Ask the Attorney: Binding and Non-Binding LOIs

By 08/13/2010
Ask the Attorney: Binding and Non-Binding LOIs

Ask the Attorney - LOIs

[This is the latest column from Tubefilter News’ resident new media legal expert, James C. Roberts. Last time he tackled reader questions on when a producer actually needs to get signed model release forms in new media and online entertainment. This week’s reader question is all about how to interpret the ever-resent Letter of Intent (LOI). ]

Q: A company wants our company to sign an LOI. What happens if we do sign it?

A: Don’t you just love it when an attorney’s reply is “It depends?” Well, it does depend. It depends on evidence as to what the parties intended when they signed the LOI (Letter of Intent).

We’d all like to believe that contracts are actual documents that parties sign with ink (or in Hollywood with blood). Well, we cannot, because the binding legal obligations created by a contract can arise from many exchanges—whether of real documents, emails, or even conversations. It depends on what the parties intended.

The operative word is binding. If it is primarily a sort of agenda for further discussions, then make that intent clear. If you want it to be obligations of both parties, then make it clear in the document itself.

It is pretty helpful, then, to include in the language of an LOI the statement whether or not the document is binding upon the parties. Include the language either way: “This
non-binding LOI sets forth some of the terms under discussion by the Parties.” It is also prudent to have in any email exchange a statement to the effect that nothing is binding
until both Parties sign a written agreement that sets forth all terms between the parties. You can even include in the LOI something to the effect that says the same thing (i.e., a
written agreement in the future that will be binding, once executed).

So you can see why the first answer is “it depends.”

Perhaps this begs another question: Why would someone want to sign a non-binding LOI? In some cases, one of the parties needs the LOI to show evidence of interest in their product or services—i.e., if they can show that someone in their relevant market is interested then an investment might follow. And another reason is that there is now a document that shows the intent of the parties.

Most lawyers would like 30 or 40 pages of disclaimers (OK, I exaggerate: 25 pages) in any LOI. It is not necessary to go overboard—unless you are buying or selling a company worth gejillions (or half a gejillion). You just need enough to show that the parties intended to be bound by the LOI or not when they signed it. It does not mean that someone will not challenge the existence or non-existence of a binding contract; it just means that the language will help.

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James C. Roberts IIIJames C. Roberts III is the Managing Principal of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group. Between the two groups there are offices in California, Colorado, the East Coast, Shanghai and Milan. He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies. Mr. Roberts speaks English and French and, with any luck, Italian in the distant future. He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California Berkeley. Have a question? Email James

This ‘Ask the New Media Attorney’ post discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented without seeking the advice of counsel in the relevant jurisdiction. Tubefilter, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.

Top photo by Mushroom and Rooster.