Clean Water Developments 2007-2008

far-reaching than a potential buyer or seller anticipates at the negotiation stage of a deal when that document is prepared. On one hand, the more completely the letter of intent spells out the terms of a deal, the more susceptible it is to interpretation as a binding contract. On the other hand, given the brief manner in which agreed-upon deal terms and steps to be taken by the parties before a purchase and sale agreement is executed tend to be described in a letter of intent, the language of a letter of intent may be found ambiguous if scrutinized by a court after one party breaks off negotiations. While the existence of these risks is not likely to outweigh the business reasons favoring execution of a letter of intent, the risks can be limited with careful drafting. Obviously, the letter of intent should very clearly state the intent of the parties not to be bound to purchase and sell assets, and any exceptions to that intent. The ACT I case is a good reminder that specifying the transactions contemplated by a letter of intent are nonbinding may not be sufficient. You should consider whether other statements in the letter of intent undercut the stated intent not to be bound in contract, and whether the parties want to limit their ability to terminate negotiations at will. Also, if the preliminary agreement anticipates that a party will undertake actions that are a prerequisite to closing, the scope of what is required and the other party's discretion in approving the action taken should be described carefully.