2/24/2017 Contracts: Letters of Intent

Contracts

Letters of Intent

BY JOSEPH VALOF

The letter of intent can provide the business person with a vital bridge between mere
discussions and a binding contract. However, the huge damages award under the
infamous Pennzoil v. Texaco case of the last decade demonstrated some of the pitfalls
inherent in this commonly used business tool. The following should help your company
to avoid those pitfalls.

Purpose

The main purpose of a letter of intent (sometimes also referred to as a “Letter of

Understanding” or “Memorandum of Understanding”) is to facilitate the start of a
business deal or project between the parties involved by identifying the key business
and contractual understandings that will form the basis of the final contract.

Drafting Issues

Binding vs. Nonbinding. A letter of intent is usually intended to be nonbinding,

but also may prove “binding” if the parties fail to so state, or if its language
indicates a conflicting purpose. Where the letter of intent stays silent on whether
it is nonbinding then, generally, it is presumed to be binding and enforceable in
the courts.
Confidentiality. A separate confidentiality agreement should be executed between
the parties if confidential information is to be exchanged during the initial
discussion stage. Such an agreement will impose binding obligations of
confidentiality that survive the nonbinding letter of intent, and may be attached to
the letter of intent as an Exhibit.
Brevity. It is easy to say too much in a letter of intent out of a misguided zeal to
cover all bases. For example, statements such as: “agree to bargain”; “make every
reasonable effort to agree upon and have prepared as quickly as possible a contract
providing for”; and “negotiate in good faith” each have caused a court to
disregard a statement of nonbinding intent, and rule a letter of intent to be
binding on the parties. Thus, as a general rule, brevity is always recommended,
and it is better to include just enough details to get the parties started.

In one recent case, the letter of intent clearly stated: “This letter of intent is not intended
to create, nor do you or we presently have any binding legal obligation whatever ” But,
in the very next paragraph the following statement was made: “[H]owever, it is
our intention, and we understand, your intention immediately to proceed in good faith
in the negotiation of such binding definitive agreement.” Schwanbeck v. Federal Mogul
Corp., 412 Mass 703 (1992). The court held that the word “however” coupled with the
intention to “proceed in good faith” created an obligation independent to the sweeping
disclaimer that the letter of intent was nonbinding.

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2/24/2017 Contracts: Letters of Intent

Form Letter of Intent

The following might serve as a guide for your own letters of intent:

Mr. John Smith

[XYZ company address]

Dear Mr. Smith:

Purchaser intends to purchase, and XYZ intends to sell certain computer hardware. The
purpose of this Letter of Intent is to summarize our discussions to date and to confirm
our respective intentions with respect to the proposed transaction, as follows:

Purchaser intends to purchase the Model 100 Computer from XYZ for the lower
of
$10,000 or whatever better price XYZ is able to extend to Purchaser.
Purchaser has paid a $1,000 deposit to XYZ, which shall be promptly refunded
in the event negotiations are terminated for any reason.
Purchaser and XYZ intend to conclude a binding agreement on or before January
30, 1996. In the event that a contract is not signed on or before such date for any
reason or no reason, Purchaser or XYZ each shall have the right to terminate the
negotiations without liability.

This is a letter of intent only. It is not intended to be, and shall not constitute in any way
a binding or legal agreement, or impose any legal obligation or duty on either Purchaser
or XYZ, Inc. If the foregoing reflects our mutual statement of intention, please sign and
return the enclosed copy of this letter.

Sincerely,
Purchaser
Agreed:
By:
Title:
Date:

Comment: Avoid overstating your case in a letter of intent because, if you say too much, you may find y
Mr. Valof will discuss another pre­contract tool in our next issue, that of the “teaming agreement,” where

© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1996; (all rights reserved). This article is not intended
as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.

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