Is your Letter of Intent Enforceable?

In many transactions (including real estate transactions), the final contract is usually preceded by letters of intent to contract.  Are those letters of intent enforceable?  A recent case discussing this issue is Copeland v. Baskin-Robbins U.S.A. Copeland was in negotiations to purchase an ice cream manufacturing plant from Baskin-Robbins.  The two parties came to an agreement that Baskin-Robbins would buy 7 million gallons of ice cream from Copeland. After signing a letter of intent, Copeland returned it to Baskin-Robbins with a $3,000 deposit.  Although negotiations continued on certain details, Baskin-Robbins subsequently put an end to the negotiations and returned the deposit.  Copeland filed a claim for breach of contract.

According to the Court of Appeals, failure to agree is not a breach of contract to negotiate. A party is only liable if failure to reach the ultimate agreement resulted from a breach of that party’s obligation to negotiate or the party failed to negotiate in good faith. However, just because an agreement to agree can give rise to a cause of action if a party fails to act in good faith, does not mean that damages would be as broad as if the main contract was breached.  Damages would be limited to the Plaintiff's out-of-pocket costs. 

Whenever you are in negotiation with another party, not only is it important to document everything in writing, but also to always negotiate in good faith.