When is a letter of intent a complete agreement?

Introduction:

An agreement that is implementable on legal grounds or is legally admissible results in a valid contract as stated in Section 2(h) of The Indian Contract Act. A letter of intent is a comprehensive term for a document that reveals a party’s intention to enter into a formal contract at a future date. In Layman’s terms, it is a prologue or a preliminary initiative to a future contract. It comprises the broad and basic terms and conditions based on which the contract will exist. To reach upon all the detailed terms and conditions of the agreement is itself an elaborate and time-consuming procedure hence the idea behind the letter of intent is to interpret the major clauses and key points of the intended covenant.

In T. S.Venkatesa Iyer’s ‘The Law of Contracts & Tenders’, it is stated:

“By giving a letter of intent, a party cannot be said to have intended to agree or do anything in order to give rise to a binding contract.”

In Cheshire, Fifoot, and Furmston’s Law of Contract (Twelfth Edition, Pg. 43), it is stated:

“A letter of intent is a very commonly employed commercial device by which one party indicates to another that he is very likely to place a contract with him.“

When a Letter of Intent does become an Agreement?[1]

A letter of intent expresses a party’s intention to enter into a contract therefore before parties enter into a detailed and descriptive agreement, they mutually agree upon the broad idea of the proposed dealing. However, a letter of intent does not make the parties bound to the agreement which is to be formed at a later date. Such a document can do so only in the presence of a certain determined clause or provision that specifies the obligatory nature of the letter. These determined clauses may be confidentiality, individuality, cost, or expenses. Such a letter of intent may turn to be hybrid because of the mentioned clauses that alter the credibility of the letter of intent and makes it stand in proximity with the actual contract.

For instance, a letter from an employer to a contractor clearly instructing to begin with the work and mentioning the remuneration, with the final agreement to be finalized later.

Pertinently if a letter of intent expresses that the parties to the future agreement hold no contractual obligation towards each other as of now, it is impliedly assumed that there is no existing legitimate contract between the parties furthermore, if the language used or the way of writing is unclear or indefinite that there exists no concrete assurance that a proper valid contract is likely to exist in the future. The legal machinery relies on two principles to determine whether the letter of intent is binding. These are the scripted manifestation of the intention specified in the letter or the illustrative action taken by the parties concerned.

A party that has signed a letter of intent may be legally bound to consider it depending on how the letter is drafted. In a business dealing, a letter of intent generally possesses a provision mentioning that the letter is non-binding. Even if such language is not included, it is possible a court would suggest that the letter is only an expression of intent and is not binding. Even if both the parties have signed the letter which has all the necessary clauses and provision that makes the letter binding but the concerned parties have a record of non-binding agreements, the court would rule the current agreement as non-binding too.

Case Brief: A.J. Richard & Sons, Inc. v. Forest City Ratner Cos., LLC[2]

Facts:

In 2005, the city of New York entered into an (MOU) Memorandum of Understanding with Forest City which authorized them with the development of the Atlantic Yards Project. Under the terms of the said MOU, (ESDC)- Empire State Development Corp. was to acquire ownership interests from the tenants of the proposed construction and development site known as the proposed site known Site 5.

A proposal was made by Forest City to one A.J Richards, for ownership of his property in exchange for a replacement property in the exact location after the redevelopment of Site 5 was completed and the terms of an (LOI) Letter of Intent were negotiated and the LOI was executed.

Terms of the LOI: 

1. An exclusivity clause implied that Forest City shall be the exclusive purchaser and developer of the property of Richards.
2. A sale and purchase negotiation agreement were to contain all the terms and conditions relating to the sale and purchase of the property in the final agreement.
3. A “proposed redevelopment” section containing a detailed account of the process of the redevelopment of the site.
4. A development agreement placed on Forest City an obligation to complete the redevelopment process in 18 months.
5. Provisions relating to the duties of both parties.
6. Sections governing an annual payment of $3800000 made by Forest City to A.J Richards during the “Go Dark period”.
7. Sections governing the price of the redeveloped property and the required approvals and permissions from governmental entities.
8. Confidentiality agreement.
9. Amendments and assignments sections.
10. Legal compliance sections.
11. Section making it an obligation on both parties to finalize sale, purchase, and redevelopment agreements within a commercially reasonable period.

Later Forest City informed A.J Richards that due to economic uncertainty and financial constraints, the proposed redevelopment plan of Site B stood suspended indefinitely with a good chance that the project would be abandoned, and to respond to this A.J Richards brought an action in the support of which he gave four causes: –

Arguments:

1. Causes cited for a declaratory action: –
   1. The LOI was a binding, valid and enforceable contract.
   2. It was an obligation for performance under the LOI.
   3. Forest City breached the contract.
   4. Plaintiff would be irreparably harmed if the Forest City or its subordinate parties acquire said property by any other means except under the terms mentioned in the LOI.
   5.  No adequate remedy is available in law.
2. The second cause alleged that Forest City by directing ESDC to initiate proceedings to take over the property in question at Site B without Forest B purchasing the said property and thus violated its obligations under the LOI.
3. The third cause alleged that Forest City had breached its contractual obligations under the LOI by failing to negotiate in good faith when it directed the EDSC to carry out the above-mentioned action.
4. The fourth cause alleged that in the event that the plaintiff was awarded specific performance, Forest City does not have the right to acquire the property in question at Site B other than in accordance with the terms mentioned in the LOI, to do otherwise would cause irreparable damage to the plaintiff.

For both the Second and Third causes, the plaintiff sought specific performance and reimbursement for incidental damages.

In response, the defendant Forest City moved for an order:

1. To be granted partial summary judgment and dismiss the plaintiff’s first, second, and fourth causes of action.
2. Vacating the preliminary injunction issued against it on February 16, 2016.

Judgment:

It was held the court that the LOI constituted a legal, binding, and enforceable agreement between all parties, the court held that “LOI set forth all of the material terms of the agreed-upon transaction, including the parties, purchase price, location, and size of the Replacement Property; mortgage arrangements; Go Dark Payments; assumption of costs; and terms of delivery”.

The Court rejected the Forest City’s argument because all material terms such as sale, purchase, and redevelopment agreements and specific terms and conditions relating have been discussed and given assent to by both the parties hereby making the LOI legally binding and enforceable

Conclusion

A letter of intent expresses the intention of a party to enter into a contract and is an abstract of a contract. The letter of intent can turn out to be binding if it satisfies the essentials of a valid contract or the requirements for a contract to be binding stands in place in the letter of intent. People who tend to engage in this concept expect the necessary amount of clarity and security. It must also equalize the risks and aims of both the parties concerned. A letter of intent can be a contract but need not necessarily be a permanent contract, It may be intended to protect a party’s interest in the same way as a normal contract would.

---

References:

[1]Letter Of Intent Under Indian Laws – Is It Legally Enforceable? , By Seema Jhingan and Neha Yadav https://www.mondaq.com/india/contracts-and-commercial-law/525504/letter-of-intent-under-indian-laws-is-it-legally-enforceable

[2] 2019 N.Y. Slip Op. 30215 (N.Y. Sup. Ct. 2019)

Other Sources:

https://www.investopedia.com/ask/answers/042315/how-legally-binding-letter-intent.as

httpswww.investopedia.com/ask/answers/042315/how-legally-binding-letter-intent.asp

https://www.mondaq.com/india/contracts-and-commercial-law/525504/letter-of-intent-under-indian-laws-is-it-legally-enforceable

https://www.quigggolden.com/publications/letters-of-intent-what-do-the-courts-have-to-say/