Author: Ryan Carroll, Law365 Summer Student
Letters of intent are typically drafted to outline the mutual understanding shared by both parties regarding key business terms. They can serve a useful purpose if they clearly indicate the parties' future intentions. Problems can arise, however, if the letter itself includes unintended points of agreement that are of a binding nature. A letter of intent that is ambiguous enough could be considered a binding agreement. Parties involved with such a letter can have different perceptions about what it represents. Differing perceptions can result in the parties relying on the letter to differing degrees. This lack of shared understanding can eventually result in issues that may have to be resolved through litigation.
What differentiates a letter of intent from a typical agreement can be difficult and must be evaluated on a case-by-case basis. The Ontario Court of Appeal in Wallace v Allen relied on the terms of the agreement to determine that the letter of intent for the purchase of one party’s business was indeed a binding agreement. When reading the letter, it was clear to the court that it was binding. The letter used language common to a typical contract, such as “it is agreed” and “upon acceptance.” The parties’ actions were also referenced to indicate that they acted as if the letter was binding. The owner of the business admitted multiple times that he was selling it. The purchaser frequently visited the company to grow more comfortable with it.
The Ontario Superior Court of Justice in Seelster Farms et al. v Her Majesty the Queen and OLG also found a letter of intent to be a binding agreement by extending the reason found in Wallace v Allen. Establishing if the typical components of a contract are present can also help determine if a letter of intent is binding. The necessary features to find include an offer, acceptance, and consideration. The court was satisfied that the letter of intent had all the essential components of a legally binding agreement previously noted.
The key to an unambiguous letter of intent is broadly two-fold. The two key factors are the letter’s construction and the parties' responses to it. Individuals should remain conscious of both when drafting a letter of intent.
Extra attention should be paid when considering what terms will be included in the letter to ensure it cannot be reasonably considered a binding agreement. Words typical to a binding agreement, including “agreement” and “is binding” should be avoided. Those terms can be misconstrued to suggest that the letter is binding. However, the words included in a letter of intent can also be leveraged to make it abundantly clear that it is not binding. Phrases to include could note that both parties acknowledge that the letter is not an agreement and that any binding arrangement will only occur upon signing a different document.
Parties should also be conscious of how they act in relation to the letter. Actions including public announcements and correspondence through email should be drafted and presented in a manner that does not suggest that the parties believe the letter of intent is binding. Acting otherwise could lead to the conclusion that parties believed the letter of intent was binding.
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