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| Aulona Arbana |
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| Jennifer Lee |
What is a letter of intent?
A letter of intent (LOI) is a document which precedes a final agreement or contract between parties. It is a preliminary commitment to engage in good faith to work toward the finalization of a deal. It can be an efficient and cost-effective way to establish trust between parties while outlining the broad terms of the final agreement. However, drafters must exercise caution, because depending on the terms agreed upon and the language used, the LOI may unintentionally form a binding agreement between the parties.
Factors influencing enforceability.
Wallace v. Allen, 2009 ONCA 36 (Wallace) held an LOI to be enforceable because of the language contained therein and the behaviour of the parties during negotiations.
An LOI must be read as a whole, with an eye to the presence of contractual language. In Wallace, the LOI contained the clause “THIS LETTER OF INTENT MUST BE REDUCED INTO A BINDING AGREEMENT OF PURCHASE OF SALE BY THE PARTIES WITHIN THE NEXT 40 DAYS,” which demonstrated a clear intention of the parties to be bound. Even in the absence of such a definitive statement, the court held that language such as “this agreement” and “it is agreed,” implies the intention to be bound.
Further, where parties intend for the LOI to be non-binding, they must act as such. In Wallace, the behaviour of the parties during negotiations indicated their intention to be bound — the seller announced his retirement and referred to the buyer as the new owner of the business. Behaviour that implies the deal will happen may influence courts to conclude contractual obligations between the parties.
Seelster Farms Inc. v. Ontario, 2020 ONSC 4013, (Seelster) extended the reasoning in Wallace. Seelster analyzed whether the LOI had the foundation required to make a valid and enforceable contract at the time of the LOI’s inception. The court found the LOI set out all essential terms, making it enforceable. At its inception, the LOI identified the parties, and contained an offer, acceptance and consideration. Therefore, the LOI possessed all the requirements necessary for a valid and enforceable contract. Seelster lets solicitors know an LOI, in the absence of contractual language, may still be enforceable if it mirrors the required framework of an enforceable contract.
Takeaways, recommendations to keep LOIs unenforceable
Litigation is expensive and no one wants to find themselves in a battle to prove the reach, or lack thereof, of a letter of intent. To minimize the risk of an unintentionally binding LOI, consider the following tips:
- Include express statements to confirm the LOI is non-binding.
- State that the parties’ contractual obligations will only be crystallized by a “future” or “definitive” agreement.
- Separately enumerate terms that will be binding (i.e., confidentiality, exclusivity) versus non-binding. For example, consider dealing with confidentiality by drafting an agreement separate from the LOI. This will allow the term to operate in a silo without compromising the non-binding nature of the LOI.
- Avoid language such as “it is agreed” and “this agreement,” as it implies a binding agreement.
- Include a deadline by which the LOI will expire — this might be a specified date or an event, the occurrence of which will trigger expiry.
- Avoid signatures on the LOI, as they attest to a binding agreement.
- Avoid behaviour which may indicate an intention to be bound by the LOI.
Aulona Arbana is an incoming associate at Aluvion Law with a keen interest in corporate law. Following her recent call to the Ontario bar, Aulona is focused on building a general corporate law practice, with a focus on mergers and acquisitions and private equity. Jennifer Lee recently completed her articles at Keyser Mason Ball, LLP and has a passion for litigation. Following her recent call to the Ontario bar, Jennifer is working to build a general litigation practice with a focus on corporate commercial and professional negligence.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author's firm, its clients, The Lawyer's Daily, LexisNexis Canada, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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