Sec. 3.4. Non-Binding Legal Instruments
A. Agreements to Agree
Drafting a constituent agreement is a process rather than an isolated event. Parties often seek to determine on a progressive or incremental basis whether to enter into a binding contract. Proper use of “agreements to agree” such as letters of expression of interest, letters of intent, term sheets and memoranda of understanding can clarify the intent of the parties, articulate expectations and minimize costs.
Before entering into agreements to agree, the parties must decide on the purpose of the agreement to agree. The most common purpose is to set forth a period of time during which the parties will negotiate exclusively with one another in an effort to agree on a binding contract. Where the parties have already agreed on the material terms, the agreement to agree binds each party to the ultimate contract pending only the ministerial act of reducing the agreement to a written contract.
B. Letters of Expression of Interest
A letter of expression of interest sets forth the terms and conditions a party desires to see in a binding contract and can serve as the basis for further discussions. A letter of expression of interest is not a contract and is not binding on any party.
C. Term Sheet
A term sheet is similar to a letter of intent except that it sets forth only the basic terms and conditions which the parties desire to see in the ultimate contract. The term sheet is used as the basis for negotiation. It usually does not contain an exclusive negotiating period and it is not signed. Some commentators counsel against using a letter of intent. They recommend using instead a term sheet.
D. Letters of Intent
A letter of intent is an agreement to agree. It is generally used to obligate parties to negotiate exclusively with one another for a specified period of time. At the end of the time period either the parties sign a binding contract or have no further obligation to one another. A letter of intent typically contains the following items:
- Description of the objective of the ultimate constituent agreement,
- Statement of the most fundamental rights and obligations of the parties,
- Statement that the parties will negotiate exclusively in good faith with each other for a set period of time or until a particular event occurs,
- Statement that at the end of the negotiation the letter of intent will merge into the ultimate contract or that it will expire,
- Statement that the letter of intent itself does not create any binding obligations, and
- Statement that if the parties sign an ultimate contract the letter of intent merges into the ultimate contract and is extinguished.
E. Memorandum of Understanding
A memorandum of understanding (referred to as an MOU) is a more detailed letter of intent. An MOU is generally used in connection with substantial transactions, such as mergers, acquisitions or large real estate sales, that require time consuming and expensive due diligence. The MOU sets forth the material terms of the transaction and leaves for the ultimate contract only those issues that arise as a result of the due diligence process. Often, in substantial transactions, the letter of intent leads to an MOU which then leads to the ultimate contract.
F. Confidentiality Agreements
Confidentiality agreements usually accompany agreements to agree or even precede agreements to agree. The purpose is to restrict the use of information which the parties exchange during negotiations. A confidentiality agreement specifies the categories of information to be exchanged, that the information is proprietary, the limitations on how the information is used, the measures which the parties must take to protect the information and the remedies a party has against a party who breaches the agreement. Confidentiality agreements can be quite elaborate. However, they are rarely enforced in court unless a breach is part of a broader cause of action.
G. The Legal Effect of Emails Contracts
Negotiations are often conducted through the exchange of emails. If the parties intend to form a contract solely through the exchange of emails, the text of the emails should set forth language which clearly establishes mutual assent, offer and acceptance. Depending on the language in the texts of the emails, it is possible for an exchange of emails to be construed as a contract even one party did not intend that the email exchange alone should form the contract. The better practice is to state that the emails are for negotiation only and that neither party is bound until the parties sign a binding written contract.
H. The Legal Effect Emails as Notice
Emails are often used to convey legal notices. The issue in using emails as notice is whether and when the email is received. Under common law, there is an old rebuttable presumption that a letter inside of a properly addressed envelope is received when the envelope is sent, meaning placed in the mail. This principle has not been explicitly applied to emails primarily because sending and receiving an email simultaneously occur. Whether or not a sent email is received is most likely an issue of technology.