RE Basics: Letters of Intent

A letter of intent is generally used to outline the terms and conditions under which the parties will enter into a particular transaction. While a letter of intent can be the binding final expression of the parties, more often it serves as a starting point and contains only some of the terms under which the parties desire to be bound. This article provides a basic overview of some of the issues that present themselves under Minnesota law when considering the use of a letter of intent.

Binding or Nonbinding?

The primary issue that arises under Minnesota law with respect to a letter of intent is whether it is binding or nonbinding. The general rule in Minnesota is that letters of intent are nonbinding and considered agreements to agree. Agreements to agree (or to negotiate in good faith in the future) are not enforceable in Minnesota because such agreements do not constitute the parties' complete and final agreement. However, letters of intent can be binding and enforceable when the parties clearly manifest their intent to be bound.

Determining Intent

A determination as to whether the parties have clearly manifested their intent to be bound will be based on standard contract law principals, which include the statute of frauds, the plain wording of the document, the conduct of the parties and other equitable considerations. In Minnesota, merely titling the document as a "letter of intent" is not enough to make it nonbinding.

Because the parties may have conflicting desires on whether the letter of intent should be binding, it is critical at the outset of any transaction to discuss a party's goals. A party may seek: (i) a preliminary framework for the transaction in which no provisions are binding, (ii) a binding agreement in recognition that all of the essential business terms have been agreed upon and the deal is complete, or (iii) that only limited provisions of the letter be enforceable, while others are not.

Binding Provisions in Letters of Intent

Although most parties generally desire that the letter of intent be nonbinding, it is common to make certain provisions binding. Some of the more common provisions that are made binding include:

• Confidentiality. As in any business transaction, confidentiality is usually desired. If a party is exploring a potential transaction, it may be detrimental to that party if the terms of the prospective transaction were made known to the public (whether or not the transaction is actually consummated).

• No-shop or exclusivity. One of the parties may want to preclude the other from soliciting or continuing to market the transaction during the period between the signing of the nonbinding letter of intent and the date the binding transaction documents are final.

• Duty to bargain and negotiate in good faith. Although Minnesota does not currently impose or imply a duty to negotiate in good faith, some other jurisdictions do. In California, if a letter of intent is construed to be a binding contract, it will be deemed to include an implied covenant of good faith and fair dealing. However, no such duty exists with a nonbinding letter of intent as this implied covenant arises only out of contractual obligation. Unlike the contractual situation, during the negotiations phase the covenant to negotiate in good faith can be expressly denied. Accordingly, if the parties desire to impose or negate any obligation to negotiate in good faith, that desire should be clearly and unambiguously stated in the letter.

Other Practical Considerations

Clarity in drafting a letter of intent is key. It is not enough to allude that the parties intend to sign a more formal agreement in the future. If the letter is not meant to be the final expression of the parties' transaction, clarify that the letter of intent is solely for the purposes of discussion and the parties agree there are no binding obligations. If only portions of the letter should be enforceable, clearly state which portions will be enforceable. Lastly, it is important to act consistently with the document that is drafted. Failure to act consistently with the letter could result in the other party seeking to enforce the letter based on equitable principles.

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Further details are necessary for complete understanding of the subjects covered by this article. For that reason, the specific advice of legal counsel is recommended before acting on any matter discussed in these pages.