Casual legal: Risks with letters of intent
DISCLAIMER: This article is meant to provide information only and is not intended to provide legal advice. You should seek the advice of legal counsel to address your specific set of circumstances. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this article to be outdated.
By Ceilidh Hemmati
Reynolds Mirth Richards Farmer LLP
Alberta Municipalities Casual Legal Service Provider
Municipalities and entities formed by them, such as municipally controlled corporations, frequently enter into contracts of various types with other parties. Occasionally, a letter of intent ("LOI") (which may also be referred to as a term sheet or memorandum of understanding) may precede the definitive agreement. The LOI is typically intended to set out the key terms of a proposed agreement or transaction and to serve as a basis for negotiation before the final contract is executed. When used in this way, the LOI itself is generally intended to be non-binding on the parties. While LOIs can be a very useful starting point for an agreement, if care is not taken in the drafting of the LOI the parties may find that they have unintentionally entered into a binding contract.
Common problems that can arise in connection with LOIs include:
Failing to clearly state whether the LOI, or certain portions of it, are intended to be binding or non-binding on the parties. Simply naming a document "Letter of Intent" or "Memorandum of Understanding" does not mean that it will not be found to be a legally binding agreement if the elements of contractual intent (offer, acceptance and consideration) are otherwise present.
Using language which suggests the parties intend to be bound by its terms, like "will", "must", "agree" or "this agreement". Courts in Canada have found in certain instances that LOIs with this type of language resulted in a contractual relationship between the signatories, such that they were obligated to proceed with the transaction or agreement as described in the LOI or pay damages to the other party.
Failing to include clear conditions that must be satisfied before the parties will enter into a definitive agreement, such as certain approvals being obtained or a more comprehensive agreement being in place, and to specify what happens if those conditions are not met.
Engaging in conduct that suggests the parties believe a contractual relationship exists between them. This can include things like making public announcements or sending email correspondence that imply the transaction or agreement is going to happen, or otherwise acting like the deal is already certain or concluded. Courts in Canada have found in certain instances that parties indicated by their conduct that they intended to be bound by a LOI, even where it had conditional or non-binding language.
Given the above, municipalities and municipally controlled corporations that are considering entering into an LOI should ensure that both the drafting of the LOI and their conduct consistently communicates whether the LOI is intended to be binding or non-binding on the parties. While LOIs are often viewed as preliminary documents that may not warrant significant scrutiny or review, proper drafting and clarity of intention can help avoid the significant challenges that may otherwise be created by an ambiguous or incomplete document.
To access Alberta Municipalities Casual Legal Helpline, Alberta Municipalities members can call toll-free to 1.800.661.7673 or email casuallegal [at] abmunis.ca (casuallegal[at]abmunis[dot]ca) and reach the municipal legal experts at Reynolds Mirth Richards and Farmer LLP. For more information on the Casual Legal Service, please contact riskcontrol [at] abmunis.ca (riskcontrol[at]abmunis[dot]ca), or call 310.MUNI (6864) to speak to Alberta Municipalities Risk Management staff. Any Regular or Associate member of Alberta Municipalities can access the Casual Legal Service.
