Does "shaking on it" mean you can you still change
You signed a non-binding letter of intent. Weeks later,
negotiations to finalize the deal have stalled, and you're
starting to lose interest in the transaction. Are you obliged to
reach a definitive agreement even though your letter of intent says
it is non-binding?
In Canada, an agreement to negotiate in the future is generally
unenforceable, so long as all essential terms have not been agreed
upon and the parties did not intend to create a binding
But that is not the end of the story.
A genuine absence of good faith by one party to negotiate a deal
may be scrutinized by the courts, even in the context of a
non-binding letter of intent or term sheet.
The Supreme Court of Canada recently decided that there is a new
general organizing principle of good faith performance, and that
parties to an existing contract have a duty of honest
Simply put: parties must perform their contractual duties
honestly and reasonably, not capriciously or arbitrarily. And they
must not lie or mislead each other about matters related to the
performance of the contract.
While the Supreme Court decision concerned an executed
contract—not a letter of intent—the dispute related to
a party's discretionary exercise of a non-renewal clause under
which it had no binding obligation to renew. As a result, it's
not out of the realm of possibility for Canadian courts to extend
good faith principles to letters of intent as they continue to
refine the scope of this new duty.
In fact, in the U.S., Delaware courts recently not only
recognized an obligation to negotiate in good faith when expressly
written in a non-binding term sheet, but they also awarded damages
for lost profits when the parties would have reached a definitive
agreement but for the breaching party's bad faith
Proving dishonesty can be an uphill battle, but given the risk
of court scrutiny at play (and the potential liability for damages
that could ultimately result), parties signing a non-binding letter
of intent in Ontario should take steps to protect themselves.
The letter should recognize that the
parties have no contractual obligations (subject to appropriate
exceptions, like confidentiality, exclusive dealings and expenses),
and no good faith duty to negotiate a definitive agreement.
Terms and conditions that must be met
before a binding contract is established can be identified in the
letter, underscoring the non-binding nature of the letter.
The parties can consider restricting
the damages that may be recovered if one of them is subsequently
found to have acted in bad faith (e.g., by excluding damages for
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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