Have you ever entered into a work arrangement with a partner/consultant/vendor without a proper legal document outlining what each party is responsible for? I know I have. It's easy to do. Most people start out with the best of intentions, but things can go south quickly so you need to be aware of the risks. David Canton's posting on this subject gives a good overview of some of the things you may want to think about.

This is a cross-post from his blog and can also be viewed on Canoe.

 

guestblogger David Canton (London, ON., Lawyer)

Watch letters of intent closely

Letters of intent are often used as a starting point to negotiate various arrangements. But they can be risky.

The March decision in the Ontario Superior Court of Justice of Wallace v. Allen et al considered whether a particular letter of intent bound the parties.

The case centered on two friends who had entered into a gentleman's agreement regarding the sale of Mr. Allen's business interests. These friends started their agreement with a letter of intent that stated "there was still much legal work to be done," and they would eventually need to enter into a binding agreement.

These friends negotiated over the span of several months, and the buyer started working alongside the seller to learn the business and meet the clients. Ultimately an agreement was drafted, but never signed. The seller lost his faith in the deal and called it off when the buyer was out of town on the day the deal was to close.

The buyer sued his former friend to enforce the letter of intent, saying it created a binding agreement for the sale of the business. The court found, however, that because of the very clear terms in the letter of intent indicating it was only to be a preliminary document, it wasn't binding.

The court referred to the fact the letter of intent was drafted before negotiations were completed. This turns out to be a key point: If that same letter had been drafted and accepted after negotiations were complete and after a large majority of the terms of the agreement had been decided, the judge may have found it formed a binding agreement.

What protected the would-be seller from having the letter of intent enforced was that there had never been any indication the letter was to be binding. All parties at all times were aware they still had to draft and sign an agreement, and the letter was just a starting point.

When the plaintiff buyer tried to enforce the letter of intent the court refused, finding there was no meeting of the minds. The friends had never meant for the letter to be the final agreement, and they couldn't now claim otherwise.

The judge referred to the seller's unfortunate temper, and his all-consuming pride. In this situation, where an agreement between friends was ready to sign, they had begun to work together and visited with each other socially, one minor delay shouldn't have caused the whole deal to fall apart. The judge, however, couldn't read into the letter of intent clauses or terms that were simply not there. The language was clear and unambiguous, and the court had to find there was no binding agreement for the sale of the business.

This case illustrates the importance of carefully worded documents, and making sure the parties' true intent is reflected. A letter of intent can be a useful tool for negotiation, but should the deal sour, a poorly worded letter of intent could turn into a weapon to be used in future litigation.