Caution: “Non-Binding” Letter of Intent May Be Binding Under California Law! Careful Drafting is Key

Article by Robert R. Carlson and Dalen Copeland

Is a preliminary agreement, such as a letter of intent, term sheet, or memorandum of understanding, binding on the parties to it? If so, to what extent? A recent Court of Appeals decision in California held that a letter of intent may constitute a binding contract to negotiate the terms of a future agreement in good faith. In Copeland v. Baskin Robbins, 96 Cal. App. 4th 1251, 1257 (2002), the court held that a contract to negotiate the terms of a future agreement is enforceable against the parties to that contract, as distinguished from an unenforceable "agreement to agree."

Generally, where any of the essential elements of a contract are reserved for future agreement, no legal obligation arises until the future agreement is reached. The court found, however, that an agreement to negotiate the terms of a future agreement does in fact create a legal obligation and may be breached by a party refusing to negotiate or by a party negotiating in bad faith.

Although Copeland is a California case, its ramifications may be widespread. First, the case may be followed in other jurisdictions. Second, even where the parties to a letter of intent have selected a different choice of law, if one of the parties is a resident of, or domiciled in, California, then that party may seek to have California law apply to that agreement. Therefore, the meaning of the Copeland case is worth considering when involved in preliminary negotiations anywhere in the country.

Background of Case

In Copeland, the plaintiff, Kevin A. Copeland, and the defendant, Baskin Robbins, entered into negotiations for Copeland to purchase an ice cream manufacturing plant that Baskin Robbins planned to close. Copeland made it clear at the outset of negotiations, and Baskin Robbins acknowledged, that the agreement to purchase the plant was contingent on Baskin Robbins agreeing to a co-packing agreement, where Baskin Robbins would purchase seven million gallons of ice cream produced from the plant in the first three years after Copeland took ownership. Baskin Robbins then sent Copeland a letter summarizing some of the proposed terms for the purchase of the plant and made mention of the separate negotiation for the co-packing agreement. The letter requested that Copeland sign the letter and make a deposit to Baskin Robbins if he agreed to the proposed terms. Copeland signed the letter and gave a three thousand dollar deposit. The parties...