Is a Letter of Intent Binding?

A buyer and a seller agree on price and structure for an acquisition and sign a letter of intent so lawyers can start drafting the purchase agreement. Weeks later, one side walks away, and the other side asks whether the letter it signed meant anything.

This post is for founders, owners and executives in Arizona, California and Texas who are about to sign a letter of intent, term sheet or memorandum of understanding for an acquisition, investment, partnership or major commercial deal. It explains which parts of a letter of intent are usually meant to bind, how courts in Texas, California and Arizona have approached the question of intent, and drafting points to consider. It is general information, not an opinion on any document. For the deal process that follows a letter of intent, see our post on buying a business.

The short answer

A letter of intent can be entirely non-binding, entirely binding, or a mix, with expressly non-binding business terms and expressly binding provisions such as exclusivity, confidentiality and expenses. Courts generally look to what the parties intended, starting with the words of the document. An express statement that the letter is not binding on certain terms is strong evidence of intent, but loose drafting can leave the question to a judge or jury. To reduce uncertainty, a letter of intent should say clearly, provision by provision, what binds and what does not.

Binding and non-binding provisions

A letter of intent can distinguish between proposed business terms and provisions intended to bind immediately.

Usually non-binding: price, structure (for example, asset or stock purchase), payment terms, earn-outs, employment arrangements for key people, the expected scope of representations and warranties, and conditions to closing. When expressly designated non-binding, these terms describe the deal the parties hope to document; any definitive agreement should address which earlier provisions it supersedes and which survive.

Often binding:

• Exclusivity or "no-shop." The seller agrees not to solicit or negotiate with other buyers for a set period. Buyers often ask for exclusivity because they are about to spend money on diligence.
• Confidentiality. If the parties do not already have an NDA, the letter of intent may include confidentiality terms or require one. Our posts on NDA mistakes and counterparty material in AI tools cover what can make those terms hard to enforce and what to check when someone puts the other side's material into an AI tool.
• Expenses. The letter can state whether each party bears its own costs or whether one party must reimburse specified expenses.
• Access for diligence, governing law, termination of the letter and its binding provisions, and a statement that no other provision binds the parties.

How Texas courts look at intent

In Foreca, S.A. v. GRD Development Co., the parties negotiated the sale of six amusement park rides, and a handwritten document initialed by both sides stated that the transaction was subject to legal documentation through a contract to be drafted by an identified attorney.¹ When the buyer withdrew, the seller sued, and a jury found an agreement.¹ The Texas Supreme Court framed the question as whether the contemplated formal document was "a condition precedent to the formation of a contract or merely a memorial of an already enforceable contract."¹

The court held that it was "a question of fact in this case" whether the agreed terms were intended as the final expression of the contract or only preliminary negotiations, and that the "subject to legal documentation" language "is not conclusive on intent to contract."¹ The court also noted that "in some cases, of course, the court may decide, as a matter of law, that there existed no immediate intent to be bound."¹ Four justices dissented, viewing the "subject to" language as a condition precedent.¹ The case shows how a short reference to later documentation can leave intent open for a jury on a disputed record. In Chalker Energy Partners III, LLC v. Le Norman Operating LLC, however, the Texas Supreme Court distinguished Foreca and enforced an express requirement for an executed and delivered definitive agreement, holding that the parties’ email exchange did not create a transaction contract as a matter of law.⁴

How California courts look at intent

California draws a distinction between an unenforceable "agreement to agree" and an enforceable agreement to negotiate. In Copeland v. Baskin Robbins U.S.A., the parties signed a letter setting out terms for the sale of a plant's equipment and a three-year co-packing arrangement that the letter made subject to a separate co-packing agreement, with the price still to be negotiated, and Baskin Robbins later broke off negotiations.²

The Court of Appeal held that "a contract to negotiate an agreement is distinguishable from a so-called 'agreement to agree' and can be formed and breached just like any other contract."² It explained: "If, despite their good faith efforts, the parties fail to reach ultimate agreement on the terms in issue the contract to negotiate is deemed performed and the parties are discharged from their obligations." A party "will be liable only if a failure to reach ultimate agreement resulted from a breach of that party's obligation to negotiate or to negotiate in good faith."² The court limited the remedy: damages for breach of a contract to negotiate are measured by the injury suffered in relying on the other party to negotiate in good faith, and "[t]he plaintiff cannot recover for lost expectations (profits)."² Because the plaintiff disavowed reliance damages and sought only lost profits, the court affirmed judgment for Baskin Robbins.²

For deal parties, the case is a reminder that a binding agreement to negotiate can carry real obligations in California even when the ultimate deal remains unresolved. Negotiations alone do not create that contractual duty. For breach of the negotiation agreement addressed in Copeland, the court limited recovery to reliance damages, not anticipated profits from the uncompleted deal, and did not decide whether Baskin Robbins had breached such an agreement.²

How Arizona courts look at intent

In Johnson International, Inc. v. City of Phoenix, a developer and the City signed a memorandum of understanding about a golf course project. The memorandum said it was "not intended to be the final agreement or to include all of the material terms, which shall be subject to further negotiations, and it shall not be binding on either party."³ When the City ended negotiations, the developer argued that the memorandum, recharacterized as a letter of intent, imposed duties to negotiate in good faith and to deal exclusively.

The Arizona Court of Appeals rejected that argument: "where there is an express nonbinding clause, we will honor it and not look to surrounding circumstances to imply an obligation at variance with the express clause."³ The court also observed that, under a federal decision it discussed, "letter of intent" is not a legal term of art, and that a good faith obligation could be found in an otherwise non-binding agreement where the parties included language to that effect.³ The case involved a public entity, municipal contracting requirements and required federal approval, so it should not be treated as deciding every private-acquisition dispute; its discussion nevertheless illustrates the importance of express non-binding language.³

Drafting tips

1. Label every provision. State which sections are binding and which are not, and say that no other provision binds the parties.
2. Make the non-binding statement unambiguous. In Foreca, a divided Texas Supreme Court held that "subject to legal documentation" was not conclusive and left intent to the jury.
3. Decide whether you want a duty to negotiate in good faith. If you intend to create a binding negotiation obligation, state its scope expressly and consider any agreed remedies; if you do not, make that intent clear and avoid conflicting promises elsewhere in the letter or related agreements.
4. Bound the exclusivity period. Set a start date, an end date or termination trigger, and what conduct is prohibited.
5. Watch conduct as well as words. In a footnote, the Foreca court identified actions taken in preparation for performance during negotiations as one circumstance relevant to contract formation. Such conduct can matter where intent is disputed, but it does not automatically override a clear non-binding provision or an express condition to contract formation.¹⁴
6. Plan for diligence. Tie access and confidentiality terms to the due diligence the buyer will run.

Questions to settle before you sign the letter of intent

1. Which provisions do both sides intend to bind, and does the letter say so section by section?
2. Is there an exclusivity period, how long does it last, and what ends it early?
3. Does the letter create a duty to negotiate in good faith, intentionally or by implication?
4. Is there already an NDA in place, or does the letter need confidentiality terms?
5. Who bears expenses if the deal does not close?
6. Which state's law governs the letter's binding provisions?
7. Is anyone about to act, such as hiring, spending or disclosing, in a way that could suggest the deal is already agreed?

What this post does not cover

This post does not decide whether any particular letter of intent is binding, and it does not cover securities law questions in an investment, tax structuring of a deal, or regulatory approvals. The four cases discussed address Texas, California or Arizona law; other jurisdictions and other facts can lead to different results. For the agreements that follow a signed letter, see our posts on asset versus stock purchases and representations and warranties. For contract cleanup before a sale, see our post on diligence-grade contracts, and for timing outside help, when a startup should hire a lawyer.

How we can help

Accord & Shield Legal drafts and negotiates letters of intent, term sheets and the acquisition and commercial agreements that follow for companies in Arizona, California and Texas. To better understand the scope of your matter, you can schedule an initial consultation. The consultation is evaluation-only; no legal advice is provided. Representation begins only after an engagement agreement is signed and any required retainer is received. Please do not send confidential or sensitive documents before we confirm that we can assist.

This article is general information, not legal advice. Reading it does not create an attorney-client relationship. Whether a particular letter of intent binds anyone depends on its words, the parties' conduct and the governing law; consult an attorney about your situation.