When is a letter of intent binding?
The question of whether a letter of intent (LOI) is binding has a simple answer, says Toronto business lawyer Anton Katz.
“It depends.”
The explanation, however, is much more complicated, says Katz, principal of Anton M. Katz Barrister and Solicitor.
Just because a document is called a letter of intent, doesn’t mean it is, he tells AdvocateDaily.com.
“Labels aren’t always determinative of the real substance of the relationship,” says Katz. “Saying so doesn’t make it so. You have to look at the details contained in the document.”
A letter of intent is meant to outline the main points of a proposed business deal and a true LOI is not intended to be binding, he explains.
“A well-drawn LOI will indicate that it’s an expression of interest,” Katz says. “It would document the intention of the parties to continue their negotiations into an agreement of purchase and sale.
“It would contain some of the salient business terms, but it would very clearly state that it is not a binding agreement of purchase and sale. It would also be very clear that such a binding agreement would have to be negotiated separately.”
Katz recently had a client who tried to put together a letter of intent by himself. The man used some language he found on the internet “and failed to appreciate some of the nuances of the words he chose.”
He says the client included words that “could arguably be construed as a binding agreement of purchase and sale.”
The man’s first mistake was calling the agreement a “Letter of Intent and Basis of Asset Purchase Agreement.”
The document used words such as “shall” — rather than “may,” “could” or “would” — and set out sanctions for failing to meet certain conditions, says Katz.
“It also referred to the completion of the transaction as opposed to entering into a separate purchase agreement,” he adds.
Katz says LOIs customarily include phrases such as: “We expressly acknowledge and agree the terms set out in this letter of intent are not, and are not intended to be, a binding legal agreement or other form of obligation on either party, except only in regard to the commitments made by each party in regard to the treatment of personal information and financial and other business-related information, as set out above.”
Katz says it’s important to look beyond the title of the document because it may be misleading — as was the example his client brought him.
“It’s kind of like a TV mystery series — things aren’t always what they seem. You may think you’ve entered into an LOI, but you may have inadvertently entered into a binding agreement of purchase and sale.”
When in doubt, Katz advises seeking legal advice “to stay on the right side of the line.”
