Is That Letter of Intent Really Non-Binding?

06.06.16

Letters of intent are created during the initial stages of a transaction as a means to summarize the main points of the contemplated transaction. Often, businesspeople will not involve their attorneys in the creation and review of the letter of intent, believing that the preliminary document is non-binding. But, this is not always the case.

This particular issue has spurred a number of lawsuits. For example, the Seventh Circuit Court of Appeals heard Venture Assoc. Corp. v. Zenith Data Sys. Corp., a case that involved a non-binding letter of intent which stated that the parties had a ​“mutual intent to negotiate in good faith to enter into a definitive purchase agreement.” When the seller attempted to substantially increase the purchase price in the transaction, the buyer sued the seller, claiming that the seller failed to negotiate in good faith as agreed upon in the letter of intent. The seller ultimately prevailed. 

The lesson here: involve your legal counsel in the creation and negotiation of a letter of intent. While the document may expressly state that the terms are non-binding, there could be liability that could be avoided with some sound legal advice.

• Contracts