A Letter of Intent ("LOI") is a preliminary document that outlines the main terms and conditions of a proposed business deal between parties. It constitutes one of the most significant pre-contractual documents relevant to international arbitration. A Letter of Intent is mainly used in complex transactions such as mergers and acquisitions, joint ventures, etc. 1
A Letter of Intent can be useful when the parties need to establish the groundwork for future negotiations. They can clarify the conditions and terms that will constitute their future contract. The Letter of Intent expresses a commitment to proceed towards a formal agreement; however, it is debatable how binding it can be. A Letter of Intent typically includes the following information: (1) the identity of the parties, (2) a description of their contract/transaction, (3) any kind of clauses (binding or not), and (4) a timeline, milestones, and deadlines for the completion of the terms of the agreement 2.
The Binding Nature of a Letter of Intent in Arbitration
A Letter of Intent acts mostly as a non-binding agreement. That emerges from the nature of the LOI, which is the expression of a tentative intention of the parties to enter negotiations for the conclusion of a future contract 3. The parties can include in their LOI that they do not wish it to be binding, with language such as "the terms are subject to contract" or "this LOI has no binding effects".
However, its binding nature can be extremely controversial. In general, legal implications may arise from a Letter of Intent in international arbitration, from (1) the expressed or implied intention of the parties, (2) the laws, rules and regulations that govern the LOI, and (3) a possible court decision that may force the LOI to be considered as legally binding 4.
The Inclusion of an Arbitration Clause as a Means of Legal Commitment
Furthermore, the parties may agree to include clauses that finalise their desire to follow the agreed terms of the LOI for their future contract. These clauses can vary depending on the parties' needs. Possible clauses can be (1) a confidentiality clause, which ensures the privacy of sensitive information shared between the parties during the negotiations; (2) an exclusivity clause, which prevents the seller from negotiating or contracting with third parties/buyers; and (3) an arbitration clause, which commits the parties to resolve disputes arising from their contract through arbitration.
More specifically, an arbitration clause, following the ICC Arbitration Rules format, can provide information such as: "All disputes arising out of or in connection with this Letter of Intent shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with said Rules. The place of arbitration shall be London, United Kingdom, and the language of the arbitration shall be English 5."
When both parties sign a Letter of Intent including an arbitration clause, a binding arbitration agreement is automatically created 6. For the arbitration clause, the parties can follow theIBA Guidelines for Drafting International Arbitration Clauses 7. These guidelines help achieve effective arbitration clauses that embody the parties' wishes.
In Letters of Intent agreed and signed by parties coming from different jurisdictions, an international arbitration clause can ensure confidentiality and enforceability of the decision 8.
Liability in the Letter of Intent
It is possible to divide the possible liability deriving from the breach of a Letter of Intent into two parts.
First, should the Letter of Intent be considered a non-binding document, the parties have no legal obligation to follow the instructed, agreed upon, and drafted terms. There may exist only a "moral" responsibility to follow the terms of the agreement. However, if one party believes that the LOI has a binding nature, and the other does not, as happened inPretoria Energy v Blankney Estates 9, the outcome will turn upon which of those differing understandings was ultimately correct 10. It is crucial that both parties know the non-binding effect of the Letter of Intent. Moreover, if one party reasonably relies on the promises of the other party made in the LOI (and incurs costs as a result), the other party may be estopped from reneging on their commitments if it would be unjust to do so 11.
Second, if the parties have agreed to make the Letter of Intent a binding agreement by including clauses such as those concerning confidentiality or international arbitration, they may be liable for damages resulting from breach or subject to arbitration. If they include a good faith clause, the parties must negotiate in good faith. If a party fails and acts in bad faith, it is typically liable for damages provoked by this conduct 12..
The Significance of Clarity in the Terms of the Letter of Intent
Multiple international cases have shown that the parties were subject to undesired legal repercussions due to their misunderstanding of the binding nature of a Letter of Intent.
InPennzoil Co. v. Texaco, Inc. 13, the dispute centred on an LOI between Pennzoil and Getty Oil, in which Pennzoil agreed to purchase Getty Oil. Texaco later made a higher offer, leading Getty Oil to abandon its deal with Pennzoil. Pennzoil sued Texaco for tortious interference with the binding Letter of Intent. In this case, the LOI, despite being preliminary, created enforceable obligations. This case highlighted the importance of clear language in LOIs and the potential legal consequences of breaching such preliminary agreements.
InEmpro Manufacturing Co., Inc., v. Ball-Co Manufacturing, Inc., et al. 14,the parties entered into an LOI for the purchase of Ball-Co's assets. The Letter of Intent included a "subject to" clause indicating the need for further agreements on specific terms. When Ball-Co decided not to proceed, Empro sued and claimed that the Letter of Intent was a binding contract. The Seventh Circuit ruled that the Letter of Intent was not binding. It emphasised that clear language indicating intent to be bound is necessary for such preliminary agreements to be enforceable. This case highlights the importance of explicit language in LOIs to avoid misunderstandings regarding their legal nature.
Conclusion
A meticulously drafted Letter of Intent, with clearly defined terms, can significantly impact the success of negotiations and any subsequent arbitration proceedings. A Letter of Intent helps prevent misunderstandings by establishing clear expectations and responsibilities. This pinpoints the significance of using precise and unambiguous language in these preliminary agreements. It also ensures that all parties have a mutual understanding of their commitments and the framework for resolving potential conflicts.
Footnotes
1. T. Tamplin,Letter of Intent (LOI)(26 November 2023),https://www.financestrategists.com/financial-advisor/letter-of-intent/ (last accessed 1 August 2024).
2. J. Orosz,Major Characteristics of a Letter of Intent, https://morganandwestfield.com/knowledge/letter-of-intent/ (last accessed 1 August 2024).
3. N. Cortes,M&A Arbitration: Pre-Closing Disputes and Letter of Intent(21 November 2017), https://arbitrationblog.kluwerarbitration.com/2017/11/21/ma-arbitration-pre-closing-disputes-letter-intent/ (last accessed 1 August 2024).
4. N. Cortes,M&A Arbitration: Pre-Closing Disputes and Letter of Intent(21 November 2017), https://arbitrationblog.kluwerarbitration.com/2017/11/21/ma-arbitration-pre-closing-disputes-letter-intent/ (last accessed 1 August 2024).
5. Standard ICC Arbitration Clauses(1 January 2021),https://iccwbo.org/wp-content/uploads/sites/3/2016/11/Standard-ICC-Arbitration-Clause-in-ENGLISH.pdf(last accessed 1 August 2024).
6. Vedder Thinking,Should a Dispute Under a Letter of Intent Be Arbitrated?(October 2011), https://www.vedderprice.com/should-a-dispute-under-a-letter-of-intent-be-arbitrated-10-12-2011 (last accessed 1 August 2024).
7. IBA Guidelines for Drafting International Arbitration Clauses(7 October 2010).
8. Gatehouse Chambers,Letter of Intent – what you need to know(5 November 2018), https://gatehouselaw.co.uk/letters-of-intent-what-you-need-to-know/ (last accessed 1 August 2024).
9. Pretoria Energy v Blankney Estates,Business and Property Courts of England and Wales, [2022] EWHC 1467 (Ch).
10. I. Hasan,Letters of intent and pre-contractual risks(22 August 2023), https://www.walkermorris.co.uk/comment-opinion/letters-of-intent-and-pre-contractual-risks/ (last accessed 1 August 2024)
11. MinterElisson,The effect of promissory estoppel(March 2023), https://constructionlawmadeeasy.com/construction-law/chapter-1/the-effect-of-promissory-estoppel/ (last accessed 1 August 2024).
12. Freiberger Haber LLP,Court Holds that a Letter of Intent is a Binding Contract When It Contains All the Material Terms of An Agreement(8 February 2019), https://fhnylaw.com/court-holds-letter-intent-binding-contract-contains-material-terms-agreement/ (last accessed 1 August 2024).
13. Pennzoil Co. v. Texaco, Inc., 481 U.S. 1 (1987).
14. Empro Manufacturing Co., Inc., v. Ball-co Manufacturing, Inc., et al, 870 F.2d 423 (7th Cir. 1989).
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.