Enforcing the 'Non-Binding' Letter of Intent

Transactional counsel involved in mergers, acquisitions, and asset sales are aware that "no binding effect" language in a letter of intent ("LOI") does not have the "talismanic" effect of preventing the LOI from obligating the parties in any way. The issue examined in this article is the extent of the protection, and conversely the extent of the exposure, where such a provision is included in an LOI, especially where the provision is juxtaposed with an express requirement that further negotiations between the parties be conducted in good faith. The good faith negotiation clause may be sought by counsel for the purchaser/acquirer to provide sufficient confidence to expend the resources required to complete due diligence, negotiate documents, locate financing, and otherwise pursue the deal.

"No Binding Effect" Provision Enforced Absent Express Duty to Negotiate

At the threshold, the law is well-established that where an LOI expressly states that the parties thereto will not be bound to complete the transaction by the terms of a preliminary agreement and the agreement contains no express duty to negotiate, the parties will not be bound by terms of the agreement.1

"Good Faith Negotiation" Provision Must Also Be Given Effect

However, despite the frequency of LOI litigation, certain significant issues await further development by the Courts. Where the LOI contains unequivocal language requiring further negotiations in good faith, and especially if the LOI requires that such negotiations be consistent with material terms set out in the LOI, the issue becomes more complicated. Such "good faith negotiation" and "consistent with material terms" provisions would be rendered essentially meaningless were the "neither party is bound" provision given full literal effect. No principle of contact interpretation is better established than the rule that "a court should not adopt an interpretation which will operate to leave a provision of a contract without force and effect" and that "[a]n interpretation that gives effect to all the terms of an agreement is preferable to one that ignores terms or accords them an unreasonable interpretation."2 Thus, somehow, all of the LOI provisions must be given meaning. The New York Court of Appeals has held that such intent should be ascertained by considering "the entirety of the agreement" rather than "merely culling distinct provisions out of an entire agreement."3 It may be argued that where a party to an LOI makes nonnegotiable demands inconsistent with material terms that were specified in the LOI, the requirement of good faith negotiation may give rise to a claim. However, the LOI's "neither party is bound" provision precludes any argument that a final deal must be reached.

Although there is no published case law on the precise issue in a New York court, other courts faced with a juxtaposed "good faith negotiation clause" and a "no intent to be bound clause" in an LOI have concluded that the obligation to negotiate in good faith is enforceable. The Seventh Circuit in the 1993 "Venture Associates I" case (Posner, J.) reversed the dismissal of a claim asserting breach of a letter of intent which contained an express good faith negotiation provision and also stated that "this is merely a letter of intent subject to the execution by Seller and Buyer of a definitive Purchase Agreement" and "does...