Top Ten Pitfalls In Negotiating And Drafting Business Contracts – Part I (Letters Of Intent)

This is the first of a ten-part series that may show you how the simplest-looking parts of a business deal can come back to haunt you. Stay with it and read about how to avoid getting into trouble, instead of how to get out of trouble.  I have published an abbreviated version of this series in the January 2014 issue of Nevada Business magazine.  Here is the link, but I warn you – it is so abbreviated that it only has seven pitfalls, and there is much more to be said than what you will see in that article!

1) Letters Of Intent – More Harm Than Good?

Before we even get to a contract, let’s look at where a pitfall lies – the innocent-looking letter of intent.

You’re excited about your deal, and you don’t want the other party to walk away before you can draw up a contract.  So you decide to take a baby step first – put the main deal points into a letter of intent, label it “non-binding,” get both sides to sign off so you can start work on a real contract.  If you change your mind, or something better comes along, you can just walk away because you didn’t sign a contract and the letter of intent is non-binding, right?

Not so fast.   

True, letters of intent normally do not obligate you to enter into a contract later on.  But be careful about friendly phrases like, “we are just agreeing to talk about doing a deal on these basic terms.…” It can mean more than you want it to mean. 

A court may interpret your statement as meaning “agreeing to talk in good faith…” even if you didn’t say it.  And if both parties agreed to talk in good faith about doing a deal on the basic terms that you listed, you may be unable to walk away or ask for better deal terms later in the negotiations, the way you thought you could.  True, you don’t have a contract for the deal yet, but you might already be stuck in a binding contract to conduct good faith negotiations intended to lead to the deal, even if you no longer want it.

There are ways to avoid this.  A truly non-binding document can be carefully drafted that way.  But if it were so simple, there would not be so many cases that have held a party to be in breach of a letter of intent, with resulting liability, because it mistakenly thought the phrase “non-binding letter of intent” meant what it said.

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