June 9, 2021

Letters of Intent: Traps for the Unwary

I have never minced words when it comes to my personal disdain for letters of intent, which is one reason why I found this Kramer Levin memo on some of the potential litigation traps for the unwary frequently lurking in those documents particularly interesting.  The memo addresses two related areas of concern – the need to ensure that the letter of intent is non-binding, and that it is also governed by the law of a jurisdiction that will respect its non-binding nature.

Here’s an excerpt on the latter issue, which says that New York law and New York courts have a lot to offer when it comes to respecting the parties efforts to craft a non-binding document:

LOI litigation is an area in which choice of law and choice of forum make a significant difference. If one wishes to maximize the chances of avoiding liability for breach of an LOI, then the LOI should provide for application of New York law and a New York forum. New York courts generally have extensive experience with LOIs, and the leading cases in the area have been decided by New York courts, both federal and state.

New York courts routinely dismiss on the pleadings breach of contract claims when the parties have executed a preliminary agreement specifically stating that the LOI is not binding or that conditions the parties’ obligations on definitive documentation. And New York courts generally do not permit parties to recast legally defective LOI breach of contract claims as claims for promissory estoppel or unjust enrichment.

New York courts likewise do not allow parties to substitute legally defective LOI contract claims as claims for breach of a supposed good faith duty to negotiate. And unlike other jurisdictions, New York courts do not recognize a duty of good faith and fair dealing separate from obligations explicitly recited in a binding contract. In other words, an LOI plaintiff who cannot sustain a breach of contract claim will not be able to sustain a claim for breach of the duty of good faith and fair dealing; so-called duty of good faith and fair dealing cannot be used to imply terms or require parties to negotiate, unless the LOI contains an explicit binding provision so stating.

John Jenkins