§ 1.16 Letters of Intent

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Some unknown, unheralded genius invented the ''Letter of Intent.''n1 Despite the intrinsic intelligence and utility of the device, in the hands of many entrepreneurs and corporate officers, and even members of the bar, it has led to much misunderstanding, litigation and commercial chaos. Properly used, the letter of intent is an outline of a not yet finalized agreement, a road-map leading perhaps to a contract. Once executed, each party can be relatively certain that the other has a good faith desire to continue negotiations to achieve goals stated in the letter. The letter will be shown to bankers, investment houses, landlords, tenants and other third parties whose cooperation is sought so that the deal can be ''done.'' As between the parties, the letter may be a license to ''kick the tires,'' that is, to retain accountants to investigate the accuracy of any representations made and other aspects of the financial desirability of the proposed transaction. The parties' lawyers will check charters, leases, zoning and any number of a myriad of other potential legal impediments to obtaining the client's goals. It is not a useless document, but it is not, in principle, a contract, except perhaps a contract to continue bargaining in good faith.n2 Nonetheless, there are times when letters of intent are signed with the belief that they are letters of commitment. If this belief is shared, or if one party is aware of the other's belief, the letter is a memorial of a contract. At other times, the parties impatiently proceed to perform the terms of the letter without finalizing their agreement in a further writing. In such cases, other principles come into play. These matters are discussed below.n3

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FOOTNOTES:

(n1)Footnote 1. After these words were first written, the author came upon this: ''Because of their susceptibility to unexpected interpretations, it is easy to understand why letters of intent have been characterized by at least one practitioner as 'an invention of the devil.' '' Quake Construction, Inc. v. American Airlines, Inc., 141 Ill.2d 281, 152 Ill.Dec. 308, 565 N.E.2d 990, 1009 (1990) (Stamos, J., concurring and citing the source).

(n2)Footnote 2. ''A complex business transaction ... requires a significant expenditure of time, effort, research and finances simply to arrive at its terms. The books of the companies must be carefully reviewed, difficult judgments of valuation must be made, financing must be secured, new corporations may have to be formed, and various timing and risk allocation issues must be spelled out in detail ... obviously incurring substantial legal fees. Depending upon the specifics of the deal, other professional services such as accounting and financing may have to be commissioned as well. Together, all these costs in executing a complex transaction may consume more than a trivial portion of the benefit the parties hope to realize. This cost may be too high if it need be borne without some assurance that it will culminate in a sale... When a deal necessarily is precede by costly groundwork, a letter of intent may benefit both the purchaser and the seller. Although much work remains to be done, indeed virtually all the details remain open, the buyer secures the seller's undivided attention as long as progress continues in ironing out the points of the transaction. Neither party has committed himself to the exchange. Both have agreed to work toward it. While success is not certain, it is more likely and the fear of wasted and duplicative effort is reduced.'' Feldman v. Allegheny International, Inc., 850 F.2d 1217, 1221 (7th Cir.1988) (Coffey, J).

(n3)Footnote 3. See §§ 2.8 and 2.9 below.