Letters of intent (LOIs) and business people can be like sex and teenagers: You tell them not to do it, but sometimes they really, REALLY want to. You won’t always be there to chaperone them, and let’s face it, in the throes of desire they’re likely to forget — or ignore — your abstinence advice.
The consequences of entering into an LOI can be significant if a court finds that the parties intended to enter into a binding contract. The canonical example of this danger, of course, is that of Texaco, Inc. v. Pennzoil Co., 729 S.W.2d 768 (Tex.App.—Houston [1st Dist.] 1986, writ. ref’d n.r.e.). In that case, Texaco was hit with a damage award of some $10.5 billion, or more than $22 billion in 2014 dollars, for interfering with Pennzoil’s agreement with Getty Oil — in the form of a memorandum of understanding — under which Pennzoil would buy Getty.
Unless you want to be stuck dealing with such consequences, it might be a good idea to try to make sure that your “teenagers” use protection if they ignore your advice and start messing around with LOIs. The usual form of protection takes the form of various disclaimers of any intent to be bound.
(For a readable discussion of such disclaimers with brief sample language, see generally Rick Angel, 8 Steps to Keep Your Letter of Intent Non-Binding (undated). Much-more elaborate disclaimer language was published by the American Bar Association as part of the Model Stock Purchase Agreement, second edition.)
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First impressions matter, for judges and juries just as with anyone else. The next time I draft an LOI, I think I’ll structure it like the following, in the hope of enhancing the visual first impression of the LOI’s non-binding nature:
(1) In the body of the LOI, I’ll include ONLY the desired binding terms such as confidentiality; each party bears its own expenses; the need for a final integrated signed document; the disclaimer of any intent to be bound; and an express covenant that neither party will assert that anything else is binding until ink is on the signature lines of the main document;
(2) I’ll put the anticipated “deal terms” to a separate document entitled (something like) “Nonbinding Discussion Worksheet, Version [date]” with NO signature blocks, and a preamble saying (A)&bsp;that the worksheet is intended only as a convenient working reference, and (B) that nothing about the worksheet is intended to be binding until ink is on the signature lines; and
(3) Finally, in the body of the LOI, I’ll state that the current version of the discussion worksheet is attached for convenient reference.
This posting is adapted from my comments in a discussion about LOIs at the “Drafting Contracts” group of LinkedIn (membership required for access).