Letters of Intent Can Be Binding

Like many lawyers, I learned way back in law school that an “agreement to reach an agreement is a contradiction in terms and imposes no obligation on the parties thereto,”  (Rosenfield v. United States Trust Co. ). What I didn’t learn until many years later, however, was that although a Letter of Intent (LOI) expressly says that the parties’ rights and obligations are subject to the execution of a full-blown contract, that LOI can be binding – even if the contemplated full-blown contract never is executed. 

I learned this through my representation of Robert and Juliann DiMinico in the case of McCarthy v. Tobin.  In that case, Ann Tobin and John McCarthy executed a one-page “Offer to Purchase Real Estate” in connection with Tobin’s condominium at Burrough’s Wharf.  The Offer to Purchase expressly made the parties’ rights and obligations “Subject to a Purchase and Sale Agreement satisfactory to Buyer and Seller,” which was required to be executed by August 16, 1995, and time was of the essence.  After McCarthy failed to return a signed Purchase and Sale Agreement by the August 16 deadline, Tobin sold her property to the DiMinicos.

McCarthy then sued, claiming he had a right to purchase Tobin’s condominium based on the Offer to Purchase, and the DiMinicos took the position that the Offer to Purchase was an unenforceable agreement to agree.  While the DiMinicos initially were awarded summary judgment, the Supreme Judicial Court reversed, ruling that the Offer to Purchase was a binding contract because it contained all of the material terms of the contemplated transaction.  The Supreme Judicial Court went on to explain that under these circumstances the contemplated Purchase and Sale Agreement merely was “to serve as a polished memorandum of an already binding contract.”  

While the SJC’s reasoning may be less than satisfactory to some, the principles in McCarthy v. Tobin have been cited to enforce preliminary agreements in contexts other than with respect to an Offer to Purchase.  See, e.g., Whirlwind Capital, LLC v. Summit Construction, Inc., 2010 Mass. App. Unpub. LEXIS 1337 (preliminary oral agreement enforced even though efforts to reduce agreement to writing failed); One to One Interactive, LLC v. Landritch, 18 Mass. L. Rep. 85 (2004) (term sheet enforced even though formal redemption agreement and promissory note never were executed).  Thus, in-house counsel and business executives should be careful to think through whether they want or do not want a LOI (or any other preliminary agreement) to be binding.  If a non-binding LOI is desired, the SJC recommends stating the following:

THE PURPOSE OF THIS DOCUMENT IS TO MEMORIALIZE CERTAIN BUSINESS POINTS. THE PARTIES MUTUALLY ACKNOWLEDGE THAT THEIR AGREEMENT IS QUALIFIED AND THAT THEY, THEREFORE, CONTEMPLATE THE DRAFTING AND EXECUTION OF A MORE DETAILED AGREEMENT. THEY INTEND TO BE BOUND ONLY BY THE EXECUTION OF SUCH AN AGREEMENT AND NOT BY THIS PRELIMINARY DOCUMENT.”

If, on the other hand, you want a preliminary agreement to be binding, consider employing introductory language such as: “This Letter of Intent sets forth all of the material terms of the parties’ agreement to…” 

While there are no guarantees, making sure that your company approaches LOI’s and all other preliminary agreements with the intent to either make sure they are binding or make sure they are not binding can avoid big risks and/or pay big dividends.