September 29, 2015

Is Your Letter of Intent an Enforceable Contract?

A contract is a binding agreement creating an obligation enforceable by law between two or more parties. It requires an offer, an acceptance, consideration, and mutual assent which those involved intend to be bound by the terms of the contract. A letter of intent containing those essential requirements can become subject to an enforceable contraction.

There are 4 categories of letters of intent:

  1. One of the parties specifically says it does not intend to be bound until a formal writing is executed;
  2. There are specific matters on which the parties must yet agree;
  3. All necessary terms are agreed, but the letter of intent says nothing about other relevant matters, which are not essential;
  4. All necessary terms are agreed, but with the express statement that the parties intend to be bound by the agreement or contract.

Under these categories, the first is a letter that cannot be an enforceable contract by itself. It requires a formal writing before the parties intend to be bound. The second and third categories are very similar. Both types of letters look at matters that have not yet been agreed upon. The second category focuses on indefinite matters, which do not need to be agreed upon for the contract to become enforceable. The third category focuses on matters that are definite, it is usually necessary for the matter to be agreed upon by both parties before it becomes enforceable.

Intent to be bound is also a component between the two, focusing on essential and nonessential matters and whether they are agreed upon and mentioned in the letter. Acknowledging whether a party intends to be bound or not is also important. If essential matters still need to be agreed upon, it is likely there is no implied intent to be bound. If nonessential matters are not agreed upon, there is likely an implied intent to be bound. The fourth category contains an express statement made by the parties, so it would be enforceable because it states the parties’ intent to be bound.

A way to make sure that your letter of intent cannot be an enforceable contract is to include a statement along the lines of “this is not a final, binding, or enforceable agreement by either party.” To ensure that your contract process moves smoothly, contact the Law Office of Michael Alan Siddons to help make sure your letter of intent does not trap you into an enforceable contract. Call today for a free consultation at (610)255-7500.