Consider the letter of intent (also known as a "memorandum of understanding," a "preliminary agreement," or other innocuous-sounding title). Some business folks believe that a surefire way to do a deal at the last minute (and no reason to bother their lawyer at 5 PM on a Friday!) is to sign a letter of intent ("LOI"). The typical LOI is a short agreement that states some - but not all - of the terms of the deal, contemplating that the parties will eventually sign a complete or definitive agreement ("DA") that will state all of the deal's provisions, both business and legal.
LOIs are inherently troublesome (an "Invention of the Devil" according to one lawyer) because the parties to a LOI may disagree on its legal significance. One party may view the LOI as obligating the parties to sign a DA at a future date, even if a disagreement develops over the provisions in the DA that the LOI didn't address. The other party may regard the LOI as merely a non-binding understanding of the deal, with no obligation to ever sign a DA. This misunderstanding is a fertile field for resolution by time-consuming and expensive litigation or arbitration.
Unless a LOI contains an appropriate disclaimer (discussed below), Michigan courts will enforce a LOI if it contains all of the material and essential terms of the proposed future DA. And a jury (or arbitration panel) decides what these material and essential terms consist of. Further, some Michigan courts have held that even if some contractual provisions normally included in DAs in the particular industry are absent from the LOI, the LOI is legally binding if the parties used language stating their intention to be obligated. According to this legal precedent, the presence or absence of essential contract provisions is but one element in the evidential panorama underlying a factual finding of intent and responsibility. So, Michigan case law does not lead to a confident outcome in whether a LOI is a binding document or merely the parties' understanding of what a DA could include, with no obligation to enter into a DA.
But Michigan courts have decided that appropriate disclaimer language will make a LOI unenforceable if that language is unambiguous and explicit. One Michigan court approved the following language as an adequate disclaimer:
- ...all legal obligations of the parties hereto shall be set forth in the [definitive] agreement and other documents negotiated by the parties and their respective counsel...This letter of intent is not an offer (and acceptance hereof does not constitute an agreement) to consummate this transaction or to enter into the [definitive] agreement.
- (Note: there are much better ways to state this disclaimer using plain English!)
Regardless of what side of the deal you are on - and even with an effective disclaimer -LOIs are more trouble than they're worth. If the deal matters that much, put the extra effort in doing a DA immediately (even if the business folks and their lawyers have to work nights and weekends to get it done - they'll survive). Don't give the devil his due!
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