Eighth Circuit Clarifies When “Letters of Intent” Are Enforceable Under Minnesota Law
Companies often use and characterize documents as “Letters of Intent” or “Letters of Agreement” in the course of negotiating. The wording of such documents will determine whether the document constitutes a binding contract or merely an “agreement to agree”—something Minnesota courts will not enforce. Where a company seeks to bind another party with such a letter of agreement, it should carefully word the agreement to ensure that it includes all material terms and makes it evident that the parties have reached a binding agreement. On the other hand, where a company does not want to make any binding commitments before final written contracts are drafted and signed, it should be careful about the language included in any “letters of intent.”
Lessons from the Richie Company Case
A recent federal Minnesota case details some important lessons to ensure that an agreement is characterized as a contract, and not an unenforceable “agreement to agree.” In Richie Company, LLP v. Lyndon Insurance Group, Inc., No. 02-1071 (8th Cir., Jan. 9, 2003), the Eighth Circuit Court of Appeals found that an agreement providing for future actions is unenforceable under Minnesota law. In the case, the parties signed an agreement detailing one party’s potential acquisition of another company and, following the acquisition, the parties’ intent to enter into a separate service-contract agreement.
The court concluded that the document was not sufficiently detailed to constitute a binding contract under Minnesota law. Rather, the document was merely an unenforceable “agreement to agree” insofar as it contemplated future negotiations about another agreement that had not yet been drafted. The court based its ruling on a history of Minnesota cases that establish the following:
- A letter creating an agreement to negotiate in good faith in the future is unenforceable where the initial agreement is not the complete and final agreement on the transaction at issue.
- Where substantial and necessary terms of an agreement are left open for future negotiations, a contract has not been created.
- A letter of agreement that merely summarizes negotiations and reflects a willingness to enter into a future binding agreement is not an enforceable contract.
Tips for Creating a Binding Agreement
Where a party intends to create a binding contract, it should refrain from agreeing to “agree in the future,” even if future agreements will be necessary corollaries to the contract at issue. Instead, the parties should specifically describe the responsibilities and obligations of each party while reciting the consideration for each party’s obligations. If certain terms, such as prices, cannot be determined at the execution of the agreement, the parties should use a formula that permits the calculation of prices in the future. Additionally, labeling an agreement as a “contract” and avoiding the phrase “letter of intent” also support a party’s intent to bind itself and others to an agreement. By foregoing the inclusion of uncertain terms requiring future negotiation, a party can help ensure that a binding contract has been formed.
Tips for Avoiding an Enforceable Contract
On the other hand, where a party does not intend to create a binding contract, it should ensure that the language in the “Letter of Intent” or “Letter of Agreement” does not inadvertently create any enforceable contractual commitments. This can be tricky, especially if the party does not want to spook the other party and destroy the goodwill that has developed during negotiations.
Regardless of whether you are trying to create a binding contract, or merely help negotiations progress to the next level without creating an enforceable contract, sound legal counsel can help achieve your objectives.
About the Authors:
Trepanier MacGillis Battina P.A. attorneys James C. MacGillis and Craig W. Trepanier practice extensively in the fields of business law and commercial litigation. Jim may be reached at 612.455.0503 or email@example.com. Craig may be reached at 612.455.0502 or firstname.lastname@example.org.