Can Businesses Use a Letter of Intent as a Binding Agreement to Work Together?

Can Businesses Use a Letter of Intent as a Binding Agreement to Work Together?

A letter of intent or memorandum of understanding can be used to formalize an agreement to move forward toward a mutual goal...

When businesses agree to work together, there are often a lot of details to work out. A letter of intent or memorandum of understanding can be used to formalize an agreement to move forward toward a mutual goal. Whether it amounts to a legally-binding contract depends on the intent of the parties, so it’s essential to make sure everyone is on the same page.

Letters of Intent

In many cases, a letter of intent or memorandum of understanding (MOU) is not a contract. Instead, it signals that a more formal (and legally binding) agreement is contemplated at the conclusion of the negotiations. In addition to confirming a willingness to work together, a letter of intent may also outline the purpose and the scope of negotiations and outline what has been agreed to so far.

While letters of intent can help streamline the negotiation process, they must be drafted carefully in order to avoid unintended consequences. Our New York and New Jersey business attorneys have frequently seen firsthand what can happen when the parties fail to specify whether a letter of intent is a contract or a nonbinding summary of the parties’ negotiations. If the negotiations sour, a poorly drafted letter of intent can lead to a messy breach of contract lawsuit.

Therefore, to avoid any unnecessary confusion, it is important to explicitly state to the extent to which the parties intend the letter of intent to be a binding agreement. Some letters of intent contain both binding and non-binding provisions, and, the various provisions should be clearly labeled as such. For instance, clauses that may be binding on both parties often include exclusive dealing, confidentiality, non-disclosure, and allocation of expenses/attorney’s fees. In contrast, the key business terms of the deal should be non-binding, as they may change over the course of negotiations. Ordinarily, the parties do not want to be locked into terms that include elements of the structure of the transaction, pricing and payment terms.

Creating a Binding Agreement

No matter what type of agreement you are negotiating, it must include the following elements for it to be enforceable:

• An offer
• Acceptance of that offer
• Intent to be legally bound
• Consideration, i.e., the benefit each party expects to obtain via the contract, often monetary compensation

Ideally, a writing intended to have some binding provisions should be in writing and signed by the parties. However, courts may still find a binding agreement without a written agreement. For instance, a string of emails and text messages can satisfy the requirements of a contract (see our full article: Contracts Via Email: Five Tips for Avoiding Unintended Liability).  The basic principles of contract law apply. An enforceable agreement requires an offer and acceptance, supported by consideration. If one party sends an email proposing different terms, the offer may be considered rejected, and the contract formation process needs a fresh start. The parties must also intend to be contractually bound. While intent need not be explicitly expressed in the email correspondence, it should be clear that the parties intended to form a binding agreement.

Courts may find that a continuing pattern of working together is evidence of an agreement to do so. Under New York and New Jersey law, the existence of a joint enterprise can be found even in the absence of a written agreement, inferred from the conduct of the parties. 

Key Takeaway

Letters of intent and MOUs can be very useful in negotiating a business deal. However, letters of intent should reflect the true intent of the parties.

If you do not want to be bound by a letter of intent, MOU, or electronic correspondence, make it clear to the other party, in writing, that it should be considered non-binding, and that any agreement is contingent upon the execution of a physically executed, formal written contract.  The meeting of the minds required for verbal agreements can be difficult to prove, and it is not difficult to show a lack of agreement when it is all verbal. Best to, at least, say what is intended, binding or not binding, in a one-sentence email. 

Conversely, if you do want to have enforceable provisions in your letter of intent, that will hold up in court, make sure it says so, and that there is a valid offer and acceptance, supported by consideration.  This does not require that there be any monetary exchange or monetary commitment; any stated reliance and material change of position can be found to be adequate consideration. That is why you will often see in agreements of all kinds a statement that says: “For $10.00 and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is agreed by the parties hereto that….”   To avoid legal headaches, reduce the negotiated points to a dated writing and have the writing signed by the parties to the agreement.  If you are concerned about the bona fides of the other party, have the writing witnessed; and, if you are truly nervous about future mischief, have the signatures notarized. That very formality, even if adding nothing to enforceability, may assist in forestalling future misbehavior.

If you have questions, please contact us

If you have questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.