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Joanna Jurasz

Attorney at law (Poland)
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Every M&A transaction, especially a complicated one, is a lengthy process. During the execution of the transaction, and more precisely – at the stage of its preparation – parties to the transaction make a declaration in a letter of intent. A letter of intent may contain provisions binding on the parties and referring to their future rights or obligations as well as the scope of information to be disclosed, e.g. during due diligence preceding the stage of negotiations. Does the letter of intent create an obligational relationship between the parties or a commitment to conclude a contract in the future?

A letter of intent is a declaration of intent submitted by one or both parties when conducting negotiations. It expresses a firm intention to conclude a contract based on the results of the negotiations so far. The parties may freely decide on its content. One important function of a letter of intent is to secure oneself against disloyal behaviour of a business partner by e.g. committing the other party – in the letter's content – not to conduct negotiations with third parties or disclose information affecting the transaction's value.
A letter of intent may be more or less binding on the parties, depending on the provisions included therein.

Legal implications of a letter of intent

  • Preliminary contract
    A preliminary contract should include material provisions of the final contract. It is the only prerequisite for its validity. Nevertheless, it is necessary to differentiate between a preliminary contract and agreements concluded in the course of negotiations. As a rule, such agreements are assumed only to oblige the parties to continue conducting negotiations in a loyal manner and not to question the arrangements made in the course of such negotiations, unless they explicitly indicate an obligation to conclude a contract with specified content in the future. The provisions included in a letter of intent and their interpretation will in each case determine whether the letter of intent may have legal implications same as a preliminary contract. In order to safeguard the interests of the party, we recommend formulating a relevant contractual provision that would disqualify treatment of the letter of intent as a preliminary contract.
  • Culpa in contrahendo (fault in conclusion of a contract)
    Signing a letter of intent by one party without the genuine intention to conclude a contract may result in contractual liability called culpa in contrahendo.
    The party that starts or conducts negotiations breaching good practices, without the intention to conclude a contract, makes untrue statements or representations, fails to properly fulfil the information obligation, withdraws from negotiating the contract without giving a reason or indicating an untrue reason, deliberately delays or hinders the conclusion of the contract, or conducts competitive negotiations to the detriment of the other party, is obliged to remedy the damage suffered by the other party as a result of the reliance on contract conclusion. In the case of contractual liability, the party must prove that it has suffered damage and estimate its value, and additionally evidence an adequate causal link between the event causing the damage and the damage itself. 
    To be exempt from liability the party violating the provisions of a letter of intent must prove that it did not act intentionally to the detriment of the other party.
  • Contractual penalty
    Similarly as in every other transaction stage, confidentiality and trust are important issues for contractual partners. If a letter of intent includes a contractual clause defining a contractual penalty for disclosure of the course of negotiations or confidential information to third parties, this may trigger the penalty for such violations. In order to best safeguard the interests of the parties, the confidentiality clause must precisely define what confidentiality means and what situations trigger the violation of confidentiality obligation.

Examples of letter of intent provisions

  • The Parties mutually represent that the provisions of the letter of intent will be effective until [DATE]. This means that unless the transaction is concluded in the above mentioned period, the parties will cease to be bound by the terms agreed in the letter of intent and each party may withdraw from further negotiations without giving any reason, without being obliged to perform any of the services or activities under the letter of intent and without being entitled to claim reimbursement of any expenses made in connection with the activities indicated in the letter of intent,
  • [X] grants [Y] the exclusive right to conduct negotiations on the sale of [PLEASE NAME THE OBJECT OF THE TRANSACTION] by [X], regardless of the legal form of this sale, until [DATE]. In view of the above, within 14 days from the date of signing this letter, [X] will suspend by [DATE] or terminate all other negotiations with third parties on the sale of [PLEASE NAME THE OBJECT OF THE TRANSACTION] or any of the components of [PLEASE NAME THE OBJECT OF THE TRANSACTION], and additionally undertakes not to start negotiations with third parties in the period until [DATE] on [PLEASE NAME THE OBJECT OF THE TRANSACTION] or any other component of [PLEASE NAME THE OBJECT OF THE TRANSACTION].
  • The parties agree that information regarding the signing of this letter of intent, conducting negotiations and other activities described herein, as well as information on the parties or transactions disclosed as part of the execution of a letter of intent and the transaction, may be used by the parties only for the purpose of concluding this transaction and contracts referred to in the letter of intent.
  • This letter of intent does not constitute a preliminary contract in the meaning of Article 389 of the Polish Civil Code, or an offer in the meaning of Polish laws, or any binding obligation to conclude a transaction.

Letter of intent vs final contract

A letter of intent may trigger contractual liability, contractual penalty or may even be considered a preliminary contract. According to the prevailing case law, the essential function of a letter of intent is to express the parties' intention to conclude a specific final contract in the future, usually after an adequate period of negotiations. A letter of intent may, above all, specify the rules of extended collaboration of the parties when implementing a concrete investment project. If any provision of a joint letter of intent (or its part) is supposed to be definitive, this should be appropriately evidenced in a given legal situation creating a legal relationship between contractual partners. 
It should be emphasized once again that the binding force of a letter of intent is in each case dependent on its particular provisions, clauses and intention of the parties. The legal concept of a letter of intent is not strictly regulated in the applicable laws, but applied following the example of American regulations. In practice, we recommend that a letter of intent includes provisions covering at least the following issues: (non-binding) declaration of the parties regarding their willingness to work together or to execute a given transaction provided that certain conditions are met, the fulfilment of which will lead to the achievement of a specific goal. It is also important to remember about the confidentiality clause.

28.08.2018

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