Understanding the Factors That Determine the Enforceability of Letters of Intent
The answer to the question posed in the title is: it depends.
A dispute often arises with respect to letters of intent ("LOI") upon the breakdown of the relationship between parties: one party argues that the letter of intent formed a binding agreement, and the other party disagrees. The courts in solving this dispute have looked at the specific language employed in the letter as well as the conduct of parties.
This Insight will explore when LOIs are binding on parties.
What is a Letter of Intent?
A letter of intent (LOI) is a written document that sets out the parties' terms connected to a proposed transaction, such as purchasing assets from a company or shares of company from a shareholder. It is often nonbinding, and it states a preliminary commitment by one party to do business with another party. A letter of intent is very similar to a memorandum of understanding, a nonbinding document that usually precedes binding agreements.
While LOIs, inherently non-binding, commonly incorporate specific provisions that hold binding implications, like confidentiality clauses, it's noteworthy to recognize their enduring impact on the involved parties. These binding aspects persist beyond the LOI's execution, regardless of whether the parties proceed to formalize a definitive agreement and consummate the transaction outlined in the LOI. Consequently, even if the transaction itself remains non-compulsory, the parties could find themselves obligated to fulfill other associated responsibilities as stipulated in the LOI. This dynamic plays a pivotal role, especially in the realm of commercial litigation, where the enforceability of such obligations may come under scrutiny.
Wallace v Allen: LOI Binding?
In this Ontario Case,1 the parties executed a "letter of intent for the share purchase and the sale" of four companies. Both parties acknowledged that all the terms they considered essential to the transaction were agreed upon and included in the letter of intent. Shortly before the date set for closing, the parties and their solicitors met for the purpose of finalizing the specific terms of the share purchase agreement. On the closing date, the plaintiff was not present. The defendant treated the transaction as at an end and refused to close. The plaintiff sued. The trial judge dismissed the action on the basis that the parties did not intend that there be a binding contractual relationship until the final share purchase agreement was signed. The plaintiff appealed.
The Court of Appeal held that trial judge erred in law in determining that the parties did not intend to be bound by the letter of intent. When read as a whole, the letter of intent evidenced the intention of the parties to be bound. Moreover, the conduct of the parties after signing the letter of intent demonstrated that they considered themselves legally bound to its terms.
On that note, while LOIs are typically non-binding there are circumstances when they could be held binding. The question in every case is a matter of interpretation: if the document in its totality would suggest to a reasonable person that the party who gave it intended to undertake a legally binding obligation, then the document may be held to be binding irrespective of how that party described it.2For example:
- Specific language used in the document: The choice of language used in the LOI can be pivotal. If an LOI uses phrases like – "it is agreed" and "upon acceptance" and "this agreement", then the court will hold it as binding.3Parties must ensure that the LOI properly reflects their intentions. If the LOI includes provisions that are intended to be binding, these must be clearly identified and the legal requirements for the creation of a valid contract must be satisfied.4
- Essential Terms of the Agreement: When there is certainty in respect to the essential terms of the agreement, it is likely for the court to infer intent to be bound. Likewise, if the essential terms lack certainty because of vagueness or incompleteness, the LOI will not be binding.5 In Alberta Sussex Insurance Agency Inc v Canada BrokerLink Inc, the letter of intent did not constitute a binding enforceable contract due to uncertainty and lack of agreement on many of the fundamental terms.6
- The Conduct of the parties: The courts examine how each party's conduct would appear to a reasonable person in the position of the other party.7 In Wallace, the court held that the conduct of the parties after signing the Letter of Intent clearly demonstrates that the parties considered themselves legally bound to its terms.8
- Governing laws: There are statutory provisions or regulations that govern certain types of transactions and may define when a contract will be enforceable. This occurs specifically in situations where it has been left for the court to decide whether an LOI should be enforceable or not. For instance, section 54(3) of the Law and Equity Act [RSBC 1979] c 224 lists when a contract respecting land, or a disposition of land will be enforceable.
Conclusion
Even if a LOI states that it is not binding, the conduct of the parties can be relied upon to argue that it is. For that reason, it is imperative that that a party to an LOI does not conduct itself in a manner that inadvertently alters the non-binding nature of the LOI. Notwithstanding, it is imperative that the LOI clearly defines which provisions of the LOI are and are not intended to be binding on the parties.
Footnotes
1. Wallace v Allen, [2009] OJ No 161, 2009 ONCA 36, 245 OAC 206, 93 OR (3d) 723, 53 BLR (4th) 1, 2009 CarswellOnt 150 (Wallace)
3. Wallace, para 29,30
4. https://ca.practicallaw.thomsonreuters.com/w-031-7705
5. Canada Square Corp. v. Versafood Services Ltd. 1981 CarswellOnt 124 at para 30
7. Ethiopian Orthodox Tewahedo Church of Canada St. Mary Cathedral v. Aga, 2021 CarswellOnt 7243 (S.C.C.), at paragraph 35
8. Wallace, para 32
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.
