United States: When Is A Letter Of Intent Truly Non-Binding?

A letter of intent ("LOI") is frequently used by buyers and sellers to memorialize their agreement on the material terms of a transaction such as price, closing date, financing, due diligence and other important deal points. The LOI can provide a measure of comfort that the parameters of a workable deal are in place and the parties can safely proceed to contract drafting and, possibly, the due diligence stage of the transaction. Details, boilerplate and remaining issues excluded from the LOI are typically addressed during the contract drafting stage by the parties and their attorneys. Though a LOI is almost universally intended to be non-binding, it frequently contains binding provisions governing confidentiality and marketing or negotiating exclusivity. The hybrid binding and non-binding nature of an LOI begs the question: when is a non-binding letter of intent binding?

A typical LOI contains a broad disclaimer that the parties will not be bound by its terms unless and until a separate binding agreement has been negotiated and executed by the parties. However, despite the presence of broad disclaimers, some courts have held that a LOI can evidence a "meeting of the minds" on the terms of an enforceable contract sufficient to award damages for breach. This is true even when one of the parties possessed the subjective belief that it never intended to be bound by the LOI. The rationale for this conclusion results from the court's use of an objective test in lieu of a subjective test in determining the existence of a binding contract: the interpretation of an offer or acceptance is not what the party making it thought it meant or intended it to mean, but what a reasonable person in the position of the parties would have thought it meant.

In determining whether a LOI is binding upon the parties, Florida courts will generally consider several factors to determine whether "a meeting of the minds" occurred, including: (1) the type of contract at issue; (2) the number of terms agreed upon relative to all of the terms to be included; (3) the number of details to be ironed out; (4) the relationship between the parties; and (5) the degree of formality attending similar contracts as compared to the LOI. Midtown Realty, Inc. v. Hussain, 712 So. 2d 1249, 1252 (Fla. Dist. Ct. App. 1998). Below are two illustrative cases.

In Med-Star Cent., Inc. v. Psychiatric Hospitals of Hernando Cnty., Inc., 639 So. 2d 636 (Fla. Dist. Ct. App. 1994), Med-Star and Psychiatric Hospitals signed a document titled "Transport Proposal" which (1) identified the parties and listed the liabilities that both parties "shall" have under the agreement; (2) provided that there was an "independent contract relationship between the parties;" (3) provided that the agreement would bind the parties for a minimum of 12 months; and (4) established rates for transportation and a payment schedule for services. Id. Med-Star sued Psychiatric Hospitals alleging it had used another company to transport its patients. Psychiatric Hospitals defended on the basis that the proposal was not an enforceable contract, but only a proposal as the title indicated. The court of appeals reversed the trial court's holding in favor of Psychiatric Hospitals and held that an issue of fact existed as to whether the proposal created a binding contract. Psychiatric Hospitals's contention that it did not intend to enter into a binding contract was irrelevant. "The test of the true interpretation of an offer or acceptance is not what the party making it thought it meant or intended it to mean, but what a reasonable person in the position of the parties would have thought it meant." Id.

In Midtown Realty, Inc. v. Hussain, 712 So. 2d 1249 (Fla. Dist. Ct. App. 1998), the court held that a letter of intent is not considered a binding contract when the parties are continuing to negotiate essential terms of the agreement. In that case, Midtown Realty entered into a listing agreement with Mr. Hussain ("Seller") for the sale of a gas station. Mr. Fiori ("Purchaser") signed a two page "Letter of Intent" ("LOI") that stated it was a "proposal" for the purchase of the gas station and contained: (1) a proposed purchase price; (2) plan for financing; (3) proposed inspection period; (4) proposed closing date, and (5) a statement that if the terms of the LOI were acceptable to the Seller, the Purchaser would present a more detailed and formal Purchase and Sale Agreement ("PSA"). A few weeks after executing the LOI, the Purchaser presented a more detailed and formal PSA. When the parties could not agree on its terms, the Seller withdrew the property from the market and the Purchaser filed suit alleging that the LOI represented a binding agreement. The court disagreed, stating that "[i]t is well established ... that a meeting of the minds of the parties on all essential elements is a prerequisite to the existence of an enforceable contract, and where it appears that the parties are continuing to negotiate as to essential terms of an agreement, there can be no meeting of the minds." Id. The court examined the language of the LOI and the surrounding circumstances in coming to this conclusion and noted that, among other things, the parties repeatedly called the LOI a "proposal," indicating it was not an offer but rather an initial statement for consideration. Furthermore, the LOI stated that after execution, Purchaser would present to Seller a "more detailed and formal Purchase Agreement." The court concluded that the Purchaser, like the Seller, believed that until the PSA was executed, there would be no binding contract and the LOI was a non-binding agreement.

So, when is a LOI truly non-binding? While even a well-drafted LOI cannot provide absolute certainty, there are several steps parties can take to avoid being bound by the terms of a letter of intent. They include:

• Include a clear and unequivocal statement that the LOI is non-binding upon the parties;
• Follow the Midtown decision and characterize the LOI as an initial statement for consideration only and that further material terms will be negotiated as part of a subsequent detailed and formal agreement;
• Reserve the right to terminate negotiations at any time in your sole discretion;
• If the LOI contains a binding exclusive or confidentiality provision, comply with its terms completely. A failure to do so may provide grounds for a reliance claim;
• Do not include a covenant to negotiate in good faith; in fact, consider an express disclaimer of the obligation. Though this issue is less problematic in Florida than in some other states, it's a good idea to expressly disclaim any obligation to negotiate in good faith in the text of the LOI;
• Do not characterize the LOI as a binding or final agreement in communications with the other side; insisting that the LOI contains material terms binding on the other side or represents the final agreement can prove costly in subsequent litigation.

Originally published in ACC North Florida Chapter Newsletter, First Quarter 2014.

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