December 8, 2021

Letters of Intent: NC Business Court Provides Another Cautionary Tale

A recent North Carolina Business Court decision provides yet another cautionary tale about the potential for a letter of intent to be viewed as a binding contract. The facts in Avadim Health v. Daybreak Capital Partners, (NC Bus.; 11/21) fit the typical pattern – the parties sign an LOI, parts of the deal start to fall into place, then the buyer tries to walk away or re-trade deal terms, and the target sues, alleging the buyer’s breached a binding contract.

Under North Carolina law, a contract to enter into a future contract, such as an LOI, must include all “material and essential terms” in order to be enforceable.  The prospective buyer said that the LOI for this transaction didn’t satisfy that requirement and moved to dismiss the complaint. The Court disagreed. This excerpt from the opinion shows how the Court used a combination of documentation and the parties’ conduct to reach that conclusion:

According to Counterclaim Plaintiffs, the LOI, which became effective as of March 2020, specified the following terms of the agreement: the purchase price; the markets being purchased; the Avadim products CHG would exclusively distribute and market; the product pricing; exclusivity of required sales thresholds; and the duration.

Counterclaim Plaintiffs further allege that, by July 2020, any loose ends that may have been remaining as to the terms of the LOI were tied up, the parties had agreed in concept to all material terms and could have proceeded to complete the transaction, and that the remaining drafting issues had been resolved by the parties and Avadim did not identify any condition that Daybreak or CHG was unable to satisfy nor any material term needing resolution.

Additional events and circumstances surrounding the execution and the signing of the LOI support Counterclaim Plaintiffs’ claim that the parties intended to be bound by the LOI in working towards a final transaction See JDH Capital,LLC v. Flowers, 2009 NCBC LEXIS 8, at **15 (N.C. Super. Ct. Mar. 13, 2009) (considering the circumstances surrounding the execution of the letter of intent involved in that matter to find whether it was intended by the parties to be a binding agreement).

In addition to the two amendments to the LOI negotiated by Avadim and Daybreak previously, in June 2020, the parties also entered into an interim Distribution Agreement, which allowed CHG to begin selling Avadim’s products in the B2B market before the ultimate sale transaction was to be completed. These acts demonstrate the parties’ mutual assent to be obligated to complete the contemplated transaction.

As a result of the foregoing, the Court concluded that the plaintiff had stated a claim and refused to grant the motion to dismiss.  It’s worth noting that the Court’s opinion makes no reference to any disclaimer language, which leads me to believe that no such language was included in the LOI.

A provision specifying which sections of the LOI were binding and which weren’t and indicating that the LOI did not impose any obligations to proceed with a transaction or negotiate for any period of time would likely have been helpful to the defendant’s case. But even disclaimers like those aren’t foolproof when it comes to preventing a Court from deciding that a defendant is bound to do something under an LOI.

John Jenkins