April 15, 2021

Letters of Intent: NC Court Says Disclaimers Preclude Fraud Claims

I’m on the record as not being a big fan of letters of intent. There are several reasons for my disdain, and one of them relates to the lingering uncertainty that – even with disclaimer language specifically stating that the LOI is non-binding – a court may find that the parties have created some sort of binding obligation to negotiate in good faith. In a recent North Carolina Business Court case, the plaintiffs tried to “up the ante” for LOI claims and contended that statements in a non-binding LOI could form the basis for fraud claims against the buyer.

In Value Health Solutions v. Pharmaceutical Research Associates, (NCBC; 4/21), the plaintiffs alleged that the defendants fraudulently misrepresented the plaintiffs’ ability to achieve earnout milestones in a LOI. In response, the defendants argued that a non-binding LOI cannot form the basis for a fraud claim. They pointed out that LOI was titled “non-binding” and expressly stated that it merely “outlines [defendants’] thinking regarding the possible structure of a Transaction”; and that “none of this LOI, any proposal made to the [plaintiffs], nor the current on-going discussions between the parties are intended to (and shall not) create a legally binding obligation or commitment.”

The Court sided with the defendants. This excerpt from the opinion explains why:

The Court has considered the evidence and the arguments of the parties and concludes that Plaintiffs have failed to establish an issue of material fact, and PRA is entitled to summary judgment on Plaintiffs’ claims for fraud and fraud in the inducement arising from the representation that Plaintiffs would have “the ability to earn” the Sales Milestone payments.

First, the Court does not believe that the contents of the LOI can form the basis for a fraud claim under the facts present in this lawsuit. The LOI contains fulsome disclaimers making it clear that its contents should not be relied upon by any party to the transaction, and that any reliance on its terms are solely at the relying party’s risk. Under North Carolina law, letters of intent that are expressly non-binding and contemplate a more detailed future agreement between the parties are not binding agreements. [Citations omitted].

Second, the “ability to earn” language relied on by Plaintiffs is, by its very nature, a statement of future intent or a “representation relating to future prospects.” Ragsdale, 286 N.C. at 139. Notably, this language did not make it into the final [asset purchase agreement], which is silent as to Plaintiffs’ ability to earn the Sales Milestones.

Finally, the Court observed that the plaintiffs cited no authority from North Carolina or other jurisdictions – and the Court was not able to locate any – which recognized a claim for fraud arising out of representations contained in a LOI.  It concluded that this “clearly is not the case in which this Court should consider recognizing such a claim.”

John Jenkins