language protecting confidential or proprietary information disclosed during the negotiations should indicate that the protective provisions survive any inability to reach a definitive agreement.
If the parties desire the letter of intent to be binding, then language should be included stating that intention, and that a more complete definitive agreement is intended, which then will obligate the parties to negotiate in good faith the terms of the definitive agreement to be executed by them.
As previously indicated, contracts today are reached through a series of negotiations and communications, “... by a series of compromises and tentative agreements on major points which are finally refined into contract terms.” This discussion should help you in negotiating your next agreement and becoming obligated only when intended.
CONCEPTS AND IDEAS ARE GENERAL STATEMENTS AND ARE INTENDED TO PROVIDE CONCEPTS
FOR CONSIDERATION IN BUSINESS AND TAX PLANNING.
CAREFUL CONSIDERATION NEEDS TO BE GIVEN BY THE USER REGARDING THE USE
AND APPLICATION OF THE CONCEPTS. YOUR
LEGAL AND TAX COUNSEL SHOULD BE CONSULTED BEFORE THE IMPLEMENTATION OF ANY OF
THE IDEAS INDICATED HEREIN. SHOULD YOU
HAVE QUESTIONS REGARDING THIS MATTER, HAROLD S. SMALL, ESQ., CAN BE REACHED AT
Copyright Harold S. Small 2007. All rights Reserved.