A Cautionary Tale: Letter of Intent – Words that Bind

What is a letter of intent?

A letter of intent is a written agreement between two parties that outlines the terms and main aspects of the business arrangement.  Unlike a contractual agreement in which parties intend to be bound to the terms of the agreement, a letter of intent is meant to be a draft that has no legal effect on either party.


A letter of intent can be positive.

The benefit of a letter of intent is that it is a sketch of the agreement that can be changed at any point.  Parties can negotiate without the worries of establishing a formal agreement and establish the main points or issues regarding the agreement. Likewise, it also provides assurance that parties intend to complete the agreement. The letter of intent can serve as the base for the written contract.


Potential risks of a letter of intent.

Despite this, there have been cases where the court has referred to the letter of intention to clarify issues that arose from a written contract.  Therefore, individuals should be careful when creating a draft agreement as it may still have a legal impact.

A letter of intent should be carefully worded to avoid being perceived as a contract.  There are terms that may indicate the creation of a legal obligation, that if used in the letter of intent, could make it legally binding on both parties.

In Wallace v Allen, 2009 ONCA 36, a dispute regarding the purchase and sale of a business, the Court of Appeal found that the use of specific terms or language in the letter of intent as well as the conduct of the parties established that the agreement was binding.

Similarly, the language used in the letter of intent was one of the key factors identified by the court in Seelster Farms et al. v Her Majesty the Queen and OLG, 2020 ONSC 4013 in determining whether the letter of intent was binding. Another factor was that it had all the elements of an enforceable contract: an offer, acceptance and consideration.

It is better to seek legal advice from a lawyer when drafting a letter of intent to avoid unintended legal obligations.

This article is intended for information purposes only. It is not intended to provide legal advice. If you have any specific questions, please contact a lawyer.

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