A letter of intent is a preliminary document, commonly used in commercial transactions, to outline the eventual terms to be included in a formal contract to follow later. It can be used for a variety of reasons: to protect confidential information, outline terms, or to evidence the parties’ interest and desire to complete a transaction. Letters of intent can be binding, non-binding, or a combination of the two.
Why Use a Letter of Intent?
A well drafted letter of intent is meant to save the parties both time and money. Before the parties begin drafting a formal contract, a letter of intent can be used to outline the major provisions in an eventual agreement. This streamlines the contract drafting process and makes formalizing the agreement easier.
Enforceability of Letters of Intent
Determining if a letter of intent is binding has a significant impact on a party’s legal remedies if an agreement is not ultimately finalized. If a letter of intent has the essential elements of contract, it can still be legally enforced. However, if the LOI lacks essential terms, is premised on an unfulfilled condition precedent, and lacks a “meeting of the minds,” it is unenforceable. Karns v. Jalapeno Tree Holdings, L.L.C., 459 S.W.3d 683, 692 (Tex. App.—El Paso 2015, pet. denied).
Enterprise v. Energy Transfer Partners
A recent decision from the Dallas Court of Appeals has cast doubt on how letters of intent are interpreted in Texas. The two parties in the case, Enterprise and Energy Transfer, created a letter of intent for a joint venture to build an oil pipeline. When the deal failed to materialize, the enforceability of the letter of intent was at issue. The language in the LOI included several conditions precedent and specifically stated that if these were not met, it would not be binding. The trial court ruled that a de facto partnership was established between the parties because the agreement satisfied the partnership requirements in the Texas Business Organizations Code (TBOC). Enterprise Products Partners, L.P. v. Energy Transfer Partners, L.P., 529 S.W.3d 531 (Tex. App. Dallas, 2017).
The appeals court reversed. Despite meeting the TBOC partnership requirements, the court ruled that the partnership factors outlined in TBOC were not exclusive in determining the existence of a partnership. The court focused on the conditions precedent in the LOI. The court ultimately ruled that the conditions precedent in the letter of intent were not satisfied, and no de facto partnership was formed, making the agreement unenforceable. Id.
Best Practices for Drafting Letters of Intent
To avoid uncertainty, an attorney should be as precise and complete as possible when drafting letters of intent. It is best to specify what provisions will be binding, and non-binding, and expressly state any conditions precedent. Letters of intent should be drafted or reviewed by an experienced attorney.
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