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When a document says it isn’t a contract, it isn’t a contract – Posner, J.

Children's blocks spelling out the word NoIn last week’s BPI v. IEC case from the Seventh Circuit, a letter of intent between two parties contained a disclaimer of any intent to enter into a binding contract. That disclaimer was enough to bar one party from suing the other for breach of contract, and also to kill the plaintiff’s claim for promissory fraud.

Disclaimer in letter of intent kills breach-of-contract claim

The specific facts of the case aren’t remarkable: Two parties entered into a letter of intent stating that they wanted to explore the possibility of doing some business together. The letter of intent included language stating that the LOI was not intended to be a binding contract. One party walked away; the other sued — for breach of contract.

The lower court granted summary judgment in favor of the defendant. On appeal, the legendary judge Richard Posner remarked that “when a document says it isn’t a contract, it isn’t a contract.” BPI Energy Holdings, Inc., v. IEC (Montgomery) LLC, No. 10-3871, slip. op. at 7 (7th Cir. Dec. 8, 2011) (affirming summary judgment in favor of defendant IEC).

No promissory fraud: Reliance was reckless

The appeals court also affirmed the lower court’s rejection of the unhappy party’s claim of promissory fraud. In essence, such a claim alleges that the defendant party never intended to go through with the contemplated transaction, but was just stringing the other party along. Judge Posner eviscerated that claim as well, stating that the plaintiff had been reckless in presuming to rely on a so-called promise that was expressly made non-binding:

There had been no agreement on the terms of the gas extraction leases that Drummond would be granting to BPI. It is reckless to rely on an agreement expressly stated to be nonbinding. Such a statement is equivalent to saying “you rely at your peril.” You know there is a risk and decide to gamble. If you lose the gamble, you have only yourself to blame.

Id. at 13-14 (bold-faced emphasis added).

Judge Posner was also mindful of the commercial realities facing business people:

To look at the question from another angle, how can a firm that wants to retain its freedom to change course avoid a suit for fraud if a warning not to rely, or (as in this case) equivalent language, in a preliminary agreement can be ignored?

Id. at 14.

Lesson learned: If you’re signing a letter of intent that says it’s non-binding, and the other side decides to walk away, you shouldn’t be too confident that a court will have any sympathy. If you want the LOI to be binding, in whole or in part, you won’t want to agree to the non-binding disclaimer.

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