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Language and actions influence enforceability of letter of intent

On Behalf of | Feb 13, 2023 | Business Litigation |

A letter of intent (LOI) often outlines the relationship of two or more businesses going forward. The document could launch the process of a merger or acquisition in Washington or explain their commitment to a joint project or business deal. An LOI often forms the basis for the parties to invest their resources in making the deal happen. If things do not proceed as expected, resolving the dispute may depend on whether the LOI is legally binding and therefore enforceable.

Binding or non-binding language?

The wording within the LOI may state directly that the parties are bound by its terms. Alternatively, the letter could specifically state that it is non-binding.

Cases do arise when an LOI does not make this clear. In the absence of definitive language one way or the other, disputes have a greater likelihood of heading to court.

What courts look at

Should a dispute regarding failures to perform as promised in an LOI go before a judge, the court examines the content of the letter and the actions of the parties involved. The court will evaluate how much the content appears to be the basis of a contract.

The existing relationship of the parties and what they did after signing the LOI may count as well. If one or both parties have a history of signing LOIs and sometimes observing them and sometimes ignoring them, then a court may view the parties as not regarding LOIs as overly serious documents.

An LOI that did not result in any serious action could appear to a court to be non-binding. The LOI did not trigger the parties to do anything. However, when one party takes action according to the plan in the LOI, the entity may argue that it believed the LOI was a contract that it must follow.