What is a Letter of Intent?
Letters of Intent (“LOI”) can be very useful in setting forth the basic deal points of a transaction, but if they are construed as binding, the parties may get more (or less) than they bargained for. Surprisingly, it may not be enough to say only once in a LOI that it is not a binding agreement.
In the famous case of Pennzoil v. Texaco, 729 S.W. 2d 768 (1987), the Texas court held that the LOI in that case contained enough terms that the billion plus dollar deal was enforced despite the fact that the LOI specifically said it was non-binding. The parties were bound to their short form term sheet instead of a deal that contained bargained for and terms with all of the I’s dotted and T’s crossed.
Nevada Law on Letter of Intent
The law in Nevada is unclear on this specific issue as it is on many matters. As a result, best practices suggest that term sheets are prepared containing terms to which the parties “morally” agree, but which they do not sign. A definitive agreement can then be prepared and executed based upon the term sheet.
What if one or more of the parties really wants some of the terms to be binding? One can certainly be strategic in the drafting of a LOI by separating the binding and non-binding terms. For example, the parties might want to immediately create a no-shop term as a binding term. Specifically, that would agree that the seller cannot use buyer’s offer to obtain a better price. Along that same line, confidentiality provisions might also be binding terms. Other strategically useful terms, assuming you are drafting a binding LOI or a LOI with binding provisions, are governing law and jurisdiction and an outside termination date in the event that a definitive agreement has not yet been negotiated and executed.
In sum, be very strategic and very clear when entering into a LOI. Plainly identify any binding terms in a letter of intent. If the LOI is not binding, say so repeatedly. Otherwise, you may get more (or less) than you bargained for.
By: Guest Blogger Mary J Drury, Esq.