PHIL1 692655-3 03/30/2009 03:19 PM Copyright © 2006, Gregory G. Gosfield. All Rights Reserved.
Letters of Intent
Gregory G. Gosfield, Esquire
Klehr, Harrison, Harvey, Branzburg & Ellers LLP 260 S. Broad Street
Philadelphia, PA 19102-5003 Tel.: 215-569-4164 Fax: 215-568-6603
E-mail: [email protected]
THE MATERIAL USED IN THIS MANUAL IS FOR TEACHING THE PHILADELPHIA CLE SEMINAR.
September 7, 2006
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“Thus, for example, an instrument which expressly states that it is a gentleman’s agreement or otherwise not a binding commitment will generally not be treated as creating contractual duties, although it is nevertheless an agreement.” I WILLISTON, A Treatise on the Law of Contracts § 1.3
“That a letter of intent is not a useless document, but it is not, in principal, a contract, except perhaps a contract to continue bargaining in good faith.” 1 CORBIN, Corbin on Contracts, § 1.16.
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Contents
1. Purposes and Goals 2. Choosing the Tactics 3. How Do We Know If It Is Binding: “Manifest Assent” 4. Key Elements of Enforceability 5. Letter of Intent Binding Provisions 6. Take Away Points 7. Some Negotiable Provisions
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1. Purposes and Goals
1.1. Term Sheet - Show interest; business terms; naked and dangerous
1.2. Pre-contractual contract to negotiate: Letter Agreement - Set enforceable ground rules: promise to negotiate; promise to provide draft Contract; fundamental deal points
1.2.1. Exclusivity of negotiation
1.2.2. Standard of negotiation effort and cooperation: Good faith (pure heart, blank mind), best efforts (every available effort) – not always enforceable.
1.2.3. Confidentiality of negotiation
1.2.4. Access and investigation
1.2.5. Consummation or termination: cessation of negotiations or consummation of negotiations by executive approval, contract document with all terms addressed, final signing, third party approvals, default by a party
1.2.6. Performance milestones and Supervening Circumstances
1.2.7. Broker fee
1.2.8. Limitation of liability; injunction against seller, not damages
1.3. Commitment Letter – Establishing terms for binding commitment, subject to isolated but broad conditions: final formal contract, diligence, financing, board approval, permits and consents
1.3.1. Operation of business, especially if diligence period is running
1.3.2. Notification of change
1.3.3. Disclaimer of representation and warranty
1.3.4. Indemnification, protection, defense, hold harmless
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1.3.5. Waiver of rights and defenses: procedural, substantive, statutory, regulatory, common law
1.3.6. Release of future claims based on part performance, promissory estoppel, course of conduct, reasonable reliance
1.3.7. Survival of protections
1.3.8. Allocation of expenses and brokerage fees
1.3.9. Integration
1.3.10. Organization, authority, no conflict
1.3.11. Consents of third parties, approval of governmental authorities
1.3.12. No third party relationships, no third party beneficiaries
1.3.13. Assignability
1.3.14. Notice and counterparts
1.3.15. Choice of law, jurisdiction, service of process
1.4. Skeletal Contract – sufficient material terms
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1.5. Goals
1.5.1. Buyer Goals
1.5.1.1. Exclusive during negotiation
1.5.1.2. Access and diligence
1.5.1.3. Option: “outs”
1.5.1.4. Expenses: Seller to “buy” Buyer’s diligence work at cost or partial cost
1.5.1.5. Confidentiality
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1.5.2. Seller Goals
1.5.2.1. No exclusive: race to the contract - no implied reliance
1.5.2.2. Access and diligence: no contract until diligence is waived while Buyer spends money
1.5.2.3. Buyer forfeits money, pays for the “option”
1.5.2.4. Seller disclaimers of representations and warranties - better in writing than oral
1.5.2.5. Buyer assumption of risk of investigation, circumstantial conditions
1.5.2.6. Buyer release of claims against Seller
1.5.2.7. Buyer indemnity (reimbursement), defense (reactive), hold harmless (proactive) and protection (prophylactic) of Seller (See Attachment 3.7)
1.5.2.8. Buyer releases and waiver of statutory or common law rights
1.5.2.9. Confidentiality
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2. Choosing the Tactics
2.1. The approach
- Clarity – The attorney’s paradise
- Ambiguity – The attorney’s hell
- Unilateral rescission or withdrawal – having the cake and eating it too
2.2. The result – to split:
- Fixed from fluid
- Fundamental and framing issues from business terms and deal points
- Binding from non-binding
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3. How do We Know If It Is Binding: “Manifest Assent”
3.1. Levels of ambiguity:
3.1.1. purposeful multiple meanings
3.1.2. vagueness
3.1.3. omissions
3.1.4. misleading non-disclosure or misrepresentation of fundamentals
3.1.5. mixed intent
3.1.6. unanticipated circumstances
3.1.7. self-negating language: “This letter is not a binding agreement”
3.2. Tone: resembles contracts which are customarily binding:
3.2.1. formal legalese or informal
3.2.2. optional or obligatory
3.2.3. “shall” – imperative, “may” – discretionary or “ought” – normative.
3.3. Binding elements:
3.3.1. Intent revealed by parties
3.3.2. Performance induced by relevance or consideration
3.3.3. All essential terms
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4. Key Elements of Enforceability
4.1. Intent revealed
4.1.1. Sealed promise – Middle Ages
4.1.2. Mutual promise or part performance – Renaissance
4.1.3. “Meeting of the minds” – Enlightenment
4.1.4. Manifest assent – Holmes and the Formalists
4.1.5. Judicial interpretation of intent – Llewellyn and the Realists
4.1.6. Philosophy of Construction: Interpreting Contractual Effect
4.1.6.1. Natural Law – certain inherent fundamentals in all human requirements which are also reflected in man made law (golden rules)
4.1.6.2. Formalist Law – Normative mechanical rules of construction will direct outcome (objective; manifest assent: seals, signings)
4.1.6.3. Positivist (“Pure”) Law – deduced rules of custom and practice, not morals
4.1.6.4. Intentionalism – “meeting of the minds” and actual intent will direct the outcome (subjective)
4.1.6.5. Realism – gap-filling construction to create, complete, or excuse contracts and their performance (open texture and “fuzzy logic”)
• Implied terms imputed to parties
• Change of circumstance and inducement
• Common mistake, oversight, disregard
• Supervening impossibility, impracticability or frustration
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4.1.7. The Test of Intent: TIAA v. Tribune Co., 670 F.Supp. 491 (S.D.N.Y. 1987)
- Expression of intent
- Context of negotiations
- Essential terms
- Partial performance to performing party’s detriment
- Custom and practice
- Conditions subsequent
4.1.8. Contractual Effect: Handshakes Can Be Binding
4.1.8.1. Essential Elements: Terms, Consideration, Mutual Assent
4.1.8.2. Informal obligations
4.1.8.3. Oral contract:
4.1.8.4. Implied-in-fact contract
4.1.8.5. Course of conduct, reasonable reliance and promissory estoppel
4.1.8.6. Acts of the parties can amend prior written disclaimer
4.1.8.7. Agreements to agree
4.2. Consideration/Estoppel
4.2.1. Private agreement or enforceable contract
4.2.2. Confers a benefit, extracts a detriment
4.2.3. Promissory estoppel –
4.2.3.1. made promise reasonably expected to induce response in promisee
4.2.3.2. promisee did respond,
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4.2.3.3. injustice can only be avoided by enforcing promise
4.2.4. Statute of frauds/part performance
4.3. Essential terms
4.3.1. Parties
4.3.2. Asset
4.3.3. Price
4.3.4. Timing
4.3.5. Intent
4.3.6. Transaction intended
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5. Letter of Intent Binding Provisions
5.1. Duty to Negotiate
5.1.1. Standard
5.1.1.1. No duty
5.1.1.2. Reasonable efforts/best efforts
5.1.1.3. good faith efforts
5.1.1.3.1. best efforts or simply good faith.
5.1.1.3.2. resolution of specific points will result in the creation of a contract.
5.1.1.3.3. the common law good faith requirement may apply:
5.1.1.3.3.1. to the contract only,
5.1.1.3.3.2. or to the negotiations that precede the contract, or
5.1.1.3.3.3. to the negotiations that precede the letter of intent if the letter has a contractual effect.
5.1.1.3.4. The requirement of good faith negotiation would include:
5.1.1.3.4.1. sincere effort; continuousness; diligence in the negotiation.
5.1.1.3.5. Examples of bad faith include:
5.1.1.3.5.1. Unjustifiable refusal to negotiate.
5.1.1.3.5.2. Improper or unreasonable conditions;
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5.1.1.3.5.3. illegal
5.1.1.3.5.4. unethical or improper negotiating tactics
5.1.1.3.5.5. misrepresentation or non-disclosure of assumptions fundamental to the commencement of the negotiation’
5.1.1.3.5.6. re-opening closed issues (“re-trading”)
5.1.1.3.5.7. repudiation
5.1.1.3.6. Silence
5.1.1.3.6.1. Personal property – UCC requires good faith
5.1.1.3.6.2. Real Property – no corresponding federal or statutory law
5.1.1.4. Approvals and consents – a duty to negotiate in good faith has been distinguished from a duty to pursue approvals or advocate the negotiated transaction.
5.1.1.4.1. If the letter is precursor to contract, parties should make clear whether the letter is intended to act as the approved contract after approval (as is usually the case in applications for permanent loans which convert to commitments upon approval), or whether approval is simply approval of the letter, which is basis for contract negotiation.
5.1.1.4.2. Time limitation for when approval has been gained or lost.
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5.1.1.4.3. The effect of refusal or non-approval in a timely fashion.
5.1.1.4.4. The letter may also specify the standard for the parties who pursue the approval process:
- submit the letter with a request for approval
- supporting efforts to obtain the approval
- continuous and diligent pursuit of the approval until it is obtained or refused
- regular advice to the other party of the status of the approval process
- use of the most efficacious and expedient procedures to obtain approval.
5.2. Exclusivity
5.2.1. Imposition of “No Shop”
5.2.1.1. Stated period
5.2.1.2. Extended upon payment of forfeitable funds
5.2.2. Termination of No Shop
5.2.2.1. Buyout
5.2.2.2. “Break-up” fee for better offer
5.2.2.3. Right of first refusal
5.2.3. No Exclusivity
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5.2.3.1. Parallel negotiations
5.2.3.2. Disclosure strong defense
5.3. Confidentiality:
5.3.1. Exposures
5.3.1.1. secret business strategies.
5.3.1.2. innovative ideas.
5.3.1.3. other proprietary information.
5.3.2. The elements of the confidentiality clause
5.3.2.1. duration and survival after the termination of the letter.
5.3.2.2. subject matter of the protection -
5.3.2.3. the class of recipients - need
5.3.2.4. standard of care –
5.3.2.4.1. Past practice - subjective
5.3.2.4.2. Peer standard
5.3.2.4.3. Industry standard
5.3.2.4.4. Best efforts
5.3.2.4.5. Absolute
5.3.2.5. limitation on use of confidential information – evaluate proposal
5.3.3. Cause of action:
5.3.3.1. breach of contract express or implied-in-fact,
5.3.3.2. more commonly tort for misappropriation or conversion,
5.3.3.3. with a remedy in damages for the breach,
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5.3.3.4. or injunction for the tort to prohibit further use or dissemination.
5.4. Termination
5.4.1. Expiration
5.4.2. Default
5.4.3. Failure of condition
5.4.4. For convenience
5.4.5. Upon reimbursement of other’s costs
5.4.6. Superceding contract
5.5. Exculpation
5.5.1. Owner disclaimer
5.5.2. Representation and warranties
5.5.3. Obvious or latent conditions
5.5.4. Known or unknown circumstances
5.5.5. Interested party acknowledgment and assumption: accept risk of loss for losses arising from disclaimer
5.6. Indemnification; Release; Waiver
5.6.1. Where one of the parties is engaged in conduct which could cause another party liability
5.6.2. use of inspection of the real estate
5.6.3. negotiation with other parties having an interest in the asset
5.6.4. interaction with the occupants
5.6.5. inquiry of governmental authorities
5.6.6. third party claims: second party equivalent is release
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5.6.7. elements of an Indemnification Clause
5.6.8. duration and survival based on when claim is made or occurrence of claim
5.6.9. indemnified events – known, unknown, later discovered
5.6.10. notice to exercise indemnification
5.6.11. indemnified parties/indemnifying parties
5.6.12. standard of indemnification; protect (proactively prevent adverse outcomes), defend (reactively bear costs or tender defense), hold harmless (refrain from attacking and make whole); relative powers; selection of counsel; veto of settlement
5.6.13. recourse: creditworthy indemnitor; set off right; escrow/bond/letter of credit; non-cash collateral
5.6.14. Waiver of defenses
5.6.15. Release of claims
5.7. Allocation of Expenses
5.8. Remedies
5.8.1. Statute of frauds and specific performance
5.8.2. Partial performance and specific performance
5.8.3. Damages:
5.8.3.1. Expectation – consequential damages – what buyer lost
5.8.3.2. Reliance – direct damages – cost reimbursement
5.8.3.3. Restitution – unjust enrichment – what seller gained
5.9. Miscellaneous
5.9.1. Notice
5.9.2. Choice of Law, venue, service of process
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5.9.3. Prohibition on assignment
5.9.4. Injunctive remedies without posting bonds if under statute of frauds as real estate contract or part performance
5.9.5. Damages for breach of contract
5.9.6. Access
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6. Take Away Points: Freedom To Negotiate Enforcement of Contractual Expectations
6.1. Letters are binding as to rules of negotiation:
6.1.1. Standard of negotiation effort
6.1.2. Disclaimer of representation and warranty
6.1.3. Waiver of claims based on part performance, promissory estoppel, course of conduct, reasonable reliance
6.1.4. Indemnification for liability
6.1.5. Conditions for binding contract: executive approval, contract document with all terms addressed, final signing, third-party approvals
6.1.6. Exclusivity
6.1.7. Confidentiality
6.1.8. Allocation of expenses
6.2. Letters are not binding as to business terms except if there is express intent: are the written terms agreed to and negotiation limited to unwritten terms
6.3. Subsequent actions can amend prior language
6.4. Specific performance requires a signed writing or significant partial performance
6.5. Damages can be obtained for breach of contract for lost profit, costs incurred, or unjust enrichment
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SOME NEGOTIABLE TERMS
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NON-BINDING TERMS
PROSPECT: Set forth below are the minimum terms and conditions for a Contract which Owner would agree to.
OWNER: This letter of intent (“Letter”) follows discussions we have had about the interest of Name of Interested Prospect (“Prospect”) in (purchasing/leasing) the Property and the manner of proceeding to negotiate the terms and conditions of a final, definitive, formal transaction contract (“Contract”). This Letter contains Binding Terms (“Binding Terms”) in Section I and Non-binding Terms in Section II (“Non-binding Terms”). The main Non-binding Terms are intended to be the basis of discussions, for they would be the minimum terms which the Owner would consider before entering into a the Contract.
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STANDARDS OF NEGOTIATIONS
PROSPECT: The parties shall negotiate in good faith to enter into a Purchase and Sale Agreement.
OWNER: NOTWITHSTANDING THAT EITHER OR BOTH PARTIES MAY EXPEND SUBSTANTIAL EFFORTS AND SUMS IN ANTICIPATION OF ENTERING INTO A CONTRACT, THE PARTIES ACKNOWLEDGE THAT IN NO EVENT WILL THIS LETTER BE CONSTRUED AS AN ENFORCEABLE CONTRACT TO [LEASE, SELL OR PURCHASE] THE PROPERTY AND EACH PARTY ACCEPTS THE RISK THAT NO SUCH CONTRACT WILL BE EXECUTED (following GMH).
This letter is not an agreement to negotiate. The parties do not intend to be bound to negotiate in good faith or use best or reasonable efforts to reach agreement. The parties shall not be bound until a final, definitive and formal contract is signed by both of them.
OVERBROAD: This letter of Intent is non-binding and is subject to the approval of a mutually satisfactory agreement. If such agreement is not negotiated and executed by the parties, they shall have no rights against each other. (following Phil Mar)
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EXCLUSIVITY
PROSPECT: Owner shall not seek, actively market, privately encourage inquiry, consider proposals, respond to proposals, analyze proposals, retain proposals, or in any way pursue or otherwise induce parallel or competing negotiations with respect to the subject matter of this transaction for a period ending [60] days after the execution of this Letter (“Negotiation Period”). [Buyer may extend the Negotiation Period up to [30] days by payment to Seller of a non-refundable extension fee of $__________ prior to the expiration of the Negotiation Period.]
OWNER COMPROMISE: If Owner receives a bona fide offer from a third party that the Owner is willing to accept, Owner will deliver a copy of the offer to the Prospect and permit the Prospect to agree to match that offer within ______ (___) days of the delivery to the Prospect.
In the event that Owner breaches Paragraph A or the Binding Provisions are terminated by the Prospect pursuant to Paragraph ____ below and, within _______ (___) months after such breach or termination, Owner closes a transaction relating to the [transfer] of a material portion of the ownership of Owner or the Property through purchase, merger or other business combination then, immediately upon such closing, Owner shall pay or cause to be paid to the Prospect the sum of $_________.
OWNER: Each party shall be free to terminate negotiations with the other for any reason whatsoever, at any time prior to the execution of the Contract without incurring liability to the other[.] (GMH)
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FINAL APPROVAL
Any Contract which may be negotiated shall not be binding on [___] until it has been approved by the [senior corporate] officers and the Law Department of [___] and by the [Finance] Committee of [___] Board of Directors. Such approvals are conditions precedent to the [___] obligation to perform under the terms of the Contract, and may be withheld for any reason or for no reason.
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EXPENSES
PROSPECT: If this letter is terminated by Owner for reasons other than due to the Prospect’s default, Owner shall reimburse the Prospect for its direct costs with respect to the following: appraiser of $_____; environmental consultant of $______; physical inspection of $______; loan application fee of $_____; reasonable attorneys fees of up to $_____; marketing and feasibility reports of $_____; survey of $_____; title inspection of $_____; syndication of $_____; consents of $_____; governmental approvals of $_____, and such amounts shall be Owner’s sole liability to the Prospect at law or in equity.
OWNER: Each party hereto shall bear its own expenses incurred in connection with the negotiation of this letter, the preparation of the final and formal contract, the investigations performed during the Investigation Period (defined below), and obligations provided under the Binding Provisions. Any materials generated for the Prospect’s benefit in connection with its analysis of the Property shall be delivered to Owner if Closing under the Contract does not occur.
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TERMINATION
The Binding Terms shall remain in effect until the earlier of either (i) the signing and delivery by both parties of the final and formal Contract, (ii) the termination declared by Prospect or Owner on account of an uncured default, (iii) the failure to have such signed final and formal Contract prior to the Effective Date above, (iv) any mutually agreed upon extension or termination of that period, or (v) prior to the Effective Date, if a material change or event makes the signing and delivery of the Contract illegal, invalid, or a violation of the fiduciary duties of the owners or directors of the Prospect or Owner (“Letter Termination”). Notwithstanding any Letter Termination, the provisions of the Binding Terms will survive such Letter Termination.
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CONFIDENTIALITY
All information made available by Owner to Prospect in accordance with this Letter or obtained by Prospect in the course of its investigations shall be treated as confidential information by Prospect and its Consultants, and at all times prior to the [purchase] of the Property by Prospect, Prospect shall use its commercially reasonable efforts to lease prevent its agents, employees and Consultants from divulging such information to any unrelated third parties except as required by applicable law or as reasonably required by third parties engaged by Prospect for the limited purpose of analyzing and investigating such information for the purpose of consummating the transaction contemplated by this Letter of Intent, including Prospect’s attorneys and representatives, prospective lenders and engineers, and prospective financial partners. Copies of all reports and results of Prospect’s investigations shall be delivered to Owner reasonably promptly after they are completed, and if Prospect terminates this Letter or the Contract on or before the expiration of the Negotiation Period, all originals of such reports and results, together with all copies of information delivered to Prospect by or on behalf of Owner, shall be turned over promptly to Owner.
The obligations under this paragraph _____ shall survive the expiration or termination of this Letter of Intent and the Contract.
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ACCESS
PROSPECT: Owner shall provide the Prospect with full access to the Property and to Owner’s records relating to the Property, upon prior reasonable notice and during business hours. In addition, within ten (10) days after Owner signs this Letter [or the Contract], Owner shall provide to the Prospect with all documents and information in Owner’s control relevant to such inspection, including environmental reports relative to hazardous substances or any other adverse environmental conditions of the Property; appraisals; market studies; reports on the physical condition of the Property; leases and tenant correspondence files; violation notices of laws, title restrictions or contracts; land surveys; utility and zoning approvals, disapprovals and letters; tax bills, assessments and notices; service and repair records; permits and licenses, applications and approvals; service and employment contracts, and such other documents as the Prospect may reasonably request. The Prospect shall take reasonable efforts to avoid unnecessary disruption of Owner’s business and that of Owner’s tenants.
OWNER: The Prospect acknowledges that whatever materials Owner makes available to the Prospect without representation, warranty or recourse as to whether they are true, correct, complete, or sufficient for the Prospect’s purpose. Owner disclaims any representation or warranty relating to the Property. Prospect assumes the risks relating to the inspection and analysis of the Property, releases Owner from any liability relating to it, and waives any defenses it may have to enforcement of Owner’s rights
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CASES IN PENNSYLVANIA
GMH Associates, Inc. v. The Prudential Realty Group, CB, 752 A.2d 889 (Pa. Super. 2000)
• Court looked for “unequivocal promise” and “mutual assent to be bound”
• Letter of intent provided that “either party could terminate negotiations at any time and for any reason without incurring liability;” no provision in the letter requiring the parties to negotiate in good faith; no provision requiring Prudential to take the property off the market
• Held: no enforceable agreement to negotiate in good faith
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SDK Investments, Inc. v. Ott, 1996 WL 69402 (E.D. Pa.)
• Court looked for specific language that would require parties to use “best efforts” or “negotiate the transaction to completion;” i.e. “withdraw the Store from the rental market and only negotiate the above described leasing transaction to completion.”
• Letter of intent required Ott to exclusively deal with SDK for ninety days from the execution of the letter, and to come to “mutually agreeable” terms.
• Court distinguished difference between language requiring parties to “negotiate terms that are mutually agreeable” and language requiring parties to “negotiate the transaction to completion;” latter creates a binding obligation to use best efforts to complete a transaction or negotiate in good faith, the former does not carry with it a guarantee of a fruitful negotiation.
• Court looked for specificity of underlying contract terms; wanted to see the letter of intent contain the “most significant lease terms”
• Letter of intent was lacking essential terms of the new business, such as how equity was to be split, how the partnership would function, and who would maintain control of the organization.
• Held: no enforceable agreement to negotiate in good faith
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Protocomm Corp. v. Fluent, Inc., 1995 WL 3671 (E.D. Pa.)
• Court looked for “some objective method of determination” that agreement on unsettled matters would follow; also looked for evidence that showed the terms left open were not deemed material by the parties; an agreement to agree on a material term is not a binding contract
• Letter of intent was ambiguous, as were the intentions of the parties; unclear as to what the parties considered to be the essential terms
• Held: summary judgment denied, further fact finding needed for more evidence on these issues
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Philmar Mid-Atlantic, Inc. v. York Street Assocs. II, 566 A.2d 1253 (Pa. Super Ct. 1989).
• Court looked for “mutual manifestation of intent to be bound”
• Letter of intent provided that it was “non-binding” and would not be binding until a “mutually satisfactory lease” was “negotiated and executed”
• Held: with express language indicating an intent not to be bound by anything, no enforceable agreement to negotiate in good faith
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Channel Home Center, Division of Grace Retail Corporation v. Grossman, 795 F.2d 291 (1986)
• Court looked for “manifestation of intent to be bound,” “sufficiently definite” terms, and consideration
• Letter of intent stated “you will withdraw the Store from the rental market and only negotiate the above described leasing transaction to completion;” Grossman used letter of intent to help obtain financing for the project; Channel prepared a draft of the lease, sent representatives to site to take measurements for renovations, developed marketing plans, and started preparing equipment.
• Held: the language was definite enough to be enforced, and consideration was given, but evidence was not clear that there was a manifestation of intent to be bound by the letter; remanded for further findings of fact on these issues.
