So-called “letters of intent” are used quite often in a wide array of business contexts. Even though they are used frequently, however, much of the time the parties signing the letter do not understand the legal effect of the letter. Parties often don’t understand if the letter of intent is legally enforceable. Can a party sue on the letter of intent alone if the other party fails to consummate the deal or hold up their end of the bargain? The answer to that question under Florida law is: maybe. This blog provides guidance on the main issues affecting enforceability of a letter of intent.
A letter of intent may be enforceable as a binding contract. Thus, a party drafting or signing a letter of intent needs to be careful. Enforceability depends on the language of the letter and the intent of the parties. There are two primary issues with the language of the letter that a party should pay close attention to: (1) an intent for the letter to be binding, or not binding; and (2) whether the essential elements of the deal are fixed.
The letter of intent will be enforceable if the essential terms of the contract are fixed in the letter and the language of the letter expresses an intent for it to be binding on the parties. Conversely, a letter of intent that is merely an “agreement to agree” or preliminary statement of intent to contract in the future is unenforceable as a matter of law in Florida. The primary threshold issue is whether the parties intended for the letter of intent to create a binding legal obligation. Unless the parties intended to be bound by the letter of intent, it will not be enforceable as a contract to pursue the contemplated deal, regardless of the level of detail set forth in the letter. See White Const. Co., Inc. v. Martin Marietta Materials, Inc., 633 F. Supp. 2d 1302, 1320 (M.D. Fla. 2009).
Every possible provision of a contemplated contract may be discussed and agreed upon [in a letter of intent], but unless the parties intend that these discussions be binding, no contract has been formed. When the parties express their intention to be bound and they specify the basic terms of the [deal], the courts will enforce the [letter as a] contract to avoid frustrating the parties’ original intent. When such indications of intent are absent or are explicitly disavowed, however, the justification for enforcing the proposed contract is wholly absent. The court does not address the terms of the proposed contract until it has satisfied itself that the parties did indeed intend to be bound.
Id. (quoting Doll v. Grand Union Co., 925 F.2d 1363, 1368-69 (11th Cir.1991). Therefore, the first question that must be asked is whether the parties intend to be bound to the deal upon signing the letter of intent, or not unless or until a subsequent formal agreement is executed. That is the difference between an enforceable letter of intent and an unenforceable “agreement to agree.” The question of whether the parties intended the letter to form a binding contract is determined by examining the language of the letter, as well as the surrounding circumstances. Id.
Where parties do not intend to be bound by their letter of intent prior to the execution of a subsequent formal written agreement (i.e. merely an “agreement to agree”), there will be no enforceable contract unless and until the written agreement is in fact executed. WrestleReunion, LLC v. Live Nation TV Holdings, Inc., 8:07CV2093-JDW-MAP, 2009 WL 2473686, at *4–5 (M.D. Fla. Aug. 11, 2009) (citing Lifecare Int’l, Inc. v. CD Med., Inc., 68 F.3d 429, 436 (11th Cir. 1995). However, the contemplation of a subsequent formal agreement “does not denote that they did not intend to be bound immediately by their” letter of intent. Id. (citing Bed Bath & Beyond, Inc. v. Ibex Constr., LLC, 860 N.Y.S.2d 107, 109 (N.Y. App. Div. 2008) (holding “letter of intent” was binding even though it called for execution of a more formal contract). The letter of intent does not have to deal with every contingency, and uncertainty as to “nonessential or small terms”—which will be dealt with in the subsequent formal agreement—will not preclude a finding that the letter of intent alone is a binding contract. Id. (citing Robbie v. City of Miami, 469 So.2d 1384, 1385 (Fla. 1985). The initial inquiry, therefore, is whether the parties intended to be bound by the letter of intent, or only intended to be bound upon the execution of a subsequent formal agreement.
Even if the parties intended the letter to be enforceable, it will only be enforceable if all essential terms are fixed. Even though all the details are not definitely fixed, a letter of intent may be binding if the parties agree on the essential terms and seriously understand and intend the agreement to be binding on them. ABC Liquors, Inc. v. Centimark Corp., 967 So. 2d 1053, 1057 (Fla. 5th DCA 2007). The fact that other, non-essential terms remain open is not fatal to a breach of contract claim based on a letter of intent. See W.R. Townsend Contracting, Inc. v. Jensen Civil Const., Inc., 728 So.2d 297, 302 (Fla. 1st DCA 1999). In addition, “the law recognizes that parties can have an enforceable contract binding them to prepare and execute a subsequent agreement.” Plumbing Serv. Co. v. Progressive Plumbing, Inc., 952 So.2d 1211, 1214 (Fla. 5th DCA 2007). In other words, the mere fact that the parties contemplate memorializing an agreement containing all essential terms in a formal document does not prevent their informal agreement from taking effect prior to that event. See W.R. Townsend, 728 So.2d at 302; NRP Group, Inc. v. Hydropress, LLC, 06-60593-CIV, 2007 WL 201259, at *2 (S.D. Fla. Jan. 24, 2007) (“These terms appear to govern the relationship between the parties and serve as an interim agreement until such time as the parties execute a more formalized agreement—an event that never transpired. The Court finds the letter is an [enforceable letter of intent].”) Therefore, the second inquiry is whether all essential terms are fixed within the letter of intent.
If essential terms remain open for consideration and negotiation, the letter will not be enforceable as a contract. This means the letter must express a “meeting of the minds” on all essential terms of the deal. De Vaux v. Westwood Baptist Church, 953 So.2d 677, 681 (Fla. 1st DCA 2007). Where essential terms of an agreement remain open, subject to future negotiation, there can be no enforceable contract, regardless of the parties’ intent that the letter be binding. Bergman v. DeIulio, 826 So. 2d 500, 503 (Fla. 4th DCA 2002); Spanish Broad. System of Florida, Inc. v. Alfonso, 689 So. 2d 1092, 1094 (Fla. 3d DCA 1997) (refusing to enforce a letter of intent where an essential term (i.e., duration of employment) was missing and indeed subject to further negotiation by the parties); Berkery v. Pratt, 390 Fed. Appx. 904, 907 (11th Cir. 2010)(unpublished) (finding a LOI to purchase real estate unenforceable because it lacked some essential terms).
Importantly, “partial performance” of the deal may not be enough, on its own, to render the letter of intent enforceable. If the letter of intent does not meet the two-part test set forth above, and it requires the execution of a subsequent formal agreement before the parties are bound to the deal, the enforceable contract between the parties does not arise unless and until the formal agreement is executed. The initial partial performance by the parties to “pursue” the deal in the interim can’t overcome the fact that the letter of intent tells the parties that no contract will form unless the formal agreement is executed. A prime example of a Court applying this rule is Lafarge N.A., Inc. v. Matraco Colorado, Inc., 07-80112-CIV, 2008 WL 2277503 (S.D. Fla. May 30, 2008).
In Lafarge, Lafarge and Matraco signed a letter of intent to establish a joint venture to pursue a mining project. The letter of intent included the following language: “This letter does not, and is not intended to, impose any binding obligations on the parties…” After executing the letter, but before the contemplated contract was ever executed, the parties started initial investigation of the project and buying equipment. A year later, and still without an executed contract, the parties’ relationship soured and they separated. Matraco sued Lafarge for breach of contract. The Court denied the breach of contract claim because no contract was ever executed and because the letter of intent was not a binding, enforceable agreement. In addition, Matraco sued for fraudulent misrepresentation based on Lafarge’s intent to enter into the contemplated joint venture. The Court denied this claim as well, because one is not justified in relying upon some action which the other party is not required to perform, and Lafarge was under no obligation to close the deal simply because it expressed an intent in pursuing the venture. The letter of intent was not enough to enforce the deal.
In conclusion, a party should carefully draft or examine the language of the letter of intent. If a party does not intend for the letter to be binding, and does not want an enforceable contract to arise unless and until a subsequent formal agreement is executed, then that party should make sure the letter clearly expresses that intent. On the other hand, if the party intends for the letter to bind the other party to the deal, the letter should clearly express that intent. For example, the letter could state: “The parties intend this letter to be legally binding and enforceable. The letter contains all essential elements of the [deal]. The parties will negotiate in good faith to reach an agreement on any non-essential terms not set forth herein, which will be codified, along with the essential elements set forth herein, in a subsequent formal agreement.” Of course, all essential elements of the deal must be agreed-to and stated in the letter.