Proposed parties to a transaction often enter into a letter of intent to reflect the basic terms of the deal. These letters are usually expressed to be non-binding (with the exception of the confidentiality and exclusive dealing provision). The parties then begin negotiating definitive binding agreements. An unintended consequence of the activities taken during the negotiating period can turn the non-binding letter of intent into a binding agreement. Such activities include:

  • beginning to try to satisfy conditions such as seeking zoning or other approvals to the transaction or conducting tests and inspections on the property which would normally be done during the conditional period of the definitive agreement;
  • beginning work on the site to be conducted by one of the parties to the deal;
  • any other activity by one of the parties which leads the other party to believe there is a firm deal in place based on the letter of intent.

If the parties want to start work on the transaction while the definitive contract is being negotiated then they should agree in writing, at the time the activities in question are commenced, that neither the conduct of any activities by a party nor the expenditure of any money by a party will make the letter of intent binding or, alternatively, they should agree the letter of intent is binding and conditional for a period of time on negotiating the definitive agreements. Overlaying all of this discussion is the recent Supreme Court of Canada’s decision in Bhasin v. Hrynew 2014 SCC 71 which introduces an obligation of good faith in the performance of contractual duties. It remains to be seen whether this obligation will be extended to non-binding letters of intent.