When Is A Letter Of Intent Truly Non-Binding?

Author:Thanner, Christopher
 
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A letter of intent ("LOI") is frequently used by buyers and sellers to memorialize their agreement on the material terms of a transaction such as price, closing date, financing, due diligence and other important deal points. The LOI can provide a measure of comfort that the parameters of a workable deal are in place and the parties can safely proceed to contract drafting and, possibly, the due diligence stage of the transaction. Details, boilerplate and remaining issues excluded from the LOI are typically addressed during the contract drafting stage by the parties and their attorneys. Though a LOI is almost universally intended to be non-binding, it frequently contains binding provisions governing confidentiality and marketing or negotiating exclusivity. The hybrid binding and non-binding nature of an LOI begs the question: when is a non-binding letter of intent binding?

A typical LOI contains a broad disclaimer that the parties will not be bound by its terms unless and until a separate binding agreement has been negotiated and executed by the parties. However, despite the presence of broad disclaimers, some courts have held that a LOI can evidence a "meeting of the minds" on the terms of an enforceable contract sufficient to award damages for breach. This is true even when one of the parties possessed the subjective belief that it never intended to be bound by the LOI. The rationale for this conclusion results from the court's use of an objective test in lieu of a subjective test in determining the existence of a binding contract: the interpretation of an offer or acceptance is not what the party making it thought it meant or intended it to mean, but what a reasonable person in the position of the parties would have thought it meant.

In determining whether a LOI is binding upon the parties, Florida courts will generally consider several factors to determine whether "a meeting of the minds" occurred, including: (1) the type of contract at issue; (2) the number of terms agreed upon relative to all of the terms to be included; (3) the number of details to be ironed out; (4) the relationship between the parties; and (5) the degree of formality attending similar contracts as compared to the LOI. Midtown Realty, Inc. v. Hussain, 712 So. 2d 1249, 1252 (Fla. Dist. Ct. App. 1998). Below are two illustrative cases.

In Med-Star Cent., Inc. v. Psychiatric Hospitals of Hernando Cnty., Inc., 639 So. 2d 636 (Fla. Dist. Ct. App. 1994), Med-Star and Psychiatric...

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