Can You Decommit After Signing a Letter of Intent?

After signing a Letter of Intent (LOI), a business is held to the terms of that contract. However, situations can change. When you need to make a change instead of moving forward with the agreement outlined in the LOI, it may become necessary to consider decommitting.

Can you decommit after signing a letter of intent? It may be possible, but in choosing to do this, you accept the wide variety of consequences that may be involved.

What Is a Letter of Intent?

In a business context, a Letter of Intent (LOI) is typically a non-binding document that shows that two or more parties have reached a preliminary agreement. It is typically a signed proposed business deal or transaction, with the specific intent to negotiate further to come to an official agreement (also called the “definitive agreement”). The purpose of an LOI is to discuss terms and conditions in a framework that will help shape the official contract.

It takes longer to develop a contract for all parties to stand behind and work towards, but an LOI helps to show good faith by all parties on the objectives present. In simple terms, an LOI is a provisional agreement to keep working together to create a formal contract. So, what happens when you sign it?

Is an LOI Legally Binding?

Signing an LOI does not bind you to a future contract.

It is not legally binding in its entirety because it is a provisional agreement held by two or more parties, and it does not create any obligations that state you must do business with that company. Either party can back out of the agreement for virtually any reason.

However, there are some critical provisions in most LOIs that play a role in this process. Most LOIs contain binding provisions, usually related to exclusivity and confidentiality. As such, if there is a confidentiality agreement within the LOI, that component could be legally binding whether the transaction moves ahead or not. 

Violations of these components could lead to legal consequences.

Withdrawal After an LOI Is in Place

Most often, the creation of an LOI indicates that both parties see the promise and potential benefits of moving forward with the relationship. However, there are some situations where this does not happen. When it does, you have the right to withdraw from moving forward on the deal.

Binding Provisions

If an LOI has binding provisions of any form, you must continue to abide by them. Additionally, if one of the parties has already started fulfilling some of the provisions contained within the LOI, that could make it more difficult to break from the LOI. For example, if sensitive information has been exchanged at this point or substantial financial commitments are made by one or both parties, withdrawal can be more challenging.

Ultimately, you should look for language in the LOI stating that it’s non-binding. 

Can an LOI Be Broken?

After signing an LOI, it is possible to break that promise if you cannot agree on the particulars of the deal; however, it is not advisable to do so in most situations. If it is a binding agreement or has any type of binding agreement components to it, then breaking the LOI may become challenging and often costly from a legal perspective.

Each situation is vastly different. As a result, those wishing to break from the LOI must work with an attorney who can offer guidance and the best way forward. This will depend significantly on the type of LOI and the situation leading to this decision.

In some situations, not fulfilling your obligation to a binding agreement can lead to fines and civil lawsuits in some cases. Ultimately, the breaking of such a letter will require that the party initiating the dissolution of the agreement make some form of restitution for the losses suffered by the other.

Have Courts Awarded Restitution Despite a No Refund Clause?

There have been instances where Pennsylvania courts have overridden the “no refund” clauses on grounds of public policy. A good example of this is Lancellotti v. Thomas, decided by the Superior Court of Pennsylvania. Here, a man who was buying a business was unable to complete the sale and sought to recover the money paid prior to the default. The court recognized that it was unjust for the seller to profit from another man’s mistake and allowed limited restitution for the breaching part under § 374 of the Restatement (Second) of Contracts.

In Central Dauphin Sch. v. American Cas. Co., the court stated that “freedom of contract is not absolute,” reinforcing the principle that a contract term should not be enforced if it goes against public policy. In another case, GMH Associates, Inc. v. Prudential Realty Group, a real estate deal fell apart after the two parties had signed an LOI. The company GMH Associates, Inc. insisted that the LOI was a binding contract, but the court disagreed, stating several reasons, such as missing formalities, explicit language stating it was not a binding contract, and the lack of finalization of essential terms. Thus, Pennsylvania courts would not recognize an LOI as a binding contract unless all key terms are laid out and the LOI contains a promise to negotiate in good faith. 

The Consequences of Decommitting from an LOI

The terms of the LOI should provide clarification on both whether it is a binding agreement and what occurs when one of the parties decides to break from it. Abide by the terms noted within the agreement beyond anything else.

Some of the potential consequences of breaking or decommitting to a letter of intent include the following (as defined by the terms of the agreement):

• Financial losses. In many situations, penalties apply to breaching the binding components of an LOI. These fines, which are laid out within the agreement, are meant to serve as restitution to the other party for the loss of investment they have made.
• Legal action. It is possible that the other party could take legal action against the party that breaks the LOI. Lawsuits as well as criminal charges may be applicable depending on the specifics of the situation.
• Reputational damage. In some situations, one or both parties may face reputational damage as a result of the dissolution of the LOI. A failure in the eyes of customers and investors could mean it is difficult to obtain, acquire, or sell assets later.
• Missed opportunities. Breaking such an opportunity creates a missed opportunity, which can be a consequence that impacts the business in various ways. Further investment or interest from other investors may be limited because this transaction failed to move forward.

Every business must carefully consider the reason for decommitting to the signing of an LOI. In some situations, the consequences of remaining in the LOI could be worse than decommitting from it. Because this can be a precarious situation, it is often advisable to work closely with an attorney who can offer guidance from a third-party perspective.

How Is an LOI Different from a Contract?

It can seem that an LOI is much like a contract, and in some ways, it is. However, an LOI for the purchase of business assets or other transactions is not the same as a formal contract that your company will use to complete the agreement. Rather, a contract, also known as a definitive agreement, has very specific details and clarity on the terms and conditions that both parties expect within the transaction.

Note, too, that LOIs are not commonly legally binding. Although there are consequences to breaking legally binding LOIs, not all will result in these restrictions. It is critical to understand the terms and conditions of the LOI you entered into to clarify this area.

Binding vs. Nonbinding Letters of Intent

Whether you can decommit without consequences is dependent on the binding details within the contract. LOIs are most often not legally binding; they are preliminary, initial agreements that are likely to be used to formulate a contract later. If it is a non-binding agreement, as expressed in the details of the LOI, each party can leave the agreement without consequence.

If the LOI has binding provisions, then this becomes more challenging. The following are some of the most common binding provisions found in LOIs:

• Exclusivity: An exclusivity clause within an LOI limits one party from negotiating with other buyers or investors for a set period of time. The deal is only available and cannot be matched by anyone else.
• Confidentiality: A confidentiality clause indicates that all sensitive information within the agreement is kept private and not shared with any other party.
• Termination clause: Some LOIs include a termination clause, which defines how and when the LOI can be terminated. It should also spell out the specific consequences of that occurring, such as fines paid.

If your LOI contains any of these types of clauses, abide by them. If you fail to do so, you risk having to pay a substantial fine or other consequences as a result. This can be financially difficult for many business owners.

How to Determine if Decommitting Is the Best Move

To determine if you should decommit after signing an LOI, it helps to work closely with an attorney who will provide guidance and clarity on the implications of doing so, based specifically on what your LOI states. Before making such decisions, consider the following:

• What does the LOI require? The LOI will likely include specific information and details about whether the agreement is binding. If it is, it should outline the terms and how they apply. 
• Seek clarity on consequences. Work with your attorney to determine the consequences that will impact your business, specifically if you choose to decommit. This could be based on the reason for the dissolution and whether it is mutually beneficial.
• Communicate clearly. In some situations, decommitting comes at a high price, but there may be ways to work around the commitment and avoid the negative fallout. Clear communication and negotiation skills make that possible.

With the guidance of your LOI attorney, you can gain more insight into what your legal options are and what you can expect from the process. The more information you have and the more views from a legal perspective, the better equipped you are to make a decision that fits your business’s long-term goals.

How AttorneyX Can Help You Navigate Decommitting to an LOI

For guidance on creating, managing, and decommitting to an LOI, turn to AttorneyX. You should do so before you create an LOI or a contract to learn the steps you can take to protect yourself, should there be a change in scope, promise, or outcome. Our attorney will review your situation, including considering your goals and proposed LOI terms, to seek the best possible outcome.

With our oversight, you gain more insight into what decommitting to an LOI will mean for your business. This helps you avoid setting yourself up with an LOI that may not be the right fit for your company’s long-term growth and development. With our extensive experience, you can expect us to help you quickly and efficiently.

Set Up a Consultation to Speak to a Letter of Intent Attorney Before You Sign

Even if you have already committed to an LOI, now is the time to take legal action if you need to decommit from it. By speaking to our legal team at AttorneyX, you can gain insight into your rights throughout this journey.

We encourage you to contact us now to learn more about creating a strong offer, LOI, or entering into a contract. Contact us now to schedule a consultation.