Comparing Letters of Intent: An Overview
It is somewhat common for parties to a North Carolina business transaction to incorporate letters of intent to outline the basics of their arrangement. The point is to create a type of “agreement to agree,” which can be effective in certain situations. For instance, investors, shareholders, or lenders may want to see a letter of intent to the extent that the transaction will affect their own interests. However, what parties may not realize is that some letters of intent cross over into the realm of a binding contract. Before you know it, you may have obligated your company by signing off on a document that includes language on enforceable rights and responsibilities.
Letters of intent backfire when they run contrary to the parties’ intentions, whether your goal was to create binding duties or outline non-binding, basic terms. For this reason, you should work with an experienced North Carolina business law attorney for drafting, reviewing, and negotiating these documents. In addition, an overview of letters of intent – and their close relative, term sheets – may be helpful.
Legal Issues with Letters of Intent: The term itself reveals the legal effect of these documents, since they typically boil down to intent of the parties. In a sense, the default rule is that a letter of intent is nothing more than conceptual: It reveals what the parties expect and anticipate, with the understanding that the details will be included in a written agreement to come. Of course, there are exceptions to the default rule that may transition a nonbinding arrangement into something that is legally enforceable.
- Binding Letters of Intent: Generally, a court will find a valid agreement within a letter of intent if the language includes North Carolina common law requirements for a contract: Assent, mutual obligations, and defined terms. If it is clear under the circumstances that the parties intended it to be binding, the court will enforce it. Note that the presence or absence of the parties’ signatures is not a determining factor.
- Nonbinding Letters of Intent: When the document lacks specificity or fundamental requirements for creating a contract, parties will have a difficult time seeking legal relief. North Carolina courts have sometimes refused to find a binding contract when it does not include material terms – i.e., the court will not supply or add provisions to reach a finding that an enforceable agreement exists.
It is important to keep in mind that, if you take the position that your letter of intent is binding, it can subject to North Carolina’s statute of limitations for breach of contract. There may be other statute of limitations that apply depending on the subject matter of the letter of intent.
How Term Sheets Work Under North Carolina Law: Though some of the same disputes can arise, some parties elect to cover the significant aspects of a transaction through a term sheet. This document lays the groundwork for the major components of the deal, alleviating the potential for misunderstandings. A term sheet tends to be one-sided, as a statement of one party regarding expectations. However, it falls short of creating a binding obligation unless you include language revealing an intent that it be enforceable.
Consult with a North Carolina Business Law Attorney About Letters of Intent
If you are considering a letter of intent for a business transaction or have been presented with one by another party, it is essential to retain skilled legal counsel before signing. Our team at Mullen Holland & Cooper P.A. can assist with letters of intent and term sheets, so please contact our Gastonia, NC office today. You can set up a consultation by calling 704.864.6751 or filling out an online form.