Business Monday

Signing a document? Proceed with caution — even if it says it’s not a contract

In late November, the University of Tennessee backed out of a memorandum of understanding with Ohio State defensive coordinator Greg Schiano to be the Volunteers' next football coach.
In late November, the University of Tennessee backed out of a memorandum of understanding with Ohio State defensive coordinator Greg Schiano to be the Volunteers' next football coach. AP file/Nov. 3, 2013

Late in November, Greg Schiano, Ohio State University’s defensive coordinator, was the next head coach of the University of Tennessee’s football program. The next day, he wasn’t. After an outcry from the Tennessee faithful, the University of Tennessee revoked the memorandum of understanding it had signed with Schiano, leaving the parties to lick their wounds and no doubt consider their legal options.

Memoranda of understanding (MOU), letters of intent (LOI), and term sheets are synonymous; and equally fraught. Usually, parties will cobble something together without consulting an attorney. Perhaps a refresher to MOU/LOI aficionados is in order.

In business, the “letter of intent” is ubiquitous. But is it enforceable? Is an LOI that is titled “binding and enforceable” actually binding and enforceable? And when is an LOI that contemplates future “formal” documentation enforceable?

In typical attorney fashion, the answer is: It depends.

Most laypersons consider an LOI to be an “agreement to agree” — that is, a recitation of the most salient terms, perhaps certain confidentiality or exclusivity provisions, potentially a breakup fee — but rarely is an LOI intended to be the final contract between the parties.

Etan 2
Etan Mark is a founding partner at Mark Migdal & Hayden. .

Whether a particular LOI rises to the level of a wholly enforceable stand-alone “contract” will depend on whether it is a “contract”— simply put, has there been an offer, acceptance, consideration and sufficient specification of essential terms. A document that leaves essential terms open, subject to future negotiation, cannot constitute an enforceable contract. Further, if the parties do not intend to be bound by an agreement, then there cannot be a contract.

Intent, however, can be a tricky thing.

Last year, a Florida court heard a dispute concerning two Tampa-based weapons manufacturers that thought to team up to secure a contract to provide high-powered rifles to the Peruvian military. They entered into a letter of intent, and things went south (not the weapons). The court held that even in cases where the LOI also contained a prominent provision stating “this document, in and of itself, does not represent a legal contract” a contract could be considered formed where the LOI was a “definite, detailed agreement spanning five pages in which both parties assented to certain rights and obligations.” In other words, at least as a matter of contract formation, the fact that the parties (effectively) stated in the LOI “THIS IS NOT A CONTRACT,” the Court still found that it could be a contract.

Notwithstanding the “meat” of the deal, often an LOI will have provisions that both parties expect will remain in effect even if the “agreement to agree” never comes to pass: confidentiality, exclusivity and breakup fees are the most common. Even in an LOI peppered with language emphasizing its unenforceability, parties routinely seek to enforce (and courts will uphold) those portions of an LOI that are explicitly intended to survive the failure of the “agreement to agree.” Explicitly carving out these provisions and expressing the parties’ intent that they will survive expiration or termination of the LOI will usually suffice. In the case of Benjamin Franklin Franchising, LLC v. On Time Plumbers, Inc., the United States District Court for the Middle District of Florida found that a specific carve-out entitled “Binding Provisions” was enforceable notwithstanding the termination of the LOI.

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In sum, when negotiating an LOI, it’s important to consider the following:

▪ An agreement to agree is not enforceable — so if you sign an LOI with an opposing party without all material terms and with an intention to “finalize the deal” later, you’re risking the possibility that the opposing party can walk away from the deal without any real consequences.

▪ Don’t act like you have a deal unless you want there to be a deal. When courts consider whether to treat an LOI as a binding contract, they will look to see whether the parties behaved as if they had a deal.

▪ Make sure you are explicit about the provisions of the LOI that you do wish to enforce. Confidentiality, for example, is often intended to survive an LOI expiration. Be sure to say that in the document.

Proceed with caution when signing a legal document, even one that contains an all caps disclaimer that “THIS IS NOT A CONTRACT.” Do you need a signed agreement to proceed to the next step of the process? If so, tread carefully: If it walks like a duck and talks like a duck, just because you call it a chicken doesn’t make it so.

Etan Mark is a partner with litigation law firm Mark Migdal & Hayden, based in Miami.▪ 

▪ This is an opinion piece written for Business Monday’s “My View” space in the Miami Herald. The views expressed do not necessarily reflect those of the newspaper.

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