Commentary: Beware of lax letters of intent

Letters of intent are generally non-binding, but parties should never presume that this is true in every situation. Given that letters of intent have sometimes been found to create enforceable contracts, lawyers who carelessly prepare these documents place their clients at risk of litigation and defeated expectations.Letters of intent are frequently used in commercial transactions to document a commitment to engage in further discussions or to establish some of the substantive terms of a deal while the parties continue to negotiate. Although the term letter of intent (LOI) denotes that these documents are intended to be non- binding, a party may later assert that the words used in the LOI or the adverse party's subsequent conduct created a binding agreement. One notable example is the LOI executed by Getty Oil and Pennzoil that was later found to be an enforceable contract. A legal battle over the LOI resulted in a $10.6 billion judgment against Texaco for tortious interference with contractual rights, where the underlying contract was the Getty-Pennzoil LOI. See Texaco v. Pennzoil, 729 S.W.2d 768 (1st Cir. 1987).When the parties to an LOI fail to fully consummate their deal, the disgruntled party may have an arsenal of arguments available to prove the existence of a binding agreement. These arguments generally fall into two categories: those based on the circumstances under which the LOI was drafted, and those relating to the conduct of the parties after the LOI was signed. When representing a client regarding an LOI, be prepared to advise the client on both types of issues.Drafting pointsPoor drafting can transform a letter of intent into a binding contract. As the Maryland Court of Appeals remarked in the seminal case of Fenton v. People's Drug, [i]f it appears that the terms of the contract are in all respects definitely understood and agreed upon, and there is nothing left for future settlement, and that a part of the understanding of the parties is that a written contract embodying these terms shall be executed by them to serve merely as evidence of their agreement, the mere fact that the parties understood that the contract should be reduced to writing does not leave the transaction incomplete and without binding force. (191 Md. at 493-494.)When you approach the task of drafting a letter of intent, keep in mind that, should litigation ensue, a court may determine that the document is binding where the two requisites of an enforceable contract - mutual assent and consideration - are present. Therefore, in the drafting phase, it is crucial to avoid language that tends to indicate that a binding agreement has been reached. Consider employing conditional and hypothetical expressions such as: If the parties reach a final agreement on the terms of their deal - or This agreement is not intended to be binding until all of the following have occurred. - Another helpful technique is to specify a deadline for the execution of a final, written document, after which the LOI and all claims relating thereto become null and void. It may also be prudent to include an express disclaimer of any other written or oral agreement between the parties.Remember, even though the Statute of Frauds specifies that some agreements must be supported by a memorandum in writing, a signed letter of intent can be found to satisfy this writing requirement. On the other hand, a well-drafted disclaimer can protect against this risk.Finally, if you are preparing an LOI while the deal terms are still being negotiated, you may also want to identify with specificity the essential terms not yet agreed upon; this can minimize the chance that the letter will be construed as an enforceable contract.Conduct subsequent to the LOIThere are many situations in which conduct subsequent to the execution of an LOI can transform a non-binding LOI into an enforceable agreement. You should advise your client about three issues that frequently arise: *Conduct that amounts to part performance.*Conduct that provides a basis for a claim of estoppel.*Conduct that supplies an essential term of the contract that is missing from the LOI.Part performance is often viewed by courts as significant evidence that the parties intended to enter into a binding agreement. It also is a commonly invoked exception to the Statute of Frauds. Lease contracts are a good example. Imagine that you represent a landlord who has signed an LOI with a prospective tenant. Also assume that the prospective tenant has been permitted to take possession of the premises without a final lease. Your client may have a hard time persuading a court that no agreement for tenancy exists. Allowing the prospective tenant to take possession may be interpreted by a judge as part performance, transforming the letter of intent into an enforceable lease.Estoppel arguments run in a similar vein. Take the same lease example. If the landlord decides to back out of the deal after the prospective tenant has already hired an engineer to upgrade the space, retained a company to create signage and advertising, and purchased a liquor license, the prospective tenant will have a good argument to make to a judge about why the landlord should be estopped from denying the existence of a lease.To minimize this risk, be sure to stay up to date with your client about developments and respond in a timely manner to any activities that might raise a red flag. Taking a more active role in this process may save your client from costly litigation down the road.Trial lawyer and author Paul Mark Sandler is a partner with Shapiro Sher Guinot & Sandler in Baltimore. His column appears each Friday in The Daily Record. He thanks attorney John J. Leidig, of the same firm, for his assistance with this article. Mr. Sandler also notes that in a recent piece on sham affidavits (Jan. 27, 2006), he did not intend to suggest that any affidavit filed by lawyers involved in the cases referred to were improper or disingenuous.

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