Haffmanslaw

Letter of Intent FAQ

LETTER OF INTENT FAQ

What is a letter of intent, also called a letter of agreement or memorandum of understanding?

Business parties that are involved in preliminary negotiations regarding a commercial transaction typically use a letter of intent. The letter of intent will set forth some, but, by definition, not all of the elements of the future transaction. It often has a confidentiality provision, or the parties may choose to execute a separate confidentiality agreement.

Why would one utilize a letter of intent?

Business parties may feel more comfortable with ‘something’ on paper, in an effort to ensure that the preliminary negotiations are taken seriously by the other side. A letter of intent will give them this sense of commitment and security. It may also give them an easy way out, because, if drafted correctly, no formal deal has been closed. But read on, because poorly phrased letters of intent can create legal troubles.

What do the Minnesota courts say about a letter of intent?

Minnesota law holds that a letter of intent or an “agreement to agree” is not enforceable because it does not provide a basis for determining the existence of a breach or for giving an appropriate remedy. A letter creating an agreement to negotiate in good faith in the future is not enforceable since it does not constitute the parties’ complete and final agreement [1].

So what is there to worry about?

One may assume that the document entitled “letter of intent” just signed is non-binding and unenforceable. Unfortunately, there may be clauses in the preliminary writing that do bind the parties to an extent that they don’t want to be bound and certainly don’t expect to be bound.

What are some of the dangers of a letter of intent?

The preliminary memorandum may be binding because it contains all the essential terms necessary for a binding agreement. The label “letter of intent” does in and by itself not determine the letter’s binding effect. To be unenforceable, it is important that a letter of intent be drafted properly and includes carefully chosen disclaimer language. One should therefore always consult an attorney prior to executing any letter of intent.

[1] Lindgren v. Clearwater Nat’l Corp., 517 N.W.2d 574 (Minn. 1994); Mohrenweiser v. Blomer, 573 N.W.2d 704, 706 (Minn. Ct. App. 1998), review denied (Feb. 19, 1998); see also Hansen v. Phillips Beverage Co., 487 N.W.2d 925, 927 (Minn. Ct. App. 1992).